SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A-1
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-021150
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) (zip code)
Registrant's telephone number, including area code:
(212) 941-1434
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01
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 the registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ].
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of March 31, 1997 was $24,358,446.
The number of shares outstanding of registrant's Common Stock as of
March 31, 1997 was: 11,339,948.
<PAGE>
Item 1. Business
Spice Entertainment Companies, Inc. (formerly known as Graff
Pay-Per-View Inc.) and its subsidiaries (collectively "Spice" or the "Company")
is a leading international provider of adult television entertainment. The
Company has strategically refocused its business to concentrate on its
profitable adult entertainment business and to establish a strong brand identity
globally. The Company changed its corporate name to Spice Entertainment
Companies, Inc. to reinforce these strategies. The Company now operates through
three units: Spice Networks - domestic adult pay-per-view networks, Spice
International - international adult networks and programming and Spice Direct -
other products and services.
Through its Spice Networks operating division, the Company owns and
operates Spice and The Adam & Eve Channel (collectively, the "Spice Networks"),
domestic pay-per-view television networks with access to over 20 million cable
addressable and direct broadcast satellite ("DBS") households.
Spice International is responsible for expanding the distribution of
the Company's adult television networks and programming globally. In Europe, the
Company operates and distributes two premium television networks, The Adult
Channel, originated from the United Kingdom, and Eurotica, originated from
Denmark (collectively the "European Networks"). The European Networks are
distributed in the cable and direct-to-home ("DTH") markets. The Company's
networks, through agreements with NetHold Electronic Media, B.V., United Philips
Cable, Metromedia International Telecommunications and others, has distribution
throughout Europe and are currently available in over 40 countries. The Company
has expanded distribution into the Pacific Rim through agreements with Pay Per
View Japan Inc., the first digital television program provider in Japan, and in
Australia, with Northgate Communications Australia PY Ltd. ("Northgate"). Spice
International is in discussions with various other parties for distribution of
the Company's networks and programming in Latin America, the Pacific Rim and
Asia.
Spice Direct focuses on products and services marketed directly to
consumers. Spice Direct, through agreements with third parties, provides
merchandising and audiotext services promoted on the Spice Networks. It also
operates CyberSpice, the Company's adult Internet website. Spice Direct, in a
joint venture with Williams Worldwide, Inc., launched Williams Infomercial
Network (the "Infomercial Network"), a 24-hour a day satellite delivered
infomercial network featuring mainstream products and advertising. Spice Direct
is also responsible for the productive utilization of the Company's transponder
capacity and provides network playback and programming services to third
parties.
The Company owns one of the world's largest adult film libraries
acquired under license and production agreements with third parties. The library
is licensed both to affiliates and third parties.
The Company has disposed of its remaining non-strategic assets. In a
transaction which closed on February 7, 1997, the Company split off Spector
Entertainment Group, Inc. ("SEG"), a provider of telecommunications and
television production services principally to the pari-mutuel wagering industry,
to the former shareholders of SEG. The Company owns a partnership interest in
CVS Partners ("CVSP") which owns and operates the Cable Video Store Network, a
domestic hit movie service. The partners of CVSP have determined to wind down
the partnership. Finally, the Company terminated its television and motion
picture production activities previously conducted by CPV Productions, Inc.
("CPV").
The following table sets forth the percentage of revenues contributed
by each of the Company's operating units during each of the last three fiscal
years:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1996 1995 1994
------------- ----------- -----------
<S> <C> <C> <C>
Spice Networks 45.3% 43.0% 45.6%
Spice Direct 5.5 6.1 3.2
Spice International 17.6 20.3 17.2
------------- ----------- -----------
Total from Continuing Operations 68.4 69.4 66.0
Discontinued Operations (SEG) 19.1 15.2 14.6
Suspended/Terminated Operations (CVSP & CPV)
12.5 15.4 19.4
------------- ----------- -----------
Total Revenue 100.0% 100.0% 100.0%
============= =========== ===========
</TABLE>
The Company was incorporated in 1987 under the laws of the State of
Delaware and has its principal executive offices at 536 Broadway, New York, NY
10012.
SPICE NETWORKS
The Spice Networks are two of the leading domestic networks in the
adult pay-per-view market place. Pay-per-view television enables a subscriber
with an addressable set top decoder or satellite receiver to purchase a block of
programming, an individual movie or an event for a set fee. Pay-per-view
programming can be delivered via cable television or "direct to the home" to
households with large satellite dishes receiving a C-band low power analog
signal (the "DTH market") or with small satellite dishes receiving a Ku-band
medium or high power digital signal such as that currently offered by Primestar
and DirecTV which are referred to as "DBS services." At the end of 1996, the
Spice Networks were available to approximately 17.8 million addressable channel
homes in cable systems throughout the country. The Spice Networks have
affiliation agreements with 9 of the top 10 and 17 of the top 20 multiple system
operators ("MSO"). The Spice Network is also offered as part of the DirecTV DBS
satellite entertainment service to over 2.3 million households.
A market leader and innovator, the Spice Networks were the first adult
pay-per-view networks to be available 24 hours a day and the first adult
pay-per-view network to feature an all movie format. The Spice Networks
pioneered the now industry standard 90-minute start times promoting customer
convenience. Spice was the first service to offer a complementary companion
adult pay-per-view service, The Adam & Eve Channel, which provides staggered
start times for its movies and features.
Each of the Spice Networks feature approximately 50 titles per month,
approximately 12 of which are first time exhibitions. There is no crossover of
programming between the two channels. The Spice Networks feature "cable version"
adult films. Cable version adult films (as contrasted with the explicit or hard
core versions) are specially produced and edited to conform to strict,
internally developed guidelines which are generally accepted as the standard in
the industry.
While the retail pay-per-view price of Hollywood hit movies has
declined to less than $3 in some cable and DBS systems, the retail pay-per-view
price for adult programming such as the Spice Networks has remained in the $5 to
$8 range. In addition, the Company believes that retail adult pay-per-view
prices can be raised within a range without adversely affecting buy rates. The
following chart shows the Company's cable addressable and DBS households for
each of the Spice Networks.
The following table is an Edgar representation of the data points used
in the printed graphic presentation.
<TABLE>
<CAPTION>
Spice Networks Subscribers
1989 1990 1991 1992 1993 1994 1995 1996
------- ------- ------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Spice 830 2,330 3,860 4,890 7,370 9,270 13,920 16,330
Adam & Eve Channel - - - - - 350 3,180 3,650
</TABLE>
The Company has been aggressively promoting the Spice brand name and
developing cost effective means of building brand identity. The logo was
completely redesigned and new programming was produced for use between the
showing of feature movies in 1995. To garner nationwide brand recognition among
its affiliates and viewers, Spice is conducting a nationwide "Search for the
Spice Girl 1997" contest. Local contests are being held in major markets
nationwide with a national contest to be held in New York City. The first two
contests had extensive media coverage and demonstrated the strength of the Spice
brand name.
Marketing adult television entertainment requires creativity and
discretion. The Company, in coordination with its affiliates, has developed
several means of promoting the Spice Networks. The Company regularly distributes
affiliate marketing kits and conducts affiliate workshops and national
sweepstakes. To broaden consumer awareness of the Spice Network and pay-per-view
buying in general, the Company successfully tested a free Spice Networks preview
in order to increase viewers. Buy rates were up over 500% over average normal
activity in several systems. Based on preliminary market research, about half of
the Spice preview buyers were first time buyers and over 20% were first time
pay-per-view buyers.
The Company is distributing its programming over a variety of emerging
video delivery technologies including multi-channel analog and digital wireless
cable systems, satellite master antenna systems and open video systems, among
others to insure the widest possible distribution of its networks and
programming. The Spice Networks are the only adult programming services
currently available on the Tele-Communications, Inc. ("TCI") All TV Service, its
digital platform of satellite delivered programming. TCI is also offering its
digital platform to non-TCI cable systems and the Company anticipates expanded
distribution of the Spice Networks as a result. The Company is continuously
exploring other avenues and locales of distribution.
Competition. The Spice Networks have one principal competitor, Playboy
Television ("Playboy"), in the domestic cable and DBS markets. The Company
believes that the Spice Networks are the most widely distributed domestic adult
pay-per-view networks.
In the C-band DTH market, competition from several explicit version
adult movie services adversely impacted the Spice Network's revenues. As a
result, the Company discontinued distribution of the Spice Networks to the
C-band DTH market on August 31, 1996.
SPICE INTERNATIONAL
Through its Spice International operating division, the Company has
been pursuing global distribution of its adult networks and programming. The
Company began its international operations with its 1994 acquisition of The Home
Video Channel Limited ("HVC"), a UK corporation. HVC owns and operates The Adult
Channel, a satellite delivered subscription service which features cable version
adult movies and related programming similar to those exhibited on the Spice
Networks. The Adult Channel, which is broadcast four hours a day commencing at
midnight, is available to approximately 2 million cable households and
approximately 4 million DTH satellite households in the United Kingdom. The
Adult Channel is also available to DTH satellite households throughout
Continental Europe and currently has subscribers in over 40 countries.
HVC also operates a cable exclusive movie service featuring action and
horror movies which began digital satellite delivery in the second quarter of
1996. The Home Video Channel is offered during the evening hours and is
programmed during the pre-midnight hours to segue into The Adult Channel. The
two services are offered as a seamless 8:00 p.m. to 4:00 a.m. programming
service at a package price.
In February 1995, the Company launched Eurotica, a satellite delivered
subscription network based in Denmark which features explicit version adult
movies and adult entertainment. Eurotica is marketed to the DTH and cable
markets throughout Europe and currently has subscribers in over 25 countries.
The Company has authorized agents throughout Western Europe who
distribute DTH subscriptions to the European Networks through sales of "smart
cards." The Company is currently concluding negotiations with Satellite
Encryption Services Ltd., a News Corp. Ltd. subsidiary, to provide subscriber
access to The Adult Channel on the Sky Card. The Sky Card is also used to
authorize subscriptions for virtually all DTH channels in the United Kingdom
including those owned by British Sky Broadcasting, Ltd. The Company, which has
lost revenues as a result of unauthorized reception of its European Networks,
believes that the advanced technology of the Sky Card will reduce piracy of its
networks and will permit easier subscriber access. The Company is also
installing its own Subscriber Management Service.
In promoting the international distribution of its adult television
networks and programming, the Company's strategy is to license its networks or
programming to local cable and DTH operators. This enables the Company to avoid
the high cost of satellite distribution. The Adult Channel is included as an
extended basic programming service and Eurotica as a pay-per-view programming
service in the NetHold Electronic Media, B.V. ("NetHold") digital package of
programming services available for distribution throughout Benelux and
Scandinavia pursuant to a Channel Distribution Agreement. The Adult Channel is
also included in the basic tier of programming in two Netherlands and one
Austrian cable systems operated by United Phillips Cable which have an aggregate
of approximately 1.1 million subscribers.
The Company has applied for a broadcast license in both Germany and
France. The Company now believes that it will obtain a broadcast license in
Germany for adult programming and is currently seeking distribution of a Spice
branded network and/or programming in both the cable and DTH markets in Germany.
There are over 16 million cable addressable homes in Germany. The Company has
now been granted a broadcast license in France which will enable it to exploit
distribution opportunities on French cable systems as well as French DTH
platforms.
In Eastern Europe, the Company has entered into agreements with
affiliates of Metromedia International Telecommunications ("Metromedia") for
distribution of The Adult Channel and Eurotica in several eastern European
Countries including Romania, Slovenia, Belarus and Russia. Under these
agreements, The Adult Channel is included in the basic programming tier and
Eurotica will be available as a pay-per-view service when the technology is made
available. The recent devaluation of the Romanian currency will adversely impact
the Company's revenues from this country. The Canal Plus takeover of NetHold has
led to that company's discontinuation of its Central European marketing and
Subscriber Management Services, which NetHold had provided to HVC under
contract. HVC is now appointing sales agents throughout Central Europe and will
provide its own Subscriber Management Services.
The Company has entered into a license agreement with Pay Per View
Japan Inc. ("PPVJ") to be the exclusive adult program provider to PPVJ's Perfect
Choice TV, the first digital television program provider in Japan. The
programming is Spice branded and specially selected and edited for the Japanese
market. Perfect Choice was launched on January 15, 1997 and preliminary
indications are that the buy rates for the Company's adult programming exceed
projections.
In Australia, the Company has entered into an agreement with Northgate
Communications Australia PY Ltd. ("Northgate") to distribute Spice as a pay
service and an explicit service on a pay-per-view basis to Northgate's cable
system subscribers in Australia.
The Company is in discussions with various other operators in Latin
America, Asia, The Pacific Rim, Taiwan and Mandarin China and other areas for
carriage of the Company's networks and programming.
Competition. As a result of the launch of two competing adult services
in the fourth quarter of 1995 and piracy, the number of DTH network subscribers
declined in 1996. Management believes that the number of subscribers will not
further decline and has developed plans to reverse the trend. In the cable
market, the number of The Adult Channel's cable subscribers remain fairly
constant and the Company is exploring various possibilities to increase cable
distribution of The Adult Channel, The Home Video Channel and Eurotica. However,
in the short term, any growth in the cable market will not be sufficient to
offset the loss of revenue from the decline of The Adult Channel in the DTH
market. Revenues from The Adult Channel for 1996 were approximately $3.6 million
less than revenues for 1995.
To combat this decline, the Company has plans to relaunch the Adult
Channel when it becomes available on the Sky Card, the most widely distributed
smart card in the United Kingdom. In addition the Company plans to establish a
new dealer network to replace NetHold and to aggressively market the service in
mainland Europe.
In the emerging global markets, Spice International's major competitor
is likely to be Playboy. The Company believes that the international appeal of
its tailor made production inventory will enable it to meet this competition.
SPICE DIRECT
Spice Direct is responsible for the Company's direct marketing of
products and services to consumers, operating the Infomercial Network and
CyberSpice, as well as arranging for the productive use of the Company's
transponder capacity and providing network playback services and programming to
third parties.
Spice Direct is responsible for adult-oriented entertainment and
information through pay-per-call telephone lines (audiotext services) advertised
on the Spice Network pursuant to a Telephone Services Agreement ("TS Agreement")
with Capital Distribution, Inc., d/b/a Cupid Network Television ("CNT"). The
audiotext with advertisements are produced exclusively for the Spice Networks by
adult film producers which enables the Company to control the networks' on-air
look. Under the TS Agreement, the Company receives a fee based on the number of
Spice Network subscribers. The Company receives a sliding percentage of revenues
from the audio text services on the Adam & Eve Channel which are operated by
third parties.
The operators of the audiotext services are responsible for the
administration of the telephone lines and are contractually required to comply
with all applicable rules and regulations. None of the operators or
administrators of the telephone lines are Company employees. The telephone lines
feature computerized audio programs and live operators on both 800 and 900
telephone lines.
In between feature movies, the Spice Networks also provide home
shopping which offer adult themed products in provocatively staged shopping
segments. The merchandising is handled on both networks by CNT pursuant to an
Amended and Restated Distribution Agreement (the "Merchandise Agreement"). These
segments, which are produced by CNT, also offer Spice branded products which
further promote the brand name.
The Company and CNT have had various disagreements over CNT's
performance under the Merchandise and TSA Agreements and the parties are
currently involved in an arbitration. See "Item 3. Legal Proceedings." There are
no assurances that the dispute between the Company and CNT can be satisfactorily
resolved.
On March 1, 1997, the Company launched a general product infomercial
network known as "Williams Infomercial Network" or "WIN" (the "Infomercial
Network"). The Infomercial Network will be jointly owned and operated by the
Company and Williams Worldwide, Inc. ("WWI") once it has at least a 1.5 million
subscriber base. The network uses the same digital compression equipment and
shares a transponder with the Spice Networks and is designed to enable cable
systems to easily program underutilized blocks of time created when other cable
networks are off-air. The Company has initially targeted cable systems that
carry the Spice Networks on a part time basis and thus can easily carry the
Infomercial Network when the cable system is not distributing the Spice Network.
As discussed below in "GOVERNMENT REGULATION", Section 505 of the
Telecommunication Act of 1996 prevents many cable operators from broadcasting
the Spice Network during the daytime hours. The Company hopes to make up lost
revenue caused by cable operators complying with Section 505 through revenues
generated by the Infomercial Network.
In 1994, the Company began CyberSpice as an on-line bulletin board service
which utilized the Company's adult programming and cross promoted the Spice
Networks. CyberSpice was converted to a website on the Internet in the second
quarter of 1995. CyberSpice is currently operated by E.O.L. Communications Corp.
("EOL") and is included in a bouquet of EOL operated adult pay sites. Under a
month to month agreement, CyberSpice receives a portion of all revenues
generated by customers of EOL's pay sites who access those sites through
CyberSpice. See "GOVERNMENT REGULATION, On-Line Services."
The Company had available transponder capacity as a result of the
digital compression of the Spice Networks and CVS. Pursuant to agreements dated
as of August 30, 1996, the Company began providing transponder services to
Emerald Media, Inc. ("EMI"), which owns and operates Eurotica, an explicit
television network distributed in the C-band DTH market. EMI also licenses adult
films from the Company and the Company has licensed EMI the "Eurotica" tradename
and related identity and granted the Company an option to acquire its stock or
assets. EMI acquired additional networks and launched one of its own and the
Company now provides transponder and playback services for two EMI networks and
licenses adult films to all four of EMI's networks.
PRODUCTION AND PROGRAMMING
The Company has an extensive library of adult films which it acquires
pursuant to license and production agreements with many of the principal adult
film producers. Through the activities of its Spice International division, the
Company has been expanding distribution of its adult networks and programming
throughout the world using it's extensive adult film library. The Company
directly or through Spice International, licenses its library to its European
Network and to third parties. This programming may also be used to create new
Spice branded services or other adult networks or repurposed for use in other
media such as the Internet and cable modem markets.
The Company has long term production agreements with VCA Labs, Inc.
("VCA") and Coastline Films, Inc. and more limited production agreements with
other adult film producers including Sin City Entertainment, Inc., Wicked
Pictures, Thomas Paine Productions and Plush. VCA supplies approximately
one-fourth of the adult films which are licensed under production agreements.
Coastline had supplied two to three movies per month pursuant to a one year 24
picture production agreement which expires April, 1997. The Company has also
entered into production agreements with foreign producers as part of the
Company's strategy to globalize its programming and to meet local content
requirements.
Under the production agreements, the Company acquires worldwide
television rights (pay-per-view, subscription and premium television rights) in
perpetuity for delivery, in most instances, using all known and to be developed
methods of delivery, for both the cable version and the explicit version of each
movie. The Company may also acquire on-line, Internet and other rights as part
of the rights, granted under the production agreements.
The Company has license agreements with other adult film producers.
Under the terms of the license agreements, the Company will typically license
the cable and explicit versions for adult films in the United States and/or
Europe for between one to three years with unlimited exhibitions in return for a
flat license fee.
NETWORK DELIVERY
Satellite Transmission. The Company delivers its video programming to
cable systems and other customers via digitally compressed satellite
transmission. Management believes that this is the most efficient delivery
method currently available for point to multipoint distribution. Satellite
delivery of video programming is accomplished as follows: The video programming
is played back at an operations facility. The program signal is then encrypted
so that the signal is unintelligible unless it is passed through the proper
decoding devices. The signal may be transmitted to the satellite as an analog
signal or digitally compressed and combined with other signals and transmitted
(uplinked) from an earth station to a designated transponder on a communications
satellite.
The transponder receives the analog or digitally compressed program
signal uplinked by the earth station, amplifies the signal and broadcasts
(downlinks) it to satellite dishes located within the satellite's area of signal
coverage. The signal coverage of the domestic satellite utilized by the Company
is the Continental United States, portions of the Caribbean, and Canada. The
signal coverage of the satellite utilized by the European Networks is
Continental Europe and portions of North Africa. Each transponder can retransmit
four or more complete digitally compressed NTSC color television signals or one
analog NTSC color television signal.
For cable systems, the encrypted digitally compressed signal received
by the cable system's satellite dish is then decoded and decompressed using, for
the Company's domestic television networks, General Instrument Digicipher II
decoders. The cable system then rescrambles the signal using scrambling
technology compatible with the addressable set top boxes deployed in its system
and then distributes the signal throughout its cable system. For DTH and DBS
customers, their set top box contains the descrambling equipment.
To offer pay-per-view services, the set top boxes must have an
electronic "address" and the cable system or satellite service provider must be
able to remotely control each customer's set top box and cause it to descramble
the television signal for a specified period of time after the customer has made
a purchase of a premium service or a pay-per-view event. The ability to control
the scrambling and descrambling of a signal from a cable system's facilities
(addressability) is essential for the marketing and delivery of pay-per-view
programming services.
In Europe, subscribers purchase "smart cards" from distributors,
including appliance and electronics stores. These smartcards are programmed to
permit reception of a premium programming service. The smart cards are then
inserted into the satellite receiver or set top box which descrambles the signal
for a specified period of time.
Service Providers. The Company utilizes transponder services for its
domestic networks pursuant to a February 7, 1995 Agreement ("AT&T Agreement")
with AT&T Corp. The AT&T Agreement was initially for services on five
transponders on AT&T's Telstar 402R Satellite. This was reduced to four
transponders as a result of the loss by AT&T of one of its other satellites on
January 11, 1997. Pursuant to a letter agreement dated March 31, 1997 between
the Company and Loral Skynet (which acquired AT&T's satellite business), the
term of the agreement, which originally expired at the end of the satellite's
useful life, was shortened to October 31, 2004 in consideration of the Company's
grant to Loral of a right to preempt one of the Company's transponders after
September 1, 1997. See "Management Discussion And Analysis."
The Home Video Channel, Ltd. ("HVC") had a contract with Societe
Europeenne des Satellites S.A. ("SES"), the owner of the Astra 1C satellite
providing transmission services for The Adult Channel, through January 1997. The
footprint of the satellite is Western Europe. This arrangement was replaced with
an agreement effective February 1, 1997 with Filmnet A.B. who subleased a
transponder from SES for the four hours a day that The Adult Channel is
broadcast. The agreement is terminable upon three months prior written notice by
either party.
Commencing in June 1, 1996, The Home Video Channel began digital
satellite distribution to cable systems on the Intelsat satellite pursuant to a
five year agreement with British Telecommunications plc ("BT") dated April 24,
1996.
Eurotica obtains transponder services from BT pursuant to a January 8,
1997 offer of transponder services on Eutelsat II Flight-3 satellite. These
services are made available on a month by month basis.
Neither The Adult Channel nor Eurotica have long term satellite
arrangements. If either of these arrangements are terminated and the Company is
unable to find a replacement satellite service, broadcast of the affected
network may be interrupted or terminated.
Four Media Company ("4MC") provided domestic playback and uplink
services until February 28, 1997 when the Company's master control and digital
playback center (the "Operations Facility") went into service. The Operations
Facility currently handles playback for five networks utilizing video file
servers. This state of the art application of new technology loads and stores
digitized programming in the memory of the video file servers. Under automated
software control, the programming is then "streamed" from the video file servers
and transmitted, over fiber optic cable, to the uplink facility. By employing
this technology, the Company can add additional networks quickly and
efficiently.
The Company contracted with Atlantic Satellite Communications, Inc.
("Atlantic") for fiber connectivity from the Operations Facility to the uplink
facility and for uplink services pursuant to a three-year letter agreement dated
February 10, 1997. The parties are currently negotiating a more formal
agreement.
As discussed above, the Company's domestic network signals are
encrypted and digitally compressed using VideoCipher II encoders (manufactured
by General Instruments) which is currently the industry standard scrambling
technology. The Company leased a General Instruments encoder and 1,210 decoders
from Vendor Capital Group. The decoders were then provided to Spice Networks
affiliates. The European Networks use the Videocrypt system developed by News
Datacom Limited. The Company plans to switch to scrambling technology from
Satellite Encryption Services Ltd., which distributes the Sky Card. This
technology is more secure and the Sky Card is more widely used then the existing
system used by the European Networks.
PRINCIPAL CUSTOMERS
The Company's principal customers are TCI and Time Warner, which are
the largest domestic multiple system operators (MSO's). TCI and Time Warner
accounted for 18% and 9%, respectively of the Company's consolidated revenues
for 1996 and 11% and 7%, respectively, of the Company's consolidated revenues
for 1995. TCI and Time Warner accounted for 11% and 9%, respectively, of the
Company's consolidated revenues for 1994.
DISCONTINUED AND SUSPENDED OPERATIONS
Hit Movie Network. On March 6, 1996, the Company contributed the Cable
Video Store Network, a domestic pay-per-view hit movie service, 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.
Cable Video Store, which the Company had operated since 1989, was available via
satellite until March 31, 1997, when satellite delivery was terminated. The
network continues to be available as a video file server based network. The
Company and WCTV, the CVSP Partners, have determined to wind down the
partnership. See "CURRENT DEVELOPMENTS, CVS Partners".
Telecommunications, Television Production And Related Services. The
Company acquired SEG in a merger which took effect on September 1, 1995. SEG is
a provider of telecommunications, television production and related services
primarily to the pari-mutuel wagering industry and to a variety of other
industries including the sports, entertainment and distance learning industries.
In the fourth quarter of 1996, the Company determined that SEG was no longer a
strategic fit with the Company's core adult entertainment business. On February
7, 1997, the Company split off SEG to the former SEG shareholders in exchange
for the 700,000 shares of common stock they had received in the SEG Merger. This
transaction is described in greater detail in "CURRENT DEVELOPMENTS, Spector
Entertainment Group, Inc."
Television and Movie Production. The Company, through its wholly-owned
subsidiary Cinema Products Video, Inc. ("CPV"), was engaged in the production
and distribution of television series and programs, movies and CD-ROMs. Because
of the substantial lead time before the Company recovered its production
advances and because CPV's principal customers did not renew their production
agreements with CPV in 1995, the Company elected to suspend CPV's production
activities at the end of 1995, though the Company continued to market CPV's
library. In 1996, the Company terminated all of CPV's activities and in the
first quarter of 1997 sold a portion of the rights to the CPV library to the
former CPV shareholders.
CURRENT DEVELOPMENTS
TeleSelect. The Company, Philips Media B.V. ("Philips") and Royal PTT
Netherlands NV ("KPN") established TeleSelect B.V. ("TeleSelect"), a Netherlands
joint venture. TeleSelect was formed to create joint ventures with European
cable operators to enable them to provide conditional access services such as
pay-per-view, near video on demand and electronic retailing to their
subscribers. On April 3, 1996, the Company sold its TeleSelect interest to
Philips and KPN for approximately $3.2 million, an amount equal to its cash
investment in TeleSelect.
Multimedia Games. The Company formed a joint venture with TV Games,
Inc. ("TVG"), a wholly-owned subsidiary of Multimedia Games, Inc. ("MGAM") and
American Gaming Network J.V. ("AGN"), to jointly develop and promote high stakes
proxy play Class II tribal bingo games. The Company contributed approximately
$1.4 million of intellectual property, which the Company had acquired from MGAM
for cash and notes, and working capital to AGN's capital. In related
transactions, the Company acquired for cash and notes 275,000 shares of MGAM's
outstanding stock and a warrant to acquire an additional 175,000 shares at an
exercise price of $3.50 per share (the "MGAM Warrants").
The parties were unable to agree on a business plan or a strategy for
going forward with AGN. Pursuant to a Purchase Agreement dated June 28, 1996,
the parties resolved their differences with the Company giving up its interest
in AGN and the 275,000 shares of MGAM stock in exchange for (i) the cancellation
of an aggregate of $775,000 of liabilities owed to MGAM and TVG, (ii) $100,000
pursuant to a note due on July 25, 1996 and (iii) $400,000 due pursuant to a
note due in three years. The Company retained the MGAM warrant. The shares
underlying the MGAM warrant are transferable pursuant to a currently effective
registration statement but are subject to a lockup agreement which requires
MGAM's investment bankers consent to a sale of the shares.
Spector Entertainment Group, Inc. In the fourth quarter of 1996, the
Company determined that SEG was no longer a strategic fit with its core adult
entertainment business. On February 7, 1997, and pursuant to a Settlement
Agreement (the "SEG Settlement Agreement") dated January 29, 1997 among the
Company, SEG and the Spector Group, the Company conveyed all of the issued and
outstanding shares of the common stock of SEG to certain members of the Spector
Group in exchange for the 700,000 shares of the Company's common stock
previously issued in the SEG Merger.
Edward M. Spector resigned from the Company's Board of Directors. As
provided for in the SEG Settlement Agreement, the Company also entered into a
Transponder Services Agreement with SEG pursuant to which the Company will
provide transponder services to SEG for monthly payments of $80,000 for two
years. SEG has the right to terminate the agreement on ninety days prior written
notice. The parties to an August 14, 1995 letter agreement which granted certain
members of the Spector Group a put to sell all of the stock of United
Transactive Systems, Inc., for a formula determined number of shares of the
Company's common stock, also entered into a Termination Agreement dated as of
February 7, 1997 terminating the August 14th agreement and suspending the
Spector Group's prior exercise of the put.
Emerald Media. Pursuant to agreements dated as of August 30, 1996, the
Company began providing transponder services to Emerald Media, Inc. ("EMI"),
which owns and operates Eurotica, an explicit television network distributed in
the C-band DTH market. The Company also licenses adult films and the "Eurotica"
trade name and related identity to EMI. EMI also granted the Company an option
to acquire its business or stock for a formula determined amount. EMI expanded
its operations and now operates four explicit television networks in the C-band
DTH market. On March 1, 1997, the Company's agreements with EMI were modified
and now the Company provides transponder services on two transponders to EMI and
handles playback for two of EMI's networks from its Operations Facility. The
Company's option to acquire the EMI business or stock was revised with a new
exercise price of $755,000.
Operations Facility. In the second quarter of 1995, the Company entered
into agreements with IBM and others to construct the Operations Facility at its
New York City headquarters. Approximately $2.1 million of the Operation
Facility's cost was to be financed by a capital lease with IBM Credit
Corporation ("ICC"). IBM did not deliver the video file servers and tape
archives, approximately $600,000 worth of equipment, and after making an initial
$435,000 lease payment, the Company terminated the lease and did not make any
further payments.
The Company reached an agreement in November, 1996 with IBM and ICC and
entered into a superseding equipment lease agreement. Under the agreement ICC
provided an additional $525,000 of financing which the Company used to purchase
video file servers and tape archives from Digital Equipment Corporation ("DEC").
IBM and ICC agreed to reduce the monthly lease payments to $37,000 per month and
the Company began making lease payments in February, 1997. The Company is
currently using the Operations Facility to playback three of its own networks
and two networks for EMI.
CVS Partners. On March 6, 1996, pursuant to a General Partnership and
Contribution Agreement dated January 27, 1996, the Company contributed the
assets of Cable Video Store and certain other assets to CVSP, a partnership
owned 75% by the Company and 25% by WCTV, a wholly-owned subsidiary of WilTech.
The Company and Vyvx, Inc. ("Vyvx") entered into service agreements with CVSP to
provide certain services.
Satellite distribution of the network terminated on March 31, 1997. The
Company and WCTV have determined to wind down CVSP and the parties are
formulating a dissolution plan.
Refinancing. The Company and certain of its subsidiaries (referred to
herein and in the PNC Credit Agreement (as defined below) as "Obligors") and PNC
Bank, N.A., as successor-in-interest to Midlantic Bank, N.A. ("PNC"), were
parties to an Amended and Restated Loan and Security Agreement, as amended (the
"PNC Credit Facility") pursuant to which PNC provided a credit facility to the
Company. The PNC Credit Facility had an outstanding principal amount of
approximately $14.6 million at December 31, 1996. As part of the PNC Credit
Agreement, the Company issued a warrant to acquire 100,000 shares of the common
stock of the Company.
Pursuant to a Settlement Agreement (the "PNC Settlement Agreement")
dated January 15, 1997, by and among PNC, the Company and the Obligors, the
Company paid PNC $9.6 million, issued a $400,000 two-year promissory note and
granted a warrant (the "PNC Warrant") to purchase 600,000 shares of common stock
in satisfaction of the PNC Credit Facility. PNC released its security interest
in the Company's assets.
The PNC Warrant supersedes the warrant previously issued to PNC. The
PNC Warrant exercise price is $2.0625 per share and is exercisable until
December 8, 2004. The Company granted PNC registration rights with respect to
the shares of common stock underlying the PNC Warrant pursuant to the terms of a
Registration Rights Agreement.
Pursuant to a Loan and Security Agreement dated January 15, 1997, which
was assigned to Darla L.L.C. ("Darla"), Darla provided a credit facility (the
"Darla Credit Facility") to the Company consisting of a $10.5 million term loan
and a revolving Credit Facility of up to $3.5 million. The term loan was used to
satisfy the $9.6 million cash payment provided for under the PNC Settlement
Agreement and to pay the loan commitment fee. The Darla Credit Facility matures
in 30 months with quarterly amortization totaling $2.5 million of the principal
in the last year of the loan. 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. As of March 31, 1997, the
Company has drawn down approximately $1.8 million of the revolving Darla Credit
Facility.
As part of this transaction, the Company issued 24,250 shares of $100
face value Convertible Preferred Stock Series 1997-A (the "Preferred Stock").
The terms of the Preferred Stock are set forth in a Certificate of Designation
of Preferences and Rights - Convertible Preferred Stock Series 1997-A. The
Preferred Stock provides for an 8% coupon payable, at the Company's election,
with additional Preferred Stock. 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 Company entered into a
Registration Rights Agreement with Darla providing for registration of the
shares of common stock underlying the Preferred Stock.
As part of the Loan Agreement, the Company entered into various
agreements with Darla pledging the stock of all of its domestic operating
subsidiaries and HVC and granting Darla a security interest in the Company's
domestic assets.
CPV. Pursuant to a Program Rights Agreement effective as of February
10, 1997, the Company sold the domestic rights and international home video
rights to the CPV library to MRG Entertainment, Inc. ("MRG") for $170,000. MRG
is owned by the shareholders of CPV prior to CPV's acquisition by the Company.
GOVERNMENTAL REGULATIONS
Domestic Networks. Congress enacted the Telecommunications Act of 1996
(the "Act"), a comprehensive overhaul of the Federal Communications Act of 1934.
The Act contains several provisions which may impact the Company. (All Section
references which follow refer to the Act.)
Section 505 requires full audio and video scrambling of channels which
are primarily dedicated to sexually explicit programming. If a multi-channel
video programming distributor (which includes a cable system operator) cannot
comply with the full scrambling requirement, then the channel must be blocked
between 6:00 AM and 10:00 PM. The Spice Networks feature "sexually explicit"
programming within the contemplation of Section 505. While the Company fully
scrambles its signal, several of the Company's cable affiliates lack the
technical capability to fully scramble the audio portion of the signal.
The Company filed an action in Delaware District Court challenging the
constitutionality of Section 505. The District Court granted the Company's
application for a temporary restraining order enjoining enforcement of Section
505. However the Company's application for a preliminary injunction was denied
on November 8, 1996 though the District Court stayed enforcement of Section 505
pending review by the Supreme Court. On March 24, 1997, the Supreme Court
affirmed the District Court's decision. It is anticipated that Section 505 will
take effect on or about May 1, 1997.
If Section 505 takes effect on May 1, 1997, the Company's revenues will
be adversely affected. While the amount of the reduction depends on several
factors some of which are outside of the Company's control, the Company
estimates the revenue reduction will be between $1.0 million and $2.0 million
for 1997.
The Act will also affect the Company's businesses in other ways. The
principal purpose of the Act was to promote deployment of advanced
telecommunications and information technologies in the marketplace by
deregulating pricing in the cable television industry and increasing competition
in the telecommunications industry by permitting the entry of the cable and
telephone companies into each other's markets. The effect of increased
competition on the Company's networks is unclear at this point in time.
On-Line Services. CyberSpice, the Company's adult oriented on-line
service, may also be affected by the Act. The Act makes it a criminal offense to
transmit to minors "indecent" content on-line and over the Internet. However a
person providing adult content on-line will not be subject to prosecution under
the Act if the provider has taken good faith reasonable efforts to prevent or
restrict access to minors. While the Company believes that CyberSpice does not
contain any "indecent" material and thus complies with the Act, the Company is
exploring various options for CyberSpice with a view to increasing its revenues.
If CyberSpice, or portions thereof are converted to "pay" sites, the Company
intends to install safeguards limiting access to CyberSpice to persons who are
not minors which should satisfy the statutory safe haven.
The constitutionality of this provision was challenged by unrelated
third parties and a District Court has issued a temporary restraining order
enjoining enforcement of this provision. The Supreme Court recently heard oral
arguments in this case.
Currency Rates and Regulations. The Company's foreign operations are
subject to the risk of fluctuation in currency exchange rates and to exchange
controls. The Company cannot predict the extent to which such controls and
fluctuations in currency rates may affect its operations in the future or its
ability to remit dollars abroad. See Note 3 to the consolidated financial
statements "Summary of Significant Accounting Policies - Foreign Currency
Translation".
EMPLOYEES
At February 28, 1997, the Company had a total of 97 employees.
Item 2. Properties
The Company leases the following locations(1):
Headquarters:
536 Broadway 24,750 square feet(2)
New York, New York 10012
Other offices:
2716 Ocean Park Blvd., Suite 1007
Santa Monica, CA 90405 2,625 square feet
1755 Park Street, Suite 200
Naperville, IL 60563 330 square feet
Home Video Channel Limited
Aquis House, Station Rd.
Hayes, Middlesex UB3 4DX
United Kingdom 5,020 square feet
Danish Satellite TV a/s:
Holger Danskesvej
40000 Copenhagen, Denmark 2,925 square feet
The Company believes its leased locations are suitable and adequate for the
conduct of the Company's business.
(1) The Company previously leased offices from Margate Associates, an affiliate
of the former SEG shareholders, which was used by SEG. SEG was split off by
the Company on February 7, 1997 and as a consequence, the Company has no
further liability under this lease.
(2) The Company also uses a portion of the roof at its headquarters for
equipment relating to the Operations Facility.
Item 3. Legal Proceedings
The Company instituted a proceeding in the Delaware District Court
against the Federal Government, Graff Pay-Per-View Inc. v. Janet Reno, et. al.
which was consolidated with a prior action filed by Playboy Entertainment Group,
Inc. (Civil Action No. 96-94/96-107 JJF), challenging the constitutionality of
Section 505 of the Telecommunications Act of 1996. As described above in
"GOVERNMENT REGULATION, Domestic Networks," Section 505 requires full audio and
video scrambling of channels which are primarily dedicated to sexually explicit
programming such as the Spice Networks. If a multi-channel video programming
distributor (which includes a cable system operator) cannot comply with the full
scrambling requirement, then the channel must be blocked during the hours when
children are likely to be watching television.
On March 7, 1996, the Court granted the Company's application for a
temporary restraining order, enjoining enforcement of the Section 505. However
the Company's application for a preliminary injunction was denied on November 8,
1996 though the District Court stayed enforcement pending review by the Supreme
Court. On March 24, 1997, the Supreme Court affirmed the District Court's
decision. It is anticipated that Section 505 will take effect on or about May 1,
1997. The Company is considering its legal options in connection with this
action.
The Company issued notices of default to Capital Distribution, Inc.,
d/b/a Cupid Network Television ("CNT") under the Amended and Restated
Distribution Agreement ("Distribution Agreement") and the Telephone Services
Agreement ("TS Agreement"). CNT responded by obtaining a temporary restraining
order preventing the Company from terminating the agreements and also filed a
Demand for Arbitration. The Company believes that it has the contractual right
to terminate the agreements and will seek such an order in the arbitration.
Hearings in the arbitration began on March 17, 1997; there are several
additional days of hearings which should be concluded by the end of June. There
are no assurances that the Company will be successful in doing so or that the
arbitrator may seek to impose monetary damages as a result of the Company's
actions.
The Company, through a wholly-owned subsidiary, was a defendant in
Monopoli Studio, Inc., et. al. v.Cinema Products Video, Inc., et. al. The
District Court action was dismissed.
On November 15, 1996 Eric M. Spector, as trustee for the Eric M.
Spector Revocable Living Trust commenced an action in the Delaware Chancery
Court. As part of the SEG Settlement Agreement, the Delaware Chancery Court
Action was dismissed.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during
the fourth quarter of the fiscal year ended December 31, 1996.
PART II
Item 5. Market for Registrants Common Equity and Related Stockholder Matters
The Company's common stock is presently traded on The Nasdaq SmallCap
Market under the symbol "SPZE."
The following table sets forth, for the calendar period indicated,
the per share range of high and low sales prices for the Company's common stock
as reported on The Nasdaq National Market through May 31, 1996 and from June 1,
1996 on the Nasdaq SmallCap Market.
High Low
1995
First Quarter $11.38 $9.50
Second Quarter $12.00 $8.38
Third Quarter $10.75 $8.25
Fourth Quarter $ 7.88 $3.88
1996
First Quarter $5.00 $3.13
Second Quarter $3.75 $2.50
Third Quarter $3.44 $2.00
Fourth Quarter $2.63 $1.00
The Company currently has approximately 1,600 beneficial shareholders.
The Company has never paid cash dividends on its common stock and
intends to retain future earnings to support the growth of its business and,
therefore, does not anticipate paying any cash dividends in the near future. The
payment of any future cash dividend on common stock will be determined by the
Company's Board of Directors in light of conditions then existing including the
Company's earnings, financial condition, capital requirements and other factors.
In addition the Company's current credit facility with Darla L.L.C. contains
provisions which restrict payments of cash dividends on its common stock.
<PAGE>
ITEM 6. Selected Financial Data
The following table is a summary of selected financial data for the
Company for the periods indicated, which has been restated for discontinued
operations:
<TABLE>
<CAPTION>
For the Years ended December 31 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues: $33,213,000 $ 43,292,000 $ 43,232,000 $ 20,528,000 $ 15,045,000
-------------- --------------- ------------ --------------- --------------
Operating expenses:
Cost of goods of sold
94,000 196,000 123,000 329,000 453,000
Salaries, wages and benefits 7,592,000 9,722,000 6,665,000 4,318,000 2,543,000
Producer royalties and library amortization 5,481,000 6,662,000 7,096,000 4,075,000 3,374,000
Satellite costs 1,884,000 10,191,000 9,670,000 5,985,000 3,363,000
Selling, general and administrative 11,354,000 17,646,000 13,472,000 7,719,000 3,956,000
Depreciation and amortization of fixed
assets and goodwill 7,499,000 2,063,000 1,156,000 465,000 181,000
Provision for write-downs and non-recurring items:
Investment in American Gaming Network (875,000) 2,039,000
Goodwill related to Guest Cinema, Inc. 871,000
Film and CD-ROM costs 3,967,000
Restructuring charges 3,655,000
-------------- -------------- -------------- -------------- --------------
Total operating expenses 33,029,000 57,012,000 38,182,000 22,891,000 13,870,000
-------------- -------------- -------------- -------------- --------------
Operating income (loss) 184,000 (13,720,000) 5,050,000 (2,363,000) 1,175,000
Interest expense 6,418,000 914,000 299,000 289,000 174,000
Minority interest (1,062,000) 500,000
-------------- -------------- -------------- -------------- --------------
Income (loss) from continuing operations
before provision for income taxes and equity
in undistributed earnings (5,172,000) (14,364,000) 4,251,000 (2,652,000) 1,001,000
Income tax (benefit) provision 192,000 734,000 1,298,000 (54,000) 83,000
-------------- -------------- -------------- -------------- -------------
Income (loss) from continuing operations
before equity in undistributed earnings (5,364,000) (15,368,000) 2,953,000 (2,598,000) 918,000
Equity in the undistributed earnings of
HVC, net of the amortization of goodwill 4,000
-------------- --------------- --------------- --------------- -------------
Income (loss) from continuing operation (5,364,000) (15,368,000) 2,953,000 (2,594,000) 918,000
-------------- --------------- --------------- --------------- ------------
Discontinued operations:
Income from discontinued operations of SEG 35,000 242,000 213,000 225,000 309,000
Loss on disposal of SEG (2,571,000)
-------------- --------------- --------------- --------------- ---------------
Income (loss) from discontinued operations (2,536,000) 242,000 213,000 225,000 309,000
-------------- --------------- --------------- --------------- ---------------
Net income (loss) ($7,900,000) (15,126,000) 3,166,000 ($2,369,000) 1,227,000
============== =============== =============== =============== ===============
Earnings (loss) per share of common stock
Primary
Income from continuing operations ($0.48) ($1.31) $0.25 ($0.29) $0.10
Discontinued operations (0.22) 0.02 0.02 0.03 0.03
============== ============== ============= =============== ===============
Net income ($0.70) ($1.29) $0.27 ($0.26) $0.13
============== ============== ============== =============== ===============
Fully diluted
Income from continuing operations ($0.48) ($1.31) $0.24 ($0.29) $0.09
Discontinued operations (0.22) 0.02 0.02 0.03 0.03
-------------- ------------ ------------- ------------- --------------
Net income ($0.70) ($1.29) $0.26 ($0.26) $0.12
============== ============== ============== =============== ==============
Cash dividends declared per common share None None None None None
============== ============== ============== ============== ===============
Weighted average number of shares outstanding:
Primary
11,351,000 11,747,000 11,909,000 8,954,000 9,662,000
============== ============== ============== ============== ===============
Fully diluted
11,351,000 11,747,000 12,215,000 8,954,000 10,029,000
============== ============== ============== ============== ===============
As of December 31,
- -----------------------------------------------------------------------------------------------------------------------------
Total assets 89,312,000 99,199,000 37,458,000 21,221,000 10,125,000
-------------- -------------- -------------- -------------- ---------------
Current portion of long-term debt and
obligations under capital leases 5,743,000 5,623,000 3,702,000 446,000 1,073,000
-------------- -------------- -------------- -------------- ---------------
Long-term debt and obligations
under capital leases less current portion 68,411,000 71,311,000 1,049,000 1,608,000 300,000
-------------- -------------- -------------- -------------- ---------------
Shareholders' equity $ 2,294,000 $ 8,069,000 23,460,000 8,583,000 4,255,000
=============== ============== ============== ============== ===============
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation.
1996 COMPARED TO 1995
For the year ended December 31, 1996, the Company reported a net loss
of $7.9 million, as compared to a net loss of $15.1 million in 1995. The current
year's loss is attributable to a loss from continuing operations of $5.4 million
and a loss from discontinued operations of $2.5 million. The loss from
continuing operations is primarily attributable to continued losses from the
Cable Video Store and Eurotica networks. Also contributing to the loss from
continuing operations were losses associated with the CPV operation as well as
the non-cash loss relating to the capitalization of the AT&T transponder lease.
Revenues. Total revenues from continuing operations for the year ended
December 31, 1996 decreased by approximately $10.1 million to approximately
$33.2 million compared to total revenues of approximately $43.3 for the year
ended December 31, 1995. The decline was primarily attributable to declines in
revenues from the C-band DTH market ($6.2 million), CPV ($2.8 million) and HVC
($3.6 million), totaling approximately $12.6 million. Offsetting these declines
was the revenue growth of Spice in the domestic cable and the DBS markets
totaling approximately $2.9 million.
In the domestic C-band DTH market several competing adult explicit
services were launched during 1994 and 1995. These explicit adult services
competed directly with Spice Networks in the C-band DTH market and have resulted
in a decline in revenues in this market of approximately $6.2 million for the
year ending December 31, 1996, as compared to the same period in 1995. These
explicit adult services are not distributed by cable operators and therefore, do
not have an impact on Spice Networks in the cable market. As a result of the
decline in the Spice Networks' C-band DTH revenues, the Company suspended the
distribution of the Spice Networks in this market on August 31, 1996.
As part of the Company's restructuring plan instituted in 1995 and 1996
and the continued projected decline in the C-band market, the Company executed a
plan in September of 1996 to transmit its programming on a digital platform,
which can not be received by the C-band market. The Company expects to realize
significant reductions in the costs resulting directly from the digital
conversion (see discussion of satellite expenses).
The revenues from CPV decreased as a result of the company's decision
to cease production activity in the beginning of 1996.
In the United Kingdom, two new competing adult services were launched
in the fourth quarter of 1995. The new adult services compete directly with The
Adult Channel, the Company's United Kingdom satellite delivered adult network.
In addition, in the second half of 1995, The Adult Channel switched satellites
to a satellite which could not be viewed by many of its existing subscribers
without the purchase of new equipment. These two factors have resulted in a
decline in revenues of approximately $3.6 million for the year ended December
31, 1996, as compared to the same period in 1995
Revenues from the Spice Networks cable market increased by
approximately $1.8 million for the year ended December 31, 1996, as compared to
the same period in 1995, a gain of approximately 12.5%. The Company increased
the number of addressable households with access to the Spice Networks at
December 31, 1996 by approximately 20% over the number of such addressable
households at December 31, 1995. The percentage increase in addressable
subscribers did not translate into the same percentage increase in revenues due
to normal delays in realizing revenues from new subscribers and a reduction in
the Company's share of revenues (referred to as license fees in the Company's
agreements with cable operators) from cable sales of the Spice Networks. This
reduction in license fees is a result of increased competition in the Company's
market segment and the growing concentration in the ownership of cable systems
by multiple system operators ("MSOs"). Management expects this downward trend to
slow and for license fees to stabilize.
Salaries. Total salaries from continuing operations for the year ended
December 31, 1996 decreased by approximately $2.1 million to approximately $7.6
million compared to total salaries of approximately $9.7 for the year ended
December 31, 1995. The decline was a result of the implementation and execution
of the restructuring plan that included the consolidation and elimination of
some employee functions which translated into significant reductions of the
Company's personnel. Under the same restructuring plan, the Company entered into
separation agreements with two of its then executive officers which translated
into an annual expense saving of approximately $1.0 million.
Royalties. Producer royalties and film cost amortization from
continuing operations decreased by approximately $1.2 million for the year ended
December 31, 1996, as compared to the same period in 1995. The decline is
primarily attributable to the reduction in film cost amortization resulting from
the write-down of CPV's film and CD-ROM costs in the fourth quarter of 1995.
Satellite. In December 1995, the Company entered into a service
agreement with AT&T for the use of five transponders on Telstar 402R for the
satellite's useful life, estimated to be 12 years. The Company is using the
transponders for broadcast of its domestic networks. The AT&T transponder
agreement is being accounted for as a capital lease as required by Statement of
Financial and Accounting Standards No. 13, "Accounting for Leases". As a result,
the Company is required to establish an asset and a corresponding offsetting
interest bearing obligation equal to $58.7 million, the present value of the
expected future minimum lease payments at the lease inception. The asset is
depreciated, on the straight-line method, over the satellite's estimated 12 year
useful life. The actual lease payments are applied against the principal and
interest of the obligation similar to a fully amortizing mortgage loan. For the
year ended December 31, 1996 the Company recognized total expenses attributable
to the lease of approximately $10.3 million comprised of depreciation expense of
approximately $5.3 million and interest expense of approximately $5.0 million.
Had the lease been accounted for as an operating lease, the Company would have
recognized approximately $2.0 million less in total expenses attributable to the
AT&T transponder lease for the year ended December 31, 1996.
Satellite, playback and uplink expenses from continuing operations for
the year ended December 31, 1996 have decreased by approximately $8.3 million,
as compared to the same period in 1995. The decrease is primarily attributable
to the capitalized AT&T transponder lease as compared to the treatment during
the same period in 1995 when domestic transponder expenses were accounted for as
operating leases. Had the AT&T lease been accounted for as an operating lease,
the Company's satellite expense for the year ended December 31, 1996 would have
been approximately the same as 1995.
In September 1996, the Company completed the project that enabled the
digital compression and transmission of its video programming to its domestic
cable systems. Digital compression and transmission allows a single transponder
to carry the programming for multiple digitally compressed Networks. The Company
has transferred three of its networks onto a single transponder, which has
resulted in an annual cost saving to the three networks of approximately $3.1
million and has made available two other transponders for productive use by the
Company.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses from continuing operations for the year ended December
31, 1996 decreased by approximately $6.3 million as compared to the same periods
in 1995. The decrease is attributable to, among other items, the suspension of
the exploration of international opportunities and decrease in marketing,
advertising and sales promotions. Also, the implementation of the restructuring
plan has contributed to the reduction of selling, general and administrative
expenses by suspending the exploration for new businesses. The Company has also
reduced selling, general and administrative expenses by amending the Company's
travel policies and reducing employee benefits as well as overhead expenditures.
Offsetting these reductions is an increase in legal fees primarily attributable
to litigation with the government over Section 505 of the Telecommunications Act
of 1996 and an increase in bad debt expense relating to the collection of
receivables at CPV which was closed down during 1996.
Depreciation of Fixed Assets. Depreciation of fixed assets and the
amortization of goodwill from continuing operations for the year ended December
31, 1996 increased by approximately $5.4 million as compared to the same period
in 1995. The increase was primarily attributable to the depreciation of the
capitalized AT&T transponder lease as compared to 1995 when domestic transponder
leases were treated as operating leases and reflected in satellite costs.
Interest Expense. Interest expense from continuing operations increased
by approximately $5.5 million for the year ended December 31, 1996, as compared
to the same period in 1995. $5.0 million of the increase is attributable to the
interest expense recognized under the capitalized AT&T transponder lease during
1996, as compared to 1995 when the domestic transponder leases were accounted
for as operating leases. The remaining increase of $0.5 million is primarily the
result of the increased average loan balance associated with the PNC debt in
1996 as compared to 1995.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company expects to realize continued savings from the execution of
the plan to dispose unprofitable and non-core adult businesses. The Company
expects significant revenue growth in 1997 and beyond from its international
operations and the sale of available transponder capacity. The Company's
international operations have targeted and have or expect to sign distribution
contracts in numerous foreign markets, including the Japanese, German,
Australian, and Latin American markets. These distribution agreements are
projected to translate into additional revenue sources at minimal additional
costs. With the completion of the project to digitally compress and transmit
video programming to the domestic cable systems, the Company has increased its
transponder capacity and expects to realize incremental revenues from the sale
of available transponder capacity.
On March 31, 1997, the Company amended the terms of the satellite
transponder lease with Loral (which acquired AT&T's satellite business). As a
result of the amendment, the lease will be reclassified to an operating lease on
March 31, 1997 and will give rise to a non-recurring gain in 1997 of
approximately $2.0 million as compared to a $2.0 million charge to income in
excess of the lease payments in 1996.
The Company's domestic cable revenues are expected to be adversely
affected as a result of the Supreme Court's affirmation of Section 505 in March,
1997 (See GOVERNMENT REGULATIONS "Domestic Networks"). The effect on revenues is
estimated to be from $1.0 to $2.0 million in 1997.
During 1996 the Company has experienced continued downward pressure on
its license fees but expects license fees to level off in the near future. The
Company expects that revenue from projected additional subscribers will offset
the effects of any reductions in the license fees.
1995 COMPARED TO 1994
For the year ended December 31, 1995 the Company reported a net loss of
$15.1 million as compared to net income of $3.2 million in 1994. The 1995 loss
is primarily attributable to a non-recurring restructuring charge of
approximately $3.7 million and approximately $6.9 million of provisions to
write-down investments including film and CD-ROM costs, the investments in AGN
and goodwill relating to the acquisition of PSP, which owns the technology
utilized by Guest Cinema.
The restructuring charge and provisions for write-down of investments
resulted from a restructuring plan intended to streamline and refocus the
Company on its profitable core businesses.
The restructuring terminated capital intensive or peripheral businesses
and other activities that the Company could no longer afford. The Company
suspended exploration of new businesses throughout Europe other than those
related to the globalization of its adult networks and programming. It suspended
the production of movie and television series for 1996 by CPV and substantially
reduced CPV's overhead. The Company suspended its activities in developing,
marketing and supporting AGN. The Company also restructured its senior
management and reduced its staff.
Revenues. Total revenues from continuing operations for the years ended
December 31, 1995 and 1994 were approximately the same ($43.3 million versus
$43.2 million).
In the C-band DTH market several competing adult explicit services were
launched during 1994 and 1995. These explicit adult services compete directly
with the Spice Networks in the DTH market and have resulted in a decline in
revenues of $0.6 million or 8.0% in this market. These explicit adult services
are not currently distributed by cable operators and therefore, do not have an
impact on the Spice Networks revenues in the cable market.
Revenues from the Spice Networks cable market increased $0.8 million
despite the loss of access to one million Spice cable subscribers (8% of Spice's
accessible subscriber base) on July 1, 1995 from the Time Warner New York Cable
System. This system represented annualized revenues of approximately $2 million.
Offsetting the loss of revenue from Time Warner New York was the addition of new
cable systems, including other Time Warner systems, and growth in the subscriber
base of existing systems. While the Company was able to increase its access to
Spice Networks addressable households by approximately 50% in 1995, this
increase did not translate into greater revenues because of downward pressure on
the Company's license fees including lower license fees on the subscribers
acquired as part of the AEC acquisition. This is a result of increased
competition in the Company's market segment and the growing concentration in the
ownership of cable systems. The addition of new cable subscribers and the
increased distribution as a result of distribution of the Spice Network on
DirectTV and other outlets for distribution should continue the growth in the
Spice Networks' subscriber base.
HVC's two networks and the start up of Eurotica contributed $1.1 and
$0.6 million to the increased revenues while CPV and Cable Video Store
experienced declines in revenues of $1.9 million and $0.6 million, respectively.
HVC's revenues were less than projected because The Adult Channel's revenues
declined in the fourth quarter of 1995 as a result of the launch of two
competitive services in the United Kingdom and the switch to a satellite which
could not be received by many existing subscribers without the purchase of
additional equipment.
Salaries. Salaries, wages and benefits from continuing operations
increased by approximately $3.1 million for the year ended December 31, 1995
over the similar period in 1994. The increase resulted primarily from higher
levels of staffing believed necessary to maintain and increase the Company's
subscriber base, explore new network opportunities, produce CD-ROMs and the
Company's on-line service and explore other business opportunities such as video
dial tone delivery systems and international ventures.
The Company has restructured its operations and has reduced its staff,
including terminating the employment agreements of all of the executives
responsible for exploring international opportunities and approximately 30 of
CPV's employees. Under the same restructuring, the Company reduced its salary
expense by amending employment agreements and entering into separation
agreements with two officers who resigned.
Royalties. Producer royalties and library amortization from continuing
operations decreased by approximately $0.4 million from 1994 to 1995. The
decline was primarily attributable to a decline in royalties payable to the
studios attributable to the decrease in Cable Video Store network revenues.
Satellite Expense. Satellite costs from continuing operations, which
include satellite transponder, playback and uplink costs, increased by
approximately $0.5 million for the year ended December 31, 1995, as compared to
the same period of the prior year. On May 31, 1995, the Company terminated its
domestic transponder lease agreement with TVN. On April 1, 1995, AT&T began
providing transponder services to the Company at a more economic rate. The
Company launched a new European network which required a transponder. The
decrease in domestic satellite transponder costs was offset by the addition of
the new European transponder.
Commencing December 1995, the Company began utilizing five transponders
pursuant to a Transponder Services Agreement with AT&T which has been accounted
for as a capital lease.
Selling, General and Administrative. Selling, general and
administrative costs from continuing operations increased by approximately $4.2
million in the year ended December 31, 1995, as compared to the same period of
the prior year. The increase was attributable to, among other items, the
exploration of international and new network opportunities, improving the on-air
images of the Company's networks, additional marketing, advertising and sales
promotion undertaken to both maintain and increase the networks' subscriber
bases and additional overhead due to the expansion of corporate headquarters.
During 1995, the Company heavily promoted its adult services to combat new
competition from other networks.
The restructuring entails a major cost reduction program designed to
reduce selling, general and administrative costs in 1996. The plan is intended
to streamline the operations of the Company's core businesses, suspend the
exploration of new businesses and significantly reduce or eliminate the
activities of non-essential capital intensive operations. The Company has also
taken steps to reduce the amount of leased space used for its operations, reduce
expenses by amending the Company's travel policies and reduce employee benefits
and other overhead expenditures.
Bad debt expense increased by approximately $0.9 million in 1995 versus
1994. The increase is primarily attributable to a provision for doubtful
accounts on a receivable owed to the Company by XTV Television, Inc. ("XTV").
The Company has a distribution agreement with XTV pursuant to which XTV
distributes the Spice Networks in combination with XTV's two explicit adult
services in the C-band DTH market. In addition MLI has licensed adult movies to
XTV. Due to increased competition in XTV's market, XTV informed the Company that
it was experiencing financial difficulty and as a result ceased paying the
Company its distribution fee commencing in the third quarter of 1995. By year
end, XTV owed the Company $0.8 million in past due distribution fees and unpaid
movie license fees. The Company is pursuing collection of these amounts but has
established a reserve against these amounts aggregating $0.8 million.
Depreciation of Fixed Assets and Amortization of Goodwill. Depreciation
of fixed assets and the amortization of goodwill from continuing operations
increased by approximately $0.9 million for the year ended December 31, 1995 as
compared to 1994. The increase is primarily due to the increased ownership of
HVC resulting from the purchase of the remaining 49% for $6.7 million in cash
and stock on August 1, 1994. The excess of the purchase price over the fair
market value of the net assets acquired is being amortized utilizing the
straight-line method over twenty years. Also contributing to the increase was
depreciation incurred on new capital improvements for the expansion of the
Company's corporate headquarters, which are being amortized using the
straight-line method over the life of the lease.
Interest Expense. Interest expense from continuing operations has
increased by approximately $0.6 million for the year ending December 31, 1995 as
compared to the same period in 1994. The increase is primarily due to additional
borrowings of $12.3 million during 1995 under the revolving line of credit.
NON-RECURRING ITEMS
Guest Cinema - Goodwill. In January 1994, the Company acquired through
the merger of PSP into its wholly-owned subsidiary, Guest Cinema, Inc., a
hotel/motel pay-per-view system. The Company suspended distribution of this
system because the Company projected that the technology would not generate
future cash flows sufficient to support its investment. Therefore, the Company
has incurred an expense of approximately $0.9 million attributable to the
write-down of goodwill created in the acquisition of PSP.
CPV Library and CD-ROMs. The Company, through its wholly-owned
subsidiary CPV, produced and distributed television, movie productions and
CD-ROMs. In the fourth quarter of 1995, the Company concluded that it was
carrying the film and CD-ROM costs at a net book value materially greater than
its current projected cash flow. Therefore, the Company has realized a one-time
expense of $4.0 million to record the impairment of its investment. Moreover,
the Company has suspended any future productions of films and television series
and the creation of CD-ROMs until such a date that the Company's liquidity
position improves and it believes that these ventures could be profitable.
American Gaming Network, J.V. and Multimedia Games, Inc. Pursuant to a
Joint Venture Agreement dated June 28, 1995, the Company formed American Gaming
Network ("AGN") with TV Games, Inc., a wholly-owned subsidiary of Multimedia
Games, Inc. ("MGAM"), to develop and promote high stakes proxy play Class II
tribal bingo games and other interactive gaming products. The Company
contributed intellectual property and cash aggregating approximately $1.4
million to AGN's capital.
In a related transaction, the Company exercised a warrant and purchased
an aggregate of 275,000 shares of MGAM common stock (the "MGAM Shares") for
approximately $0.4 million in cash and a note of $0.275 million payable August
30, 1996. MGAM also granted the Company additional warrants to acquire 175,000
shares of MGAM common stock (the "MGAM Warrant"). MGAM granted the Company
registration rights for the MGAM Shares and the shares underlying the MGAM
Warrant.
On December 11, 1995, the parties executed a letter agreement modifying
the Joint Venture Agreement which released claims the parties had against each
other through such date. The parties had been unable to agree on a strategy or a
business plan for the next twelve months. As a result the Company has
established a reserve against its investment in AGN. In addition there is no
assurance that the MGAM Shares or the shares underlying the MGAM Warrant, if
exercised, will be registered or if registered, whether the Company will be able
to sell such shares, in the near future. The Company also reserved against the
value of its investment in the MGAM Shares in 1995.
Restructuring Costs. The Company, in an attempt to return to
profitability, has restructured its operations. The Company has suspended
production of all films, television series and CD-ROM for 1996. It will continue
to license CPV's library to third parties. As a result of the suspended
productions, CPV has terminated approximately 30 employees and has renegotiated
the employment contracts with the two key executives of CPV to provide for their
early termination as described above. The Company has recognized a charge of
approximately $0.6 million in 1995 for restructuring CPV.
The Company has also terminated the employment of all of the employees of
Pay-Per-View International, Inc. ("PPVI") at the end of 1995. PPVI employees
were responsible for the development of TeleSelect and exploring other
international opportunities for the Company. In the first quarter of 1996, the
Company sold its interest in TeleSelect and suspended exploration of new
international business opportunities. The Company will continue to pursue its
strategy of globalizing its adult networks and programming.
The Company has restructured Guest Cinema by terminating the employment
contract of its President and discontinuing the marketing and use of its
hotel/motel pay-per-view system.
Two senior executives, Mark Graff and Leland H. Nolan, have resigned as
officers of the Company effective December 31, 1995. Messrs. Graff and Nolan
have signed separation agreements (see "Executive Compensation, Employment
Agreements") which are in force through 1998. The Company has also reduced its
staffing in other areas of the Company and reduced overhead.
The accrued restructuring charge at December 31, 1995 was approximately
$3.7 million and was comprised of corporate level restructuring and the
suspension of production activities formerly conducted by CPV. Each component
involved contraction of the Company's workforce and facilities and other
miscellaneous costs associated with the restructuring as follows:
Corporate
Salaries $2,750,000
Facilities and Other 250,000
CPV
Salaries 464,000
Facilities and Other 191,000
------------
Total $3,655,000
Management estimates that cash outflows associated with the accrued
restructuring costs will aggregate approximately $2.2 million in 1996, $755,000
in 1997, and $700,000 in 1998.
Liquidity and Capital Resources. At December 31, 1996, the Company had
a working capital deficit of approximately $6.1 million compared to a surplus of
approximately $0.1 and $2.8 million at December 31, 1995 and 1994. Stockholders'
equity at December 31, 1996 was approximately $2.3 million compared to
approximately $8.1 million on December 31, 1995 and $23.5 million at December
31, 1994. The decrease in working capital and Stockholders' equity was primarily
attributable to the net losses in 1996 and 1995.
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 L.L.C. ("Darla") which resulted in the replacement
of its primary revolving credit line with PNC. PNC settled the outstanding
balance of the credit line, totaling $14.6 million, for $9.6 million in cash, a
new $400,000 term loan, and 600,000 warrants.
The Darla agreement provided a term loan of $10.5 million, of which
$9.6 million was used to satisfy the PNC settlement and $0.9 which financed
acquisition fees. This agreement also made available a revolving line of credit
totaling $3.5 million. The term loan and the credit line both mature in 30
months. The agreement contains certain covenants including financial covenants
regarding working capital, tangible net worth, EBITDA, revenues and capital
expenditures.
Net cash provided by operating activities of continuing operations was
approximately $3.0 million for the year ended December 31, 1996, compared to
$0.5 million for the year ended December 31, 1995 and a use of cash in operating
activities of approximately $3.2 million for the year ended December 31, 1994.
In 1996 and 1995 the cash from operating activities was primarily the result of
non-cash adjustments to net income which more than offset net losses for the
period. The principal adjustments in 1996 were depreciation and amortization of
fixed assets, goodwill and the library as well as a decrease in the accounts
receivable and the loss from the discontinued operations. Offsetting these
sources of cash were a reduction of subscription revenues received in advance
and the allocation of losses to the minority partner of CVSP in 1996, as well as
payments of accrued restructuring charges. Principal adjustments in 1995 were
the restructuring charges, provision for write-down of investments and bad
debts, amortization and depreciation of fixed assets, film costs, library of
movies, and goodwill, together with an increase in accounts payable and
royalties payable, offset by an increase in film costs. The net cash used in
operating activities in 1994 was primarily attributable to the non-cash
adjustments to net income which more than offset net income for the period. The
principal adjustments in 1994 were increases in the accounts receivable, CD-ROM
costs and decreases in royalties payable offset by amortization of film and
CD-ROM costs.
Net cash used in investing activities of continuing operations was
approximately $0.2 million for the year ended December 31, 1996, compared with
approximately $10.4 million for the year ended December 31, 1995 and $4.4
million for the year ended December 31, 1994. The decrease in net cash used in
investing activities in 1996 as compared to 1995 was primarily attributable to
significant declines in the purchase of property and equipment and proceeds from
the sale of the Company's investment in TeleSelect as compared to investments in
TeleSelect in 1995. The increase in net cash used in investing activities in
1995 as compared to 1994 was primarily attributable to greater investments in
fixed assets and library of movies in 1995 as compared to 1994.
Net cash used in financing activities of continuing operations was
approximately $1.4 million for the year ended December 31, 1996, compared with
cash provided by financing activities of approximately $10.3 and $6.7 million
for the years ended December 31, 1995 and 1994. The decrease in cash from
financing activities is primarily attributable to payments of the PNC debt ($1.0
million) as compared to borrowings from PNC in 1995. Also contributing to the
decline in cash from financing activities was the treatment of the AT&T lease in
1996 as a capital lease as compared to an operating lease in 1995. Offsetting
these declines in 1996 was a capital contribution by a minority partner to CVS
Partners and borrowings under the IBM lease. The increase in cash provided from
financing activities in 1995 as compared to 1994 was the increased borrowings
from PNC in 1995 as compared to 1994. Offsetting the increase in cash from PNC
borrowings was a reduction of proceeds from the issuance of common stock and
warrants and a capital contribution in 1994 related to the AEC merger.
Item 8. Financial Statements and Supplementary Data
The information required by this Item is included at Pages F-1
through F-30.
Item 9. Changes in and Disagreements with Accountants on Account and
Financial Disclosure.
(a) The Company terminated its audit relationship with its former
auditors, Coopers & Lybrand L.L.P. ("C&L"), on January 9, 1997. C&L's report on
the financial statement for the past two years did not contain an adverse
opinion or disclaimer of opinion, and was not qualified or modified as to
uncertainty. The audit committee of the Board of Directors approved the decision
to change accountants. During the Company's two most recent fiscal years and any
subsequent interim period preceding such termination, there were no
disagreements with the former accountant on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of the former
accountant, would have caused it to make reference to the subject matter of the
disagreements in connection with its report. There were no reportable events of
the type described in Item 304(a)(1)(v) (a) through (d) of Regulation S-K.
(b) On February 13, 1997, the Company engaged the firm of Grant
Thornton LLP as its independent auditors to audit its financial statements for
the fiscal period ended as of December 31, 1996.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Name Age Position, Occupation and Business Experience
J. Roger Faherty 58 Chairman of the Board of Directors, Chief
Executive Officer, President and Director.
Mr. Faherty has been Chairman of the Board
and a Director of the Company since
December 1991. In 1991 he was elected as
the Company's Chief Executive Officer and
became President in 1996. Beginning in
March 1990 and until joining the Company in
December 1991, he was a consultant to the
Company.
Leland H. Nolan 50 Director. Mr. Nolan has been a Director of
the Company since 1988 and from that time
and until the end of 1995, held various
executive positions, most recently as Vice
Chairman, International Initiatives.
Prior to joining the Company, he was
Chairman of the Board of Orange
Entertainment Company, a video production
and distribution company.
Dean R. Ericson 51 Director. Mr. Ericson was elected a
Director of the Company on January 24,
1994. Mr. Ericson is co-founder and
President, since 1987, of Media Management
Services, Inc., a Denver-based consulting
practice providing technology and business
development services to selected media and
telecommunications companies. He was
formerly Vice President of New Business
Development, Director of Pay Television,
and Manager of Special Markets at American
Television and Communications Corporation.
R. Christopher Yates 54 Director. Mr. Yates was elected a Director
of the Company on July 23, 1996. He has
been the Chief Executive Officer of HVC
since HVC's 1989 formation. Since the end
of 1994, HVC has been a wholly-owned
subsidiary of the Company. Prior to 1989,
he was the Chief Executive of Cabletel
Communications Ltd. which was owned by the
Ladbroke Group PLC and Comcast
Communications Inc. and operated a fully
interactive cable system in West London.
Mr. Yates is also a founding member of
the Cable Television Association in the
U.K. and has served in various capacities
with that organization.
Rudy R. Miller 49 Director. Mr. Miller was elected a
Director of the Company on July 23, 1996.
He has served as Chairman, President and
Chief Executive Officer of Miller
Management Corp., a financial consulting
firm, since 1972 and of Miller Capital
Corp., a venture capital, financial
services and investor relations firm,
since 1993. Mr. Miller was Chairman,
President and Chief Executive Officer of
StatesWest Airlines, Inc. operating as US
Air Express from 1986 to 1993. That
company petitioned for protection under
Chapter 11 of the U.S. Bankruptcy Code in
December 1992 which was dismissed by the
Bankruptcy Court in September 1994. Mr.
Miller was also a member of the board of
directors of American West Airlines from
1982 to 1986 and a member of the board of
directors of Jacor Communications Inc.,
one of the largest radio broadcasting
groups in the United States.
Steve Saril 43 Director, Senior Vice President, Sales &
Marketing. Mr. Saril has been an executive
officer of the Company since 1989 and is
currently its Senior Vice President of Sales
and Marketing. He was elected as a
Director on September 26, 1996.
Between 1979 and 1989, he was a
Director of National Accounts for
Showtime Networks, Inc., an
operator of cable movie networks.
Harlyn C. Enholm 55 Executive Vice President, Chief Financial
Officer. Mr. Enholm was appointed as the
Company's Executive Vice President and
Chief Financial Officer on May 20, 1996
having previously worked for SEG
as its Chief Financial Officer since June,
1994. Between joining SEG in 1994 and
1991, he was a self-employed consultant.
From 1984 to 1991 he was Executive Vice
President and Chief Financial Officer of
The Geneva Companies.
Rich Kirby 36 Senior Vice President, Network Operations.
Mr. Kirby has been an executive officer of
the Company since 1988 and is currently its
Senior Vice President, Network Operations.
Between 1985 and 1988, Mr. Kirby was Vice
President of Operations for Reiss Media,
which operated Request Television.
Daniel J. Barsky 41 Senior Vice President, General Counsel &
Secretary. Mr. Barsky has been an
executive officer of the Company since 1995
and is currently its Senior Vice President,
General Counsel and Secretary. Prior to
joining the Company, he was a partner in
Dornbush Mensch Mandelstam & Schaeffer,
which acted as the Company's legal counsel
from 1989 to 1994.
<PAGE>
Item 11. Executive Compensation
The following table sets forth, for the fiscal years ended December 31,
1996, 1995 and 1994, compensation paid by the Company for services in all
capacities to the Chief Executive Officer, the former Chief Operating Officer
and the four most highly compensated executive officers during 1996.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long-Term Compensation
------------------------------------ ------------------------------------------------------
Other Restricted Securities
Annual Stock Underlying All Other
Name and Salary Compensation Awards Options Compensation16
Principal Position Year ($) ($) ($) (#) ($)
- ---------------------------- -------- --------- ----------- ------------ -------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
J. Roger Faherty 1996 358,077 44,071 1 38,500 5 12,954
Chairman and Chief 1995 421,539 58,298 1 435,585 6 19,909
Executive Officer 1994 400,000 67,667 1 12,432
Edward M. Spector* 1996 341,250 2 7 15,371
Director, Former Chief 1995 80,769
Operating Officer & 1994
President
R. Christopher Yates, 1996 348,032 42,442 3 38,407 8 43,535
Director, President 1995 378,013 2 38,000 9 43,997
Spice 1994 264,699 2 31,783
International
Steve Saril 1996 200,000 2 70,000 10 462
Director, Senior Vice 1995 193,462 345,000 4 70,000 11 1,435
President Sales & 1994 177,500 50,000 12 1,500
Marketing
Harlyn C. Enholm 1996 148,900 2 18,962 13
Executive Vice President, 1995
Chief Financial Officer 1994
Daniel J. Barsky 1996 150,000 2 45,000 14 667
Senior Vice President, 1995 142,500 233,000 4 20,000 15 811
General Counsel, & 1994 20,000 15
Secretary
*No longer a Company employee.
</TABLE>
1) Mr. Faherty's other annual compensation included a Company provided
leased automobile and payments of auto operating expenses of $14,400 in
1995 and $24,115 in 1994, respectively, and deferred compensation of
$36,566 each year in 1996, 1995 and 1994 and long-term disability
premiums of $7,505 in 1996, $7,332 in 1995 and $6,986 in 1994.
2) Other Annual Compensation for these executives is less than 10% of
such executive's salary and bonus compensation for the year.
3) Mr. Yates' other annual compensation consists of auto operating
expenses of $12,499, premiums paid on a long-term disability policy of
$3,937 and deferred compensation of $26,006.
4) Messrs. Saril and Barsky received 40,000 and 27,000 shares, respectively,
of Restricted Stock on May 12, 1995 at a market value of $8.63 per share.
5) Mr. Faherty's securities underlying options for 1996 include (i)
21,000 options granted on August 13, 1996 with an exercise price of
$2.75 and (ii) 17,500 options granted on December 13, 1996 with an
exercise price of $1.75.
6) Mr. Faherty's securities underlying options in 1995 include 249,585
options granted on December 11, 1995 with an exercise price of $3.875
in replacement of the identical number of options which were granted in
1991, exercised in April 1995 and whose exercise was rescinded in
December, 1995. Mr. Faherty was also granted 25,000 options on May 12,
1995 which were repriced on December 11, 1995. In addition, 136,000
options previously granted in 1993 were repriced on December 11, 1995.
7) Mr. Spector was granted 17,500 options on August 13, 1996 with an
exercise price of $2.75 and 17,500 options on December 13, 1996 with an
exercise price of $1.75. These options were canceled as part of the SEG
Settlement Agreement
8) Mr. Yates' securities underlying options for 1996 include (i) 18,589
options granted on August 13, 1996 with an exercise price of $2.75 and
(ii) 19,818 options granted on December 13, 1996 with an exercise price
of $1.75.
9) Mr. Yates' securities underlying options for 1995 include 19,000
options granted on May 12, 1995 which were repriced on December 11,
1995.
10) Mr. Saril's securities underlying options for 1996 include (i) 10,000
options with an exercise price of $4.25 granted on January 26, 1996 in
lieu of a cash raise for 1996 based on 1995 performance and (ii) 40,000
options granted on January 26, 1996 in lieu of a performance based cash
bonus. Mr. Saril was also granted 10,000 options on August 13, 1996
with an exercise price of $2.75 and 10,000 options on December 13, 1996
with an exercise price of $1.75.
11) Mr. Saril's securities underlying options for 1995 include 10,000
options granted on May 12, 1995 which were repriced on December 11,
1995. 50,000 options granted on January 6, 1995 were also repriced on
December 11, 1995.
12) Mr. Saril's securities underlying options for 1994 include 50,000
options granted on January 6, 1994 which were repriced on December 11,
1995.
13) Mr. Enholm's securities underlying options for 1996 include 9,250
granted on August 13, 1996 with an exercise price of $2.75 and 9,712
options on December 13, 1996 with an exercise price of $1.75.
14) Mr. Barsky's securities underlying options for 1996 include (i) 7,500
options granted in January 26, 1996 with an exercise price of $4.25 in
lieu of a cash raise for 1996 based on 1995 performance and (ii) 22,500
options granted in January 26, 1996 in lieu of a performance based cash
bonus. Mr. Barsky was also granted 7,500 options on August 13, 1996
with an exercise price of $2.75 and 7,500 options on December 13, 1996
with an exercise price of $1.75.
15) Mr. Barsky's securities underlying options for 1995 include 20,000 options
granted on December 16,1994 were repriced on December 11, 1995.
16) The amount paid by the Company for Messrs. Faherty, Yates, Spector,
Saril and Barsky for premiums for life insurance and for employer
contributions to the 401(k) Plan, or with respect to Mr. Yates, a
pension plan was as follows:
<TABLE>
<CAPTION>
Life Ins. 401(k), Pension Plan
Name Year Premiums Contributions
----- ----- --------- --------------------
<S> <C> <C> <C>
J. Roger Faherty 1996 12,088 866
1995 17,599 2,310
1994 10,122 2,310
R. Christopher Yates 1996 6,131 37,404
1995 6,196 37,801
1994 5,323 26,460
Edward M. Spector 1996 15,371
1995
1994
Steve Saril 1996 462
1995 1,435
1994 1,500
Daniel J. Barsky 1996 436 231
1995 436 375
1994
</TABLE>
1996 Compensation Program for Key Executives. At a Compensation
Committee meeting held on November 17, 1995, the committee determined that the
Chief Executive Officer, Chief Operating Officer and Chief Financial Officer
would not receive compensation adjustments for 1996. Compensation adjustments
for other employees were capped at 5% and employees earning over $61,000 would
receive options in lieu of cash raises. No cash bonuses would be paid at year
end 1995; options would be issued in lieu thereof.
At a meeting held on January 30 and 31, 1996, the Compensation
Committee granted an aggregate of 114,771 options in lieu of raises including
10,000 options granted to Mr. Saril and 7,500 options granted to Mr. Barsky.
The committee also granted an aggregate of 127,500
options in lieu of cash bonuses under the performance based plan to five
executives including 40,000 options granted to Mr. Saril and 22,500 options
granted to Mr. Barsky. Both of these sets of option grants had an exercise price
of $4.25 and all options were immediately exercisable.
Employment Agreements. Mr. Faherty is employed by the Company as its
Chairman, Chief Executive Officer and President pursuant to an Employment
Agreement effective January 11, 1992 which was amended effective June 15, 1993,
March 23, 1994, March 23, 1995 and again as of January 1, 1996. The agreement,
as presently amended, provides for a base salary of $350,000, with any
adjustments determined annually. The agreement has a six year term. In each year
that the agreement is not terminated, the agreement's term is extended for five
years from that anniversary date. Under the most recent amendment, the agreement
provides for loans from the Company of up to $215,000 exclusive of accrued
interest. The loan has a maturity date of December 31, 1997 and bears interest
at the same rate the Company is paying its principal lender. The agreement also
provides for annual retirement benefits of not less than $100,000 (implemented
by the deferred compensation agreement described below) and provides for other
benefits including reimbursement for automobile costs. Mr. Faherty waived his
rights to a reimbursement for automobile costs for 1996.
On October 1, 1992, the Company entered into a deferred compensation
agreement with Mr. Faherty. Under the agreement the Company is obligated to
provide for retirement benefits to the executive on or after reaching the age of
65 and also provide for early retirement benefits. Upon retirement the executive
will receive from the Company a total of 180 monthly payments which will provide
a benefit of $100,000 per annum. Upon early retirement the executive will
receive maximum benefits of $95,000 or a minimum of $50,000 annually upon
retirement on or after age 55 but before the age of 65. Upon the death of the
executive, prior to the age of 65 but after the age of 55, his beneficiary will
receive maximum annual benefits of $95,000 or a minimum benefit of $50,000
payable monthly.
Mr. Spector was employed by the Company as a Director and Senior
Executive Officer of SEG pursuant to an employment agreement effective September
1, 1995 and expiring on August 31, 1998. The Company had guaranteed Mr.
Spector's employment agreement. He was serving as President and Chief Operating
Officer of the Company until his September 25, 1996 resignation. The agreement
provided for a base salary of $350,000, with annual increases of not less than
5%. The Company's liability under Mr. Spector's agreement was terminated under
the SEG Settlement Agreement.
Mr. Yates is employed by HVC pursuant to a Service Agreement dated
January 22, 1993 and amended on June 16, 1994. Mr. Yates' original annual salary
of (pound)125,000 was adjusted to (pound)239,400 based on HVC's pre-tax profits
for the fiscal period ending July 31, 1994. In addition, the agreement requires
pension contribution equal to 10% of his salary. The agreement expires on one
year prior notice provided such termination occurs after March 1, 1997 and
provides for a lump sum severance payment of (pound)125,000. On October 11,
1996, the Company issued a notice to Mr. Yates of its intention to renegotiate
or, if a renegotiation could not be completed, to terminate the agreement. The
Company and Mr. Yates are currently negotiating a new employment agreement.
Mr. Enholm had been employed by SEG pursuant to an employment agreement
dated August 31, 1995. As part of the SEG Settlement Agreement, SEG terminated
Mr. Enholm's employment and the Company continued the engagement of Mr. Enholm
as its Chief Financial Officer pursuant to a consulting agreement effective
February 1, 1997. Under this agreement, Mr. Enholm has agreed to serve as the
Company's Chief Financial Officer through May 31, 1997.
Mr. Barsky is employed by the Company pursuant to a January 1, 1995
Employment Agreement. The agreement provided for a base salary of $135,000 with
no less than 5% annual increases. Mr. Barsky waived his rights to the 5%
increase in 1996 and his automobile allowance in 1996.
Stock Option Plans. The Company has four stock option plans (the 1992,
1993, 1994 and 1995 Plans) (collectively the "Plans") for officers, employees,
directors and consultants of the Company or any of its subsidiaries and a
Directors' Plan ( the "Directors' Plan"). Options granted to employees may be
either incentive stock options (ISO's) or non-ISO's; ISO's may not have an
exercise price of not less than 100% of fair market value of the Company's
common stock on the grant date and all options may not have an exercise price of
less than 100% of fair market value on the grant date in the case of options
granted to holders of 10% or more of the voting power of the Company's stock on
the date of the grant. The aggregate fair market value, as determined on the
grant date, of ISO's that may become exercisable in any one year can not exceed
$100,000. Options canceled subsequent to issuance are returned to the Plan and
are available for re-issuance as determined by the Stock Option Committee .
The Plans are currently administered by the Stock Option Committee
consisting of three non-employee directors (the "Committee"). In general, the
Committee has the responsibility to select the persons to whom options will be
granted and will determine, subject to the terms of the Plan, the number, the
exercise period, vesting schedule and other provisions of such options.
The options are evidenced by a written agreement containing the above
terms and such other terms and conditions consistent with the Plans as the
Committee may impose. Each option, unless sooner terminated, expires no later
than 10 years (five years in the case of ISOs granted to holders of 10% of the
voting power of the Company's common stock) from the date of grant, as the
Committee may determine. The Committee has the right to amend, suspend or
terminate the Plans at any time, provided, however, that unless ratified by the
Company's stockholders within 12 months thereafter, no amendment or change in
the Plans including: (a) increasing the total number of shares which may be
issued under the Plans; (b) reducing below fair market value on the date of
grant the price per share at which any option which is an ISO may be granted;
(c) extending the term of the Plan or the period during which any option which
is an ISO may be granted or exercised; (d) altering in any way the class of
persons eligible to participate in the Plans; (e) materially increasing the
benefits accruing to participants under the Plans; or (f) with respect to
options which are ISOs, amending the Plans in any respect which would cause such
options to no longer qualify for incentive stock option treatment pursuant to
the Internal Revenue Code of 1986, as amended, will be effective.
The Directors Plan, as amended, provides for the automatic annual
issuance of 10,000 options to each non-employee director on the last business
day of the calendar year. The exercise price of options issued under the
Directors' Plan is equal to the closing price of the Company's common stock on
the date of grant. In 1996, 10,000 options were issued to each of Messrs.
Ericson, Nolan and Miller non-employee directors who are also the Stock Option
Committee members.
The following table sets forth stock options that the Company granted
to the named executive officers during 1996.
<TABLE>
<CAPTION>
Option/Grants in Last Fiscal Year
Individual Grants
- ---------------------------------------------------------------------------------------
Potential Realizable
Number of Value at Assumed
Shares of Annual Rates of
Common Total Stock Price
Stock Options Appreciation for
Underlying Granted to Exercise Option Term
Options Employees or Base
Name Granted in Fiscal Price Expiration 5% 10%
(#) Year ($/Sh) Date ($) ($)
- --------------------------- ------------- ------------ --------- --------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
J. Roger Faherty 21,000 1 1.79 2.75 8/13/06 34,599 86,737
17,500 2 1.49 1.75 12/13/06 19,153 48,477
R. Christopher Yates 18,584 1 1.58 2.75 8/13/06 30,619 76,758
19,818 2 1.69 1.75 12/13/06 21,690 54,898
Edward M. Spector 17,500 3 1.49 2.75 8/13/06 28,833 72,281
17,500 3 1.49 1.75 12/13/06 19,153 48,477
Steve Saril 10,000 4 .85 4.25 1/25/06 23,670 58,422
40,000 5 3.41 4.25 1/26/06 94,715 233,793
10,000 1 .85 2.75 8/13/06 16,476 41,303
10,000 2 . 85 1.75 12/13/06 10,945 27,701
Harlyn C. Enholm 9,250 1 .79 2.75 8/13/06 15,240 38,206
9,712 2 .83 1.75 12/13/06 10,630 26,903
Daniel J. Barsky 7,500 4 .64 4.25 1/25/06 17,752 43,816
22,500 5 1.92 4.25 1/26/06 53,277 131,508
7,500 1 .64 2.75 8/13/06 12,357 30,978
7,500 2 .64 1.75 12/13/06 8,209 20,776
</TABLE>
These options were granted on August 13, 1996. Twenty five percent
were immediately exercisable and the balance are exercisable in three
equal annual installments commencing August 13, 1997, one year after
the effective date of the grant.
These options were granted on December 13, 1996. Twenty five percent
were immediately exercisable and the balance are exercisable in three
equal annual installments commencing December 13, 1997, one year after
the effective date of the grant.
The options granted to Mr. Spector were canceled on February 7, 1997
pursuant to the SEG Settlement Agreement.
These options were granted on January 25, 1996 in lieu of a cash raise
for 1996.
These options were granted on January 25, 1996 in lieu of a
performance based cash bonus.
<TABLE>
<CAPTION>
Aggregate Options Exercised in Last Fiscal Year
and Year End Option Value
- ----------------------------------------------------------------------------------------------------------------------
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
FY-End FY-End
--------------- -----------------
Shares Acquired Value Exercisable/ Exercisable/
on Exercise Realized Unexercisable Unexercisable(1)
Name (#) ($) (#) ($)
- ----------------------------------- -- ------------------ - ------------------ -- --------------- -- -----------------
<S> <C> <C> <C> <C>
J. Roger Faherty None None 620,347 1,085,608
157,069 274,870
- ----------------------------------- -- ------------------ - ------------------ -- --------------- -- -----------------
R. Christopher Yates None None 14,351 25,113
43,052 75,340
- ----------------------------------- -- ------------------ - ------------------ -- --------------- -- -----------------
Edward M. Spector None None 8,750 15,313
26,250 45,938
- ----------------------------------- -- ------------------ - ------------------ -- --------------- -- -----------------
Steve Saril None None 203,500 356,125
22,500 39,375
- ----------------------------------- -- ------------------ - ------------------ -- --------------- -- -----------------
Harlyn C. Enholm None None 4,741 8,296
14,222 24,888
- ----------------------------------- -- ------------------ - ------------------ -- --------------- -- -----------------
Daniel J. Barsky None None 43,750 76,563
21,250 37,188
- ----------------------------------- -- ------------------ - ------------------ -- --------------- -- -----------------
</TABLE>
(1) Based on the last trade price on December 31, 1996 of $1.75 quoted by
The NASDAQ Small Cap Market.
401(k) Tax Deferred Savings Plan. Effective January 1, 1993, all
qualified employees, including the executive officers, are eligible to
participate in the Company's 401(k) Tax Deferred Savings Plan (the "401(k)
Plan"). Under the 401(k) Plan, each employee may, at his or her option, elect to
defer (and contribute to the Plan) up to 15% of his or her salary. At its
discretion, the Company may elect to contribute a percentage of the
contributions of the employees. Contributions to the 401(k) Plan shall be
invested as determined by the Plan trustees, Messrs. Faherty and Barsky. The
trustees have retained Nationwide Services Company to invest the 401(k) Plan
funds.
Filings with Securities and Exchange Commission. Section 16(a) of the
Securities Exchange Act of 1934 requires that officers, directors and 10%
stockholders of the Company file reports of their ownership with the Securities
and Exchange Commission. No officer or director was late with their filings for
1996.
Director's Compensation. The Company pays $1,000 per meeting, plus expenses
and $250 per telephone conference to non-officer directors serving on its Board
of Directors.
Compensation Interlocks and Insider Participation. Since 1994,
recommendations relating to executive compensation have been made by the
Company's Compensation Committee to the Board of Directors. The Compensation
Committee members currently are Messrs. Ericson, Miller and Nolan, non-employee
Directors of the Company. Mr. Nolan resigned as an officer of the Company on
December 31, 1995.
<PAGE>
PERFORMANCE GRAPH
The graph below compares the cumulative total shareholder return on the
common stock for the period from August 31, 1992 to December 31, 1996 with the
cumulative total return on the NASDAQ Stock Market-United States Index and a
peer group (1) of comparable companies (the "Peer Group") selected by the
Company over the same period (assuming the investment of $100 in the common
stock, the NASDAQ Stock Market-United States Index and the Peer Group on August
31, 1992 and the reinvestment of all dividends).
The following table is an Edgar representation of the data points used in
the printed graphic presentation:
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
SUMMARY
9/92 1992 1993 1994 1995 1996
------- ------- -------- ------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Spice Entertainment
Companies, Inc. 100 242 325 450 185 70
Peer Group 100 118 228 195 474 237
NASDAQ Stock Market -
United States 100 118 136 133 188 231
(C) Paul Kagan Associates, Inc. estimates. All rights reserved.
</TABLE>
(1) The peer group comprises those companies which compete against the
Company in the interactive television and pay-per-view industries. None
of the companies in the peer group is fully comparable with the
Company's business. The returns of each company have been weighted
according to their respective stock market capitalization for purposes
of arriving at a peer group average. The members of the peer group are
as follows: Macromedia, Inc., Hypermedia Communications, Lodgenet
Entertainment Corp., Interfilm Inc., Iwerks Entertainment Inc., Creative
Program Tech Venture, Videotron Group Ltd., Actv Inc., NTN
Communications Inc., Interactive Network Inc., Playboy Enterprises Inc.,
and Spi Holding Inc.
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the
beneficial ownership of the Company's common stock as at March 1, 1997 (i) by
each person who is known by the Company to own beneficially more than 5% of the
outstanding shares of common stock, (ii) each of the Company's directors, (iii)
each of the Company's named executive officers and (iv) all officers and
directors of the Company as a group.
<TABLE>
<CAPTION>
Executive Officers, Shares Percentage of
Directors and 5% Beneficially Shares Outstanding
Shareholders Owned (1)
- ------------------------ ----------------- -------------------
<S> <C> <C> <C> <C>
J. Roger Faherty (2) 1,025,297 (7)(8) 8.5
Mark Graff (3) 1,043,066 (9) 8.7
Leland H. Nolan (2), 976,442 (10)(11) 8.1
Dean R. Ericson (4) 36,000 (12) 0.3
Rudy R. Miller (5) 5,000 (13) 0.0
Steve Saril (2) 265,067 (14) 2.3
R. Christopher
Yates (6) 385,762 (15) 3.4
Harlyn C. Enholm (2) 4,741 (16) 0.0
Daniel J. Barsky (2) 70,750 (17) 0.6
All directors and executive officers
as a group (10 persons) 3,950,124 33.2%
</TABLE>
(1) Assumes exercise of options exercisable within sixty days owned by
such person and the exercise of no other options or warrants.
(2) The business address of such persons, for purposes hereof, is c/o Spice
Entertainment Companies, Inc., 536 Broadway 7th Floor, New York, New
York 10012.
(3) The business address of such person is c/o Web Feat, Inc., 611
Broadway, New York, New York 10012.
(4) The business address of such person is 5429 South Krameria Street,
Englewood, CO 80111.
(5) The business address of such person is 4909 East McDowell Road,
Phoenix, Arizona 85008
(6) The business address of such person is Aquis House, Station Road,
Hayes, Middlesex UB3 4DX, United Kingdom.
(7) Includes 729,791 shares issuable upon exercise of outstanding options.
(8) Mr. Faherty's shares do not include the 85,097 shares owned by his
spouse and the 10,800 shares owned by his children. Mr. Faherty does
not have or share voting or investment power over the shares owned by
his spouse or children and disclaims beneficial ownership of such
shares.
(9) Includes 702,916 shares issuable upon exercise of outstanding options.
(10) Includes 684,166 shares issuable upon exercise of outstanding options.
(11) Mr. Nolan's shares do not include the 25,500 of shares issuable upon
exercise of outstanding options owned by his wife. Mr. Nolan does
not have or share voting or investment power over the shares owned by
his spouse and disclaims beneficial ownership of such shares.
(12) Includes 35,000 shares issuable upon exercise of options.
(13) Includes 5,000 shares issuable upon exercise of options.
(14) Includes 203,500 shares issuable upon exercise of options and 40,000
shares of Restricted Stock.
(15) Includes 14,351 shares issuable upon exercise of options.
(16) Includes 4,741 shares issuable upon exercise of options.
(17) Includes 43,750 shares issuable upon exercise of options and 27,000
shares of Restricted Stock.
Item 13. Certain Relationships and Related Transactions
During 1995, Messrs. Faherty, Graff and Nolan borrowed $215,000,
$24,000 and $82,000, respectively, from the Company. All of the loans bear
interest at the same rate the Company pays on its loan from its senior secured
lender. Pursuant to the Fourth Amendment to Mr. Faherty's Employment Agreement
and a December 31, 1996 letter from the Chairman of the Compensation Committee
of the Board of Directors, Mr. Faherty's loan is due on December 31, 1997. Mr.
Graff plans to repay his loan in full in the second quarter of 1997 and Mr.
Nolan's loan will be paid in monthly installments beginning January, 1998.
As part of the SEG Merger, certain members of the Spector Group and the
Company entered into a Letter Agreement dated August 14, 1995, as amended (the
"August 14th Agreement"), under which the Company was granted an option to
acquire and the Spector Group signatories were granted a put ("Put") to sell,
all of the issued and outstanding shares of the Spector Information Systems,
Inc. (n/k/a United Transactive Systems, Inc.) in exchange for a formula
determined number of shares of the Company's common stock. As part of the SEG
Settlement Agreement, the parties to the August 14th Agreement also entered into
a Termination Agreement dated as of February 7, 1997 terminating the August 14th
Agreement and suspending the Spector Group's prior exercise of the Put. The
Company also entered into a Transponder Services Agreement with SEG pursuant to
which the Company will provide transponder services to SEG for monthly payments
of $80,000 for two years.
SEG had a note receivable from Buccaneer Games, Inc. ("Buccaneer"), a
developmental corporation, owned by Eric M. Spector. During the third quarter of
1996, the Company deemed that the note was uncollectable and established a
provision for the write-down of the note. SEG leased offices from Margate
Associates, an affiliate of Edward M. Spector. The aggregate lease payments were
$221,000 in 1996. SEG also leased equipment from entities affiliated with Mr.
Spector; the aggregate 1996 lease payments were $150,000 in 1996. As a
consequence of the split off of SEG pursuant to the SEG Settlement Agreement,
the Company has no further liability under these transactions.
Management believes that the terms of the transactions described above
are no more favorable than could be obtained in transactions between
non-affiliated parties.
PART IV
ITEM 14. Financial Statements, Financial Statement Schedules and Exhibits
(a) 1. Financial Statements of the Company.
2. Financial Statements Schedules.
3. Exhibits.
2.01 SEG Settlement Agreement dated January 29, 1997 among Spice
Entertainment Companies, Inc., Spector Entertainment Group, Inc., the
Spector Family Revocable Trust, the Eric M. Spector Revocable Living
Trust, Edward M. Spector, Ilene H. Spector, Eric M. Spector, Evan M.
Spector and Staci M. Spector. Incorporated by reference to Exhibit
2.03 of the Form 8-K filed on February 13, 1997.
3.01 Certificate of Incorporation of the Company. Incorporated by
reference to Exhibit 2.2 of the 8-A.
3.02 By-Laws of the Company. Incorporated by reference to Exhibit 2.2
of the 8-A.
3.03 Certificate of Merger dated May 13, 1992 merging Jericap, Inc. into
Graff Pay-Per-View Inc.
3.04 Certificate of Amendment of Certificate of Incorporation dated
November 26, 1996.
4.01 Specimen Certificate representing the Common Stock, par value $.01
per share. Incorporated by reference to Exhibit 1 of the 8-A.
4.02 Termination Agreement dated as of February 7 , 1997 by and among
Spice Entertainment Companies, Inc. and the Spector Family Revocable
Trust, Eric M. Spector, Evan M. Spector and Staci M. Spector.
Incorporated by reference to Exhibit 4.06 of the Current Report on
Form 8-K dated February 13, 1997.
4.03 Settlement Agreement dated January 15, 1997 by and among PNC Bank,
N.A. and Spice Entertainment Companies, Inc. and the other Obligors.
Incorporated by reference to Exhibit 4.07 of the Current Report
on Form 8-K dated February 13, 1997.
4.04 Warrant to Purchase 600,000 shares of Common Stock of Spice
Entertainment Companies, Inc. issued to PNC Bank, N.A. dated
January 15, 1997. Incorporated by reference to Exhibit 4.08 of the
Current Report on Form 8-K dated February 13, 1997.
4.05 Registration Rights Agreement dated as of January 15, 1997 by and
between Spice Entertainment Companies, Inc. and PNC Bank, N.A.
Incorporated by reference to Exhibit 4.09 of the Current Report on
Form 8-K dated February 13, 1997.
4.06 Loan and Security Agreement dated as of January 15, 1997 between Spice
Entertainment Companies, Inc. and Darla L.L.C. Incorporated by
reference to Exhibit 4.06 of the Current Report on Form 8-K dated
February 13, 1997.
4.07 Certificate of Designation of Preferences and Rights Convertible
Preferred Stock Series 1997-A. Incorporated by reference to Exhibit
4.10 of the Current Report on Form 8-K dated February 13, 1997.
4.08 Registration Rights Agreement dated January 15, 1997 by and between
Spice Entertainment Companies, Inc. and Darla L.L.C. Incorporated by
reference to Exhibit 4.11 of the Current Report on Form 8-K dated
February 13, 1997.
10.01 Amended 1991 Management Stock Option Plan. Incorporated by reference
to Exhibit 10 of the March, 1992 10-Q.
10.02 The Company's 401(k) Tax Deferred Savings Plan. Incorporated by
reference to Exhibit 10.03 of the 1992 10-K.
10.03 Employment Agreement dated as of June 1, 1992 between the Company and
J. Roger Faherty. Incorporated by reference to Exhibit 10.04 of the
1992 10-K.
10.04 First Amendment dated as of February 22, 1993 to Employment Agreement
dated as of June 1, 1992 between the Company and J. Roger Faherty.
Incorporated by reference to Exhibit 10.05 of the 1992 10-K.
10.05 Deferred Compensation Agreement dated as of October 1, 1992 between
the Company and J. Roger Faherty. Incorporated by reference to
Exhibit 10.06 of the 1992 10-K.
10.06 Investment and Option Agreement dated as of January 22, 1993 between
R.C. Yates, A. D. Wren, S. P. Kay, the Company and The Home Video
Channel Limited. Incorporated by reference to Exhibit 2.1 of the
Company's Current Report on Form 8-K dated February 22, 1993.
10.07 1993 Employees Stock Option Plan. Incorporated by reference to
Exhibit 10.19 of the 1993 S-1.
10.20 Second Amendment dated as of June 15, 1993 to Employment Agreement
dated as of June 1, 1992 between the Company and J. Roger Faherty.
Incorporated by reference to Exhibit 10.20 of the 1993 S-1.
10.08 Employment Agreement dated as of June 1, 1992 between Richard Kirby
and the Company. Incorporated by reference to Exhibit 10.24 of the
1933 S-1.
10.09 Third Amendment dated as of March 23, 1994 to Employment Agreement
dated as of June 1, 1992 between the Company and J. Roger Faherty.
Incorporated by reference to Exhibit 10.41 of the 1993 10-K.
10.10 1994 Employees' Stock Option Plan. Incorporated by reference to Exhibit
1 to the Company's Proxy Statement (the "1994 Proxy Statement") for its
Annual Meeting of Stockholders held June 22, 1994.
l0.11 Employment Agreement dated January 1, 1995 between the Company and
Daniel J. Barsky. Incorporated by reference to Exhibit 10.48 of the
December 31, 1994 10-K.
10.12 Agreement between AT&T Corp. and Graff Pay-Per-View Inc. concerning
Skynet Transponder Service dated February 7, 1995. Incorporated by
reference to Exhibit 10.45 of the December 31, 1994 10-K.
10.13 Form of Promissory Note between the Company and each of J. Roger
Faherty, Mark Graff and Leland H. Nolan dated April 7, 1995 to Graff
Pay-Per-View Inc. Incorporated by reference to Exhibit 10.59 of the
Company's Registration Statement on Form S-3, Registration No.
33-93534, effective July 5, 1995.
10.14 Joint Venture Agreement of American Gaming Network dated June 28,
1995 and between American Gaming Network, Inc. and TV Games, Inc.
Incorporated by reference to Exhibit 10.60 of the Company's
Registration Statement on Form S-3, Registration No. 33-93534,
effective July 5, 1995.
10.15 Merger Agreement and Plan of Reorganization dated August 9, 1995 by
and among Spector Entertainment Group, Inc., Edward Spector and the
Registrant and Newco SEG, Inc. Incorporated by reference to Exhibit
2.04 of the September 12, 1995 Form 8-K.
10.16 Industrial Lease Between Margate Associates and Spector Entertainment
Group, Inc. Incorporated by reference to Exhibit 10.62 of the
September 12, 1995 Form 8-K.
10.17 Employment Agreement dated September 1, 1995 between the Company and
Edward M. Spector. Incorporated by reference to Exhibit 10.63 of the
September 12, 1995 Form 8-K.
10.18 Separation Agreement entered into as of December 31, 1995 between
Graff Pay-Per-View Inc. and Leland Nolan. Incorporated by reference
to Exhibit 10.66 of the December 31, 1995 Form 10-K/A-1.
10.19 Separation Agreement entered into as of December 31, 1995 between
Graff Pay-Per-View Inc. and Mark Graff. Incorporated by reference
to Exhibit 10.67 of the December 31, 1995 Form 10-K/A-1.
10.20 Fourth Amendment to Employment Agreement effective as of January 1,
1996 between Graff Pay-Per-View Inc. and J. Roger Faherty.
Incorporated by reference to Exhibit 10.68 of the December 31, 1995
Form 10-K/A-1.
10.21 General Partnership and Contribution Agreement of CVS Partners dated
January 27, 1996 by and between the Company and WilTech Cable
Television Services, Inc., WilTech Services, Inc. and Cable Video
Store, Inc. Incorporated by reference to Exhibit 10.69 of the December
31, 1995 Form 10-K/A-1.
10.22 Share Sale Agreement made on March 22, 1996 by and between Philips
Media Services B.V., KPN Multimedia B.V. and Graff Pay-Per-View Inc.
Incorporated by reference to Exhibit 10.71 of the December 31, 1995
Form 10-K/A-1.
10.23 Telephone Services Agreement made as of October 20, 1995 by and
between Capital Distribution, Inc. d/b/a Cupid Television Network,
and Spice, Inc.
10.24 Contract between British Telecommunications and The Home Video Channel
Limited dated 24 April, 1996.
10.25 Production Agreement between VCA Labs, Inc. and Media Licensing, Inc.
dated as April 20, 1995.
10.26 Transponder Services Agreement dated February 7, 1997 by and between
Spice Entertainment Companies, Inc. and Spector Entertainment Group,
Inc. Incorporated by reference to Exhibit 10.72 of the Current Report
on Form 8-K filed on February 13, 1997.
10.27 Service Agreement dated January 22, 1993 between The Home Video
Channel Limited and Richard Christopher Yates as amended on
June 16, 1994.
10.28 Purchase Agreement dated June 25, 1996 among TV Games Inc.,
AGN Venture LLC, Multimedia Games, Inc., American Gaming Network,
Inc., Cable Video Store, Inc., Graff Pay-Per-View Inc. and American
Gaming Network, J.V.
11.01 Computation of Earnings Per Share.
21.01 Subsidiaries of the Registrant.
23.01 Consent of Grant Thornton LLP
23.02 Consent of Coopers & Lybrand L.L.P.
23.03 Consent of Price Waterhouse LLP
27.00 Summary Financial Data Schedule.
(b) Reports on Form 8-K None.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities
Exchange Act of 1934, Spice Entertainment Companies, Inc. has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: April 15, 1997
SPICE ENTERTAINMENT COMPANIES, INC.
By: /s/ J. ROGER FAHERTY
_____________________
J. Roger Faherty
Chairman, Chief Executive
Officer, President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of Spice
Entertainment Companies, Inc. and in the capacities and on the date indicated.
/s/ LELAND H. NOLAN Director April 15, 1997
- -------------------
Leland H. Nolan
/s/ DEAN ERICSON Director April 15, 1997
- ----------------
Dean Ericson
/s/ STEVE SARIL Director April 15, 1997
- ----------------
Steve Saril
/s/ RUDY R. MILLER Director April 15, 1997
- ------------------
Rudy R. Miller
/s/ R. CHRISTOPER YATES Director April 15, 1997
- ---------------------------
R. Christopher Yates
PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER:
/s/ HARLYN C. ENHOLM Executive Vice April 15, 1997
- --------------------------- President and
Harlyn C. Enholm Chief Financial Officer
and Chief Accounting Officer
<PAGE>
SPICE ENTERTAINMENT COMPANIES, INC.
Peer Group Cumulative Total Return
(Weighted Average by Market Value)
<TABLE>
<CAPTION>
% Peer Group;
Peer Group Market
Cumulative Total Return Capitalization
------------------------------------------------------------ ------------------
9/92 1992 1993 1994 1995 1992 1995
------ ------ ------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Peer Group Weighted Average 100 119 229 172 386 100 100
134 898
Macromedia Inc. MACR 100 97 148 606 44.0
Hypermedia Communications HYPR 100 160 100 65 1.7
Lodgenet Entertainment Corp. LNET 100 87 45 57 6.1
Interfilm Inc. IFLM 100 100 124 2 3.4
Iwerks Entertainment Inc. IWRK 100 80 14 19 5.3
Creative Program Tech Venture CPTV 100 84 41 15 0.7
Videotron Group Ltd. VDO 100 96 151 157 119
Actv Inc. IATV 100 113 353 193 200 6.7 3.6
NTN Communications Inc. NTN 100 134 271 163 122 26.2 12.8
Interactive Network Inc. INNN 100 121 18 0 4.5
Playboy Enterprises Inc. PL 100 113 200 162 129 67.0 18.8
</TABLE>
<TABLE>
<CAPTION>
Cumulative Total Return
Summary
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
9/92 1992 1993 1994 1995
-------- ------ ------- ------- -------
Spice Entertainment Companies, Inc. 100 242 325 450 185
PEER GROUP 100 119 229 172 386
NASDAQ STOCK MARKET--United States 100 118 136 133 188
</TABLE>
<PAGE>
Exhibit 11.01
SPICE ENTERTAINMENT COMPANIES and SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------
1996 1995 1994
--------------- ---------------- ---------------
Primary:
Earnings (loss) per share subject to primary earnings per
share;
<S> <C> <C> <C>
Income (loss) from continuing operations ($5,364,000) ($15,368,000) $ 2,953,000
Income (loss) from discontinued operations (2,536,000) 242,000 213,000
---------------- --------------- --------------
Net Income (loss), subject to primary earnings per share ($7,900,000) ($15,126,000) $ 3,166,000
=============== ================ ===============
Weighted average number of common shares outstanding (1) 11,351,000 11,747,000 10,386,000
Issued common shares assuming that warrants and options
outstanding during that period were exercised 2,791,000
Common shares assumed to be repurchased with proceeds
from the exercise of warrants and options subject to
20% limitation under the modified treasury stock method(2) (1,268,000)
=============== ================ ===============
Weighted average number of common shares and equivalents
outstanding 11,351,000 11,747,000 11,909,000
=============== ================ ===============
From continuing operations ($0.48) ($1.31) $0.25
Discontinuing operations (0.22) 0.02 0.02
=============== ================ ===============
Earning (loss) per share ($0.70) ($1.29) $0.27
=============== ================ ===============
Fully Diluted:
Earnings (loss) per share subject to primary earnings
per share;
Income (loss) from continuing operations ($5,364,000) ($15,368,000) $2,953,000
Income (loss) from discontinued operations (2,536,000) 242,000 213,000
=============== =============== ===============
Net Income (loss), subject to primary earnings per share ($7,900,000) ($15,126,000) $3,166,000
=============== ================ ===============
Weighted average number of common shares outstanding (1) 11,351,000 11,747,000 10,386,000
Issued common shares assuming that warrants and options
outstanding during that period were exercised 2,791,000
Common shares assumed to be repurchased with proceeds from
the exercise of warrants and options subject to 20%
limitation under the modified treasury stock method(2) (962,000)
=============== ================ ===============
Weighted average number of common shares and equivalents
outstanding 11,351,000 11,747,000 12,215,000
=============== ================ ===============
From continuing operations ($0.48) ($1.31) $0.24
Discontinuing operations (0.22) 0.02 0.02
=============== ================ ===============
Earning (loss) per share ($0.70) ($1.29) $0.26
=============== ================ ===============
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 $8.54
===============
Proceeds from exercise of options and warrants $ 10,830,577
===============
Common shares repurchased 1,268,217
===============
Notes to Fully Diluted 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:
The price per common share at December 31, 1994 $ 11.26
===============
Proceeds from exercise of options and warrants $10,830,577
===============
Common shares repurchased 962,000
===============
</TABLE>
<PAGE>
Exhibit 12.01
SPICE ENTERTAINMENT COMPANIES, INC.
Subsidiaries of the Registrant
State or Jurisdiction of
Subsidiary Incorporation
- ----------------------------------------------------- ----------------------
DOMESTIC:
Cable Video Store, Inc. Delaware
CPV Productions, Inc. Delaware
CyberSpice, Inc. Delaware
Guest Cinema, Inc. Delaware
Magic Hour Productions, Inc. Delaware
Spector Entertainment Group(1) Delaware
Spice Direct, Inc. Delaware
Spice International, Inc. Delaware
Spice Networks, Inc. New York
Spice Productions, Inc. Nevada
FOREIGN:
Home Video Channel Limited England and Wales
Danish Satellite T/V a/s Denmark
(1) Split off from the Company on February 7, 1997 pursuant to the
SEG Settlement Agreement.
SPICE ENTERTAINMENT COMPANIES, INC.
and SUBSIDIARIES
Consolidated Financial Statements
for the years ended
December 31, 1996, 1995 and 1994
<PAGE>
INDEX TO FINANCIAL STATEMENTS
AND SCHEDULE
Page Number(s)
Spice Entertainment Companies, Inc. and Subsidiaries
Reports of Independent Accountants
Consolidated Balance Sheets at
December 31, 1996 and 1995
Consolidated Statements of Operations
for the years ended December 31, 1996,
1995 and 1994
Consolidated Statements of Stockholders'
Equity for the years ended
December 31, 1996, 1995, and 1994
Consolidated Statements of Cash Flows
for the years ended December 31, 1996,
1995 and 1994
Notes to the Consolidated Financial Statements
Consolidated Financial Statement Schedule
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
Spice Entertainment Companies, Inc.
(formerly Graff Pay-Per-View Inc.)
We have audited the consolidated balance sheet of Spice Entertainment
Companies, Inc. and Subsidiaries (the "Company") as of December 31, 1996 and the
related statements of operations, stockholders' equity and cash flows for the
year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Spice Entertainment Companies, Inc. and Subsidiaries as of December 31, 1996,
and the consolidated results of their operations and their consolidated cash
flows for the year then ended in conformity with generally accepted accounting
principles.
We also audited Schedule II for the year ended December 31, 1996. In
our opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
GRANT THORNTON LLP
New York, New York
March 31, 1997
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Spice
Entertainment Companies, Inc.
(formerly Graff Pay-Per-View Inc.):
We have audited the consolidated financial statements and the financial
statements schedule II of SPICE ENTERTAINMENT COMPANIES, INC. and Subsidiaries
(the "Company") (formerly Graff Pay-Per-View Inc.) for the years ended December
31, 1995 and 1994. These financial statements and financial statements schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits. We did not audit the financial statements or the
financial statement schedule information of Spector Entertainment Group, Inc. a
wholly-owned subsidiary, for December 31, 1994 which has been treated as a
discontinued operation. These statements were audited by other auditors, whose
report dated March 30, 1995, which has been furnished to us, includes an
emphasis of a matter paragraph that describes the subsidiaries extensive
transactions and relationships with related parties. Our opinion, insofar as it
relates to the amounts included for Spector Entertainment Group, Inc. is based
solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company as of
December 31, 1995, and the consolidated results of their operations and their
consolidated cash flows for each of the two years in the period ended December
31, 1995, in conformity with generally accepted accounting principles. In
addition, in our opinion, based upon our audits and the report of the other
auditors, the financial statement schedule referred to above, when considered in
relation to the basic financial statements taken as a whole present fairly, in
all material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
New York, New York
March 8, 1996 except for
Note 2 as to which
the date is
April 3, 1996.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Spector Entertainment Group, Inc.
In our opinion, the statements of operations, of stockholders' equity
and of cash flows for the year ended December 31, 1994 of Spector Entertainment
Group, Inc. (not presented separately herein) present fairly, in all material
respects, the results of its operations and its cash flows for the year ended
December 31, 1994, 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 audit. We conducted our audit 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 audit provides a reasonable basis for the opinion expressed
above.
As described in Note 8 to the aforementioned financial statements, the
Company is a member of a group of affiliated companies and, as disclosed in the
financial statements, has extensive transactions and relationships with members
of the group. Because of these relationships, it is possible that the terms of
these transactions are not the same as those that would result from transactions
among wholly unrelated parties.
We have not audited the financial statements of Spector Entertainment
Group, Inc. for any period subsequent to December 31, 1994.
PRICE WATERHOUSE, LLP
San Diego, California
March 30, 1995
<PAGE>
SPICE ENTERTAINMENT COMPANIES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
------------------------------------ ----------------
Historical Pro forma
---------------- ----------------
(unaudited)
(Note 15)
ASSETS:
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents $ 2,663,000 $ 2,663,000 $ 1,292,000
Accounts receivable, less allowance for doubtful accounts of
$1,736,000 in 1996 and $1,178,000 in 1995 4,801,000 4,801,000 7,523,000
Income tax refunds receivable 28,000 28,000 495,000
Film and CD-ROM costs, net - - 400,000
Prepaid expenses and other current assets 1,325,000 1,222,000 2,269,000
Deferred subscription costs 132,000 132,000 511,000
Due from related parties and officers 23,000 23,000 262,000
Investment in TeleSelect, asset held for sale - - 3,177,000
Net assets of discontinued operations 2,550,000 2,550,000 2,329,000
---------------- ---------------- ----------------
Total current assets 11,522,000 11,419,000 18,258,000
Property and equipment 61,948,000 8,581,000 66,556,000
Due from related parties 294,000 294,000 87,000
Library of movies 3,797,000 3,797,000 2,990,000
Cost in excess of net assets acquired, net of accumulated
amortization of $1,931,000 in 1996 and $1,267,000 in 1995 11,399,000 11,399,000 10,961,000
Other assets 352,000 726,000 347,000
--------------- --------------- ----------------
Total assets $ 89,312,000 $ 36,216,000 $ 99,199,000
================ ================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of obligations under capital leases $ 4,926,000 $ 828,000 3,978,000
Current portion of long-term debt 817,000 817,000 1,645,000
Royalties payable 2,322,000 2,322,000 2,611,000
Accounts payable 2,319,000 4,224,000 3,305,000
Accrued interest expenses payable 1,118,000 198,000
Accrued cost of discontinued operations 1,800,000 1,800,000
Accrued expenses payable 2,395,000 2,715,000 1,892,000
Current portion of accrued restructuring costs 820,000 820,000 2,205,000
Deferred subscription revenue 1,121,000 1,121,000 2,337,000
---------------- ---------------- ----------------
Total current liabilities 17,638,000 14,647,000 18,171,000
Obligations under capital leases 53,759,000 1,707,000 56,230,000
Long-term debt 14,652,000 10,931,000 15,081,000
Accrued restructuring costs 700,000 700,000 1,450,000
Deferred compensation 269,000 269,000 198,000
---------------- ---------------- ----------------
Total liabilities 87,018,000 28,254,000 91,130,000
---------------- ---------------- ----------------
Commitments and contingencies (Note 11)
Stockholders' equity
Preferred stock, $.01 par value; authorized
10,000,000 shares, none were issued or
outstanding Common stock, $.01 par value;
authorized 25,000,000 shares; 11,339,948 and
11,357,928 shares issued and outstanding at
December 31, 1996 and 1995 113,000 113,000 114,000
Additional paid-in capital 22,645,000 26,174,000 22,997,000
Unearned compensation (765,000) (765,000) (1,323,000)
Accumulated deficit (21,338,000) (19,199,000) (13,438,000)
Cumulative translation adjustments 1,639,000 1,639,000 210,000
---------------- ---------------- ----------------
2,294,000 7,962,000 8,560,000
Stockholders' loan collateralized by common stock - - (491,000)
---------------- ---------------- ----------------
Total stockholders' equity 2,294,000 7,962,000 8,069,000
---------------- ---------------- ----------------
Total liabilities and stockholders' equity $ 89,312,000 $ 36,216,000 $ 99,199,000
================ ================ ================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
SPICE ENTERTAINMENT COMPANIES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Revenues: $ 33,213,000 $ 43,292,000 $ 43,232,000
------------- ------------- -------------
Expenses:
Cost of goods sold 94,000 196,000 123,000
Salaries, wages and benefits 7,592,000 9,722,000 6,665,000
Producer royalties and library amortization 5,481,000 6,662,000 7,096,000
Satellite costs 1,884,000 10,191,000 9,670,000
Selling, general and administrative expenses 11,354,000 17,646,000 13,472,000
Depreciation of fixed assets and amortization of
goodwill 7,499,000 2,063,000 1,156,000
Provision for write-downs and non-recurring items:
Investment in AGN (875,000) 2,039,000
Goodwill related to Guest Cinema 871,000
Write-down of film & CD-ROM costs 3,967,000
Restructuring costs 3,655,000
------------- ------------- -------------
Total operating expenses 33,029,000 57,012,000 38,182,000
------------- ------------- -------------
Total income (loss) from operations 184,000 (13,720,000) 5,050,000
Interest expense 6,418,000 914,000 299,000
Minority interest (1,062,000) 500,000
------------- ------------- -------------
Income (loss) from continuing operations before
provision for income taxes (5,172,000) (14,634,000) 4,251,000
Provision for income taxes 192,000 734,000 1,298,000
------------- ------------- -------------
Income (loss) from continuing operations (5,364,000) (15,368,000) 2,953,000
------------- ------------- -------------
Discontinued operations, net of income taxes
Income from discontinued operations of SEG 35,000 242,000 213,000
Loss on disposal of SEG (2,571,000)
------------- ------------- -------------
Income (loss) from discontinued operations (2,536,000) 242,000 213,000
------------- ------------- -------------
Net income (loss) ($7,900,000) ($15,126,000) 3,166,000
============= ============= =============
Earnings (loss) per share,
Primary
From continuing operations ($0.48) ($1.31) $0.25
Discontinued operations (0.22) 0.02 0.02
------------- ------------- -------------
Earnings (loss) per common share ($0.70) ($1.29) $0.27
============= ============= =============
Fully diluted
From continuing operations ($0.48) ($1.31) $0.24
Discontinued operations (0.22) 0.02 0.02
------------- ------------- -------------
Earnings (loss) per common share ($0.70) ($1.29) $0.26
============= ============= =============
Weighted average number of shares outstanding,
Primary 11,351,000 11,747,000 11,909,000
============= ============= =============
Fully diluted 11,351,000 11,747,000 12,215,000
============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
SPICE ENTERTAINMENT COMPANIES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years Ended December 31, 1996, 1995 and 1994
---------------------------------------------------------------------------------------------
Foreign
Additional Currency
Common Paid-in Unearned Accumulated Translation Stock in
Stock Capital Compensation Deficit Adjustment Treasury Total
---------- ----------- ------------ ------------ ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 $98,000 $ 9,607,000 $ - ($997,000) ($23,000) ($50,000) $8,635,000
Issuance of shares in connection
with the purchase of 100%
interest in PSP Holding Inc.
("PSP") and PSP Communications 1,000 1,046,000 1,047,000
Exercise of warrants in
connection with the private
placement offering of 500,000
units and other warrants 6,000 2,602,000 2,608,000
Exercise of employee stock
options 64,000 64,000
Shares issued in connection with a
conversion of a convertible note 1,000 418,000 419,000
Capital contribution in
connection with the merger
of AEC 1,165,000 1,165,000
Issuance of shares as
compensation for
services rendered 37,000 37,000
Contributed services by AEC
shareholders 278,000 278,000
Sale of treasury stock 76,000 50,000 126,000
Issuance of shares in connection
with the purchase of the
remaining 49% interest in HVC 6,000 5,595,000 5,601,000
Net income for the year 3,166,000 3,166,000
Foreign currency translation
adjustment 315,000 315,000
---------- ----------- ------------ ------------ ----------- ---------- ------------
Balance at December 31, 1994 112,000 20,888,000 - 2,169,000 292,000 - 23,461,000
Shares issued in connection with
the exercise of employee options 32,000 32,000
Shares issued in connection with
the settlement of a consultancy
agreement 224,000 224,000
Contributed services by
shareholders 46,000 46,000
Capital contribution in
connection with AEC Merger 26,000 26,000
Restricted stock granted to
executive officers 2,000 1,524,000 (1,323,000) 203,000
Distribution by SEG to its
former shareholders (481,000) (481,000)
Shares issued as compensation
for services rendered and
bonuses to employees 148,000 148,000
Shares issued in connection with
library purchases 109,000 109,000
Net loss for the period (15,126,000) (15,126,000)
Foreign currency translation (82,000)
adjustment (82,000)
---------- ----------- ------------ ------------ ----------- ---------- ------------
114,000 22,997,000 (1,323,000) (13,438,000) 210,000 - 8,560,000
Shareholders' loans (491,000)
---------- ----------- ------------ ------------ ----------- ---------- ------------
Balance at December 31, 1995 114,000 22,997,000 (1,323,000) (13,438,000) 210,000 - 8,069,000
Shares issued in connection with
the exercise of employee options 27,000 27,000
Pro rata share of restricted stock
granted to executive officers 178,000 178,000
Cancellation of restricted stock
granted to an executive officer (1,000) (379,000) 380,000 -
Net loss for the period (7,900,000) (7,900,000)
Foreign currency translation
adjustment 1,429,000 1,429,000
---------- ----------- ------------ ------------ ------------- ---------- ------------
113,000 22,645,000 (765,000) (21,338,000) 1,639,000 - 1,803,000
Shareholders' loans 491,000
---------- ----------- ----------- ------------ ------------ ---------- -----------
Balance at December 31, 1996 $113,000 $22,645,000 ($765,000)($21,338,000) $1,639,000 - 2,294,000
========== =========== ============ ============ ============ ========== ============
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
<PAGE>
SPICE ENTERTAINMENT COMPANIES, INC., and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------
1996 1995 1994
----------------- ---------------- -----------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss) ($7,900,000) ($15,126,000) $ 3,166,000
----------------- ---------------- -----------------
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
(Income) loss from discontinued operations (Note 4) 2,536,000 (242,000) (213,000)
Write-down of goodwill related to PSP Holding, Inc. acquisition 871,000
Write-down of film and CD-ROM costs 3,967,000
Accrual (payments) of restructuring costs (2,135,000) 3,655,000
Provision for investment in American Gaming Network (775,000) 2,039,000
Depreciation and amortization of fixed assets 6,834,000 1,148,000 626,000
Gain on sale of property and equipment (47,000)
Amortization of goodwill and other intangibles 661,000 914,000 530,000
Amortization of films and CD-ROM cost 400,000 1,681,000 1,299,000
Amortization of library of movies 1,638,000 1,539,000 43,000
Provision for bad debts 558,000 847,000 87,000
Decrease in income tax (benefit) provision, net 467,000 (495,000)
Amortization of debt discounts and deferred financing costs 50,000
Compensation satisfied through the issuance of common stock 178,000 576,000 56,000
Charge for contributed services 72,000 278,000
Deferred compensation expense 71,000 66,000 65,000
Subscription revenues received in advance (1,216,000) (854,000) 464,000
Minority interest (1,062,000) 500,000
Other, net 111,000
Changes in assets and liabilities (excluding the effects of acquisitions):
Decrease (increase) in accounts receivable 2,164,000 279,000 (4,390,000)
Decrease (increase) in prepaid expenses in other current assets 517,000 (760,000) 286,000
Decrease (increase) in deferred subscription costs 379,000 542,000 (88,000)
Increase in film and CD-ROM costs (2,790,000) (3,183,000)
(Increase) decrease in other assets (4,000) 488,000 (713,000)
(Decrease) increase in royalties payable (289,000) 432,000 (1,565,000)
(Decrease) increase in accounts payable and accrued expenses (95,000) 1,562,000 (110,000)
Decrease in advance (275,000)
Increase in security deposit (75,000)
----------------- ---------------- -----------------
Total adjustments 10,891,000 15,587,000 (6,378,000)
----------------- ---------------- -----------------
Net cash provided by (used in) operating activities from
continuing operations 2,991,000 461,000 (3,212,000)
Net cash provided by operating activities from
discontinued operations 932,000 1,542,000 279,000
----------------- ---------------- -----------------
Net cash provided by (used in) operating activities 3,923,000 2,003,000 2,933,000
----------------- ---------------- -----------------
Investment activities:
Investment in subsidiaries and J.V. (3,656,000) (1,132,000)
Purchase of property and equipment (1,094,000) (4,451,000) (1,686,000)
Proceeds from sale of property and equipment 135,000
Proceeds from the sale of TeleSelect 3,177,000
Purchase of rights to libraries of movies (2,444,000) (2,342,000) (1,593,000)
----------------- ---------------- -----------------
Net cash used in investing activities from
continuing operations (226,000) (10,449,000) (4,411,000)
Net cash used in investing activities from
discontinued operations (473,000) (798,000) (926,000)
----------------- ---------------- -----------------
Net cash used in investing activities (699,000) (11,247,000) (5,337,000)
----------------- ---------------- -----------------
Financing activities:
Proceeds from issuance of common stock and detachable warrants 27,000 32,000 2,672,000
Proceeds from issuance of long-term debt and capital lease
obligations 1,377,000 12,815,000 4,201,000
Proceeds from sale of treasury stock 126,000
Additional capital contribution in connection with the merger of AEC 1,165,000
Decrease (increase) in loans receivable from related parties 523,000 (840,000) 471,000
Repayment of long-term debt and capital leases obligations (4,321,000) (1,658,000) (1,125,000)
Proceeds from capital contribution of a third party 1,000,000
Dividends paid to minority shareholders of HVC (848,000)
----------------- ---------------- -----------------
Net cash provided by (used in) financing activities from
continuing operations (1,394,000) 10,349,000 6,662,000
Net cash used in financing activities from
discontinued operations (459,000) (744,000) 647,000
----------------- ---------------- -----------------
Net cash provided by (used in) financing activities (1,853,000) 9,605,000 7,309,000
----------------- ---------------- -----------------
Net increase (decrease) in cash and cash equivalents 1,371,000 361,000 (961,000)
Cash and cash equivalents, beginning of the year 1,292,000 931,000 1,892,000
----------------- ---------------- -----------------
Cash and cash equivalents, end of the year $ 2,663,000 $ 1,292,000 $ 931,000
================= ================ =================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $5,718,000 1,323,000 164,000
================= ================ =================
Income taxes 3,000 1,256,000 914,000
================= ================ =================
Supplemental schedule of non-cash investing and financing activities:
Capital Lease Obligations (Note 8) 1,163,000 60,127,000
Fair market value of 15,000 shares issued to purchase
foreign library rights 109,000
Fair market value of shares issued as compensation for services
rendered by a consultant 38,000
Acquired investment in AGN through issuance of notes payable 740,000
Distributions to former shareholders in the form of property and
equipment and the elimination of amounts owed from shareholders 454,000
Issuance (cancellation) of common shares to senior management (Note 9) (380,000) 1,527,000
Acquired 100,000 shares of Multimedia Games' common stock
through issuance of a note payable 200,000
Acquired equipment through the issuance of a note payable 39,000
Convertible debentures and accrued interest converted into
GPPV's common shares 419,000
Fair market value of 582,820 common shares issued in connection
with the acquisition of HVC, Ltd 5,601,000
Fair market value of 12,500 common shares issued in connection
with the purchase of PSP Communications, Inc. 94,000
Fair market value of 125,000 common shares issued in connection
with the purchase of PSP Holding, Inc. 953,000
Liabilities assumed from the purchase of PSP Holdings 75,000
Liabilities assumed from the purchase of HVC Ltd. 342,000
Notes receivable forgiven in connection with the purchase of PSP
Holdings and PSP Communications 106,000
Foreign currency translation adjustment $1,099,000 $(82,000) $315,000
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
<PAGE>
SPICE ENTERTAINMENT COMPANIES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
Spice Entertainment Companies, Inc., (formerly Graff Pay-Per-View Inc.)
and its subsidiaries (collectively "SPICE" or the "Company") is a diversified
media entertainment company which owns and operates television networks in North
America and Europe, and produces and distributes television programs and motion
pictures. Certain business units and activities have been discontinued or are
being phased out as a result of the Company's restructuring plan (Note 2, 4 and
14).
Formed in 1987, the Company is a leading provider of pay-per-view
entertainment networks. The Company operates and distributes Spice and The Adam
and Eve Channel (collectively, the "Spice Networks"), two domestic pay-per-view
programming services with access to over 20 million cable and DirecTV direct
broadcast satellite ("DBS") households. In Europe, the Company operates and
distributes two subscription networks, The Adult Channel ("TAC") and Eurotica
which have approximately 360,000 and 7,000 subscribers, respectively and are
distributed in the cable and the C-band direct to home ("DTH") markets. In
addition, the Company in conjunction with a partner (Note 2) operated Cable
Video Store ("CVS"), a domestic hit movie pay-per-view service with access to
approximately 2.3 million subscribers and The Home Video Channel, a subscription
movie service in the United Kingdom with approximately 66,000 subscribers.
In 1996, approximately 68% of total consolidated revenues from
continuing operations was from United States and United Kingdom cable operators,
19.4% of total revenue was from the DBS and DTH markets and 12.6% of total
revenue was from worldwide programming distribution and other sources.
The Company experienced losses of approximately $7.9 and $15.1 million
in the years ended December 31, 1996 and 1995, respectively. The Company
analyzed all its business units and determined in December 1995 that certain
actions had to be taken to conserve cash and to return to profitability. These
actions included the following: ceasing production of and distribution of movies
and television programs which resulted in the write-down of approximately $4.0
million of accumulated film and CD-ROM costs (Note 5); suspending distribution
of its hotel/motel pay-per-view technology related to Guest Cinema and writing
down associated goodwill of approximately $0.9 million (Note 2); ceasing the
Company's involvement in American Gaming Network, J.V., a joint venture formed
to develop and promote high stakes proxy play Class II tribal bingo games and
writing off its investment in the joint venture of approximately $2.0 million
(Note 2). The Company also reviewed all of its operations and restructured its
operating units to reduce overhead and labor costs, resulting in a charge for
restructuring of approximately $3.7 million in 1995 (Note 14).
The accompanying financial statements have been prepared assuming that
the Company will be able to meet its obligations in the ordinary course of
business. The Company has incurred a $5,364,000 loss from continuing operations
for the year ended December 31, 1996.
<PAGE>
At December 31, 1996, the Company has a working capital deficit of
$6,116,000. The Company's revolving credit line amounting to $14,621,000 at
December 31, 1996, scheduled to mature on January 2, 1997 was extended until
January 15, 1997. On January 15, 1997, the Company entered into agreements
with a new lender which paid off the revolving line of credit and replaced it
with a term loan and line of credit (Note 15).
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 filed an action in Delaware District Court challenging the
constitutionality of Section 505 which was granted before the provision was
scheduled to take effect. The Company's application for a preliminary injunction
was denied on November 8, 1996 though the District Court continued the stay
enforcement of Section 505 pending review by the Supreme Court. On March 24,
1997 the Supreme Court affirmed the District Court's decision. It is anticipated
that when Section 505 takes effect, the Company's revenues will be adversely
affected, the amount of which depends on several factors which are mostly
outside of the Company's control.
In August 1996, the Company entered into a capital lease for equipment
including a Digicipher encoder and approximately 1,200 decoder boxes which were
provided to cable system customers (Note 8). This equipment enabled the Company
to digitally compress its domestic television networks, which freed up the use
of two transponders. In January 1997, another transponder was preempted by the
lessor, AT&T, resulting in a reduction of annual lease payments of approximately
$1,400,000 (Note 15).
2. Acquisitions, Joint Ventures and Divestitures
Spector Entertainment Group. On August 31, 1995, pursuant to a Merger
Agreement and Plan of Reorganization by and among Spector Entertainment Group,
Inc. ("SEG"), Edward M. Spector, the Company and a newly-formed wholly-owned
subsidiary, the subsidiary was merged into SEG and the surviving corporation
became a wholly-owned subsidiary of the Company (the "Spector Merger"). On
February 7, 1997 and pursuant to a Settlement Agreement (the "Settlement
Agreement") dated January 29, 1997, among Spice Entertainment Companies, Inc.,
SEG and the former shareholders of SEG, the Company conveyed all of the issued
and outstanding shares of the common stock of SEG to the former shareholders of
SEG in exchange for the 700,000 shares of the Company's Common Stock, $.01 par
value ("Common Stock"), previously issued to certain members of the Spector
Group as part of the acquisition merger transaction whereby SEG became a
wholly-owned subsidiary of the Company. The Settlement Agreement also provides
for mutual general releases and for each party to indemnify the other in
connection with certain matters relating to the transactions contemplated by the
Settlement Agreement. As provided for in the Settlement Agreement, the Company
also entered into a Transponder Service Agreement with SEG pursuant to which the
Company will provide transponder services to SEG for monthly payments of $80,000
for two years. SEG is accounted for as a discontinued operation in the
accompanying financial statements (Note 4).
Adam & Eve Communications, Inc. On April 13, 1995, pursuant to a Merger
Agreement and Plan of Reorganization, Adam & Eve Communications, Inc. ("AEC")
merged with and into SPICE (the "AEC Merger"). In consideration of the AEC
Merger, the AEC shareholders received 820,000 shares of common stock. This
transaction was accounted for as a pooling of interest whereby the financial
statements for all prior periods to the combination were restated to reflect the
combined operations.
During the first quarter of 1995, former shareholders of AEC provided
the Company with management, consulting accounting and advisory services free of
charge. The Company has recorded a charge of $46,300 to operations and a
corresponding increase to additional paid-in capital for the cost of these
services for the year ended December 31, 1995.
The Home Video Channel Limited. On January 22, 1993, the Company
entered into an Investment and Option Agreement (the "Agreement") with The Home
Video Channel Limited ("HVC"), a corporation registered in England and Wales.
Pursuant to the Agreement, the Company acquired 10,001 shares of HVC, a
25% interest, for $2,000,000 in cash and 200,004 shares of common stock valued
at $1,000,000. On December 16, 1993, the Company acquired an additional 10,399
shares, constituting an additional 26% interest in HVC for $1,458,000 in cash.
On December 27, 1994, the Company purchased 19,600 shares constituting the
remaining 49% interest in HVC for $1,132,000 in cash and 582,820 shares of
common stock valued at $5,600,000.
The Company is now the sole stockholder of HVC.
CVS Partners. 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.
CPV Productions, Inc. On May 27, 1994, the Company acquired all of the
outstanding common stock of CPV Productions, Inc. ("CPV") and its wholly-owned
subsidiary, Magic Hour Productions, Inc. ("MH") (which created, produced and
distributed movies and television programming) in exchange for 845,000 shares of
common stock in a business combination accounted for as a pooling of interest.
Historical financial statements have been restated to include CPV. At the
beginning of 1996 the Company had suspended production of movies due to a
shortage of capital requirements but had continued to license and distribute the
related film library. At the end of 1996, the Company determined to shut-down
the operations of CPV and in the first quarter of 1997 sold a portion of the
rights to the film library to the former owners of CPV for $170,000.
Guest Cinema, Inc. In January 1994, the Company acquired through the
merger of PSP Holding, Inc. ("PSP") into its wholly-owned subsidiary, Guest
Cinema, Inc., a hotel/motel pay-per-view system. As part of the restructuring
plan instituted in the last quarter of 1995, the Company ceased distribution of
this system because the Company projected that the technology would not generate
future cash flows sufficient to support its investment. Accordingly, the Company
incurred a $871,000 expense in 1995 attributable to the write-down of goodwill
created on the acquisition of PSP.
American Gaming Network, J.V. Pursuant to a joint venture agreement
dated June 28, 1995, the Company formed American Gaming Network, J.V. ("AGN")
with TV Games, Inc. ("TVG"), a wholly-owned subsidiary of Multimedia Games, Inc.
("MGAM"), to jointly develop and promote high stakes proxy play Class II tribal
bingo games. The Company contributed approximately $1.4 million of intellectual
property and working capital to AGN's capital. The Company had acquired the
intellectual property from MGAM for cash and notes. In related transactions, the
Company acquired for cash and notes 275,000 shares of MGAM's outstanding stock
and a warrant to acquire an additional 175,000 shares at an exercise price of
$3.50 per share. The parties were unable to agree on a business plan or a
strategy for going forward with AGN.
Pursuant to a Purchase Agreement dated June 28, 1996, the parties
resolved their differences with the Company giving up its interest in AGN and
the 275,000 shares of MGAM stock in exchange for (i) the cancellation of an
aggregate of $775,000 of liabilities owed to MGAM and TVG, (ii) $100,000
pursuant to a note which was paid in 1996 and (iii) $400,000 due pursuant to a
note due in three years. The Company retained a warrant to acquire 175,000
shares of common stock of MGAM stock and the parties released each other. Due to
the likelihood that the parties would not proceed forward with AGN and as part
of the Company's restructuring at December 31, 1995, the Company wrote off its
investment in AGN and the MGAM stock. As a result of the foregoing transaction,
the Company recognized a non-recurring gain of $875,000 in the second quarter of
1996 and will recognize an additional non-recurring gain of $400,000 when the
$400,000 note is paid.
TeleSelect B.V. The Company, Philips Media B.V. ("Philips") and Royal
PTT Netherlands NV ("KPN") established TeleSelect B.V. ("TeleSelect"), a
Netherlands joint venture, to create joint ventures with European cable
operators to enable them to provide conditional access services such as
pay-per-view, near video on demand and electronic retailing to their
subscribers. On April 3, 1996, the Company received $3.2 million of proceeds
from the sale of its TeleSelect interest of which $1 million was utilized to pay
down long-term debt and the remaining funds were utilized to pay trade payables.
3. Summary of Significant Accounting Policies
Consolidation. The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries and majority-owned
partnership. All significant intercompany transactions have been eliminated.
Use of Estimates. 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 disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments. The carrying amounts for cash and
cash equivalents, accounts receivable, royalties payable, accounts payable and
accrued expenses reflected in the financial statements approximate fair value
because of the short maturity of these items. See Note 15 for a discussion of
the fair value of the Company's long-term debt and capitalized lease obligations
at December 31, 1996.
Cash and Cash Equivalents. The Company considers all highly liquid debt
instruments with original maturities of three months or less to be cash
equivalents.
Concentration of Credit Risk. The Company's financial instruments that
are exposed to concentrations of credit risk consist primarily of cash and trade
receivables.
The Company's trade receivables are from a broad base of cable
operators, two of which account for 23% and 10%, respectively, of the
consolidated accounts receivable balance at December 31, 1996. The Company
routinely assesses the financial strength of these debtors. Accordingly,
concentration of credit risk is limited. The Company's cash is deposited in
major banks, thereby limiting credit risk.
Valuation of Long-Term Assets. The Company adopted Statement of
Financial Accounting Standards No. 121 ("SFAS No. 121"), "Account for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
during the year ended December 31, 1996. The statement requires that the Company
recognize and measure impairment losses of long-lived assets, such as the movie
library, film and CD-ROM costs, equipment and certain identifiable intangibles
and value long-lived assets to be disposed of.
The Company periodically assesses the possible impairment of its
long-term assets by comparing the sum of the undiscounted projected future cash
flows attributable to each business unit to the carrying value of the assets of
that business unit. Projected future cash flows for each business unit are
estimated for a period approximating the remaining lives of that business unit's
long-lived assets, based on earnings history, market conditions and assumptions
reflected in internal operating plans and strategies. The Company has determined
that no provision is necessary for the impairment of long-lived assets at
December 31, 1996.
Cost in Excess of Net Assets Acquired (Goodwill). This represents the
cost over the fair value of net assets acquired in business combinations
accounted for as a purchase. This asset is being amortized on a straight line
basis over a period of 20 years. Goodwill is reviewed for impairment whenever
events or changes in circumstances indicate that the carrying value amount
may have been impaired. If the sum of the future cash flows is less than the
carrying amount of the asset, a loss is recognized.
Property and Equipment. Property and equipment, including major capital
improvements, are recorded at cost. The cost of maintenance and repairs is
charged against results of operations as incurred. Depreciation is charged
against results of operations using the straight line method over the estimated
useful lives of the related assets. Equipment leased under capital leases is
amortized over the lives of the respective leases. Improvements to leased
property are amortized over the life of the lease or life of the improvement,
whichever is shorter. Sales and retirements of depreciable property and
equipment are recorded by removing the related cost and accumulated depreciation
from the accounts. Gains or losses on sales and retirements of property and
equipment are reflected in results of operations.
Revenue Recognition. Pay-per-view revenues are recognized in the
periods in which the films or events are aired by the cable systems which have
license agreements with the Company.
Subscription revenues are deferred and amortized over the life of the
subscription. At December 31, 1996 and 1995 deferred subscription revenues were
$1,121,000 and $2,337,000 respectively.
Deferred subscription costs of $132,000 and $511,000 at December 31,
1996 and 1995, respectively, are deferred and amortized over the life of the
subscription.
CPV (which terminated operations at the end of 1996) recognized
revenues in accordance with Statement of Financial Accounting Standards ("FAS")
No. 53, Financial Reporting by Producers and Distributors of Motion Picture
Films. Revenue is recognized when films rights are distributed.
SEG (which was reacquired by the original owners on February 7, 1997)
recognizes revenue when services are performed. A substantial part of SEG's
revenues are generated under long-term contracts with remaining terms from 1 to
6 years. SEG provides services for all the customers' scheduled events under
these non-cancelable contracts for the term of the contract.
Producer Royalties. The Company has entered into contractual agreements
with producers or film makers in order to obtain the rights to license films or
events to the cable systems, home backyard satellite dish market and hotels. The
producer agreements require that royalties be paid on the basis of either a
percentage of the revenues ("the producer royalty split") or a flat fee for a
specified period, generally one or two years. The producer royalty splits are
recorded in the period the film or event is exhibited. Royalties paid on a flat
fee basis are amortized by the straight-line method over the term of the
licensing period.
Amortization of Film and CD-ROM Costs. Film and CD-ROM costs are
amortized using the income forecast method.
Earnings (Loss) per Share. The computations of primary and fully
diluted earnings (loss) per share are based upon the weighted average number of
shares outstanding during the periods presented, after giving effect to the
potential dilutive effect, if any, of common stock equivalents and excludes
those securities whose conversions, exercise or other contingent issuance would
have the effect of increasing earnings per share or decreasing loss per share.
Foreign Currency Translation. Assets and liabilities in foreign
currencies are translated into United States dollars at the exchange rate
existing at the balance sheet date. Revenues and expenses are translated at
average rates for the period. The net exchange difference resulting from these
translations is recorded as a separate component of stockholders' equity. The
excess cost over the Company's share in the net book value in the foreign
investee has been considered as a foreign currency denominated asset in applying
Statement of Financial Accounting Standards No. 52, "Foreign Currency
Translation".
Income Tax. The Company uses the liability method of accounting for
income taxes, as set forth in Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes". Under this method, deferred income taxes,
when required, are provided on the basis of the difference between the
financial-reporting and income-tax bases of assets and liabilities at the
statutory rates enacted for future periods.
Reclassifications. Certain amounts for previous years have been
reclassified to conform with the 1996 presentation.
4. Discontinued Operations and Activities
As part of the Company's restructuring efforts, the Company determined
during the fourth quarter of 1996 that it would dispose of or sell certain
non-strategic operating units. In November, 1996, the Board of Directors
approved a plan to split off Spector Entertainment Group, Inc., (which provides
satellite simulcasting and television production services to the pari-mutuel
industry) 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.
The results of operations for SEG have been classified as discontinued
operations for all periods presented in the Consolidated Statement of
Operations. The components of the net assets of SEG which are included in the
Consolidated Balance Sheet as Net Assets of Discontinued Operations at December
31, 1996 and 1995 are as follows:
<PAGE>
<TABLE>
<CAPTION>
1996 1995
-------------------- -------------------
<S> <C> <C>
Current Assets $ 658,000 $ 1,095,000
Property, plant and equipment, net 3,977,000 4,214,000
Other assets 801,000 589,000
Current liabilities (1,951,000) (1,738,000)
Long-term debt (920,000) (1,816,000)
Deferred taxes (15,000) (15,000)
-------------------- -----------------
Net Assets 2,550,000 $ 2,329,000
==================== =================
</TABLE>
The revenues of SEG for 1996, 1995 and 1994 were $7,885,000, $7,766,000
and $7,424,000, respectively. Included in the loss on disposal on SEG is
$403,000 of operating losses subsequent to the measurement date.
In addition, the Company also determined to terminate the operations of
CPV Productions, Inc. (a wholly-owned subsidiary which created, produced and
distributed movies and television programming) at the end of 1996. The Company
had suspended production of movies at the beginning of 1996 due to a shortage of
capital but had continued to license and distribute its existing film library.
5. Film and CD-ROM Costs
Film and CD-ROM costs consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1996 1995
--------------- ----------------
<S> <C> <C>
Films and CD-ROMs released $400,000 $8,071,000
Films and CD-ROMs not released 0 290,000
--------------- ----------------
400,000 8,361,000
Less amortization 400,000 3,994,000
Reduction to net realizable value 3,967,000
--------------- ---------------
$0 $400,000
=============== ================
</TABLE>
Prior to the restructuring, the Company created, produced and
distributed movies, CD-ROMs and television programs (Note 14).
6. Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------------------
<S> <C> <C> <C>
Useful Lives in Years 1996 1995
----------------------- ------------- -------------
Satellite transponders 12 $58,663,000 $58,663,000
Equipment 5 9,716,000 7,615,000
Furniture and fixtures 7 510,000 505,000
Leasehold improvements Life of lease or 2,564,000 2,483,000
shorter ------------- -------------
71,453,000 69,266,000
Less accumulated depreciation and 9,505,000 2,710,000
amortization ------------- =============
$61,948,000 $66,556,000
============= =============
</TABLE>
Certain of the aforementioned equipment having a net book value of
$54,559,000 and $60,260,000 is collateral for the equipment loans and capital
leases at December 31, 1996 and 1995, respectively.
<PAGE>
7. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1996 1995
---------------- ---------------
<S> <C> <C>
9.9% note payable (a) $ - 638,000
Revolving credit line (a) 14,621,000 14,880,000
10% note payable 80,000 130,000
11% note payable 100,000 125,000
7% note payable (b) 668,000
8% note payable (c) 178,000
Notes payable (d) 775,000
---------------- ----------------
15,469,000 16,726,000
Less current portion 817,000 1,645,000
================ ===============
Long-term portion $ 14,652,000 $15,081,000
================ ===============
</TABLE>
The aggregate principal payments of the aforementioned long-term debt,
reflecting the proforma effect of the debt refinancing on January 15, 1997 (Note
15), maturing in each of the years subsequent to December 31,1996, including
estimated payments on debt with contingent terms, are as follows:
<TABLE>
<CAPTION>
Years Ending December 31, Payment
---------------------------------------- --------------------
<S> <C>
1997 $817,000
1998 1,030,000
1999 9,901,000
--------------------
Total $ 11,748,000
====================
</TABLE>
On October 21, 1994, the Company entered into a loan agreement with
Midlantic National Bank, N.A. ("Midlantic"). The loan agreement included a
term loan with a principal sum of $900,000 and a revolving credit line of
$15,000,000, no further funds were available on or after December 31, 1995.
The term loan bore interest at 9.90% and was repayable in forty-eight
monthly payments of $18,750. Interest on the revolving credit line is based
on either prime plus 1% or the 30, 60, or 90 day LIBOR plus 3% as selected
by the Company at the time of each draw-down. Interest payments are made
quarterly and the revolving credit line expired on December 31, 1996 and
was extended to January 15, 1997. On December 31, 1996, the interest rate
was 9.25%. The term loan and revolving credit line are collateralized by
the stock of the Company's subsidiaries excluding SEG.
On April 3,1996, the Company paid the balance of the term loan in full
from the proceeds received on the sale of its TeleSelect interest.
On January 15, 1997, the Company restructured its debt with PNC Bank N.A.,
as successor in interest to Midlantic ("PNC") (Note 15).
On September 19, 1996, the Company's UK subsidiary HVC entered into a
short-term loan agreement with National Westminster Bank in England to
provide up to $750,000 of financing. The loan is payable over 12 months
at $65,000 per month including interest at 7% per annum.
Prior to the acquisition of CPV, a former shareholder of CPV and officer
of the Company, provided loans to CPV to fund its working capital needs.
The loan balance and accrued interest totaling $207,000 was paid in 1996.
The Company issued a $500,000 note at 8% in connection with a joint
venture in AGN. The Company also issued a $275,000 note in connection with
the purchase of 100,000 shares of MMG stock at $2.75 per share. The
$275,000 note was due on July 26, 1996 and bore interest at the short term
applicable federal rate, as such term is defined in Section 1274 of the
Internal Revenue Code ("AFR"). On June 28, 1996, the parties entered into
an agreement which settled various disputes and the $775,000 in notes were
canceled.
8. Obligation Under Capital Leases
Minimum annual rentals under capital leases for the five years
subsequent to 1996 and in the aggregate are as follows:
<TABLE>
<CAPTION>
Years ending December 31,
---------------------------------------------- -------------------
<S> <C>
1997 $10,660,000
1998 8,730,000
1999 8,445,000
2000 7,657,000
2001 7,620,000
Thereafter 45,720,000
-------------------
Net minimum lease payments 88,832,000
Less amount representing interest 30,147,000
-------------------
Present value of minimum lease obligations 58,685,000
Current portion of lease obligations 4,926,000
-------------------
Long-term portion of lease obligations $53,759,000
===================
</TABLE>
a) Effective as of December 1995, the Company entered into a non-cancelable
lease agreement for five transponders on the AT&T satellite Telstar 402R
for a monthly payment of $635,000. The term of the agreement for the useful
life of the satellite's geo-stationary orbit was estimated to be twelve
years. Included in property and equipment is an asset with an original cost
of $58,663,000 equal to the discounted lease payments using a discount rate
of 8%. On March 31, 1997, this lease was amended which will result in the
lease being accounted for as an operating lease (Note 15).
b) In 1995, the Company entered into a financing agreement, accounted for as
a capital lease, totaling $2,078,000 with IBM to construct a master control
and digital playback center, at its New York facility. In 1995, the Company
made payments totaling $435,000 on the obligation. As a result of certain
delays, changes in equipment requirements and other factors, the original
lease agreement was superseded in the fourth quarter of 1996 with a new
lease which requires 36 payments of approximately $37,000, commencing on
February 1, 1997. The lease obligation on December 31, 1996 is $1,083,000.
c) On August 14, 1996, the Company entered into an equipment lease agreement
for approximately $1.8 million of equipment from Vendor Capital Group. The
lease was accounted for as a capital lease. The equipment included a
Digicipher encoder and approximately 1,200 decoder boxes which were
provided to the Company's cable systems customers. This equipment enabled
the Company to digitally compress its domestic television networks, freeing
up two transponders for other uses.
9. Capital Transactions
During May, 1995, the Company granted to several key executives 177,000
restricted shares of common stock ("Restricted Shares") which were approved at
the 1996 annual shareholders' meeting. The Restricted Shares are
non-transferable with such restriction lapsing in five years. During 1996 the
Company canceled 44,000 shares of the restricted stock, issued on May 1, 1995,
as part of a termination agreement with one of the Company's then executive
officers. The Company recorded unearned compensation for the portion of shares
not yet vested and will recognize such amount as an expense on a pro rata basis
over five years as the restriction lapses. The unamortized balance of unearned
compensation at December 31, 1996 of $765,000 has been included as a reduction
in stockholders' equity.
On July 1, 1993, Pay-Per-View International, Inc. ("PPVI"), a
wholly-owned subsidiary of the Company, entered into an agreement with Coastline
Films and CPV Productions, Inc. to license 200 feature length motion pictures
for ten years. In consideration for the license, the Company issued 37,500
shares of common stock to Coastline Films. As additional consideration, PPVI
agreed to make certain cash payments if PPVI's subscriber base reached certain
thresholds. On August 30, 1995, PPVI entered into a Modification and
Substitution Agreement with Coastline Films. Coastline agreed that no further
cash payments would be required in exchange for the Company's issuance of an
additional 15,000 shares of common stock to Coastline Films. The parties also
agreed to reduce the number of films from 200 to 150 and to extend the terms of
the film licenses from 10 years to perpetuity.
On December 26, 1994, the Company issued 5,000 shares of common stock
to a consultant for services rendered.
Warrants. On December 8, 1994, the Company granted 100,000 warrants
exercisable at $12.03 (which were subsequently canceled and reissued during 1996
at an exercise price of $3.88) to Midlantic in connection with a revolving
credit line. These warrants were subsequently canceled as part of the Company's
debt restructuring in January of 1997 (Note 15).
During May 1994, the Company granted 3,750 warrants at a purchase price
of $6.50 to three individuals in connection with an unsecured $125,000 loan.
During January 1994, the remaining 300,900 warrants exercisable at
$6.67 as part of an equity offering were exercised. Also warrants to acquire
85,409 shares issued in connection with a senior secured note and 24,000 other
warrants were exercised.
On April 1, 1996 the Company granted Imperial Bank, 20,000 warrants
with an exercise price of $3.125 per share to purchase the Company's common
stock, in connection with the SEG term loan. These warrants will expire on April
1, 2001.
Changes in warrants outstanding are summarized as follows:
<TABLE>
<CAPTION>
Warrants
------------------------------------
Exercise Price
Shares Range
--------------- ------------------
<S> <C> <C>
Balance January 1, 1994 615,331
Granted 103,750 $6.50-$12.03
Exercised (600,331) $.08-$6.67
Canceled
---------------
Balance December 31, 1994 118,750
Granted 100,000 $3.88
Exercised
Canceled (100,000) $12.03
---------------
Balance December 31, 1995 118,750
Granted 20,000 $3.125
Exercised
Canceled
---------------
Balance December 31, 1996 138,750
===============
</TABLE>
At December 31, 1996, 1995 and 1994, there were 138,750, 118,750, and
118,750 respectively, of exercisable warrants.
Options. The Company has four stock option plans (the 1992, 1993, 1994
and 1995 Plans) (collectively the "Plans") for officers, employees, directors
and consultants of the Company or any of its subsidiaries and in addition a
Directors' Plan (the "Directors' Plan"). Options granted to employees may be
either incentive stock options (ISO's) or non-ISO's; ISO's may not have an
exercise price less than 100% of fair market value of the Company's common stock
on the grant date and all options may not have an exercise price of less than
110% of fair market value on the grant date in the case of options granted to
holders of 10% or more of the voting power of the Company's stock on the grant
date. The aggregate fair market value, as determined on the grant date, of ISO's
that may become exercisable in any one year can not exceed $100,000. Options
canceled subsequent to issuance are returned to the Plan and are available for
re-issuance as determined by the Stock Option Committee.
The options are evidenced by a written agreement containing the above
terms and such other terms and conditions consistent with the Plans as the
Board/or Committee may impose. Each option, unless sooner terminated, shall
expire no later than 10 years (five years in the case of ISO's granted to
holders of 10% of the voting power of the Company's common stock) from the date
of grant, as the Board/or Committee may determine.
The Plans in effect on December 31, 1996, 1995 and 1994 authorize the
granting of stock options to purchase an aggregate of 4,000,000, 4,000,000 and
3,600,000 shares of the Company's common stock, respectively. At December 31,
1996, 1995 and 1994 there were a total of 126,588, 1,213,987 and 950,901 shares,
respectively, remaining for future grants under the four plans.
The Directors' Plan authorizes the automatic annual issuance to each
non-employee director of options to acquire 10,000 shares of the Company's
common stock on each December 31, at an exercise price equal to the market price
of the stock on that date. The plan was adopted in 1994 and authorizes the
granting of a total of 100,000 stock options. On December 31, 1996, 1995 and
1994 there were a total of 50,000, 60,000 and 80,000 shares, respectively,
available for future grant under this plan.
During 1992 and 1995 the Company granted options to acquire 24,000 and
16,000 shares, respectively, outside the aforementioned plans at an exercise
price equal to the market price of the Company's common stock on each grant
date.
The Company has adopted the disclosure provisions of Financial
Accounting Standards No. 123. "Accounting for Stock-Based Compensation" (FAS
123). It applies APB Opinion No. 25 "Accounting for Stock Issued to Employees"
and related interpretations in accounting for its plans and does not recognize
compensation expense for its stock-based compensation plans. If the Company had
elected to recognize compensation expense based upon the fair value at the grant
date for awards under these plans consistent with the methodology prescribed by
FAS 123, the Company's net income and earning per share would be reduced to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1996 December 31, 1995
--------------------------- --------------------------
<S> <C> <C>
Net loss
As reported ($7,900,000) ($15,126,000)
Pro forma ($9,748,000) ($18,283,000)
Loss per share
As reported ($0.70) ($1.29)
Pro forma ($0.86) ($1.56)
</TABLE>
These pro forma amounts may not be representative of future disclosure
because they do not take into effect pro forma compensation expense related to
grants made before 1995. The fair value of these options was estimated at the
date of grant using the Black-Scholes option valuation model and using
assumptions for the year ended December 31, 1996 and 1995; respectively;
expected volatility of 63% and 61%; risk-free interest rates of 5.6% and 5.%;
and expected life of 7 years. The weighted average fair value of options granted
during the year ended December 31, 1996 and 1995 for which the exercise price
equals the market price on the grant date was $2.05 and $2.67, respectively, and
the weighted average exercise prices were $3.07 and $4.05, respectively.
Transactions involving stock options are summarized as follows:
<TABLE>
<CAPTION>
Options
---------------------------------------
Stock Options Weighted-average
Outstanding exercise price
--------------- --------------------
<S> <C> <C>
Balance at January 1, 1994 $2,434,149 $3.13
Granted 260,250 7.84
Exercised (19,200) 3.33
Canceled (2,100) 3.33
---------------
Balance at December 31, 1994 2,673,099 3.59
Granted 2,899,820 5.07
Exercised (8,200) 3.40
Canceled (2,698,706) 5.17
---------------
Balance at December 31, 1995 2,866,013 3.60
Granted 1,235,918 3.07
Exercised (26,000) 1.02
Canceled (165,919) 4.23
===============
Balance at December 31, 1996 3,910,012 3.42
===============
</TABLE>
The following table summarizes information concerning currently
outstanding and exercisable stock options:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------- ---------------------------------
Number Weighted Weighted Number Weighted
Outstanding at Average Average Exercisable at Average
Ranges of December 31, Remaining Exercise December 31, Exercise
Exercise Prices 1996 Contractual Life Price 1996 Price
- ------------------- ---------------- ----------------- -------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
$.83 - $1.75 438,525 8.91 years $1.55 189,131 $1.28
$2.61 - $4.63 3,315,487 7.88 years 3.41 2,544,949 3.53
$7.75 - $9.25 156,000 7.12 years 8.85 125,250 8.93
</TABLE>
At December 31, 1996, 1995 and 1994, there were 2,859,330, 1,695,113, and
1,335,232 of options that are exercisable, respectively.
<PAGE>
10. Income Taxes
The components of income tax expense (benefit) follow:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------
1996 1995 1994
---------------- ---------------- ----------------
<S> <C> <C> <C>
Current
Federal $ 89,000 ($356,000) $ 351,000
State and Local 50,000 240,000 154,000
Foreign 53,000 850,000 793,000
---------------- ---------------- ----------------
192,000 734,000 1,298,000
---------------- ---------------- ----------------
Deferred
Federal
State and Local
---------------- ---------------- ----------------
- - -
---------------- ---------------- ----------------
Total Income Taxes $ 192,000 734,000 1,298,000
================ ================ ================
</TABLE>
The following is a reconciliation between the statutory federal income
tax for each of the past three years and the Company's effective tax rate:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1996 1995 1994
--------- --------- ----------
<S> <C> <C> <C>
Income tax provision (benefit) at federal statutory rate (34%) (34%) 34%
State and local income taxes net of federal tax benefit 1% 0% 2%
Foreign income taxes 1% 2% 15%
Foreign income, excluded, net of federal tax benefit 0% (2%) (13%)
Amortization of Goodwill 12% 4% 4%
Non-deductible business meals and entertainment 1% 0%
(Decrease) increase due to the change in the valuation
allowance 14% 22% (13%)
Other items 1% 3% 0%
Effective tax rate ----- ----- -----
(4%) (5%) 30%
</TABLE>
The Company's foreign subsidiaries have no accumulated earnings.
Therefore, no U.S. Federal income taxes have been provided relating to the
foreign subsidiaries. The foreign income subject to foreign taxes was
approximately $161,000 in 1996 and $2,110,000 in 1995.
As of December 31, 1996, the Company has available, for Federal income
tax purposes, unused net operating loss carryforwards of $3,541,000 which may
provide future tax benefits, expiring 2005. Due to a change in control of the
Company that occurred in September 1990 approximately $1,118,000 of the net
operating loss carryforward is subject to an annual limitation of approximately
$27,000.
<PAGE>
The components of the net deferred tax assets are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1996 1995
--------------- --------------
<S> <C> <C>
Deferred tax assets
Bad debts $637,000 $503,000
Deferred compensation expense 207,000 185,000
Net operating loss carry-forwards 1,204,000 162,000
Foreign tax carry-forwards 52,000
AMT credit carry-forward 107,000
Satellite lease classification 798,000
Accrual for restructuring changes 1,695,000 3,506,000
Non-deductible capital losses 256,000 938,000
Valuation allowance (4,068,000) (4,772,000)
--------------- --------------
Total deferred tax asset 888,000 522,000
--------------- --------------
Deferred tax liability
Accrual versus cash method
(14,000)
Tax depreciation in excess of book (888,000) (445,000)
Undistributed earning of foreign
investee (63,000)
--------------- --------------
Total deferred tax
liability (888,000) (522,000)
--------------- --------------
Net deferred tax assets $ - $ -
=============== ==============
</TABLE>
11. Commitment and Contingencies
Employment Agreements. Mr. Faherty is employed by the Company as its
Chairman and Chief Executive Officer pursuant to an amended Employment Agreement
effective January 1, 1996. The agreement, as presently amended, provides for a
base salary of $350,000, with any adjustments determined annually. The agreement
has a six year term. In each year that the agreement is not terminated, the
agreement's term is extended for five years from that anniversary date. The
agreement provides for loans from the Company of up to $215,000, plus accrued
interest. The agreement also provides for certain benefits including annual
retirement benefits of not less than $100,000 (implemented by the Deferred
Compensation Agreement described below). Mr. Faherty has waived his rights to a
reimbursement for automobile costs for 1996.
Effective December 31, 1995, Messrs. Graff and Nolan resigned as
officers of the Company. Messrs. Graff and Nolan will receive $350,000 per annum
payable in equal installments beginning January 1, 1996 through December 31,
1998. In the event the Company completes financing in excess of $20 million,
each individual may require prepayment of the remaining balance due on their
agreements. These costs were accrued as restructuring costs as of December 31,
1995 (See Note 14).
Messrs. Graff and Nolan have loans outstanding with the Company which are
required to be repaid during 1997 and 1998. Pursuant to the Fourth Amendment to
Mr. Faherty's Employment Agreement, Mr. Faherty will repay his loan by December
31, 1997. All of the loans bear interest at the same rate the Company pays on
its loan from its senior secured lender. At December 31, 1996, the interest rate
was 9.25%.
Each of these agreements prohibits the executive from competing with
the Company for a specified period after termination of employment.
Deferred Compensation. The estimated present value of future benefits
is accrued over the period from the effective date of the agreements (October 1,
1992) until the expected retirement dates of the participants. The expense
incurred for the years ended December 31, 1996, 1995 and 1994 amounted to
$71,000, $66,000 and $66,000, respectively.
Leases and Service Contracts. The Company leases its office facilities,
satellite transponders and uplink and certain equipment. As of December 31,
1996, the aggregate minimum rental commitments under non-cancelable leases were
approximately as follows:
<TABLE>
<CAPTION>
Office Satellite
Years Ending Facilities and Transponder
December 31 Total Equipment and Uplink
--------------------- ---------------- ---------------- -------------------
<S> <C> <C> <C>
1997 $1,762,000 $ 581,000 $ 1,181,000
1998 671,000 502,000 169,000
1999 571,000 477,000 94,000
2000 461,000 461,000
2001 405,000 405,000
Thereafter 635,000 635,000
--------------- --------------- -------------------
Total $4,505,000 $3,061,000 $ 1,444,000
================ =============== ====================
</TABLE>
Total expense under operating leases amounted to $3,220,000, $9,418,000
and $9,448,000 for the years ended 1996, 1995 and 1994, respectively.
Neither The Adult Channel nor Eurotica have long term satellite
arrangements. If either of these arrangements is terminated and the Company is
unable to find a replacement satellite service, broadcast of the affected
network may be interrupted or terminated.
Contracts with Producers. The Company has entered into contracts with
several major motion picture studios for the content on Cable Video Store. The
Company has contributed all contract rights associated with Cable Video Store to
the CVS Partners on March 6, 1996 (Note 2). The terms range from one to two
months to obtain the rights to exhibit the movies or events licensed. Payment
terms are based upon a percentage of the gross revenues, usually ranging from
35% to 50%.
The Spice Networks, The Adult Channel and The Home Video Channel have
entered into contracts with producers with terms ranging from one to two years
which are on a flat fee basis. Also, the Company has contracted with several
major adult motion picture producers. These contracts allow the Company to
license world-wide pay-TV rights in perpetuity.
Contracts with Cable Systems. The Company has entered into affiliation
agreements with numerous cable systems in the United States. The contracts have
terms ranging from one to ten years with the fees to the cable systems based
upon a percentage of the subscriber gross revenues, as defined, in the
respective agreements.
12. Significant Customers
Two cable operators accounted for approximately 17.6% and 9.0%,
respectively, of revenues in 1996 and approximately 13.0% and 8.3%,
respectively, in 1995 and approximately 12.9% and 10.5%, respectively, in 1994.
13. Retirement Plan
On January 13, 1993, the Company established a 401(k) tax deferred
savings plan (the "Plan") for all employees of the Company on March 1, 1993.
Employees are eligible to participate in the Plan after completing one year of
service. Eligible employees may elect to contribute up to 15% of their annual
compensation to the Plan, up to the maximum allowed by law. The Company declared
for 1995 and 1994 a discretionary matching contribution equal to 25% of the
amount of the salary reduction employees elect to defer, up to the first 4% of
compensation. For the years ended December 31, 1995 and 1994, the Company
incurred a 401(k) contribution expense of approximately $42,000 and $19,000,
respectively. The Company made no matching discretionary contribution during the
year ended December 31, 1996.
14. Restructuring Reserve
In December 1995, the Company entered into a restructuring plan for
certain operating units and its corporate management. Two executives, Mr. Mark
Graff and Mr. Leland H. Nolan, also resigned as officers of the Company
effective December 31, 1995. Messrs. Graff and Nolan have signed separation
agreements (refer to Employment Agreements) which are in force through 1998.
The accrued restructuring reserve is comprised of corporate level
restructuring and the suspension of production activities formerly conducted by
CPV. Each component involved contraction of the Company's workforce and
facilities and other miscellaneous costs associated with the restructuring. The
balances of each component at December 31, 1995 and 1996 were as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1995 Cash Outflows 1996
---------------- ----------------- ----------------
<S> <C> <C> <C>
Corporate
Salaries $2,750,000 $1,301,000 $1,449,000
Facilities and Other 250,000 179,000 71,000
CPV
Salaries 464,000 464,000 0
Facilities and Other 191,000 191,000 0
--------------- -------------- -----------------
Total $3,655,000 $2,135,000 $1,520,000
=============== ================= =================
</TABLE>
As a result of this restructuring, the Company took a pretax charge of
$3,655,000 in 1995, including the separation costs for approximately 50
employees.
15. Subsequent Events
On January 11, 1997, as a result of AT&T losing contact with and
declaring Telstar 401 permanently out of service, one of the Company's
unprotected transponders on Telstar 402R was pre-empted by AT&T and transferred
to another AT&T customer. This action has resulted in the permanent reduction of
the Company's satellite transponder costs and caused the monthly payments to be
reduced from $635,000 to $520,000 per month. In addition, the Company's
capitalized satellite transponder costs and related obligation have been reduced
by $9,655,000 and $10,026,000 respectively. As a result of this transaction, the
Company will record a one-time gain of $361,000 in January of 1997.
On March 31, 1997, the Company amended the terms of the satellite
transponder lease with Loral Skynet ("Loral") (which acquired AT&T's satellite
business). The term of the 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 lease will be classified as an operating lease on March 31, 1997
and will give rise to a non-recurring gain of approximately $1.6 million.
On January 15, 1997 the Company negotiated agreements with PNC and
Darla L.L.C. ("Darla"), as Assignee, which resulted in the replacement of its
primary revolving credit line with PNC. PNC settled the outstanding balance of
the credit line, 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 PNC settlement and $0.9 million which
financed acquisition fees. Additionally, this agreement included a revolving
line of credit totaling $3.5 million. The term loan and the credit line 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 Credit Facility is paid
in full within two years.
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, and the loan restricts payment of
common stock dividends.
16. Geographic Data
Revenues and operating profit (loss) from continuing operations and
identifiable assets by geographic area were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------------- ---------------- ---------------
<S> <C> <C> <C>
Revenues
United States $26,000,000 $32,939,000 $34,530,000
Europe 7,213,000 10,353,000 8,702,000
--------------- ---------------- --------------
$33,213,000 $43,292,000 $43,232,000
=============== ================= ==============
Operating Profit (loss)
United States $1,392,000 ($15,550,000) $2,511,000
Europe (1,208,000) 1,830,000 2,539,000
-------------- ---------------- --------------
$184,000 ($13,720,000) $5,050,000
============== ================ ==============
Identifiable Assets
United States $73,755,000 $81,529,000
Europe 15,557,000 17,670,000
--------------- ----------------
$89,312,000 $99,199,000
=============== ================
</TABLE>
<PAGE>
SPICE ENTERTAINMENT COMPANIES, INC. and SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Page
Schedule: Numbers(s)
II. Valuation and Qualifying Accounts
and Reserves F-30
All other schedules are omitted since the required information is not
present or is not presented in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements.
<PAGE>
SCHEDULE II
SPICE ENTERTAINMENT COMPANIES, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
for the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
Balance at Charged to
Beginning of Costs and Balance End
Description Period Expenses Deductions of Period
--------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Fiscal year ended December 31, 1996
Allowance for Doubtful Accounts $ 1,178,000 $ 832,000 $ 274,000 $ 1,736,000
-------------- -------------- -------------- ---------------
$ 1,178,000 $ 832,000 $ 274,000 $ 1,736,000
=============== ============== ============== ===============
Fiscal year ended December 31, 1995
Allowance for Doubtful Accounts $ 331,000 $ 926,000 $ 79,000 $ 1,178,000
-------------- ------------- -------------- --------------
$ 331,000 $ 926,000 $ 79,000 $ 1,178,000
============== ============== ============== ==============
Fiscal year ended December 31, 1994
Allowance for Doubtful Accounts $ 244,000 $ 98,000 $ 11,000 $ 331,000
--------------- -------------- -------------- --------------
$ 244,000 $ 98,000 $ 11,000 $ 331,000
=============== ============== ============== ===============
</TABLE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement of
Spice Entertainment Companies, Inc. and Subsidiaries, (formerly Graff Pay-Per-
View Inc.) on Form S-3 (File Nos. 33-80824, 33-82806, and 33-93534) of our
report, based in part on the report of other auditors dated March 8, 1996 and
April 3, 1996, respectively, on our audits of the consolidated financial
statements and financial statements Schedule II of Spice Entertainment
Companies, Inc. as of December 31, 1995, and for the two years in the period
ended December 31, 1995, which report is included in this Annual Report on
Form 10-K.
COOPERS & LYBRAND L.L.P.
New York, New York
April 15, 1997
