SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(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,
through agreements with NetHold Electronic Media, B.V., United Philips Cable,
Metromedia International Telecommunications and others, has distribution
throughout Europe and the networks are 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 on the Spice Networks. It also operates
CyberSpice, the Company's adult Internet website. Spice Direct, in a joint
venture with the 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 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 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.
<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 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 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, and 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 one year 24
picture production agreements which expire 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 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, which are
manufactured by General Instrument ("GI") 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 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 percent 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.
<PAGE>
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.
<PAGE>
<TABLE>
<CAPTION>
High Low
1995
<S> <C> <C>
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
</TABLE>
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 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
============== ============== ============== ============== ===============
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 1,025,000
-------------- -------------- -------------- -------------- ---------------
Long-term debt and obligations
under capital leases less current portion 68,411,000 71,311,000 1,049,000 1,608,000 1,303,000
-------------- -------------- -------------- -------------- ---------------
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 periods 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 AT&T. 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 (45.8%) 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 (6.1%). 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 (5.4%) for the year ended December 31, 1995. 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 (31.0%) in the year ended December 31, 1995. 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.
The bad debt expense increased by approximately $0.9 million in 1995.
The increase is primarily attributable to a provision for doubtful account 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 has informed the Company that it is
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 (78.5%) 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 (205.7%) 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 CD-ROM costs.
Net cash used in investing activities in 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 and Imperial Bank in 1995 as compared to 1994.
Offsetting the increase in cash from PNC and Imperial borrowings was a
reduction of proceeds from the issuance of common stock and warrants, a capital
contribution in 1994 related to the AEC merger as well as an increase of loans
related to parties in 1995 as compared to a decrease in 1994.
Item 8. Financial Statements and Supplementary Data
The information required by this Item is included at Pages F-1
through F-34.
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 Ladbrook 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 Compensation1
Principal Position Year ($) ($) ($) (#) ($)
- - ---------------------------- -------- --------- ----------- ------------ -------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
J. Roger Faherty 1996 358,077 44,071 1 38,500 5 14,463
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
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 31,793
International
Steve Saril 1996 200,000 2 70,000 10 2,375
Director, Senior Vice 1995 193,462 345,000 4 70,000 11 2,200
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 1,500
Senior Vice President, 1995 142,500 233,000 4 20,000 15 750
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 in 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, 1996 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 two 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 option 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>
1) 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.
2) 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.
3) The options granted to Mr. Spector were canceled on February 7, 1997
pursuant to the SEG Settlement Agreement.
4) These options were granted on January 25, 1996 in lieu of a cash raise
for 1996.
5) 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, 1994.
<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)(16) 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 4,741 shares issuable upon exercise of options.
(16) 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 R. ERICSON Director April 15, 1997
- - --------------------
Dean R. Ericson
/s/ STEVE SARIL Director April 15, 1997
- - ---------------
Steve Saril
/s/ RUDY R. MILLER Director April 15, 1997
- - --------------------
Rudy R. Miller
/s/ R. CHRISTOPHER 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>
<TABLE>
SPICE ENTERTAINMENT COMPANIES, INC.
Peer Group Cumulative Total Return
(Weighted Average by Market Value)
% Peer Group;
<CAPTION>
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>
<TABLE>
Exhibit 11.01
SPICE ENTERTAINMENT COMPANIES and SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER SHARE
<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. (formerly Graff
Pay-Per-View Inc.) and Subsidiaries (the "Company") for the years ended December
31, 1995 and 1994. These financial statements and financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and 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, which statements reflect
15% of consolidated assets as of December 31, 1994, and 15% of consolidated
revenues for December 31, 1994. This statements were audited by other auditors,
whose report, which has been furnished to us, includes an emphasis of a matter
paragraph that describes the subsidiaries extensive transactions and
relationships with related parties, and in our opinion, insofar as it relates to
the amounts included for Spector Entertainment Group, Inc. is based solely on
the report of the other auditor.
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, in 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 auditor,
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 1994, 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
auditor, 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 and paragraph (a) and (e) of
Note 6 as to which the dates are April 3, 1996, March 29, 1996 and April 10,
1996, respectively.
<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,
Year Ended 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 adjustment 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
------------- ------------- -------------
Net (loss) income 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)
============= ============= =============
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
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>
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, 5 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 the United States and the United Kingdom cable
operators, 19.4% of total revenue was from the DBS and DTH markets and 12.6% of
the 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 had 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. 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).
<PAGE>
SPICE ENTERTAINMENT COMPANIES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
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 first 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,
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 24% 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, transportation and other 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 are
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 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 and television programs (Note 14).
6. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------------
Useful Lives in Years 1996 1995
----------------------- ------------- -------------
<S> <C> <C> <C>
Satellite transponders 12 $58,663,000 $58,663,000
Equipment 5 9,716,000 7,615,000
Furniture and fixtures 7 505,000
510,000
Leasehold improvements Life of lease or 2,483,000
shorter 2,564,000
------------- -------------
71,453.000 69,266,000
Less, accumulated depreciation and 2,710,000
amortization 9,505,000
============= =============
$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 9,500,000
====================
Total $ 11,347,000
</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:
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
===================
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, which 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
resulted in the lease being accounted for as an operating lease (Note 15).
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.
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. ("CPV") 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 to CPV and Coastline Films 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:
Warrants
------------------------------------
Exercise Price
Shares Range
--------------- ------------------
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
===============
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 options, 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
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 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
--------------------------- --------------------------
Net loss
<S> <C> <C>
As reported ($7,900,000) ($15,126,000)
Pro forma (9,748,000) (18,283,000)
Loss per share
As reported (.70) (1.29)
Pro forma (.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 expenses 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:
Options
---------------------------------------
Stock Options Weighted-average
Outstanding exercise price
--------------- --------------------
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
===============
The following table summarizes information concerning currently
outstanding and exercisable stock options:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------- ---------------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding at Remaining Average Exercisable at Average
Ranges of December 31, Contractual Life Exercise December 31, Exercise
Exercise Prices 1996 Price 1996 Price
- - ------------------- ---------------- ----------------- -------------- ---------------- -------------
<S> <C> <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
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.
</TABLE>
<PAGE>
10. Income Taxes
The components of income tax expense (benefit) follow:
<TABLE>
<CAPTION>
Years Ended
--------------------------------------------------------
1996 1995 1994
---------------- ---------------- ----------------
Current
<S> <C> <C> <C>
Federal $ 89,000 ($423,000) $351,000
State and Local 50,000 240,000 154,000
Foreign 53,000 850,000 793,000
---------------- ---------------- ----------------
192,000 667,000 1,298,000
---------------- ---------------- ----------------
Deferred
Federal
State and Local
- -
---------------- ---------------- ----------------
Total Income Taxes
$ 192,000 $ 667,000 $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
-------------------------------------
1996 1995 1994
---------- --------- ----------
<S> <C> <C> <C>
Income tax provision (benefit) at federal statutory (34%) (34%) 34%
rate
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% 1%
(Decrease) increase due to the change in the valuation
allowance 14% 22% (13%)
Other items 1% 3% (5%)
========= ========== ==========
Effective tax rate (4%) (5%) 25%
</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>
Years Ended
---------------------------------
1996 1995
--------------- --------------
Deferred tax assets
<S> <C> <C>
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>
<PAGE>
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 year ended December 31, 1996, 1995 and 1994 amounted to
$11,000, $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>
Years Ending Office Satellite
December 31 Total Facilities and Transponder
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 are 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 401K 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 firs
4% of compensation. For the years ended December 31, 1995 and 1994, the Company
incurred a 401K contribution expense of approximately $42,000 and $19,000,
respectively. The Company 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
---------------- ----------------- ----------------
Corporate
<S> <C> <C> <C>
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 Loral Skynet ("Loral") (which
acquired AT&T's satellite business) losing contact with and declaring Telstar
401 permanently out of service, one of the Company's unprotected transponders on
Telstar 402R was preempted by Loral and transferred to another Loral customer.
This action has resulted in the permanent reduction of the Company's satellite
transponder costs with Loral 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 the month of January, 1997.
On March 31, 1997, the Company amended the terms of the satellite
transponder lease with Loral. 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 an 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 percent 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, operating profits (loss) and identifiable assets by
geographic area were as follows:
1996 1995 1994
--------------- ---------------- ---------------
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 Profits (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
=============== ================
<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-31
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>
<TABLE>
<CAPTION>
SCHEDULE II
SPICE ENTERTAINMENT COMPANIES, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
for the years ended December 31, 1996, 1995 and 1994
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Balance at Additions
Beginning of Charged to Balance End
Period Costs and of Period
Description Expenses Deductions
--------------- -------------- -------------- ---------------
<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>
CERTIFICATE OF INCORPORATION
OF
GRAFF PAY-PER-VIEW INC.
The undersigned, a natural person, for the purpose of organizing a
corporation for conducting the business and promoting the purposes hereinafter
stated, under the provisions and subject to the requirements of the laws of the
State of Delaware (particularly Chapter 1, Title of the Delaware Code and the
acts amendatory thereof and supplemental thereto, and known, identified and
referred to as the "General Corporation Law of the State of Delaware") hereby
certifies that:
FIRST: The name of this corporation (hereinafter called the
"Corporation") is GRAFF PAY-PER-VIEW INC.
SECOND: The address, including street, number, city and county of the
registered office of the Corporation in the State of Delaware is 15 North
Street, City of Dover, County of Kent (zip code 19901) and the name of the
registered agent of the corporation in the State of Delaware at such address is
National Corporate Research, Ltd.
THIRD: The nature of the business and of the purposes to be conducted
and promoted by the Corporation are to conduct any lawful business, to promote
any lawful purpose, and to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of the State of
Delaware.
FOURTH: The total number of shares of all classes of stock that the
Corporation shall have authority to issue is 35,000,000 of which 10,000,000
shall be Preferred Stock, par value $.01 per share ("Preferred Stock"), and
25,000,000 shall be Common Stock, par value $.01 per share ("Common Stock"), and
the voting powers, designations, preferences and relative, participating,
optional or other special qualifications, limitations or restrictions thereof
are as follows:
1. Preferred Stock
(a) The Preferred Stock may be issued from time to time in one
or more series, each of which shall be distinctively designated, shall rank
equally and shall be identical in all respects, except as otherwise provided in
subsection 1(b) of this Article FOURTH.
(b) Authority is hereby vested in the Board of Directors to
issue from to time the Preferred Stock of any series and to state in the
resolution or resolutions providing for the issue of shares of any series the
voting powers, if any, designations, preferences and relative, participating,
optional or other special rights, and the qualifications, limitations or
restrictions of such series to the full extent now or hereafter permitted by the
law of the State of Delaware in respect of the matters set forth in the
following clauses (i) to (viii) inclusive:
(i) the number of shares to constitute such series, and
the distinctive designations thereof;
(ii) the voting powers, full or limited, if any, of such
series; (iii) the rate of dividends payable on shares of such
series, the conditions on which
and the times when such dividends are payable, the preferences to, or the
relation to, the payment of the dividends payable on any other class, classes or
series of stock whether cumulative or non-cumulative and, if cumulative, the
date from which dividends on shares of such series shall be cumulative;
(iv) the redemption price or prices, if any, and the
terms and conditions on which shares of such series shall be redeemable;
(v) the requirement of any sinking fund or funds to be applied
to the purchase or redemption of shares of such series and, if so, the amount of
such fund or funds and the manner of application;
(vi) the rights of shares of such series upon
the liquidation, dissolution or winding up of, or upon any distribution of
the assets of, the Corporation;
(vii) the rights, if any, of the holders of shares of such
series to convert such shares into, or to exchange such shares for, shares of
any other class, classes or series of stock and the price or prices or the rates
of exchange and the adjustments at which such shares shall be convertible or
exchangeable, and any other terms and conditions of such conversion or exchange;
(viii) any other preferences and relative, participating,
optional or other special rights of shares of such series, and qualifications,
limitations or restrictions including, without limitation, any restriction on an
increase in the number of shares of any series theretofore authorized and any
qualifications, limitations or restrictions of rights or powers to which shares
of any future series shall be subject.
(c) The number of authorized shares of Preferred Stock may be
increased or decreased by the affirmative vote of the owners of a majority of
the stock of the Corporation that is entitled to vote, without a class vote of
the Preferred Stock, or any series thereof, except as otherwise provided in the
resolution or resolutions fixing the voting rights of any series of the
Preferred Stock.
FIFTH: The name and mailing address of the incorporator is as
follows:
Karen S. Lieberstein
DORNBUSH MENSCH MANDELSTAM &
SCHAEFFER
747 Third Avenue
New York, New York 10017
SIXTH: The corporation is to have perpetual existence.
SEVENTH: Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 279 of Title 8 of the Delaware Code order a meeting of
the creditors or class of creditors, and/or of the stockholders or class of
stockholders of this Corporation, as the case may be, to be summoned in such
manner as the said court directs. If a majority in number representing
three-fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this Corporation as the case may be,
agree to any compromise or arrangement and to any reorganization of this
Corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of this Corporation, as the case may be, and also on this
Corporation.
EIGHTH: The original By-Laws of the Corporation shall be adopted by
the incorporator. Therefore, the power to make, alter, or repeal the By-Laws,
and to adopt any new By-Law, shall be vested in the Board of Directors.
NINTH: The Corporation shall, to the fullest extent permitted by
Section 145 of the General Corporation Law of the State of Delaware, as the same
may be amended and supplemented, or by an successor thereto, indemnify any and
all persons whom its shall have power to indemnify under said section from and
against any and all of the expenses, liabilities or other matters referred to in
or covered by said Section. The Corporation shall advance expenses to the
fullest extent permitted by such Section. Such right to indemnification shall
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of the heirs, executors and administrators
of such a person. The indemnification and advancement of expenses provided for
herein shall not be deemed exclusive of any other rights or which those seeking
indemnification may be entitled under any By-Law, arrangement, vote of
stockholders or disinterested directors or otherwise. To the fullest extent that
the General Corporation Law of the State of Delaware, as it exists on the date
hereof or as it may hereafter be amended, permits the limitation or elimination
of the liability of directors, no director shall be personally liable to the
Corporation or its stockholders for any monetary damages for breach of fiduciary
duty as a director. Notwithstanding the foregoing, a director shall be liable to
the extent provided by applicable law (i) for any breach of such director's duty
of loyalty to the Corporation or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the General Corporation Law of the State of
Delaware, or (iv) for any transaction from which such director derived an
improper personal benefit. Neither the amendment or repeal of this Article, now
the adoption or any provision of this Certificate of Incorporation inconsistent
with this Article shall adversely affect any right or protection existing under
this Article at the time of such amendment or repeal.
TENTH: The personal liability of the directors of the Corporation is
hereby eliminated to the fullest extent permitted by paragraph (7) of subsection
(b) of Section 102 of the General Corporation Law of the State of Delaware, as
the same may be amended and supplemented.
I, THE UNDERSIGNED, being the incorporator hereinbefore named, for the
purpose of forming a corporation pursuant to the General Corporation Law of the
State of Delaware, do make this certificate, hereby declaring and certifying
that this is my act and deed and the facts herein stated are true, and
accordingly have hereunto set my hand this 12th day of May, 1992.
/s/Karen S. Lieberstein
Karen S. Lieberstein, Incorporator
CERTIFICATE OF MERGER
MERGING
JERICAP, INC.
INTO
GRAFF PAY-PER-VIEW INC.
Graff Pay-Per-View Inc., a corporation organized and existing under
and by the virtue of the General Corporation Law of the State of Delaware, does
hereby certify as follows:
FIRST: The name and states of incorporation of each of the
constituent corporations are as follows:
Jericap, Inc.
a New York corporation
and
Graff Pay-Per-View Inc.
a Delaware corporation
SECOND: An Agreement and Plan of Merger dated as of May 7, 1992 has
been approved, adopted, certified, executed and acknowledged by each of the
constituent corporations in accordance with the requirements of Section 25(c)
of the Delaware General Corporation Law.
THIRD: Graff Pay-Per-View Inc. shall be the surviving corporation
and its name shall be unchanged.
FOURTH: The Certificate of Incorporation of Graff Pay-Per-View Inc.
shall be the Certificate of Incorporation for the surviving corporation.
FIFTH: A copy of the executed Agreement and Plan of Merger is on file
at the principal place of business of Graff Pay-Per-View Inc., 532 Broadway,
New York, New York 10012.
SIXTH: A copy of the Agreement and Plan of Merger will be furnished
by Graff Pay-Per-View Inc. on request and without cost to any stockholder of
any constituent corporation.
SEVENTH: The authorized capital stock of Jericap, Inc. is
120,000,000 shares of Common Stock, par value $.001.
IN WITNESS WHEREOF, Graff Pay-Per-View Inc. has caused this
Certificate to be signed by Mark Graff, its President, and attested by Leland
H. Nolan, its Secretary, on this 13th day of May, 1992.
ATTEST GRAFF PAY-PER-VIEW INC.
/s/ Leland H. Nolan By: /s/ Mark Graff
Leland H. Nolan Mark Graff, President
TELEPHONE SERVICES AGREEMENT
THIS AGREEMENT is made on October 20, 1995, by and between CAPITAL
DISTRIBUTION INC., a New York corporation d/b/a/CUPID NETWORK TELEVISION
("CNT"), with offices located at 1123 Broadway, Suite 902, New York, New York
10010 and SPICE, INC. ("Spice"), a New York corporation, with offices at 536
Broadway, 7th Floor, New York, New York 10012.
R E C I T A L S
A. Spice is engaged in the business of distributing multiple
television services featuring cable version adult movies. One service is
currently known as the Spice Service.
B. CNT produces the "Cupid" adult-oriented retail sale
programming segments,
. C. Simultaneously with the execution hereof, Spice and CNT are entering into a
Amended and Restated Distribution Agreement (the "Distribution Agreement") which
restates and amends in its entirety the prior Distribution Agreement between the
parties dated August 11, 1994 (the "Original Distribution Agreement") and which
provides for the exhibition of the Cupid segments on the Spice Service and which
grants Spice the right to distribute the Cupid segments on an exclusive basis on
the Spice Services.
D. Prior to the execution of the Original Distribution Agreement, Spice
operated telephone "chat lines" which Spice promoted on the Spice Service.
Pursuant to an Addendum to the Original Distribution Agreement (the
"Addendum")(copy attached as Exhibit A), Spice transferred administration and
the economic benefit of the chat lines to the Amtech service bureau then
utilized by CNT in exchange for a fee equal to 50% of Gross Sales (as such term
was defined in the Addendum). As part of such arrangement, CNT was obligated to
produce promotional spots for the Chat Lines and each party was responsible for
half of such cost.
E. The parties have agreed to revise the Original distribution
Agreement and the Addendum. Simultaneously with the execution hereof, the
parties are executing an Amended and Restated Distribution Agreement and this
Agreement which amends and restates Addendum in its entirety.
NOW, THEREFORE, in consideration of the mutual promises contained
herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
1. DEFINITIONS. As used in this Agreement, the following
terms have the following respective meanings:
1.1 "Applicable Spice Subscriber Count" shall mean the number
homes or other dwelling units (including a private residential apartment,
condominium, mobile home or house) capable of receiving, as a result of being
equipped with addressable decoders or IRD's, the Spice Service via cable or
wireless television, high power KU band direct broadcast services such as
DirecTV, Primestar, Alphastar or any other similar means now existing or
hereinafter developed and the number of monthly Spice subscribers in the C band
direct to home to home market but excluding all other homes in the C-Band direct
to home market, as determined on the last day of the month preceding the month
for which the Spice Fee (as defined in Section 6.2) is being determined. For
example and in clarification of the foregoing, the July, 1995 Spice Fee shall be
based on the Applicable Subscriber Count determined on June 30, 1995 as set
forth by way of illustration in the invoice attached as Exhibit 1.
1.2 "Chat Lines" shall mean all telephone "chat lines"
advertised on the Spice Service.
1.3 "Chat Line Spots" shall mean the advertisements produced
by or for Spice as provided for in Section 3 hereof and which promote the Chat
Lines and have a length of between 30 seconds and five minutes and which will be
exhibited on the Spice Service as provided for herein.
1.4 "Cupid Segments" means CNT's adult-oriented programming
segments for sales of Cupid Goods and which is comprised of the Segments.
1.5 "Event" means a motion picture, production or
other event exhibited on the Spice Service.
1.6 "Interstitial Time" shall mean the time between the end of
an Event and the beginning of the next Event on the Spice Service which shall
average, on a monthly basis of approximately 18 to 20 minutes for each 90 minute
programming block containing an Event and which programming block commences
approximately two minutes before an Event.
1.7 "Spice Service" means Spice's single channel adult
entertainment programming service, currently transmitted via Anik E-2 and
including any successor adult entertainment programming service which is Spice's
premiere or first adult service (as represented and covenanted to in Sections
10.1 and featuring 11.1 featuring11.1 and whether or not using the "Spice" name)
and transmitted via satellite or any other means currently existing or
hereinafter developed and which currently features one (1) Event (and time
permitting, various interstitial programming) and including any future and
currently programmed in ninety (90) minute blocks, twenty-four (24) hours per
day seven (7) days per week.
2. ADMINISTRATION.
2.1 Throughout the term hereof, CNT, exclusively, shall
administer the Chat Lines. The parties acknowledge that the Amtech service
bureau is the service bureau currently utilized by CNT to administer the Chat
Lines until replaced by CNT in its sole discretion, subject to the provisions of
Sections 2.2 or 2.3.
2.2 CNT shall, at CNT's sole cost and expense, be solely
responsible for all of the following: (i) maintaining the Chat Lines and (ii)
all service bureau fees. CNT shall use its reasonable efforts to insure that the
service bureau engaged by CNT, provided first quality services comparable to
other adult telephone chat lines. CNT acknowledges that Spice will be monitoring
the Chat Lines for quality and service and CNT agrees to use its reasonable
efforts to cause implementation of suggestions made by Spice for improvement of
the Chat Line services.
2.3 CNT shall administer or cause the Chat Lines to be
administered in compliance with applicable rules and regulations and in a manner
which will not have a material adverse affect on Spice's business or reputation
as result of unfair or deceptive practices committed by CNT or by Amtech or any
successor service bureau engaged by CNT, provided that if Amtech or any service
bureau utilized by CNT is determined by Spice to be violating the provisions of
this Section 2.3, CNT shall terminate such service bureau within 5 days of
notice and shall have 60 days to locate and engage a replacement service bureau.
3. PRODUCTION OF CHAT LINE SPOTS.
3.1 Spice shall produce or cause others (which may include
CNT, in Spice's sole discretion) to produce Chat Line Spots and shall be
responsible for the production costs thereof. Spice agrees to produce a minimum
of eight approximately five minute Chat Line Spots per month, each to be cut
down to at least four shorter elements per Chat Line Spot until Spice has
established a library of no less than 120 Chat Line Spots. Thereafter, Spice
will produce at least 10 new Chat Line Spots (two spots of approximately five
minute cut down to at least four shorter spots) every 3 months.
3.2 Spice shall have primary authority over the content and
production of the Chat Line Spots. Spice shall provide proposed scripts of the
Chat Line Spots to CNT at least 10 days prior to their being shot and provide
screeners at least 20 days prior to the Chat Line Spots being aired for the
first time for CNT's comments and suggestions. Spice and CNT agree to cooperate
to reflect as many of CNT's comments and suggestions as are practicable. CNT
shall have the right to designate the 800 telephone numbers which appear in the
Chat Line Spots.
3.3 If the average revenue per Spice Subscriber generated by
CNT from the Chat Line Spots diminishes by more than 25% of the level from the
corresponding month from the prior year and CNT reasonably believes such
reduction is attributable to the content or quality of the Chat Line Spots, CNT
shall have the option to either (a) require Spice to permit CNT to produce the
Chat Line Spots provided (i) Spice's costs for the CNT produced Chat Line Spots
are comparable to Spice's costs of having the Chat Line Spots produced by third
parties and (ii) the on-air look and quality of the CNT produced Chat Line Spots
is comparable or better than the Chat Line Spots previously aired by Spice
and/or (b) direct which Chat Line Spots from Spice's library of Chat Line Spots
it wishes Spice to air.
3.4 All CNT produced Chat Line Spots delivered to Spice on or
prior to July 24, 1995 shall be at no charge to Spice and may be aired, in
Spice's sole discretion on the Spice Service. The parties acknowledge that it is
Spice's intention to replace the CNT produced Chat Line Spots with Chat Line
Spots produced by or for Spice at its direction as provided for herein.
4. SCHEDULING.
4.1 As used herein, the term "Featurette Time" means for each
month, with respect to the Spice Service on average approximately two-thirds of
the Interstitial Time.
4.2 Except as otherwise provided for herein, Spice shall
schedule and air the Chat Line Spots during the Featurette Time between each
Event on the Spice Service. Spice represents and warrants that the average
Featurette Time, on a monthly basis, will be no less than 20 minutes and Chat
Line Spots will be aired, on a monthly basis, an average of approximately 50% of
the Featurette Time. Within the foregoing parameters, the scheduling of Chat
Line Spots during the Interstitial Time shall be at Spice's sole discretion
provided, however, that CNT shall have the right to request that Spice air
certain of the Chat Line Spots based on revenues generated therefrom; Spice's
compliance with such requests shall not be unreasonably withheld. Spice
acknowledges that CNT would prefer that a Chat Line Spot be scheduled
immediately before and immediately after an Event. Spice agrees not to broadcast
anything other than Chat Line Spots during such time other than, in its
reasonable discretion, materials promoting the Spice Service.
5. FEE AND STUDIO USAGE.
5.1 Commencing July 1, 1995, CNT shall pay to Spice a fee (the
"Spice Fee") equal to $.011 multiplied by the Applicable Spice Subscriber Count.
The Spice Fee shall be paid as provided for in Sections 6.1 and 6.2.
5.2 If during the term of this Agreement, the number of
subscribers (determined in accordance with the principles used to determine the
Applicable Spice Subscriber Count) to adult programming services owned and
distributed by Spice (or an affiliate thereof operating in North America) other
than the Spice Service is greater than 30% of the Applicable Subscriber Count
for the Spice Service, the parties agree to renegotiate, in good faith, a
downward adjustment in the rate per subscriber used to determine the Spice Fee.
Prior to the commencement of any renegotiation as provided for herein, CNT shall
provide to Spice reports detailing the previous twelve months of calls and
revenues generated from the Chat Lines, including a breakdown of 800 and 900
calls (allocated on a consistent basis which if CNT determines to invoke this
provision, Spice shall have the right to review such allocation and audit the
900 revenue numbers) and such other information as Spice may reasonably request.
5.3 If during the term of this Agreement, the average gross
monthly revenues per subscriber derived by CNT from operation of the Chat Lines
for any three month period is less than 70% or more than 130% of the average
gross monthly revenues per subscriber from the corresponding three months from
the prior year, the parties agree to renegotiate, in good faith, the rate per
subscriber used to determine the Spice Fee. For example if the average monthly
revenues per subscriber for July, August and September of 1994 was $1.00, CNT
would be entitled to renegotiate the Spice Fee if the average gross monthly
revenues for July, August and September of 1995 were less than $.70 and Spice
would be entitled to renegotiate the Spice Fee if the average gross monthly
revenues for July, August and September of 1995 were more than $1.30. CNT shall
not be entitled to trigger a renegotiation of the Spice Fee unless CNT has
provided Spice with monthly reports of its revenues from both 800 and 900
numbers within 15 days of the end of each month in both such three month
periods.
5.4 Twelve times a year, approximately once a month, CNT will
make available its studios to Spice for its use at no charge. Spice and CNT
shall cooperate to schedule such usage on a mutually agreeable day. CNT will
provide the studio to Spice with three cameras, director of photography,
technical director, character generator, audio, make-up and appropriate crew and
CNT provided talent. If CNT cannot provide studio usage to Spice for a
particular month or scheduled time, CNT shall either provide a replacement
studio or pay Spice $5,000.
6. PAYMENT; STATEMENTS AND AUDIT.
6.1 Commencing July 1995, no later than 20 days after the end
of each month, Spice shall provide to CNT an invoice ("Invoice") detailing the
calculation of the Applicable Spice Subscriber Count and the Spice Fee.
6.2 CNT shall remit to Spice the Spice Fee the later of
thirty (30) days after each calendar month or ten (10) days after CNT
receives the Invoice from Spice.
6.3 Spice shall keep and maintain, at Spice's principal place of
business, complete and accurate books and records relating to the calculation of
the Applicable Spice Subscriber Count by cable system, C-Band direct to home
subscribers and KU Band DBS distributors. During the term of this Agreement and
for two years thereafter, at CNT's expense, CNT by its representatives,
accountants and/or designated agents shall have the right, at Spice's office and
during regular business hours, to audit and check Spice's books and records for
the purpose of verifying and confirming the accuracy of the Invoices delivered
to CNT by Spice and the amount of the Spice Fees paid or payable under this
Agreement.
7. TERM.
7.1 The term of this Agreement shall become effective as of
July 1, 1995 and the Addendum shall be superseded on such date. The term shall
continue until October 30, 2000, unless sooner terminated as provided herein. As
used herein, "Term" means the period which commences on August 11, 1994 and ends
on the date on which this Agreement is terminated. If (i) the Agreement is in
effect at the end of the scheduled five (5) year Term, (ii) there have be no
material breaches of the Agreement which have remained uncured and (iii) Spice
plans to continue the Chat Lines and to broadcast Chat Line Spots on the Spice
Service in the future, Spice (or an affiliate operating in North America) will
grant CNT a right of first refusal and a right of last offer to continue to
provide administration of the Chat Lines on the Spice Service on terms
competitive with that offered by any bona fide third party with experience in
the business of administering chat lines in accordance with Section 7.2.
7.2 By no later than July 31, 2000, Spice shall give CNT
notice of its intention whether it plans to continue to offer Chat Lines Spots
on the Spice Service. If it does, CNT shall have up to 60 days to make an offer
(the "CNT Offer") to Spice to provide such services and the essential economic
terms thereof. Spice shall then have up to 60 days to obtain bona fide bids from
third parties with experience in the telephone services business. If any such
bids contain more favorable economic terms than the CNT Offer, Spice shall give
CNT notice within such 60 day period of such competing bid(s) specifying the
terms thereof and the identity of the third party(ies) (the most favorable of
such bids is referred to as the "Competing Bid"). CNT shall have 30 days from
its receipt of the Competing Bid to elect to match the Competing Bid in which
event CNT and Spice will enter into an agreement on terms and conditions
consistent with the Competing Bid. If CNT elects not to match the Competing Bid,
Spice shall be free to enter into a telephone services agreement with the third
party providing the Competing Bid provided such agreement contains economic
terms which are consistent with the Competing Bid and such other terms and
provisions as are customary and typical for such agreements.
8. CUSTOMER LISTS.
CNT shall download on a monthly basis, a list of all customers
telephone numbers (including no more than four times a year, customer names and
other pertinent information) ("Customer Lists") using the Chat Lines (including
customers using the 900 telephone number for non-credit card calls who shall be
reported on the list by virtue of calling an 800 number). Spice may use the
Customer List for statistical purposes as a matter of right, and for any purpose
other than soliciting such customers for any service, merchandise or product
sales which would be competitive with the business conducted by CNT as described
herein or in the Distribution Agreement with CNT's prior consent, which consent
will not be unreasonably withheld. Spice acknowledges and agrees that (i) the
Customer List is owned by CNT and (ii) it will not use the Customer List in any
manner other than as specifically permitted herein.
9. REPRESENTATIONS AND WARRANTIES OF CNT. CNT represents and
warrants to Spice as follows:
9.1 CNT is a corporation duly organized, validly existing and
in good standing under the laws of the State of New York and has all requisite
corporate power and authority to own and use its properties and assets and to
conduct its business as and where such properties and assets are now owned or
used and such business is now conducted. CNT is duly qualified and in good
standing to do business as a foreign corporation in every jurisdiction where
such qualification is necessary.
9.2 CNT has full power and authority to enter into this
Agreement and to consummate the transactions contemplated hereby. This Agreement
and all transactions contemplated hereby and any documents to be delivered by
CNT pursuant hereto have been duly authorized by all requisite corporate action
of CNT and constitute the legal, valid and binding obligations of CNT,
enforceable in accordance with their terms.
9.3 The execution, delivery, and performance of this Agreement
and of all other documents to be delivered by CNT and the consummation of the
transactions contemplated hereby will not violate the Certificate of
Incorporation or bylaws of CNT and will not, with or without the giving of
notice or the passage of time or both, effect a breach or default of, or cause
an event of default under, any mortgage, agreement, instrument, statute,
regulation, order, judgment or decree to which CNT is a party or by which CNT is
bound or affected.
9.4 There are no claims, suits, actions or proceedings
pending, or to CNT's knowledge threatened, against CNT in connection with or
relating to or which could have an effect on the transactions contemplated by
this Agreement.
10. REPRESENTATIONS AND WARRANTIES OF SPICE. Spice represents
and warrants to CNT as follows:
10.1 Spice is a corporation duly organized, validly existing
and in good standing under the laws of the State of New York and has all
requisite corporate power and authority to own and use its properties and assets
and to conduct its business as and where such properties and assets are now
owned or used and such business is now conducted. Spice is duly qualified and in
good standing to do business as a foreign corporation in every jurisdiction
where such qualification is necessary.
10.2 Spice has full power and authority to enter into this
Agreement and to consummate the transactions contemplated hereby. This Agreement
and all transactions contemplated hereby and any documents to be delivered by
Spice pursuant hereto have been duly authorized by all requisite corporate
action of Spice and constitute the legal, valid and binding obligations of
Spice, enforceable in accordance with their terms.
10.3 The execution, delivery, and performance of this
Agreement and of all other documents to be delivered by Spice and the
consummation of the transactions contemplated hereby will not violate the
Certificate of Incorporation or bylaws of Spice and will not, with or without
the giving of notice or the passage of time or both, effect a breach or default
of, or cause an event of default under, any mortgage, agreement, instrument,
statute, regulation, order, judgment or decree to which Spice is a party or by
which Spice it is bound or affected.
10.4 There are no claims, suits, actions or proceedings
pending, or to Spice's knowledge threatened, against Spice in connection with or
relating to or which could have an effect on the transactions contemplated by
this Agreement.
10.5 That if a cable system or DBS distributor distributes
only one Spice service, that service will be the Spice Service.
11. SPICE COVENANTS.
11.1 Spice covenants that the Spice Service will be the first
Spice (or any Spice affiliate operating in North America) owned, operated and
distributed adult service distributed in each cable and DBS system and the last
Spice owned, operated and distributed adult service remaining in each cable
system or DBS system.
11.2 Spice agrees that it will not advertise or otherwise
promote any chat line services of the type contemplated by this Agreement other
than the Chat Lines on the Spice Service.
12. EVENTS OF DEFAULT. The occurrence of any of the
following events shall constitute, and is hereby defined to be, an "Event of
Default":
12.1 With respect to CNT, (i) the failure to pay the Spice Fee
when due, (ii) the material failure to comply with the provisions of Section
5.4, (iii) the administration of the Chat Lines in a manner which violates the
provisions of Section 2.3, or (iv) the failure to supply Spice with the Customer
List as provided for in Section 8.
12.2 With respect to Spice, (i) the failure to produce or
cause to be produced the Chat Line Spots as provided for in Section 3, (ii) the
failure to broadcast the Chat Line Spots in accordance with Section 4.2 (iii)
the violation of either Section 11.1 or 11.2.
12.3 The material failure of either party (the "Obligated
Party") to punctually and faithfully observe or perform any of the covenants,
conditions or obligations imposed upon Obligated Party by this Agreement.
Agreement.
12.4 The material falsity of any representation or
warranty of the Obligated Party contained in this Agreement.
12.5 The termination of the Distribution Agreement as a
result of the uncured breach thereof by CNT.
12.6 The assignment for the benefit of creditors by the
Obligated Party or the commencement of a case under Title 11 of the United
States Code (Bankruptcy) by or against the Obligated Party, provided that in the
case of a bankruptcy case filed against the Obligated Party, an Event of Default
shall not be deemed to occur if the case is vacated within thirty (30) days
after the filing thereof.
12.7 The appointment of a receiver, trustee or custodian for
or over the Obligated Party or any of the Obligated Party's property not vacated
within ten (10) days thereafter.
12.8 The termination of existence or cessation of
business of the Obligated Party.
13. REMEDIES. If an Event of Default occurs, then the party which is
not is default (the "Non-Defaulting Party") shall have all of the rights and
remedies hereinafter provided. Notwithstanding the foregoing, if the Event of
Default is an event described in Section 12.1, 12.2, 12.3 or 12.4, then (i)
Non-Defaulting Party shall give written notice (the "Default Notice") thereof to
the Obligated Party, (ii) Obligated Party shall have twenty (20) business days
after the Default Notice is given to cure or remedy such Event of Default and
(iii) Non-Defaulting Party shall not exercise any of the rights and remedies
herein provided if Obligated Party has fully cured or remedied such Event of
Default by the expiration of such 20-business day grace period.
13.1 Non-Defaulting Party may, at Non-Defaulting Party's
option, terminate this Agreement.
13.2 Non-Defaulting Party may pursue any legal or equitable
remedy available to collect all sums owing from Obligated Party to
Non-Defaulting Party and to enforce any and all other rights or remedies
available to Non-Defaulting Party, and no such action shall operate as a waiver
of any other right or remedy of the Non-Non-Defaulting Party under the terms
hereof, or under the laws of the State of New York.
14. INDEMNIFICATIONS.
14.1 As used herein, the following terms shall have the
following meanings:
"CNT's Group" shall mean CNT, its subsidiary and
affiliated companies, Amtech, its officers, directors, employees and
shareholders, and its successors and assigns, and each of them.
"Spice's Group" shall mean Spice, its
subsidiary and affiliated companies, its officers, directors, employees
and shareholders, and its successors and assigns, and each of them.
14.2 CNT's Group shall, indemnify and hold
harmless Spice's Group from and against the following:
(a) Any damages, losses, obligations,
liabilities, claims, actions or causes of action sustained or suffered by
Spice's Group arising from or relating to any breach of any representation,
warranty, covenant or agreement made by CNT's Group in this Agreement, or in
any certificate, instrument or agreement delivered by CNT's Group pursuant
hereto or thereto or in connection with the transactions contemplated hereby
or thereby, or any facts or circumstances constituting such breach.
(b) Any damages, losses, obligations,
liabilities, claims, actions or causes of action sustained or suffered by
Spice's Group arising from or relating to the execution, delivery or
performance of this Agreement by CNT's Group.
(c) All reasonable costs and expenses
(including, without limitation, reasonable attorneys', accountants' and
other professional fees and expenses) incurred by the Spice's Group in
connection with any action, suit, proceeding, demand, assessment or judgment
incident to any of the matters indemnified against under subparagraphs (a)
and (b) immediately above.
14.3 Spice shall indemnify and hold harmless CNT's
Group from and against the following:
(a) Any damages, losses, obligations,
liabilities, claims, actions or causes of action sustained or suffered by
Spice's Group arising out of or relating to any breach of any representation,
warranty, covenant or agreement made by Spice in this Agreement, or in any
certificate, instrument or agreement delivered by any of such parties pursuant
hereto or thereto or in connection with the transactions contemplated hereby or
thereby or any facts or circumstances constituting such breach or as a result
of the content of the Chat Line Spots which are not produced by CNT.
(b) Any damages, losses, obligations,
liabilities, claims, actions or causes of action sustained or suffered by
CNT's Group arising out of or relating to Spice's execution, delivery or
performance of this Agreement.
(c) All reasonable costs and expenses
(including, without limitation, reasonable attorneys', accountants' and
other professional fees and expenses) incurred by CNT's Group, in connection
with any action, suit, proceeding, demand, assessment or judgment incident
to any of the matters indemnified against under subparagraphs (a) and (b)
immediately above.
14.4 The person(s) seeking indemnity under Paragraph 14.2 or
14.3 of this Section, as the case may be (hereinafter referred to as the
"Indemnitee") shall give written notice to the persons and/or entities from whom
or which such indemnity is sought hereunder (each and all of such persons and
entities being hereinafter referred to as the "Indemnitor") of any assertion of
liability by a third party which might give rise to a claim by the Indemnitee
against the Indemnitor based on the indemnity contained herein, stating the
nature and basis of said assertion and the amount thereof, to the extent known.
The defense of any suit, action, legal or
administrative proceeding that may be threatened, brought or instituted
against any Indemnitee on account of any matter which is or may be the subject
of the indemnity provided for herein shall be conducted at the sole expense of
the Indemnitor by legal counsel unilaterally selected and approved by the
Indemnitee.
The Indemnitee shall be kept fully informed of such action,
suit or proceeding at all stages thereof. The Indemnitor shall not make any
settlement of any claim without the prior written consent of the Indemnitee,
not to be unreasonably withheld, provided that if Indemnitor fails to undertake
the defense of such action, suit or proceeding, then Indemnitee may settle
such claim on such terms as the Indemnitee elects and Indemnitor shall be
deemed to have approved such settlement.
14.5 The remedies provided for in this Section shall be
cumulative and shall not preclude assertion by the Indemnitee of any other
rights or the seeking of any other remedies against the Indemnitor.
14.6 The provisions of this Section shall survive the
termination of this Agreement.
15. CONFIDENTIALITY.
15.1 Each party (each the "Responsible Party") hereto
acknowledges that in the course of performing the Responsible Party's
obligations under this Agreement, the Responsible Party will acquire or have
access to information and knowledge which relates to the other party and/or to
affiliate(s) of the other party (such other party and all affiliates of such
other party being hereinafter separately and collectively referred to as the
"Other Party"), and/or to the products, methods, billing practices and financial
condition of the Other Party. As used herein, the term "Confidential
Information" means any information which pertains in any way to the Other Party
and which is not generally known to the public or disclosed pursuant to a
requirement of a duly empowered government agency or court of competent
jurisdiction.
15.2 The Responsible Party agrees that with respect to the
Confidential Information, the Responsible Party will not at any time, without
the express written consent of the Other Party, disclose to any third party
whatsoever any Confidential Information.
15.3 Without limiting anything contained in the previous
provisions of this Section, neither party shall disclose to any third party the
terms and provisions of this Agreement.
15.4 Notwithstanding the foregoing, either party may, without
the consent of the other party, disclose the terms of the Agreement as may be
required by law to its attorneys, accountants, employees, agents or for any bona
fide business purpose, such as the requirements of banks, investment bankers and
creative personnel, on the condition that the recipient of any such disclosure
agrees to keep said terms confidential.
15.5 The provisions of this Section shall survive the
termination of this Agreement.
16. INSURANCE.
Each party, including any service bureau retained by CNT to
provide services hereunder, shall procure and maintain insurance policies with
respect to such party's products and services from a nationally recognized
insurance carrier in the United States and having limits of not less than $1
million per occurrence. CNT agrees within 30 days of the execution hereof to
cause such insurance to be procured naming Spice as a named insured under such
policies as Spice and CNT shall reasonably determine in good faith negotiations
are necessary.
17. TEST MARKET. Notwithstanding the provisions of Section 11.2 and any
other provision of this Agreement to the contrary, Spice shall be entitled on
one occasion to exhibit for no more than one minute of the Interstitial Time
during which Chat Line Spots and Segments are not exhibited, a psychic love line
or personals club (a "Trial Use") promoted by a third party for a period of 90
days (the "Trial Period"). Spice shall give CNT full and accurate reports
concerning revenues generated by the Trial Use during the Trial Period. At the
end of the Trial Period, Spice may either (i) terminate the Trial Use, (ii)
offer CNT the opportunity to promote its own use, (iii) or negotiate in good
faith with CNT for a either a percentage of Spice's share of the revenues from
the Trial Use or flat fee to permit spice to exhibit the Trial Use.
18. SEVERABILITY. If any term or provision of this Agreement or the
application thereof to any party or circumstance shall, to any extent, be
invalid and/or unenforceable, the remainder of this Agreement and the
application of such term of provision to any other party(ies) or circumstance(s)
other than those as to which it is held invalid and/or unenforceable, shall not
affected thereby, and each such other term and provision of this Agreement shall
be valid and be enforceable to the fullest extent permitted by law. Nothing
contained in this Agreement shall be construed so as to require the commission
of any act contrary to law, and wherever there is any statute, law, ordinance,
order or regulation contrary to which the parties have the legal right to
contract, the latter shall prevail. In such event any provision of this
Agreement which is affected shall be curtailed and limited only to the extent
necessary to bring it within the legal requirements and no other provision of
this Agreement shall be affected thereby and each such other provision shall
continue in full force and effect and shall be valid and enforceable to the
fullest extent permitted by law.
19. FURTHER DOCUMENTS. Each party shall promptly execute, acknowledge
and deliver to the other party, or promptly procure the execution,
acknowledgment and delivery to the other party, of any and all further
agreements and instruments which such party may deem necessary or expedient to
effectuate the purposes of this Agreement.
20. ARBITRATION. Any dispute or controversy arising under this
Agreement shall be determined by binding arbitration by, and under the
commercial rules (the "Commercial Rules") of, the American Arbitration
Association. Hearings on such arbitration shall be held in New York County
before one (1) arbitrator experienced in commercial law. The arbitrator shall
hear and determine any such controversy in accordance with applicable New York
law and the intention of the parties as expressed in this Agreement and upon the
evidence produced at the arbitration hearing. Pre-arbitration discovery shall be
permitted as authorized under the Commercial Rules or New York law applicable to
arbitration proceedings.
If the American Arbitration Association is not then in
existence or for any reason fails or refuses to act, the arbitration shall be in
conformity with and subject to the provisions of the New York Code of Civil
Procedure relating to arbitration as in effect at the time the notice or demand
for arbitration is given.
The entire cost and expense of arbitration shall be borne by
the losing party in the arbitration or in such manner as the arbitration may
apportion.
The decision of the arbitrator shall be binding upon the
parties and shall be subject to confirmation as a judgment under the then
governing statutes of the State of New York.
21. WAIVERS. No waiver by either party of any breach or
default hereunder shall be deemed to be a waiver of any preceding or
subsequent breach or default.
22. NOTICES. Any notice, request, demand, consent, waiver or other
communication which either party may wish to serve or may be required to serve
on the other party hereunder shall be served by personal delivery, by facsimile,
by prepaid recognized overnight air express delivery or by prepaid certified
mail, return receipt requested addressed to the appropriate party as follows:
(a) To CNT:
Capital Distribution Inc.
d/b/a Cupid Network Television
1123 Broadway, Suite 902
New York, New York 10010
Telephone: (212) 989-2879
Facsimile: (212) 989-3130
with a copy to:
Yerushalmi, Shiboleth, Yisraeli
& Roberts
350 Fifth Avenue, Suite 6011
New York, New York 10118-6096
Attn: Joseph Yerushalmi, Esq.
Telephone: (212) 244-2400
Facsimile: (212) 563-7108
(b) To Spice:
Spice, Inc.
536 Broadway, 7th Floor
New York, New York 10012
Attn: President
Telephone: (212) 941-1434
Facsimile: (212) 941-4746
All notice shall be deemed received: the same business day
delivered if personally delivered to the party to whom addressed; the same
business day transmitted if sent by facsimile (as evidenced by a copy of the
facsimile and the "answerback" thereto indicating the date and time of
transmission thereof to the receiving party); one (1) business day after the
same is delivered to the air express company or three (3) business days after
the same is deposited, postage paid in the United States Postal Service. Either
party may from time to time change its address or facsimile number for the
purpose of notice by giving like notice in accordance with this paragraph.
23. ASSIGNMENT AND SUCCESSORS. Neither party may assign this Agreement
without the prior written consent of the other party, which consent shall not be
unreasonably withheld or delayed. Notwithstanding the foregoing, either party
may assign this Agreement to a parent company, subsidiary or affiliate of such
party or an entity acquiring all or substantially all of such party's assets and
any such assignment shall discharge such party of liability hereunder. Any
purported assignment or delegation contrary to the foregoing shall be null and
void. Subject to the foregoing, this Agreement shall inure to the benefit of and
shall be binding upon the parties' parents, subsidiaries and affiliated
corporations, their agents, licensees, successors and assigns.
24. RELATIONSHIP OF THE PARTIES. Nothing herein contained shall be
deemed to constitute either of the parties a joint venturer or partner or agent
of the other. Neither party shall hold itself out contrary to the terms of this
Agreement and neither party shall become liable by reason of any representation,
act or omission of the other contrary to the provisions hereof.
25. APPLICABLE LAW. This Agreement shall be construed in accordance
with the laws of the State of New York (including the applicable statute of
limitations) applicable to agreements executed and wholly performed within such
State. The parties consent and agree to the exclusive jurisdiction of the State
and Federal courts having jurisdiction of the State and Federal courts having
jurisdiction over New York County, New York with respect to any action which any
party desires to commence arising out of or in connection with this Agreement or
any breach or alleged breach of any provision hereof.
26. PARAGRAPH HEADINGS. Paragraph headings are for convenience
only, and shall not effect, qualify or amplify the interpretation of this
Agreement.
27. BINDING EFFECT. This Agreement, and all rights and
obligations hereunder, shall be binding on and inure to the benefit of the
parties hereto and their respective heirs, executors, legal and personal
representatives, successors, licensees and assigns.
28. FORCE MAJEURE. Neither party shall be liable to the other for any
loss, damage or default occasioned by strike, civil disorder, governmental
decree or regulation, acts of God or any other force majeure beyond the control
of such party. If an event of force majeure lasts more than three (3) months,
either party may terminate this Agreement upon written notice to the other
party.
29. ATTORNEY'S FEES. In any arbitration or litigation between the
parties relating to this Agreement, the enforcement of any of its terms or to
any other contract relating to the subject matter of this Agreement, the
prevailing party shall, in addition to any other award of damages or other
remedy, be entitled to reasonable attorney's fees, costs and other expenses as
may be fixed by the Court.
30. ENTIRE AGREEMENT. This Agreement contains the full and
complete understanding between the parties hereto and supersedes all prior
understandings, whether written or oral including the Addendum and the
Original Distribution Agreement, and written agreement(s) pertaining to the
subject matter hereof.
31. AMENDMENT. This Agreement may not be amended or modified
except by a written instrument signed by the parties hereto.
32. SURVIVAL. All representations, warranties and covenants
of each party as set forth in this Agreement shall survive the termination of
this Agreement.
33. RELEASE. The parties hereby waive the effects of and
release each other from any breach which may have occurred prior to
October 20, 1995 under any prior agreement between the parties which relates
to the subject matter of this Agreement.
IN WITNESS WHEREOF, the parties hereby have duly executed and delivered
this Agreement as of the day and year first above written.
CAPITAL DISTRIBUTION INC. d/b/a CUPID NETWORK
TELEVISION
By: /s/ Offer Assis____________
OFFER ASSIS, President
SPICE, INC.
By: /s/Philip Callaghan
PHILIP CALLAGHAN, Executive Vice
President
Exhibit 10.73
THIS CONTRACT is made 199
BETWEEN
(1) BRITISH TELECOMMUNICATIONS public limited company whose registered
office is at BT Centre, 81 Newgate Street, London, EC1A 7AJ.
registered in England No 1800000 ("BT")
AND
(2) THE HOME VIDEO CHANNEL Ltd. whose registered office is at
[Pembroke House. 11 Northlands Pavement, Basildon Essex SS13 3DX]
registered in England (& Wales No 2412178], ("the Customer")
INTRODUCTION
A. The Customer is in the business of transmitting a television service
and requires facilities to enable it to transmit the service by means
of satellite to various receive points, and
B. BT has agreed to provide the Service (defined below) to the Customer
on the terms and conditions of this Contract.
BT warrants that it has at the date of this Contract the right power
and authority to provide the Service and otherwise perform its
obligations under this Contract.
IT IS AGREED AS FOLLOWS:
1. Definition and Interpretation
1.1 In this Contract, unless otherwise specifically provided or required by
the context, the following expressions will have the following
meanings:
Charge the charge set out in Clause 5;
Compressed Channel the Signals which conform to the
specifications set out in
Schedule 2.2;
Compressed Encoders the equipment that will output the
Compressed Channel;
Contract the Clauses of the Contract
together with the Schedules set
out on the contents page above;
Customer Signals the electronic signals generated
by the Customer delivering
the Television Service to BT as
described in Schedule 3;
the Due Date (a) for the first month the
Operational Service Date; and
(b) for each succeeding month
during the Contract, the first
day of the month;
Early Termination is defined in Clause 11;
Earth Segment Facilities (a) capacity in a transmitting
earth terminal;
(b) terrestrial links from the
International Gateway to the
earth terminal;
all as set out in Schedule 2;
Expiry Date the date set out in Schedule 1
when the Contract expires;
Facilities the Space Segment Facilities and
the Earth Segment Facilities;
Force Majeure is defined in Clause 16;
International Gateway the BT Tower in London;
License any license granted, or having
effect as if granted to BT under the
Telecommunications Act 1984 or any
replacement of that Act, including
any amendment to such license;
Multiplex the means of aggregating each
customers' individual digital
packetised streams;
Operational Service the date set out in Schedule 1 on
which the Service commences;
Date or OSD
Pre-emption the deliberate interruption and/or
cessation of the availability of the
Space Segment Facilities by the
Space Segment Operator in its sole
and absolute discretion at any time
and from time to time; the current
policy of the Space Segment Operator
regarding preemption is set out in
Schedule 6. BT will give prompt
notice of any change of policy.
Schedule 1 states whether the Space
Segment Facilities are pre-emptible;
Renewal Period The period (set out in Schedule 1)
during which negotiations for
renewal of the Contract in
accordance with Clause 4 may take
place;
Satellite the satellite referred to in
Schedule 1;
Service means the provision and use of the
Earth Segment Facilities,
Compression Encoders, Multiplex and
conditional access to enable the
transmission of the Television
Services by means of the Signals to
the Satellite and the provision and
use of the Space Segment Facilities
to enable the transmission of the
Television Service for reception in
the countries covered by the
footprint of the satellite as given
in Schedule 2;
Signals the individual digital packetised
streams of which when aggregated
will generate a bit stream rate of
not more than 4Mbit/s/s;
Space Segment Facilities capacity in the Satellite for the
Service, described in Schedule 2;
Space Segment Operator the owner, operator and maintainer
of the Space Segment Facilities who
is named in Schedule 1;
Television Service the television programmers
and/or services of the Customer
comprising video including VBI
teletext, and audio signals
transmitted to viewers in the
direction only and delivered to the
International Gateway by the
Customer.
Termination Date the date that termination is
effective;
Termination Payment is the payment for early
termination set out in Clause 13;
Transmission Period the hours set out in Schedule 1
during which the Facilities are
available for transmission of
Television Service;
Transmission Plan a technical description agreed
between the Customer and BT and
submitted by BT for approval by the
Space Segment Operator detailing the
usage and technical parameters of
all Uplink Signals to be transmitted
via the Facilities.
Unavailability is defined in Clause 7;
Uplink Signals electronically generated carriers
described in Schedule 2;
Year any 12 months starting on the
Operational Service Date or any
anniversary of the Operational
Service Date.
1.2 Words in the singular include the plural and vice versa. Clause
headings for the purpose of guidance only and will not affect the
construction or interpretation of this Contract.
2. Provision of Service
2.1 BT will provide the Service to the Customer during each Transmission
Period from the Operational Service Date to the Expiry Date on the
basis set out in this Clause 2.
2.2 The Customer will deliver the Television Service by means of the
Customer Signals to BT at the International Gateway using
telecommunications circuits which do not form part of this Contract.
2.3 The Customer must ensure that the Customer Signals comply with Schedule
3, so that they do not cause any damage, loss or interference to the
Facilities or to other services using the Facilities.
2.4 BT will provide and the Customer will use the Space Segment Facilities
in accordance with the operating procedures and policy of the Space
Segment Operator. Such policy may be amended from time to time and
includes (amongst other matters) policy on Pre-emption. Schedule 1
states whether the Space Segment Facilities are pre-emptible together
with any specific requirements of the Space Segment Operator regarding
the use of the Facilities. In the event of conflict between this
Contract and the Space Segment Operators policies and operating
procedures the latter shall prevail.
2.5 At BT's request, the Customer will provide information to enable BT to
compile the Transmission Plan. BT will submit the Transmission Plan to
the Space Segment Operator and will use its reasonable endeavors to
obtain the Space Segment Operator's approval. The Customer will (if
requested by BT) assist BT in obtaining that approval.
2.6 The Customer will keep BT informed of the hours during the Transmission
Period during which the Television Service is actually being
transmitted, and of any changes to these times.
2.7 The Customer will be responsible for the content of the Television
Service, even if the Customer is not the creator of the material
comprising the Television Service.
2.8 The Customer is responsible for obtaining all necessary consents from
relevant authorities in and must observe the applicable laws of any
country where the Television Service is to be transmitted or received.
2.9 When using the Service the Customer must:
29.1. comply, in the UK, with any applicable obligations
under the Broadcasting Act of 1990 and the
Independent Television Commission Code of Practice
(including any successor legislation or code) and
with any other appropriate laws and regulations in
any other country where the Television Service is
transmitted and can be received according to the
Customer's instructions to BT regarding the
conditional access system; and
29.2. in addition not use, or permit any other person to
use, the Service contrary to any applicable mandatory
rules or guidelines or for sending any message or
communication which is, according to the
determination of the appropriate bodied appointed by
such mandatory rules or guidelines, offensive,
abusive or of an indecent obscene or menacing
character.
2.10 Use of the service in contravention of Clauses 2.8 or 2.9 is a breach
of Contract by the Customer. If in BT's reasonable opinion BT is
potentially exposed to civil or criminal liability, or other type of
action likely to be taken by any competent regulatory authority. BT may
on giving the Customer notice of the breach immediately suspend or
terminate the Service.
2.11 This Contract is subject to the continuing right of BT and the Space
Segment Operator to provide the Service. If at any time such right is
withdrawn or terminated by any competent authority then this Contract
will terminate forthwith, unless:
2.11.1. alternative facilities can be obtained within that
period under Clause 8; or
2.11.2. the Contract has already been terminated.
2.12 The customer may request in writing to BT that the transmission hours
are to be extended and/or transmission rates increased as set out under
the terms of Schedule 1. Subject to the availability of Earth and Space
Segment Facilities, and payment of the increased Charge, BT shall grant
such request.
2.13 The conditional access used for this service will be Scientific
Atlanta's PowerVu system which is subject to the approval of the Space
Segment Operator. At this moment in time such approval has been given.
2.14 BT will provide the Service with the conditional access system in
operation during the entire Transmission Periods and will authorize and
deauthorize decoders when requested by the Customer in accordance with
the procedures set out in Schedule 1 part B.
3. Delay in Commencement of Service
3.1 If BT does not provide the Service to the Customer on the Operational
Service Date and if the Customer suffers loss as a result:
3.1.1. the Customer will not be liable to pay the Charge
during such period of non- provision; and
3.1.2. in addition BT will pay to the Customer an amount
equal to the pro-rata daily rate of the Charge for
the period for which the non-provision continues up
to a maximum of the equivalent of 30 days' Charge.
3.2 Payment under Clause 3.1 will be in full satisfaction of BT's liability
to the Customer arising out of BT's failure to provide the Service on
the Operational Service Date, but the Customer will retain its rights
to terminate under Clause 11.
3.3 BT will not be liable to make any payment under Clause 3.1, and nor may
the Customer terminate under Clause 11, in respect of any period when a
failure to provide Service to the Customer on the OSD is due to Force
Majeure or the Customer's act or omission provided that BT shall notify
the Customer as soon as reasonably practicable after the Force Majeure
event or the Customer's act or omission comes to BT's attention.
4. Renewal of this Contract
4.1 Not later than the start of the Renewal Period, the Customer may give
written notice to BT requesting the renewal of this Contract, BT will
grant a renewal, on terms and conditions to be negotiated, if:
4.1.1 this Contract has not been terminated with effect
from the Expiry Date or earlier; and
4.1.2 BT is able to contract for the necessary segment
facilities from the Space Segment Operator (which BT
will use reasonable endeavors to obtain).
4.2 BT reserves the right not to re-negotiate under Clause 4.1 if the
Customer is or has been in breach of this Contract which breach was
notified to Customer upon BT becoming aware of the breach and was not
promptly rectified by the Customer.
4.3 If BT does not receive notice under Clause 4.1 BT is not restricted or
precluded from using the Facilities for any purpose after the Expiry
Date, nor from negotiating with any other potential customer for the
Facilities during the Renewal Period.
4.4 If the Customer does not give notice to BT under Clause 4.1 above but
the parties are unable to reach agreement before the end of the Renewal
Period on any new terms, conditions and charges, then after the Renewal
Period (or sooner if the parties agree that they are unable to reach
agreement), BT may offer to provide (after the Expiry Date) services
via the Facilities to any third party on terms no more favorable than
those last offered to the Customer. If BT wants to offer more favorable
terms to any other third party then it shall first give the Customer
notice of such terms and if these are not acceptable by the Customer
within 14 {7} days, BT is free to negotiate with any other third party
on those terms.
4.5 The provision of this Clause 4 shall cease to apply and shall have no
force and effect after the Expiry Date or, if this Contract is
terminated prior to the Expiry Date, after the date of termination.
5. The Charge for the Service
5.1 The Customer agrees to pay BT's Charge for the provision of the Service
for the duration of this Contract. The Charge for the Service is stated
in Schedule 1.
5.2 The Charge will be paid in advance on the Due Date by the method and to
the bank stated in Schedule 1. Payment will be made in equal monthly
installments except for the first and last months which will be
calculated on a pro-rata basis by BT.
5.3 If BT does not receive any payment of the Charge in full, or any agreed
installment, (together with payment of VAT or other taxes as
appropriate) within 30 days of the Due Date for payment. BT may charge
interest upon the sum outstanding from the Due Date at 4 per cent per
annum above the base lending rate of Midland Bank plc.
Interest will accrue on a daily basis, will be compounded on a monthly
basis and will be computed on the basis of actual days and of a 365 day
year.
5.4 The Charge and any other sums payable are exclusive of United Kingdom
Value Added Tax and other local taxes or value added taxes. Invoices
payable under this Contract are subject to the addition of VAT or other
taxes where appropriate.
5.5 The Customer will pay the Charge (less any credits calculated by BT
under Clause 9.2 and less any payment calculated by BT under clause
3.1.2, 12.1 or 13.8) and any other sums payable under the Contract
without set off, counter claim or other deductions. Any sum falling due
on a day which is not a business day will be payable on the immediate
preceding business day. For the purposes of this Clause, a business day
is any day which is a legal business day in London.
5.6 BT will issue invoices to the Customer but the Customer's obligation
to pay will not depend on prior receipt of an invoice.
5.7 The Customer will remain liable for all Charges due or to become due
for Service provided during any period of this Contract in which the
Customer fails to comply with any provision of this Contract.
6. Maintenance
6.1 BT reserves the right to interrupt the Service for maintenance,
adjustments or repair of the Facilities. BT will, except in case
emergency, give as much prior notice to the Customer of such
interruption as is reasonably practicable. Notice of BT's requirement
to interrupt the Service shall state the date time and anticipated
length of interruption and where ever possible BT shall use its
reasonable endeavors to complete the maintenance adjustments or repair
of the Facilities as speedily as is reasonably practicable and to
interrupt the Service at a time and date causing the Customer the least
inconvenience and generally to have regard to the interests of the
Customer in comparison with those of other users of the Facilities and
not to discriminate against the interests of the Customer in that
comparison and to disrupt the Service as little as is reasonably
practicable in the circumstances.
6.2 The parties will agree suitable times for interruptions for routine
maintenance of the Facilities.
7. Unavailability of the Service
7.1 The Service will be regarded as Unavailable during the Transmission
Period in the following circumstances:
7.1.1. failure of the Service or its degradation below
the specifications in Schedule 4;
7.1.2. failure of the Space Segment Facilities or their
degradation below the parameters set out in
Schedule 2 section 3:
7.1.3. failure of the Earth Segment Facilities to maintain
the specifications in Schedule 2 section
2;
7.1.4. withdrawal or interruption of Service for
maintenance and repairs;
7.1.5. if the Service cannot be provided because of an
event of Force Majeure; or
7.1.6 if the Space Segment Facilities have been pre-empted
by the Space Segment Operators, of the Space Segment
Facilities are pre-emptible and "Unavailable" and
"Unavailability" will be construed accordingly.
7.2 Any loss of Service caused by the act or omission of, or a request by,
the Customer its employees, or agents or contractors will not be
counted as "Unavailability provided that BT shall give the Customer
notice of such act or omission as soon as reasonably practicable after
the same comes to BT's attention.
7.3 Periods of Unavailability will be recorded in accordance with Schedule
5 section 3. Such periods will be measured from the time such
Unavailability is reported to BT (and confirmed by BT's operations
staff) or such other time (if earlier) when the Unavailability becomes
known to BT. Unavailability will continue until the time the Service is
restored to the standard specified in relevant Schedules or as
otherwise agreed in writing between the parties.
8. Alternative Facilities
8.1 If the Earth or Space Segment Facilities have been Unavailable during a
Transmission Period BT will consult with the Customer and use
reasonable endeavors to identify alternative earth or space segment
facilities:
8.1.1 after the Space Segment Facilities have been
Unavailable for:
(a) a continuous period of 8 hours, or
(b) sooner if in BT's reasonable judgment the
Unavailability is unlikely to be remedied within
that period.
8.1.2 after the Earth Segment Facilities have been
Unavailable for:
(a) a continuous period of 1 hour or more; or
(b) sooner when in BT's reasonable judgment the
Unavailability is unlikely to be remedied within 4 hours from the start
of such Unavailability.
8.2 After written approval from the Customer of the nature, duration, and
cost to the Customer of any identified alternative facilities (which
will not be unreasonably withheld or delayed), BT will make the
alternative facilities available to the Customer wile the Space Segment
Facilities or Earth Segment Facilities are Unavailable and will
reinstate the original facilities as soon as this is reasonably
practicable. The Customer shall continue to pay the Charge while the
alternative facilities are being provided.
8.3 BT will bear the cost of providing alternative space segment
facilities to the amount stated in Schedule 1 and the Customer will
bear the rest of the costs in addition to the Charge.
8.4 When BT provides alternative earth segment facilities out of resources
already then available to it, BT will bear the entire cost of providing
them.
8.5 Where alternative earth segment facilities are made available other
than pursuant to Clause 8.4. BT will:
8.5.1. bear the cost of providing them where they have to
be provided as a result of any act or omission on
the part of BT or of any of its employees or
agents; or
8.5.2. in any other case, bear the cost of providing them
up to the daily rate set out in Schedule 1 and the
Customer will bear the rest in addition to the
Charge.
8.6 If BT is unable to provide alternative earth segment facilities which
are acceptable to the Customer (such acceptance not to be unreasonably
withheld or delayed) and the Earth Segment Facilities have been
Unavailable for a continuous period of 24 hours, then the Customer may
nominate alternative earth segment facilities not owned or controlled
by BT.
8.7 BT will use reasonable endeavors to procure the use of alternative
earth segment facilities nominated under Clause 8.6 provided that:
8.7.1. BT and the Space Segment Operator have given written
consent to the use of such alternative earth segment
facilities (BT's consent not to be unreasonably
withheld or delayed). BT will promptly seek the Space
Segment Operator's consent and convey to it any
representations on the Customer's behalf which the
Customer may reasonably request;
8.7.2. all appropriate government regulatory requirements
have been satisfied. The Customer must
provide reasonable evidence of such satisfaction
(where it is reasonable for BT to require
such evidence);
8.7.3. the Customer must indemnify BT in respect of any
damage to the Satellite or loss to third
parties to the extent that the damage or loss is
caused by the nominated alternative earth
segment facilities;
8.7.4 BT will not be responsible in any respect for the
Earth Segment Facilities of the Service from such
nominated alternative earth segment facilities; and
8.7.5. BT will bear the cost of providing the cost of
providing the alternative facilities up to the amount
stated in Schedule 1 and the Customer will bear the
rest of the costs in addition to the Charge.
9. Credits
9.1 Subject to Clause 9.3. the Customer will receive credit calculated as
provided in Schedule 1 for and continuous periods of Unavailability
lasting one minute or more.
9.2 The calculation of credit under Clause 9.1 above will be carried out
for each calendar month of this Contract. BT will allow an appropriate
credit to the Customer in the next but one monthly invoice and the
Customer will pay the invoice for that month's portion of the Charge
reduced by the amount of the credit. Where any credit becomes due to
the Customer for the penultimate or the last month of the term of this
Contract BT will pay to the Customer an amount equal to such credit on
or before the last day of the month immediately following that last
month.
9.3 For the avoidance of doubt credit will not be given under this Clause
9 for:
9.3.1 periods of Unavailability while alternative
facilities are being provided to the Customer;
9.3.2 periods when Service is not being provided due
directly or indirectly to the act or omission of, or
request by, the Customer or any of its employees,
agents or contractors provided that BT shall give the
Customer notice of any such acts or omissions as soon
as reasonably practicable after the same come to BT's
attention;
9.3.3 periods when Service is not being provided due to
sun outage or adverse weather conditions;
or
9.3.4 periods during which the Service is suspended
pursuant to Clause 14 of this Contract.
9.4 Allowance of credits by BT under this Clause shall be in full and
final settlement of any claim arising from any period of
Unavailability.
10. Information
10.1 BT will, as far as is practical, keep the Customer informed of:
10.1.1. the plans, practices and policies of the Space Segment
Operator to the extent that they may adversely affect the provision
of the Service;
10.1.2. any changes in the operating characteristics of the Satellite
to the extent that such change adversely affect the provision of the
Service; and
10.1.3. all tests, repairs or maintenance work which will, or are
likely to, cause Unavailability of the Service.
10.2 By the fifteenth day of each calendar month, for the duration of this
Contract, BT will deliver to the Customer a summary of any periods of
Unavailability occurring during the immediately preceding month. Such
summary will include the times and duration of such periods and will
describe the reason for such Unavailability and shall where possible be
accompanied by an analysis of the results of the monitoring agreed to
be performed by BT in accordance with Schedule 4.
10.3 The obligations of BT under this Clause 10 relate only to such
information as is in BT's possession (or which BT can reasonably
obtain) and which BT can reveal without being in breach of any duty to
a third party. The Customer will comply with all BT's reasonable
requirements which it notifies to the Customer for protecting the
confidentiality of such information.
11. Termination by the Customer
11.1 The Customer may terminate this Contract before the Expiry Date
immediately by written notice to BT.
11.1.1. for Unavailability of the Space Segment Facilities:
(i) after they have been Unavailability for a single
continuous period of 30 days; or
(ii) sooner when it is clear to both parties that the
Unavailability will continue for longer than 30 days from the day it
started and alternative space segment facilities will not be provided
within that 30 day period.
11.1.2. For Unavailability of the Earth Segment Facilities;
(i) after they have been Unavailable for a single
continuous period of 15 days; or
(ii) sooner when it is clear to both parties that the
Unavailability will continue for longer than 15 days from the day it
started and suitable alternative earth segment facilities will not be
provided within that 15 day period; or
(iii) if the aggregate of all continuous Unavailability of 30
minutes or more duration during Transmission Periods within any 90 day
period exceeds the total time comprised in 6 Transmission Periods.
Periods during which alternative facilities are provided following
written consent pursuant to Clause 8.2 under Clause 8 will not be
counted for the purposes of this Clause 11.1.
11.2 The Customer may terminate this Contract before the Expiry Date by
written notice to BT if BT commits a substantial breach of this
Contract (other than matters provided for in Clause 11.1) and:
11.2.1. if the breach of Contract is capable of remedy, fails to
remedy the breach within 30 days of written notice to do so; or
11.2.2. if it is not possible to remedy the breach.
11.3 The Customer may terminate this Contract before the Expiry Date by
written notice to BT if BT is the subject of a bankruptcy order or
becomes insolvent or makes any arrangement or composition with or
assignment for the benefit of its creditors or goes into liquidation,
either voluntary (otherwise than for reconstruction or amalgamation) or
compulsory, or if a receiver or administrator is appointed over its
assets.
11.4 The Customer may terminate this Contract before the Expiry Date on the
day immediately preceding the 3rd anniversary of the OSD without
becoming liable for the Termination Payment subject to at least 6
months prior written notice to BT.
12. Termination by BT
12.1 BT may immediately terminate this Contract by written notice to the
Customer if the Space Segment Operator gives written notification to BT
that the Space Segment Facilities have become permanently Unavailable.
Upon such termination BT will advise the Customer of the availability,
if any, of alternative space segment facilities and will use reasonable
endeavors to arrange for the provision of alternative space segment
facilities on terms to be agreed. In the event of termination under
this Clause 12.1. BT shall repay any charges paid in advance by the
Customer.
12.2 BT may (without prejudice to any other right or remedy) without notice
summarily terminate this Contract if BT does not receive any payment
and interest due on it within 30 days of the Due Date and the Customer
fails to remedy failure to pay within 30 days of receipt of written
notice requiring it to do so.
12.3 BT may terminate this Contract before the Expiry Date by written notice
to the Customer if the Customer commits a substantial breach of this
Contract (other than matters provided for in Clause 12.2) and;
12.4 BT may terminate this Contract before the Expiry Date by written notice
to the Customer if the Customer is the subject of a bankruptcy order or
becomes insolvent or makes any arrangement or composition with or
assignment for the benefit of its creditors or goes into liquidation,
either voluntary (otherwise than for reconstruction or amalgamation (or
compulsory, or if a receiver or administrator is appointed over its
assets.
13. Effect of Termination
13.1 Termination or expiry of this Contract will be without prejudice to the
rights and liabilities of either BT or the Customer which may accrue on
or up to the Termination Date.
13.2 Where BT terminates this Contract under Clause 12 (excluding Clause
12.1) or where the Customer purports to terminate before the Expiry
Date (other than under Clause 11), the Customer must pay the
Termination Payment.
13.3 The Termination Payment is calculated:
13.3.1. by taking this aggregate of all sums payable under this
Contract up to the third anniversary of the OSD or if this has been
exceeded, the Expiry Date not received by BT on or before the
Termination Date, less the aggregate of all credits due to the Customer
under Clause 9, which have not been allowed to the Customer on or
before the Termination Date; and
13.3.2. discounting the result using the Interbank offered rate quoted
by Barclays Bank plc. London at 11:00 a.m. on the last business day of
the preceding month for three months time deposits in the Euro-Currency
market applying to the currency of the Charge calculated for the period
between the date of BT's invoice for the Termination Payment and the
Expiry Date.
13.4 The Customer must pay the Termination Payment to BT within 30 days of
the date of BT's invoice.
BT may charge interest calculated in accordance with Clause 5.3 if the
Termination Payment is not paid within 30 days of the date of BT's
invoice.
13.5 If after payment by the Customer of the Termination Payment BT secures
another customer or customers for services using the Facilities for any
of the balance of the period between the Termination Date and the
Expiry Date. BT will pay the Customer the money it obtains from the new
customer(s) less BT's reasonable costs. BT agrees to use reasonable
endeavors to mitigate the loss by securing another Customer for the
Earth and Space Segment Facilities.
13.6 The sum payable by BT under Clause 13.5 will be no greater than the
proportion of the Termination Payment which is applicable to the
re-used Facilities.
13.7 BT will pay the sum in Clause 13.5 out of money received from the new
customer(s).
13.8 Where the Customer terminates this contract under Clause 11.1 to 11.4
inclusive. BT shall refund to the Customer all advanced payments made
by the Customer in respect of any period after the termination date.
14. Suspension by BT
14.1 BT may (without prejudice to any other right or remedy) suspend the
Service;
14.1.1. by seven days' written notice if BT does not receive any
payment within 30 days of the Due Date,
together with any interest due;
14.1.2. immediately by written notice if the Customer commits a
substantial breach of this Contract; or
14.1.3. immediately by written notice if any of the events which are
grounds for suspension under Clause
2.10 occurs.
Suspension will continue until such time only as the grounds for
suspension are removed to BT's reasonable satisfaction or BT terminates
the Contract pursuant to the terms herein.
14.2 The Customer remains liable to pay the Charges for any period of
suspension.
15. Use and Assignment
15.1 The Customer may assign any rights or obligations under the Contract
only with the prior written consent of BT (such consent not to be
unreasonably withheld or delayed, provided that BT shall be entitled to
require such guarantees or other security as BT in its reasonable
discretion thinks fit in relation to performance of any obligations of
the assignee). A change in the ownership or control of the Customer or
its business or of a substantial part of the Customer's assets will
also continue an assignment. For the purposes of this Clause a change
of ownership or control shall mean the acquisition by any third party
which is not already a shareholder of the Customer of more than 50% of
the voting rights in the Customer.
15.2 If the Customer wishes to permit a third party to use part of the
Service then the Customer must notify BT in advance of that party's
name and the proposed extent of their use of the Service. The Customer
remains responsible under the Contract for the use of the Service and
will ensure that the third party is aware of and complies with the
provisions of the Contract. Notification to BT does not imply any
approval by BT of the third party or its proposed usage not does it
prejudice any of the Customer's obligations or BT's rights under the
Contract.
16. Force Majeure
16.1 If either BT or the Customer is unable to perform any obligation under
this Contract because of matters beyond its reasonable control such as
lightning, flood, exceptionally severe weather, fire, explosion, war,
civil disorder, industrial disputes (whether or not involving their
employees), sun outage, satellite or launch failure or acts of local or
central Government or other competent authorities it will have no
liability to the other party.
16.2 In addition BT will not be liable for any breach of this Contract
directly or indirectly occasioned by or resulting from:
16.2.1. compliance with the License; or
16.2.2. regulatory action taken by any relevant regulatory authority.
16.3 A party affected by Force Majeure must promptly give written notice to the
other party:
16.3.1. on commencement; and
16.3.2. on cessation of the Force Majeure event.
17. Limitation of Liability
17.1 BT's duty in performing any obligation under this Contract is only to
exercise the reasonable skill and care of a competent
telecommunications service provider .
17.2 BT accepts liability under this Contract only to the extent stated in
this Clause 17, Clause 9, Clause 12.1 and Clause 13.8.
17.3 Neither party excludes or restricts its liability for death or
personal injury resulting from its own negligence.
17.4 BT's liability to the Customer in contract, tort (including negligence)
or otherwise in relation to this Contract is limited to (pound)1
million for any one incident or series of related incidents and to
(pound)2 million for all incidents in any period of 12 months.
17.5 Neither BT nor the Customer is liable to the other either in contract,
tort (including negligence) or otherwise or loss (whether direct or
indirect) of profits business or anticipated savings or for any
indirect or consequential loss or damage whatever. This does not
relieve the Customer from obligation for the Charges in full under this
Contract.
17.6 Each provision of this Clause 17 limiting or excluding liability
operates separately. If any part is held unreasonable or inapplicable
the other parts shall continue to apply.
18. Indemnity
18.1 Subject to Clause 17 the Customer must indemnify BT against any
actions, proceedings, claims or demands for loss or damages including
death or personal injury in any way connected with this Contract
brought or threatened against BT by a third party except to the extent
that the same are directly or indirectly occasioned by, or result from
any fault of BT or are otherwise due to any act or omission, negligence
or wilful misconduct by BT, its employees, agents or contractors.
18.2 Without prejudice to the generality of Clause 18.1 the Customer must
indemnify BT in the event of:
18.2.1. actual or alleged libel, slander, invasion of privacy or
infringement of copyright;
18.2.2. actual or alleged infringement of intellectual property
rights arising from use of the Service with facilities or services,
apparatus or systems not provided by BT for use with the Service;
18.2.3. use of the Service contrary to the provisions of this
Contract;
18.2.4. claims relating to quality or contents fo the Television
Service; or
18.2.5. claims relating to any actual or alleged failure, however
casued, to meet an obligation to any person to transmit the
Television Service; or
18.2.6 any actions, proceedings, claims or demand conneted with the
Service which are brought or threatened agaisnt BT due to BT acting in
accordance with the instructions of the Customer.
18.3 BT wil promptly notify the Customer of any claim to which the
indemnity in this Clause 18 relates and will:
18.3.1. make no admission without the Customer's consent;
18.3.2. allow the Customer to conduct any proceedings or settle any
claims in each case at the expense of the Customer and must do so at
BT's written request; and
18.3.3. give to the Customer at the cost and expense of the Customer
reasonable assistance in connection with such proceedings.
19. Notices
19.1 Notices given under this Contract will be in writing and will be
sent to the address of the Customer or BT specified in Schedule 1.
19.2 All notices will be:
19.2.1. delivered by hand or sent by telex, facsimile or, in the United
Kingdom, by registered post or by recorded delivery, and outside of the
United Kingdom by registered airmail letter. All notices will be deemed
to have been received when delivered by hnand or on the date on which
they would be received in the normal course of posting (if posted) or
when the proper answerback code or confirmation is received by the
sender if sent by telex or facsimile; or
19.2.2. in the case of an emergency the Customer accepts that BT may
give notice by telephone, provided that this is later confirmed in
writing as soon as is reasonably practicable.
20. Confidentiality
20.1 BT and the Customer will keep in confidence any information of a
confidential nature obtained under this Contract and will not divulge
it to any person (other than their employees who need to know the
information and subject to their employer making them fully aware of
and causing them to comply with the provisions of this Clause) without
the consent of the other party.
20.2 Clause 20.1 will not apply to:
20.2.1. information in the public domain otherwise than in breach
of this Contract;
20.2.2. information in the possession of the receiving party prior
to its disclosure to them under the terms of this Contract;
20.2.3. information obtained from a third party who is free to
divulge it;
20.2.4 information which is independently developed by the receiving
party without any breach of confidentiality under this Contract or
otherwise; or
20.2.5. the disclosure of information as required by a court of law
or other competent authority.
21. Variations and Amendments
21.1 No variation, amendment or change to this Contract will be effective
unless contained in a document agreed by the parties and signed by
their authorized representatives.
21.2 If the Customer wishes BT to modify the Service it must notify BT in
writing. If the proposed modification is acceptable to BT (such
acceptance not to be unreasonably withheld or delayed) the parties will
negotiate the applicable terms and conditions in good faith.
22. No Partnership
Nothing in this Contract will give rise to any partnership between BT
and the Customer.
23. Severability
Any part of this Contract whic is determined illegal or invalid will
not affect the legality or validity of the remainder.
24. Waiver
If either party delays in acting upon a breach of Contract by the other
that delay will not be regarded as a waiver of that breach. If either
party waives a breach of the Contract by the other that waiver is
limited to the particular breach.
25. Entire Agreement
This Contract governs the provision of the Service to the Customer to
the exclusion of all other written or verbal representations,
statements, understandings, negotiations, proposals or agreements.
26. Proper Law and Jurisdiction
This Contract will be governed and construed in accordance with English
law and the parties agree to submit to the exclusive jurisdiction of
the English Courts.
27. Security
27.1 Subject to Clause 15.1 Security is not required for the provision of
Service described in this Contract.
AS WITNESS these agreements the duly authorized representatives of the parties
have signed this Contract on the day and year stated on page 1 above.
Signed for and on behalf of the Customer
- - ---------------------------
Signature
- - ---------------------------
Name and Title
Signed for an on behalf of BT
- - ---------------------------
Signature
- - ---------------------------
Name and Title
PRODUCTION AGREEMENT
THIS AGREEMENT ("Agreement") is entered into and made effective as of ,
1995, by and between Media Licensing, Inc., a Nevada corporation with offices at
536 Broadway, 7th Floor New York, New York, 10012 (hereinafter referred to as
"Licensee"), Spice, Inc., a New York corporation with offices at 536 Broadway,
7th Floor, New York, New York 10012, and VCA Labs Inc., a California
corporation, with offices at 9650 DeSoto Avenue, Chatsworth, California 91311
(hereinafter referred to as "Licensor").
RECITALS
A. Licensor produces motion pictures containing explicit sexual content
for mature audiences (each motion picture produced and/or distributed by
Licensor is referred to as a "Picture" and collectively as the "Pictures").
B. Licensee is engaged in the business of distributing motion pictures
to others for distribution, currently, by satellite delivered pay-per-view
television to cable affiliates for distribution to their subscribers and
directly to subscribers in the direct to home satellite market, via video dial
tone ("VDT"), video on demand ("VOD"), near video on demand ("NVOD") and other
media throughout the world.
C. Spice, Inc., Adam & Eve Communications, Inc., Licensor and certain
other persons entered into a letter agreement dated January 26,1995 (the "Letter
Agreement") which provided among other things, for the merger of AEC into Spice
(the "AEC Merger"). Pursuant to the Letter Agreement, Licensor and Licensee are
entering into simultaneously with the execution hereof, an agreement (the
"Master Agreement") which provides (i) an election by Spice to extend the term
of the existing licenses of the approximately 140 adult pictures previously
licensed by Licensor and PHE, Inc., to AEC for distribution by AEC on the Adam &
Eve television service pursuant to the terms set forth in the Master Agreement,
(ii) Licensor offering to Spice or an affiliate thereof, a right of first
refusal to license all heterosexual adult picture produced and/or distributed by
Licensor which are not Joint Pictures (as defined below)(pictures for which
Licensee exercises its right of first refusal are referred to as "Licensed
Pictures") and which Licensed Pictures will be licensed by Licensor to Licensee
pursuant to the terms of a License Agreement and (iii) for Licensor and Licensee
to enter into this Production Agreement to co-produce and co-finance between 2
and 4 Pictures (referred to as "Joint Pictures") a month as provided for herein.
D. Spice, an affiliate of Licensee, is engaged in the business of
distributing two television services featuring cable version adult movies, one
of which is currently known as the Spice service (collectively, the Spice
Services").
E. Licensor and Licensee desire that Licensor grant the rights and
license the Joint Pictures to Licensee upon the terms and conditions set forth
in this Agreement.
NOW, THEREFORE, in consideration of the mutual promises and agreements
herein contained, and for other good and valuable consideration, the parties
hereto do hereby agree as follows:
1. DEFINED TERMS.
The following terms shall have the meaning set forth below:
1.1 "Linear Transmission" shall mean transmission of a Picture
for noninteractive playback including, but not limited to, cable television
("CATV"), direct to home satellite ("DTH"), video dial tone ("VDT"), video on
demand ("VOD"), near video on demand ("NVOD"), on line, SMATV, video file
server, wireless cable and other means of transmission and/or distribution
currently existing or hereinafter developed.
1.2 "Territory" shall mean any geographic area where the
Spice Services may be received by Spice Subscribers.
1.3 "Spice Services" mean the two 24 hour a day 7 day a week
programming services owned and operated by Spice, Inc. and currently distributed
by satellite and tape delivery and which feature Cable Version adult movies and
programming, one of which is currently known as "Spice" and which are
distributed on a pay-per-block, pay per view and subscription basis.
1.4 "Spice Subscriber" shall mean an individual with an
addressable decoder capable of viewing the Spice Services.
1.5 "Interactive Program Rights " shall mean all rights to
exhibit, transmit, sell, rent, disseminate, distribute, and generally exploit a
Picture and its elements by any means for the purpose of creating or otherwise
devising a multimedia presentation (which presentation may include some or all
of moving pictures, photographs, sound, music, graphics, animation, artwork,
text, and data, and other material, whether interactive or otherwise) and
available on a variety of media including CD-ROM, CDI, 3DO, Sega Genesis or
distributed, exhibited or otherwise made available via interactive television
transmission, dedicated phone line or other digital transmission, or in any
theater or other place where an admission fee is charged for a multimedia
presentation, or by any other means, method, technique, or device whether now
known or hereafter invented, devised, or discovered for enabling a multimedia
program or presentation or such other means as currently existing or developed
in the future.
1.6 "Joint Pictures" shall mean (i) the Pictures which meet
the parameters of section 3 (ii) Pictures which Licensee and VCA bear equally
the production cost thereof as provided for in Section 8.1 and (iii) Pictures in
which Licensor has licensed to Licensee the rights as set forth in Section 4.
1.7 "Licensed Pictures" shall mean the Pictures licensed by
Licensor to Licensee pursuant to the License Agreement.
1.8 "Cable Version" shall mean a Picture with adult content
which depicts heterosexual situations and nudity but does not depict actual
penetration of body parts or erect genitalia or male ejaculation and where the
content and degree of explicitness of movies and related programming currently
featured on the Spice Services.
1.9 "Explicit Version" shall mean a Picture which depicts
heterosexual situations and nudity and which depicts actual penetration of body
parts, erect genitalia and ejaculation.
1.10 "Universe" shall mean the universe as that term is
commonly defined.
1.11 "Stand Alone Hotel Rights" shall mean and include the
right to sell, market and license any form of a Picture for exhibition in
hotels, motels, military bases, oil rigs, fraternities, sororities, prisons,
ships, airplanes and hospitals by means of closed-circuit television systems
where the copy of the Picture is delivered to the facility and the telecast
originates within such place and specifically excluding delivery of the Picture
by satellite feed or a feed from a cable affiliate (which is included in the
definition of Linear Transmission).
1.12 "Videogram Rights" shall mean and include all rights to
distribute, sell, rent, disseminate, market, and generally exploit all forms of
audio-visual discs and cassettes including, but not limited to , video cassette,
laser disc, DVD, analog or digital linear playback and storage devices and
similar devices, whether now known or hereafter devised for the "at home"
market.
2. JOINT PICTURES.
2.1 Submission of Joint Pictures. Not later than 90 days prior
to the first day of each month during the Term of this Agreement, Licensor shall
submit to Licensee notice (the "Notice") of the availability of no less than 2
and no more than 4 Pictures meeting the specification of Section 3 for joint
development, ownership and license by Licensee as more specifically set forth in
Section 4 (referred to as "Joint Pictures"). Licensee shall license all such
Joint Pictures which meet the specifications and criteria set forth in this
Agreement. The Notice of such Joint Picture's availability shall contain (i) the
title of such Joint Picture, (ii) the principal stars (iii) a brief synopsis of
the plot and (iv) if applicable, Licensor's election to retain the Interactive
Programming Rights to the Joint Picture as provided for in accordance with
Section 4.3. Licensor acknowledging that Licensee requires the information
contained in the Notice prepare its monthly schedules for the Spice Services at
least 90 days prior to the first exhibition of a Picture on the Spice Services.
3. PICTURES.
Each Joint Picture when delivered by Licensor to Licensee
shall meet the following specifications:
3.1 Each Picture shall be a newly produced motion picture in
color fully synchronized with dialogue, music, lyrics, sound and effects
containing all of the elements provided for in this Agreement containing scenes
of an explicit nature and shot with two cameras to provide an Explicit Version
and a Cable Version.
3.2 Each Picture shall be produced in the English language,
and shall be of a quality similar to Licensor's highest quality adult motion
pictures with similar budgets
3.3 Each Picture shall be of first class technical quality,
shall comply with all the provisions of the Delivery Schedule attached hereto as
Schedule "C" , and without limiting the generality of the foregoing, the master
videotapes, soundtracks, and other material of the Pictures shall be of suitable
quality and condition so that first class copies suitable for Linear
Transmission can be made therefrom.
3.4 At Licensor's election, the Pictures may be produced on
35mm motion picture film (the "Filmed Pictures") or produced on video tape (the
"Videotaped Pictures"). Notwithstanding the foregoing Licensee acknowledges that
most if not all of the Joint Pictures and Licensed Pictures will be Videotaped
Pictures
3.5 With respect to each of the Joint Pictures, Licensee shall
approve the final budget, Director, and cast in the Principal Roles (the
"Elements") and all of Licensee's obligations hereunder are specifically made
subject to and conditioned upon the Picture containing such Elements.
3.6 The final budget ("Budget") for each of the Joint Pictures
shall be no more than approximately $30,000. Licensor's license fee for each
Joint Picture shall be equal to half of the cost of such Picture.
Notwithstanding the forgoing, the Budget for a Joint Picture shall in no event
exceed $35,000 without Licensee's prior written consent.
3.7 The Director and the cast in the Principal Roles shall be
approved by Licensee in accordance with the provisions of subparagraph 3.10
below.
3.8 Once an Element has been approved by Licensee, any
replacements for or other substantial changes in any such Element shall be
subject to Licensee's prior written approval, however, such approval shall not
be unreasonably withheld and shall not be exercised in a manner to intentionally
frustrate the terms of this Agreement except that Licensor may in its reasonable
discretion, substitute similar valued Elements in order to mitigate any adverse
production problems beyond Licensor's control.
3.9 If a Picture is delivered to Licensee with any of the
Elements differing from those purported by Licensor and approved in writing by
Licensee, Licensee shall have the right, in its sole discretion, to: (a)
terminate its obligations hereunder with respect to such Picture, and/or (b)
select another Picture to be treated as a Joint Picture.
3.10 As used in Section 3.10, "Principal Roles" means the
female lead, second female lead, and the male lead. Each of the Pictures shall,
in the Principal Roles, feature cast considered to be "A" list cast in
accordance with the standards of the U.S. adult video industry, including
without limitation actresses and actors such as Juli Ashton, Sunset Thomas and
other performers of similar prominence. Prior to the commencement of principal
photography on a Picture, Licensor shall submit to Licensee a list of performers
proposed for the Principal Roles. Licensee shall be entitled to disapprove of
any proposed performers who in Licensee's reasonable opinion might reduce the
marketability of the Picture. All performers on the "Approved List" attached as
Schedule "B" are pre-approved for all Principal Roles in any of the Pictures.
Prior to the commencement of principal photography on a Picture, Licensor shall
submit to Licensee the name of the proposed Director, and Licensee shall be
absolutely entitled to disapprove of any proposed Director. All Directors on the
"Approved List" attached as Schedule "B" are pre-approved in respect to any of
the Pictures.
3.11 Each Picture's title, as and when identified, shall be
listed on the form of Amendment to this Agreement, attached as Schedule "A". The
term "Picture", as used herein, shall include the underlying literary material
upon which the Picture is based and all characters, plots, themes, and titles
and all rights of whatever kind or nature in and to the Picture including any
and all copyrights, and renewals and extensions thereof.
3.12 For each of the Pictures, Licensor shall comply with all
laws, rules and regulations, including the Child Protection Restoration and
Penalties Act of 1990 and the regulations issued thereunder (the "Act and
Regulations"), as they may be amended from time to time. Without limiting the
generality of the foregoing, in respect of the Act and Regulations, Licensor
shall: (i) ascertain, by examination of an identification document or documents
containing such information, the name (including any aliases or former names)
and date of birth of every performer in each Picture; (ii) create and maintain
true, individually identifiable records of such information for every performer
portrayed in each of the Pictures, and maintain said records as required by Act
and Regulations; (iii) in accordance with the Act and Regulations, affix to each
of the Pictures a statement describing where the said records are located, such
statement to include the name, title, and business address of the individual
employed by Licensor who is responsible for maintaining the said records, and
(iv) insure that none of the cast appearing in any Joint Picture are minors or
under any other legal disability.
4. GRANT OF RIGHTS IN JOINT PICTURES.
4.1 Except for Licensor's retained rights set forth below in
Section 4.2 and 4.3(collectively, the "Retained Rights"), Licensor hereby
irrevocably grants, transfers, sets over and assigns to Licensee the sole and
exclusive right, license and privilege, under copyright and otherwise, to
exhibit and/or distribute by all means and in all media including via Linear
Transmission, Stand Alone Hotel Rights and all other means or methods, whether
now known or hereinafter developed, and otherwise to market, reissue, transmit,
perform and exploit the Joint Pictures and trailers thereof, and excerpts and
clips therefrom throughout the universe and in perpetuity, in any and all
languages and versions (including dubbed, subtitled and narrated and Cable
Version and Explicit Version), including Stand Alone Hotel Rights and any other
rights in the Joint Picture for all purposes.
4.2 Licensor shall retain the Videogram Rights to the Joint
Pictures.
4.3 Pursuant to the Letter Agreement, Licensor and Licensee
agreed to apportion the Interactive Programming Rights to the Joint Pictures
during each calendar year during the Term as follows: Licensor had the right to
first select to retain for itself the Interactive Programming Rights to two of
the Joint Pictures, then Licensee had the right to select to retain for itself
the Interactive Programming Rights to two of the remaining Joint Pictures, then
the parties were to alternate thereafter. To avoid delay in the exploitation of
the Interactive Programming Rights, the following procedure will be used, it
being the parties' intention to follow the principles of the alternating
selection process described above as closely as is practicable. Licensor shall
elect whether to retain the Interactive Programming Rights to each Joint Picture
in the Notice pertaining to such Joint Picture as provided for in Section 2.1.
The Interactive Programming Rights to any Joint Picture which Licensor does not
elect to retain shall be granted to Licensee. After Licensor has selected the
Interactive Programming Rights to two Joint Pictures, if Interactive Programming
Rights to at least two of the Joint Pictures have not been granted to Licensee
under the preceding sentence, Licensee shall have the right to select to retain
the Interactive Programming Rights to two of the Joint Picture from the next
three Joint Pictures produced by Licensor. After each of the parties have been
granted the Interactive Programming Rights to two Joint Picture, the parties
shall alternate with Licensor making its election to retain the Interactive
Programming Rights with respect to a Joint Picture in the Notice pertaining to
such Joint Picture. If at any time Licensor and Licensee have selected to retain
the Interactive Programming Rights to an equal number of Joint Pictures,
Licensee shall have the right to refuse the Interactive Programming Rights for a
Joint Picture, provided that Licensee shall be entitled to exercise the
foregoing right to refuse no more than 5 times during any calendar year.
4.4 If Licensor wishes to produce and/or otherwise distribute
a sequel, prequel or remake of a Joint Picture, Licensor shall be obligated to
offer to Licensee the right to designate any such Picture as a Joint Picture and
shall give written notice of its intention to make such Picture, which notice
shall contain the proposed title, principal actors, plot synopsis and proposed
budget . Licensee shall have 15 days from its receipt of such notice to elect
whether to have such Picture designated as a Joint Picture. If Licensee elects
to designate the Picture as a Joint Picture, Licensee shall be granted the
rights in such Picture set forth in Section 4 and pay the license fee for such
Picture as provided for in Section 8.1.
4.5 Licensor agrees that it shall not exploit its Retained
Rights in any Joint Picture licensed to Licensee in any mode or manner of media
anywhere in the universe including without limitation, Videogram Rights and
Interactive Program Rights in certain of the Joint Pictures as provided for in
Section 4.2 until 30 days after the Joint Picture's Delivery Date(as that term
is defined in Section 6.1).
4.6 Without in any way limiting the generality of the
foregoing, the rights granted to Licensee shall include, and there is hereby
granted to it, the sole and exclusive right:
4.6.1 To use the title(s) by which the Joint Pictures are
or may be known or identified and to change the title(s) of the Joint Pictures;
4.6.2 To permit, authorize and license others to exercise
and exploit any of Licensee's rights hereunder (including without limitation
Licensee's right to sub-license and to receive credit) and to distribute,
exhibit, advertise, publicize and exploit the Joint Pictures under any terms
and in such manner as Licensee may deem proper or expedient;
4.6.3 To make such dubbed and subtitled versions of the
Joint Pictures, and the trailers thereof, including but not limited to, cut-in,
synchronized and superimposed versions thereof in any and all languages for
use in such parts of the Territory as Licensee may deem advisable; if either
party makes a dubbed or subtitled version of a Joint Picture, it shall make
such version available to the other party;
4.6.4 To permit commercial messages to be exhibited or
broadcast before, during and/or after the exhibition of the Joint Pictures;
4.6.5 To place Licensee's name, logo and/or trademark on
the prints, master videotapes, Beta SP video dubs, and multimedia products in
which Licensee has obtained the Interactive Program Rights to the Joint
Pictures ("Selected Joint Pictures") and in trailers thereof, and in all
advertising and publicity relating thereto, in such a manner, position,
form and substance as Licensee may deem advisable in the exercise of its
sole discretion;
4.6.6 To make such changes, additions including, but
not limited to narration, alterations, cuts, interpolations and eliminations
as Licensee may require in
order to adapt and make the Joint Pictures suitable for exhibition in any and
all parts of the Universe in connection with content requirement or otherwise or
to meet the time segment requirements of television stations. Furthermore, in
respect of the Selected Joint Pictures, Licensee shall be entitled to make any
changes, additions, alterations, cuts, interpolations, rearrangements, changes
of sequence, and eliminations ("changes") deemed desirable by Licensee in
connection with the exploitation of the Interactive Program Rights to the
Selected Joint Pictures; and any such changes shall not constitute a violation
of the so-called "moral rights" of authors or any other party;
4.6.7 To publicize, advertise, and exploit the
Joint Pictures throughout the Universe during the Term and to cause or permit
others to do so, including, without limitation, the exclusive right in the
Territory in connection with, and for the purpose of, advertising, publicizing
and exploiting the Joint Pictures, to: (a) publish and to license and authorize
others to publish in any language and in such forms as Licensee may deem
advisable, synopses, summaries, resumes and stories of and excerpts from the
Joint Pictures and from any literary or dramatic material included in the Joint
Pictures or upon which the Joint Pictures are based in book form and in
newspapers, magazines, trade periodicals, booklets, pressbooks and any other
periodicals and in all other media of advertising and publicity whatsoever;
(b) to perform, disseminate, and exhibit by any means in any media, including
without limitation to broadcast by radio and television and to license and
authorize others to so broadcast, in any language, the Joint Pictures or any
parts or portions thereof, and any literary or dramatic material included in
the Joint Pictures or upon which the Joint Pictures are based, and to use in
conjunction therewith any other literary, dramatic or musical material; and
(c) to use, license and authorize others to use the name, physical likeness and
voice (and any simulation or reproduction of any thereof including still
photographs from or relating to the Joint Pictures) of any party rendering
services in connection with the Joint Pictures for the purpose of advertising,
publicizing or exploiting the Joint Pictures or Licensee, subject to
contractual restrictions in favor of any third party or such party rendering
such services or granting such rights, provided that Licensor shall have
notified Licensee of said provisions as part of delivery hereunder and except
as limited or restricted as set forth on the "Disclosure" item of Schedule A;
4.6.8 To cause the production of trailers of the
Joint Pictures and to perform, disseminate, and exhibit such trailers, using
the performances, names, physical likenesses and voices (and any simulation or
reproduction of any thereof) depicted, reproduced or portrayed in the Joint
Pictures and the artwork, scenery, props and objects appearing or portrayed
therein, subject to contractual restrictions in favor of any third party
rendering services or granting such rights, provided that Licensor shall have
notified Licensee of said provisions as part of delivery hereunder;
4.7 Nothing herein contained shall be construed as to obligate
Licensee or Licensor to exercise any or all of its rights under this Agreement
or to release, distribute or exploit the Joint Pictures or any part thereof in
any form or medium, all such decisions being in Licensee's or Licensor's sole
discretion.
5. TERM.
Unless sooner terminated in accordance with the provisions of this
Agreement, "Term", as used in this Agreement, shall mean the period commencing
with the date of Delivery (as that term is defined in section 7. below) and
ending three years thereafter (the "Initial Term") which shall automatically be
extended for additional 3 year periods (each referred to as a "renewal Term")
unless either party gives written notice at least 90 days prior to the
expiration of the Initial Term or the Renewal Term, as the case may be, not to
renew this Agreement or this Agreement is sooner terminated pursuant to the
express terms of this Agreement.
6. DELIVERY OF THE PICTURES.
For each Joint Picture, Licensor shall, as a budgeted cost and
expense, deliver to Licensee (or its designee) the Joint Picture and all
materials, elements, and items (the "Delivery Items") specified herein and in
the Joint Picture Delivery Schedule, attached as Schedule "C" by the Delivery
Date for each Picture set forth in Section 7.4 and in the manner specified
herein:
6.1. On or before the Delivery Date for each Joint
Picture, Licensor shall deliver:
6.1.1 One (1) individually manufactured Beta SP videotape
dub (or 35mm print for Filmed Pictures) of the Explicit Version of the Picture;
6.1.2 One (1) individually manufactured Beta SP videotape
dub (or 35mm print for Filmed Pictures) of the Cable Version of the Picture;
and
6.1.3 VHS videotape screener of the Cable Version.
The dubs (or 35 mm prints, as the case may be) shall be of
first-class, broadcast quality, shall be first-generation transfers from the
videotape master, which shall have been derived directly from the original
motion picture low contrast print or interpositive of the Picture (in respect of
the Filmed Pictures), or from the original videotape elements (in respect of the
Videotaped Pictures). The dubs shall conform to all of the technical and other
standards set out in Schedule "C" hereto, and the dubs shall not contain any
advertising or promotional material. Within a reasonable time after receiving a
dub, Licensee shall evaluate it and accept or reject such dub by notice to
Licensor within 10 days of its receipt thereof(the last day of such 10 day
period is referred to as the Inspection Date"). If Licensee shall fail to notify
Licensor of rejection of a Dub in writing by the Inspection Date, such Dub shall
be deemed acceptable. If Licensee rejects a dub, Licensor shall deliver a second
or corrected dub within 10 days. Licensee's right of evaluation shall apply to
each and every dub of a Picture delivered hereunder; provided, however, that if
Licensee shall reject a dub of a Picture a second time, Licensee may, at its
sole option, terminate its obligation to license such Picture hereunder, and
Licensee shall not be obligated to pay any license fee for such Picture. (The
date Licensee accepts a Dub or if Licensee fails to reject a Dub by the
Inspection Date, the Inspection Date, shall be referred to as the "Delivery
Date.")
6.2 Other Delivery Items. As soon as reasonably
possible, but in no event later than 30 days prior to the Delivery Date for a
Joint Picture, Licensor shall deliver to the Licensee all of the Collateral
Materials, the Legal Materials, and all other Delivery Items as provided in
Schedule "D."
6.3 Access. In addition to the Delivery Items, Licensor shall
give Licensee a laboratory access letter in the form attached hereto as attached
Schedule "E" granting Licensee access to all of the negative pre-print and
videotape materials relating to the Joint Pictures, if any such materials are
located at another person's facility.
6.4 Delivery Dates. Licensor shall deliver the Joint Pictures
for a respective month on the first of each and every month (the "Delivery Date"
for said Pictures) starting June 1, 1995 and continuing thereafter during the
Term.
6.5. Failure of Delivery. Should Licensor fail to timely
deliver any of the Pictures, or any of the Delivery Items, Licensee, in addition
to all of its other rights and remedies, may manufacture, repair, correct, or
purchase such undelivered items and deduct the cost thereof from the License
Fee, said amount deducted not to exceed the License Fee.
7. LICENSE FEE.
7.1 As the full, complete, and entire consideration for the
rights granted to Licensee in the Joint Pictures and for Licensor's
representations, warranties and indemnifications made hereunder, Licensee hereby
agrees to pay Licensor a license fee for the Joint Pictures equal to one-half of
the budgeted cost for each Joint Picture, Licensee's share is estimated to be
approximately $15,000 per Joint Movie. The parties acknowledge that the budgeted
cost for a Joint Picture may be greater or less than the $30,000 estimate but in
no event shall the budgeted cost for a Joint Picture exceed $35,000 without
Licensee's express written consent.
7.2 Payment. Licensee shall pay for the Joint Pictures
or the Licensed Pictures within 10 days after the Delivery Date.
8. WARRANTIES AND REPRESENTATIONS.
Licensor warrants, represents and agrees as follows:
8.1. The Joint Pictures will be, when completely finished,
fully edited, titled and fully synchronized with English language, dialogue,
sound and music, recorded with sound equipment pursuant to valid licenses and in
all respects ready and of a technical quality adequate for release;
8.2. Licensor will take reasonable steps to ensure that
the Cable Versions of each of the Joint Pictures will meet the standards of
attached Schedule __;
8.3. Licensor is the sole owner of, and has the right,
power and authority to enter into this Agreement and to grant to or vest in
Licensee, all of the rights, licenses and privileges granted to or vested in
Licensee under this Agreement;
8.4. Licensor has taken reasonable measures to ensure
that all of the following have been fully paid or discharged or the payment
thereof shall be secured in a manner reasonably satisfactory to Licensee;
8.4.1 All claims and rights of owners of copyrights in
literary, dramatic, musical rights and other property or rights in and to all
stories, plays, scripts, scenarios, themes, incidents, plots, characters,
dialogues, sounds, music, words and other material of any nature whatsoever
appearing, used or recorded in the Joint Pictures;
8.4.2 All claims and rights of owners of inventions and
patent rights with respect to the recording of any and all dialogue, music and
other sound effects recorded in the Joint Pictures and with respect to the use
of all equipment, apparatus, appliances and other materials used in the
photographing, recording or otherwise in the manufacture of the Joint Pictures;
8.4.3 All claims and rights with respect to the use,
distribution, performance, exhibition and exploitation of the Joint Pictures,
and any music contained therein, excluding so-called small performance fees
and television performing rights fees payable to the owners of copyrights to
the music contained in the Joint Pictures; and
8.4.4 All cost of producing and completing the
Joint Pictures.
8.5. Licensor reasonably believes that there are not now, and
there will not be outstanding at any time liens, claims, charges, encumbrances,
restrictions, agreements, commitments, or arrangements whatsoever with any
person, firm or corporation, or any obligation (past, present or future), or any
defaults under, or breaches of, any contract, license or agreement which can, or
will, in any way interfere with, impair, abrogate, or adversely or otherwise
affect any of the rights granted to Licensee pursuant to the terms of this
Agreement, and that (except to the extent hereinafter expressly provided) there
are not now and will not be any payments of any kind required to be made by
Licensee in respect, or as a result, of any use of the Joint Pictures pursuant
to the rights and licenses herein granted to Licensee. Licensor represents and
warrants that any liens of any other third parties which may hereafter attach to
the Joint Pictures are and will be subordinate in all respects to Licensee's
rights under this Agreement, and that Licensor has paid all sums owing to the
Screen Actors Guild, if any, including residuals described in Section 8.11 below
and except set forth in the Disclosure item of Schedule A;
8.6. Licensor reasonably believes that neither the Joint
Pictures nor any parts thereof, nor any materials contained therein or
synchronized therewith, nor the titles thereof, nor the exercise of any right,
license or privilege herein granted, violates or will violate, or infringes any
trademark, trade name, contract, agreement, copyright (whether common law or
statutory), patent, or any literary, artistic, dramatic, personal, private,
civil or property right of privacy or publicity or "moral rights of authors" or
any other right whatsoever or constitute libel or slander of any person, firm,
corporation or association whatsoever except if Licensee materially alters the
content or sequence of a Joint Picture ;
8.7. To the best of Licensor's knowledge, the Joint
Pictures do not violate applicable FCC or other governmental requirements;
8.8. Licensor has taken reasonable steps to ensure that
neither the Joint Pictures nor any part thereof have been released, distributed,
or exhibited theatrically or non-theatrically or by means of television or in
any medium whatsoever except as otherwise noted in Schedule A in the Disclosure
item;
8.9. Licensor has not sold, assigned, transferred or conveyed,
and will not sell, assign, transfer or convey, to any party, any right, title or
interest in and to any of the Joint Pictures or any part thereof, or in and to
the dramatic or literary material upon which they are based adverse to or
derogatory of the rights granted to Licensee. Licensor further represents and
warrants that it has not authorized and will not authorize any party to
distribute, exhibit or exploit in any language, in any location, by any method
or means, any of the Joint Pictures, or any remake or sequel thereto, or any
motion picture of any type or kind based in whole or in part on such literary or
dramatic material, or any of the characters depicted therein adverse to or
derogatory of the rights granted Licensee, and has not authorized and will not
authorize any other party to exercise any right or take any action which might
tend to derogate from or compete with the rights herein granted or purported to
be granted to Licensee;
8.10. Licensor reasonable believes it owns or controls, all
motion picture, performance and all other rights granted hereunder in and to the
Joint Pictures and all the soundtracks thereof, and has obtained all necessary
licenses required for the production, synchronization, exhibition, performance,
distribution, marketing and exploitation of the Joint Pictures hereunder
(including the music contained therein, subject only to the payment of such
performing fees if any, as are customarily payable by exhibitors to such
performing rights society as shall have jurisdiction) throughout the Territory
and in perpetuity for any and all purposes licensed hereunder and by every
means, method and device now or hereafter known or required for full, complete
and unlimited exercise and enjoyment by Licensee of each and all of the rights
herein granted to it; the performing rights to all musical compositions
contained in the Picture are with respect to the contemplated use herein, (i)
controlled by the American Society of Composers, Authors and Publishers (ASCAP),
Broadcast Music, Inc. (BMI), the Performing Rights Society (PRS), SESAC, or
their affiliates or (ii) in the public domain or (iii) controlled by Licensor to
the extent required for the purpose of this Agreement in which event Licensor
hereby grants a synchronization license and public performance license to
Licensee with regard to all music contained in the Joint Pictures throughout the
Territory and in perpetuity without additional consideration;
8.11 Licensor reasonably believes that there are no
restrictions which would or could prevent Licensee from distributing the Joint
Pictures by any media or means for which rights are granted to Licensee
hereunder and there are not and will not be any payments (out of any part of any
revenues from the distribution or exploitation of the Joint Pictures or
otherwise) which must be made by Licensee to any actors, musicians, directors,
writers or to other persons who participated in the Joint Pictures, or to any
union, guild or other labor organization for any right to exhibit the Joint
Pictures or as compensation in connection with such exhibition or for any other
use of the Joint Pictures or any of the rights therein and thereto granted
hereunder and Licensee shall have no obligation to pay any residuals except
those set forth as a Disclosure item on Schedule A;
8.12 Licensor will take reasonable steps to ensure that the
copyright in the Joint Pictures and the literary, dramatic and musical material
upon which they are based or which are contained in the Joint Pictures will be
valid and subsisting for the maximum period of copyright protection available
throughout the universe.
9. INDEMNIFICATION.
9.1 Licensor shall, at all times, at its own expense,
indemnify, defend and hold harmless Licensee, its parent, subsidiaries and
affiliates and their respective officers, directors, agents, employees and
licensees from and against any reasonable damages, liabilities, losses, costs
and expenses (including reasonable legal fees and costs) directly arising out of
any breach of any of the warranties, representations, agreements, covenants or
obligations made by Licensor herein. Licensor shall reimburse Licensee on demand
for amounts paid or incurred by Licensee, including reasonable attorney's fees.
Pending final determination of any claim involving such breaches, Licensee may
withhold sums due Licensor in an amount consistent with the amount of such
claim, provided if Licensee withholds more than $5,000 with respect to a Joint
Picture , Licensor shall not be obligated to deliver additional Joint Pictures
hereunder. However, in any event, Licensee acknowledges its duty to take
reasonable steps to mitigate any damages owed by Licensor under this agreement.
9.2 Licensee shall, at all times, at its own expense,
indemnify, defend and hold harmeless Licensor, its parent, subsidiaries and
affiliates and their respective officers, directors, agents, employees and
licensees from and against any reasonable damages, liabilities, losses, costs
and expenses (including reasonable legal fees and costs) directly arising out of
any breach of any of the warranties, representations, agreements, covenants or
obligations made by Licensee herein. Licensee shall reimburse Licensor on demand
for amounts paid or incurred by Licensor, including reasonable attorney's fees.
10. CREDITS.
Licensor agrees to take reasonable steps to ensure that the
main and end titles on the Beta SP videotapes of the Joint Pictures to be
delivered to Licensee hereunder contain all necessary and proper credits for the
actors, directors, writers and all other persons appearing in or connected with
the production of the Joint Pictures who are entitled to receive the same.
Licensor shall deliver to Licensee a complete statement setting forth said
credits as they appear on the screen. Provided that Licensor delivers to
Licensee a complete statement setting forth the names of all persons to whom
Licensor is contractually obligated to accord credit in any advertising,
publicity or exploitation of the Joint Pictures and includes in such statements
excerpts from any such agreements defining and describing the form and nature of
such required credits, then Licensee shall comply with the minimum requirements
so indicated, provided that such credits are standard and customary in the adult
motion picture business. If Licensee shall not have complied with the
contractual requirements of which it has been so advised in writing, Licensee
shall, upon written notice from Licensor, promptly endeavor to cure such failure
on a prospective basis. No casual or inadvertent failure by Licensee or its
licensees to comply with the provisions of this paragraph shall constitute a
breach of this Agreement.
11. COPYRIGHT.
Licensor shall have the obligation to register the Joint
Pictures for copyright protection. If Licensor fails to do so, Licensee shall
have the right, at its election (but not the obligation) to cause any of the
Joint Pictures to be registered for copyright in the sole name of Licensor and
for such purpose, and only such purpose, Licensee is hereby appointed the
attorney-in-fact of Licensor. In such connection, it is understood that
copyright registration of such Joint Pictures shall initially be Licensor's
responsibility, and if Licensor undertakes such copyright registration, it will
affect registration in accordance with the foregoing in Licensor's name.
Licensee shall be under no liability of any kind in the event there shall be
failure to secure any such copyright or in the event of any defect in any such
copyright. The party registering any of the Joint Pictures for copyright shall
provide the other party with a photocopy of the certificate of copyright
registration as soon as the same has been acquired. Licensor agrees to execute a
Short Form Copyright Assignment in the form attached as Exhibit "F" for each
Joint Picture delivered by Licensor to Licensee.
12. NO PARTNERSHIP; NO THIRD PARTY BENEFICIARIES.
Nothing contained herein shall constitute or be deemed a
partnership between or joint venture by the parties hereto or constitute either
party the agent of the other. Neither party shall hold itself out contrary to
the terms of this Agreement and neither party shall become liable or responsible
for any representation, act or omission of the other contrary to the provisions
hereof. This Agreement is not for the benefit of any third party and shall not
be deemed to give any right or remedy to any such party whether referred to
herein or not.
13. WAIVER.
No waiver by any party hereto of the breach of any term or
condition of this Agreement shall be deemed or construed to be a waiver of the
breach of such term or condition in the future, or of any preceding or
subsequent breach of the same or any other term or condition of this or any
other agreement.
14. REMEDIES CUMULATIVE.
All remedies, rights, undertakings, obligations and agreements
contained in this Agreement shall be cumulative, and none of them shall be in
limitation of any other remedy, right, undertaking, obligation or agreement of
either party.
15. ASSIGNMENT.
Licensee shall have the right to assign this Agreement or any
of its rights or interests hereunder, to any parent, subsidiary or affiliate or
to any other person, firm or corporation, with Licensor's prior written
approval, not to be unreasonably withheld. Any assignee must assume all
obligations to Licensor under this Agreement in writing however Licensee and
Spice shall remain fully liable on Licensee's obligations hereunder. Licensor
may not assign its rights or obligations under this Agreement without the prior
written consent of Licensee, which consent shall not be unreasonably withheld.
16. ADDITIONAL DOCUMENTS.
Each party shall execute, acknowledge and deliver to the
other, promptly upon the request of the other party therefor, any other
instruments or documents necessary or desirable to evidence, effectuate, or
confirm this Agreement, or any of the terms and conditions hereof. With respect
thereto, Licensor shall execute and deliver to Licensee the Short Form
Assignment attached hereto as Schedule "E" and incorporated herein by reference,
for recordation in the U.S. Copyright Office to demonstrate Licensee's rights as
set forth herein. For purposes of this section only, Licensor hereby appoints
Licensee its attorney-in-fact with the right, but not the obligation, to
execute, acknowledge and deliver in Licensor's name and on Licensor's behalf any
such document or instrument which Licensor shall fail to provide in connection
herewith.
17. MODIFICATIONS.
This Agreement, together with its exhibits, cannot be amended,
modified or changed in any way whatsoever excepting only by a written instrument
duly executed by authorized officers of the parties hereto.
18. ENTIRE AGREEMENT.
This Agreement shall be binding upon the parties hereto and
their respective successors, licensees, assigns, and other representatives, and
hereby cancels and supersedes all prior negotiations and understandings between
the parties relating to the Joint Pictures, and together with the Master
Agreement and the License Agreement contains all of the terms, covenants,
conditions, representations and warranties of the parties hereto in relation to
the subject matter hereof.
19. SEVERABILITY.
In the event that any term, condition, covenant, agreement,
requirement or provision herein contained shall be held by any Court or
arbitration tribunal having jurisdiction to be unenforceable, illegal, void or
contrary to public policy, such term, condition, covenant, agreement,
requirement or provision shall be of no effect whatsoever upon the binding force
or effectiveness of any of the others hereof, it being the intention and
declaration of the parties hereto that had they or either of them, known of such
unenforceability, illegality, invalidity or contrariety to public policy, they
would have entered into a contract each with the other, containing all of the
other terms, conditions, covenants, agreements, requirements and provisions
hereof.
20. NOTICES.
All notices, statements, or other instruments required or
desired to be given hereunder by either party shall be in writing and shall be
given at the address set forth at the head of this Agreement, and shall be
either deposited in the mails in the country of origin (postage prepaid), sent
by telegraph or telecopier (charges prepaid), or personally delivered, and shall
be deemed given upon the date of such deposit, sending, or delivery. Either
party shall have the right to designate other or different addresses for the
giving of any notices hereunder by a notice given in accordance with the
provisions of this paragraph. All payments shall be remitted to Licensor at the
address designated at the head of this Agreement, or such other address as
Licensor shall so advise Licensee in writing.
21. GOVERNING LAW.
This Agreement shall be deemed made in and is to be construed
and interpreted in accordance with and governed by the internal laws of the
State of New York applicable to contracts executed and to be performed therein.
Any dispute between the parties hereto with respect to the subject matter of
this Agreement shall be resolved in the State or Federal Courts in the County of
New York, New York and the parties do hereby specifically consent to the
jurisdiction and venue of said Courts. The parties further agree that service of
any pleading, document, notice, or paper ("Document") hereunder may be effected
by mailing said Document certified mail to the party being served in any action
hereunder at the address set forth at the head of this Agreement, and that any
Document so served shall be deemed served on the recipient with same legal force
and effect as if personally served upon the recipient within New York County,
New York.
22. LICENSEE'S REMEDIES.
It is hereby agreed that certain of th rights granted or
reserved by Licensee and Licensor hereunder are of special and unique nature,
the loss of which cannot be adequetely compensated at law, and in the event of a
breach of any of the provisions hereof granting or reserving such rights, the
aggrieved party shall be entitled to specific performance, injunctive relief,
and/or such other equitable relief as may be applicable, however, the exercise
of such equitable relief or any one type of equitable relief shall not be
construed as or be deemed to be a waiver of any other rights and remedies to
which such party may be entitled at law, in equity, or otherwise.
23. LICENSOR'S REMEDY FOR NONPAYMENT.
If Licensee defaults with respect to payment of the license
fee for a Picture and such default is not cured within twenty (20) business days
after written notice, then Licensee shall have no rights with respect to the
Picture for which payment has not been received, Licensor shall be entitled to
seek an injunction against Licensee's exploitation of such Picture and Licensor
shall have the right to terminate this Agreement with respect to Joint Pictures
not yet delivered to Licensee.
24. ATTORNEYS' FEES.
In any action between the parties relating to this Agreement,
the enforcement of any of its terms or to any other contract relating to the
subject matter of this Agreement, the prevailing party shall, in addition to any
other award of damage or other remedy, be entitled to reasonable attorney's
fees, costs and expenses as may be fixed by the Court provided however the
amount of attorney's fees shall not exceed the amount of any monetary judgment.
IN WITNESS WHEREOF, the parties hereto have executed the foregoing
agreement as of the date and year first above written.
LICENSOR
VCA LABS, INC.
a California corporation
By: _____________________________
RUSSELL J. HAMPSHIRE, President
LICENSEE
MEDIA LICENSING, INC.
a Nevada corporation
By: _____________________________
Mark Graff, President
Spice hereby unconditionally guarantees the full and timely
performance by Licensee of Licensee's obligations hereunder and the accuracy of
the representations, warranties and covenants of Licensee hereunder.
SPICE, INC.
By:_________________________
<PAGE>
SCHEDULE "A"
(SAMPLE)
Dated:________________, 199_.
This is AMENDMENT NO. ______ to the Agreement dated March ___, 1995 between
VCA Labs, Inc. and Media Licensing, Inc. All terms defined in the Agreement
shall have the same meanings herein.
1. The following Joint Pictures are licensed to Licensee in accordance
with the Agreement:
- - -------------------------------------------------------
- - -------------------------------------------------------
- - -------------------------------------------------------
- - -------------------------------------------------------.
2. Except as specifically provided in this Amendment, the Agreement shall
remain unaffected and is hereby ratified and confirmed.
3. Notice of limitation of rights granted, other contractual requirements
or portions of Joint Picture previously released.
"Licensor"
VCA Labs, Inc.
a California corporation
By: __________________________
"Licensee"
MEDIA LICENSING, INC.
a Nevada corporation
By: __________________________
STEVE SARIL
SCHEDULE "B"
(SAMPLE)
APPROVED LIST
Dated for reference:________________, 199_.
This is Schedule "B" ______ to the Agreement dated March ___, 1995 between VCA
Labs, Inc. and Media Licensing, Inc.
1. Pursuant to paragraph 3.7 of the Agreement, the following performers
are pre-approved for all Principal Roles in any of the Joint Pictures:
- - -----------------------------------------
- - -----------------------------------------
- - -----------------------------------------
- - -----------------------------------------
- - -----------------------------------------
- - -----------------------------------------
- - -----------------------------------------
- - -----------------------------------------
2. Pursuant to paragraph 3.7 of the Agreement, the following Directors
are pre-approved for any of the Joint Pictures:
- - -----------------------------------------
- - -----------------------------------------
- - -----------------------------------------
- - -----------------------------------------
- - -----------------------------------------
- - -----------------------------------------
- - ----------------------------------------
SCHEDULE "C"
DELIVERY SCHEDULE
DELIVERY OF MATERIALS
Except as otherwise provided herein, in respect of each the Joint
Pictures, Licensor shall make physical delivery, at the sole cost and expense of
Licensor, of the items set forth herein to such Delivery Location as hereinafter
designated or as Licensee shall otherwise designate.
A. Delivery Locations.
1. [Insert Laboratory name and address].
2. [Insert Licensee's recipient of Delivery Items].
3. [Insert Video Duplicator name and address].
4. [Insert Sound House name and address].
B. Film Materials.
For all of the Filmed Pictures:
1. Original Negative. Access to the original 35mm Picture negative
(without scratches or defects) conformed to the American National Standards
Institute catalogue reference P.H.22.59, "35mm Motion Picture Camera Aperture
Images", fully cut, edited and assembled, complete with credits and main title,
narrative (if any), end titles and all descriptive titles, and conforming to the
final edited version of the action work print of the Picture approved by
Licensee and in all respects ready and suitable for the manufacture of the
Protection Interpositive. (Deliver fully executed Laboratory Access Letter to
Jan Partnoy/GPPV Operations in New York.)
2. Optical Sound Track Negative. Access to one (1) fully mixed
and recorded original 35mm Optical Sound Track Negative of the Picture, of
technically acceptable quality, prepared for printing in perfect
synchronization with the Picture Negative and conforming in all respects to
the Release Print approved by Licensee. (Per Laboratory Access Letter).
3. Magnetic 6-Track 35mm Fullcoat. Access to one (1) 35mm
original magnetic 6-track fullcoat, consisting of separate dialogue, music and
100% filled sound effects, fully recorded and equalized in perfect
synchronization with the Picture action, and conforming in all respects to the
Release Print approved by Licensee. Sound track channel assignments as
follows: Ch.1 Composite Stereo Left. Ch.2 Composite Stereo Right. Ch.3 Music
and Effects Stereo Left. Ch.4 Music and Effects Stereo Right. Ch.5 Separate
Sound Effects fully filled. Ch.6 Separate Dialogue with no sound effects.
4. Color Interpositive Protection Master. If the Picture is in
color, access to one (1) corrected and complete interpositive master of the
Picture, conformed in all respects to the Answer Print for protection
purposes. (Per Laboratory Access Letter).
5. Color Internegative/Dupe Negative. Access to one (1) 35mm
Internegative manufactured from the Color Interpositive Protection Master
conformed in all respects to the delivered and accepted Release Print. (Per
Laboratory Access Letter).
C. Videotape Items.
For each of the Joint Pictures (whether Filmed Pictures or Videotaped
Pictures):
1. Video Masters. One (1) video master in High Band PAL made
from NTSC video master (which shall also be furnished ) manufactured from a low
contrast print or the interpositive or the master if shot on video
tape of both the Explicit Version and Cable Version of the Joint Picture.
(a) Video Format and specifications shall conform with
guidelines as detailed in (Technical Specifications for Videotape Supplied to
Graff Pay-Per-View, Inc.).
D. Publicity Materials.
1. Black and White Stills. Access to any Black and White
photography depicting scenes in the Picture with members of the cast.
(Deliver Access Letter to Robin Sacks/GPPV Marketing in New York.)
2. Color Transparencies. Access to all production color slides
depicting scenes in the Picture with members of the cast (including Principal
Actors) appearing therein. A minimum of fifty color slides selected by
Licensee will be duplicated and delivered. (Deliver to Robin Sacks/GPPV
Marketing in New York.)
3. 4" x 5" transparency (or such other format as is acceptable
to Licensee) of the keyart for each Picture, and copies of all other existing
artwork, advertising or promotional campaigns, including ad slicks and
one-sheets, if any. (Deliver to Robin Sacks/GPPV Marketing in New York.)
E. Legal and Publicity Documents.
For each of the Joint Pictures:
1. Laboratory Access Letters. Fully executed Laboratory Access
Letters, as provided in paragraph 4(D) of the Agreement, and in the form
attached thereto as Schedule "D" giving Licensee irrevocable access for
the period of this Agreement, to all preprint and video materials being held in
various facilities. Said letters are to be countersigned by laboratories.
(Deliver to Jan Partnoy/GPPV Operations in New York.)
2. Sound Laboratory Access Letter. One (1) letter of access to
the Sound Service Facility, giving Licensee irrevocable access for the period
of this Agreement, to all preprint and video materials being held. (Deliver to
Jan Partnoy/GPPV Operations in New York.)
3. Final Shooting Script. One (1) copy of the final shooting
script of each of the Joint Pictures. (Deliver to Robin Sacks/GPPV Marketing
in New York.)
4. Feature Dialogue, Continuity and Spotting List. 2 copies in
the English language of a detailed, final dialogue and action continuity, in
an acceptable format, of the completed Joint Pictures and 2 copies in the
English language of a detailed final spotting list for the purpose of
subtitling, in an acceptable format, of the Joint Pictures.
(Deliver to Jan Partnoy/GPPV Operations in New York.)
5. Synopsis. Three (3) copies of a brief synopsis in the
English language (one typewritten page in length) of each Picture.
(Deliver to Barry Teiman/GPPV Programming in Santa Monica.)
6. Technical Crew. Three (3) copies of a list of all technical
personnel (including their title or assignment) involved in the production of
the Joint Pictures. (Deliver to Barry Teiman/GPPV Programming in
Santa Monica.)
7. Credit Obligations. Three (3) copies of the Screen Credit
Obligations, Paid Advertising Credit Obligations, and any and all contracts of
the cast (including releases, name and likeness use and approval), director,
cinematographer, screenwriter(s), producer(s), and author(s), (or other
owner(s) of underlying material, if applicable). (Deliver to Barry
Teiman/GPPV Programming in Santa Monica.)
8. Music Cue Sheets. 2 Music Cue Sheets for each Picture
setting forth the titles of the compositions, names of the composers, the
nature, extent, exact timing and uses made of each composition in the
Picture, the name and address of the owner of the copyright of each
composition, if copyrighted, and the name and address of the publisher thereof,
if published. (Deliver to Barry Teiman/GPPV Programming in Santa Monica.)
9. Certificate of Origin. Ten (10) original, notarized
Certificates of Origin for each of the Joint Pictures.
(Deliver to _________________.)
10. Assignment of Rights. Ten (10) original, notarized
assignment of rights in each of the Joint Pictures from Licensor to Licensee.
(Deliver to ________________.)
11. Insurance Certificate. Insurance certificate evidencing coverage of
the Picture and naming Licensee as an Additional Insured under a standard
producer's liability ("E & O") insurance policy issued by a nationally
recognized, U.S. insurance carrier reasonably acceptable to Licensee for a
period of at least one (1) year following delivery of the Picture. Such policy
shall: (a) have limits of not less than one million dollars ($1,000,000) for a
single occurrence/three million dollars ($3,000,000) annual aggregate, (b) name
Licensee, its parent, subsidiaries, affiliates, licensees, and their respective
officers, directors, agents and employees as additional insureds, (c) not
provide for a deductible or retention of more than $10,000, (d) provide that
such policy shall not be canceled, terminated, or modified without thirty (30)
days written notice to Licensee, (e) not contain any exceptions (unless approved
in writing by Licensee),(f) state that such policy is primary, state that any
insurance maintained by Licensee is neither primary or contributing, and contain
a provision or endorsement negating the "other insurance" clause (if any). In
the event of cancellation, termination or modification of such policy, Licensor
shall immediately secure a substitute policy satisfactory to Licensee. If
Licensor fails to secure or maintain said insurance, Licensee may terminate this
Agreement, or at its sole election, obtain its own insurance and deduct the cost
thereof from any monies payable to Licensor hereunder or otherwise (Deliver to
__________________.)
12. Copyright Certificate. For each Picture fully executed,
dated and numbered, United States Copyright Form PA, verifying the copyright
number and year of publication (including extensions and renewals, if
applicable) and when issued, a copy of the Certificate of Copyright.
(Deliver to __________________.)
13. Music Licenses and Composer's Agreement. Copies of Music
Licenses (synchronization and mechanical) and the Composer's Agreement.
(Deliver to __________________.)
14. Chain of Title. Chain of title clearances (Licensor must
provide in all contracts that all work created for the film was "work made for
hire" and that all right, title and interest and all results and proceeds are
owned by Licensor). (Deliver to _________________.)
15. UCC Search. Current UCC searches showing each Picture is
free and clear of any and all liens. (Deliver to __________________. )
16. Acquisition of Underlying Material Agreements. Copies of
Acquisition of Rights from novel or short story author, if applicable.
These documents must state that all work created for the film was "work made
for hire" and that all right, title and interest and all results and proceeds
are owned by Licensor). (Deliver to_____________________.)
17. Mortgage and Assignment of Copyright. For each Picture, 2
fully executed and notarized copies of the Mortgage and Assignment of Copyright.
Acceptance by Licensee of less than all of the foregoing items with
respect to the Joint Pictures and/or release of any of the Joint Pictures by
Licensee, prior to delivery of all of the aforementioned items, shall in no
event be construed as a waiver by Licensee of Licensor's obligation to deliver
any such item not so delivered. No waiver of delivery of any such item shall be
valid or binding unless in writing and signed by Licensee.
Licensor agrees to keep Licensee advised at all times as to the
location of the principal preprint elements and other materials with respect to
which Licensee has been granted access hereunder. With respect to unfinished
films, Licensor agrees to keep Licensee advised of the production status at
regular intervals.
DATED 22nd January 1993
(1) THE HOME VIDEO CHANNEL LIMITED
(2) RICHARD CHRISTOPHER YATES
SERVICE AGREEMENT
THIS AGREEMENT is made on 22nd January 1993
BETWEEN:-
(1) THE HOME VIDEO CHANNEL LIMITED (company number 2412178) whose
registered office is at Pembroke House, 11 Northlands Pavement,
Pitsea, Basildon, Essex (the "Company"); and
(2) RICHARD CHRISTOPHER YATES of Woodbarn Cottage, Pump Lane North, Marlow,
Buckinghamshire SL7 3RD (the "Executive").
WHEREBY IT IS AGREED as follows:
1. INTERPRETATION
1.1 In this Agreement:-
the "Board" means the board of directors of the Company from
time to time;
"Employment" means the Executive's employment under this
Agreement;
"Financial Year" has the meaning set out in Section 223 of the
Companies Act 1985 as in effect on the date of
this Agreement;
"Intellectual includes letters patent, trade marks, service marks,
Property" designs, copyrights, design rights, applications for
registration of any of the foregoing and the right
to apply for them in any part of the world
and rights of a like nature; and
"Net Profits" means (in relation to any financial year of the
Company) a sum calculated in accordance with the
provisions of the Schedule.
1.2 So far as the context allows or requires:-
1.2.1 the singular includes the plural and vice versa and a reference to
one gender includes a reference to any gender;
1.2.2 references to Clauses are to the clauses of this Agreement and
references to this Agreement include the Schedule;
1.2.3 references to a person include references to an individual, firm,
body corporate, or unincorporated association.
1.3 The headings in this Agreement are for ease of reference only and
shall not be used in the interpretation or construction of any of the
provisions of this Agreement.
2. EMPLOYMENT
The Company shall continue to employ the Executive and the Executive
shall continue to be employed by and serve the Company as its Managing
Director.
3. TERM
3.1 Subject always to earlier termination pursuant to Clause 11.1, the
employment may be determined at any time by the Executive giving to the
Company at least six months' notice in writing or the Company giving to
the Executive at least twelve months' notice in writing in either case
so as to expire on or at any time after 1st March 1995.
3.2 The Employment forms part of a continuous period of employment within
the meaning of the Employment Protection (Consolidation) Act 1978 which
began on 1st August 1989.
4. DUTIES
During the term of the Employment:
4.1 The Executive shall perform and observe such powers, duties and
restrictions and shall conduct and manage such of the affairs of the
Company as may from time to time reasonably be required of him by the
Board and he shall obey and carry out the reasonable directions of the
Board;
4.2 Unless prevented by illness or accident and except during holidays
provided for under Clause 7 the Executive shall, during normal working
hours and at such other reasonable times as may be necessary, devote
the whole of his time attention and abilities to his duties at such
place or places within the United Kingdom and, if appropriate and for
the benefit of the Company, at such place or places abroad as the Board
may reasonably determine, except that the Executive may not be required
without his prior consent to devote so large a percentage of his time
to the performance of his duties abroad as to make it necessary or
desirable for him to take up residence abroad;
4.3 The Executive shall faithfully serve the Company to the best of his
ability and endeavour to promote the business of the Company;
4.4 The Executive shall give to the Board or such persons as the Board may
direct such information regarding the affairs of the Company as the
Board shall require; and
4.5 The Executive shall also act without further remuneration or fees as a
director of the Company.
5. OFFICE OF DIRECTOR
During his Employment the Executive shall not:
5.1 Voluntarily resign as a director of the Company unless the Executive
reasonably considers it necessary or appropriate to do so to avoid any
or any continuing personal liability (in which case such a resignation
shall not constitute a breach of this Agreement by the Executive);
5.2 Be subject to retirement by rotation pursuant to the articles of
association of the Company; or
5.3 Do anything that would cause the Executive to be disqualified from
continuing to act as a director of the Company.
6. REMUNERATION, EXPENSES AND CAR
6.1 The Company shall pay the Executive a salary at the rate of
(pound)100,000 per annum to accrue from day to day and to be paid by
equal monthly installments in arrears on the last working day of each
calendar month by bank transfer. The Board shall review the Executive's
salary once a year on or as near as reasonably practicable to the 1st
day of August in each year (with the first such review being on 2nd
August 1993) but shall not decrease the Executive's salary.
6.2 The Executive shall be reimbursed on a monthly basis all expenses
properly incurred by him in the performance of his duties hereunder
such reimbursement to be made against the production of relevant
receipts or other evidence of expense.
6.3 During the period of this Agreement the Company shall place at the
disposal of the Executive a car with a car telephone for both the
business and personal use of the Executive. The car initially shall be
a Porsche 944 Cabriolet and shall be replaced forthwith after the
earliest of (a) the date that the mileage that such car has traveled
(as shown on the car's odometer) is equal to 40,000 miles or (b) on (or
as near as reasonably practicable to) 1st August 1994. Thereafter the
Executive shall receive successive replacements forthwith after the
earliest of (a) the third anniversary of the date that the Executive's
then current car was first provided or (b) the date that the mileage
that the Executive's then current car has traveled (as shown on the
car's odometer) is equal to 40,000 miles. All such replacement cars
shall be Porsche 944 Cabriolet (or the nearest equivalent then
available) or a car chosen by the Executive having equivalent value.
The Company shall pay all road tax, insurance premiums, maintenance,
repair, servicing and petrol expenses in respect of the car and (as
appropriate) the car telephone. Upon termination of the Employment for
whatever reason the Executive shall immediately return the car (with
the car telephone) and all keys to it to the Company.
6.4 The Company shall cause its auditors for the time being to certify the
Net Profits of the Company for each financial year of the Company
starting on or after 31st July 1993 on or within 7 days of the date on
which accounts of the Company for that financial year are laid before
the Company in general meeting. Such certificate shall be final and
binding on the parties.
6.5 Subject to Clause 6.6, the Company shall pay the Executive by way of
additional remuneration a sum equal to 7.5 percent of the increase in
the Net Profits of the Company as so certified in respect of the
immediately preceding financial year starting. Such sum shall be paid
by bank transfer within 30 days of the certification in question.
6.6 If the Employment is terminated for any reason during any financial
period starting on or after 31st July, the sum otherwise payable to the
Executive by way of additional remuneration pursuant to Clause 6.5
shall be reduced by an amount equal to the proportion of the financial
period in question falling after termination of the Employment.
6.7 In the event that the Company changes its accounting reference date at
any time after the date of this Agreement the parties shall agree
appropriate adjustments to the provisions of Clauses 6.4 - 6.6 and in
default of agreement within 14 days such adjustments shall be
determined by the Company's auditors for the time being whose decision
shall be final and binding on the parties and whose costs shall be
borne by the Company.
7. PENSION, LIFE INSURANCE AND PRIVATE HEALTH SCHEME
7.1 The Company shall provide to the Executive annually during the term of
the Employment a further sum equal to 10% of the Executive's salary
from time to time under Clause 6.1 for the purposes of investing in any
pension plan of his own choice, such sum to be paid by equal monthly
installments in arrears on the last working day of each calendar month
to any pension plan nominated from time to time by the Executive
provided always that in the event that the Company or any holding
company of the Company shall establish its own pension scheme then the
Executive shall be entitled to become a member of such scheme (at the
Executive's option) in which case the Company shall pay all
contributions to such scheme in respect of the Executive such
contributions being not less than 10% of the Executive's salary from
time to time under Clause 6.1. No contracting-out certificate pursuant
to the provisions of the Social Security Pensions Act 1975 is in force
in respect of the Employment.
7.2 The Company shall at its own cost procure that throughout the term of
the Employment the Executive shall:
7.2.1 be a member of a reputable private medical care scheme on the
highest scale provided by such scheme under which he, his wife
and his children under the age of 18 years shall be eligible
to benefit;
7.2.2 have the benefit of term life insurance cover in the amount of 4
times his basic salary under Clause 6.1 from time to time;
7.2.3 have the benefit of permanent disablement cover conferring
salary continuance benefits of 75% of his basic salary from
time to time (provided always that the Company shall not be
obliged to pay the amount of any premium therefor in excess of
a reasonable and usual premium for an individual of equivalent
age and seniority as the Executive).
8. HOLIDAYS AND HOLIDAY PAY
8.1 In addition to all bank and other public holidays the Executive shall
be entitled to 25 working days holiday during each calendar year to be
taken at such time or times as the Board may approve during which his
remuneration under Clause 6 shall continue to be payable. The Executive
may with the approval of the Board carry forward any unused part of his
holiday entitlement in any calendar year to the next calendar year.
8.2 During the calendar year in which the Employment terminates the
Executive shall be entitled to such proportion of his annual holiday
entitlement as the period of the Employment for such year shall bear to
one calendar year. Upon termination of the Employment for whatever
reason the Executive shall be entitled to salary in lieu of any then
outstanding holiday entitlement and for the purposes of calculating any
such entitlement the Executive's holiday entitlement shall be treated
as accruing pro rata through the year on a daily basis.
8.3 Any days forming part of a holiday period taken by the Executive in
respect of which he is ill or incapacitated by accident and for which a
doctor's certificate of illness or incapacity is provided by him shall
not be set against his holiday entitlement but will be treated as
illness or accident for the purposes of Clause 9 below.
9. ILLNESS/INCAPACITY
9.1 If the Executive becomes unable properly to perform his duties under
the Agreement as a result of illness, accident or other incapacity for
more than 7 consecutive days he shall send to the Company a certificate
of his incapacity signed by a registered medical practitioner and
during any continued absence the Executive shall send a further
certificate every week. In respect of such absences of 7 or less
consecutive days, the Executive will be required to comply with such
procedures within the Company as may be in force from time to time
governing the self certification of reasons for absence .
9.2 If the Executive shall be prevented by illness, accident or other
incapacity from properly performing his duties hereunder the Executive
shall be entitled to his salary at the full rate, less any social
security, statutory sick pay or other benefits received by him for up
to 190 working days in respect of all periods of absence in any period
of 12 consecutive months and thereafter his salary shall continue to be
paid at 50% of the then full rate for a further period of up to 65
working days and thereafter the payment of his salary during any
further period of absence shall be at the discretion of the Board.
9.3 For the purposes of calculation of statutory sick pay the days on which
the Executive could qualify for payments are Monday, Tuesday,
Wednesday, Thursday and Friday.
10. RESTRICTIONS AND CONFIDENTIAL INFORMATION
10.1 During the continuance of his Employment the Executive shall not
without the prior written consent of the Board, directly or indirectly,
in any capacity engage in any other business or be concerned, engaged
or interested in any trade, business or occupation of a similar nature
to or competitive with that carried on by the Company.
10.2 The Executive shall not for a period of one year after the termination
howsoever caused of the Employment whether alone or with any other
person or as principal, agent, partner, director, employee or
consultant and whether directly or indirectly be engaged, concerned or
interested in any business directly competing in material respects with
the business of the Company as carried on at the date of such
termination.
10.3 Nothing in Clauses 10.1 and 10.2 shall prohibit the Executive from
holding (a) any number of shares of common stock or debentures in Graff
Pay-Per-View Inc. or (b) shares or debentures quoted or dealt in on a
recognized stock exchange (whether in the United Kingdom or elsewhere)
if not more than 2% of the shares or debentures of any class of any
company is so held or (c) shares or debentures in respect of which he
is eligible for relief from income tax under the Business Expansion
Scheme.
10.4 The Executive shall not during the term of the Employment (except in
the proper course of his duties as a director or employee of the
Company) nor at any time after the termination for whatever reason of
the Employment use for his own or other purposes or disclose or publish
to any person at all any trade secret or any other confidential
information concerning the business or management or finances of the
Company which may have come to his knowledge during or in the course of
his employment with the Company (whether prior to the commencement of
this Agreement or not).
10.5 Clause 10.4 above shall not apply or shall cease to apply to any
such trade secret or confidential information:
10.5.1 once it falls into the public domain otherwise than through the
Executive's default;
10.5.2 which the Executive can show he obtained from an independent
third party without any direct or indirect breach of an
obligation of confidentiality owed to the Company; or
10.5.3 which the Executive is obliged to disclose pursuant to an order of
any court of competent jurisdiction.
11. TERMINATION IN SPECIFIC CASES
11.1 In all or any of the following cases the Company may, subject to Clause
14 below, terminate the Employment by giving the Executive written
notice to operate and take effect from the date of its service
whereupon the Executive shall not be entitled to any further payment
under this Agreement except for salary (including any holiday pay)
accrued due but unpaid as at the date of termination and any payment
due as reimbursement of expenses:
11.1.1 if he is in serious or (after warning) repeated breach of any of his
material obligations under this Agreement;
11.1.2 if he refuses without good cause to carry out any lawful and
reasonable instructions given to him in the course of the Employment
by the Board;
11.1.3 if he commits any fraudulent act in connection with the business of
the Company as the result of which the Company suffers any loss;
11.1.4 if he is convicted of any criminal offense (other than an
offense under the Road Traffic Acts for which a penalty of
imprisonment is not imposed), such as being an offense which
materially affects the Company's business;
11.1.5 if he is prevented from properly performing his duties under
this Agreement as a result of illness/accident or other
incapacity in respect of periods of absence totaling 190
working days or more in any period of 12 consecutive months;
11.1.6 if he shall have a disqualification order (as defined in Section 1 of
the Directors Disqualification Act 1986) made against him.
12. TERMINATION PAYMENT
12.1 Upon expiration or termination howsoever of the Employment for whatever
reason and by which ever party, the Company shall pay to the Executive
a lump sum (after deduction by the Company of all tax payable thereon
but with no other deduction or withholdings whatsoever) equal to one
year's gross salary. For this purpose one year's gross salary means the
salary per annum of the Executive as at the date of such termination
without any tax deductions or other deductions of any kind (but
excluding the cash value of any non-cash benefit for which the
Executive is entitled as at the date immediately prior to such
termination). The Company shall be responsible for paying all taxes
arising in respect of any payment to the Executive under this Clause
12.1.
12.2 The payment referred to in Clause 12.1 shall be without prejudice (and
in addition) to any payment to which the Executive is or becomes
entitled under or in connection with this Agreement (including, without
limitation, payment for the remainder of the Term if the Employment is
terminated prior to the expiry of the Term).
13. EXECUTIVE'S OBLIGATIONS UPON TERMINATION OF EMPLOYMENT
If on the termination of the Employment for whatever reason the
Executive is a director of the Company he shall forthwith resign such
directorship and shall not be entitled to any compensation or other sum
in respect thereof and should the Executive fail to do so the Company
or anyone authorized by it is hereby irrevocably appointed as his agent
and attorney to execute any documents and do any things necessary or
desirable to give effect to such resignation.
14. GRIEVANCE PROCEDURE
If the Executive is dissatisfied with any disciplinary decision
relating to him or to the Employment he may apply with reference to
such matters by letter to the Board and the Board shall reasonably
consider the contents of any such letter.
15. AMALGAMATION/RECONSTRUCTION
If before the expiration of this Agreement the employment of the
Executive shall be terminated by reason of the liquidation of the
Company for the purpose of amalgamation or reconstruction or as any
part of an arrangement for the amalgamation of the undertaking of the
Company not involving liquidation and the Executive shall be offered
employment with the amalgamating or reconstructed company for a period
not less than the unexpired term of this Agreement and on terms no less
favorable than the terms of this Agreement the Executive shall have no
claim against the Company in respect of the termination of his
employment by the Company.
16. ASSIGNMENT
The Company may not assign or otherwise transfer any of its rights or
obligations under this Agreement and any such assignment or other
transfer shall be null and void.
17. NOTICES
Any notice to be served under or pursuant to this Agreement shall be in
writing. In the case of notice to the Company it shall be sent by
recorded delivery to or left at the Company's registered office and in
the case of notice to the Executive it shall be handed to him
personally or sent - by recorded delivery to his last known residential
address.
18. PREVIOUS AGREEMENTS
This Agreement supersedes all previous agreements and arrangements (if
any) between the Company and the Executive relating to his employment
by the Company which are hereby terminated by mutual consent and the
Executive acknowledges that he has no claim whatsoever against the
Company in respect of such termination.
19. INTELLECTUAL PROPERTY
19.1 In accordance with the provisions of the Patents Act 1977, the
Registered Designs Act 1949 and the Copyright, Designs and Patents Act
1988 if at any time in the course of his Employment the Executive makes
or discovers or participates in the making or discovery of any
Intellectual Property relating to or capable of being used in the
business for the time being carried on by the Company full details of
the Intellectual Property shall immediately be communicated by him to
the Company and shall be the absolute property of the Company. At the
request and expense of the Company the Executive shall give and supply
all such information, data, drawings and assistance as may be requisite
to enable the Company to exploit the Intellectual Property to the best
advantage and shall execute all documents and do all things which may
be necessary or desirable for obtaining patent or other protection for
the Intellectual Property in such parts of the world as may be
specified by the Company and for vesting the same in the Company or as
it may direct.
19.2 The Executive irrevocably appoints the Company to be his attorney in
his name and on his behalf to sign, execute or do any such instrument
or thing and generally to use his name for the purpose of giving to the
Company (or its nominee) the full benefit of the provisions of this
Clause.
19.3 The Executive waives all of his Moral Rights as defined in the
Copyright, Designs and Patents Act 1988 in respect of any acts of the
Company or any acts of third parties done with the Company's authority
in relation to the Intellectual Property the property of the Company by
virtue of Clause 19.1 hereof.
19.4 Rights and obligations under this Clause shall continue in force after
termination of this Agreement in respect of Intellectual Property made
or discovered during the Executive's employment under this Agreement
and shall be binding upon his representatives.
20. GOVERNING LAW AND JURISDICTION
This Agreement shall be governed by and construed in accordance with
English law and shall be subject to the exclusive jurisdiction of the
English courts.
IN WITNESS whereof the duly authorized representative of the Company has
executed this Agreement and the Executive has hereunto set his hand and seal the
day and year first before written.
THE SCHEDULE
Net Profits
1. Net Profits, in respect of any financial year, shall mean the amount of
profit before (a) taxation of the Company and/or (b) the payment of any dividend
or other distribution as shown in the Company's annual accounts for such
financial year to which amount:
1.1 shall be EXCLUDED (so as to increase the amount of profit) any costs
shown in such accounts in respect of (a) payments made by the Company
pursuant to the consultancy agreement of even date herewith and made
between the Company and Pay Per View International Inc. and (b)
auditors' fees (but only if and to the extent that the auditors of the
Company are changed after the date of this Agreement and such fees
exceed the auditors' fees shown in the audited accounts of the Company
for the year ended 31st July 1992) and (c) conducting a second audit of
the Company (in addition to an audit as at 3lst July) as a consequence
of any change in the accounting reference date of the Company;
1.2 shall be EXCLUDED (so as to increase the amount of profit) the amount
of any provision in such accounts in respect of which Graff
Pay-Per-View Inc. is entitled to make a claim under the investment and
option agreement dated 22nd January 1993 and made between (1) the
Executive, Andrew Donald Wren and Stephen Philip Kay ("the Vendors")
(2) Graff Pay-Per-View Inc. and (3) the Company ("the Agreement")
against one or more of the Vendors;
1.3 shall be EXCLUDED (so as to increase the amount of profit) any costs
shown or provision made in such accounts in respect of any claims made
by Graff Pay-Per-View Inc. against the Company under or in connection
with the Agreement or any other arrangement or agreement;
1.4 shall be EXCLUDED (so as to increase or reduce the amount of profit as
the case may be) any extraordinary item shown in such accounts;
1.5 shall be EXCLUDED (so as to increase or reduce the amount of profit as
the case may be) any costs and/or revenue directly arising as a result
of business activities undertaken by the Company at the instigation of
Graff Pay Per View Inc. and formally noted as such by the Board;
1.6 shall be ADDED (so as to increase the amount of profit) an amount equal
to any sum claimed during the financial year of such accounts against
any of the Vendors under the deed of covenant of even date herewith and
made between the Vendors, the Company and Graff Pay-Per-View Inc.
2. From the amount ("the Initial Amount") resulting from or otherwise determined
by the application of the provisions of paragraph 1 of this Schedule shall be
further deducted (so as to decrease the amount of profit) an amount equal to the
charge to Corporation Tax (at the rate applying in respect of the financial year
to which such accounts relate and assuming that the Company is able to take
advantage of the provisions of section 13 of the Taxes Act 1988 - small
companies' relief) that would have been made in respect of the Initial Amount if
the Inland Revenue had determined that the Initial Amount was the amount of the
profits of the Company properly chargeable to Corporation Tax.
3. The amount resulting from or otherwise determined by the application of the
provisions of paragraph 2 of this Schedule shall be the amount of "Net Profits"
for the purposes of this Agreement.
4. Within ten (10) working days of the date of adoption of the Company's annual
accounts the parties shall seek to agree the amount of "Net Profits" in
accordance with the above provisions but either party shall be entitled to apply
to the President for the time being (or other proper officer) of the Institute
of Chartered Accountants in England and Wales to appoint an independent
Chartered Accountant to determine the matter in dispute and the decision of the
Chartered Accountant so appointed shall be final and binding on the parties
except in the case of manifest error.
SIGNED by Andrew D. Wren )
for and on behalf of THE HOME ) /s/ Andrew D. Wren
------------------
VIDEO CHANNEL, LIMITED )
in the presence of: )
Guy P. Bastable
4 John Carpenter Street
New York, New York USA
Solicitor
SIGNED as of Deed by the said ) /s/ Richard Christopher Yates
-----------------------------
RICHARD CHRISTOPHER YATES )
in the presence of: )
Guy P. Bastable
4 John Carpenter Street
New York, New York USA
Solicitor
APPENDIX A
Material Contracts
Parties Description Date
1. Societe Transponder 20th January 1992
Europeenne des Capacity on Astra
Satellites S.A. (1) 1B
The Home Video
Channel Limited (2)
(together with side letter of even date and letter of 1st October 1992
exercising option to extend the term)
2. British International [ ] January 1992
Telecommunications Satellite Uplink
Plc (1) Service; Earth
Segment
The Home Video
Channel Limited (2)
(together with side letter of even date)
3. Electric License of Films 11th December 1989
Video Limited (1)
The Home Video
Channel Limited (2)
4. Film Investors License of Films 1st April 1992
Overseas Service S.A. (1)
The Home Video
Channel Limited (2)
THIS SUPPLEMENTAL AGREEMENT is made the 16th day of June One thousand nine
hundred and ninety-four BETWEEN (1) THE HOME VIDEO CHANNEL LIMITED (Company No.
2412178) whose registered office is at Pembroke Home 11 Northlands Pavement
Pitsca Basildon Essex (the "Company") and (2) RICHARD CHRISTOPHER YATES of
Woodbarn Cottage Pump Lane North Marlow Buckinghamshire SL7 3RD (the
"Executive"). RECITALS
(1) By an Agreement (the "Principal Agreement") dated 22nd January 1993 made
between the parties hereto the Company agreed to employ and the Executive agreed
to serve the Company as its managing director. (2) The parties have agreed that
the Principal Agreement shall be varied in manner hereinafter appearing.
NOW WHEREBY IT IS HEREBY DECLARED AND AGREED as follows:
1. CLAUSE 3.1 of the Principal Agreement shall be varied by deleting therefrom
the words and figures "1st March 1995" and substituting therefor the words and
figures "1st March 1997." 2. CLAUSE 6.1 of the Principal Agreement shall be
deleted and replaced by the following: "With effect from and including 1st
August 1993 the Company shall pay the Executive a salary at the rate of
(pound 125,000.00 per annum to accrue from day to day and to be paid by equal
monthly installments in arrears on the last working day of each calendar month
by bank transfer. The Board shall review the Executive's salary once a year on
or as near as reasonably practicable to the 1st day of August in each year but
shall not decrease the Executive's salary and provided that at 1st August 1994
no review shall take place but instead the Executive's salary shall be increased
(such increase being adjusted to the nearest(pound 100) by the same percentage
increase as the pre-tax profits certified by the Board for the financial year
ending 31st July 1994 over the pre-tax profits certified by the Board for the
financial year ended 31st July 1993." 3. THERE shall be deleted from Clause 12.1
of the Principal Agreement the words "equal to one year's gross salary" and
there shall be substituted therefor the words "ONE HUNDRED AND TWENTY FIVE
THOUSAND POUNDS (pound 125,000.00)." 4. THE second sentence of Clause 12.1 of
the Principal Agreement shall be deleted in its entirety. 5. EXCEPT as hereby
varied the Principal Agreement shall remain in full force and effect. IN WITNESS
whereof the duly authorized representative of the Company has executed this
Agreement and the Executive has hereunto set his hand and seal the day and year
first before written. SIGNED by Philip Callaghan ) for and on behalf of THE )
/s/ Philip Callaghan HOME VIDEO CHANNEL, LIMITED ) in the presence of: )
Robinson G. Strong
401 East 65th Street
New York, New York USA
Occupation: Secretary
SIGNED as of Deed by the said ) /s/ Richard Christopher Yates
-----------------------------
RICHARD CHRISTOPHER YATES )
in the presence of: )
Ruth Huggett
Flat Two
64 Granville Road
London
N12 0HT
Occupation: Secretary
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT, dated this 25th day of June, 1996 (this
"Agreement"), by and among each of the MMG Parties, each of the Graff Parties
and the Venture (as these and certain other capitalized terms used herein are
defined in Article I hereof),
W I T N E S S E T H:
WHEREAS, on June 28, 1995, TVG and AGNI entered into the Joint Venture
Agreement for the purpose of forming the AGNJV to own and operate the TV
MegaBingo Business, the AGN Charity Hall Bingo Business, the AGN On-Line
Services and the AGN Web Site and to conduct other activities related thereto;
WHEREAS, in connection with the Joint Venture Agreement, (i) MMG issued
to Graff a warrant (the "Initial Warrant") to purchase 175,000 shares of MMG's
Common Stock, $.01 par value, at an exercise price of $2.50 per share, and (ii)
Graff, AGNI, MMG and TVG entered into the Technology Transfer Agreement,
pursuant to which MMG and TVG sold to Graff a one-third interest in the TV
MegaBingo Business Intellectual Property in consideration of the delivery to MMG
of the Graff IP Purchase Note;
WHEREAS, in connection with the Joint Venture Agreement, Graff, AGNI,
MMG and TVG entered into the Side Letter Agreement as later amended by the
Amendment to Side Letter Agreement, pursuant to which (i) MMG sold 100,000
shares of its Common Stock to Graff at $2.75 per share in consideration of the
delivery to MMG of the Graff Stock Purchase Note, (ii) the terms of the Initial
Warrant were amended to reduce the exercise price to $2.25 per share, and (iii)
Graff agreed to (and did) exercise the Initial Warrant (as so amended) and MMG
issued to Graff (A) the Replacement Warrant, and (B) the 175,000 shares of the
Company's Common Stock issuable upon exercise of the Initial Warrant (such
175,000 shares of Common Stock together with the 100,000 shares of Common Stock
referred to in clause (i) of this WHEREAS paragraph, being herein collectively
called the "MMG Shares");
WHEREAS, subject to the terms of the Joint Venture Agreement, (i) AGNI
agreed to provide financing to the Venture which AGNI discontinued doing in
December 1995, (ii) since December 1995, MMG has advanced $336,000 to the
Venture which is evidenced by the Venture Note;
WHEREAS, pursuant to the December Agreement, MMG accepted the Graff JV
Note as the final payment due by Graff pursuant to Section 1.5 of the Joint
Venture Agreement;
WHEREAS, the parties hereto desire to terminate any and all interests
of Graff and AGNI in the Venture and, in connection therewith, Newco (or its
Permitted Designee) has agreed to purchase all of AGNI's right, title and
interest in the AGNI Venture Interest, and AGNI has agreed to sell its AGNI
Venture Interest to Newco (or its Permitted Designee), upon the terms and
subject to the conditions hereinafter set forth; and
WHEREAS, MMG (or its Permitted Designee) desires to purchase all of the
MMG Shares from Graff and Graff desires to sell all the MMG Shares to MMG (or
its Permitted Designee), upon the terms and subject to the conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements set forth herein, the parties hereto, intending to be
legally bound hereby, agree as follows:
ARTICLE I
DEFINITIONS
1.1 For all purposes of this Agreement, except as otherwise expressly
provided or unless the context otherwise requires:
"Accounts" shall mean all accounts and other rights of AGNI to receive
payments or distributions from the Venture.
"Additional Products" shall mean as such term is defined in the Joint
Venture Agreement.
"Affiliate" shall have the meaning prescribed by Rule 12b-2 of the
regulations promulgated pursuant to the Securities Exchange Act of 1934, as
amended.
"AGN Charity Hall Bingo Business" shall mean as such term is defined in
the Joint Venture Agreement.
"AGNI" shall mean American Gaming Network, Inc., a Delaware corporation
wholly owned by CVS.
"AGNJV" or the "Venture" shall mean American Gaming Network, JV, a
joint venture formed pursuant to the general partnership laws of the State of
New York comprised of TVG and AGNI, as Venturers.
"AGN On-Line Services" shall mean as such term is defined in the Joint
Venture Agreement.
"AGN Web Site" shall mean as such term is defined in the Joint Venture
Agreement.
"AGNI Venture Interest" shall mean all right, title and interest owned
by AGNI in or related to the Venture, including without limitation, all Contract
Rights, all Accounts and all Intellectual Property.
"Amendment to Side Letter Agreement" shall mean the Letter Agreement,
dated September 26, 1995, by and among Graff, AGNI, MMG and TVG that amends the
Side Letter Agreement.
"Business Day" shall mean any day other than Saturday, Sunday, Federal
holiday or day on which the banks in New York are required or permitted by law
to be closed.
"Claim" shall mean any demand, claim, action or cause of action based
on any Loss.
"Closing" shall mean the closing referred to in Section 4.01 of this
Agreement.
"Commercial Efforts" shall mean such efforts as shall not require the
performing party (i) to do any act that is unreasonable under the circumstances,
(ii) to make any capital contribution not expressly contemplated hereunder,
(iii) to amend or waive any rights under this Agreement, or (iv) to incur or
expend any funds other than reasonable out-of-pocket expenses incurred in
satisfying its obligation hereunder, including the fees, expenses and
disbursements of accountants, counsel and other professionals.
"Contract Rights" shall mean all right, title and interest of the Graff
Parties in and to all contracts, arrangements and agreements relating to the
Venture Business, including without limitation the Joint Venture Agreement, the
Technology Transfer Agreement, the Side Letter Agreement and the December
Agreement; provided that, "Contract Rights" shall not include (i) the rights of
Graff under the Replacement Warrants, (ii) the rights of Graff under the
Registration Rights Agreement, (iii) the rights of Graff, CVS and AGNI under and
pursuant to this Agreement, and (iv) the rights of Graff under each of the
Graves Guaranty, the MMG Guaranty and the Venture Guaranty (each of the rights
referred to in the foregoing clauses (i) through (iv) being herein called the
"Retained Contract Rights").
"CVS" shall mean Cable Video Store, Inc., a Delaware corporation wholly
owned by Graff.
"December Agreement" shall mean the Letter Agreement, dated December
11, 1995, by and among MMG, TVG, AGNI and Graff.
"GPPV-Developed Products" shall mean as such term is defined in the
Joint Venture Agreement.
"Graff" shall mean Graff Pay-Per-View Inc., a Delaware corporation.
"Graff IP Purchase Note" shall mean the promissory note of Graff in the
principal amount of $500,000.00 payable to MMG and/or TVG, and issued pursuant
to the Technology Transfer Agreement.
"Graff JV Note" shall mean the promissory note of Graff payable to MMG
in the principal amount of $75,000.00 and delivered by Graff pursuant to the
December Agreement.
"Graff Parties" shall mean, individually and collectively as the
context requires Graff, AGNI and CVS.
"Graff Stock Purchase Note" shall mean the promissory note of Graff
payable to MMG in the original principal amount of $275,000.00 of which
$75,000.00 principal amount has been paid as of the date of this Agreement.
"Graves Guaranty" shall mean the Guaranty (Graves) of Gordon Graves, to
be dated the Closing Date, in substantially the form attached hereto as Exhibit
E.
"Intellectual Property" shall mean:
(i) all of the intellectual property acquired by any Graff Party from
MMG or TVG pursuant to the LOI, the Joint Venture Agreement and the Technology
Transfer Agreement, including without limitation, all property and assets listed
in paragraphs 1 and 2 of Schedule C to the Joint Venture Agreement, in each case
to the extent the same has not been effectively transferred and contributed by
the Graff Parties to the Venture: and
(ii) all right, title and interest of AGNI in and to the name "American
Gaming Network, Inc.", and any and all derivations thereof (including all trade
names, trade name licenses and applications, if any, related thereto).
"Joint Venture Agreement" shall mean the Joint Venture Agreement, dated
June __, 1995, by and among AGNI and TVG.
"Lien" shall mean any mortgage, pledge, security interest, lien,
charge, encumbrance, equity, claim, option, tenancy, right or restriction on
transfer of any nature whatsoever.
"LOI" shall mean the letter of understanding dated March 15, 1995,
between Graff and MMG.
"Loss" shall mean any loss, damage, liability, cost, assessment and
expense including, without limitation, any interest, fine, court cost and
reasonable investigation cost, penalty and attorneys' and expert witnesses'
fees, disbursements and expenses, after taking into account any insurance
proceeds actually received by or paid on behalf of any party incurring a Loss
which are not required to be remitted by such party to the other party pursuant
to the terms hereof.
"MMG" shall mean Multimedia Games, Inc., a Texas corporation.
"MMG Guaranty" shall mean the Guaranty (MMG) of MMG, to be dated the
Closing Date, in substantially the form attached hereto as Exhibit F.
"MMG Retained Contract Rights" shall mean (i) the rights of MMG under
the Replacement Warrants, (ii) the rights of MMG under the Registration Rights
Agreement, (iii) the rights of the MMG Parties under and pursuant to this
Agreement, (iv) the rights of Gordon Graves under the Graves Guaranty, (v) the
rights of MMG under the MMG Guaranty, and (vi) the rights of AGNJV under the
Venture Guaranty.
"MMG Parties" shall mean, individually and collectively as the context
requires, MMG, TVG and Newco.
"Newco" shall mean AGN Venturer L.L.C., a Delaware limited liability
company wholly owned by TVG.
"Off-Reservation Bingo Play" shall mean as such term is defined in the
Joint Venture Agreement.
"Person" shall mean an individual, a partnership, a joint venture, a
corporation, a trust, an unincorporated organization, a governmental entity or
any other entity.
"Products" shall mean as such term is defined in the Joint Venture
Agreement.
"Registration Rights Agreement" shall mean in this Agreement and for
purposes of Section 9 of the Replacement Warrant, the Registration Rights
Agreement between MMG and Graff in substantially the form attached hereto as
Exhibit C.
"Replacement Warrant" shall mean the Warrant Certificate (No. W-43),
dated July 31, 1995, issued by MMG to Graff evidencing the right of Graff to
purchase 175,000 shares of MMG's Common Stock at a purchase price of $3.50 per
share.
"Side Letter Agreement" shall mean the Letter Agreement, dated June 28,
1995, by and among Graff, AGNI, MMG and TVG.
"Technology Transfer Agreement" shall mean the agreement so captioned
by and among Graff, AGNI, MMG and TVG entered into simultaneously with the Joint
Venture Agreement.
"TVG" shall mean TV Games Inc., a Texas corporation wholly owned by
MMG.
"TV MegaBingo Business" shall mean as such term is defined in the Joint
Venture Agreement.
"TV MegaBingo Business Intellectual Property" shall mean as such term
is defined in the technology Transfer Agreement.
"Venture Business" shall mean all business and activities conducted or
contemplated to be conducted by the Venturers pursuant to the Joint Venture
Agreement, including without limitation owning and operating the TV MegaBingo
Business, the AGN Charity Hall Bingo Business, the AGN On-Line Services, and the
AGN Web Site.
"Venture Guaranty" shall mean the Guaranty (Venture) of AGNJV, to be
dated the Closing Date, in substantially the form attached hereto as Exhibit F.
"Venture Note" shall mean the promissory note of the Venture to MMG in
the principal amount of $336,000 which evidences all advances to the Venture
made by MMG and TVG since December 1, 1995, to the Closing Date.
1.2 Plurals; Etc. As used herein, the plural form of any noun shall
include the singular and the singular shall include the plural, unless the
context otherwise requires. Each of the masculine, neuter and feminine forms of
any pronoun shall include all such forms unless the context otherwise requires.
ARTICLE II
PURCHASE AND SALE OF AGNI VENTURE INTEREST
2.1 Purchase and Sale. Upon the terms and subject to the conditions of
this Agreement, at the Closing Newco (which for purposes of this Article II
shall include its Permitted Designee) will purchase the AGNI Venture Interest
from AGNI and AGNI will sell all of its right, title and interest in the AGNI
Venture Interest to Newco, free and clear of all Liens.
2.2 Purchase Price. In consideration of Graff's and AGNI's
performance of this Agreement and the sale of the AGNI Venture Interest, at
the Closing:
(a) Newco will deliver to AGNI the promissory note of Newco in
the principal amount of ONE HUNDRED THOUSAND DOLLARS ($100,000.00) in
substantially the form attached hereto as Exhibit A (the "Newco A Note"); and
(b) Newco will deliver to AGNI the promissory note of Newco in
the principal amount of FOUR HUNDRED THOUSAND DOLLARS ($400,000.00) in
substantially the form attached hereto as Exhibit B (the "Newco B Note").
ARTICLE III
PURCHASE AND SALE OF MMG SHARES
3.1 Purchase and Sale. Upon the terms and subject to the conditions of
this Agreement, at the Closing MMG (which for purposes of this Article III shall
include its Permitted Designee) will purchase the MMG Shares from Graff and
Graff will sell all right, title and interest in the MMG Shares to MMG, free and
clear of a 11 Liens.
3.2 Purchase Price. In consideration of the sale of the MMG
Shares, at the Closing:
(a) MMG will deliver to Graff the Graff Stock Purchase Note
marked "canceled" and thereupon the Graff Stock Purchase Note shall be of no
further force or effect and Graff shall have no obligation or liability
thereunder including, without limitation, any obligation to pay principal or
accrued interest thereon; and
(b) MMG will deliver to Graff the Graff IP Purchase Note and
the Graff JV Note, each marked "canceled" and thereupon each of the Graff IP
Purchase Note and the Graff JV Note shall be of no further force or effect and
Graff shall have no obligation or liability thereunder including, without
limitation, any obligation to pay principal or accrued interest thereon.
(c) Notwithstanding the foregoing, MMG may, at its sole
option, direct Graff to sell the MMG Shares to a Permitted Designee for such
consideration (whether in cash or property, or both) as MMG may direct. In such
event:
(i) Graff agrees to sell the MMG Shares to such
Permitted Designee for such consideration and to deliver such
consideration to MMG in the same form and amount as received
by Graff, without recourse to Graff and without any
representation or warranty of Graff other than as to Graff's
own actions; and
(ii) MMG agrees to accept such consideration in the
form delivered by Graff and, in consideration thereof, to
deliver to Graff each of the Graff Stock Purchase Note, the
Graff IP Purchase Note and the Graff JV Note, each marked
"canceled" and thereupon each of the Graff Stock Purchase
Note, the Graff IP Purchase Note and the Graff JV Note shall
be of no further force or effect and Graff shall have no
obligation or liability thereunder including, without
limitation, any obligation to pay principal or accrued
interest thereon.
ARTICLE IV
CLOSING
4.1 Closing. Subject to Section 9.01 hereof, the Closing of the sale
and purchase of the AGNI Venture Interest and the MMG Shares hereunder shall
take place at 10:00 A.M., on the second business day following the receipt by
the Graff Parties of the consent referred to in Section 8.2(d) hereof, or at
such other date and time as the parties hereto may mutually agree. The Closing
shall be conducted by the mutual exchange of documents and instruments delivered
at the respective offices of the parties by overnight courier.
4.2 Deliveries at Closing.
(a) At the Closing, MMG or Newco (or their respective
Permitted Designees), as appropriate, shall deliver or cause to be delivered the
following:
(i) the Newco A Note to AGNI;
(ii) the Newco B Note to AGNI;
(iii) the Graff IP Note marked "canceled" to Graff;
(iv) the Graff Stock Purchase Note marked "canceled"
to Graff;
(v) the Graff JV Note marked "canceled" to Graff;
(vi) the Registration Rights Agreement to Graff;
(vii) the MMG Guaranty to Graff;
(viii) the Graves Guaranty to Graff;
(ix) the Venture Guaranty to Graff; and
(x) such other documents and instruments as
reasonably may be requested by Graff not less than five
Business Days prior to the Closing.
(b) At the Closing, Graff or AGNI, as appropriate,
shall deliver or cause to be delivered the following:
(i) a certificate or certificates evidencing the
MMG Shares to MMG (or its Permitted Designee);
(ii) in the event Section 3.02(c) of this Agreement
is applicable, such consideration as was received by Graff
from such Permitted Designee;
(iii) an assignment of the AGNI Venture Interest, in
substantially the form attached hereto as Exhibit D, to Newco
(or its Permitted Designee);
(iv) evidence of the satisfaction of the condition
set forth in Section 8.2(d); and
(v) such other documents and instruments as
reasonably may be requested by MMG not less than five Business
Days prior to the Closing.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF GRAFF PARTIES
Each Graff Party hereby represents and warrants, jointly and severally,
to each MMG Party and the Venture as follows:
5.1 Organization; Qualification; Authority. Each Graff Party is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and each has the power and authority to make, execute,
deliver and perform this Agreement and to incur and perform the obligations
provided for herein, all of which have been duly authorized by all necessary and
proper corporate action, including shareholder action. Neither the execution,
delivery and performance of this Agreement by any Graff Party nor the
consummation by any Graff Party of the transactions contemplated hereby conflict
with or will result in any breach or default of any provision of the Certificate
of Incorporation or Bylaws of any Graff Party. This Agreement has been duly and
validly executed and delivered by the duly authorized officers of each Graff
Party and constitutes the valid, legally binding and enforceable obligations of
each Graff Party in accordance with the terms of this Agreement.
5.2 Consents and Approvals; No Violation. Neither the execution,
delivery and performance of this Agreement by any Graff Party (a) requires any
consent, approval, authorization or permit of, or filing with or notification
to, any Person including any governmental or regulatory authority; (b)
constitutes a breach or will result in a default under any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, license,
contract, agreement or other instrument or obligation of any kind to which any
Graff Party is a party or by which any Graff Party may be bound; or (c) violates
any order, writ, injunction, judgment, decree, law, statute, rule, regulation or
governmental permit or license applicable to any Graff Party, the Venture or the
Venture Business .
5.3 Title, Etc. AGNI is the sole owner of the AGNI Venture Interest and
has good and valid title thereto, free and clear of all Liens. Graff is the sole
owner of the MMG Shares and has good and valid title thereto, free and clear of
all Liens.
5.4 Venture Property. Each Graff Party has validly and effectively
transferred and contributed to the Venture all property, rights and assets
acquired by any Graff Party from MMG and TVG pursuant to the LOI, the Joint
Venture Agreement and the Technology Transfer Agreement, in each case in such
form and in such condition as was received by such Graff Party. Such transfer
and contribution was (and is) made by such Graff Party free and clear of any
Liens created or permitted by any Graff Party but without recourse (except as to
such Graff Party's own actions) and without any representation or warranty as to
title or fitness for use. No Graff Party has or claims any interest in any such
property, rights or assets. The representation and warranty of each Graff Party
made in this Section 5.4 includes, but is not limited to, all right, title and
interest of any Graff Party in and to the following property, rights and assets:
(a) All Products and Additional Products.
(b) All of the property and assets listed in paragraphs
1 and 2 of Schedule C to the Joint Venture Agreement.
(c) All intellectual property created by MMG or TVG for any
Graff Party as work made for hire and any modifications, developments or
enhancements thereto.
(d) All ownership and proprietary rights to Off-Reservation
Bingo Play and any modifications, developments, or enhancements thereto,
including Proxy Play software, telephone order entry software, TV Bingo game
shows, subcontracts for proxy service and TV Bingo market research.
(e) All ownership and proprietary rights to the TV MegaBingo
Business, the AGN Charity Hall Bingo Business, the AGN Web Site and the AGN
On-Line Services, and any modification, developments or enhancements thereto.
(f) All ownership and proprietary rights to TV MegaBingo
Business Intellectual Property and any modifications, developments or
enhancements thereto.
Notwithstanding the foregoing, the MMG Parties and the Venture
acknowledge and agree that the Graff Parties have no further obligation to
transfer or contribute to the Venture any GPPV-Developed Products.
5.5 Legal Proceedings Etc. There is no claim, action, proceeding or
investigation pending or, to the knowledge of any Graff Party, threatened
against or relating to or involving any Graff Party or AGNJV with respect to the
Venture, the Venture Business, the AGNI Venture Interest or the MMG Shares
before any court or governmental or regulatory authority or body or which
questions or challenges the validity of this Agreement or any action taken or to
be taken pursuant to this Agreement or in connection with the transactions
contemplated hereby. No Graff Party or AGNJV is subject to any outstanding
order, writ, judgment, injunction or decree of any court or governmental or
regulatory authority or body.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF MMG PARTIES
Each MMG Party, jointly and severally, represents and warrants to each
Graff Party as follows:
6.1 Organization; Qualification; Authority. Each MMG Party is a
corporation duly organized, validly existing and in good standing under the laws
of the state of its incorporation and each has the power and authority to make,
execute, deliver and perform this Agreement and to incur and perform the
obligations provided for herein, all of which have been duly authorized by all
necessary and proper corporate action, including shareholder action. Neither the
execution, delivery and performance of this Agreement by any MMG Party nor the
consummation by them of the transactions contemplated hereby conflict with or
will result in any breach or default of any provision of the Certificate of
Incorporation or Bylaws of any MMG Party. This Agreement has been duly and
validly executed and delivered by the duly authorized officers of each MMG Party
and constitutes the valid, legally binding and enforceable obligations of each
of them in accordance with the terms of this Agreement.
6.2 Consents and Approvals; No Violation. Neither the execution,
delivery and performance of this Agreement by any MMG Party (a) requires any
consent, approval, authorization or permit of, or filing with or notification
to, any Person including any governmental or regulatory authority; (b)
constitutes a breach or will result in a default under any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, license,
contract, agreement or other instrument or obligation of any kind to which MMG
Party is a party or by which any of them may be bound; or (c) violates any
order, writ, injunction, judgment, decree, law, statute, rule, regulation or
governmental permit or license applicable to any Graff Party.
6.3 Legal Proceedings, Etc. There is no claim, action, proceeding or
investigation pending or, to the knowledge of the MMG Parties, threatened
against or relating to the MMG Parties before any court or governmental or
regulatory authority or body or against or involving any MMG Party which
questions or challenges the validity of this Agreement or any action taken or to
be taken by the MMG Parties pursuant to this Agreement or in connection with the
transactions contemplated hereby.
ARTICLE VII
COVENANTS OF THE PARTIES
7.1 Expenses. All costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby will be paid by the party
incurring such costs and expenses, whether or not the transactions contemplated
hereby are consummated.
7.2 Further Assurances. Subject to the terms and conditions of this
Agreement, each of the parties hereto will use its Commercial Efforts to take,
or cause to be taken, all action, and to do, or cause to be done, all things
necessary under applicable laws and regulations to consummate the transactions
contemplated by this Agreement. On and from time to time after the Closing Date,
without further consideration, each Graff Party will, at its own expense,
execute and deliver such documents to the MMG Parties as the MMG Parties may
reasonably request in order to consummate the transactions contemplated by the
Agreement. On and from time to time after the Closing Date, without further
consideration, each MMG Party will, at its own expense, execute and deliver such
documents to the Graff Parties as the Graff Parties may reasonably request in
order to consummate the transactions contemplated by this Agreement.
7.3 Filing.
(a) The MMG Parties promptly will make, or cause to be made,
all such filings and submissions under laws and regulations applicable to the
MMG Parties, if any, as may be required of the MMG Parties for the consummation
of the transactions contemplated hereby. The Graff Parties promptly will make,
or cause to be made, all such filings and submissions under laws and regulations
applicable to the Graff Parties, as may be required of the Graff Parties, for
consummation of the transactions contemplated hereby. The parties hereto will
coordinate and cooperate with one another in exchanging such information and
reasonable assistance as may be requested in connection with all of the
foregoing.
(b) To the extent that the approval, consent or permission of
any governmental entity or other Person is necessary or desirable for the MMG
Parties to obtain in connection with the conduct of the Venture Business after
the Closing, including the issuance of such new permits as may be required for
the MMG Parties to conduct the Venture Business, the Graff Parties shall, at the
MMG Parties' request and expense, reasonably cooperate with the MMG Parties in
obtaining all such approvals, consents or permissions .
7.4 Transfer Taxes. The Graff Parties shall pay the cost of any
conveyance, deed, transfer, excise, stamp, sales, use, recording or similar
taxes or fees, arising out of the sale, transfer, conveyance or assignment of
the AGNI Venture Interest and the MMG Shares as contemplated hereby. The
covenants contained in this Section 7.4 shall survive the Closing Date until
fully discharged.
7.5 Public Announcements. Neither the Graff Parties nor the MMG Parties
shall issue any press release or make any other public disclosure or
announcement concerning the transactions contemplated by this Agreement without
the prior written consent of the other parties hereto as to both the timing and
content of such press release or public disclosure, which consent shall not be
unreasonably withheld; provided that any party may make such disclosure as in
the opinion of counsel to such party is required by applicable law.
7.6 Confidentiality; Absence of Covenant Not To Compete.
(a) The Graff Parties shall hold and shall cause each of their
Affiliates to hold in strict confidence (unless compelled to disclose by
judicial or administrative process or in making any filings with governmental
entities with respect to the transactions contemplated hereby or, in the written
reasonable opinion of its counsel, by other requirements of law) all documents
and information concerning any MMG Party, AGNJV or the Venture Business obtained
or furnished to or acquired or developed by it in connection with the Venture
Business and the transactions contemplated by the Joint Venture Agreement
(except to the extent that such information can be shown to have been (i)
previously known by the party to which it was furnished, (ii) in the public
domain through no fault of such party, or (iii) later lawfully acquired by the
party to which it was furnished from other sources not bound by a
confidentiality obligation with respect to such information), and no Graff Party
will use, release or disclose such information to any other Person, except its
auditors and attorneys who need to know such information in the ordinary course
of their representation of the Graff Parties.
(b) The MMG Parties shall hold and shall cause each of their
Affiliates to hold in strict confidence (unless compelled to disclose by
judicial or administrative process or in making any filings with governmental
entities with respect to the transactions contemplated hereby or, in the written
reasonable opinion of its counsel, by other requirements of law) all documents
and information concerning any Graff Party obtained or furnished to or acquired
or developed by it in connection with the Venture Business and the transactions
contemplated by the Joint Venture Agreement (except to the extent that such
information can be shown to have been (i) previously known by the party to which
it was furnished, (ii) in the public domain through no fault of such party, or
(iii) later lawfully acquired by the party to which it was furnished from other
sources not bound by a confidentiality obligation with respect to such
information), and no MMG Party will use, release or disclose such information to
any other Person, except its auditors and attorneys who need to know such
information in the ordinary course of their representation of the MMG Parties.
(c) The Graff Parties acknowledge and agree that, because of
the nature and subject matter of the provisions of Section 7.06(a), it would be
impractical and extremely difficult to determine actual damages in the event of
the breach of any such provisions. Accordingly, if any Graff Party or any
Affiliate of any Graff Party commits a breach, or threatens to commit a breach,
of any matter set forth in Section 7.06(a), MMG shall have the right to have the
provisions of Section 7.06(a) specifically enforced by any court having equity
jurisdiction, it being further acknowledged and agreed by the Graff Parties that
any such breach or threatened breach will cause irreparable injury to MMG and
that an injunction may be issued against the breaching Graff Party to stop or
prevent such breach or threatened breach. If any such action shall be
instituted, the breaching Graff Party agrees to waive, and does hereby waive to
the fullest extent permitted by law, the defense that MMG has an adequate remedy
at law and agrees to interpose no opposition, legal or otherwise, as to the
propriety of pursuing specific performance as a remedy and agrees not to request
any bonding for the issuance of the relief sought.
(d) The MMG Parties acknowledge and agree that, because of the
nature and subject matter of the provisions of Section 7.06(b), it would be
impractical and extremely difficult to determine actual damages in the event of
the breach of any such provisions. Accordingly, if any MMG Party or any
Affiliate of any MMG Party commits a breach, or threatens to commit a breach, of
any matter set forth in Section 7.06(b), Graff shall have the right to have the
provisions of Section 7.06(b) specifically enforced by any court having equity
jurisdiction, it being further acknowledged and agreed by the MMG Parties that
any such breach or threatened breach will cause irreparable injury to Graff and
that an injunction may be issued against the breaching MMG Party to stop or
prevent such breach or threatened breach. If any such action shall be
instituted, the breaching MMG Party agrees to waive, and does hereby waive to
the fullest extent permitted by law, the defense that Graff has an adequate
remedy at law and agrees to interpose no opposition, legal or otherwise, as to
the propriety of pursuing specific performance as a remedy and agrees not to
request any bonding for the issuance of the relief sought.
(e) Anything to the contrary contained in this Agreement, the
LOI or the Joint Venture Agreement (or in any other agreement between the
parties whether or not related thereto) notwithstanding, each of the Graff
Parties and each of the MMG Parties and each of their respective Affiliates
shall be free to engage in any business whatsoever including, but not limited
to, a business that competes, directly or indirectly, with the Venture Business
or any other business or activity currently conducted, proposed to be conducted
or hereafter conducted by any such person.
7.7 Releases.
(a) In consideration of the promises and payments of the MMG
Parties made in this Agreement, and provided that the Closing shall have
occurred, each of the Graff Parties, for and on behalf of their respective
Affiliates, officers, subsidiaries and affiliated companies, successors and
assigns, hereby release and forever discharge each of the MMG Parties and its
subsidiaries and affiliated companies (including AGNJV), successors and assigns,
and the officers, directors, shareholders, employees and agents of each of the
MMG Parties, and its and their respective officers, directors, shareholders,
employees and agents, including, in each case, any of the foregoing in their
individual as well as corporate capacities, of and from all liabilities,
obligations, manner of actions, causes of action, suits, debts, sums of money,
accounts, damages, judgments, executions, claims, counterclaims and demands
whatsoever, whether in law, equity or otherwise, known or unknown, that relate
to the period of time on and prior to the Closing Date including, but not
limited to, any claims arising under or with respect to the Joint Venture
Agreement and the other agreements and transactions entered into in connection
therewith; provided that the foregoing release does not release any right of the
Graff Parties under this Agreement or with respect to any of the other Retained
Contract Rights.
(b) In consideration of the promises and payments of the Graff
Parties made in this Agreement, and provided that the Closing shall have
occurred, each of the MMG Parties and the Venture, for and on behalf of their
respective affiliates, officers, subsidiaries and affiliated companies,
successors and assigns, hereby release and forever discharge each of the Graff
Parties and its subsidiaries and affiliated companies, successors and assigns,
and the officers, directors, shareholders, employees and agents of each of the
Graff Parties, and its and their respective officers, directors, shareholders,
employees and agents, including, in each case, any of the foregoing in their
individual as well as corporate capacities, of and from all liabilities,
obligations, manner of actions, causes of action, suits, debts, sums of money,
accounts, damages, judgments, executions, claims, counterclaims and demands
whatsoever, whether in law, equity or otherwise, known or unknown, that relate
to the period of time on and prior to the Closing Date including, but not
limited to, any claims arising under or with respect to the Joint Venture
Agreement and the other agreements and transactions entered into in connection
therewith; provided that the foregoing release does not release any right of the
MMG Parties under this Agreement or with respect to any of the other MMG
Retained Contract Rights.
ARTICLE VIII
CLOSING CONDITIONS
8.1 Conditions to Each Party's Obligations. The respective obligations
of the parties to consummate the transactions contemplated by this Agreement
shall be subject to each of the following conditions:
(a) No party shall be subject to any order, judgment, decree
or injunction of a court of competent jurisdiction or governmental body, agency
or official nor any applicable law or regulation or executive order which
prevents consummation of the transactions contemplated hereby.
(b) All filings required by applicable law shall have been
made and all consents thereunder with respect to the transactions contemplated
by this Agreement shall have been obtained.
8.2 Conditions to the Obligations of Graff Parties. The obligation of
the Graff Parties to consummate the transaction contemplated hereby shall be
further subject to the fulfillment on or prior to the Closing Date of each of
the following conditions:
(a) Each MMG Party shall have performed and complied in all
material respects with the agreements contained in this Agreement required to be
performed and complied with by it at or prior to the Closing Date.
(b) The representations and warranties of the MMG Parties set
forth in this Agreement shall be true and correct in all material respects as of
the date made and as of the Closing Date as though made at and as of the Closing
Date (except as otherwise contemplated by this Agreement).
(c) The Graff Parties shall have received a certificate, dated
the Closing Date, certifying to the fulfillment of the conditions set forth in
paragraphs (a) and (b) of this Section 8.2 and signed on behalf of the MMG
Parties by an authorized officer of the MMG Parties.
(d) The Graff Parties shall have received the consent of
Midlantic Bank, N.A., Graff's senior secured lender, to the transactions
contemplated by this Agreement.
8.3 Conditions to the Obligations of the MMG Parties. The obligation of
the MMG Parties to consummate the transactions contemplated hereby shall be
further subject to the fulfillment on or prior to the Closing Date of each of
the following conditions:
(a) Each Graff Party shall have performed and complied in all
material respects with the agreements contained in this Agreement required to be
performed and complied with by it at or prior to the Closing Date.
(b) The representations and warranties of the Graff Parties
set forth in this Agreement shall be true and correct in all material respects
as of the date made and as of the Closing Date as though made at and as of the
Closing Date (except as otherwise contemplated by this Agreement).
(c) The MMG Parties shall have received a certificate, dated
the Closing Date, signed by an authorized officer of Graff Parties certifying to
the fulfillment of the conditions set forth in paragraphs (a) and (b) of this
Section 8.3.
ARTICLE IX
TERMINATION
9.1 Termination. This Agreement may be terminated at any time
prior to the Closing Date:
(a) By mutual written consent of MMG and Graff.
(b) By written notice by either MMG or Graff to the other
party if the Closing shall not have occurred on or before 5:00 p.m., local time
in Tulsa, Oklahoma, on July 10, 1996, unless such failure to occur is due to the
failure of the party seeking to terminate this Agreement to perform in all
material respects each of its obligations under this Agreement required to be
performed by it or its affiliate at or before the Closing Date.
(c) By the MMG Parties if there has been a material violation
or breach by any of the Graff Parties of any agreement, representation or
warranty contained in this Agreement which has rendered the satisfaction of any
condition to the obligations of the MMG Parties specified in Section 8.3
impossible and such violation or breach has not been waived by the MMG Parties
or cured by the Graff Parties within 15 days after written notice to the Graff
Parties of such violation or breach.
(d) By the Graff Parties if there has been a material
violation or breach by any of the MMG Parties of any agreement, representation
or warranty contained in this Agreement which has rendered the satisfaction of
any condition to the obligations of the Graff Parties specified in Section 8.2
impossible and such violation or breach has not been waived by the Graff Parties
or cured by the MMG Parties within 15 days after written notice to the MMG
Parties of such violation or breach.
9.2 Procedure and Effect of Termination.
(a) In the event of termination of this Agreement pursuant to
Section 9.1, this Agreement shall terminate, and in each case the transactions
contemplated hereby shall be abandoned, without further action by any of the
parties hereto, and there shall be no liability on the part of the parties,
except as set forth in Section 7.1, which Section shall survive the termination
of this Agreement and except that the foregoing shall not relieve any party from
liability for damages actually incurred as a result of breach by it of this
Agreement.
(b) If this Agreement is terminated as provided in Section
9.1, all filings, applications and other submissions made pursuant to this
Agreement shall, to the extent practicable, be withdrawn from the agency or
other person to which they were made.
ARTICLE X
SURVIVAL AND INDEMNIFICATION
10.1 Survival. The representations, warranties, covenants and
agreements of the parties hereto shall survive the execution and delivery hereof
and the delivery of all of the documents executed in connection herewith and
shall continue in full force and effect after the date hereof and after the
Closing Date for a period of one (1) year after the Closing Date, except that
(i) the representation and warranty of the Graff Parties and the MMG Parties
contained in Section 5.1 and Section 6.1, respectively, shall survive without
limitation or until the expiration of any applicable statute of limitations, and
(ii) any covenants or agreements contained herein or made pursuant hereto which
by their terms are to be performed after the Closing Date shall survive until
fully discharged. The date until which the representations, warranties,
covenants and agreements of the parties hereto survive, as set forth herein, is
known as the "Expiration Date". From and after the Expiration Date, no party
shall be under any liability whatsoever with respect to any such representation
or warranty or any obligation or liability based upon such representation or
warranty, except for breaches as to which a party shall have given notice
(specifying, with reasonable particularity, facts establishing such breach) to
the other party or parties prior to the applicable Expiration Date. The
respective representations and warranties contained herein or in any
certificates delivered pursuant to this Agreement prior to or at the Closing
shall not be deemed waived or otherwise affected by any investigation made by
any party hereto.
10.2 Indemnification. Subject to the limitation set forth in
Section 10.1:
(a) Each Graff Party, jointly and severally, hereby agrees to
indemnify, defend and hold harmless each MMG Party and any subsidiary or
Affiliate of any MMG Party, and any officer, director, stockholder, employee,
representative or agent of any thereof and their respective successors and
assigns from and against all Losses and Claims based upon, arising out of or
resulting from, any breach of any representation or warranty of such Graff Party
that survives the Closing as provided in Section 10.1 and any covenant or
agreement of such Graff Party contained in this Agreement.
(b) Each MMG Party, jointly and severally, hereby agrees to
indemnify, defend and hold harmless each Graff Party and any subsidiary or
Affiliate of any Graff Party, and any officer, director, stockholder, employee,
representative or agent of any thereof and their respective successors and
assigns, from and against all Losses and Claims based upon, arising out of or
resulting from, any breach of any representation or warranty of such MMG Party
that survives the Closing as provided in Section 10.1 and any covenant or
agreement of such MMG Party contained in this Agreement.
10.3 Notice of Claim. If any party hereto has suffered or incurred any
Loss or Expense or a third-party claim, whether pursuant to an administrative
proceeding, action at law, suit in equity, or otherwise ("Third-Party Claim") is
instituted which, if decided adversely to a party, would result in such party
suffering or incurring any Loss, such party shall give prompt written notice to
the party against which a claim for indemnification may be made pursuant to this
Agreement ("indemnifying party"), setting forth: (a) the facts or events, in
reasonable detail which indicate that such party has suffered or incurred such
Loss, (b) the Section or Sections of this Agreement (in addition to this Article
X) under which such party has suffered or incurred such Loss and Expense, (c)
the amount of such Loss and Expense (estimated, if necessary) or, in the case of
a Third-Party Claim, such party's then good faith estimate of the reasonably
foreseeable estimated amount of its claim for indemnification for such Loss and
Expense, and (d) the method of computation of the amount of such Loss and
Expense, any of which information shall be promptly amended by such party when
its knowledge of the facts or events and any resulting liability so warrant. No
party shall be liable for indemnification pursuant to Section 10.2 unless notice
of claim for such indemnification has been given in accordance with this Section
10.3 and on or prior to the applicable Expiration Date.
10.4 Defense of Third-Party Claim. The indemnifying party shall have
the right to conduct and control, at its expense and through counsel of its own
choosing, the defense of any Third-Party Claim, action or suit, but the
indemnified party may, at its election, participate in the defense of such
claim, action or suit at its sole cost and expense; provided that if (a) the
indemnifying party shall fail to defend any such claim, action or suit, (b) the
indemnifying party and indemnified party mutually agree or (c) the named parties
to such claim, action or suit (including any impeded parties) include both the
indemnifying party and the indemnified party and representation of both parties
by the same counsel would be inappropriate due to actual or potential differing
interests between them, then the indemnified party may defend, through counsel
of its own choosing, such claim, action or suit and settle such claim, action or
suit, and recover from the indemnifying party the amount of any settlement to
which the indemnifying party consents or of any resulting judgment and the costs
and expenses of such defense, provided that the indemnified party shall not
compromise or settle any third-party claim, action or suit without the prior
written consent of the indemnifying party, which consent will not be
unreasonably withheld, continued or delayed.
ARTICLE XI
MISCELLANEOUS PROVISIONS
11.1 Amendment and Modification. This Agreement may be amended,
modified or supplemented only by a subsequent written agreement of the Graff
Parties and the MMG Parties.
11.2 Waiver of Compliance. Except as otherwise provided in this
Agreement, any failure of any of the parties to comply with any obligation,
covenant, agreement or condition herein may be waived by the party entitled to
the benefits thereof only by a written instrument signed by the party granting
such waiver, but such waiver or failure to insist upon strict compliance with
such obligation, covenant, agreement or condition shall not operate as a waiver
of, or estoppel with respect to, any subsequent or other failure.
11.3 Notices. All notices and other communications hereunder shall be
in writing and shall be deemed given if delivered personally or by facsimile or
three days after mailed by registered or certified mail (return receipt
requested), postage prepaid, to the parties at the following addresses (or at
such other address for a party as shall be specified by like notice; provided,
however, that notices of a change of address shall be effective only upon
receipt thereof):
(a) if to The Graff Parties to:
Graff Pay-Per-View Inc.
536 Broadway, 7th Floor
New York, New York 10012
Attention: President
and by telecopy to: (212) 941-4746
(b) if to The MMG Parties, to:
Multimedia Games, Inc.
7335 So. Lewis, Suite 204
Tulsa, Oklahoma 74136
and by telecopy to: (918) 494-0177
with a copy to:
Hall, Estill, Hardwick, Gable, Golden & Nelson, P.C.
320 South Boston, Suite 400
Tulsa, Oklahoma 74103-3708
Attention: Larry W. Sandel, Esq.
and by telecopy to: (918) 594-0505
11.4 Assignment. This Agreement may not be assigned, in whole or in
part, by the parties hereto without the prior written consent of the parties;
provided that MMG or Newco, as the case may be, may assign its right to purchase
the MMG Shares or the AGNI Venture Interest to a person and in a manner that
does not involve a public offering (a "Permitted Designee")
11.5 Governing Law. This Agreement shall be governed by the laws
of the State of Oklahoma, without reference to principles of conflicts of law
which require that the substantive laws of another jurisdiction apply.
11.6 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
11.7 Interpretation. The article and section headings contained in this
Agreement are solely for the purpose of reference, are not part of the agreement
of the parties and shall not in any way affect the meaning or interpretation of
this Agreement.
11.8 Severability. The invalidity or unenforceability of any particular
provision of this Agreement shall be construed in all respects as if such
invalid or unenforceable provision were omitted. All provisions of this
Agreement shall be enforced to the full extent permitted by law.
11.9 No Third-Party Beneficiaries. Nothing contained in this Agreement,
expressed or implied, is intended or shall be construed to confer upon or give
to any Person other than the parties hereto and their successors or permitted
assigns, any rights or remedies under or by reason of this Agreement.
11.10 Entire Agreement. This Agreement, including the documents,
schedules, certificates and instruments referred to herein, is the entire
agreement and understanding of the parties hereto in respect of the transactions
contemplated by this Agreement. There are no restrictions, promises,
representations, warranties, covenants or undertakings, other than those
expressly set forth or referred to herein or therein. This Agreement supersedes
all prior agreements and understandings between the parties with respect to the
transactions contemplated hereby.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
MULTIMEDIA GAMES, INC.
By: /s/ Mike Howard
TV GAMES, INC.
By: /s/ Mike Howard
AGN VENTURER L.L.C.
By: /s/ Mike Howard
AMERICAN GAMING NETWORK, INC.
By: /s/ J. Roger Faherty
CABLE VIDEO STORE, INC.
By: /s/ J. Roger Faherty
GRAFF PAY-PER-VIEW INC.
By: /s/ J. Roger Faherty
AMERICAN GAMING NETWORK, J.V.
By: /s/ Larry Montgomery
Exhibits
A - Newco A Note
B - Newco B Note
C - Registration Rights Agreement
D - Assignment of AGNI Venture Interest
E - Graves Guaranty
F - MMG Guaranty
G - Venture Guaranty
Exhibit ______
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of
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 reports of other auditors, dated March 8,
1996, except for Note 2 and paragraph (a) and (e) of Note 6 as to which dates
are April 3, 1996, March 29, 1996 and April 10, 1996, respectively, on our
audits of the consolidated financial statements and financial statement schedule
II of Graff Pay-Per-View Inc. as of December 31, 1995 and 1994, 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.
April 14, 1997
Exhibit ______
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Prospectus constituting
part of the Registration Statements on Form S-3 (File Nos. 33-80824, 33-82806,
and 33-93534)of Spice Entertainment Companies, Inc. (formerly Graff Pay-Per-
View Inc.) of our report dated March 30, 1995 relating to the consolidated
financial statements of Spector Entertainment Group, Inc., which appears in
this Form 10-K.
PRICE WATERHOUSE LLP
San Diego, California
April 10, 1997
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated March 31, 1997, accompanying the consolidated
financial statements and schedule included in the Annual Report of Spice
Entertainment Companies, Inc. on Form 10-K for the year ended December 31,
1996. We hereby consent to the incorporation by reference of said report in
the Registration Statements of Spice Entertainment Companies, Inc. on
Forms S-3 (File Nos. 33-80824, 33-82806 and 33-93534).
GRANT THORNTON LLP
New York, New York
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
SUMMARY FINANCIAL DATA SCHEDULE
FOR THE NINE MONTHS ENDING SEPTEMBER 30, 1996
This schedule contains summary financial information extracted from the Form
10-K for the year ended December 31, 1996 of Spice Entertainment Companies, Inc.
(formerly Graff Pay-Per-View Inc.)
</LEGEND>
<CIK> 0000839431
<NAME> Spice Entertainment Companies, Inc.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,663,000
<SECURITIES> 0
<RECEIVABLES> 4,801,000
<ALLOWANCES> 1,736,000
<INVENTORY> 0
<CURRENT-ASSETS> 11,522,000
<PP&E> 61,948,000
<DEPRECIATION> 9,505,000
<TOTAL-ASSETS> 89,312,000
<CURRENT-LIABILITIES> 17,638,000
<BONDS> 74,154,000
0
0
<COMMON> 113,000
<OTHER-SE> 2,181,000
<TOTAL-LIABILITY-AND-EQUITY> 89,312,000
<SALES> 0
<TOTAL-REVENUES> 33,213,000
<CGS> 94,000
<TOTAL-COSTS> 33,904,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 832,000
<INTEREST-EXPENSE> 6,418,000
<INCOME-PRETAX> (5,172,000)
<INCOME-TAX> 192,000
<INCOME-CONTINUING> (5,364,000)
<DISCONTINUED> (2,536,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,900,000)
<EPS-PRIMARY> (0.70)
<EPS-DILUTED> (0.70)
</TABLE>
