SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
Commission file number 0-21150
Spice Entertainment Companies, Inc.
(Exact name of registrant as specified in its charter)
Delaware 11-2917462
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
536 Broadway, New York, NY 10012
(Address of principal executive offices)
(212) 941-1434
(Registrant's telephone number, including area code)
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
filing requirements for the past 90 days.
Yes X No
Number of shares outstanding of Registrant's Common Stock as of
March 31, 1997: 11,339,948.
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PART I
ITEM 1: FINANCIAL STATEMENTS
SPICE ENTERTAINMENT COMPANIES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1997 1996
- -------------------------------------------------------------------------------------------------------
(Unaudited)
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents ........................................ $ 1,830,000 $ 2,663,000
Accounts receivable, less allowance for doubtful accounts ........ 4,818,000 4,801,000
Income tax refunds receivable .................................... 28,000 28,000
Prepaid expenses and other current assets ........................ 1,987,000 1,325,000
Deferred subscription costs ...................................... 183,000 132,000
Due from related parties and officers ............................ 364,000 23,000
Net assets of discontinued operations ............................ -- 2,550,000
------------ ------------
Total current assets .............................. 9,210,000 11,522,000
Property and equipment, net of accumulated depreciation ............... 8,331,000 61,948,000
Due from related parties .............................................. -- 294,000
Library of movies ..................................................... 3,750,000 3,797,000
Cost in excess of net assets acquired, net of accumulated amortization 11,237,000 11,399,000
Deferred refinancing costs ............................................ 572,000 --
Other assets .......................................................... 715,000 352,000
------------ ------------
============ ============
Total assets ...................................... $ 33,815,000 $ 89,312,000
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of obligations under capital leases ............... $ 777,000 $ 4,926,000
Current portion of long-term debt ................................. 2,307,000 817,000
Royalties payable ................................................. 1,956,000 2,322,000
Accounts payable .................................................. 3,240,000 2,319,000
Accrued interest expenses payable ................................. 340,000 1,118,000
Accrued cost of discontinued operations ........................... -- 1,800,000
Accrued expenses payable .......................................... 3,479,000 2,395,000
Current portion of accrued restructuring costs .................... 746,000 820,000
Deferred subscription revenue ..................................... 1,074,000 1,121,000
------------ ------------
Total current liabilities ......................... 13,919,000 17,638,000
Obligations under capital leases ...................................... 1,564,000 53,759,000
Long-term debt ........................................................ 10,918,000 14,652,000
Accrued restructuring costs ........................................... 525,000 700,000
Deferred compensation ................................................. 275,000 269,000
------------ ------------
Total liabilities ................................. 27,201,000 87,018,000
------------ ------------
Commitments and contingencies
Stockholders' equity
Preferred stock, $.01 par value; authorized 10,000,000 shares:
24,250 issued and outstanding at March 31, 1997 ..................... -- --
Common stock, $.01 par value; authorized 25,000,000 shares;
11,339,948 and 11,357,928 shares issued and outstanding at
March 31, 1997 and December 31, 1996 ................................ 113,000 113,000
Additional paid-in capital ........................................ 26,378,000 22,645,000
Unearned compensation ............................................. (708,000) (765,000)
Accumulated deficit ............................................... (19,527,000) (21,338,000)
Cumulative translation adjustment ................................. 1,496,000 1,639,000
------------ ------------
7,752,000 2,294,000
Less cost of common stock held in treasury, 700,000 shares
at March 31, 1997 ................................................... (1,138,000) --
------------ ------------
Total stockholders' equity ........................ 6,614,000 2,294,000
------------ ------------
============ ============
Total liabilities and stockholders' equity ........ $ 33,815,000 $ 89,312,000
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
SPICE ENTERTAINMENT COMPANIES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS of OPERATIONS
(Unaudited)
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<CAPTION>
THREE MONTHS ENDED
MARCH 31,
- ---------------------------------------------------------------------------------------------
1997 1996
------------ ------------
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Revenues: ...................................................... $ 8,761,000 $ 8,756,000
------------ ------------
Operating expenses:
Salaries, wages and benefits ............................... 1,943,000 2,097,000
Producer royalties and library amortization ................ 1,121,000 1,377,000
Satellite costs ............................................ 474,000 559,000
Selling, general and administrative expenses ............... 2,959,000 2,714,000
Depreciation of fixed assets and amortization of
goodwill ................................................. 1,650,000 1,835,000
------------ ------------
Total operating expenses ....................................... 8,147,000 8,582,000
------------ ------------
Total income from operations ............... 614,000 174,000
Interest expense ............................................... 1,516,000 1,663,000
Minority interest .............................................. (438,000) (165,000)
Gain from transponder lease amendment .......................... (2,348,000) --
------------ ------------
Income (loss) from continuing operations before
provision for income taxes ................................... 1,884,000 (1,324,000)
Provision for income taxes ..................................... 167,000 42,000
------------ ------------
Net income (loss) from continuing operations 1,717,000 (1,366,000)
Loss from discontinued operations of SEG,
net of income taxes .......................................... -- (245,000)
Extraordinary gain on debt restructuring ....................... 143,000 --
------------ ------------
Net income (loss) .............................................. 1,860,000 (1,611,000)
Dividends on preferred stock ................................... 49,000 --
============ ============
Net income (loss) attributable to common stock ................. $ 1,811,000 ($ 1,611,000)
============ ============
Earnings per common share
Primary
From continuing operations ............................... $ 0.15 ($ 0.12)
Extraordinary item ....................................... 0.01 --
Discontinued operations .................................. -- (0.02)
============ ============
Earnings (loss) per common share ............................... $ 0.16 ($ 0.14)
============ ============
Fully Diluted
From continuing operations ............................... $ 0.14 ($ 0.12)
Extraordinary item ....................................... 0.01 --
Discontinued operations .................................. -- (0.02)
============ ============
Earnings (loss) per common share ............................... $ 0.15 ($ 0.14)
============ ============
Weighted average number of shares outstanding:
Primary ...................................................... 11,418,000 11,369,000
============ ============
Fully Diluted ................................................ 12,355,000 11,369,000
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
SPICE ENTERTAINMENT COMPANIES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(Unaudited)
- ----------------------------------------------------------------------------------------------------------------------------------
Additional Unearned Cumulative
Common Preferred Paid-in Compensa- Accumulated Translation Treasury
Stock Stock Capital tion Deficit Adjustment Stock Total
- ------------------------------- ---------- --------- ----------- ---------- ------------ ---------- ----------- ------------
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Balance at January 1, 1997 .... $ 113,000 $ -- $22,645,000 ($765,000) ($21,338,000) $1,639,000 $-- $2,294,000
Issuance of Preferred Stock
and warrantsin connection with
the debt restructuring ....... 3,528,000 3,528,000
Issuance of warrants in
connection with a
consulting agreement ....... 205,000 205,000
Pro rata share of restricted
stock granted to an
executive officer ............ 57,000 57,000
Treasury stock acquired in
connection with the sale
of SEG ...................... (1,138,000) ($1,138,000)
Net income attributable to
common stock.................. 1,811,000 1,811,000
Foreign currency
translation adjustment ....... (143,000)
=========== ========= =========== ========== ============= ========== =========== ============
Balance at March 31, 1997 ..... $ 113,000 $ -- $26,378,000 ($708,000) ($19,527,000) $1,496,000 ($1,138,000) $6,614,000
=========== ========= =========== ========== ============= ========== =========== ============
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
SPICE ENTERTAINMENT COMPANIES, INC., and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
- -------------------------------------------------------------------------------------------------------------------
1997 1996
----------- -----------
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) .................................................. $ 1,860,000 ($1,611,000)
----------- -----------
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Loss from discontinued operations ................................... 245,000
Depreciation and amortization of fixed assets ....................... 1,488,000 1,674,000
Gain on transponder lease amendment ................................. (2,348,000)
Extraordinary gain on debt restructuring ............................ (143,000)
Amortization of goodwill and other intangibles ...................... 162,000 161,000
Amortization of films and CD-ROM cost ............................... -- 186,000
Amortization of library of movies ................................... 542,000 314,000
Provision for bad debts ............................................. 270,000 33,000
Compensation satisfied through the issuance of common stock ......... 58,000
Consulting expense satisfied through the issuance of warrants ....... 205,000
Deferred compensation expense ....................................... 6,000 24,000
Minority interest ................................................... (438,000) (165,000)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable ..................... (87,000) 541,000
(Increase) decrease in prepaid expenses and other current assets (474,000) 209,000
(Increase) decrease in deferred subscription costs ............. (51,000) 119,000
Decrease (increase) in other assets ............................ 12,000 (29,000)
Decrease in royalties payable .................................. (366,000) (399,000)
Increase (decrease) in accounts payable and accrued expenses ... 953,000 (530,000)
Decrease in accrued restructuring costs ........................ (249,000) (646,000)
Decrease in deferred subscription revenue ...................... (47,000) (502,000)
----------- -----------
Total adjustments .................................... (507,000) 1,235,000
----------- -----------
Net cash provided by (used in) operating activities
from continuing operations .......................... 1,353,000 (376,000)
Net cash provided by operating activities
from discontinued operations ........................ -- 255,000
----------- -----------
Net cash provided by (used in) operating activities .. 1,353,000 (121,000)
----------- -----------
Cash flows from investment activities:
Purchase of property and equipment ............................. (213,000) (147,000)
Purchase of rights to libraries of movies ...................... (495,000) (467,000)
----------- -----------
Net cash used in investing activities
from continuing operations .......................... (708,000) (614,000)
Net cash used in investing activities
from discontinued operations ........................ -- (5,000)
----------- -----------
Net cash used in investing activities ................ (708,000) (619,000)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock and detachable warrants . 27,000
Proceeds from capital contributed to CVSP by a third party ..... 1,000,000
Proceeds from issuance of long-term debt ....................... 1,015,000 120,000
(Decrease) increase in loans receivable from related parties ... (47,000) 31,000
Repayment of long-term debt and capital leases obligations .... (1,874,000) (128,000)
Deferred refinancing costs ..................................... (572,000)
----------- -----------
Net cash (used in) provided by financing activities
from continuing operations .......................... (1,478,000) 1,050,000
Net cash used in financing activities
from discontinued operations ........................ -- (250,000)
----------- -----------
Net cash (used in) provided by financing activities .. (1,478,000) 800,000
----------- -----------
Net (decrease) increase in cash and cash equivalents . (833,000) 60,000
Cash and cash equivalents, beginning of the period ................... 2,663,000 1,292,000
----------- -----------
Cash and cash equivalents, end of the period ......... $ 1,830,000 $ 1,352,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
SPICE ENTERTAINMENT COMPANIES, and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,1997 (unaudited)
- --------------------------------------------------------------------------------
1. In the opinion of Spice Entertainment Companies, Inc. and its wholly-owned
subsidiaries and a majority-owned partnership (the "Company"), the accompanying
unaudited consolidated financial statements contain all adjustments (consisting
of only normal recurring accruals) necessary to present fairly the financial
position as of March 31, 1997 and the results of operations and cash flows for
the three months ended March 31, 1997 and 1996.
2. The results of operations for the three months ended March 31, 1997
are not necessarily indicative of the results to be expected for the full year.
3. The accompanying financial statements include the accounts of the Company,
its wholly-owned subsidiaries and a majority-owned partnership. All intercompany
transactions and balances have been eliminated in consolidation. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles ("GAAP")
have been condensed or omitted. These consolidated financial statements should
be read in conjunction with the financial statements and notes thereto included
in the Company's December 31, 1996 annual report on Form 10K/A-1.
4. On August 31, 1995, the Company acquired Spector Entertainment Group, Inc.
("SEG") (which provides satellite simulcasting and television production
services to the pari-mutuel industry) in exchange for 700,000 shares of the
Company's Common Stock. On February 7, 1997, the Company split off SEG to the
former shareholders of the wholly-owned subsidiary in exchange for the 700,000
shares of Common Stock of the Company they received in the original merger
between SEG and the Company. SEG is accounted for as a discontinued operation in
the Consolidated Statements of Operations.
5. On January 11, 1997, as a result of AT&T losing contact with and declaring
Telstar 401 permanently out of service, AT&T permanently one of the Company's
unprotected transponders and transferred it to another AT&T customer. This
resulted in the reduction of the Company's satellite transponder payments from
$635,000 to $520,000 per month.
On March 31, 1997, the Company and Loral (which acquired AT&T`s
satellite business) amended the Skynet Transponder Services Agreement (the
"Transponder Agreement"). The term of the Transponder Agreement, which was to
originally expire at the end of the satellite's useful life, was shortened to
October 31, 2004. In consideration of the amendment, the Company granted Loral
the right to pre-empt one of the Company's transponders after September 1, 1997.
As a result of the amendment, the Transponder Agreement has been classified as
an operating lease commencing on March 31, 1997.
As a result of the two events described above, the Company has realized
a non-recurring gain of approximately $2.3 million in the three months ended
March 31, 1997.
6. On January 15, 1997 the Company negotiated agreements with PNC Bank N.A.
("PNC") and Darla L.L.C. ("Darla"), as assignee, which resulted in the
replacement of the Company's credit facility with PNC. PNC settled the
outstanding balance of the credit facility, totaling $14.6 million, for $9.6
million in cash, a new $400,000 term loan, and 600,000 warrants exercisable at
$2.06 per share. The new PNC agreement canceled the 100,000 warrants previously
issued to PNC which had an exercise price of $3.88 per share.
The Darla agreement provided a term loan of $10.5 million, of which
$9.6 million was used to satisfy the cash portion of the PNC agreement and $0.9
million which financed loan acquisition fees. Additionally, this agreement
included a revolving line of credit totaling $3.5 million, of which $1.8 million
has been drawn down. The term loan and the revolving line of credit mature in 30
months. The loan bears interest at 5% over the Citibank prime rate but not less
than 13%. Three percentage points of the interest may be accrued and added to
the principal of the loan and will be forgiven if the Darla credit facility is
paid in full within two years.
<PAGE>
SPICE ENTERTAINMENT COMPANIES, and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,1997 (unaudited) CONTINUED
- --------------------------------------------------------------------------------
As part of the Darla transaction, the Company issued 24,250 shares of
cumulative, convertible Series A Preferred Stock, with a $100 face and
liquidation value per share and an 8.0% cumulative dividend to be paid at the
Company's discretion. The Preferred Stock is convertible after two years into
Common Stock of the Company at a 10% discount from the then current market price
of the Company's Common Stock. The loan is secured by all the Company's assets
including the stock of its subsidiaries. The loan also restricts payment of
common stock dividends.
7. On March 6, 1996, the Company contributed the Cable Video Store Network
("CVS"), a domestic pay-per-view hit movie service which the Company had
operated since 1989, to a newly formed partnership, CVS Partners ("CVSP"). The
other partner was Wiltech Cable Television Services, Inc. ("WCTV"), a subsidiary
of The Williams Companies, Inc. The CVS network was available via satellite
until March 31, 1997, when satellite delivery was terminated. The partners of
CVSP are in the process of winding down the affairs of the partnership.
8. Pursuant to two short-term agreements effective as of September 1, 1996, the
Company provided transponder services on one of its transponders, made available
as a result of the digital compression of the Company's domestic networks, and
agreed to provide certain telecommunications services to Emerald Media, Inc.
("EMI"). The Company also agreed to license pictures from its adult film library
and licensed the "EUROTICA" name and related identity to EMI. EMI owns and
operates EUROTICA, a premium television network featuring explicit version adult
movies which is distributed to the domestic direct-to-home C-band satellite dish
("DTH") market.
EMI also granted the Company an option to acquire its stock or business.
EMI expanded its operations and now operates four explicit television
networks in the DTH market. On March 1, 1997, the Company's agreements with EMI
were modified and now the Company provides EMI transponder services on two
transponders and handles playback for two of EMI's networks from its master
control and digital playback facility. The Company's option to acquire the EMI
business or stock was revised with a new exercise price of $755,000.
9. The Company was previously involved in an arbitration with Capital
Distribution, Inc., d/b/a Cupid Network Television ("CNT") which has now been
dismissed. The Company and CNT are parties to (i) an Amended and Restated
Distribution Agreement under which CNT provides merchandising services promoted
on the Spice Networks (the "Distribution Agreement") and (ii) a Telephone
Services Agreement under which CNT provides audiotext services promoted on the
Spice Network. The Company alleged that CNT breached the agreements and the
Company attempted to terminate the agreements. CNT had obtained a temporary
restraining order preventing the Company from terminating the agreements and
also commenced an arbitration. The Company and CNT have executed a Settlement
Agreement dated May 15, 1997 which provides, among other things, for (i) the
dismissal of the arbitration, (ii) the termination of the Distribution Agreement
with the shopping segments airing during the month of June, 1997 and (iii) the
termination of the Telephone Agreement on May 31, 1999.
10. Section 505 of the Telecommunications Act of 1996 requires cable operators
to fully scramble the audio and video signal of television channels such as the
Spice Networks or block the channels between 6:00 a.m. and 10:00 p.m. The
Company challenged the constitutionality of Section 505 but the Supreme Court
affirmed a lower court's ruling upholding the constitutionality of Section 505.
As a result, Section 505 will take effect on May 18, 1997. When Section 505
takes effect, the Company's revenues will be adversely affected; the amount of
the revenue impact depends on several factors, most of which are outside of the
Company's control.
11. The accrued restructuring reserve at December 31, 1996 and at March 31, 1997
was approximately $1.5 million and $1.3 million, respectively. The reduction in
the accrued restructuring reserve is principally attributable to severance
payments to two former senior executive officers. The Company's severance
obligation to the former officers will expire at the end of 1998.
12. Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings
per Share," which supersedes APB Opinion No. 15, "Earnings per Share," was
issued in February 1997. SFAS 128 requires dual presentation of basic and
diluted earnings per share ("EPS") for complex capital structures on the face of
the Statement of Operations income statement. Basic EPS is computed by dividing
income by the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution from the exercise or
conversion of securities into common stock, such as stock options. SFAS 128 is
required to be adopted for year-end 1997; earlier application is not permitted.
The Company does not expect the basic or diluted EPS measured SFAS 128 to be
materially different than its primary or fully-diluted EPS measured under APB
No. 15.
Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure," was issued in February 1997. The Company
does not expect it to result in any substantive change in its disclosure.
<PAGE>
ITEM 2: MANAGEMENT DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS of OPERATIONS
SPICE ENTERTAINMENT COMPANIES, INC. and SUBSIDIARIES CONTINUED
- --------------------------------------------------------------------------------
Results of Operations
This report contains forward looking statements that involve a number of risks
and uncertainties. In addition to the factors discussed elsewhere in this
report, among the other factors that could cause actual results to differ
materially are the following: business conditions and the general economy;
governmental regulation of the Company's adult programming and of the content
and distribution of television programming in general; competitive factors such
as rival adult television networks and alternative sources of adult programming
content; consolidation in the ownership of the Company's principal customers;
the risks of doing business in new international markets; and the risks
associated with the distribution of premium television programming.
For the three months ended March 31, 1997, the Company reported net
income of $1.9 million as compared to a net loss of $1.6 million for the same
period in 1996. The current period's income was primarily attributable to the
gain on the amendment of the Company's transponder services agreement of $2.3
million. (See Note 5) Also contributing to the increase was income from
operations of $0.6 million as well as the allocation of the loss from CVSP of
$0.4 million to the minority partner, which was included in income from
operations. Offsetting these income sources was interest expense of $1.5
million, primarily attributable to interest on the capitalized transponder
services agreement prior to its amendment and borrowings under the Company's new
credit facility. (See Note 6)
Revenues
Total revenues for the three months ended March 31, 1997 were
approximately the same as revenues for the three months ended March 31, 1996.
The Company reported revenue growth from its Spice Networks cable and domestic
direct broadcast satellite system ("DBS") markets totaling approximately $0.5
million. The Company also generated revenue of approximately $0.9 million from
the sale of its excess transponder capacity for the three months ended March 31,
1997. Offsetting theses gains is a decline in revenue attributable to the
Company ceasing distribution of its adult networks in the domestic DTH market
and a decline in revenue from the European DTH markets totaling approximately
$1.0 million. Revenues also declined by approximately $0.4 million as a result
of the Company's suspension of production and licensing activities of its
wholly-owned subsidiary, CPV Productions, Inc. Revenues from the Cable Video
Store network ("CVS"), the domestic hit movies pay-per-view service operated by
CVSP, decreased by approximately $0.4 million for the three months ended March
31, 1997 as compared to same period in 1996 as a result of the decision to wind
down the CVSP operations in the first quarter of 1997.
The Company elected to cease distribution of the Spice Networks in the
domestic DTH market on August 31, 1996 as a result of competition from several
explicit adult services. These explicit adult services are not distributed by
cable operators and therefore, do not have an impact on Spice Networks in the
cable market. The Company withdrew from the DTH market and commenced
transmission of its programming in a digitally compressed format which cannot be
received in the DTH market. As a result of the digital compression of the Spice
Networks, the Company freed up two transponders for other uses.
Revenues from the European operations have decreased by approximately
$0.4 million for the three months ended March 31, 1997 as compared to the same
period in 1996. The decline in revenues is directly attributable to the
continued competition in the European DTH market. The Company is evaluating
various alternatives in an effort to reverse this trend.
Revenues from the Spice Networks cable and the domestic DBS markets
increased by approximately $0.5 million, approximately 13%, for the three months
ended March 31, 1997, as compared to the same period in 1996. The Company
increased the number of addressable households with access to the Spice Networks
at March 31, 1997 by approximately 18% as compared to March 31, 1996. The
percentage increase in addressable households was more than the percentage
increase in revenues because of a decrease in license fees. This reduction in
license fees is a result of increased competition in the Company's market
segment and the growing concentration in theownership of cable systems by
multiple system operators ("MSOs). The Company's top seven MSO customers
and DirecTV, the DBS provider which carries the Spice Network, account for
over 75% of the Company's domestic cable and DBS revenues.
Salaries, Wages and Benefits
Salaries, wages and benefits decreased by approximately $150,000 to
approximately $1.9 million for the three months ended March 31, 1997 as compared
to the same period in 1996. The decrease is primarily attributable to the
consolidation of employee function.
Producer Royalties
Producer royalties and film cost amortization for the three months
ended March 31, 1997 decreased by approximately $260,000 as compared to the same
period in 1996. The decline is primarily attributable to the elimination of film
amortization resulting from suspension of CPV's production activities in 1996.
Also contributing to the decline is the decrease in revenues from CVS which
resulted in a corresponding reduction in producer royalties.
Satellite, Playback and Uplink Expenses
Satellite, playback and uplink expenses from continuing operations for
the three months ended March 31, 1997 were approximately the same as in the
corresponding period in 1996.
For the three months ended March 31, 1997 and prior to the amendment
described below, the Company accounted for the Transponder Agreement with Loral
(which acquired AT&T's satellite business) as a capital lease and recognized
total expenses attributable to the Transponder Agreement of approximately $2.0
million, comprised of depreciation expense and interest expense of approximately
$1.0 million each. Had the Transponder Agreement been accounted for as an
operating lease, the Company would have recognized approximately $0.4 million
less in total expenses for the three months ended March 31, 1997.
On January 11, 1997, as a result of AT&T losing contact with and
declaring Telstar 401 permanently out of service, AT&T permanently one of the
Company's unprotected transponders and transferred it to another AT&T customer.
This resulted in the reduction of the Company's monthly satellite transponder
costs from $635,000 to $520,000 per month. In addition, on March 31, 1997, the
Company and Loral amended the Transponder Agreement to shorten the agreement's
term, originally scheduled to expire at the end of the satellite's useful life,
to October 31, 2004. As a result of this amendment, the Transponder Agreement
was classified as an operating lease commencing on March 31, 1997. As a result
of the pre-emption and the amendment of the Transponder Agreement, the Company
realized a non-recurring gain attributable to the Transponder Agreement of
approximately $2.3 million.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended
March 31, 1997 increased by approximately $0.2 million as compared to the same
period in 1996. The rise is primarily attributable to increased costs associated
with the continued development of Spice Networks and an increase to bad debt
reserve.
Depreciation of Fixed Assets and Amortization of Goodwill
Depreciation of fixed assets and amortization of goodwill decreased by
approximately $0.2 million to approximately $1.7 million for the three months
ended March 31, 1997 as compared to the same period in 1996. The decline in
depreciation expense was primarily attributable to the reduction in the carrying
value of the capitalized transponder costs on January 11, 1997 which was a
direct result of the pre-emption of one of the Company's transponders.
Offsetting this reduction was an increase in depreciation expense associated
with the Company's operations facility.
Interest Expense
Interest expense decreased by approximately $0.2 million to approximately
$1.5 million for the three months ended March 31, 1997 as compared to the same
period in 1996. The decrease is primarily attributable to the reduction in the
carrying value of the capitalized transponder lease obligation. Offsetting this
reduction is additional interest associated with new capital lease obligations
and, in the first quarter of 1997, the increase in interest on the
Company's new credit facility with Darla as compared to interest on the PNC
credit facility in the corresponding period in 1996.
Liquidity and Capital Resources
At March 31, 1997, the Company had a working capital deficit of
approximately $4.7 million as compared to $6.1 million at December 31, 1996. The
decrease in the deficit is primarily attributable to the amendment of the
Transponder Agreement in the first quarter of 1997, which resulted in a
reduction of current lease obligations.
At December 31, 1996, the Company had a credit facility with PNC with a
principal balance of $14.6 million. On January 15, 1997 the Company entered into
agreements with PNC and Darla which resulted in the replacement of its credit
facility with PNC. PNC settled the outstanding balance of the credit line,
totaling $14.6 million, for $9.6 million in cash, a $0.4 million new term loan,
and 600,000 warrants.
The Darla agreement provided a term loan of $10.5 million, of which
$9.6 was used to satisfy the PNC agreement and $0.9 million was used to finance
loan acquisition fees. This agreement also made available a revolving line of
credit totaling $3.5 million. The term loan and revolving line of credit have a
term of 30 months. The outstanding balance of the credit line at March 31, 1997
was approximately $1.7 million.
Net cash provided by operating activities from continuing operations
was approximately $1.4 million for the three months ended March 31, 1997 as
compared to a net cash used in operating activities from continuing operations
of approximately $0.4 million for the same period in 1996. The increase in cash
from operating activities from continuing operations was primarily attributable
to net income in the period ended March 31, 1997 as compared to a loss in the
same period in 1996.
Net cash used in investing activities from continuing operations for
the three months ended March 31, 1997 was comparable to the same period in 1996,
$0.7 and $0.6 million, respectively. The two major components for both periods
were the purchases of property and equipment and the licensing of movie
libraries.
Net cash used in financing activities was approximately $1.5 million
for the three months ended March 31, 1997 as compared to cash provided by
financing activities of $1.1 million for the same period in 1996. The decrease
in net cash from financing activities is primarily attributable to the Company's
payment of four installments under its Transponder Agreement in 1997 as compared
to no payments made in the corresponding quarter in 1996. As a result of cash
flow problems in 1996, based on a agreement with AT&T (as predecessor to Loral)
, the Company deferred the first quarter of 1996's Transponder Agreement
payments until the second quarter of 1996. Also contributing to the decrease are
the payments of deferred financing costs associated with the debt restructuring.
The Company also had sources of cash from financing activities of
approximately $1.0 million in each of the quarters ended March 31, 1997 and
1996. The 1997 source is a result of borrowing under the Company's new credit
facility. This borrowing offsets the decreases in cash used in financing
activities described in the preceding paragraph. The 1996 source is a result of
third party investments in CVSP.
<PAGE>
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
1. Capital Distribution, Inc. v. Spice, Inc., AAA
File No. 13 140 00661 96 (see Note 9).
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits - Exhibit 11.01 - Computation of Earnings Per Share
Exhibit 27.00 - Financial Data Schedule
(b) Reports on Form 8-K -
1. The Company filed a Current Report on Form 8-K dated January 9, 1997.
Such report contained information under Item 4 reporting that Coopers &
Lybrand, L.L.P. has ceased serving as the Company's independent
auditors.
2. The Company filed a Current Report on Form 8-K dated January 15, 1997.
Such report contained the following information:
(i) Under Item 2, the Company reported the split-off of
Spector Entertainment Group, Inc. from the Company;
(ii) Under Item 4, the Company reported that it had engaged
Grant Thornton LLP as its independent auditors; and
(iii) Under Item 5, the Company reported that it had
refinanced its senior credit facility, replacing the credit
facility provided by PNC Bank, N.A. with a credit facility
provided by Darla L.L.P., as assignee.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf of the
undersigned, thereunto duly authorized.
SPICE ENTERTAINMENT COMPANIES, INC.
Dated: May 15, 1997
By: /s/ Harlyn C. Enholm
Harlyn C. Enholm
Executive Vice President
& Chief Financial Officer
<TABLE>
<CAPTION>
Exhibit 11.01
SPICE ENTERTAINMENT COMPANIES, INC. and SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER SHARE
(Unaudited) THREE MONTHS ENDED
MARCH 31,
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1997 1996
Primary:
Earnings (loss) per share subject to primary earnings per share;
Income (loss) attributable to common stock from continuing operations ....... $ 1,668,000 ($ 1,366,000)
Loss from discontinued operations ........................................... -- (245,000)
Income from extraordinary items ............................................. 143,000 --
============== ============
Net Income (loss) attributable to common stock, subject to earnings per share . $ 1,811,000 ($ 1,611,000)
============== ============
Weighted average number of common shares outstanding (1) ...................... 11,340,000 11,369,000
Issued common shares assuming that warrants and options outstanding during that
period were exercised ........................................................ 433,000
Common shares assumed to be repurchased with proceeds from the exercise of
warrants and options (2) ..................................................... (355,000)
============== ============
Weighted average number of common shares and equivalents outstanding........... 11,418,000 11,369,000
============== ============
Earnings (loss) per common share;
From continuing operations .................................................. $ 0.15 ($ 0.12)
Discontinuing operations .................................................... -- (0.02)
Extraordinary items ......................................................... 0.01 --
============== ============
Earning (loss) per common share ............................................. $ 0.16 ($ 0.14)
============== ============
Fully Diluted:
Earnings per share subject to primary earnings per share;
Income (loss) from continuing operations .................................... $ 1,717,000
Income from extraordinary items ............................................. 143,000
==============
Net Income, subject to earnings per share ..................................... $ 1,860,000
==============
Weighted average number of common shares outstanding (1) ...................... 11,340,000
Issued common shares assuming that warrants and options outstanding during
that period were exercised ................................................... 433,000
Issued common shares assuming that preferred stock outstanding during
that period were exercised ................................................... 867,000
Common shares assumed to be repurchased with proceeds from the exercise
of warrants and options(2) ................................................... (285,000)
==============
Weighted average number of common shares and equivalents outstanding .......... 12,355,000
==============
From continuing operations .................................................... $ 0.14
Extraordinary items ........................................................... 0.01
==============
Earning per share ............................................................. $ 0.15
==============
Notes to Primary Earnings per Share:
(1) Represents the number of common shares outstanding during the period in
connection with the modified treasury stock method
(2) The common shares assumed to be repurchased under the modified treasury
method are as follows:
Average price per common share during the period ....................... $ 1.88
==============
Proceeds from exercise of options and warrants ......................... $ 668,000
==============
Common shares repurchased .............................................. 355,000
==============
Notes to Fully Diluted Earnings per Share:
(1) Represents the number of common shares outstanding during the period in
connection with the treasury stock method
(2) The common shares assumed to be repurchased under the treasury stock
method are as follows:
The price per common share at March 31, 1997 .......................... $ 2.38
==============
Proceeds from exercise of options and warrants ......................... $ 668,000
==============
Common shares repurchased .............................................. 285,000
==============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,830,000
<SECURITIES> 0
<RECEIVABLES> 4,818,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,210,000
<PP&E> 8,331,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 33,815,000
<CURRENT-LIABILITIES> 13,919,000
<BONDS> 15,566,000
0
0
<COMMON> 113,000
<OTHER-SE> 6,501,000
<TOTAL-LIABILITY-AND-EQUITY> 33,815,000
<SALES> 0
<TOTAL-REVENUES> 8,761,000
<CGS> 0
<TOTAL-COSTS> 8,147,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,516,000
<INCOME-PRETAX> 1,884,000
<INCOME-TAX> 167,000
<INCOME-CONTINUING> 1,717,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,860,000
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0
</TABLE>
