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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, 1998 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
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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: (323) 965-5700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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COMMON STOCK, $.001 PAR VALUE NEW YORK AND PACIFIC EXCHANGES
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K.
On March 26, 1999, the registrant had 93,121,804 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 $160,459,000.
DOCUMENTS INCORPORATED BY REFERENCE
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
PART I
Item 1. Business 3
Item 2. Properties 11
Item 3. Legal Proceedings 11
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 7A. Quantitative and Qualitative Disclosure about Market Risk 22
Item 8. Financial Statements and Supplementary Data 23
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 48
PART III
Item 10. Directors and Executive Officers of the Registrant 49
Item 11. Executive Compensation 51
Item 12. Security Ownership of Certain Beneficial Owners
and Management 57
Item 13. Certain Relationships and Related Transactions 58
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 64
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ITEM 1. BUSINESS
INTRODUCTION
Spelling Entertainment Group Inc. (the "Company") is a producer and distributor
of television series, mini-series and movies-for-television (collectively
referred to hereinafter as "television product"). The Company has an extensive
library of television product and feature-length films, which it distributes
worldwide. The Company also licenses and otherwise exploits ancillary rights to
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's television production operations are conducted by subsidiaries of
the Company, including Spelling Television Inc. ("Spelling Television") and Big
Ticket Television Inc. ("Big Ticket Television"). The Company is engaged in the
worldwide distribution of television product and feature-length films through
Worldvision Enterprises, Inc. ("Worldvision"). The Company's licensing and
merchandising operations are conducted by Hamilton Projects, Inc. ("Hamilton
Projects"). In August 1997, the Company ceased the distribution of home video
rental titles and licensed its remaining 1997 rental titles to Paramount Home
Video. In September 1998, the Company licensed the home video and DVD
distribution rights to its library to Artisan Home Entertainment Inc.
("Artisan") for distribution primarily in the sell-through market in the U.S.
and Canada for a seven year term. Virgin Interactive Entertainment Limited
("VIEL") produced and distributed interactive games for the Company. In 1998,
the Company disposed of VIEL (together with its subsidiaries, "VIE").
Accordingly, VIE is presented as a discontinued operation in the accompanying
financial statements. (See "Discontinued Operations.") Theatrical feature film
production, acquisition and distribution had been conducted by Spelling Films
Inc. and its subsidiaries ("Spelling Films"). On February 19, 1998, the Company
announced its decision to exit the theatrical feature film business and the
Company closed Spelling Films during 1998.
The Company (formerly The Charter Company) was originally incorporated in
Florida in 1959. The Company was formerly engaged in petroleum operations, but
substantially all of its remaining operations in this area were sold in 1992.
(See Note 9 to the Company's Consolidated Financial Statements; references to
Notes hereinafter are to the notes to such financial statements.) The Company
began production and distribution of entertainment product when it acquired 82%
of Spelling Entertainment Inc. ("SEI") in May 1991. It acquired the remaining
shares of SEI in July 1992. The Company acquired all of the stock of Republic
Entertainment Inc. (formerly Republic Pictures Corporation, with its
subsidiaries, hereinafter "Republic") on April 26, 1994 and approximately 91% of
the Ordinary Shares of VIEL on July 30, 1994.
Approximately 48% of the Company's Common Stock was owned by American Financial
Corporation and its subsidiaries ("AFC") until March 31, 1993 when AFC sold the
Common Stock it owned to Blockbuster Entertainment Corporation ("BEC"). BEC
acquired additional Common Stock during 1993 and 1994, both from third parties
and from the Company. Effective as of September 29, 1994, BEC merged with and
into Viacom Inc. ("Viacom"), with Viacom being the surviving corporation. As a
result of the merger, and the subsequent acquisition of the Company's shares and
the exercise of certain warrants, Viacom currently owns approximately 80% of the
Company's Common Stock.
On March 19, 1999, Viacom submitted a proposal to the Company's Board of
Directors (the "Board") to acquire all outstanding shares of the Company not
already held by Viacom. The Board formed a Special Committee of independent
directors to review Viacom's proposal. The Special Committee has retained legal
advisors and will be retaining financial advisors shortly to assist the Special
Committee in its review of the proposal.
In the ordinary course of business, the Company has done and expects to continue
to do business with Viacom and its affiliates, including Blockbuster, Showtime,
Nickelodeon and Paramount. In each case the transaction is negotiated on an
arms-length basis and the Company believes that the transaction is on terms
comparable to or better than terms the Company could obtain from an outside
third party.
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The Company is incorporated in the state of Delaware and has its principal
executive offices at 5700 Wilshire Boulevard, Los Angeles, California 90036,
telephone (323) 965-5700.
PROGRAMMING - DEVELOPMENT AND PRODUCTION
TELEVISION PROGRAMMING
GENERAL
The Company develops and produces programming for the U.S. television networks
through Spelling Television and Big Ticket Television. Spelling Television is
one of the largest independent suppliers of one-hour drama series for network
television. Big Ticket Television develops and produces half-hour situation
comedy series for network television and programming for first-run syndication.
NETWORK PROGRAMMING
Scripts for potential television programming are usually developed by the
Company in conjunction with one of the broadcast networks. If the network orders
the script to production, it will typically order a pilot episode or
presentation, for which it will pay the Company a fixed license fee pursuant to
a negotiated license agreement. If the network exercises its option to order
episodes of the series for broadcast, the license agreement provides for a
minimum number of episodes to be delivered, with the network having certain
rights to order additional episodes. All other ownership and distribution rights
are generally retained by the Company, subject to certain network-related
holdbacks. Alternatively, certain network agreements provide that the network
has a financial or ownership interest, and sometimes, certain distribution
rights, in the program, or the network has an interest in the profits from
exploitation of the program. These agreements grant the network the right to
exhibit the episodes a limited number of times in the United States during the
license period.
The license fees paid by the networks are typically less than the Company's
costs of producing the related programming, resulting in a deficit for the
Company. In recent years, the size of the series deficits incurred by the
Company has generally increased as escalations in license fees have failed to
keep pace with escalations in production costs. However, in the case of its
one-hour drama series, the Company has generally been successful in obtaining
sufficient revenue from its international sales to offset a significant portion
of its production deficits. Generally, for those series that have a successful
network run (at least four years), it is the international sales and the
off-network domestic syndication and/or cable sales that are responsible for the
profit contribution, if any, from such successful series. See
"Business-Distribution."
Aaron Spelling, Chairman and Chief Executive Officer of Spelling Television and
Vice Chairman of the Company, has a history of successful network television
production, including more than 4,200 hours of television series,
movies-for-television and mini-series, as well as a number of feature films. 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." In association with a variety of partnerships, he
has also produced "Fantasy Island," "Charlie's Angels," "Starsky and Hutch,"
"Family" and "Hart to Hart."
The Company is currently producing eight one-hour drama television series and a
one-hour daytime serial. "Beverly Hills, 90210," which is currently in its ninth
season, has been ordered by Fox Broadcasting Company ("Fox") for a 10th season.
"Melrose Place" is completing its seventh and final season. "7th Heaven," which
is in its third season on The WB Television Network ("The WB"), has been ordered
by The WB for a fourth season. "Charmed," which debuted in the 1998/1999
television season on The WB has been picked up for a second season. "Any Day
Now" debuted in the 1998/1999 season on Lifetime and has been picked up for its
second season. The Company is also currently producing the "Love Boat: The Next
Wave," which debuted in April 1998 on UPN and
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is currently in its second season. The daytime serial "Sunset Beach" is
currently in its third year on NBC. "Rescue 77" premiered on The WB in March
1999. "Buddy Faro" aired on CBS during the 1998/1999 television season, but was
not picked up for another season. The Company also is currently producing a
half-hour situation comedy, "Moesha," which is airing on UPN in its fourth
season and has been ordered for a fifth season.
The Company has a number of scripts in development and has received two pilot
orders for one-hour dramas for the 1999/2000 television season from The WB and
UPN and has received a pilot order for a half-hour situation comedy for the
1999/2000, television season from CBS. There is no assurance that the pilots
will be ordered to series by the networks. Additionally, the Company has
received an eight-episode series order (with a network option to cut back the
order to six episodes) for "Gary & Mike," a half-hour claymation series from
Fox.
The Company received revenue from Fox in 1998, 1997 and 1996 representing 19%,
21% and 20% 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 and exhibited on a
market-by-market basis, in contrast to network distribution where the programs
are telecast simultaneously, which provides more concentrated and direct access
to a national audience.
In first-run syndication, programming is licensed domestically by Worldvision in
exchange for cash payments, advertising time ("barter") or a combination of
both. While generally not as accepted in the international marketplace as
traditional network series, Worldvision distributes this programming
internationally on a limited basis primarily for cash license fees. When
programs are licensed on a cash basis, a broadcaster agrees to pay a license fee
in one or more installments in exchange for the right to broadcast the
programming a specified number of times over an agreed period of time. When
programming is licensed on a barter basis, the Company reserves a specified
amount of advertising time during the broadcast, which its advertising sales
staff sells for cash to national advertisers.
As compared with programming produced for the networks, first-run syndicated
programming provides the Company greater control over creative and production
decisions. However, there may be greater financial risk associated with such
programming as there is no third-party network to share the production and
promotion costs. While the license fees paid by a network for television
programming are fixed by contract, barter revenue derived from the broadcasting
of first-run syndicated programming is not fixed in amount, and varies depending
on the ratings success of the programming. Such ratings may vary significantly
among different types of programming, as well as between individual programs of
the same type. Even when a first-run syndicated program is ultimately
successful, its revenue is often less than the Company's costs of producing,
promoting and distributing the program during its initial years. However, if a
program has strong ratings, the advertising revenue and cash license fees which
may be realized by the Company can be substantial.
In the first-run syndication market, the Company is currently producing "Judge
Judy," which is in its third season and will be returning for a fourth season.
The Company also produces "Judge Joe Brown," which is in its first season and
will be returning for a second season.
DEVELOPMENT AND PRODUCTION RISKS
There are a number of factors beyond the Company's control which may affect the
timely and successful completion of the development and production of the
Company's entertainment product, including the availability of literary
properties, creative personnel and talent, production personnel, distribution
channels and financing, as well as the status of various collective bargaining
agreements. The Company attempts to minimize such risks to the greatest extent
possible through the active management of the development and production
process. See "Competition" and "Employees."
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FEATURE FILMS
In February 1998, the Company announced plans to close its Spelling Films unit
to capitalize on the greater growth potential of its successful television
production and distribution operations. The Company had acquired and licensed
the rights to theatrical feature films in international markets through Spelling
Films and subsequently expanded these activities to include the development and
production of films. The operations of Spelling Films have been shut-down and
the remaining assets are being handled in a manner to preserve such assets and
ensure that current projects, including films already in distribution, are
appropriately serviced and exploited.
The Company will continue to exploit the television distribution rights from the
Spelling Films library through Worldvision, and its home video rights through
its various licensing arrangements. To the extent that Spelling Films and/or
Republic desired to exploit theatrical feature films in the United States and
Canadian theatrical markets, they engaged a third party to handle such
distribution.
DISTRIBUTION
In addition to its production activities, the Company is actively engaged in the
worldwide distribution of television product and feature length films, either
directly or through subdistributors. As a result of these activities, as of
December 31, 1998, the Company had contractual agreements with licensees which
provide for approximately $102,911,000 in future revenue, approximately 49% of
which is expected to be recognized after 1999. As of December 31, 1997, the
Company had contractual agreements which provided for approximately $121,266,000
in future revenue.
TELEVISION DISTRIBUTION
Worldvision has been engaged in the distribution of entertainment product in the
worldwide television market for over 25 years, originally serving as the
distribution arm of the ABC Network. Today, Worldvision is a leading distributor
and as of December 31, 1998 held rights to approximately 10,000 hours of
programming available for worldwide distribution. Worldvision currently
distributes such programming in the United States through offices located in
Atlanta, Los Angeles and Chicago and in approximately 110 countries through
offices or representatives located in London, Paris, Toronto, Sydney, Tokyo and
Rio de Janeiro.
In 1998, Worldvision distributed in first-run syndication five half-hour series:
"Judge Judy" and "Judge Joe Brown" (which are produced by the Company),
"Pictionary," "Better Homes and Gardens" and "America's Dumbest Criminals."
"Judge Judy" and "America's Dumbest Criminals" are presently in their third
seasons, "Better Homes and Gardens" is in its second season of production
(although this is the first season distributed by Worldvision) and "Judge Joe
Brown" is in its first season. ("Pictionary" was cancelled in 1998.) "Judge
Judy" and "Judge Joe Brown" are being licensed on a cash plus barter basis and
"America's Dumbest Criminals" and "Better Homes and Gardens" are being licensed
on a barter basis. In addition, Worldvision is preparing to launch a new
half-hour series from the producers of "Better Homes and Gardens" titled
"Country Home, Country Garden." If successfully launched, the series will be
licensed on a barter basis.
The profitability of the Company's network television programming continues to
depend substantially on the consumer's acceptance of the programming during its
network exhibition and subsequent off-network exhibition. At least four
broadcast seasons of a network series are typically required to successfully
license repeat showings of a series in the domestic syndication market where the
Company's profitability increases. Expected revenue per episode in this market
is normally greater for more popular shows and longer running series.
Worldvision is currently distributing "Beverly Hills, 90210" and "Melrose Place"
in the domestic syndication market and has entered into domestic syndication
agreements for "Moesha" and "7th Heaven," which will both launch off-network in
2000. Episodes from a network series typically become available for off-network
syndication or basic cable exploitation four to five years after the series'
initial network telecast.
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Demand for American-made entertainment product in international markets had been
increasing in recent years due to the increase in the number of international
television stations, cable channels and satellite delivery systems in those
markets and, in some territories, the privatization of the local television
industry. The Company often begins to earn international television revenue from
its television programming during the same season such programming is originally
broadcast in the United States and generally attempts to exploit its library
internationally. Substantially all of the Company's current television
programming is being distributed by Worldvision in international television
markets. Expected revenue per episode in this market is normally greater for
more popular shows and longer running series.
In December 1996, the Company and the KirchGroup entered into a television
licensing agreement whereby the KirchGroup has licensed Spelling's existing
library through 2010 for free and pay television, pay per view and
video-on-demand principally for Germany and the German-language territories of
Europe. Additionally, for the period 1996-2000, the KirchGroup licensed certain
rights to newly produced television mini-series, series and certain theatrical
feature films in Germany and the German-language territories as well as
made-for-television movies for continental Europe. The Company has the option to
extend that agreement for an additional five years.
In March 1993, the Company launched its basic cable/satellite delivered channel,
TeleUNO, which eventually reached approximately 6.5 million subscribers in Latin
America, including Mexico, Argentina and Brazil. In May 1998, a subsidiary of
Sony Pictures Entertainment Inc. acquired substantially all of the assets of,
and assumed substantially all of the Company's liabilities relating to, TeleUNO,
including its programming liabilities.
Domestic basic cable television networks potentially represent an increasingly
significant market for the Company's original, off-network and library product.
The Company has taken advantage of this demand for original programming by
producing "Any Day Now" for Lifetime. Cable exhibition has effectively developed
as an alternative market, albeit traditionally a less lucrative one, than
domestic syndication. However, each year a greater number of successful network
television series are being licensed to basic cable in lieu of or in addition to
domestic broadcast syndication and certain high-profile and successful
programming is able to generate off-network license fees comparable to the fees
available in domestic syndication. Additionally, cable exhibitors in some
instances have purchased rights to short-running television series which do not
include sufficient episodes to allow for traditional off-network syndication.
The series "Melrose Place" and "Models, Inc.," on the one hand, and "Hotel,"
"Beverly Hills, 90210," "Vegas" and "Dynasty," among others, have been licensed
to E! Television and F/X, respectively. These services help to substitute for
The WB and UPN stations that no longer license off-network product due to these
networks supplying new programs to their affiliated stations.
See "Government Regulation" for restrictions placed on exhibition of the
Company's entertainment product in certain markets.
LICENSING AND MERCHANDISING
Hamilton Projects is a full-service consumer product and promotional licensing
agency providing its clients with strategic planning, concept development and
product marketing program management. Hamilton Projects typically earns its fees
through a commission based upon the royalties earned by its clients from the
sale of licensed consumer products, promotions and books based upon the
copyrights, trademarks and trade names of the companies or products it
represents. In addition to managing the consumer product merchandising programs
for "Beverly Hills, 90210,(R)" "Melrose Place(R)," "Charmed(TM)," and "7th
Heaven(TM)," Hamilton Projects also represents several third parties, such as
Jeep(R), Dr. Scholl's,(R) Comedy Central's "South Park"(TM) and the United
States Postal Service(R). Through the efforts of Hamilton Projects, the Company
has taken advantage of various consumer product and promotional opportunities
such as a packaged goods promotion for "7th Heaven(TM)" on 15 million Post
Cereal Boxes; the operation of World Wide Web sites on the Internet; the
introduction of the "Charmed" books; as well as the traditional merchandising of
clothing, posters, calendars, toys and books.
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HOME VIDEO DISTRIBUTION
In September 1998, the Company entered into a license agreement with Artisan for
the home video and DVD distribution rights to the Company's approximately 3,000
titles. Under the terms of the seven-year agreement, Artisan will distribute the
titles primarily to the sell-through market in the U.S. and Canada. Prior to
this, domestically, videocassettes had been sold by Republic through its sales
force to independent wholesalers for resale to retail outlets, or directly to
retailers, for the sell-through market.
As a result of the decrease in demand for made-for-video product, and the
expectation that this trend would continue, the Company ceased to acquire
made-for-video titles in 1997, and in 1998 distributed only those titles for
which it had prior contractual commitments. In August 1997, the Company ceased
the wholesale distribution of home video rental titles, licensing for
distribution its remaining seven 1997 rental titles, including "Night Falls on
Manhattan," to Paramount Home Video.
Internationally, where rights were available, the Company licensed third parties
to distribute its product in the home video market, generally in exchange for a
minimum guarantee against future royalties.
TRADEMARKS, SERVICE MARKS AND COPYRIGHTS
The Company or its subsidiaries own various United States trademarks and service
marks, including, among others, SPELLING ENTERTAINMENT(R), SPELLING
TELEVISION(R), BEVERLY HILLS, 90210(R), MELROSE PLACE(R), 7TH HEAVEN(TM), BIG
TICKET TELEVISION(R), JUDGE JUDY(TM), MOESHA(TM), WORLDVISION ENTERPRISES(R) and
REPUBLIC ENTERTAINMENT(R), and has applied for registration for numerous other
marks relating to its entertainment product in the United States and foreign
countries. The Company or its subsidiaries own various foreign trademark and
service mark registrations and have pursued licensing and/or merchandising
opportunities related to the use of certain of these marks. The Company
registers and endeavors to take the necessary actions to protect the marks
created and acquired in its businesses. See "Distribution - Licensing and
Merchandising."
The Company regularly obtains copyright protection for each episode of its
television programs and for other entertainment product. Certain of the
Company's copyrights, trademarks and service marks may be considered material to
the Company's business.
DISCONTINUED OPERATIONS
In August 1998, the Company entered into an agreement to sell the majority of
the development assets of VIE, including VIE's subsidiary Westwood Studios,
Inc., to Electronic Arts. In November 1998, the Company completed the sale of
all non-U.S. operations of VIE to an investor group, completing the Company's
disposal of its interactive game business. The Company is in the process of
liquidating the remaining U.S. operations of VIE. Accordingly, VIE is presented
as a discontinued operation in the accompanying financial statements.
VIE was a developer, publisher and worldwide distributor of interactive games
and developed its products for use on both multimedia personal computers and
dedicated gaming consoles. VIE generated its revenues through the sale,
distribution and licensing of products that it had developed internally, through
collaboration with external developers, or through other co-publishing,
licensing or distribution relationships with third parties.
Prior to 1992, the Company, formerly known as The Charter Company, was engaged
in petroleum operations, all of which have been sold or discontinued.
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Additional information relating to discontinued operations, including
information regarding environmental contingencies, is provided in the
accompanying financial statements. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations Discontinued
Operations" and Notes 1, 2 and 9.
COMPETITION
The entertainment industry is highly competitive with many companies competing
for available literary properties, creative personnel, talent, production
personnel, distribution channels and financing which are essential to acquire,
develop, produce and distribute entertainment product. The Company's competitors
include major motion picture and television companies, the broadcast and cable
networks, as well as independent production and distribution companies. Certain
of the Company's competitors have greater financial resources and better access
to distribution than the Company.
Licensing television programming to broadcast and cable networks has become
increasingly competitive as broadcast networks are now permitted to have a
financial interest in and/or own syndication rights to programs they broadcast.
(See "Government Regulation.") The broadcast networks now air a significant
amount of programming in which they have financial interest and syndication
rights. In addition, certain of the Company's competitors have developed their
own programming services which may reduce the time periods available for the
Company to exploit its programming.
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 a program's ratings. Similarly, the
overall success of the Company's first-run syndicated programming is dependent
upon its ability to attain sufficient ratings to support the continuing renewal
of the program.
The Company's ability to compete in certain countries is affected by an increase
in investment in local production by local and U.S. media companies as well as
local restrictions and quotas. Governments of certain countries require that a
minimum percentage of locally produced programming be broadcast. See "Government
Regulation."
The Company is subject to certain business risks as a result of changing
technologies in the media, communications and computer industries. Changes in
new digital disk systems, direct-to-home satellite systems and other new
delivery systems also may provide new opportunities and markets for the Company.
The Company endeavors to adjust to technological developments affecting delivery
systems and seeks to minimize the risk to the Company of technological change to
a particular media.
GOVERNMENT REGULATION
The production and distribution of television programming by independent
producers is not directly regulated by the federal or state governments, but the
marketplace for television programming in the U.S. is substantially affected by
regulations of the Federal Communications Commission ("FCC") applicable to
television stations, television networks and cable television systems and
channels. With respect to the ownership of programming by broadcast television
networks, in September 1995 the FCC repealed its rules prohibiting such networks
from acquiring financial interest and syndication rights in television
programming produced by program suppliers such
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as the Company. Accordingly, the networks are able to own the programming that
they broadcast, and increasingly become competitors of the Company in the
production and distribution of programming. As to ownership of broadcast
television stations on a national basis, in February 1996 Congress enacted the
Telecommunications Act of 1996 (the "1996 Act"), which, among other things,
eliminated the 12-station cap on nationwide ownership of television stations and
increased from 25% to 35% the nationwide audience reach of commonly owned
television stations. This provision of the 1996 Act served to further increase
the ability of the broadcast networks and major studios to secure distribution
for their own programming product. On a local basis, various FCC rules and
policies limit the ownership of broadcast television stations. As directed by
the 1996 Act, the FCC recently initiated a biennial review of national and local
ownership rules. Changes in these rules could augment the market power of
television group owners and could have an impact on the market for the Company's
syndicated television product.
In 1989, the 12-member European Community ("EC") adopted a directive that its
member states insure that more than 50% of the programming shown on their
television stations be European-produced "where practicable and by appropriate
means to be achieved progressively on the basis of suitable criteria." These
guidelines could restrict the amount of American television programming and
number of 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 interpretation and
enforcement, as well as the possible future modification of the current
guidelines, the Company cannot predict what effect they may have on its
business. In its review of the 1989 directive, the EC agreed to continue with
the 1989 wording which will not tighten the quotas or reduce the flexibility
with regard to the quotas. In addition, many European countries have adopted
individual national restrictions on broadcasting of programming based on origin.
Other countries in which the Company distributes its programming may adopt
similar restrictions, which may have an adverse effect on the Company's ability
to distribute its programs or create stronger incentives for the Company to
establish ventures with international firms. Further, foreign countries have
regulations that impact or regulate the Company's customers.
Congress is presently considering a revision to the compulsory copyright license
schemes applicable to direct-to-home satellite video programming ("DTH")
distributors. In August 1997, a copyright arbitration royalty panel ruled that
the DTH rates for retransmission of distant broadcast signals should be
increased. This decision was upheld by the Librarian of Congress who set the
effective date for the rate increase as of January 1, 1998. The new rate
increase was unsuccessfully challenged in Federal Court. In January of this
year, the Court of Appeals for the D.C. Circuit affirmed the lower court ruling,
upholding the rate increase. Legislation has been introduced in the Senate to
reduce the compulsory copyright license rate and to extend the term until 2004.
Legislation has not yet been introduced in the House of Representatives. The
final rate to be paid by the satellite distributors could affect the revenues
that the Company derives from the compulsory license royalty fee pool.
The effect of the foregoing regulations on the Company's operations cannot be
accurately assessed at this time.
EMPLOYEES
At December 31, 1998, the Company had approximately 400 employees. In
addition, the Company employs a large number of individuals for particular
television productions. As a result, the total number of employees can vary
substantially during the course of a year, depending upon the number and
scheduling of its productions.
Certain of the Company's subsidiaries are signatories to collective bargaining
agreements relating to the engagement of various individuals in the many
different job classifications required to produce entertainment product. These
agreements set forth wage scales and fringe benefits which are generally
applicable to the production of television programming and feature films.
Typically in the United States, such agreements are industry-wide. These
employees include writers, directors, actors, musicians and studio technicians
and craftsmen.
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The following table sets forth the collective bargaining agreements to which
certain of the Company's subsidiaries are parties, and the relevant expiration
dates:
CONTRACT
UNION EXPIRATION DATE
----- ---------------
Writers Guild of America................................................May 1, 2001
Screen Actors Guild.....................................................June 30, 2001
American Federation of Television and Radio Artists.....................November 15, 2001
American Federation of Musicians (TV Film)..............................February 15, 1999
American Federation of Musicians (TV Tape)..............................May 31, 1999
Directors Guild of America..............................................June 30, 1999
Directors Guild of America Freelance Live and Tape
Television Agreement...................................................June 30, 1999
International Alliance of Theatrical
and Stage Employees (IATSE) (United States)............................July 31, 2000
IATSE Videotape Agreement...............................................July 31, 2000
Although the Company considers its guild and union relationships to be
satisfactory at present, the renewal of union contracts does not depend on its
activities or decisions alone and is largely beyond the Company's control.
Spelling Television and Big Ticket Television are signatories to collective
bargaining agreements negotiated by the Alliance of Motion Picture and
Television Producers ("AMPTP"). The AMPTP is currently negotiating with the
American Federation of Musicians ("AFM") for a new collective bargaining
agreement. The AMPTP and the Directors Guild of America ("DGA") are currently
negotiating but have not yet concluded a deal for a new collective bargaining
agreement. If new agreements are not reached by the expiration of the current
AFM and DGA agreements, or if any other material collective bargaining agreement
is not concluded on a timely basis, there could be a resulting work stoppage
which could have an adverse impact on the Company's production activities. In
addition, agreements concluded with various guilds may contain terms which may
have an adverse impact on the Company.
ITEM 2. PROPERTIES
The Company leases office space of approximately 132,000 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.
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 that pending 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
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understanding of the applicable law, that the ultimate resolution of such suits
and claims will not have a material adverse effect on the Company's results of
operations or financial condition. This belief is also based upon the reserves
which have been established in connection with these matters and the Company's
coverage under an insurance-type indemnity agreement which covers up to
$35,000,000 of certain such liabilities in excess of a threshold amount of
$25,000,000, subject to certain adjustments. Substantial portions of such
reserves and indemnity are intended to cover environmental costs associated with
the Company's former petroleum operations. Although there are significant
uncertainties inherent in estimating environmental liabilities, based upon the
Company's experience it is considered unlikely that the number of possible
environmental liabilities and Chapter 11 disputed claims would exceed the amount
of the reserves by more than $50,000,000, a substantial portion of which would
be covered by the indemnity discussed above. (For a more complete description of
such legal matters, see the discussion under "Contingencies" in Note 9.)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded on the New York Stock and Pacific Exchanges
under the symbol SP. The table below sets forth the low and high sales prices
for the Common Stock as reported on the Composite Tape.
1998 1997
------------------- --------------------
Quarter Low High Low High
First $ 7 $ 9 $ 5 1/2 $ 8 3/8
Second 8 7/16 9 1/2 5 1/4 7 1/8
Third 6 9 7/16 6 3/8 9 3/16
Fourth 6 3/16 8 6 5/8 9 1/8
The number of holders of record of the Company's Common Stock as of March 26,
1999, was approximately 8,500. The Company does not currently pay 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 Note 9 for discussion of discontinued operations.
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
Income Statement Data:
Revenue from continuing
operations $ 586,125 $ 564,239 $ 497,601 $ 452,150 $ 416,445
Operating income $ 15,667 $ 1,056 $ 23,790 $ 66,252 $ 40,394
Net income (loss) from
continuing operations $ 8,942 $ (12,322) $ 4,075 $ 34,131 $ 19,430
Earnings before income taxes,
depreciation and amortization
(EBITDA) $ 25,204 $ 10,207 $ 32,386 $ 74,043 $ 47,321
Net income (loss) per common
share from continuing operations:
Basic $ 0.10 $ (0.14) $ 0.04 $ 0.39 $ 0.26
Diluted $ 0.10 $ (0.14) $ 0.04 $ 0.38 $ 0.26
Balance Sheet Data:
Total assets $ 772,949 $ 773,580 $ 840,346 $ 956,836 $ 871,245
Long-term debt $ 239,930 $ 289,000 $ 315,000 $ 210,000 $ 181,805
Shareholders' equity $ 271,207 $ 271,018 $ 319,743 $ 558,520 $ 528,447
Cash dividends per
common share $ -- $ -- $ -- $ -- $ 0.06
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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 businesses based on financial
and strategic considerations. The Company may from time to time invest in,
acquire or divest businesses or assets in addition to those described below.
The Company is strengthening its core television business in an effort to
improve its performance in an increasingly competitive environment. This has
included a significant increase in the production of new television series and
first-run syndication programming, as well as expanded efforts to exploit the
Company's entertainment product on an international basis. As part of its focus
on its core business, the Company announced its intention to dispose of its
interactive game business, VIE. As a result of this decision, VIE is being
treated as a discontinued operation in the accompanying financial statements. On
September 4, 1998, the Company completed the sale of the stock of Westwood
Studios, Inc., a subsidiary of VIE, and certain development assets of VIE for
$122,500,000 in cash. The proceeds of this transaction were used to pay down
bank debt and other costs associated with the transaction. On November 10, 1998,
the Company completed the sale of all non-US operations of VIE, effectively
completing the disposal of its interactive game business. (See "Results of
Operations - Discontinued Operations" and "Financial Condition" below and Note 9
regarding the disposition of VIE.)
In the third quarter of 1997, the Company determined that it was appropriate to
exit the business of distributing video titles in the domestic rental market.
The Company has ceased to acquire made-for-video titles other than those for
which it had previously made contractual commitments. Further, in August of
1997, it licensed its remaining made-for-video titles scheduled for initial
release during the remainder of 1997, and eliminated the sales infrastructure
and other support functions specifically serving this market.
In February 1998, the Company announced its decision to exit the theatrical
feature film business and close Spelling Films. The Company recorded a charge of
$20,000,000, including the write-down to estimated net realizable value of
capitalized development projects which will be sold or abandoned, reserves for
commitments to various talent, as well as severance costs related to Spelling
Films' employees. (See Note 2 and "Provision for Closure of Film and Video
Divisions" below.)
In April 1998, the Company sold TeleUNO, its Latin American entertainment
channel. The Company recognized a gain of $7,030,000 from this transaction in
the second quarter, which is reflected in the accompanying financial statements.
(See Note 2 and "Gain on Sale of TeleUNO" below.)
In September 1998, the Company entered into a seven-year licensing agreement
with Artisan covering the domestic and Canadian home video and digital video
disc ("DVD") distribution rights to approximately 3,000 titles remaining in the
Company's library. The Company recorded a charge to exit the domestic home video
distribution business of $3,995,000 in 1998, including severance costs related
to employees of Republic Entertainment Inc. ("Republic"), the reduction of
carrying values of physical inventory sold to Artisan and the write-down to the
estimated net realizable value of certain titles. (See Note 2 and "Provision for
Closure of Film and Video Divisions" below.)
On March 19, 1999, Viacom submitted a proposal to the Company's Board of
Directors (the "Board") to acquire all outstanding shares of the Company not
already held by Viacom. The Board formed a Special Committee of independent
directors to review Viacom's proposal. The Special Committee has retained legal
advisors and will be retaining financial advisors shortly to assist the Special
Committee in its review of the proposal.
RESULTS OF OPERATIONS
The results of operations for any period are significantly affected by the
quantity and performance of the Company's entertainment product which is
licensed or sold to, and available for exhibition by, licensees or customers in
various media and territories, the number of series being produced by the
Company during a given period and the volume, performance and production costs
associated with the Company's new television product. Consequently, results of
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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. Due to the aforementioned factors and those discussed below, the
Company's net income is generally negatively impacted in the fourth quarter each
year.
The success of the Company's television programming business depends, in part,
upon the successful network exhibition of its television series over a
sufficient number of years to allow for off-network exhibition opportunities.
During the initial years of a one-hour television series, network and
international license fees substantially offset the production costs of the
series, and accordingly the Company normally recognizes a nominal loss during
this period. With respect to half-hour network programming, the production costs
can substantially exceed the combination of the network and international
license fees during the initial years and the Company normally recognizes larger
losses during this period. However, if a sufficient number of episodes of a
one-hour or half-hour series are produced, the Company is reasonably assured
that it will also be able to sell the series in the domestic off-network market,
and the Company would then expect to be able to recoup its deficits and realize
a profit with respect to these series.
First-run syndicated television series, which are sold on a cash basis, barter
basis or a combination of both, typically do not generate sufficient revenue to
cover the production and promotion costs of the programs during their initial
years and such financial risk is borne exclusively by the Company. However, with
strong ratings, the series may generate significant revenue which may be
realized by the Company through its cash license fees and barter arrangements.
The Company's business in general is affected by the public's acceptance of its
product, which is unpredictable and subject to change, and by conditions within
the entertainment industry, including, but not limited to, the quality and
availability of creative talent and the negotiation and renewal of union
contracts relating to writers, directors, actors, musicians and studio
technicians and craftsmen, as well as any changes in the law and governmental
regulations. On September 6, 1995, the FCC released an order repealing its rules
which prohibited television networks from acquiring financial interests and
syndication rights in television programming produced by program suppliers such
as the Company. Accordingly, the networks are able to own the programming that
they broadcast, and increasingly compete with the Company in the production and
distribution of programming. The Telecommunications Act of 1996 eliminated the
restrictions on the number of television stations that one entity may own and
increased the national audience reach limitation by one entity from 25% to 35%,
which served to further enhance the broadcast networks' and major studios'
ability to secure distribution for their own product.
The following paragraphs discuss significant items in the Consolidated
Statements of Operations for the three years ended December 31, 1998.
REVENUE
The following table sets forth the components of the Company's revenue for the
three years ended December 31 (in thousands):
1998 1997 1996
-------- -------- --------
Television $487,865 $446,572 $402,600
Non-television distribution 61,542 97,043 74,700
Licensing and merchandising 22,110 15,643 15,076
Other 14,608 4,981 5,225
-------- -------- --------
$586,125 $564,239 $497,601
======== ======== ========
Television revenue increased $41,293,000 (9%) and $43,972,000 (11%) in 1998 and
1997, respectively. The increase in 1998 arose primarily from (i) higher per
episode network license fees; (ii) increased hours of programming delivered to
broadcast and cable networks, and (iii) improved performance of the Company's
first-run syndication products, including "Judge Judy." The increase in 1997 was
attributable to (i) higher per episode network license fees; (ii) increased
hours of programming delivered to the networks, including the new daytime serial
"Sunset Beach;" and (iii) increased first-run syndication revenue. These 1997
increases were offset by reduced revenue from exploitation of the Company's
library. (See Note 1.)
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Non-television distribution revenue represents revenue generated from the
distribution of entertainment product in the home video and theatrical markets.
Such revenue decreased $35,501,000 (37%) in 1998 from 1997. This decrease is
primarily due to the closure in February 1998 of Spelling Films and the
Company's 1997 and 1998 decisions to exit the business of distributing home
video titles in the domestic market, offset by revenue recognized from the
Artisan domestic distribution licensing agreement. Non-television distribution
revenue increased $22,343,000 (30%) in 1997 from 1996 primarily due to the
release in 1997 of "Night Falls on Manhattan" both theatrically and on home
video, the international theatrical releases of "Breakdown" and "In & Out" and
the domestic release of "House of Yes." Also contributing to the 1997 increase
was the home video release of "Bound" and "Stephen King's Thinner" in 1997, both
of which were feature films released theatrically by Spelling Films.
Licensing and merchandising revenue increased $6,467,000 (41%) and $567,000 (4%)
in 1998 and 1997, respectively. The increase in both periods is due to an
increase in revenue from third-party clients, particularly relating to
merchandising and licensing agreements with Comedy Partners for the television
show "South Park."
Other revenue increased $9,627,000 (193%) in 1998 from 1997 and decreased
$244,000 (5%) in 1997 from 1996. The increase in 1998 is primarily due to the
recognition of a new agreement with Famous Music Corporation and Ensign Music
Corporation for the administration of the Company's music rights and the
associated non-refundable advances received pursuant to the terms of the
agreement. The decrease in 1997 is primarily attributable to reduced stage
rental revenue due to the closing of these operations in Canada.
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 and Canadian dollars, among others. The Company has
no material transactions denominated in Asian currencies.
GAIN ON SALE OF TELEUNO
In April 1998, the Company sold TeleUNO, its Latin American entertainment
channel. The Company recognized a gain of $7,030,000 in the quarter ended June
30, 1998, relating to the sale.
ENTERTAINMENT PRODUCT COSTS
Entertainment product costs consist primarily of the amortization of capitalized
product costs, including deficits recognized on new programming, and the accrual
of third-party participations and residuals. (See Note 1.) Such costs decreased
$9,301,000 (2%) and increased $90,681,000 (22%) in 1998 and 1997, respectively,
from the prior years. The decrease in 1998 versus 1997 resulted primarily from
the Company's exit from the feature film business, partially offset by increased
television production write-downs. The increase in 1997 primarily resulted from
the increase in revenue discussed above. Additionally, the percentage
relationship between such costs and the related revenue was 85%, 89%, and 83% in
1998, 1997 and 1996, 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.
Included in entertainment product costs above were write-downs to net realizable
value with respect to its television product of $44,039,000, $23,856,000 and
$29,331,000 in 1998, 1997, and 1996, respectively. The increase in 1998 from
1997 was primarily attributable to deficits associated with new television
production, which was significantly increased in the current year. Also,
write-downs to net realizable value of $4,647,000, $20,680,000, and $14,636,000
were recorded in 1998, 1997, and 1996, respectively, related to theatrical and
made-for-video feature films. The significant decrease in 1998 versus 1997 was a
result of the Company's decision to exit the feature film business.
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SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative costs decreased $389,000 (1%) and $1,309,000
(2%) in 1998 and 1997 respectively, from the prior years. The decrease in 1998
results primarily from the Company's 1997 exit from the business of distributing
video titles in the domestic rental market, the Company's February 1998 exit
from the theatrical film business and the Company's ongoing costs savings
initiatives, offset by higher costs associated with the Company's year 2000
remediation efforts and a decrease in overhead capitalized to product. (See
"Year 2000" below.) The decrease in 1997 resulted from the impact of executive
severance expense in 1996 with no similar expense in 1997 and the impact of the
Company's ongoing cost savings initiatives.
PROVISION FOR CLOSURE FOR FILM AND VIDEO DIVISIONS
A charge of $20,000,000 was recorded in the quarter ended March 31, 1998 related
to the Company's decision to exit the theatrical feature film business and close
Spelling Films. This charge includes the write-down to estimated net realizable
value of capitalized development projects to be sold or abandoned, reserves for
commitments to various talent, as well as severance costs related to Spelling
Films' employees. As of December 31, 1998, the remaining accrual balances for
this provision was $2,862,000 and is included in accounts payable, accrued
expenses and other liabilities in the accompanying balance sheet. (See Note 1.)
In conjunction with the licensing of home video rights to approximately 3,000
titles in the Company's library, in 1998 the Company recorded a charge to exit
the domestic home video distribution business of $3,995,000. The charge included
severance costs related to Republic employees, the reduction of carrying values
of physical inventory sold to Artisan and the write-down of certain titles to
their estimated net realizable value. As of December 31, 1998, the remaining
accrual balance of this reserve was $2,431,000 and is included in the accounts
payable, accrued expenses and other liabilities in the accompanying balance
sheet. (See Note 1.)
INTEREST EXPENSE, NET
Interest expense decreased $1,740,000 (8%) in 1998 from 1997 and increased
$6,497,000 (45%) in 1997 from 1996. The decrease in 1998 is due to lower average
indebtedness, under the Company's credit arrangements. The increase in 1997 was
due to higher average indebtedness, as well as an increase in the average
interest rate. Interest expense in 1997 was net of $981,000 capitalized to
feature film production costs. (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 fluctuations in such
interest rates.
OTHER, NET
Other income, net, increased $21,144,000 (460%) and $4,209,000 (1096%) in 1998
and 1997, respectively, from the prior years. The increase in 1998 is primarily
due to the recognition of a realized gain related to the sale of an investment
in Gemstar International. The increase in 1997 is primarily due to the
recognition of a non-cash gain from a common stock investment upon the merger of
the original investee with Gemstar International.
PROVISION FOR INCOME TAXES
The Company's provision for income taxes increased $15,981,000 to a provision of
$15,000,000 in 1998 as compared to a benefit of $981,000 in 1997, largely as a
result of the increase in income from continuing operations and an increase in
the effective tax rate, offset by certain adjustments to tax attributes and
valuation allowances. The effective tax rate increased to 63% in 1998 from 7% in
1997 largely as a result of changes in the relationships between revenue and
expenses comprising income from continuing operations before income taxes. The
provision for income taxes is primarily non-cash in nature due to the use of tax
attribute carryforwards. (See Note 8.)
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During 1998, the Company recognized an income tax benefit of $8,750,000 related
to the discontinued operations of VIE. No similar benefit was recognized in 1997
or 1996 due to management's assessment of the realizability of such benefit at
that time. (See "Discontinued Operations" below.)
During 1997, the Company's provision for income taxes decreased $8,234,000 to a
benefit of $981,000 as compared to a provision of $7,253,000 in 1996, largely as
a result of the decrease in income from continuing operations and adjustments to
tax attributes and valuation allowances offset by a decrease in the effective
tax rate. The effective tax rate decreased to 7% in 1997 from 64% in 1996,
largely as a result of changes in the relationships between revenue and expenses
comprising income from continuing operations before income taxes and adjustments
to tax attributes.
Viacom owns approximately 80% of the outstanding shares of the Company.
Therefore, the Company is required to be included in the consolidated federal
income tax return of Viacom. The Directors of the Company approved an agreement
between the Company and Viacom that provides for the administration of federal,
state and foreign tax matters (the "Tax Agreement"). Under the Tax Agreement,
the Company will remain in the same tax position as it would have if it were
continuing to file its tax returns separate and apart from Viacom; as a result,
the Company does not anticipate any material impact to its financial condition
or results of operations. Furthermore, the majority of the amounts reported as
current and deferred taxes represent amounts that are ultimately payable to, or
receivable from, Viacom pursuant to the Tax Agreement.
DISCONTINUED OPERATIONS
INTERACTIVE GAME BUSINESS. The financial position of the discontinued operations
of VIE is included in the balance sheets under the captions "Net liabilities
related to discontinued operations" as of December 31, 1998 and 1997,
respectively. During 1998, the Company recorded a provision of $16,250,000, net
of a $8,750,000 currently realizable income tax benefit, to provide for the
costs of shut-down, net of the proceeds from the sale of VIE's remaining
operations and assets. During 1997, the Company recorded a provision of
$40,000,000, net of income taxes, for future operating losses and cash funding
requirements projected for the remaining holding period through completion of
the disposition, resulting in net liabilities at VIE. During 1996, the net
assets of VIE decreased by approximately $194,000,000 as a result of operating
losses, the recording of an impairment loss with respect to the carrying value
of goodwill and accounting adjustments recorded in connection with the Company's
decision to dispose of VIE. (See "Financial Condition" below and Note 9
regarding the disposition of VIE.)
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. On June 8, 1995, Blockbuster Entertainment Group ("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 had executed amendments to extend the put- and call-option
agreements, which were originally scheduled to expire in July 1995, through
December 31, 1998. Effective November 9, 1998, the put- and-call option
agreements were terminated by mutual agreement. (See Note 9.)
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." 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 $5,349,000 and $9,331,000 at December 31, 1998 and 1997,
respectively. (See Note 9.)
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The Company is involved in a number of legal actions including threatened
claims, pending lawsuits and contract disputes, environmental cleanup
assessments or damages and other matters. Some of the parties involved in such
actions seek damages in very large amounts. While the outcome of these suits and
claims cannot be predicted with certainty, the Company believes, based upon its
current knowledge of the facts and circumstances and its understanding of the
applicable law, that the ultimate resolution of such suits and claims will not
have a material adverse effect on the Company's results of operations or
financial condition. This belief is also based upon the allowances described
above and the Company's coverage under an insurance-type indemnity agreement
which covers up to $35,000,000 of certain such liabilities in excess of a
threshold amount of $25,000,000, subject to certain adjustments. Substantial
portions of such allowances and indemnity are intended to cover environmental
costs associated with the Company's former petroleum operations. Although there
are significant uncertainties inherent in estimating environmental liabilities,
based upon the Company's experience it is considered unlikely that the amount of
possible environmental liabilities and Chapter 11 disputed claims would exceed
the amount of the allowances by more than $50,000,000, a substantial portion of
which would be covered by the indemnity discussed above. (See Note 9.)
FINANCIAL CONDITION
CONTINUING OPERATIONS. The Company's continuing operations require significant
capital resources for the production of entertainment product and the
acquisition of distribution or other rights to entertainment product produced by
third parties. The Company's expenditures in this regard totaled $456,960,000
and $385,020,000 in 1998 and in 1997, respectively. The cost of producing
network television programming is borne by the Company to the extent costs are
not recouped through network license fees and cash receipts from both cash and
barter licensing arrangements on syndicated product.
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 and the
Company's working capital and other requirements. At December 31, 1998,
$115,070,000 was available under these facilities to fund the Company's
operations and investments. (See Note 4.) 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 funds available under its credit facilities and other financing
sources to meet its ongoing plans for the production, acquisition and
distribution of entertainment product. (See Note 4 regarding certain
acceleration provisions of the Viacom facility.)
DISCONTINUED OPERATIONS. A wholly owned subsidiary of VIE had a revolving
multi-currency credit agreement for $100,000,000 with a bank in the U.S. (the
"Credit Agreement"). On September 8, 1998 total borrowings under the Credit
Agreement in the amount of $97,000,000 were repaid and the Credit Agreement was
terminated. As of December 31, 1997, the Company had no letters of credit
outstanding under the Credit Agreement. (See Note 9.)
Another wholly owned subsidiary of VIE had a credit facility with a bank in the
United Kingdom ("the UK Facility") in the net amount of 10,000,000 pounds
sterling, which the Company and Viacom had guaranteed. On November 10, 1998,
total borrowings under the UK Facility were repaid and the UK Facility was
terminated. Borrowings under the UK Facility as of December 31, 1997 were
$11,090,000, and the Company had approximately $938,000 in letters of credit
outstanding to guarantee its interactive game purchases. (See Note 9.)
OTHER FINANCING ITEMS. Viacom owns approximately 80% of the Company's common
stock. Pursuant to the separate credit facilities under which Viacom is a
borrower, certain subsidiaries of Viacom, including the Company, are restricted
from incurring indebtedness (other than indebtedness owing to Viacom) without
the prior consent of Viacom's lenders. Such consents were obtained with respect
to the Credit Agreement and the UK Facility.
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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 May 1996, the Emerging Issues Task Force published Issue No. 96-6,
"Accounting for the Film and Software Costs Associated with Developing
Entertainment and Educational Software Products," which determined that
companies developing computer software are required to follow SFAS No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed." The Company had previously accounted for its software development
costs with respect to interactive games under the requirements of SFAS No. 53,
"Financial Reporting by Producers and Distributors of Motion Picture Films." The
Company recorded a cumulative pretax adjustment of approximately $7,500,000
resulting from the change to SFAS No. 86 in the second quarter of 1996 and
restated its second and third quarter 1996 results in filings on Form 10-QA to
reflect the cumulative and period adjustments. (See Notes 1 and 9.)
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share," which is
effective for interim and annual financial statements for periods ending after
December 15, 1997. The Company adopted SFAS No. 128 in the accompanying
financial statements. (See Note 1.)
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
effective for fiscal years beginning after December 15, 1997. The new rules
establish standards for the reporting of comprehensive income and its components
in financial statements. Comprehensive income consists of net income and other
gains and losses affecting shareholders' equity that, under generally accepted
accounting principles, are excluded from net income, such as unrealized gains
and losses on marketable equity securities and foreign currency translation
gains and losses. The Company adopted SFAS No. 130 in the accompanying financial
statements. (See Note 5).
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," effective for fiscal years beginning after
December 15, 1997. The new rules establish revised standards for public
companies relating to the reporting of financial and descriptive information
about their operating segments in financial statements. The Company adopted SFAS
No. 131 in 1998 in the accompanying financial statements.
In October 1998, the FASB released an exposure draft of the proposed statement
on "Recission of FASB Statement No. 53, Financial Reporting by Producers and
Distributors of Motion Picture Films," ("SFAS 53"). An entity that previously
was subject to the requirements of SFAS 53 would follow the guidance in a
proposed Statement of Position, "Accounting by Producers and Distributors of
Films." This proposed Statement of Position would be effective for financial
statements for fiscal years beginning after December 15, 1999 and could have a
significant impact on the Company's results of operations and financial position
depending on its final outcome. The Company has not concluded on its impact
given the preliminary stages of the proposed Statement of Position.
21
22
YEAR 2000
OVERVIEW
The widespread use of computer programs that rely on two-digit dates to perform
computations and decision making functions may cause computer systems to
malfunction prior to or in the year 2000 ("Y2K") and lead to significant
business delays and disruptions in the U.S. and internationally. The Company
started its Y2K initiative in December 1997 by developing a program to identify
and mitigate Y2K risks. External consulting firms and contractors have been
engaged by the Company to assist with Y2K remediation. At present it is
anticipated that the Company will complete its program to have substantially all
critical and non-critical systems compliant prior to the end of the third
quarter of 1999.
The Company is reviewing its Y2K issues based upon three areas: applications,
infrastructure and business partners.
o The applications cover the software systems resident on mid-range, network
and desktop computers. The Company defines an application as a collection
of programs directly related to a common system. For example, a financial
application can include all the general ledger and accounts receivable
software code used to process information throughout an operating segment.
In addition, the Company's applications have been segregated into critical
and non-critical applications. Critical applications are software systems
which, if not operational, would have a material impact on business
operations.
o Infrastructure includes the computers, data and voice communications
networks, and other equipment which use embedded chip processors (e.g.,
film projectors, tape duplication equipment, inventory movement systems,
etc.).
o The business partners include third party vendors, customers and public
entities whose systems may interface with the Company or whose own
operations are important to the Company's daily operations.
These three areas have been addressed using a five phase program: inventory,
assessment, remediation, testing and contingency planning.
o Phase 1 inventories the respective applications, hardware and business
partners.
o Phase 2 involves assessing the Y2K effects concerning each application,
hardware systems or business partner relationship; and subsequently
determining the risk to operations and assigning priorities.
o Phase 3 establishes and implements specific plans for the remediation of
applications and hardware systems and for the determination of business
partners' compliance.
o Phase 4 tests each application and hardware system and reviews business
partners' compliance under the plans established in Phase 3 to ensure that
Y2K issues no longer exist.
o Phase 5 covers the development of contingency plans in the event internal
or external systems are not compliant.
Changes may occur to the Company's operations during the implementation of its
Y2K program or subsequent to the completion of each phase; therefore, management
may periodically revise its plans. The Company continues to review and test
systems for Y2K compliance as changes occur.
STATE OF READINESS
The Company's Y2K progress as of March 22, 1999 is as follows:
APPLICATIONS
The inventory and assessment phases for the Company are completed. The critical
applications for accounting, rights management and payroll are currently being
remediated and are expected to complete testing in the second quarter of 1999.
All critical milestones have been met. The critical applications for domestic
and non-domestic banking operations have been remediated and are currently
awaiting testing to be completed in the second quarter.
INFRASTRUCTURE
The inventory and assessment phases for computer systems have been completed.
The inventory and assessment of the remaining non-computer domestic systems
(e.g., telecommunications equipment) will be completed by the second quarter of
1999. The remediation and testing of all critical equipment is over 90% complete
and will be completed in the third quarter of 1999.
BUSINESS PARTNERS
During the course of business operations, the Company relies on third party
business partners to provide goods and services to the Company, to distribute
and to sell the Company's products. These business partners also include public
utilities, governmental agencies and financial institutions. The disruption of
receiving goods or services or distributing and selling the Company's products
could adversely affect the financial condition of the Company. Although the
Company has little or no control over the remediation and testing of these third
party systems, the Company is taking action in an effort to determine the level
of Y2K compliance at each third party. These actions include, but are not
limited to, requesting written confirmation of a business or business system's
Y2K compliance; directly meeting with a business' management; and, performing
additional independent tests. Subsequent to the Company's review of third party
Y2K compliance, management is determining the need for contingency plans.
The Company has completed approximately 90% of the inventory and assessment
phase of business partners and expects to be completed by the second quarter of
1999. The determination of third party Y2K compliance will continue through the
end of the year.
CONTINGENCY PLANS
As the remediation, testing and review of each application, infrastructure item
and business partner occurs, the Company is determining the need for
contingency plans. Where appropriate, plans addressing both operational and
technical requirements and alternatives are being developed. This phase will
continue through the end of 1999.
COSTS
Y2K costs have been expensed as incurred, except those directly related to the
replacement of non-compliant systems which have been capitalized. As of February
28, 1999, the Company had incurred costs of approximately $1,689,000, of which
$895,000 has been capitalized. The estimated additional costs to complete the
Y2K program are currently expected to approximate $1,238,000, of which
approximately $106,000 are expected to be capitalized. Based on these amount,
the Company does not expect the costs of Y2K program to have a material effect
on its results of operations, financial position or liquidity.
RISKS
The Company's goal is to achieve timely and substantial Y2K compliance, with
remediation work assigned based upon how critical each system is to the
Company's business. In addition, the Company's international operations may be
adversely affected by failures of businesses in other parts of the world to take
adequate steps to address the Y2K problem. Due to the general uncertainty
inherent in the Y2K problem resulting in part from the uncertainty of compliance
by the Company's principal business partners and third party providers, the
Company is unable to determine at this time what the consequences of Y2K may be.
The Company will continue to devote the necessary resources to complete its Y2K
program and contingency plans and believes that the completion of its Y2K
program and contingency plans should significantly mitigate operational and
financial risks.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
22
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
PAGE
----
Report of Independent Accountants 24
Consolidated Balance Sheets:
December 31, 1998 and 1997 25
Consolidated Statements of Operations:
Years ended December 31, 1998, 1997 and 1996 26
Consolidated Statements of Changes in Shareholders' Equity:
Years ended December 31, 1998, 1997 and 1996 27
Consolidated Statements of Cash Flows:
Years ended December 31, 1998, 1997 and 1996 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. present fairly, in all material respects,
the financial position of Spelling Entertainment Group Inc. and its subsidiaries
at December 31, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1998, 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.
PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
March 19, 1999
24
25
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
December 31,
--------------------------
1998 1997
--------- ---------
Assets
Current Assets:
Cash and cash equivalents $ 7,086 $ 860
Accounts receivable, net 127,473 104,150
Entertainment product, net 252,600 246,955
Other current assets 4,256 4,372
--------- ---------
Total current assets 391,415 356,337
Accounts receivable, net 43,248 90,593
Entertainment product, net 145,556 127,901
Property and equipment, net 10,875 11,409
Intangible assets, net 181,835 187,320
Other noncurrent assets 20 20
--------- ---------
$ 772,949 $ 773,580
========= =========
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable, accrued expenses and other liabilities $ 52,389 $ 34,691
Accrued participation expense 78,252 59,490
Deferred revenue 29,990 15,430
Income and other taxes 5,940 4,103
--------- ---------
Total current liabilities 166,571 113,714
Accrued participation expense 41,572 48,159
Long-term debt payable to Viacom 239,930 289,000
Deferred income and other taxes 24,546 25,245
Net liabilities related to discontinued operations 29,123 26,444
--------- ---------
501,742 502,562
--------- ---------
Commitments and contingent liabilities
Shareholders' Equity
Preferred Stock -- --
Common Stock, $.001 par value,
- 300,000,000 shares authorized
- 92,995,756 and 90,987,329 shares issued and outstanding 93 91
Capital in excess of par value 592,298 578,704
Accumulated deficit (320,663) (313,355)
Other equity adjustments (521) 5,578
--------- ---------
Total shareholders' equity 271,207 271,018
--------- ---------
$ 772,949 $ 773,580
========= =========
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,
-------------------------------------------
1998 1997 1996
--------- --------- ---------
Revenue $ 586,125 $ 564,239 $ 497,601
Gain on sale of TeleUNO 7,030 -- --
Costs and expenses:
Entertainment product costs 495,225 504,526 413,845
Selling, general and administrative 58,268 58,657 59,966
Provision for closure of film and video divisions 23,995 -- --
--------- --------- ---------
577,488 563,183 473,811
--------- --------- ---------
Operating income 15,667 1,056 23,790
Interest income 1,726 1,976 1,585
Interest expense, net (19,188) (20,928) (14,431)
Other, net 25,737 4,593 384
--------- --------- ---------
Income (loss) from continuing operations
before income taxes 23,942 (13,303) 11,328
Benefit (provision) for income taxes (15,000) 981 (7,253)
--------- --------- ---------
Income (loss) from continuing operations 8,942 (12,322) 4,075
Loss from discontinued operations of VIE, net -- -- (103,820)
Estimated loss on disposal of VIE, net (16,250) (40,000) (151,380)
--------- --------- ---------
Net loss $ (7,308) $ (52,322) $(251,125)
========= ========= =========
Weighted average number of common shares:
Basic 92,385 90,777 90,369
Diluted 93,158 90,777 91,298
Basic income (loss) per common share:
Continuing operations $ 0.10 $ (0.14) $ 0.04
Discontinued operations (0.18) (0.44) (2.82)
--------- --------- ---------
Basic loss per common share $ (0.08) $ (0.58) $ (2.78)
========= ========= =========
Diluted income (loss) per common share:
Continuing operations $ 0.10 $ (0.14) $ 0.04
Discontinued operations (0.18) (0.44) (2.79)
--------- --------- ---------
Diluted loss per common share $ (0.08) $ (0.58) $ (2.75)
========= ========= =========
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)
Accumulated
Common Stock Capital In Other Total
------------------------- Excess of Accumulated Comprehensive Shareholders'
Number Par Value Par Value Deficit Income (Loss) Equity
---------- ---------- ---------- ----------- ------------- -------------
Balance December 31, 1995 89,683,378 $ 90 $ 571,244 $ (9,908) $ (2,906) $ 558,520
Exercise of options and warrants 941,943 1 4,878 -- -- 4,879
Pension liability adjustment, net -- -- -- -- 1,453 1,453
Income tax benefit related
to stock options -- -- 138 -- -- 138
Unrealized holding gain, net -- -- -- -- 2,915 2,915
Cumulative translation adjustment -- -- -- -- 2,963 2,963
Net loss -- -- -- (251,125) -- (251,125)
---------- ---------- ---------- ---------- ---------- ----------
Balance December 31, 1996 90,625,321 91 576,260 (261,033) 4,425 319,743
Exercise of options
and warrants 362,008 -- 2,274 -- -- 2,274
Pension liability adjustment, net -- -- -- -- 2,555 2,555
Income tax benefit related
to stock options -- -- 170 -- -- 170
Realized gain included in net loss -- -- -- -- (3,484) (3,484)
Unrealized holding gain, net -- -- -- -- 4,124 4,124
Cumulative translation adjustment -- -- -- -- (2,042) (2,042)
Net loss -- -- -- (52,322) -- (52,322)
---------- ---------- ---------- ---------- ---------- ----------
Balance December 31, 1997 90,987,329 91 578,704 (313,355) 5,578 271,018
Exercise of options and warrants 2,008,427 2 13,268 13,270
Income tax benefit related to
stock options -- -- 326 -- -- 326
Realized gain included in net loss -- -- -- -- (25,875) (25,875)
Unrealized holding gain, net -- -- -- -- 20,244 20,244
Cumulative translation adjustment -- -- -- -- (468) (468)
Net loss -- -- -- (7,308) -- (7,308)
---------- ---------- ---------- ---------- ---------- ----------
Balance December 31, 1998 92,995,756 $ 93 $ 592,298 $ (320,663) $ (521) $ 271,207
========== ========== ========== ========== ========== ==========
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,
---------------------------------------
1998 1997 1996
--------- --------- ---------
Cash Flows From Operating Activities:
Net loss $ (7,308) $ (52,322) $(251,125)
Adjustments to reconcile net loss to cash flows
from continuing operations:
Net loss from discontinued operations 16,250 40,000 255,200
Depreciation and amortization 9,579 9,151 8,596
Provision for closure of film and video divisions 23,995 -- --
Amortization of entertainment product costs 400,828 428,381 362,255
Additions to entertainment product costs (456,960) (385,020) (416,841)
Gain from marketable securities (25,875) (5,648) --
Gain on sale of TeleUNO (7,030) -- --
Decrease (increase) in accounts receivable 24,243 1,700 (42,829)
Increase (decrease) in accounts payable,
accrued expenses, other liabilities and income taxes 18,493 (11,503) 12,919
Increase in accrued participation expense 29,997 10,490 9,708
Increase (decrease) in deferred revenue 14,560 (5,959) 2,042
Other, net 1,531 (2,487) 1,393
--------- --------- ---------
Net cash provided (used) by continuing operations 42,303 26,783 (58,682)
Net cash used by discontinued operations (41,071) (9,698) (47,726)
--------- --------- ---------
1,232 17,085 (106,408)
--------- --------- ---------
Cash Flows From Investing Activities:
Purchases of property and equipment, net (3,660) (1,766) (3,902)
Funding of discontinued operations of VIE (40,619) (960) (44,773)
Proceeds from sale of investments 35,586 -- --
Proceeds from sale of TeleUNO 12,500 -- --
Changes in net liabilities related to
discontinued operations of Charter (4,084) (2,086) (2,552)
--------- --------- ---------
Net cash used by continuing operations (277) (4,812) (51,227)
Net cash provided (used) by discontinued operations 118,857 (2,114) (7,752)
--------- --------- ---------
118,580 (6,926) (58,979)
--------- --------- ---------
Cash Flows From Financing Activities:
Borrowings under credit facilities 164,927 54,000 120,000
Repayments of credit facilities (213,997) (80,000) (15,000)
Issuances of Common Stock 13,270 1,564 1,590
--------- --------- ---------
Net cash (used) provided by continuing operations (35,800) (24,436) 106,590
Net cash (used) provided by discontinued operations (87,039) 8,215 54,294
--------- --------- ---------
(122,839) (16,221) 160,884
--------- --------- ---------
Net Decrease in Cash and Cash Equivalents (3,027) (6,062) (4,503)
Cash and Cash Equivalents at Beginning of Year 10,113 16,175 20,678
--------- --------- ---------
Cash and Cash Equivalents at End of Year $ 7,086 $ 10,113 $ 16,175
========= ========= =========
Cash and Cash Equivalents at End of Year:
Continuing operations $ 7,086 $ 860 $ 3,325
Discontinued operations -- 9,253 12,850
--------- --------- ---------
$ 7,086 $ 10,113 $ 16,175
========= ========= =========
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"). The Company has an extensive library of entertainment
product, which it distributes worldwide. The Company also licenses and otherwise
exploits ancillary rights of this product, such as music and merchandising
rights. Unless the context indicates otherwise, "Spelling" or the "Company"
refers to Spelling Entertainment Group Inc. and its subsidiaries.
BASIS OF PRESENTATION. The consolidated financial statements present the
consolidated financial position and results of operations of Spelling. All
material intercompany accounts and transactions have been eliminated. Certain
reclassifications have been made to prior periods to conform to the current
year's presentation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could subsequently differ from those estimates.
Assets and liabilities of international operations are translated at year-end
rates of exchange while results of operations are translated at average rates of
exchange in effect for the applicable period. Translation gains or losses are
included in other equity adjustments as a separate component of shareholders'
equity. (See Note 5.)
Viacom Inc. ("Viacom") currently owns approximately 80% of the Company's common
stock ("Common Stock"). On March 19, 1999, Viacom submitted a proposal to the
Company's Board of Directors (the "Board") to acquire all outstanding shares of
the Company not already held by Viacom. The Board formed a Special Committee of
independent directors to review Viacom's proposal. The Special Committee has
retained legal advisors and will be retaining financial advisors shortly to
assist the Special Committee in its review of the proposal.
CASH AND CASH EQUIVALENTS. Cash equivalents consist of interest-bearing
securities with original maturities of less than 90 days.
ACCOUNTS RECEIVABLE, NET. Current and noncurrent accounts receivable are net of
allowances for doubtful accounts and returns of $25,473,000 and $20,697,000 at
December 31, 1998 and 1997, respectively.
ENTERTAINMENT PRODUCT, NET. Current and noncurrent entertainment product, net,
includes development, production or acquisition costs (including advance
payments to producers), capitalized overhead and interest, home video
manufacturing costs, and prints, advertising and other related distribution
costs expected to benefit future periods. These costs are amortized, and
third-party participations and residuals are accrued, generally on an individual
product basis in the ratio that current-year gross revenue bears to estimated
future gross revenue. Revenue estimates are not included in estimated future
gross revenue of television programming until such sales are probable.
Entertainment product, net, is stated at the lower of cost less amortization or
estimated net realizable value. Estimates of total gross revenue, costs and
participations are reviewed quarterly and revised as necessary. When estimates
of total revenue and costs indicate that an individual product will realize an
ultimate loss, additional amortization is provided to fully recognize such loss
in that period or, for new television product, generally as the episodes are
delivered.
PROPERTY AND EQUIPMENT, NET. The carrying values of property and equipment are
based on cost, and provision for depreciation is made principally on the
straight-line method over estimated useful lives, ranging from 3 to 10 years.
Property and equipment are net of accumulated depreciation of $19,076,000 and
$14,882,000 at December 31, 1998 and 1997, respectively.
29
30
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
INTANGIBLE ASSETS, NET. Intangible assets represent the acquisition costs of
various entities in excess of the value of their identified net assets. These
costs are being amortized on a straight-line basis over 40 years from the
various dates these costs were incurred. Amortization expense relating to such
intangible assets was $5,486,000 for each of the three years ended December 31,
1998.
Intangible assets are net of accumulated amortization of $37,500,000 and
$32,015,000 at December 31, 1998 and 1997, respectively. It is the Company's
policy to evaluate the carrying value of such costs on a regular basis, using
the methodology prescribed in SFAS No. 121, and to recognize impairment if it
becomes probable that such costs would not be recoverable. (See Note 9 regarding
goodwill of VIE.)
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES. Included in the
caption "Accounts payable, accrued expenses and other liabilities" at December
31, 1998 and 1997 are accounts payable of $12,794,000 and $10,446,000; accrued
compensation of $14,390,000 and $10,755,000; interest and other payables to
Viacom of $4,377,000 and $1,391,000 (see Note 7); and other current liabilities
of $15,909,000 and $11,051,000, respectively. Additionally, accrued distribution
costs of $4,919,000 and $1,048,000 related to domestic theatrical distribution
are included at December 31, 1998 and 1997, respectively.
DEFERRED REVENUE. A substantial portion of the network license fees related to
television programming are received prior to the time the programming is
completed or delivered to the network. Such fees, and other monies received
prior to the time that the related entertainment product is available to the
licensee, are recorded on the balance sheet as deferred revenue. Such amounts
are normally repayable by the Company only if it fails to deliver the related
product to the licensee.
REVENUE RECOGNITION. Revenue from licensing agreements covering entertainment
product owned or distributed by the Company is recognized when the entertainment
product is available to the licensee for telecast, exhibition or distribution,
and other conditions of the licensing agreements have been met. Long-term
non-interest-bearing receivables arising from such agreements are discounted to
present value.
Revenue from direct distribution of home video product is recognized, net of an
allowance for estimated returns and discounts, together with related costs, in
the period in which the product is shipped to the Company's customers.
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. In May 1997,
the Company realized a non-cash gain with respect to a common stock investment
upon the merger of the investee with an unrelated acquiring company. The Company
received common shares of the acquiring company in exchange for the common
shares of the investee, and recorded the fair market value of the shares
received as the cost basis for such shares. During the fourth quarter of 1998,
the Company liquidated this common stock investment and recognized a gain of
$25,875,000.
The Company has accounted for both common stock investments (prior and
subsequent to the merger) as "available for sale" securities under the
applicable provisions of SFAS No. 115, adjusting the carrying value to fair
market value, with a corresponding adjustment, net of tax, to shareholders'
equity. (See Note 5.)
ACCOUNTING FOR ENVIRONMENTAL MATTERS. The allowances for estimated expenses and
disputed claims reported in Note 9 include accruals for environmental
liabilities, including anticipated remediation costs of properties held for
sale. Such accruals are determined independently of the estimated net realizable
value of any related asset, and are recorded without discount or offset for
either (i) time value of money prior to the anticipated date of payment, or
30
31
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(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 SHARE. Basic income (loss) per common share amounts
are based on the weighted average common shares outstanding during the
respective period. Diluted income (loss) per common share amounts are based on
the weighted average common shares outstanding during the period and shares
assumed issued upon conversion of stock options and warrants only in periods
when the effect of such conversions would have been dilutive to income (loss)
from continuing operations. There was no assumed conversion of stock options and
warrants for the year ended December 31, 1997, as the effect would be
anti-dilutive.
The table below presents a reconciliation of weighted average shares used in the
calculation of basic and diluted income (loss) per share:
1998 1997 1996
------ ------ ------
Basic shares - weighted average of common
shares outstanding 92,385 90,777 90,369
Additional shares assuming conversion of
stock options and warrants 773 -- 929
------ ------ ------
Diluted shares 93,158 90,777 91,298
------ ------ ------
STATEMENTS OF CASH FLOWS. Included in net cash provided by discontinued
operations from financing activities are fundings by the Company of $40,619,000,
$960,000, and $44,773,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
2. BUSINESS COMBINATIONS, ACQUISITIONS AND DISPOSITIONS
In February 1998, the Company announced its decision to exit the theatrical
feature film business and close Spelling Films. The Company recorded a charge of
$20,000,000, including the write-down to estimated net realizable value of
capitalized development projects to be sold or abandoned, reserves for
commitments to various talent, as well as severance costs related to Spelling
Films' employees. As of December 31, 1998, the remaining accrual balances for
this provision was $2,862,000 and is included in accounts payable, accrued
expenses and other liabilities in the accompanying balance sheet.
In April 1998, the Company sold TeleUNO, its Latin American entertainment
channel. The Company recognized a gain of $7,030,000 from this transaction in
the second quarter of 1998, which is reflected in the accompanying financial
statements.
In September 1998, the Company entered into a seven-year licensing agreement
with Artisan covering the domestic and Canadian home video and digital video
disc ("DVD") distribution rights to approximately 3,000 titles in the Company's
library. In connection with this transaction, the Company recorded a charge of
$3,995,000 in 1998, including severance costs related to employees of Republic
Entertainment Inc. ("Republic"), the reduction of carrying values of physical
inventory sold to Artisan and the write-down of certain titles to their
estimated net realizable value. As of December 31, 1998, the remaining accrual
balance of this reserve was $2,431,000 and is included in account payable,
accrued expenses and other liabilities in the accompanying balance sheet.
See Note 9 regarding the disposition of Virgin Interactive Entertainment Limited
("VIEL," together with its subsidiaries, "VIE").
31
32
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. ENTERTAINMENT PRODUCT, NET
Entertainment product, net, is comprised of the following at December 31 (in
thousands):
1998 1997
--------- ---------
Entertainment product:
Television
Released $ 231,366 $ 189,624
In process and other 43,560 25,324
--------- ---------
274,926 214,948
--------- ---------
Theatrical
Released 121,595 147,301
In process and other 1,635 12,607
--------- ---------
123,230 159,908
--------- ---------
Total 398,156 374,856
Less: non-current portion (145,556) (127,901)
--------- ---------
Current portion $ 252,600 $ 246,955
========= =========
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,
1998, approximately 65% of unamortized released entertainment product will be
amortized during the three years ending December 31, 2001.
4. DEBT
On September 30, 1996, the Company and Viacom executed a credit agreement (the
"Viacom Credit Agreement"). 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, as amended, were due to mature on
December 31, 1998. In March 1999, the Company and Viacom executed an amendment,
effective December 31, 1998, to extend the maturity date to December 31, 2000.
32
33
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Under the Viacom Credit Agreement, the Company pays an annual fee (currently
0.2375%) based on the unused portion of the facility, as well as certain
facility and administration fees. Effective October 1, 1998, 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 0.75%)
or at Citibank N.A.'s base rate. The average interest rate at December 31, 1998
and 1997, on borrowings under the Viacom Credit Agreement was 5.9% and 8.5%,
respectively.
Additional terms of the Viacom Credit Agreement require, among other items, a
minimum amount, as defined, of net worth. The minimum net worth covenant has
been amended as of December 31, 1996. Borrowings under the Viacom Credit
Agreement are secured by all of the assets of the Company and its domestic
subsidiaries and the entire amount outstanding under the Viacom Credit Agreement
may be accelerated if Viacom's borrowings under its separate credit facilities
were to be accelerated.
The Company made cash interest payments of $19,876,000 in 1998, $25,942,000 in
1997 and $19,418,000 in 1996.
At December 31, 1998, the carrying value of all of the Company's debt
approximated fair value.
See Note 9 regarding debt related to discontinued operations.
5. SHAREHOLDERS' EQUITY
PREFERRED STOCK. At December 31, 1998 and 1997, there were 20,000,000 shares of
Preferred Stock authorized but none outstanding.
COMMON STOCK. The par value of the Company's common stock is $0.001 per share.
ISSUANCE OF COMMON STOCK. As a result of Viacom's merger with BEC, Viacom
acquired certain warrants to purchase 1,337,148 shares of Common Stock. These
warrants were exercised in February 1998 for a total exercise price of
approximately $9,316,000.
CAPITAL IN EXCESS OF PAR VALUE. An adjustment of $326,000, $170,000, and
$138,000 was recorded to Capital in Excess of Par Value in 1998, 1997, and 1996,
respectively, to reflect the tax benefit obtained by the Company with respect to
stock options exercised by its employees. (See Note 8.)
COMPREHENSIVE INCOME (LOSS). The Company adopted SFAS No. 130, "Reporting
Comprehensive Income," effective January 1, 1998. After tax, total comprehensive
income (loss) was $(9,583,000), $(51,250,000) and $(240,486,000) for the years
ended December 31, 1998, 1997 and 1996, respectively. Total comprehensive income
(loss) is comprised of net income (loss) and other comprehensive income items,
including foreign currency translation adjustments and unrealized holding gains
on securities.
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
33
34
the date of grant. Options expire no later than 10 years from their date of
grant. Stock option data follows:
1998 1997 1996
--------------------------- ----------------------------- -----------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------- -------- ---------- ------------- --------- -------------
Outstanding at January 1 8,198,791 $ 7.66 7,978,318 $ 7.80 5,759,218 $ 7.72
Granted 1,287,500 $ 6.76 1,171,000 $ 6.90 3,750,010 $ 7.13
Exercised (671,279) $ 6.15 (362,008) $ 6.29 (841,943) $ 4.91
Terminated (1,187,839) $ 8.06 (588,519) $ 8.90 (688,967) $ 7.02
------------- ---------- ---------
Outstanding at December 31 7,627,173 8,198,791 7,978,318
============= ========== =========
Exercisable at December 31 3,914,923 $ 8.12 3,813,349 $ 7.85 3,079,436 $ 7.70
============= ========== =========
Available for grant at
December 31 2,867,963 3,030,838 5,094,251(a)
============= ========== =========
(a) Includes 1,360,866 shares available for grant under a plan which expired on
April 13, 1997.
The following table summarizes information concerning currently outstanding and
exercisable stock options at December 31, 1998:
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
- ---------------- ----------- ---------------- -------------- ------------- --------------
$ 5.25 - $ 5.75 25,834 7.27 $ 5.69 8,959 $ 5.56
$ 6.00 - $ 7.75 5,942,717 7.48 6.83 2,309,842 6.61
$ 7.88 - $ 9.88 469,622 5.66 9.11 417,122 9.14
$10.00 - $ 11.78 1,189,000 5.86 10.75 1,179,000 10.75
----------- ---------- ------------ ------------- ------------
$ 5.25 - $ 11.78 7,627,173 7.12 $ 7.58 3,914,923 $ 8.12
=========== ========== ============ ============= ============
Options related to employees of VIE and reflected in the tables above include
875,010 shares granted for the year ended December 31, 1996. Also included are
120,276, 133,582, and 775,220 shares exercised, and 615,060, 184,269 and 149,921
shares terminated for the years ended December 31, 1998, 1997 and 1996,
respectively.
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 $2,598,582 ($1,598,128 after tax or
$0.02 per share), $3,389,000 ($2,084,000 after tax or $0.02 per share) and
$2,007,000 ($1,240,000 after tax, or $0.01 per share) in 1998, 1997 and 1996,
respectively. These pro forma
34
35
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 $2.91,
$2.65 and $2.66 for 1998, 1997 and 1996, 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:
1998 1997 1996
------- ------- -------
Dividend yield (a) -- -- --
Expected stock price volatility 34.30% 30.91% 28.45%
Risk-free interest rate 4.91% 5.75% 6.60%
Expected life of options (years) 6.2 5.2 4.8
(a) During 1998, 1997 and 1996, the Company did not declare 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 $966,000, $1,306,000 and
$1,951,000 for the three years ended December 31, 1998, 1997 and 1996,
respectively. The Company's matching contribution to the Plan and its
discretionary profit-sharing contributions to the Plan are made in cash and are
restricted to investment in the Company's Common Stock, which is purchased by
the Plan's trustee in the open market.
A significant number of the Company's production employees are covered by union
sponsored, collectively bargained, multi-employer pension plans. The Company
contributed approximately $16,028,000, $11,512,000 and $9,229,000 to such
plans for the three years ended December 31, 1998, 1997 and 1996, respectively.
The Company does not provide any postemployment benefits other than to former
employees of Charter and to certain union employees employed by the Company's
television production operations.
7. RELATED PARTY TRANSACTIONS
See Notes 4 and 9 regarding the Company's credit facility with Viacom and
Viacom's guarantees of the Company's credit agreements with banks. The Company
was charged interest and fees by Viacom of $20,350,000, $25,633,000 and
$19,808,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
Included in accounts payable, accrued expenses and other liabilities is accrued
interest payable to Viacom of $882,000 and $568,000 as of December 31, 1998 and
1997, respectively. VIE was allocated interest charges of $325,000, $2,676,000
and $1,633,000 in 1998, 1997 and 1996, respectively, related to its pro rata
share of borrowings under the Viacom Credit Agreement and the Viacom Credit
Facility. (See Note 9.)
The Company participates in certain Viacom health and welfare benefit plans for
its employees. In addition, the Company participates in Viacom insurance
programs with respect to general business and workers' compensation coverage. As
of December 31, 1998 and 1997, the Company had a net payable to Viacom of
$3,495,000 and $823,000, respectively, with respect to these and other expenses.
During 1998, 1997 and 1996, the Company sold home video product to several
operating subsidiaries of Viacom International Inc., a subsidiary of Viacom.
Additionally, the Company licensed certain entertainment product to the
35
36
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
following parties in which Viacom has or had an ownership interest (i) United
Paramount Network, Nickelodeon U.K. and Comedy Central, in which Viacom has
equity interests; (ii) Showtime Networks Inc. ("Showtime"), a subsidiary of
Viacom; (iii) MTV Networks, a division of a subsidiary of Viacom; (iv) certain
television stations owned by Viacom; and (v) USA Network and Sci-Fi Channel in
which Viacom had equity interests until October 1997. For the three years ended
December 31, 1998, these transactions were not material.
Republic has entered into agreements with, and in certain cases has advanced
funds to Viacom, a partnership in which a subsidiary of Viacom is the managing
partner, and Showtime to distribute certain of their productions in the home
video market.
The Company has entered into agreements with Paramount Pictures Corporation
("Paramount") with respect to the domestic distribution of two of the Company's
feature film releases, "Night Falls on Manhattan" and "Stephen King's Thinner,"
in the theatrical, non-theatrical and pay television markets. Additionally, the
Company has partnered with Paramount in the production or funding of two
additional feature films, "In & Out" and "Breakdown," to which the Company owns
the international distribution rights. In August 1997, Republic entered into an
agreement with Paramount and licensed its domestic home video rights to seven
1997 rental titles, including "Night Falls on Manhattan."
The Company has entered into an agreement with Comedy Partners, in which Viacom
has an equity interest, to perform certain licensing and merchandising
activities on their behalf in exchange for a fee.
In November 1997, the Company entered into an agreement with Famous Music
Corporation and Ensign Music Corporation, subsidiaries of Paramount, with
respect to administration of the Company's music rights.
The Company engaged Showtime to explore business development opportunities for
the Company's various cable/programming channels, through December 31, 1997, at
which time the Company terminated this arrangement.
In the ordinary course of business, the Company has and expects to continue to
do business with Viacom and its affiliates.
36
37
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
8. INCOME TAXES
The provision (benefit) for income taxes for continuing operations and
discontinued operations for each of the three years ended December 31 include
(in thousands):
1998 1997 1996
-------- -------- --------
Continuing operations:
Current tax expense
Federal $ 817 $ 141 $ --
Foreign 3,178 8,818 5,047
State and local 2,557 516 80
-------- -------- --------
Total current 6,552 9,475 5,127
-------- -------- --------
Deferred tax expense
Federal 8,872 3,168 1,099
Foreign -- -- 234
State and local (424) (117) 793
-------- -------- --------
Total deferred 8,448 3,051 2,126
-------- -------- --------
Change in the beginning-of-the-year
valuation allowance -- (13,507) --
-------- -------- --------
Total provision (benefit) for continuing operations $ 15,000 $ (981) $ 7,253
======== ======== ========
Discontinued operations:
Federal $ (8,750) $ -- $ 7,863
Foreign -- 1,106 3,678
State and local -- -- 338
-------- -------- --------
Total provision for discontinued operations $ (8,750) $ 1,106 $ 11,879
======== ======== ========
37
38
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, 1998 and 1997 were as
follows (in thousands):
1998 1997
--------- ---------
Deferred Tax Assets:
Loss on disposal of VIE $ 105,526 $ 105,863
Tax attribute carryforwards 14,723 37,159
Discontinued operations allowances - Charter 3,556 3,344
Other, net 10,683 2,658
--------- ---------
134,488 149,024
Valuation allowance (108,325) (115,558)
--------- ---------
Total deferred tax assets $ 26,163 $ 33,466
========= =========
Deferred Tax Liabilities:
Revenue recognition $ 21,964 $ 27,368
Entertainment product, net 11,152 16,095
Other, net 7,401 5,056
--------- ---------
Total deferred tax liabilities $ 40,517 $ 48,519
========= =========
The decrease in the valuation allowance during 1998 is due to the Company's
determination that certain tax benefits related to discontinued operations are
currently realizable under a more likely than not standard, as well as a
reduction of previously recorded valuation allowances attributable to the
expiration of certain limited investment tax credit carryforwards.
The components of income (loss) from continuing operations before the provision
for income taxes in 1998, 1997 and 1996 were as follows (in thousands):
1998 1997 1996
-------- -------- --------
Domestic $ 16,088 $(17,190) $ (8,540)
Foreign 7,854 3,887 19,868
-------- -------- --------
$ 23,942 $(13,303) $ 11,328
======== ======== ========
The primary reasons for the effective tax rates on the income (loss) from
continuing operations differing from the statutory U.S. federal income tax rates
for each of the three years ended December 31 are summarized as follows:
1998 1997 1996
---- ---- ----
U.S. federal statutory income tax rate 35% 35% 35%
Increase (decrease) in rate:
Amortization of intangible assets 8 (15) 17
Adjustment of valuation allowance and
other reserves (2) 43 (3)
State and local taxes, net of available
federal income tax benefits 9 (3) 8
Foreign taxes, net of available federal
income tax benefits 9 (44) --
Other non-deductible expenses 4 (9) 7
--- --- ---
Effective tax rates 63% 7% 64%
=== === ===
Viacom owns approximately 80% of the outstanding shares of the Company and,
therefore, the Company is required to be included in the consolidated federal
income tax return of Viacom. The Directors of the Company
38
39
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
approved an agreement between the Company and Viacom that provides for the
administration of federal, state and foreign tax matters (the "Tax Agreement").
Under the Tax Agreement, the Company will remain in the same tax position as it
would have if it were continuing to file its tax returns separate and apart from
Viacom; as a result, the Company does not anticipate any material impact to its
financial condition or results of operations. Furthermore, the majority of the
amounts reported as current and deferred taxes represent amounts that are
ultimately payable to, or receivable from, Viacom pursuant to the Tax Agreement.
As of December 31, 1998, the Company has available net operating loss
carryforwards of approximately $20,273,000 as adjusted to reflect provisions and
elections in the Tax Agreement, AMT tax credit carryforwards of $4,394,000 and
investment tax credit carryforwards of $2,194,000. The use of these attributes,
which, except for the AMT credit, will expire beginning in 1999 through 2009, is
subject to certain limitations as a result of BEC's acquisition of a majority
interest in the Company during 1993. These tax attribute carryforwards represent
amounts determined on a separate company basis, the ultimate realization of
which is subject to the terms of the Tax Agreement with Viacom.
Total cash income tax payments were $4,796,000, $6,534,000 and $5,349,000 for
1998, 1997 and 1996, respectively. In addition, the Company received $32,000,
$724,000 and $1,431,000 of income tax refunds during 1998, 1997 and 1996,
respectively, the receipt of which had previously been accrued. However, the
Company did recognize benefits of $366,000, $5,661,000 and $300,000 during
1998, 1997 and 1996, respectively, as a result of the favorable resolution of
certain tax controversies and other issues. Additionally, the Company is subject
to audit by taxing authorities for varying periods in various tax jurisdictions.
Management believes that any required adjustments to the Company's tax
liabilities resulting from such audits will not have a material adverse impact
on its financial condition or results of operations.
9. DISCONTINUED OPERATIONS
INTERACTIVE BUSINESS
On February 20, 1997, the Company announced its intention to dispose of its
interactive game business, VIE. The Company has disposed of substantially all of
its investment in VIE and expects to shut-down the remaining VIE operations in
1999. Accordingly, the operations of VIE are reflected as discontinued.
During the year ended December 31, 1996, the Company provided for an estimated
loss on disposal of VIE of approximately $139,501,000, which included a
provision for future operating losses of approximately $56,000,000 and an
impairment loss of approximately $74,000,000 with respect to the carrying value
of goodwill associated with that business. Additionally, in 1996 the Company
revised its estimate of the remaining useful life asociated with VIE goodwill to
seven years and recorded an adjustment to goodwill amortization of approximately
$3,000,000. For the year ended December 31, 1997, the net operating loss of VIE
(before the additional provision discussed below) was $55,808,000 and was
provided for in the estimated loss on disposal as of December 31, 1996. In the
fourth quarter of 1997, the Company recorded an additional provision of
$40,000,000, net of income taxes, for future operating losses and cash funding
requirements projected for the remaining holding period through completion of
the disposition. In 1998, the Company recorded an additional provision of
$16,250,000, net of a $8,750,000 currently realizable income tax benefit, to
provide for the costs of shut-down.
Included in costs and expenses in the 1996 results of operations is a cumulative
pretax adjustment of approximately $7,500,000 related to the change in
accounting principles from SFAS No. 53 to SFAS No. 86 with respect to accounting
for software development costs, as required by EITF 96-6. The income tax
provision in the 1997 and 1996 results of operations is due to the Company's
determination that the tax benefit arising from the estimated loss on disposal,
as well as from VIE's past losses, is not currently realizable under a more
likely than not standard.
39
40
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
VIE's net assets (liabilities) as of December 31, 1998 and 1997, and results of
operations for the three years then ended are as follows (in thousands):
December 31,
------------------------
1998 1997
--------- ---------
Current assets $ -- $ 115,043
Current liabilities -- (194,505)
--------- ---------
Net current assets (liabilities) -- (79,462)
--------- ---------
Property and equipment, net -- 14,081
Intangibles, net -- 91,707
Other non-current assets -- 5,066
Non-current liabilities (28,673) (53,301)
--------- ---------
Net non-current assets (liabilities) (28,673) 57,553
--------- ---------
Net assets (liabilities) $ (28,673) $ (21,909)
========= =========
Year Ended December 31,
---------------------------------------
1998 1997 1996
--------- --------- ---------
Revenue $ 102,949 $ 243,265 $ 254,046
Loss before provision for income taxes $ (25,000) $ (38,894) $(243,730)
Net loss from discontinued operations $ (16,250) $ (40,000) $(255,200)
On September 4, 1998, the Company completed the sale of the stock of Westwood
Studios, Inc., a subsidiary of VIE, and certain development assets of VIE for
$122,500,000 in cash. The proceeds of this transaction were used to pay down
bank debt and other costs associated with the transaction. On November 10, 1998,
the Company completed the sale of all non-U.S. operations of VIE, effectively
completing the disposal of its interactive game business.
A wholly owned subsidiary of VIE had a multi-currency credit agreement with a
bank in the U.S. (the "Credit Agreement") which was due to expire on September
30, 1998. On September 8, 1998, total borrowings under the Credit Agreement in
the amount of $97,000,000 were repaid and the Credit Agreement was terminated.
Borrowings under the Credit Agreement as of December 31, 1997 were $97,472,000.
As of December 31, 1997, the Company had no letters of credit outstanding under
the Credit Agreement.
Another wholly owned subsidiary of VIE had a 10,000,000 pounds sterling credit
facility (the "UK Facility") with a bank in the United Kingdom which was due to
expire on December 31, 1998 and was guaranteed by Viacom and the Company.
Advances under the renegotiated UK Facility bore interest at the bank's prime
rate plus 1.0% or alternatively at selected Eurocurrency rates. On November 10,
1998, total borrowings under the UK Facility were repaid and the UK Facility was
terminated. Borrowings under the UK Facility as of December 31, 1997 were
$11,090,000. As of December 31,
40
41
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
1997, the Company had approximately $938,000, in letters of credit outstanding
under the UK Facility to guarantee its interactive game purchases. The Company
and Viacom provide a rent guarantee for this subsidiary which expires in 2005.
Pursuant to the separate credit facilities under which Viacom is a borrower,
certain subsidiaries of Viacom, including the Company, are restricted from
incurring indebtedness (other than indebtedness owing to Viacom) without the
prior consent of Viacom's lenders. Such consent has been given with respect to
the Credit Agreement.
VIE made cash interest payments of $4,947,000, $7,119,000 and $7,484,000 in
1988, 1997 and 1996, respectively, with respect to the credit arrangements
discussed above.
PETROLEUM BUSINESS
Net assets (liabilities) of discontinued petroleum operations which are held for
disposition consisted of the following at December 31 (in thousands):
1998 1997
------- -------
Receivables, net $ 574 $ 574
Property and equipment, net 3,189 3,186
Pension asset 2,793 2,691
Accounts payable and other (1,658) (1,655)
Allowances for estimated expenses
and disputed claims (5,349) (9,331)
------- -------
$ (451) $(4,535)
======= =======
CONTINGENCIES. Contingent liabilities relating to discontinued operations
include matters such as contract disputes, remaining disputed claims under the
joint plan of reorganization of the Company and certain of its subsidiaries (the
"Joint Plan") and environmental cleanup assessments or damages. Some of the
parties seek damages from the Company in very large amounts, however, as
discussed below, management does not believe the ultimate resolution of these
matters should have a material adverse effect on its financial condition and its
results of operations.
(A) The Company and its insurers paid approximately $15,500,000 and $33,000,000,
respectively, over a 10-year period to resolve government and private-party
actions arising from the alleged improper disposal by a subsidiary in 1971 of
waste material, which later was determined to contain dioxin, at a number of
sites in Missouri. The
41
42
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 co-defendant (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. Two private actions
have also been brought with respect to such possible contamination at an
additional location. Notification of possible cleanup or damages responsibility
has also been received regarding eight other sites where waste materials
allegedly were delivered. [The foregoing summary excludes certain matters which,
due to the passage of time, the Company believes the claimant no longer intends
to pursue their allegations.] 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.
A subsidiary is engaged in the cleanup of a petroleum terminal property owned by
the subsidiary in Tiverton, Rhode Island. Environmental cleanup activity at the
Tiverton, Rhode Island site was substantially completed in September 1998,
although final site grading and negotiation of final administrative approvals
will continue into 1999.
Ten parties unaffiliated with the Company, plus certain affiliates of those
parties, (together, the "Group") entered into agreements in 1996 with the United
States tolling the statute of limitations with respect to potential
reimbursement claims by the government in connection with its cleanup of the
Sikes Superfund Site in Crosby, Texas, at an alleged cost exceeding
$140,000,000. An effort to mediate such claims has failed, and the United States
and the State of Texas have filed a cost recovery lawsuit against the Group.
Although the EPA previously had advised a subsidiary of the Company, Charter
International Oil Company ("CIOC"), that it was a potentially responsible party,
any action by the government against CIOC appears now to be precluded by the
statute of limitations. The Group is filing third-party claims in such lawsuit,
seeking contribution from other parties they believe should be responsible for
an equitable share of any judgment or settlement amounts the Group ultimately
may pay. To the best of the Company's knowledge, the Group presently does not
intend to file such a claim against CIOC because of its defenses, including
those relating to CIOC's Chapter 11 proceedings.
While the results of such actions cannot be predicted with certainty, based upon
its current knowledge of the facts and circumstances and its understanding of
the applicable laws, the Company believes the ultimate resolution of these
matters should not have a material adverse effect on its financial condition and
its results of operations. This belief is also based upon (i) allowances that
have been established for estimated expenses related to environmental matters
and remaining Chapter 11 disputed claims (see table above), and (ii) an
insurance-type indemnity agreement with American Financial Corporation ("AFC").
Although there are significant uncertainties inherent in estimating
environmental-related liabilities, based upon the Company's experience it is
considered unlikely that the amount of possible environmental liabilities and
Joint Plan disputed claims would exceed the amount of the allowances by more
than $50,000,000, a substantial portion of which would be covered by the AFC
indemnity.
The AFC indemnity, which was agreed to in exchange for a one-time payment of
$5,000,000 expensed by the Company as part of discontinued operations in the
first quarter of 1993, provides for the reimbursement to the
42
43
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 non-contributory, defined benefit pension plan
that 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.
The additional minimum pension liability was reduced by $1,453,000 (net of a tax
benefit adjustment of $909,000) in 1996 and by $2,555,000 (net of a tax benefit
adjustment of $1,658,000) in 1997 with corresponding credits to shareholders'
equity. (See Note 5.)
The following table sets forth the plan's funded status and amounts recognized
as of December 31 (in thousands):
1998 1997
-------- --------
Total projected benefit obligation $(47,552) $(46,749)
Market value of assets 51,973 49,661
-------- --------
Funded status 4,421 2,912
Transition asset (1,185) (1,580)
Unrecognized loss 967 1,334
-------- --------
Prepaid (accrued) pension cost $ 4,203 $ 2,666
======== ========
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):
1998 1997 1996
------- ------- -------
Interest Cost $ 3,167 $ 3,215 $ 3,273
Expected return on assets (5,993) (8,316) (5,857)
Net amortization and deferrals 1,290 4,492 2,432
------- ------- -------
Pension expense $(1,536) $ (609) $ (152)
======= ======= =======
The weighted-average discount rates used in determining the actuarial present
value of the projected benefit obligation were 6.75%, 7% and 7.25% for the
years ended December 31, 1998, 1997 and 1996, respectively. The expected
long-term rate of return on assets was 9% for the year ended December 31, 1998
and 8% for each of the years ended December 31, 1997 and 1996. 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.
43
44
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
As of December 31, 1998, 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, 1998 was $6,132,000,
$5,962,000, and $5,527,000, 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):
1999 $ 10,403
2000 5,756
2001 4,659
2002 4,726
2003 3,831
Thereafter 7,668
---------
Total $ 37,043
=========
The Company guarantees a lease for VIE for office space in London, England. The
future minimum annual rental commitments, excluding renewal options, for the
subsequent five years and thereafter for this lease is $1,035,000 for 1999,
$1,035,000 for 2000, $1,035,000 for 2001, $1,035,000 for 2002, $1,035,000 for
2003, and $16,562,000 thereafter.
11. INDUSTRY SEGMENT INFORMATION
The Company's continuing business activities consist of one industry segment,
entertainment. The Company's operations primarily consist of producing,
distributing and exploiting various entertainment product, including television
series and feature films, throughout the world. The Company had revenue from one
customer in 1998, 1997 and 1996 representing 19%, 21%, and 20% 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, 1998 and 1997.
The following table presents revenue by geographic region for the years ended
December 31, 1998, 1997 and 1996.
1998 1997 1996
-------- -------- --------
Domestic revenue $400,616 $340,665 $314,610
-------- -------- --------
Export revenue, Europe 146,427 144,915 120,925
Export revenue, other 39,082 78,659 62,066
-------- -------- --------
Total export revenue 185,509 223,574 182,991
Total revenue $586,125 $564,239 $497,601
======== ======== ========
12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents quarterly results of operations for the years ended
December 31, 1998 and 1997 (in thousands, except per share data).
44
45
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
1998
---------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
Revenue $ 167,425 $ 108,785 $ 157,065 $ 152,850
Income (loss) from continuing
operations, net 1,614 51 (4,459) 11,736
Discontinued operations, net -- -- (25,000) 8,750
----------- ----------- ----------- -----------
Net income (loss) $ 1,614 $ 51 $ (29,459) $ 20,486
=========== =========== =========== ===========
Basic income (loss) per common share:
Continuing operations $ 0.02 $ 0.00 $ (0.05) $ 0.13
Discontinued operations -- -- (0.27) 0.09
----------- ----------- ----------- -----------
Basic income (loss) per common share $ 0.02 $ 0.00 $ (0.32) $ 0.22
=========== =========== =========== ===========
Diluted income (loss) per common share:
Continuing operations $ 0.02 $ 0.00 $ (0.05) $ 0.13
Discontinued operations -- -- (0.27) 0.09
----------- ----------- ----------- -----------
Diluted income (loss) per common share $ 0.02 $ 0.00 $ (0.32) $ 0.22
=========== =========== =========== ===========
1997
---------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
Revenue $ 166,503 $ 148,425 $ 108,480 $ 140,831
Income (loss) from continuing
operations, net 728 3,037 (18,087) 2,000
Discontinued operations, net -- -- -- (40,000)
----------- ----------- ----------- -----------
Net income (loss) $ 728 $ 3,037 $ (18,087) $ (38,000)
=========== =========== =========== ===========
Basic income (loss) per common share:
Continuing operations $ 0.01 $ 0.03 $ (0.20) $ 0.02
Discontinued operations -- -- -- (0.44)
----------- ----------- ----------- -----------
Basic income (loss) per common share $ 0.01 $ 0.03 $ (0.20) $ (0.42)
=========== =========== =========== ===========
Diluted income (loss) per common share:
Continuing operations $ 0.01 $ 0.03 $ (0.20) $ 0.02
Discontinued operations -- -- -- (0.44)
----------- ----------- ----------- -----------
Diluted income (loss) per common share $ 0.01 $ 0.03 $ (0.20) $ (0.42)
=========== =========== =========== ===========
13. SUBSEQUENT EVENTS
On March 19, 1999, Viacom submitted a proposal to the Company's Board of
Directors (the "Board") to acquire all outstanding shares of the Company not
already held by Viacom. The Board formed a Special Committee of independent
directors to review Viacom's proposal. The Special Committee has retained legal
45
46
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
advisors and will be retaining financial advisors shortly to assist the Special
Committee in its review of the proposal.
46
47
SPELLING ENTERTAINMENT GROUP INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
1998
- ----------------------------------------------------------------------------------------------------------------
Other
Balance Additions Deductions adjustments Balance at
at beginning charged from during end of
Description of year to income reserves year year
- ----------------------------------------------------------------------------------------------------------------
Deducted from accounts receivable $20,697 $ 8,283 $ (4,179) $ 672 $25,473
for doubtful accounts and returns
Estimated expenses and $ 9,331 -- $ (4,431) $ 449 $ 5,349
disputed claims
1997
- ----------------------------------------------------------------------------------------------------------------
Deducted from accounts receivable
for doubtful accounts and returns $18,935 $ 9,568 $ (8,690) $ 884 $20,697
Estimated expenses and
disputed claims $10,986 $ -- $ (1,655) $ -- $ 9,331
1996
- ----------------------------------------------------------------------------------------------------------------
Deducted from accounts receivable
for doubtful accounts and returns $26,070 $ 4,331 $(11,448) $ (18) $18,935
Estimated expenses and
disputed claims $12,194 $ -- $ (1,208) $ -- $10,986
47
48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
48
49
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The persons named below are currently serving as directors of the Company.
SUMNER M. REDSTONE, age 75, has been Chairman of the Board since January 1996
and has been a Director of the Company since November 1994. Mr. Redstone has
served as Chairman of the Board of Viacom since 1987 and as Chief Executive
Officer of Viacom since January 1996. He has served as President, Chief
Executive Officer of National Amusements, Inc. ("NAI") since 1967 and as
Chairman of the Board of NAI since 1986. He is a member of the Advisory Council
for the Academy of Television Arts and Sciences Foundation and is on the Board
of Trustees for The Museum of Television and Radio. He served as the first
Chairman of the Board of the National Association of Theater Owners, and is
currently a member of the Executive Committee of that organization. Since 1982,
Mr. Redstone has been a member of the faculty of Boston University Law School,
where he has lectured in entertainment law, and since 1994, he has been a
Visiting Professor at Brandeis University.
AARON SPELLING, age 75, has been Vice Chairman of the Board of the Company since
April 1993 and a Director since October 1992. Mr. Spelling also serves as the
Chairman of the Board and Chief Executive Officer of Spelling Television Inc.
Mr. Spelling's career includes involvement as a writer, creator and producer of
more than 100 movies-for-television and more than 30 television series including
"The Danny Thomas Hour," "The Guns of Will Sonnett," "The Mod Squad," "Charlie's
Angels," "The Rookies," "Starsky & Hutch," "Hart to Hart," "Fantasy Island,"
"Family," "The Love Boat," "Vegas," "Matt Houston," "Hotel," "Dynasty," "The
Colbys," "Beverly Hills, 90210," "Melrose Place," and "7th Heaven," encompassing
more than 4,200 hours of television programming over 30 years.
PHILIPPE P. DAUMAN, age 45, has been a Director of the Company since November
1994. Mr. Dauman has served as Executive Vice President of Viacom since March
1994 and as Deputy Chairman of Viacom since January 1996. From February 1993 to
October 1998, he also served as General Counsel and Secretary of Viacom.
Prior thereto, he was a partner in the law firm of Shearman & Sterling
in New York, which he joined in 1978. Mr. Dauman also serves on the Board of
Directors of Lafarge Corporation, NAI and Viacom.
THOMAS E. DOOLEY, age 42, has been a Director of the Company since April 1996.
Mr. Dooley has served as Executive Vice President of Viacom since March 1994 and
as Deputy Chairman of Viacom since January 1996. From July 1992 to March 1994,
Mr. Dooley served as Senior Vice President, Corporate Development of Viacom.
From August 1993 to March 1994, he also served as President, Interactive
Television of Viacom. Prior thereto, he held various positions in Viacom's
corporate and divisional finance areas. Mr. Dooley also serves on the Board of
Directors of Viacom.
WILLIAM M. HABER, age 56, has been a Director of the Company since August 1997.
Mr. Haber has served as Advisor to the President of Save the Children
Federation, Inc. since November 1995. In 1975, Mr. Haber co-founded Creative
Artists Agency ("CAA"). From January 1975 to November 1995 he was responsible
for managing and executing CAA's corporate advisory services. From 1964 to 1975
he was head of the talent department at the William Morris Agency. Mr. Haber is
a past President of the Hollywood Radio & Television Society and a member of the
Board of Directors of several organizations, including the Museum of Television
& Radio, the Ad Council, Jim Henson Productions, The Foundation for the Junior
Blind and Save the Children Federation, Inc.
JOHN L. MUETHING, age 77, has been a Director of the Company since October 1992.
He has been Of Counsel to the Cincinnati, Ohio law firm of Keating, Muething &
Klekamp for more than eight years.
49
50
EXECUTIVE OFFICERS
Set forth below is information regarding those persons who serve as executive
officers of the Company, but who do not serve as directors of the Company.
PETER H. BACHMANN, age 41, was elected President of the Company in May 1997. Mr.
Bachmann served as Executive Vice President, Office of the President of the
Company from September 1994 to May 1997. From August 1993 to September 1994, he
served as Senior Vice President-Business and Legal Affairs of the Company and of
Spelling Television Inc.
ROSS G. LANDSBAUM, age 36, has been Senior Vice President - Chief Financial
Officer of the Company since July 20, 1998. From August 1997 to July 20, 1998 he
served as Vice President Finance and Business Development and Treasurer of the
Company. Mr. Landsbaum served as Vice President, Finance and Tax of the Company
from July 1994 to August 1997. Prior to joining the Company, Mr. Landsbaum held
various positions with Arthur Andersen LLP from January 1986 to June 1994, most
recently as Manager.
JAMES MILLER, age 39, has been Vice President and Controller of the Company
since January 1997. Mr. Miller served as Vice President and Controller/Acting
Chief Financial Officer of Silver King Communications, Inc. from July 1996 to
December 1996. Prior thereto, he served as Vice President, Controller of Savoy
Pictures, Inc. from November 1993 to July 1996.
SALLY SUCHIL, age 48, has been Senior Vice President - General Counsel,
Secretary and Administration since January 1998. From January 1995 to January
1998, Ms. Suchil served as Senior Vice President, General Counsel and Secretary
of the Company. Prior thereto, Ms. Suchil served as Senior Vice President and
Assistant General Counsel of Metro-Goldwyn-Mayer Inc. ("MGM") from June 1992 to
December 1994.
50
51
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table contains compensation data for services rendered in all
capacities to the Company for the years ended December 1998, 1997, and 1996, of
those persons who were (i) the Company's Principal Executive Officer during 1998
and (ii) certain executive officers of the Company during 1998. (Such persons in
(i) and (ii) being referred to herein collectively as the "Named Officers").
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
---------------------- ------------
Securities
Name and Underlying All Other
Principal Positions Year Salary Bonus Options Compensation(c)
- ------------------- ---- ------ ----- ------- ---------------
Peter H. Bachmann 1998 725,385 500,000(a) 125,000 4,091
President 1997 697,624 303,750(b) 125,000 7,200
1996 492,308 175,000 250,000 6,750
Ross G. Landsbaum 1998 236,730 198,400(a) 50,000 6,400
Senior Vice President - 1997 160,923 75,000(b) 30,000 7,200
Chief Financial Officer 1996 144,870 30,000 20,000 3,805
James Miller 1998 188,821 94,000(a)(d) 15,000 5,972
Vice President and 1997 160,000 40,000(b) 35,000 2,215
Controller
Sally Suchil 1998 305,423 105,225(a) 25,000 4,830
Senior Vice President - 1997 259,615 63,750(b) 25,000 7,200
General Counsel, 1996 249,039 55,000 40,000 6,750
Secretary and
Administration
- ---------------
(a) Bonuses were paid in February 1999 in respect of services performed in
1998.
(b) Bonuses were paid in February 1998 in respect of services performed in
1997.
(c) Company contribution under the 401(k) Savings Plan.
(d) Includes a bonus payment of $10,000 paid in November 1998.
51
52
STOCK OPTION GRANT TABLE
Set forth below is information with respect to grants of stock options during
the fiscal year ended December 31, 1998, to the Named Officers. All such options
were granted with an exercise price equal to the market value of the underlying
Common Stock on the date of the grant. Stock appreciation rights are not
available under the Company's stock option plans.
OPTION GRANTS IN 1998
Potential Realizable
Individual Grants Value at Assumed
----------------------------------- Annual Rates of Stock
Number of % of Total Price Appreciation for
Securities Options Granted Option Term
Underlying to Employees Exercise Expiration ------------------------------
Options Granted(1) in Fiscal Year Price Date 5% 10%
----------------- --------------- -------- ---------- ---------- ----------
Peter H. Bachmann 125,000 10.12% $ 6.75 09/15/08 $ 530,630 $1,344,720
Ross G. Landsbaum 50,000 4.05% $ 6.75 09/15/08 212,252 537,888
James Miller 15,000 1.21% $ 6.75 09/15/08 63,676 161,366
Sally Suchil 25,000 2.02% $ 6.75 09/15/08 106,126 268,944
- -----------
(1) Grant vests 25% each year over a period of four years.
As required by the Commission, the dollar amounts in the last two columns
represent the hypothetical gain or "option spread" that would exist for the
options based on assumed 5% and 10% annual compounded rates of stock price
appreciation over the full option term. These prescribed rates are not intended
to forecast possible future appreciation, if any, of the Common Stock.
STOCK OPTION EXERCISES AND YEAR-END HOLDINGS
The following table contains certain information pertaining to stock options (i)
exercised during the fiscal year ended December 31, 1998 and (ii) held as of
December 31, 1998 by the Named Officers. The Company has no long-term incentive
compensation plans pursuant to which stock appreciation rights may be awarded.
AGGREGATED OPTION EXERCISES IN 1998 AND FISCAL YEAR END OPTION VALUES
Number of Unexercised Value of Unexercised
Options at In-The-Money Options at
Shares December 31, 1998 December 31, 1998(1)
Acquired Value ------------------------------ ------------------------------
Named Officers On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- -------------- ----------- -------- ----------- ------------- ----------- -------------
Peter H. Bachmann -- -- 373,750 406,250 $ 25,938 $210,938
Ross G. Landsbaum -- -- 48,750 88,750 1,875 50,000
James Miller -- -- 5,000 45,000 0 20,625
Sally Suchil -- -- 45,000 85,000 3,750 40,625
- -----------
(1) The closing price of the Company's Common Stock on December 31, 1998 was
$7.50.
DIRECTOR COMPENSATION
Each member of the Board (excluding Messrs. Dauman, Dooley and Redstone) are
entitled to receive an annual fee of $15,000 plus $750 for each Board and
Committee meeting attended.
52
53
EMPLOYMENT CONTRACTS
Pursuant to an Employment Agreement dated as of March 1, 1998 (the "Employment
Agreement"), Aaron Spelling is employed as Vice Chairman of the Board of the
Company and as Chairman of the Board and Chief Executive Officer of Spelling
Television Inc. and is entitled to serve as Executive Producer or Producer of
substantially all television programs and films (as he may elect) produced by
the Company or its production subsidiaries. Mr. Spelling's Employment Agreement
extends through April 30, 2000. As compensation for the performance of his
obligations under the agreement, Mr. Spelling receives a salary of $129,167 per
month for the first two months of the agreement, and an annual base salary of
$1,700,000 for the period May 1, 1998 to April 30, 1999 ("first term year") and
$1,850,000 for the period May 1, 1999 to April 30, 2000 ("second term year").
Mr. Spelling is also entitled to receive a year-end bonus of $175,000 for the
first term year and $200,000 for the second term year. As compensation for
serving as an Executive Producer or Producer, Mr. Spelling receives certain
producer fees and other compensation. (See "Certain Transactions.")
Mr. Spelling has the right to terminate the Employment Agreement effective upon
seven (7) days' written notice in the event that the Company materially breaches
its obligations under the Employment Agreement or upon certain circumstances
involving a change of control of the Company. If the agreement is terminated for
any reason, Mr. Spelling may elect to continue to provide Executive Producer
services on the Company's product as set forth in the agreement and the Company
will pay him producer fees and other compensation as set forth therein. If Mr.
Spelling terminates the Employment Agreement based on a material breach by the
Company, Mr. Spelling has the right to cease providing services and receive a
lump sum payment equal to the present value of his base salary for the remainder
of the term, as well as Executive Producer fees and other compensation payable
in accordance with a formula provided in his Employment Agreement, and the
year-end bonuses. In addition, Mr. Spelling was also granted 75,000 stock
options. In the event the Company is sold or taken private (as defined in his
agreement), any outstanding and unvested stock options he holds will become
immediately exercisable.
The Company has a three-year employment agreement with Peter H. Bachmann, dated
as of January 1, 1997, wherein he is employed as President of the Company and
received an annual salary of $675,000 during the first year of the term.
Pursuant thereto, his salary increased to $725,000 on January 1, 1998 and
increased to $795,000 on January 1, 1999. Further, he is eligible to receive
incentive compensation, targeted at 50% of his annual salary, based on the
Company's performance and his individual performance. Mr. Bachmann is also
entitled to receive an annual grant of not less than 125,000 stock options.
Under certain circumstances, including a change of control, sale, liquidation or
other disposition of the Company or if the Company engages in a "going private"
transaction (as defined in his agreement), Mr. Bachmann's outstanding stock
options will become vested and fully exercisable. In the event Mr. Bachmann is
terminated without cause or he terminates the agreement for good reason, he is
entitled to receive his base salary, bonus and certain other compensation for
the balance of the employment term, subject to mitigation after the first 18
months, and all outstanding and vested stock options as of the end of the
employment term shall remain exercisable for six months following the date of
termination (but not beyond the expiration date of such stock options.)
The Company has a two-year employment agreement with Ross G. Landsbaum, dated as
of July 20, 1998. Pursuant to such agreement, Mr. Landsbaum is employed as
Senior Vice President - Chief Financial Officer of the Company at an annual
salary of $265,000 during the first year of the agreement and $285,000 during
the second year of the agreement. Further, he is eligible to receive incentive
compensation targeted at 40% of his base salary.
The Company has an employment agreement with James Miller, dated as of January
6, 1997, as amended as of June 30, 1998, which terminates on September 30, 2000.
Pursuant to such agreement, Mr. Miller is employed as Vice President and
Controller of the Company at an annual salary of $200,000 from October 1, 1998
to September 30, 1999 and $215,000 from October 1, 1999 to September 30, 2000.
Mr. Miller is also entitled to receive a bonus at the Company's discretion.
Pursuant to Mr. Miller's employment agreement, he was granted 20,000 stock
options vesting 25% each year.
53
54
The Company has an employment agreement with Sally Suchil which terminates on
January 4, 2000. Pursuant to such agreement, Ms. Suchil is employed as Senior
Vice President - General Counsel, Secretary and Administration of the Company at
an annual salary of $305,000 during the first year of the agreement, which
increased to $325,000 on January 1, 1999. Ms. Suchil is also eligible to receive
incentive compensation targeted at 30% of her base annual salary.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors at December 31, 1998
consisted of Philippe P. Dauman, William M. Haber (Chairman) and John L.
Muething. The Compensation Committee's functions include reviewing and
recommending compensation arrangements for executive officers (including the
Named Officers) of the Company and administering the Company's stock option
plans, including determining eligibility, the number of shares to be granted and
the terms of such grants. Mr. Dauman recuses himself from all matters relating
to stock option grants to directors and executive officers of the Company who
are subject to the provisions of Section 16 of the Securities Exchange Act of
1934. Such matters are administered solely by the non-employee directors who are
members of the Compensation Committee.
GENERAL
The Company's executive compensation policies relating to executive officers
have been designed to provide a total compensation program that will attract,
retain and motivate superior executive personnel while integrating such
compensation with Company performance and shareholder interests. The Company's
compensation program for executive officers has three principal components:
annual base salary, annual incentive bonuses and stock option grants. Under this
program, a portion of an executive's compensation, in both the short term and
the long term, is linked to the Company's performance. In addition, each of the
Company's employees including its executive officers is permitted, when
eligible, to participate in the Company's 401(k) Savings Plan by making
voluntary contributions to his or her account. The Company contributes to
individual employee accounts based upon the amount of the employee's
contributions. In addition, at the Company's discretion, the Company may
annually make a discretionary contribution based on a profit-sharing component
of the plan in such amount as may be determined, from time to time, by the Board
of Directors, of the total compensation (subject to a maximum of $160,000 of
such compensation) paid to participants in such plan, which amount is
distributed ratably to participants' individual accounts based on the
participants' base salaries.
BASE SALARY
Annual salaries are established after a review of industry, peer group and
national surveys of total compensation packages, as well as evaluation of the
individual executive's past and expected future performance. Annual salary
levels are generally targeted to, and in 1998 corresponded to, the range of
salaries paid to executives with comparable qualifications, experience and
responsibilities at other similarly situated companies in the entertainment
industry. In establishing salary levels against such range, the competitiveness
of the executive's entire compensation package is considered. Executive officers
are generally employed pursuant to employment agreements which fix their base
salary.
ANNUAL INCENTIVE BONUSES
Eligible employees, including executive officers and the Named Officers, are
eligible to receive annual incentive bonuses. In approving such bonuses,
consideration is given to the operating results of the Company as a whole, the
performance of the individual executive's division and the contributions made by
the individual during the course of the year. The evaluation is conducted from a
more generalized consideration of each of the three factors with a view towards
rewarding outstanding performance and incentivizing executives to contribute to
the overall success of their operating division and the Company as a whole.
Incentive bonuses were paid to executive officers in February 1999 in respect of
services performed in 1998.
54
55
STOCK OPTIONS
Stock options represent an important part of the Company's compensation program.
The Committee believes that the Company's shareholders' interests are well
served by aligning the interests of the Company's executive officers (including
the Named Officers) with those of the shareholders through the grant of stock
options. Options under the Company's 1994 Stock Option Plan have been granted at
exercise prices equal to the fair market value of the Common Stock on the date
of the grant, and will only have value if the Company's stock price increases.
Options granted subsequent to July 1993 generally become exercisable at the rate
of 25% per year and executives generally must be employed for the options to
vest. In this manner, the options provide an incentive for the growth of
shareholder value over the long-term since the full benefit of the options can
only be realized if the price of the Company's stock appreciates over time. The
Compensation Committee believes that these features provide the optionee with
substantial incentives to maximize the Company's long-term success. Grants of
stock options generally are based upon the executive's position within the
Company and an evaluation of the executive's past and expected future
performance.
COMPENSATION OF THE PRESIDENT
From September 1994 through May 1997, Peter H. Bachmann was the Executive Vice
President, Office of the President of the Company. Mr. Bachmann was elected
President of the Company in May 1997.
Mr. Bachmann received an annual salary of $725,000 during 1998 pursuant to the
terms of his employment agreement with the Company. Mr. Bachmann's compensation
as set forth in such agreement (dated as of January 1, 1997) reflects the Board
of Directors' assessment of the base compensation level which would be necessary
to attract and retain experienced executives in the entertainment industry who
had the requisite qualifications to manage a business enterprise of the
Company's size and complexity. (See "Employment Contracts.")
The employment contract provides that Mr. Bachmann is entitled to receive target
bonus compensation of 50% of his annual base salary based upon his individual
performance and the performance of the Company. Mr. Bachmann received a bonus of
$500,000 in respect of services performed in 1998. During 1998 the Company
entered into a number of significant transactions including a video distribution
licensing transaction with Artisan Home Entertainment Inc., the sale of Westwood
Studios and certain other assets of Virgin Interactive Entertainment, Inc.
("VIE") (a subsidiary of the Company) to Electronic Arts, the sale of the
Company's cable/satellite channel TeleUNO to Sony Entertainment, and
successfully launched several new television shows. In light of the foregoing
and the importance which the Compensation Committee attaches to retaining Mr.
Bachmann's services, it believes $500,000 to be appropriate bonus compensation
for Mr. Bachmann.
In September 1998, the Compensation Committee granted Mr. Bachmann options to
acquire 125,000 shares under the Company's 1994 Stock Option Plan. Such options
are exercisable at $6.75 per share and vest in annual increments of 31,250
shares commencing January 1, 2000. Pursuant to his employment agreement, the
Company shall make an annual grant of stock options to Mr.
Bachmann of no less than 125,000 shares.
DEDUCTIBILITY OF EXECUTIVE COMPENSATION
The Omnibus Budget Reconciliation Act of 1993 added a provision to the Internal
Revenue Code limiting to $1,000,000 the deductibility of compensation (including
stock-based compensation, such as stock options) other than "performance-based"
compensation paid to certain executives by public companies. The tax law change
includes an exclusion for "performance-based" compensation, provided such
compensation meets certain requirements, including outside director and
shareholder approval of the performance goals. The Company will continue to
consider the deductibility of compensation payments when establishing its
compensation practices and programs.
The Compensation Committee continually evaluates the Company's compensation
policies and procedures with respect to executives. Although the Compensation
Committee believes that current compensation policies have
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been successful in aligning the financial interests of executive officers with
those of the Company's shareholders and with Company performance, it continues
to examine what modifications, if any, should be implemented to further link
executive compensation with both individual and Company performance.
The Compensation Committee
Philippe P. Dauman
William M. Haber (Chairman)
John L. Muething
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Dauman and Muething were elected members of the Company's Compensation
Committee in November 1994 and Mr. Haber (Chairman) was elected in August 1997.
Since November 1994, Mr. Dauman, an executive officer and Director of Viacom,
has served as a member of the Company's Compensation Committee. For further
information regarding certain relationships of Mr. Dauman see "Election of
Directors" and "Report of the Compensation Committee on Executive Compensation."
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning the Common Stock of the Company beneficially owned by
each director, each Named Officer in the Summary Compensation Table below, each
person (or group) known to the Company to beneficially own more than five
percent of the outstanding Common Stock, and the directors and executive
officers as a group on December 31, 1998, is shown in the following table:
Number of Shares
Name of Director, Executive Officer of Common Stock Percent
or Shareholder Beneficially Owned(l) of Class
----------------------------------- --------------------- --------
Sumner M. Redstone......................... 75,041,881 (2) 80%
Aaron Spelling............................. 917,250 (3)(4) *
Philippe P. Dauman......................... -- (5) *
Thomas E. Dooley........................... -- (5) *
William M. Haber........................... -- *
John L. Muething........................... 2,000 (6) *
Peter H. Bachmann.......................... 467,500 (7) *
Ross G. Landsbaum.......................... 57,500 (7) *
James Miller............................... 13,750 (7) *
Sally Suchil............................... 71,250 (7) *
Viacom Inc................................. 75,041,881 (8) 80%
All directors and executive officers
as a group (10 persons).................. 76,571,131 (4)(7) 82%
- -----------------------
* Less than one percent of the class of securities
(1) Unless otherwise indicated, each holder named has sole voting and
investment power with respect to the shares of Common Stock owned by
such holder.
(2) Consists of shares of Common Stock indirectly owned by Viacom and
attributed to Mr. Redstone. NAI owns approximately 67.2% of Viacom's
Class A Common Stock and approximately 18.3% of Viacom's Class B Common
Stock. Mr. Redstone is the controlling shareholder of NAI and is its
Chairman of the Board, President and Chief Executive Officer.
(3) Of this amount, 48,500 shares are held jointly with his wife.
(4) Includes 868,750 shares of Common Stock which may be acquired within 60
days of December 31, 1998 by Mr. Spelling upon exercise of stock
options.
(5) Does not include any shares of Common Stock beneficially owned by
Viacom.
(6) Held jointly with his wife.
(7) Consists of shares of Common Stock which may be acquired within 60 days
of December 31, 1998 upon exercise of stock options.
(8) Consists of shares of Common Stock indirectly owned by Viacom and
attributed to Mr. Redstone.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS
In this section, references to Blockbuster are to Blockbuster Entertainment
Corporation ("BEC") and its subsidiaries for the period ending September 29,
1994 and to Blockbuster Entertainment Group ("BEG") and its subsidiaries
thereafter. References in this section to Viacom are to Viacom Inc. and its
subsidiaries.
On April 26, 1994, pursuant to an Agreement and Plan of Merger (the "Merger
Agreement") by and among the Company, Republic Pictures Corporation (now known
as Republic Entertainment Inc.) ("Republic") and DE Acquisition Corporation, a
wholly owned subsidiary of the Company ("Merger Sub"), Republic Pictures was
merged with and into Merger Sub (the "Merger"), and Republic Pictures became a
wholly owned subsidiary of the Company. At the time the Merger became effective
(the "Effective Time"), each share of Republic's common stock outstanding
immediately prior to the Effective Time was converted into the right to receive
$13.00 in cash without interest (the "Cash Merger Consideration"). Options and
warrants to acquire Republic common stock outstanding immediately prior to the
Effective Time were converted into the right to receive, upon payment of the
exercise price (as adjusted as set forth below), 1.6508 shares of Common Stock
for each share of Republic common stock into which such option or warrant was
exercisable immediately prior to the Effective Time. The exercise price of such
options and warrants was adjusted by multiplying such exercise price by 0.6058.
Immediately prior to the Effective Time, Blockbuster owned 2,550,000 shares of
Republic common stock and warrants to acquire an aggregate of 810,000 shares of
Republic common stock at an exercise price of $11.50 per share, which shares and
warrants, as a result of the Merger, were converted into the right to receive an
aggregate of $33,150,000 and a warrant to acquire 1,337,148 shares of Common
Stock, respectively. The exercise price for such warrant is $6.9667 per share.
Subsequently, Blockbuster assigned the warrants to SEGI Holding Company, a
subsidiary of Viacom. On February 11, 1998, Viacom exercised its right and
acquired 1,337,148 shares of the Company.
On July 30, 1994, the Company and Blockbuster entered into an exchange agreement
(the "Exchange Agreement") and consummated the transactions contemplated thereby
(the "Acquisition"). Pursuant to the Exchange Agreement, Blockbuster delivered
to the Company 8,686,984 ordinary shares (the "Ordinary Shares") of Virgin
Interactive Entertainment Limited ("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. Blockbuster 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 Blockbuster with respect to the Ordinary Shares of
VIEL not owned by the Company. Under these agreements, the Company could
acquire, or be required by Blockbuster to purchase, these shares from
Blockbuster at an agreed-upon price. At the option of the Company, such purchase
price could be paid to Blockbuster in cash or shares of the Company's Common
Stock. On June 8, 1995, Blockbuster acquired the remaining Ordinary Shares of
VIEL not owned by the Company for approximately $22,973,000 plus other costs
associated with the transaction. Viacom and the Company had executed amendments
to extend the put- and call-option agreements through December 31, 1998. As a
result of the Company's disposal of VIEL in 1998, these agreements expired.
In November 1998, the Company completed the sale of all non-U.S. operations of
VIEL to an investor group, which included the former Managing Director of
VIE-UK.
In January 1994, the Company entered into a three-year credit agreement with
Blockbuster. As a result of the merger of Blockbuster with and into Viacom,
Viacom succeeded to Blockbuster's position under the credit agreement (the
"Viacom Facility"). This agreement was amended and restated in January 1995 to
reflect certain amendments to the facility which were effective as of December
7, 1994, including a $25,000,000 increase in the amount available under the
facility. In November 1995, the Viacom Facility was again amended to provide a
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59
$40,000,000 increase in the amount available. The Viacom Facility, as amended,
provides for (i) a term loan of $100,000,000 which funded the Company's merger
with Republic, a wholly owned subsidiary of the Company and (ii) a revolving
credit facility of $140,000,000 to fund the Company's working capital and other
requirements. 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, as amended, mature on December 31, 2000. Under the Viacom
Credit Agreement, the Company pays an annual fee (currently 0.2375%) based on
the unused portion of the facility, as well as certain facility and
administration fees. Effective October 1, 1998, interest on all outstanding
borrowings is payable, at the Company's option, at LIBOR plus a spread
(currently 0.75%) or at Citibank N.A.'s base rate. The spread is based on a
sliding scale with regard to the Company's leverage ratio, as defined.
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. Borrowings under
the Viacom Credit Agreement may be accelerated in the event of a change in
control of the Company, as defined in the Viacom Credit Agreement.
On December 23, 1993, a wholly owned subsidiary of VIEL established a
multi-currency credit agreement with a bank in the U.S. (the "Credit
Agreement"). The Credit Agreement initially provided for maximum borrowings of
$15,000,000, subject to a borrowing base test. Following the Acquisition, the
amount of borrowings allowable under the Credit Agreement was increased to
$75,000,000, and the borrowing base test and other ratio tests were eliminated,
based on the guarantee of all borrowings under the Credit Agreement by Viacom.
During 1995, the borrowings allowable under the Credit Agreement were increased
to $100,000,000 and in 1996, the term was extended to March 31, 1998. On
February 23, 1998, the term was extended to September 30, 1998. On September 8,
1998, total borrowings under the Credit Agreement were repaid and the Credit
Agreement was terminated.
A wholly owned subsidiary of VIEL maintains a credit facility in the amount of
10,000,000 pounds sterling with a bank in the United Kingdom (the "UK
Facility"). The UK Facility initially expired on April 30, 1997, but was
renegotiated on terms more favorable to the subsidiary. The renegotiated UK
Facility, which expired on December 31, 1997, was extended to June 30, 1998 and
was guaranteed by Viacom and the Company. On November 10, 1998, total borrowings
under the UK Facility were repaid and the UK Facility was terminated. The
Company also provides a rent guarantee for this subsidiary which expires in
2005.
During the fiscal year ended December 31, 1998, Blockbuster was charged by the
Company approximately $1,184,000 for the purchase of prerecorded videocassettes
in connection with Blockbuster's retailing business. At December 31, 1998, the
Company had no receivable from BEG related to these sales. The Company believes
that the terms of the sale of this product to Blockbuster were as favorable to
the Company as could have been obtained from an unaffiliated party.
The Company participates in certain Viacom health and welfare benefit plans for
its employees. In additon, the Company participates in Viacom insurance programs
with respect to general business and workers' compensation coverage, including
coverage with respect to the Company's productions. The Company was charged
approximately $2,672,000 during 1998 under these insurance programs. The Company
believes that such amount is at least as favorable as the Company could have
obtained from an outside third party for such insurance coverage. As of December
31, 1998, the Company has a net payable to Viacom of $3,495,000, with respect to
these and other expenses.
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60
Spelling Television Inc. ("Spelling Television") has an agreement with Tori
Spelling, Aaron Spelling's daughter, wherein Spelling Television is granted the
exclusive right and property in and to Ms. Spelling's television series services
as an actress in regard to the production of "Beverly Hills, 90210" for a period
dating from September 26, 1990. Spelling Television has recently extended the
term of the agreement for Ms. Spelling's services for a tenth season of the
series. Ms. Spelling is compensated: per program; for television re-runs,
theatrical re-runs, foreign telecasting and supplemental markets; for a portion
of the net profits derived from certain merchandising activities; and if Ms.
Spelling renders services for commercial announcements. Spelling Television
guarantees to employ and compensate or compensate Ms. Spelling for all episodes
produced in a season, but in no event for less than 26 episodes for the
1998/1999 season and no less than 26 episodes for the 1999/2000 season. In
fiscal year 1998, Ms. Spelling received $3,111,000 pursuant to such agreement.
Spelling Television has an agreement dated as of September 24, 1996 with Randy
Spelling, Aaron Spelling's son, wherein Spelling Television is granted the
exclusive right to Randy Spelling's services as an actor in regard to the
production of "Sunset Beach," with options to extend the agreement. Pursuant to
such agreement, Randy Spelling is compensated: per episode (with a minimum
number of episodes per week); for a portion of the net profits derived from
certain merchandising activities; as well as for certain other required
payments. Spelling Television guarantees to employ and compensate or compensate
Randy Spelling for any episode for which Spelling Television has granted him
compensation. In fiscal year 1998, Randy Spelling received $260,000 pursuant to
such agreement.
Spelling Television has an agreement with Aaron Spelling whereby he is entitled
to receive producer fees and other compensation on a per episode or per hour
basis on the product produced by Spelling Television, including series,
mini-series and movies for television, and for certain theatrical films.
Pursuant to such agreement, in fiscal year 1998, Mr. Spelling was paid
$7,207,000 in producers fees and other compensation by Spelling Television. The
Company believes that the amount of fees paid to Mr. Spelling are equal to or
less than fees paid to unaffiliated producers of comparable stature.
The Company licensed certain entertainment product to certain television
stations owned by Viacom. License agreements with the television stations
consist of a cash or barter component. Revenue from cash contracts was
$1,453,000 and the Company has a receivable due from Viacom of $2,816,000 at
December 31, 1998. The Company realized approximately $194,000 in revenue from
third-party advertisers with respect to the sale of advertising time received
under the barter contracts. The Company also licensed certain entertainment
product to United Paramount Network, Comedy Central and Nickelodeon U.K., in
which Viacom has equity interests. Revenue from such sales were $27,767,000 for
the year ended December 31, 1998 and receivables with respect to such sales were
$6,545,000 at December 31, 1998.
The Company has entered into an agreement with Comedy Partners, in which Viacom
has an equity interest, to perform certain licensing and merchandising
activities on its behalf for "South Park" in exchange for a fee. During 1998,
revenues resulting from this agreement were approximately $10,383,000. Pursuant
to such arrangement, the Company has a net payable to Comedy Partners of
$1,175,000 as of December 31, 1998.
In November 1997, the Company entered into an agreement with Famous Music
Corporation and Ensign Music Corporation (collectively referred to as "Famous
Music"), subsidiaries of Paramount, with respect to administration on behalf of
the Company of all musical compositions, musical cues, music scores and other
musical works owned in whole or in part by the Company or acquired by the
Company between January 1, 1998 and December 31, 2001 (the "License Term"). This
agreement provides for the Company to receive a non-returnable, recoupable
advance. If Famous Music does not recoup its advance prior to the expiration of
the License Term, the term of the agreement can be automatically extended for up
to two one-year terms. Pursuant to such agreement, the Company recognized
revenue in the amount of $9,054,000 in 1998 and had a receivable in the amount
of $2,833,000 due from Famous Music.
Republic entered into an agreement with a subsidiary of BEG for the acquisition
and distribution of the film "Open Season." As of December 31, 1998, a net
payable of $699,000 is due to BEG in connection with this agreement.
The Company entered into agreements with 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-
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61
theatrical and pay television markets. Pursuant to such arrangement, the
Company recognized revenue in the amount of $127,000 from "Stephen King's
Thinner" and $4,234,000 from "Night Falls on Manhattan" in 1998 and incurred
distribution fees to Paramount in the amount of $25,000 for the release of
"Stephen King's Thinner" and $817,000 for "Night Falls on Manhattan" in 1998. At
December 31, 1998, the Company had a receivable of $82,000 due from Paramount
for "Stephen King's Thinner" and $350,000 due from Paramount for "Night Falls on
Manhattan." Additionally, the Company engaged Paramount to perform the
theatrical distribution in selected international territories for two additional
feature films, "Breakdown" and "In & Out," in which the Company owns the
international distribution rights. Pursuant to this arrangement, in 1998 the
Company recognized revenue in the amount of $5,486,000 from "In & Out" and
$1,457,000 from "Breakdown" and incurred distribution fees to Paramount in the
amount of $823,000 for the release of "In & Out" and $245,000 for the release of
"Breakdown." At December 31, 1998, the Company had a receivable of $66,000 due
from Paramount for "In & Out" and $2,000 due from Paramount for "Breakdown."
In August 1997, the Company licensed the distribution rights to its 1997 home
video rental titles to Paramount Home Video. Under the terms of the agreement,
Paramount Home Video has acquired the distribution rights to seven video rental
titles from the Company including "Night Falls on Manhattan." In addition,
during 1997 the Company engaged Paramount Home Video to distribute "In & Out"
and "Breakdown" in certain foreign territories. In January 1998, the Company
exercised an option for Paramount Home Video to acquire the distribution rights
to three remaining rental titles. Pursuant to such arrangement, the Company
recognized revenue in the amount of $3,655,000 in 1998 and incurred distribution
fees to Paramount in the amount of $393,000. At December 31, 1998, the Company
had a receivable of $1,200,000 due from Paramount related to this agreement.
Viacom owns approximately 80% of the outstanding shares of the Company and,
therefore, the Company is required to be included in the consolidated federal
income tax return of Viacom. The Directors of the Company approved an agreement
dated November 12, 1997 between the Company and Viacom that provides for the
administration of federal, state and foreign tax matters (the "Tax Agreement").
Under the Tax Agreement, the Company will remain in the same tax position as it
would have if it were continuing to file its tax returns separate and apart from
Viacom; as a result, the Company does not anticipate any material impact to its
financial condition or results of operations.
On March 19, 1999, Viacom submitted a proposal to the Company's Board to acquire
all outstanding shares of the Company not already held by Viacom (see "Business
- - Introduction").
In the ordinary course of business, the Company has and expects to continue to
do business with Viacom and its affiliates, including Blockbuster, Showtime, MTV
Networks and Paramount. In each case the transaction is negotiated on an
arms-length basis and the Company believes that the transaction is at least
equal to the value that the Company could obtain from an outside third party.
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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 1998, 1997 and 1996:
PAGE
II - Valuation and Qualifying Accounts 47
All other schedules for which provisions are made in the
applicable regulation of the Securities and Exchange
Commission have been omitted as they are not applicable,
not required, or the information required thereby is set
forth in the Consolidated Financial Statements or the notes
thereto.
3. Exhibits 64
(b) Reports on Form 8-K:
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SPELLING ENTERTAINMENT GROUP INC.
Date: March 31, 1999 By: /s/ Peter H. Bachmann
-----------------------------------------
Peter H. Bachmann
President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: March 31, 1999 By: /s/ Sumner M. Redstone
--------------------------------------------
Sumner M. Redstone
Chairman of the Board
Date: March 31, 1999 By: /s/ Aaron Spelling
--------------------------------------------
Aaron Spelling
Vice Chairman of the Board
Date: March 31, 1999 By: /s/ Ross G. Landsbaum
--------------------------------------------
Ross G. Landsbaum
Senior Vice President - Chief Financial
Officer (Principal Financial Officer)
Date: March 31, 1999 By: /s/ James Miller
--------------------------------------------
James Miller
Vice President and Controller
(Principal Accounting Officer)
Date: March 31, 1999 By: /s/ Philippe P. Dauman
--------------------------------------------
Philippe P. Dauman
Director
Date: March 31, 1999 By: /s/ Thomas E. Dooley
--------------------------------------------
Thomas E. Dooley
Director
Date: March 29, 1999 By: /s/ William M. Haber
--------------------------------------------
William M. Haber
Director
Date: March 28, 1999 By: /s/ John L. Muething
--------------------------------------------
John L. Muething
Director
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64
SPELLING ENTERTAINMENT GROUP INC.
INDEX TO EXHIBITS
NUMBER EXHIBIT DESCRIPTION
- ------ -------------------
2.1 Certificate of Merger merging Spelling Entertainment Group Inc. with and
into Spelling Merger Corporation (incorporated by reference to Exhibit
2.1 to Registrant's Form 10-K for fiscal year ended December 31, 1995).
3.1 Certificate of Incorporation of Spelling Merger Corporation
(incorporated by reference to Spelling Entertainment Group Inc.'s Notice
of Annual Meeting and Proxy Statement dated April 14, 1995).
3.2 ByLaws of Spelling Merger Corporation (incorporated by reference to
Spelling Entertainment Group Inc.'s Notice of Annual Meeting and Proxy
Statement dated April 14, 1995).
10.1 Credit Agreement dated as of September 30, 1996, by and among the
Registrant, certain subsidiaries of the Registrant and Viacom Inc.
(incorporated by reference to Exhibit 10.1 to Registrant's Form 10-Q for
quarterly period ended September 30, 1996).
10.2 Pledge and Security Agreement dated as of September 30, 1996, by and
among the Registrant, certain subsidiaries of the Registrant and Viacom
Inc. (incorporated by reference to Exhibit 10.2 to Registrant's Form
10-Q for quarterly period ended September 30, 1996).
10.3 Copyright Mortgage and Assignment; Power of Attorney dated as of
September 30, 1996, by the Registrant and certain subsidiaries of the
Registrant in favor of Viacom Inc. (incorporated by reference to Exhibit
10.3 to Registrant's Form 10-Q for quarterly period ended September 30,
1996).
10.4 Guaranty dated as of September 30, 1996, by the Registrant and certain
subsidiaries of the Registrant in favor of Viacom Inc. (incorporated by
reference to Exhibit 10.4 to Registrant's Form 10-Q for quarterly period
ended September 30, 1996).
10.5 Amendment No. 1 to the Credit Agreement dated as of December 31, 1996,
by and among the Registrant, certain subsidiaries of the Registrant and
Viacom Inc. (incorporated by reference to Exhibit 10.5 to Registrant's
Form 10-K for fiscal year ended December 31, 1996).
10.6 Amendment No. 2 to the Credit Agreement dated as of December 31, 1997 by
and among the Registrant, certain subsidiaries of the Registrant and
Viacom Inc. (incorporated by reference to Exhibit 10.6 to Registrant's
Form 10-K for fiscal year ended December 31, 1997).
10.7 Amendment No. 3 to the Credit Agreement dated as of December 31, 1998 by
and among the Registrant , certain subsidiaries of the Registrant and
Viacom Inc.
10.8 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).
10.9 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).
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65
SPELLING ENTERTAINMENT GROUP INC.
INDEX TO EXHIBITS
NUMBER EXHIBIT DESCRIPTION
- ------ -------------------
10.10 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).
10.11 Tax Agreement dated November 12, 1997, by and among the Registrant and
Viacom Inc. (incorporated by reference to Exhibit 10.26 to Registrant's
Form 10-K for fiscal year ended December 31, 1997).
10.12 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).
10.13 Registrant's 1987 Stock Option Plan, as amended and restated
(incorporated by reference to Exhibit 99.1 to the Registrant's
Post-Effective Amendment No. 1 to the Registration Statement No.
33-61914 on Form S-8 dated February 26, 1998).
10.14 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).
10.15 Registrant's 1994 Stock Option Plan, as amended and restated
(incorporated by reference to Exhibit 99.1 to the Registrant's
Post-Effective Amendment No. 1 to the Registration Statement No.
33-53951 on Form S-8 dated February 26, 1998).
10.16 Amended and Restated Employment Agreement dated March 1, 1998, between
Registrant and Aaron Spelling (incorporated by reference to Exhibit
10.31 to Registrant's Form 10-K for fiscal year ended December 31,
1997).
10.17 Employment Agreement dated as of January 1, 1997, between Registrant and
Peter H. Bachmann (incorporated by reference to Exhibit 10.1 to
Registrant's Form 10-Q for quarterly period ended September 30, 1997).
10.18 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) and Amendment to
Employment Agreement dated as of December 12, 1997, (incorporated by
reference to Exhibit 10.34 to Registrant's Form 10-K for fiscal year
ended December 31, 1997).
10.19 Employment Agreement dated as of January 6, 1997, between Registrant and
James Miller (incorporated by reference to Exhibit 10.27 to Registrant's
Form 10-K for fiscal year ended December 31, 1996) and Amendment to
Employment Agreement dated as of June 30, 1998.
10.20 Employment Agreement dated as of July 20, 1998, between Registrant and
Ross G. Landsbaum (incorporated by reference to Exhibit 10.1 to
Registrant's Form 10-Q for the quarterly period ended September 20,
1998).
11 Computation of net income (loss) per common share.
21 Subsidiaries of the Registrant.
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66
SPELLING ENTERTAINMENT GROUP INC.
INDEX TO EXHIBITS
NUMBER EXHIBIT DESCRIPTION
- ------ -------------------
23.1 Consent of PriceWaterhouseCoopers LLP.
27 Financial Data Schedule.
66