SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
_____________________
Form 10-K
Annual Report Pursuant to Section 30 or
15(d) of the Securities Exchange
Act of 1934 For the fiscal year
ended December 31, 1997
of
SPICE ENTERTAINMENT COMPANIES, INC.
A Delaware Corporation
IRS Employer Identification No. 11-2917462
SEC File Number 0-21150
536 Broadway
New York, New York 10012
(212) 941-1434
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01
Spice Entertainment Companies, Inc., does not have any securities registered
pursuant to Section 12(b) of the Act.
Spice Entertainment Companies, Inc., (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.
Spice is unaware of any delinquent filers pursuant to Item 405 of Regulation
S-K.
Spice had 11,581,418 shares of Common Stock outstanding at March 31, 1998.
<PAGE>
Item 1. Business.
INTRODUCTION
Spice Entertainment Companies, Inc. and its subsidiaries (collectively
"Spice" or the "Company") is a leading international provider of adult
television entertainment. Formed in 1987, our networks and programming
are available in over 50 countries and on the Internet.
1997 was an important year for the Company. We refinanced our senior
credit facility and completed the disposition of our remaining non-strategic
assets, enabling us to focus our energies on our core adult entertainment
business. We then successfully launched a new more profitable domestic
television network, Spice Hot. On February 3, 1998, the Company entered into a
letter agreement to be acquired by Playboy Entertainment, Inc. ("Playboy") for a
combination of cash and stock. The proposed transaction is subject to several
conditions and is described below in RECENT DEVELOPMENTS.
The Company operates through four operating units: Spice Networks
domestic adult pay-per-view networks, Spice International - international adult
networks and programming, Spice Direct - direct to the consumer products and
services and Spice Productions - adult film production and licensing.
Approximately 50% of our gross revenues for 1997 are derived from our
three domestic adult pay-per-view television networks, Spice, the Adam & Eve
Channel and Spice Hot ("Spice Networks"). (Pay-per-view television enables a
household with an addressable set top decoder or a satellite receiver to
purchase a block of programming for a set fee.) Spice Hot, our newest network
offers more erotic content. From its launch in October 1997, Spice Hot is now
carried by over 25 cable systems and as of April 1, 1998, was available
nationwide in over 4.4 million addressable cable and direct broadcast satellite
("DBS") households. Spice and The Adam & Eve Channel feature cable version adult
movies and related programming. The Spice Networks are available to over 15
million cable addressable households and over 3.3 million DBS households.
Spice International is responsible for expanding the global
distribution of our adult television networks and programming. In Europe, we
operate and distribute The Adult Channel, originated from the United Kingdom,
and The Home Video Channel. The Adult Channel is distributed in the cable and
direct-to-home ("DTH") markets and is currently available in over 40 countries
in Europe. We also distribute the Spice and Spice Hot networks throughout Latin
America and Spice programming in the Pacific Rim through agreements in Japan.
Spice Direct focuses on products and services marketed directly to
consumers. Spice Direct, through agreements with third parties, provides
audiotext services promoted on the Spice Networks. Spice Direct is also
responsible for the productive utilization of our transponder capacity and
provides network playback and programming services to third parties. Spice
Direct also operates Cyberspice, our adult Internet website. Spice Productions
licenses adult movies from the leading producers of adult movies both in this
country and abroad. In order to satisfy the special demands of our television
broadcast business, Spice Productions itself now produces approximately two
adult movies per month. The Company owns the rights to an extensive library of
adult films. We exhibit the films from our library on the Spice Networks and The
Adult Channel and license films to third parties.
The following table sets forth the percentage of revenues contributed
by each of our operating units during each of the last three fiscal years:
Years Ended December 31,
--------------------------
1997 1996 1995
------ ------ ------
Spice Networks ............................. 54.9% 45.3% 43.0%
Spice Direct ............................... 22.5 5.5 6.1
Spice International ........................ 18.5 17.6 20.3
------ ------ ------
Total from Continuing Operations ........... 95.9 68.4 69.4
Discontinued Operations (SEG) .............. -- 19.1 15.2
Suspended/Terminated Operations (CVSP & CPV) 4.1 12.5 15.4
------ ------ ------
Total Revenue .............................. 100.0% 100.0% 100.0%
====== ====== ======
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.
RECENT DEVELOPMENTS
Proposed Transaction With Playboy. On February 3, 1998, the Company and
Playboy executed a letter agreement providing for Playboy's acquisition of all
of the outstanding shares of the Company's Common Stock for cash and Playboy
stock (the "Proposed Transaction"). The February 3, 1998 agreement provided that
for each share of the Company's Common Stock, Company stockholders will receive:
-- $3.60 in cash; and
-- 0.1524 shares of Playboy Class B Stock, subject to a collar designed
to provide a minimum value of $2.11 or a maximum value of $2.69 per
share of Common Stock.
The February 3, 1998 agreement also provided for tax, working capital and other
adjustments to the purchase price.
The terms of the Proposed Transaction were modified by an amendment
agreement dated April 15, 1998 which, among other things, eliminated the
purchase price adjustments, other than the collar, and modified the
consideration to be received by Company stockholders. Under the amended
agreement, for each share of the Company's Common Stock, Company stockholders
would receive:
-- $3.60 in cash; and
-- 0.1371 shares of Playboy Class B Stock, subject to a collar designed
to provide a minimum value of $2.20 or a maximum value of $2.88 per
share of Common Stock.
As part of the Proposed Transaction, the Company will transfer to a
to-be-named spin-off company (referred to as "Spinco")its digital operations
center for video and Internet broadcasts (the "Operations Facility"), its option
to acquire the outstanding stock or assets of Emerald Media, Inc. ("EMI"), a
leading provider of adult entertainment in the C-band market, and certain rights
to a library of adult films. The Company will distribute all of the Spinco
capital stock to its stockholders. It is anticipated that the Spinco
distribution will occur at the closing of Playboy's acquisition of Spice as part
of the merger consideration. Spinco will apply to list its common stock on the
Nasdaq SmallCap market. Spinco intends to exercise the EMI Option after the
acquisition.
Spinco will retain rights to distribute explicit programming in the
U.S., Canada and sovereign islands of the Caribbean in the C-band DTH market.
Spinco will also retain EMI's explicit Internet websites and will have C-band
DTH broadcast rights to the explicit version of films from the Company's
existing library and for use on EMI's websites. Spinco will also have the right
to the explicit version of titles licensed by Playboy under any of the Company's
existing production agreements on a royalty-free basis. Spinco will provide
Playboy with playback services from the Operations Facility for all of Spice's
cable network services that Playboy continues to distribute pursuant to a
service contract. The service contract will provide for a fair market value
service fee and have a two-year term.
The Proposed Transaction is subject to definitive documentation,
Company stockholder approval, receipt of a fairness opinion and other customary
closing conditions. The waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, has expired and Playboy has completed its
due diligence review of the Company.
Playboy and the Company intend to promptly complete preparation of
definitive documentation and obtain the approval of the Company's shareholders.
Closing of the transaction is expected during the end of the second or beginning
of the third calendar quarter. There is no assurance that any definitive
agreement regarding the sale of the Company will be reached or that the
transaction will be completed.
Refinancing. On January 15, 1997, the Company replaced its credit
facility with PNC Bank, N.A. ("PNC") with a new credit facility with Darla,
L.L.C. ("Darla"). PNC had provided a credit facility to the Company that had an
outstanding principal balance of approximately $14.6 million at December 31,
1996. As part of these arrangements, we had issued PNC a warrant to acquire
100,000 shares of our common stock. Pursuant to a Settlement Agreement dated as
of January 15, 1997, by and among PNC and the Company, we paid PNC $9.6 million,
issued a $400,000 two-year promissory note and replaced the warrant previously
granted to PNC with a new warrant to purchase 597,000 shares of common stock in
satisfaction of the PNC credit facility. PNC released its security interest in
our assets.
Pursuant to an Amended and Restated Loan and Security Agreement dated
as of January 15, 1997, Darla provided the Company with a new credit facility
(the "Darla Credit Facility") consisting of a $10.5 million term loan and a
revolving credit facility of up to $3.5 million. The term loan proceeds were
used to satisfy the $9.6 million cash payment provided for under the agreement
with PNC and to pay Darla a loan commitment fee. The Darla Credit Facility
matures on July 15, 1999 with quarterly principal amortization totaling $2.5
million due in the last year of the loan. The loan bears interest at 5% over the
Citibank prime rate but not less than 13%. The Company has exercised its right
to accrue three percentage points of the interest and added it to the principal
of the loan. The accrued amount will be forgiven if the Darla Credit Facility is
paid in full within two years.
As part of this transaction, we issued 24,250 shares of $100 face value
Convertible Preferred Stock Series 1997-A (the "Preferred Stock"). The Preferred
Stock has an 8% coupon which we have elected for the first four quarterly
periods to pay by issuing additional shares of Preferred Stock. The Preferred
Stock is convertible after two years into the Company's common stock at a 10%
discount from the then current market price. The Preferred Stock is convertible
earlier in other circumstances including when our stock price exceeds $5.00 per
share for 30 trading days. As a result of this provision, the Preferred Stock is
currently convertible. We agreed to register the shares of common stock
underlying the Preferred Stock by entering into a Registration Rights Agreement
with Darla.
As part of the Loan Agreement, we entered into various agreements with
Darla pledging the stock of all of our domestic operating subsidiaries and The
Home Video Channel Limited ("HVC") and granting Darla a security interest in our
domestic assets. The Darla loan agreement contains various financial covenants
including minimum levels of revenues and adjusted EBITDA (earnings before
interest, taxes, depreciation and amortization) for each quarter. We did not
meet these covenants for the quarter ended September 30, 1997. On November 14,
1997, Darla and the Company executed an amendment to the Darla loan agreement
which revised the revenue and adjusted EBITDA covenants for the balance of the
loan's term and waived the financial covenant violations for the quarter ended
September 30, 1997.
Emerald Media. In an effort to productively utilize available
transponder capacity, we began providing transponder services to Emerald Media,
Inc. ("EMI") in the fourth quarter of 1996. EMI is a provider of explicit adult
television networks distributed in the domestic C-band DTH market. As part of
these arrangements, EMI granted us an option to acquire its business or stock
for a formula-determined amount. EMI expanded its operations and now operates
several explicit adult television networks in the C-band DTH market. Our
agreements with EMI were modified and we currently provide services on three
transponders to EMI and handle playback for all of the EMI networks from our
Operations Facility. The EMI Option was modified and now has an exercise price
of $755,000. The Company will contribute the EMI Option to Spinco as part of the
Proposed Transaction.
Operations Facility. In the second quarter of 1995, we entered into
agreements with IBM and others to construct the Operations Facility at our 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").
After making an initial $435,000 lease payment, we subsequently renegotiated the
lease with IBM and ICC in November 1996. Under the revised agreement, ICC
provided an additional $525,000 of financing which we 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 we
agreed to begin making lease payments in February 1997. We are currently using
the Operations Facility to playback three of our own networks and the EMI
networks. The Company intends to transfer the Operations Facility to Spinco as
part of the Proposed Transaction
Sale of Controlling Interest in Danish Satellite Television A/S
("DSTV"). In February 1995, HVC formed DSTV which launched Eurotica, a satellite
delivered subscription network based in Denmark that 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.
Eurotica never achieved profitability, in part due to limited distribution and
signal piracy.
On July 9, 1997, DSTV entered into a facilities agreement with
Rendez-Vous Television International S.A. ("RDT") whereby RDT agreed to pay DSTV
an amount equal to the cost of operating Eurotica plus 20% in exchange for the
right to market Eurotica in the DTH market on a royalty free-basis. On September
12, 1997, HVC sold 51% of its interest in DSTV to RDT for approximately $45,000.
RDT also paid the Company approximately $355,000 for a continued license of
DSTV's library of adult films and agreed to license 120 adult films from the
Company in the future. We believe that RDT has defaulted on certain of its
obligations under these agreements and we are currently evaluating our
alternatives with regard to this situation.
Adoption of Anti-Takeover Defenses. During 1997, the Company adopted an
array of anti-takeover defenses. These included a Stockholders Rights Plan,
amendments to the Company's by-laws and employment agreements with the Company's
senior officers.
The purpose of the Stockholders Rights Plan is to give the Company time
to analyze a potential hostile take-over and to force a hostile acquirer to
negotiate with the Company's Board of Directors. The following summarizes the
way the Stockholder Rights Plan achieves these goals: The Stockholder Rights
Plan provides for the issuance of rights to each stockholder which are attached
to the Common Stock. If a person acquires a specified percentage of the
Company's Common Stock or commences a tender offer for the Company which has not
been approved by the Board of Directors, the Board of Directors can cause the
rights to detach. The detached rights give the Company's stockholders, other
than the hostile acquirer, the right to acquire stock at a price that will
result in a substantial reduction in the value of the hostile acquirer's Common
Stock and make it more expensive to acquire control of the Company. Because the
Board of Directors has the right to determine whether the rights should detach,
it is likely that a potential acquirer will negotiate with the Board of
Directors rather than attempting a hostile takeover of the Company. For more
information on the Stockholder Rights Plan, refer to the description contained
in the Company's Current Report on Form 8-K filed on June 18, 1997 and the copy
of the plan attached to that Form 8-K.
The amendments to the Company's by-laws include provisions that require
advance notice to the Company of (i) stockholder nominations to the board of
directors and (ii) stockholder proposed amendments to the Company's Certificate
of Incorporation and by-laws. The by-laws also require a super-majority vote of
directors for certain actions to be taken.
The employment agreements with the senior officers generally provide
for severance payments if an officer's employment is terminated within 18 months
of a change in control.
Termination of Audiotext Service Provider. Capital Distribution, Inc.,
d/b/a Cupid Network Television ("Cupid") provided audiotext services (telephone
chat lines) promoted on the Spice Network under a Telephone Services Agreement
dated October 20, 1995. Cupid paid the Company a fee based on the number of
Spice Network subscribers. Cupid subcontracted the operation of the chat lines
to Amtec Audiotext Inc. ("Amtec"). Cupid also provided merchandise services
under an Amended and Restated Distribution Agreement promoted on Spice and The
Adam & Eve Channel.
The Company believed Cupid had breached its agreements with the Company
and we attempted to terminate both agreements. Cupid instituted arbitration
seeking to prevent the Company from terminating the agreements. The parties
agreed to a settlement in a Settlement Agreement dated May 15, 1997 ("Settlement
Agreement") that provided for, among other things, the adjournment of the
arbitration, termination of the Distribution Agreement and modification of the
Telephone Services Agreement.
In the first quarter of 1998, Cupid defaulted in the payment of service
fees under the Telephone Services Agreement. The Company and Cupid are
negotiating a termination of that agreement. American Telnet replaced Cupid and
now provides the audiotext services promoted on the Spice network.
ELIMINATION OF NON-CORE BUSINESSES
Hit Movie Network. During the second quarter of 1997, we withdrew from
the hit movie pay-per-view business, a business that did not achieve
profitability. As an initial step in limiting our exposure to fund the business'
operating losses, we contributed our hit-movie network, the Cable Video Store
Network, to a partnership, CVS Partners ("CVSP"). The other CVSP partner,
WilTech Cable Television Services, Inc. ("WCTV"), a subsidiary of The Williams
Companies, Inc., agreed to fund the partnership. In the first quarter of 1997
and in the face of continuing losses, the CVSP partners elected to shut down the
business and terminated satellite delivery of the network on March 31, 1997.
On June 3, 1997, the CVSP partners executed an agreement to dissolve
the partnership. Under the terms of the dissolution agreement, WCTV agreed to
pay us $580,000, representing past and future transponder services. We agreed to
be responsible for winding down the partnership and they contributed an
additional $1,030,000 to the partnership which was used to fund the wind-down of
the business.
Spector Entertainment Group, Inc. In the fourth quarter of 1996, we
determined that Spector Entertainment Group, Inc. ("SEG"), a provider of
telecommunications, television production and related services primarily to the
pari-mutuel wagering industry, was no longer a strategic fit with our 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 various Spector family members and affiliates (the "Spector
Group"), we conveyed all of our SEG stock to certain members of the Spector
Group in exchange for the 700,000 shares of our common stock we had previously
issued in the transaction when we acquired SEG.
As part of the SEG Settlement Agreement, we also entered into a
Transponder Services Agreement with SEG under which we provided transponder
services to SEG for $80,000 a month for two years, subject to SEG's right to
terminate upon 90 days prior notice. SEG exercised its termination right and the
agreement was terminated on July 15, 1997.
As part of the original acquisition of SEG, we granted certain members
of the Spector Group a put to sell all of the stock of another corporation they
owned for a formula-determined number of shares of our common stock. As part of
the SEG Settlement Agreement, this put was terminated.
Television and Movie Production. The Company, through its
wholly-owned subsidiary Cinema Products Video, Inc. ("CPV"), was engaged in the
production and distribution of movies, television series and programs and
CD-ROMs. After suspending CPV's production activities at the end of 1995, we
elected to terminate all of CPV's activities in 1996.
Multimedia Games. We formed a joint venture with TV Games, Inc.
("TVG"), a wholly-owned subsidiary of Multimedia Games, Inc. ("MGAM") to develop
and promote high stakes proxy play Class II tribal bingo games. The parties were
unable to agree on a business plan or a strategy for going forward with the
joint venture. Pursuant to a Purchase Agreement dated June 28, 1996, we
exchanged our interest in the joint venture and the 275,000 shares of MGAM stock
we had previously acquired for (i) the cancellation of an aggregate of $775,000
of liabilities owed to MGAM and TVG, (ii) a $100,000 promissory note due on July
25, 1996 and (iii) a $400,000 promissory note due in three years. We retained a
warrant to acquire 175,000 shares of MGAM stock that we had acquired when the
joint ventured was formed.
In the third quarter of 1997, we exercised the warrant and sold the
MGAM shares realizing approximately $1.3 million in excess of the warrant
exercise price. In the last quarter of 1997, we sold the $400,000 note to a
group of investors for $350,000.
SPICE NETWORKS
Introduction. The Spice Networks are among the leading domestic adult
pay-per-view networks and for 1997 accounted for over 50% of our revenues. Adult
programming is an important source of revenue for cable and DTH operators,
typically accounting for between 30% to 50% of the operators' net pay-per-view
revenues, surpassing, in many systems, net revenues from hit movies and events.
("Sex Still Sells," Multichannel News, April 7, 1997.) We believe that
pay-per-view television distribution of adult programming is the preferred
delivery vehicle for adult entertainment primarily for three reasons:
-- the convenience of purchasing pay-per-view programming; the
-- ability to make a private purchase; and the ability to make a
-- spontaneous entertainment decision.
The Company believes that as the universe of addressable households
(those households capable of ordering pay-per-view programming) expands, adult
programming will continue to be a mainstay of operators' pay-per-view
programming offerings. According to Paul Kagan and other industry analysts, less
than 50% of all cable households are currently addressable. The Spice Networks
and the other pay-per-view adult television networks are currently available in
over 75% of all addressable homes. Industry analysts expect that the universe of
addressable households will grow and that adult television programming will be
available in an even greater portion of that growing universe.
Television and entertainment industry analysts Veronis, Suhler and
Associates project strong gains in addressable households, spending on
pay-per-view movies and adult movie service revenue. The Veronis, Suhler 1996
Communications Industry Forecast projects an increase in addressable households
from 25.4 million in 1996 to 40.3 million in 2001 and a 14.4% compound annual
growth rate in pay-per-view movie spending from 1996 through 2001. Showtime
Event Television, in its annual "State of the PPV" report, noted that the
pay-per-view business surpassed the $1.2 billion revenue mark in 1997, with
adult pay-per-view programming accounting for $253 million.
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 any number of delivery methods including via cable television,
"direct to home" to households with large satellite dishes receiving a C-band
low power analog or digital signal (the "C-band DTH market") or with small
satellite dishes receiving a Ku-band medium or high power digital signal such as
currently offered by DirecTV, Primestar and Echostar (referred to as "DBS
services"), wireless cable systems and via new technologies such as cable modem
and the Internet. The Spice Networks are currently distributed by all of these
delivery methods. The following chart depicts the number of addressable
households for each of the Spice Networks since 1989.
The following table is an EDGAR representation of the data points used in
the printed graphic presentation:
<TABLE>
<CAPTION>
SPICE NETWORKS GROWTH
Y/E 1989 Y/E 1990 Y/E 1991 Y/E 1992 Y/E 1993 Y/E 1994 Y/E 1995 Y/E 1996 Y/E 1997
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Spice 0.8 2.3 3.9 4.9 7.4 9.3 12.8 16.3 17.3
AEC 0.4 3.2 3.6 4.4
Spice Hot 0.5
</TABLE>
Spice Hot. In response to growing Spice customer demand for more erotic
product and the greater mainstream acceptance of adult programming, we
introduced a new television network, Spice Hot. Spice Hot features hot cable
version adult movies, a more erotic version of the cable version featured on
Spice and The Adam & Eve Channel.
Our preliminary results indicate that the buy-rates for systems that
have replaced Spice with Spice Hot have typically increased between 40% to over
100% over those for Spice. (The buy-rate is the number of purchases per month
divided by the number of addressable households.) In addition, Spice Hot
commands a higher retail price. Spice Hot is designed to replace Spice in a
cable or a DBS system. By replacing Spice with Spice Hot we believe our cable
and DBS affiliates can increase their adult pay-per-view revenues without using
up valuable channel capacity.
The Paul Kagan Pay TV Newsletter (No. 445, November 30, 1997) reported
an increase in revenue per addressable household of 84% and 122% in the two
cable systems that recently launched Spice Hot. Buy-rates increased 40% in one
system (part-time Spice Hot carriage) and 66% in another (24 hour a day Spice
Hot carriage) even with a $2.00 increase in retail prices.
As of April 1, 1998, we have entered into over 25 affiliation
agreements for Spice Hot including agreements with a major DBS provider and 6 of
the top 15 largest multiple system operators. As of April 1, 1998, Spice Hot was
available in over 4.4 million addressable households. Since entering into an
affiliation agreement with a major DBS provider and a top ten cable system
operator, we have secured additional affiliation agreements with other cable
system operators. We believe the acceptance by major cable system and DBS
operators and the nationwide availability of Spice Hot from a major DBS operator
has and will continue to prompt other cable systems to offer Spice Hot so they
can remain on a competitive footing with their programming offerings.
The Spice Hot affiliation agreements have multi-year terms and restrict
replacement of Spice Hot with another comparable adult service during their
terms. Certain of the Spice Hot affiliation agreement provide Spice with early
termination rights if the Proposed Transaction with Playboy is consummated.
Section 505. In part, we launched Spice Hot to make up the revenue that
we lost as a result of legislation which effectively restricted the carriage
hours of the Spice Networks in many cable systems. Section 505 of the
Telecommunications Act of 1996 (the "1996 Act") requires full audio and video
scrambling of channels such as the Spice Networks. See GOVERNMENT REGULATION,
Section 505. If a cable system operator cannot comply with the full scrambling
requirement, then the channel must be blocked between 6:00 A.M. and 10:00 PM.
(The hours between 10:00 P.M. and 6:00 A.M. are referred to as the "safe harbor
hours.") Several of our cable affiliates do not comply with the full scrambling
requirements and were forced to carry the Spice Networks only during the safe
harbor hours. The reduction in carriage hours had and will continue to have a
detrimental affect on revenues from affected cable systems.
We developed several means of mitigating the adverse impact of Section
505. These included new feature start times to coincide with the safe harbor
hours, alternate audio feeds of music for broadcast in place of the audio track
of the Spice Networks during non-safe harbor hours, proposed changes in
packaging and retail prices - increasing the retail price and offering a longer
block of programming - and aggressive marketing. We found that affected cable
systems that adopted one or more of our revenue preserving suggestions had a
much lower revenue loss from Section 505 than those systems that did not follow
our suggestions. For 1997, we estimate that the aggregate revenue loss
attributable to Section 505 was approximately $600,000.
Digital Cable Rollout. Cable operators have begun to introduce digital
programming as a means of upgrading their cable systems and to counteract
competition from the DBS operators. Spice and the Adam & Eve Channel are
currently available on Telecommunications, Inc. ("TCI") All TV digital platform.
Digital cable television has many advantages over analog cable television
including more channels, better audio and video quality and advanced set-top
boxes that are addressable, provide a secure fully scrambled signal and have
integrated program guides and advanced ordering technology. (We have found that
our buy-rate, on a system by system basis, tends to increase when the more
advanced ordering technology is used.)
While there are advantages to digital cable television, we believe the
rollout of digital cable will have a mixed impact on our business. In the short
term, many TCI systems have recaptured analog channels to make room for the
digital tier of programming. In some cases, TCI systems eliminated analog
carriage of Spice and/or the Adam & Eve Channel. While Spice and the Adam & Eve
Channel are included in the preferred grouping of digital channels that most TCI
systems utilize when they rollout digital cable television, we estimate that we
lost an aggregate of 600,000 addressable households in the fourth quarter of
1997 and first quarter of this year due to the slow rollout of digital set-top
boxes. On the other hand, other multiple system operators have not had to
recapture analog channels and the digital rollout has increased our business by
adding new Spice and/or Adam & Eve Channel addressable households, all with 24
hour a day carriage.
As digital cable becomes more widely available, industry analysts
predict the digital rollout will foster an increase in the number of addressable
households and result in better buy-rates for adult television programming
because of the use of advanced ordering technology and from the 24 hour a day
carriage of adult television networks. The capital costs of the digital rollout
are large and the rollout has been slower than originally forecasted. The net
effect of all of these factors cannot be accurately predicted at this time.
Programming. Each of the Spice Networks features approximately 60
titles per month, approximately 10 of which are first time exhibitions. Spice
and Spice Hot have virtually identical program schedules to facilitate switching
between the two networks when the two are exhibited on a shared channel, using
the same program guides. Spice and the Adam & Eve Channel have no crossover of
programming.
Spice and the Adam & Eve Channel 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. Spice Hot features the "hot cable" version which is more erotic than
the cable version.
Competition. The Company competes with all other forms of entertainment
including broadcast, premium and other pay-per-view television services. In the
adult category, we compete with other outlets for adult entertainment including
video stores, adult bookstores, mail order companies and the Internet. We have
one principal competitor in our adult pay-per-view television market niche and
compete with cable systems who program their own adult movies and from video
file server based video delivery systems. Based on our calculation of the number
of Spice Networks addressable households and the number of addressable
households served by our competition as disclosed in their public filings, we
believe that our networks are the most widely distributed domestic adult
pay-per-view networks in the cable market.
SPICE INTERNATIONAL
We have been pursuing global distribution of our adult networks and
programming since our 1994 acquisition of The Home Video Channel Limited
("HVC"). This past year was one of mixed results. While we have gained a strong
foothold in the nascent Latin American market through our agreements with Sky
Latin America and others, we have lost market share in the UK DTH market for The
Adult Channel primarily as a result of competition. We have restructured the
management of the Spice International division and instituted a business plan to
address the loss of UK DTH market share.
HVC. HVC owns and operates The Adult Channel, a satellite delivered
subscription service that features cable version adult movies and related
programming similar to those exhibited on the Spice network. 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 to cable operators as a seamless 8:00 P.M. to 4:00 A.M.
programming service at a package price.
In the UK, the Adult Channel has lost DTH subscribers and market share
over the last 18 months. Several factors have contributed to this decline,
primarily the launch of two competing services in 1995 and increased piracy. In
addition The Adult Channel currently uses a transponder that has adversely
affected its business in two ways. First, many potential DTH viewers cannot
receive The Adult Channel without additional equipment. Second, The Adult
Channel follows a foreign language service with limited distribution. This
curtails any benefits derived from HVC's practice of broadcasting the first 10
minutes of the Adult Channel unencrypted to secure potential impulse buying and
broaden brand awareness. HVC also began directly handling subscriber management
services ("SMS") (the function of receiving and processing subscriber orders).
There were problems in the transition to HVC of these services which adversely
affected revenues and increased costs.
In an effort to address these issues, we restructured HVC's management
and instituted certain changes to our business plan for 1998. To remedy the
shortcomings with its transponder, HVC secured replacement transponder services
from British Sky Broadcasting Limited ("Sky") that will begin in August 1998.
The new transponder is both less expensive than The Adult Channel's current
transponder and is receivable by potential DTH subscribers without additional
equipment. The Adult Channel will follow SCi-Fi and The History Channel, two
widely distributed networks. HVC also switched to the Sky encryption technology
in October 1997 to curtail signal piracy. We have also increased The Adult
Channel's programming budget for 1998 with an added emphasis on European
programming. The Company has also increased HVC's advertising budget and
reallocated it to the UK DTH market in an effort to regain lost market share.
HVC has expanded its distribution of The Adult Channel throughout the
rest of Europe. We have authorized agents throughout Western Europe who
distribute DTH subscriptions to The Adult Channel through sales of "smart
cards." HVC has entered into an agency agreement with Nuevas Estructuras
Televisivas who has secured affiliation agreements for The Adult Channel in over
thirty Spanish cable systems. The Adult Channel is now carried on the Canal
Digital AS platform which serves subscribers in Scandinavia and we are in the
final stages of negotiations to secure carriage on the Canal Plus digital
platform serving subscribers in the Benelux countries. HVC is in the final
stages of securing a German broadcast license for The Adult Channel. If we are
successful in obtaining a German Broadcast license, Deutsche Telekom has
expressed interest in distributing The Adult Channel. Deutsche Telekom has more
than 16 million cable homes.
HVC has entered into affiliation agreements for The Adult Channel in
Eastern Europe, securing carriage in cable systems located in Russia, Lithuania,
Estonia and Slovenia. However, one of our more promising programming
arrangements was with Metromedia which operated cable systems in Rumania and
Russia. Several of the Rumanian cable systems have ceased distribution of The
Adult Channel as a result of the devaluation of the Rumanian currency.
DSTV. As described above in "RECENT DEVELOPMENTS," HVC sold a
majority of its interest in DSTV to RDT.
Other International Arrangements. The Company entered into a license
agreement with Pay Per View Japan Inc. ("PPVJ") to be the exclusive adult
pay-per-view program provider to PPVJ's Perfect Choice TV, the first digital
television program provider in Japan. We supply PPVJ with Spice-branded
programming specially selected and edited for the Japanese market. Perfect
Choice was launched on January 15, 1997 and while the initial results were
positive, the Company's licensing fees have been dropping. We believe this is
because of the availability of multiple channels of Japanese sourced-adult
programming and we plan to adjust our programming to fit this market. Perfect
Choice has announced its intention to merge with J Sky B, the News Corporation's
Japanese affiliate. We are uncertain as to the impact of the proposed merger on
our Japanese activity.
Recently, the Company entered into an affiliation agreement with Sky
Latin America L.L.C. for carriage of Spice and Spice Hot on its various DTH
platforms that serve Latin America. Spice and Spice Hot are currently available
in Mexico and Colombia. This arrangement has been expanded to include commercial
establishments.
We are also in discussions with cable and DTH operators in the Pacific
Rim, Taiwan and China and other areas for carriage of the Company's networks and
programming.
SPICE DIRECT
Spice Direct is responsible for the direct marketing of our products
and services to consumers including the operation of Cyberspice, our Internet
website. Spice Direct also arranges for the productive use of our transponder
capacity and network playback services and licenses our programming to third
parties.
Audiotext Services. Spice Direct manages the adult-oriented
pay-per-call telephone lines (audiotext services) promoted on the Spice
Networks. On the Spice Network, these services were provided by Capital
Distribution, Inc., d/b/a Cupid Network Television ("Cupid") until its recent
replacement by American Telnet, Inc. American Telnet and Allstate Communications
Incorporated ("Allstate") provide audiotext services promoted on Spice Hot. PHE,
Inc. ("PHE") and VCA Labs, Inc. ("VCA") retained the right, as part of the
Company's acquisition of Adam & Eve Communications, Inc., to promote audiotext
services on The Adam & Eve Channel.
The audiotext services are promoted on all the Spice Networks with
advertisements that we produce or are produced exclusively for us by adult film
producers. This enables us to control our networks' on-air look. Under the prior
agreement with Cupid, we received a fee based on the number of Spice Network
subscribers. Under the agreements with Allstate and American Telnet, we receive
a percentage of revenues from the audiotext services. PHE and VCA are
contractually obligated to pay us a sliding percentage of their revenues from
the audiotext services promoted on the Adam & Eve Channel.
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. The telephone lines feature
computerized audio programs and live operators on both 800 and 900 telephone
lines. The audiotext service providers employ the operators and administrators
of the telephone lines promoted on our networks. As described above in RECENT
DEVELOPMENTS, Cupid provided the audiotext services promoted on the Spice
Network until March 20, 1998. Cupid defaulted in the payment of service fees
under the Telephone Services Agreement and the Company and Cupid have agreed to
a negotiated termination of that agreement. American Telnet now provides the
audiotext services promoted on the Spice network.
Merchandising. In between feature movies on Spice and the Adam & Eve
Channel, we previously exhibited home shopping segments that offered
adult-themed products in provocatively staged segments. We believed that we
could make more productive use of the interstitial time and as part of the
Settlement Agreement with Cupid the Company and Cupid agreed to terminate the
home shopping segments in the third quarter of this year.
Cyberspice. In 1994, we began Cyberspice as an on-line bulletin board
service which utilized our adult programming and cross-promoted the Spice
Networks. Cyberspice was converted to a website on the Internet in the second
quarter of 1995. E.O.L. Communications Corp. ("EOL") was responsible for
maintaining and operating the Internet server where Cyberspice resides (a set of
functions referred to as "hosting") until May 31, 1997. EOL included Cyberspice
in a bouquet of EOL operated adult pay sites. Under the arrangement with EOL,
we received a portion of all revenues generated by customers of EOL's pay sites
who accessed those sites through Cyberspice.
In June 1997, we transferred hosting of Cyberspice to Media on Demand,
Inc., ("MOD"). Under our agreement with MOD, we share revenues generated by
Cyberspice from pay services including audiotext services and merchandise sales.
In addition, MOD encodes Spice Hot and transmits a simultaneous webcast of Spice
Hot (a broadcast of Spice Hot which can be viewed by a subscriber from the
Internet) which is offered on a pay-per-view or monthly subscription basis. We
are also developing with MOD a database accessible library of video clips from
our adult film library. Cyberspice subscribers will be able to select video
clips meeting user-designed criteria for download on a pay basis. Under a
revenue sharing arrangement with Babenet, an affiliate of VCA, Cyberspice
subscribers can access Babenet's live nude chat services. See "GOVERNMENT
REGULATION, On-Line Services."
Transponder and Playback Services. We began to digitally compress our
Spice Networks on September 1, 1996 which made three transponders available for
productive utilization. We designed the Operations Facility with the ability to
increase the number of networks for which we can provide playback services with
nominal incremental capital cost.
Pursuant to agreements dated as of August 30, 1996, the Company began
providing transponder services to EMI, which at that time owned and operated a
single explicit television network distributed in the C-band DTH market. EMI
acquired two additional networks in February 1997 and launched two more in the
third quarter of 1997 and the first quarter of 1998. The Company has provided
transponder services for three of EMI's networks since February 1997 and
provides digital compressed transponder services for another television network.
We also provide playback services for the EMI networks.
As described above in RECENT DEVELOPMENTS, we intend to contribute the
Operations Facility and the EMI Option to Spinco as part of the Proposed
Transaction with Playboy. If the Proposed Transaction, including the spin-off,
is consummated, it is anticipated that Spinco will exercise the EMI Option and
operate the EMI networks and the Operations Facility.
SPICE PRODUCTIONS
Spice Productions is responsible for licensing and producing adult
movies for use on our networks and for other program licensing arrangements.
With a full-time staff of five, Spice Productions screens adult movies to select
the ones that meet our strict criteria for exhibition on our networks. We have
an extensive library of adult movies with worldwide rights in perpetuity in over
450 titles and more limited rights in over 250 titles for a more limited period
of time.
We license rights to adult films under two general categories of
license agreements: agreements where we acquire most of the rights to the adult
movie (referred to as "production agreements") and agreements where we acquire
more limited rights (referred to as "license agreements").
Production Agreements. Under our production agreements, we generally
acquire worldwide television rights (pay-per-view, subscription, premium and
broadcast television rights) in perpetuity for delivery using all known and to
be developed methods of delivery including via the Internet, for both the cable
and explicit version of each movie. We also have the right to edit the movies
and create the hot cable version featured on Spice Hot.
We have a long-term production agreement with VCA and more limited
production agreements with, among others, All-Channel Films, Elegant Angel
Video, Eyeland Pictures, Fred H. Schulte, Golden Orchid Productions, Lone Wolf
Productions, Parco L.L.C., Sin City Entertainment, Primal Productions, Ultra
Image Productions, Wellwood Entertainment, Inc. and Wicked Pictures. VCA
supplies approximately one-fourth of the adult films which we license under
production agreements. The Company believes that the VCA Production Agreement
was automatically renewed for an additional five-year term commencing April 10,
1998. VCA has disputed the automatic renewal of the agreement but continues to
supply movies under the Production Agreement. We are currently in discussion
with VCA to modify the terms of the Production Agreement for the renewal term.
We have also entered into production agreements with foreign producers
as part of the Company's strategy to globalize our programming and to meet local
content requirements.
License Agreements. Under the terms of our 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. The license
agreements permit unlimited exhibitions in return for a flat license fee. Most
of the movies exhibited on the Adam & Eve Channel are licensed under these
arrangements. We license adult movies from the adult film producers mentioned
above and others.
In-House Productions. Most adult films are produced for sale in the
home video market which has a different target audience than our networks. To
more directly meet the special demands of our broadcast-based television network
business, we started to produce our own adult movies in 1997. Spice Production
currently makes, on average, two adult movies per month. We hire adult film
producers and stars to make these productions. To date we have completed 13
movies with approximately 18 more scheduled for the balance of the year. We are
currently exploring the license of home video rights to our movies for
distribution by third parties.
NETWORK DELIVERY
Satellite Transmission. The Company delivers its video programming to
cable systems and DTH customers via digitally compressed satellite transmission.
We believe that this is the most efficient delivery method currently available
for distribution of the Spice Networks. Satellite delivery of video programming
is accomplished as follows: The video programming (movies and interstitial
programming) is played back at a facility such as our 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
(uplinked) to the satellite as an analog signal or digitally compressed and
combined with other signals. (By digitally compressing several channels, we can
spread the cost of a transponder over several networks.) The signal is
transmitted 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 Mexico, the Caribbean, and Canada.
The signal coverage of the satellite utilized by the Adult Channel is
Continental Europe and portions of North Africa. Each transponder can retransmit
four or more complete digitally compressed color television signals or one
analog 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
subscribers, 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 -
known as addressability - is essential for the marketing and delivery of
pay-per-view programming services.
In Europe, DTH 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. We utilize transponder services for our domestic
networks pursuant to a February 7, 1995 Agreement ("Transponder Agreement") with
AT&T Corp. The Transponder Agreement initially provided for services on five
transponders on AT&T's T4 Satellite. This was reduced to four transponders when
AT&T preempted one of our transponders. At our request, the Transponder
Agreement `s term was also shortened from the end of the satellite's useful life
(estimated to be 12 years) to October 31, 2004 pursuant to a letter agreement
dated March 31, 1997 between the Company and Loral Skynet (which acquired AT&T's
satellite business). In exchange, we granted Loral a right to preempt one of our
transponders after September 1, 1997. To date, Loral has not exercised its
preemption right. See "MANAGEMENT DISCUSSION AND ANALYSIS."
HVC obtained part-time transponder services for The Adult Channel from
Societe Europeenne des Satellites S.A. ("SES"), the owner of the Astra 1C
satellite, through January 31, 1997. This arrangement was replaced with an
agreement effective February 1, 1997 with Filmnet AB for part-time transponder
services on Astra 1A. The agreement with Filmnet AB was replaced with an
agreement with Asia TV Limited for part-time transponder services on Astra 1D
through November 30, 1998.
HVC has secured part-time transponder services on Astra 1B from Sky
pursuant to an agreement that will commence on August 1, 1998 and continue
through December 31, 2002. The Company is attempting to release its Astra 1D
transponder capacity back to Asia TV Limited after a one month period of dual
illumination during August 1998. 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
dated April 24, 1996.
The Operations Facility, which became operational in February 1997,
currently handles playback for three of the Company's networks and the EMI
networks utilizing video file servers. This 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 has been able to add additional networks
quickly and efficiently.
The Company contracted with Atlantic Satellite Communications, Inc.
("Atlantic") for fiber connectivity from the Operations Facility to Atlantic's
uplink facility and for uplink services pursuant to a three-year agreement dated
as of February 24, 1997.
As discussed above, our domestic network signals are encrypted and
digitally compressed using Digicipher encoders (manufactured by General
Instruments) which is currently the industry standard scrambling technology. The
Company leased a General Instruments Digicipher encoder and 1,210 decoders from
Vendor Capital Group. The decoders were then provided to Spice Networks
affiliates.
HVC provides playback services for The Adult Channel. British
Telecommunications currently handles uplink services for The Adult Channel until
Sky takes over in August 1998. HVC previously used the News Datacom Videocrypt
encryption technology and its own proprietary smart card. HVC now uses a more
advanced secure generation of this encryption technology and uses the Sky smart
card. Over 90% of UK DTH subscribers use the Sky card. Satellite Encryption
Services Ltd., a Sky affiliate, is responsible for authorizing and deauthorizing
Sky cards on HVC's behalf. TV Direct Limited used to handle subscriber
management services (order processing) for HVC until HVC began handling this
function itself.
PRINCIPAL CUSTOMERS
For 1997, our principal customers were EMI which accounted for
approximately 14% of consolidated revenues and TCI, DirecTV and Time Warner,
Spice Networks customers, each of which accounted for approximately 9% of
consolidated revenues. TCI and Time Warner accounted for 18% and 9%,
respectively, of our consolidated revenues for 1996 and 11% and 7%,
respectively, of our consolidated revenues for 1995.
GOVERNMENTAL REGULATIONS
Congress enacted the 1996 Act, a comprehensive overhaul of the Federal
Communications Act of 1934. The 1996 Act contains several provisions which may
impact the Company. (All Section references which follow refer to the Act.)
Section 505. 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. (referred to as "time
channeling"). 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 and, to a lesser extent, the video portion of the signal.
The Company filed an action in Delaware District Court challenging the
constitutionality of Section 505. After initially granting the Company's
application for a temporary restraining order enjoining enforcement of Section
505, the District Court denied the Company's application for a preliminary
injunction. On March 24, 1997, the Supreme Court affirmed the District Court's
decision and Section 505 took effect on or about May 1, 1997.
When Section 505 took effect, the Company's revenues were adversely
affected with several cable systems moving to time channeling. The Company
developed several means of mitigating the adverse impact of Section 505. These
included new feature start times to coincide with the safe harbor hours,
alternate audio feeds of music for broadcast in place of the audio track of the
Spice Networks during non-safe harbor hours, proposed changes in packaging and
retail prices - increasing the retail price and offering a longer block of
programming - and aggressive marketing.
While we continue to believe that Section 505 is unconstitutional
because there are other less restrictive means of blocking access by minors and
others to unwanted partially scrambled television programming (both ours and
other types of programming that some may find offensive), we believe we can
successfully operate our business within the legal framework established by
Section 505.
Closed Captioning. Section 713 of the 1996 Act also directed the
Federal Communications Commission ("FCC") to adopt rules requiring that video
programming be accessible via closed captioning unless exempted. The FCC issued
a Report and Order on August 22, 1997 which provided rules on closed captioning.
Under the rules, responsibility for closed captioning falls on the video
programming distributors (broadcasters, cable and DBS operators) unless they do
not have editorial control over the programming. In that case, responsibility
falls on the programmer. The rules also provide transitional rules for phased-in
implementation of closed captioning which require that 95% of new programming -
programming created after the January 1, 1998 effective date of the rules must
be closed captioned after a staged 8 or 10 year transition period. The rules
require that 75% of library programming - programming published or completed
prior to the January 1, 1998 effective date - must be closed captioned after a
10-year transition period.
The rules contain exemptions from the closed captioning requirement
based on economic burden. These include exemptions for new networks, late night
programming, local origination and public education programming, interstitial
programming, advertising and a revenue-based exemption. An exemption may also be
granted upon a showing of "undue burden." The FCC plans to establish a
petitioning process for exemptions based on undue burden. Applications for
exemptions for undue burden may be based on:
1. the nature and cost of the closed captioning;
2. the impact on the program provider;
3. the financial resources of the program provider; or
4. the type of operations of the program provider.
We are currently evaluating the impact of the closed captioning
rules on our business and whether to file an exemption application claiming
undue burden. If the Spice Networks are required to include closed captioning,
the Company will be adversely affected as a result of the additional costs
incurred to comply with the rules. It is not possible, at this time to quantify
the cost of closed captioning the movies exhibited on the Spice Networks.
Moreover, if we elect to file an exemption application, it is uncertain whether
such an application would be granted.
On-Line Services. The 1996 Act also contained provisions aimed at
curbing indecent material on the Internet. The Supreme Court declared this
provision unconstitutional. The Company plans to carefully monitor future
developments in laws regulating adult content on the Internet, and will adjust
its practices and procedure accordingly. While the provision of the 1996 Act
regulating the Internet is not in effect, the Company has conformed its
practices with a safe harbor provision contained in the 1996 Act. Under this
provision, content providers will have no liability if certain adult material is
made available only to persons with a credit card, which the Act presumes can be
obtained only by person over 18 years of age. The webcast of Spice Hot and other
more explicit material and services on Cyberspice are available only to persons
who both certify that they are over the age of 18 and who have a credit card.
Other Provisions of the 1996 Act. The 1996 Act will also affect our
businesses in other ways. The principal purpose of the 1996 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.
CURRENCY RATES AND REGULATIONS
Our 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 March 31, 1997, the Company had a total of 104 employees.
Item 2. Properties.
We lease the following locations:
Headquarters:
536 Broadway
New York, NY 10012 24,750 square feet(1)
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(2)
1300 West Belmont Avenue, Suite 201
Chicago, IL 60657 150 square feet(2)
120 International Parkway
Heathrow, FL 60563 330 square feet(2)
Home Video Channel Limited
Aquis House, Station Rd.
Hayes, Middlesex UB3 4DX
United Kingdom 5,020 square feet
We believe our leased locations are suitable and adequate for the conduct of our
business.
- ----------------
1) We also use a portion of the roof at the headquarters for equipment
relating to the Operations Facility.
2) We lease offices in professional suites. In addition to the square
footage indicated, we have use of common areas in the professional
suites.
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 1996 Act. Section 505 is discussed above in "GOVERNMENT
REGULATION, Section 505."
On March 7, 1996, the Court granted our application for a temporary
restraining order, enjoining enforcement of the Section 505. However, our
application for a preliminary injunction was denied on November 8, 1996 and on
March 24, 1997, the Supreme Court affirmed the District Court's decision.
Section 505 took effect on or about May 1, 1997. We elected not to continue
participating in the constitutional challenge of Section 505. The other
plaintiff in the action has continued its challenge of Section 505. A trial on
the merits was held at the end of February 1998. The Delaware District Court has
not yet rendered a decision.
We issued notices of default to Cupid under the Distribution Agreement
and the Telephone Services Agreement. Cupid responded by obtaining a temporary
restraining order preventing the Company from terminating the agreements and
also filed a Demand for Arbitration. Hearings in the arbitration began on March
17, 1997. Before the second set of hearing days, the Company and Cupid agreed to
settle their differences and executed a Settlement Agreement dated May 15, 1997.
The Settlement Agreement provided for, among other things, the adjournment of
the arbitration, termination of the Distribution Agreement and modification of
the Telephone Services Agreement. In March 1998, Cupid defaulted in the payment
of service fees under the Telephone Services Agreement and the Company and Cupid
are negotiating a termination of that agreement. American Telnet now provides
the audiotext services promoted on the Spice network.
On February 26, 1998, TX Media, Inc. filed a breach of contract claim
against the Company in Worcester, Superior Court, Civil Action No. 98-0465B. The
claim relates to November 10, 1995 Interconnection and Consultancy Services
Agreement between Company and TX Media, Inc. TX Media, Inc. was to receive
brokerage fees for arranging fiber connectivity and uplink services. We
terminated the agreement on December 28, 1995, as a result of the non-delivery
by IBM of video file servers which resulted in a more than a one-year delay in
our Operations Facility becoming operational. The Company believes TX Media,
Inc.'s claims are without merit.
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, 1997.
<PAGE>
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, 1997 and from June 1,
1997 on the Nasdaq SmallCap Market.
High Low
----- -----
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
1997
- ----
First Quarter $2.38 $1.44
Second Quarter $3.69 $2.13
Third Quarter $3.88 $2.88
Fourth Quarter $4.13 $3.38
The Company currently has approximately 2,300 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 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 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, 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues: ............................................ $ 33,596,000 $ 33,213,000 $ 43,292,000 $43,232,000 $ 20,528,000
------------ ------------ ------------ ----------- ------------
Operating expenses:
Cost of goods sold ................................. -- 94,000 196,000 123,000 329,000
Salaries, wages and benefits ....................... 7,786,000 7,592,000 9,722,000 6,665,000 4,318,000
Producer royalties and library amortization ........ 2,748,000 5,481,000 6,662,000 7,096,000 4,075,000
Satellite costs .................................... 6,744,000 1,884,000 10,191,000 9,670,000 5,985,000
Selling, general and administrative expenses ....... 10,240,000 11,354,000 17,646,000 13,472,000 7,719,000
Depreciation of fixed assets and
amortization of goodwill ......................... 3,654,000 7,499,000 2,063,000 1,156,000 465,000
Provision for write downs and non-recurring items of:
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 ........................... 31,172,000 33,904,000 54,973,000 38,182,000 22,891,000
------------ ------------ ------------ ----------- ------------
Operating income (loss) .............................. 2,424,000 (691,000) (11,681,000) 5,050,000 (2,363,000)
Interest expense ..................................... 3,609,000 6,418,000 914,000 299,000 289,000
Minority interest .................................... (680,000) (1,062,000) -- 500,000 --
Gain from transponder lease amendment ................ (2,348,000) -- -- --
Gain on disposition of DSTV .......................... (352,000) -- -- --
Gain on Nethold settlement ........................... (740,000) -- -- --
(Gain) loss on disposition of AGN .................... (1,712,000) (875,000) 2,039,000
------------ ------------ ------------ ----------- ------------
Income (loss) from continuing operations
before provision for income taxes and
equity in undistributed earnings ................... 4,647,000 (5,172,000) (14,634,000) 4,251,000 (2,652,000)
Income taxes (benefit) provision ..................... 348,000 192,000 734,000 1,298,000 (54,000)
------------ ------------ ------------ ----------- ------------
Income (loss) from continuing operations
before equity in undistributed earnings ............ 4,299,000 (5,364,000) (15,368,000) 2,953,000 (2,598,000)
Equity in the undistributed earnings of
HVC, net of the amortization of goodwill ........... -- -- -- -- 4,000
------------ ------------ ------------ ----------- ------------
Income (loss) from continuing operations ............. 4,299,000 (5,364,000) (15,368,000) 2,953,000 (2,594,000)
------------ ------------ ------------ ----------- ------------
Discontinued operations, net of income taxes
Income from discontinued operations of SEG ......... -- 35,000 242,000 213,000 225,000
Loss on disposal of SEG ............................ -- (2,571,000) -- -- --
------------ ------------ ------------ ----------- ------------
Income (loss) from discontinued operations ......... -- (2,536,000) 242,000 213,000 225,000
Extraordinary gain on debt restructuring ............. 143,000 -- -- -- --
------------ ------------ ------------ ----------- ------------
Net income (loss) .................................... 4,442,000 (7,900,000) (15,126,000) 3,166,000 (2,369,000)
Dividends on preferred stock ......................... 192,000 -- -- -- --
------------ ------------ ------------ ----------- ------------
Net income (loss) attributable to common stock ....... $ 4,250,000 $ (7,900,000) $(15,126,000) $ 3,166,000 $ (2,369,000)
============ ============ ============ =========== ============
Earnings (Loss) Per share,
Basic
From continuing operations ........................... $ 0.39 ($ 0.48) ($ 1.31) $ 0.28 ($ 0.29)
Extraordinary item ................................... 0.01 -- -- -- --
Discontinued operations .............................. -- (0.22) 0.02 0.02 0.03
------------ ------------ ------------ ----------- ------------
Net income ........................................... $ 0.40 ($ 0.70) ($ 1.29) $ 0.30 ($ 0.26)
============ ============ ============ =========== ============
Diluted
From continuing operations ........................... $ 0.35 ($ 0.48) ($ 1.31) $ 0.25 ($ 0.29)
Extraordinary item ................................... 0.01 -- -- -- --
Discontinued operations .............................. -- (0.22) 0.02 0.02 0.03
------------ ------------ ------------ ----------- ------------
Net income ........................................... $ 0.36 ($ 0.70) ($ 1.29) $ 0.27 ($ 0.26)
============ ============ ============ =========== ============
Cash dividends declared per common share ............. None None None None None
============ ============ ============ =========== ============
Weighted average number of shares outstanding,
Basic .............................................. 10,706,000 11,351,000 11,747,000 10,386,000 8,954,000
============ ============ ============ =========== ============
Diluted ............................................ 12,237,000 11,351,000 11,747,000 11,909,000 8,954,000
============ ============ ============ =========== ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
As of December 31, 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets ......................................... $ 31,138,000 $ 89,312,000 $ 99,199,000 $37,458,000 $ 21,221,000
------------ ------------ ------------ ----------- ------------
Current portion of long-term debt
and obligations under capital leases ............... 3,853,000 5,743,000 5,623,000 3,702,000 446,000
------------ ------------ ------------ ----------- ------------
Long-term debt and obligations
under capital lease less current
portion ............................................ 11,232,000 68,411,000 71,311,000 1,049,000 1,608,000
------------ ------------ ------------ ----------- ------------
Shareholders' equity ................................. $ 8,956,000 $ 2,294,000 $ 8,069,000 $23,460,000 $ 8,583,000
============ ============ ============ =========== ============
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
RESULTS OF OPERATIONS
This report contains forward looking statements that involve a number
of risks and uncertainties. In addition to the factors discussed elsewhere in
this report, among the other factors that could cause actual results to differ
materially are the following: business conditions and the general economy;
governmental regulation of the Company's adult programming and of the content
and distribution of television programming in general; competitive factors such
as rival adult television networks and alternative sources of adult programming
content; consolidation in the ownership of the Company's principal customers;
the risks of doing business in new international markets; and the risks
associated with the distribution of premium television programming.
1997 COMPARED TO 1996
For the year ended December 31, 1997 the Company reported net income
from continuing operations of $4.3 million as compared to a net loss from
continuing operations of $5.4 million for the year ended December 31, 1996. The
1997 net income from continuing operations was primarily attributable to
non-recurring gains of $5.2 million and operating income of $2.4 million offset
by interest expense of $3.6 million. The 1996 net loss from continuing
operations was primarily attributable to an operating loss of $0.7 million and
interest expense of $6.4 million offset by minority interest of $1.1 million and
a non recurring gain of $0.9 million. The improvement in income from continuing
operations was primarily attributable to three main factors; non-recurring
gains, the Company's sale of excess transponder and playback capacity to third
parties and reduced expenses attributable to domestic transponder services
resulting from the amendment of the Company's transponder lease and the
corresponding change in its classification from a capital to an operating lease.
Revenues. The Company reported total revenue of $33.6 million for the
year ended December 31, 1997, which was comparable to total revenue from
continuing operations of $33.2 for the year ended December 31, 1996. The Company
generated an additional $4.1 million in 1997 from the sale of excess transponder
capacity bundled with playback and other related services as compared to 1996.
The Company also reported an increase in revenue from the Spice Networks,
excluding the domestic C-band satellite dish ("DTH") market, of $0.5 million and
from its audiotext services, Internet activities and film license fees of $0.9
million. Offsetting these increases were declines in revenues from the Cable
Video Store network of $3.2 million as a result of the decision to wind down
operations in the first quarter of 1997 and the elimination of revenue, in the
third quarter of 1996, from the distribution of its adult networks in the DTH
market of $1.0 million. The Company also experienced declines in revenue from
it's international operation, primarily due to increased competition in the UK
DTH market, totaling $1.0 million and a decline in revenue of $0.7 million from
the Company's suspension of production and licensing activities of CPV.
As of December 31, 1997, the Spice Networks were available in
approximately 22.4 million cable and DBS addressable channel households,
representing an 11% increase from December 31, 1996. The revenue growth from the
increase in addressable households was offset by reductions in license fees and
the effect of the implementation of Section 505 which resulted in a decline in
buy rates for systems not in compliance with the regulation (See Note 1 to the
Consolidated Financial Statements). The reduction in license fees was a result
of continued competition in the Company's market segment and the ongoing
concentration in the ownership of cable systems by multiple system operators
("MSO's"). The Company's top eight MSO's and DirecTV, a DBS provider, account
for over 75% of the Company's domestic cable and DBS revenues.
Spice Networks developed and launched Spice Hot in October of 1997.
Spice Hot is a domestic television pay per view network which broadcasts a more
explicit product than either Spice or the Adam & Eve channels. Based on the
results from the October 1, 1997 launch through March 31, 1998, Spice Hot
delivers higher buy rates and revenue per subscriber than either Spice or the
Adam and Eve channels. The Company had 0.6 million and 4.4 million Spice Hot
subscribers on December 31, 1997 and March 31, 1998, respectively, with pending
contracts to add another 1.6 million subscribers by June 1, 1998. Based on the
projected growth in Spice Hot subscribers, the Company anticipates an increase
to total revenue and income from the Spice Networks as a whole in 1998 as
compared to 1997.
The Company elected to cease distribution of the Spice Networks in the
domestic DTH market on August 31, 1996 as a result of increased competition in
this market from several explicit adult services. These explicit services are
not currently distributed by cable operators. The Company accomplished this by
digitally compressing the Spice Networks onto one transponder. DTH customers
cannot receive a digitally compressed transmission. The Company used the
available transponders to generate an additional $4.1 million from the sale of
excess transponder capacity bundled with playback and other related services as
compared to 1996. Offsetting the additional revenue from sale of excess capacity
was the loss of revenue realized in 1996 from the DTH market totaling $1.0
million.
The decline in revenues from the international operations of $1.0
million in 1997 as compared to 1996 was primarily attributable to continued
declines in the DTH market. The Company's transmission of the Adult Channel
using a low frequency transponder puts the channel at a competitive disadvantage
because the signal is only available to approximately 50% of the total DTH
market in the UK. Compounding this problem is the specific channel location, The
Adult Channel currently follows a niche subscription channel limiting the
effectiveness of the channel's ten minutes of unencrypted teaser that introduces
the channel on a nightly basis. As of August 1, 1998 the channel will be
transmitted using a high frequency transponder and is scheduled to follow the
SCi-Fi and the History Channel. The Company believes that the transition to a
high frequency transponder with the new channel location along with the
implementation of other initiatives will result in an increase in market share,
revenue and operating results.
Salaries, Wages and Benefits. The Company reported salaries, wages and
benefits from continuing operations of $7.8 million for the year ended December
31, 1997 as compared to $7.6 million in the year ended December 31, 1996. The
Company incurred $1.1 million of additional salaries, wages and benefits from
expansion of both the sales and marketing departments and the network operation
center. Offsetting these increases were savings from the suspension of CPV's
production activities in 1996, the suspension of the CVSP operations in the
second quarter of 1997 and the sale of a majority interest in DSTV in the third
quarter of 1997, all totaling $0.7 million.
Producer royalties and film cost amortization. The Company reported
producer royalties and film cost amortization from continuing operations of $2.7
million for the year ended December 31, 1997 as compared to $5.5 million in
1996. The decrease was primarily attributable to the elimination of film
amortization resulting from suspension of CPV's production activities in 1996
and the decline in revenues from the Cable Video Store Network that resulted in
a corresponding reduction in producer royalties.
Satellite, Playback and Uplink Expenses. The Company reported
satellite, playback and uplink expenses from continuing operations of $6.7
million for the year ending December 31, 1997 as compared to $1.9 million in
1996. The increase was primarily attributable to the amendment of the
Transponder Agreement on March 31, 1997 and the corresponding reclassification
of the Transponder Agreement as an operating lease from a capital lease. In
1997, the Company included in satellite expense $4.7 million of transponder
payments which in 1996 were treated as capital lease payments. If the
Transponder Agreement had been classified as an operating lease from its
inception, the Company would have reported additional satellite expense of
approximately $1.6 million and $7.6 million in 1997 and 1996, respectively. In
addition the Company would have reported a decrease in depreciation of $1.0
million and $5.3 million as well as a decrease in interest expense of $0.9
million and $5.0 million in 1997 and 1996, respectively.
On January 11, 1997, AT&T permanently pre-empted one of the Company's
unprotected transponders. This resulted in the reduction of the Company's
monthly satellite transponder costs from $635,000 to $520,000 per month. In
addition, on March 31, 1997, the Company and Loral amended the Transponder
Agreement to shorten the Agreement's term, originally scheduled to expire at the
end of the satellite's useful life, to October 31, 2004. As a result of this
amendment, the Transponder Agreement was classified as an operating lease
commencing on March 31, 1997, and the Company realized a non-recurring gain
attributable to the Transponder Agreement of approximately $2.3 million.
Selling, General and Administrative Expenses. The Company reported
selling, general and administrative expenses from continuing operations of $10.2
million for the year ended December 31, 1997 as compared to $11.4 million in
1996. The decline was primarily attributable to the suspension of the CVSP
operations in the second quarter of 1997 and a substantial decrease in HVC's
expenses. Offsetting these reductions was an increase in corporate consulting
expenses attributable to the debt restructuring and an increase in bad debt
expense in 1997.
Depreciation of Fixed Assets and Amortization of Goodwill. The Company
reported depreciation of fixed assets and amortization of goodwill from
continuing operations of $3.7 million for the year ended December 31, 1997 as
compared to $7.5 million for the year ended December 31, 1996. The decline in
depreciation expense was primarily attributable to the amendment of the
Transponder Agreement and the corresponding accounting treatment which resulted
in the Transponder Agreement being accounted for as a operating lease as of
March 31, 1997.
Interest Expense. The Company reported interest expense from continuing
operations of $3.6 million for the year ended December 31, 1997 as compared to
$6.4 million for the year ended December 31, 1996. The decline in interest
expense was primarily attributable to the amendment of the Transponder Agreement
and the corresponding accounting treatment that resulted in the Transponder
Agreement being accounted for as an operating lease as of March 31, 1997.
Offsetting this reduction was the increase in interest on the Company's new
credit facility with Darla as compared to interest on the PNC credit facility in
1996 and the additional interest associated with capital lease obligations
entered into September of 1996.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's business is exposed to concentrations of risk. The
Company derive a significant portion of its revenues (approximately 54% in 1997)
from five multiple system operators , DirecTV and EMI. The loss of one or more
of these customers could have a material adverse impact on the Company's results
of operations.
<PAGE>
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 loss in
1996 was 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 was 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 Agreement.
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 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, 1996 to transmit its programming on a digital platform, which
cannot be received by the C-band market.
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 which compete directly with The Adult Channel. In
addition, in the second half of 1995, The Adult Channel switched satellites to a
satellite which could not be viewed by many of its existing subscribers without
the purchase of new equipment. These two factors have resulted in a decline in
revenues of approximately $3.6 million for the year ended December 31, 1996, as
compared to the same period in 1995.
Revenues from the Spice Networks cable market increased by
approximately $1.8 million for the year ended December 31, 1996, as compared to
the same period in 1995, a gain of approximately 12.5%. The Company increased
the number of addressable households with access to the Spice Networks at
December 31, 1996 by approximately 20% over the number of such addressable
households at December 31, 1995. The percentage increase in addressable
subscribers did not translate into the same percentage increase in revenues due
to normal delays in realizing revenues from new subscribers and a reduction in
the Company's share of revenues (referred to as license fees in the Company's
agreements with cable operators) from cable sales of the Spice Networks. This
reduction in license fees is a result of increased competition in the Company's
market segment and the growing concentration in the ownership of cable systems
by multiple system operators ("MSOs").
Salaries. Total salaries from continuing operations for the year ended
December 31, 1996 decreased approximately $2.1 million to approximately $7.6
million compared to total salaries of approximately $9.7 million 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 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 resulted in
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 was
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. The AT&T Transponder Agreement was accounted for as a
capital lease until March 31, 1997 as required by Statement of Financial and
Accounting Standards No. 13, "Accounting for Leases." As a result, the Company
was 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 Agreement for the year ended December 31, 1996.
Satellite, playback and uplink expenses from continuing operations for
the year ended December 31, 1996 decreased by approximately $8.3 million, as
compared to the same period in 1995. The decrease was primarily attributable to
the capitalized AT&T Transponder Agreement 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 Transponder Agreement 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
transferred three of its networks onto a single transponder, which resulted in
an annual cost saving to the three networks of approximately $3.1 million and
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 was attributable to, among other items, the suspension of
the exploration of international opportunities, decrease in marketing,
advertising and sales promotions and the implementation of the restructuring
plan which contributed to the reduction of selling, general and administrative
expenses by suspending the exploration for new businesses. The Company 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 was an increase in legal fees primarily attributable
to litigation with the government over Section 505 of the 1996 Act 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 Agreement 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 was attributable to the
interest expense recognized under the capitalized AT&T Transponder Agreement
during 1996, as compared to 1995 when the domestic transponder leases were
accounted for as operating leases. The remaining increase of $0.5 million was
primarily the result of the increased average loan balance associated with the
PNC debt in 1996 as compared to 1995.
NON-RECURRING ITEMS
Guest Cinema - Goodwill. In January 1994, the Company acquired 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
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 realized a one-time
expense of $4.0 million to record the impairment of its investment. The Company
suspended future productions of films and television series and the creation of
CD-ROMs.
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 TVG, a wholly-owned subsidiary of 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 established a
reserve against its investment in AGN. In addition, since there was no assurance
that the MGAM Shares or the shares underlying the MGAM Warrant, if exercised,
would be registered or if registered, whether the Company would be able to sell
such shares in the near future, the Company reserved against the value of its
investment in the MGAM Shares.
Restructuring Costs. The Company, in an attempt to return to
profitability, restructured its operations. The Company suspended production of
all films, television series and CD-ROM for 1996 and terminated approximately 30
employees and renegotiated the employment contracts with the two key executives
of CPV to provide for their early termination. The Company recognized a charge
of approximately $0.6 million in 1995 for restructuring CPV.
The Company 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 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, resigned as
officers of the Company effective December 31, 1995. Messrs. Graff and Nolan
executed separation agreements (see "Executive Compensation, Employment
Agreements") which are in force through 1998. The Company 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:
<TABLE>
<CAPTION>
December 31, Cash December 31, Cash December 31,
1995 Outflows 1996 Outflows 1997
---------- ---------- ---------- -------- -----------
Corporate
<S> <C> <C> <C> <C> <C>
Salaries ................................. $2,750,000 $1,301,000 $1,449,000 $749,000 $700,000
Facilities and Other ..................... 250,000 179,000 71,000 71,000 --
CPV
Salaries ................................. 464,000 464,000 -- -- --
Facilities and Other ..................... 191,000 191,000 -- -- --
---------- ---------- ---------- -------- -----------
Total ............................... $3,655,000 $2,135,000 $1,520,000 $820,000 $700,000
========== ========== ========== ======== ===========
</TABLE>
The remaining balance of $0.7 million of accrued restructuring at
December 31, 1997 is scheduled to be paid in 1998.
Liquidity and Capital Resources
The Company reported a working capital deficit of $2.0 million and $6.1
million on December 31, 1997 and 1996, respectively. In the first quarter of
1998 the Company significantly improved its working capital position with the
proceeds received from the exercise of stock options totaling approximately $3.2
million. Stockholders equity at December 31, 1997 was $9.0 million compared to
$2.3 million on December 31, 1996.
At December 31, 1997, the Company had a credit facility with Darla
consisting of a term loan of $10.6 million and a revolving line of credit of
$3.5 million of which $1.9 million had been drawn down from the revolving line
of credit. The term loan and the revolving line of credit both mature on July
15, 1999. The outstanding balance on the revolving line of credit was repaid in
the first quarter of 1998.
The Darla credit facility is secured by all of the Company's domestic
assets and the stock of its domestic operating subsidiaries and HVC. The Darla
loan agreement contains various financial covenants including minimum levels of
revenues and adjusted EBITDA (earnings before interest, taxes, depreciation and
amortization) for each quarter. The Company did not meet these covenants for the
quarter ended September 30, 1997. On November 14, 1997, Darla and the Company
executed an amendment to the Darla loan agreement which revised the revenue and
adjusted EBITDA covenants for the balance of the loan's term and waived the
financial covenant violations for the quarter ended September 30, 1997. The
Company is currently exploring various alternatives to replace or satisfy its
current credit facility. The Company, based on its prior refinancing experience,
believes that the credit facility will be refinanced.
Net cash provided by operating activities from continuing operations
was approximately $5.4 million, $3.0 million and $0.5 million for the years
ended December 31, 1997, 1996 and 1995, respectively. In 1997, cash provided by
operating activities was primarily the result of net income and other non-cash
adjustments as opposed to 1996 and 1995 in which the cash provided by operating
activities was primarily the result of non-cash adjustments which more than
offset net losses for the period. The principal adjustments in 1997 which
provided a total of $0.7 million of operating cash were depreciation and
amortization of fixed assets, goodwill and the library of movies as well as a
provision for bad debts, offset by a reduction in royalties payable, repayment
of accrued restructuring charges and a non-cash gain on the transponder lease
amendment. 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 of movies as well as a
decrease in accounts receivable and the loss from 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.
Net cash used in investing activities from continuing operations was
approximately $3.7 million, $0.2 million and $10.4 million for the years ended
December 31, 1997, 1996, and 1995, respectively. The increase in net cash used
in investing activities in 1997 as compared to 1996 was primarily attributable
to proceeds realized from the sale of the Company's investment in TeleSelect in
1996. 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.
Net cash used in financing activities from continuing operations was
approximately $1.6 million and $1.4 million for the years ended December 31,
1997 and 1996, respectively, as compared to net cash provided by financing
activities from continuing operations of approximately $10.3 million for 1995.
The decrease in cash from financing activities for 1997 and 1996 as compared to
1995 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 Transponder Agreement 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 Company has considered the impact of the year 2000 as it relates to
the programming of the Company's computer and operating systems and does not
believe there is a significant risk to the Company.
Item 8. Financial Statements and Supplementary Data.
The information required by this Item is included at Pages F-1 through
F-33.
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 reports on
the financial statements for the years ending December 31, 1995 and 1994 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. Grant Thornton was re-appointed
as the Company's independent auditors to audit its financial statements for the
fiscal period ended as of December 31, 1997.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
<TABLE>
<CAPTION>
Name Age Position, Occupation and Business Experience
- --------------------------- ------ --------------------------------------------------------------------------
<S> <C> <C>
J. Roger Faherty 59 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 51 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 52 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 58 Director. Mr. Yates was elected a Director of the Company on July 23,
1996. He was the Chief Executive Officer of HVC since HVC's 1989
formation and until his resignation on October 17, 1997. Since the end
of 1994, HVC has been a wholly-owned subsidiary of the Company. Prior to
1989 he was the Chief Executive of Cabletel Communications Ltd., which was
owned by the Ladbroke Group PLC and Comcast Communications Inc., and
operated a fully interactive cable system in West London. Mr. Yates is
also a founding member of the Cable Television Association in the U.K. and
has served in various capacities with that organization.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Name Age Position, Occupation and Business Experience
- --------------------------- ------ --------------------------------------------------------------------------
<S> <C> <C>
Rudy R. Miller 50 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 America 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.
Stephen K. Liebmann 59 Director. Mr. Liebmann became a Director of the Company on June 3, 1997.
Mr. Liebmann has been a self-employed marketing consultant to
growth-oriented consumer businesses since 1976. Mr. Liebmann has provided
consulting services to several major corporations including several in
businesses related to the Company including American Television &
Communication Corp. (a subsidiary of a predecessor of Time Warner),
Paragon Cable, Home Box Office, Primestar Partners, and Hughes Network
Systems. He has also provided consulting services to other consumer
businesses including Sara Lee, Hallmark, Quaker Oats Company and Cadbury
Scwheppes U.S.A.
Steve Saril 44 Director, Senior Vice President, Sales & Marketing. Mr. Saril has been an
executive officer of the Company since 1989 and is currently the Company's
Senior Vice President of Sales and Marketing and is also the president of
Spice Networks, Inc. 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 56 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Name Age Position, Occupation and Business Experience
- --------------------------- ------ --------------------------------------------------------------------------
<S> <C> <C>
Daniel J. Barsky 42 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.
Rich Kirby 37 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.
John R. Sharpe 33 Vice President, Controller and Chief Accounting Officer. Mr. Sharpe has
been an executive officer of the Company since 1997 and is currently its
Vice President, Controller and Chief Accounting Officer. Prior to joining
the Company in 1995, Mr. Sharpe was a Divisional Controller for U.S.
Services, Inc., a publicly traded software development company from 1991
through 1994. From 1988 through 1991, Mr. Sharpe was employed by Wiss &
Company, a public accounting firm.
</TABLE>
<PAGE>
Item 11. Executive Compensation.
The following table sets forth, for the fiscal years ended December 31,
1997, 1996 and 1995, compensation paid by the Company for services in all
capacities to the Chief Executive Officer, the former Chief Executive Officer of
HVC and the four most highly compensated executive officers during 1997.
<TABLE>
<CAPTION>
Summary Compensation Table
Other
Annual Restricted Securities All Other
Compen- Stock Underlying Compen-
Name and Salary sation(1) Awards Options sation(2)
Principal Position Year ($) ($) ($) (#) ($)
- ---------------------------- -------- --------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
J. Roger Faherty 1997 350,000 49,410 400,000 3 12,088
Chairman, Chief 1996 358,077 44,071 38,500 5 12,974
Executive Officer 1995 421,539 58,298 435,585 6 19,909
& President
R. Christopher Yates* 1997 118,353 18,250 10,000 3 202,689
Director, former President 1996 348,032 42,442 38,402 7 43,535
Spice International 1995 378,013 38,000 8 43,997
Steve Saril 1997 249,615 110,000 3 4,045
Director, Senior Vice 1996 200,000 70,000 9 462
President, Sales & 1995 193,462 345,000 4 70,000 10 1,435
Marketing
Harlyn C. Enholm 1997 250,000 38,500 3
Executive Vice President, 1996 233,000 18,962 11
Chief Financial Officer 1995 164,000
Daniel J. Barsky 1997 174,808 21,000 3 2,603
Senior Vice President, 1996 150,000 45,000 12 667
General Counsel, & 1995 142,500 233,000 4 20,000 13 811
Secretary
Rich Kirby 1997 174,731 21,000 3 1,419
Senior Vice President, 1996 174,096 61,500 14 381
Network Operations 1995 170,260 311,000 4 67,000 15 1,797
*No longer a Company employee.
</TABLE>
1) Refer to the Other Annual Compensation/All Other Compensation table
below for information on the components of Other Annual Compensation.
Where no dollar amount appears, Other Annual Compensation for these
executives is less than 10% of the executive's salary and bonus for the
year.
2) Refer to the Annual Compensation/All Other Compensation table below for
information on the components of All Other Compensation.
3) Refer to the "Options Grants in Last Fiscal Year" table below for
information concerning 1997 option grants.
4) Messrs. Saril, Barsky and Kirby received 40,000, 27,000 and 36,000
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. Yates' securities underlying options for 1996 include (i) 18,584
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.
8) Mr. Yates' securities underlying options for 1995 include 19,000
options granted on May 12, 1995 which were repriced on
December 11, 1995.
9) Mr. Saril's securities underlying options for 1996 include (i) 10,000
options with an exercise price of $4.25 granted on January 25, 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.
10) 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, 1994 were also repriced on
December 11, 1995.
11) Mr. Enholm's securities underlying options for 1996 include (i) 9,250
granted on August 13, 1996 with an exercise price of $2.75 and
(ii) 9,712 options on December 13, 1996 with an exercise price of
$1.75.
12) Mr. Barsky's securities underlying options for 1996 include (i) 7,500
options granted in January 25, 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.
13) Mr. Barsky's securities underlying options for 1995 include 20,000
options granted on December 16,1994 were repriced on December 11, 1995.
14) Mr. Kirby's securities underlying options for 1996 include (i) 8,500
options with an exercise price of $4.25 granted on January 25, 1996 in
lieu of a cash raise for 1996 based on 1995 performance and (ii) 25,500
options granted on January 26, 1996 in lieu of a performance based cash
bonus. Mr. Kirby was also granted (i) 12,000 options with an exercise
price of $3.38 on April 1, 1996, (ii) 8,500 options on August 13, 1996
with an exercise price of $2.75 and (iii) 7,000 options on December 13,
1996 with an exercise price of $1.75.
15) Mr. Kirby's securities underlying options for 1995 include 8,500
options granted on May 12, 1995 which were repriced on December 11,
1995. 50,000 options granted on January 6, 1994 were also repriced on
December 11, 1995.
<PAGE>
<TABLE>
<CAPTION>
Other Annual Compensation/All Other Compensation
Other Annual Compensation All Other Compensation
----------------------------------------------- ---------------------------
Automobile Deferred Long-
Related Compen- Term Life Ins.
Expenses sation Disability Premium 401(k)
Name Year ($) ($) ($) ($) ($)
- ----------------------- ---------- -------------- ------------ ------------ ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
J. Roger Faherty 1997 4,818 36,566 8,026 12,088
1996 36,566 7,505 12,088 886
1995 14,400 36,566 7,332 17,599 2,310
R. Christopher Yates 1997 14,966 3,284 5,894 196,795
1996 12,499 26,006 3,937 6,131 37,404
1995 6,196 37,801
Steve Saril 1997 2,530 1,515
1996 462
1995 1,435
Harlyn C. Enholm 1997
1996
1995
Daniel J. Barsky 1997 630 1,973
1996 436 231
1995 436 375
Rich Kirby 1997 549 871
1996 381
1995 297 1,500
</TABLE>
1997 Compensation Program for Key Executives. Senior officers had not
received salary adjustments in 1996, were granted increases in 1997 averaging
approximately 20%. The Stock Option Committee also established a pool of 200,000
options to be granted to the Company's senior officers. The Committee
established early vesting criteria for half of the options based on the
Company's performance in 1997; the Committee intends to establish early vesting
criteria for the other half of the options based on the Company's 1998
performance. The Committee delayed consideration of cash bonuses pending a
review of the Company's 1997 performance. The Company did not award 1997 cash
bonuses.
The Committee has also modified Mr. Faherty's employment agreement as
described below and developed a new form of employment agreement for other
senior officers of the Company and its subsidiaries.
Employment Agreements. The Company employs Mr. Faherty 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, January 1, 1996, April 1, 1997 and as of December 31,
1997. The agreement, as presently amended, provides for a base salary of
$350,000 for 1997 and $367,500 for 1998, 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 $282,878 including interest accrued through
December 31, 1997. The loan has a maturity date of December 31, 1998 and for
1997, had an interest rate equal to the rate the Company paid its principal
lender and for 1998 will have an interest rate equal to one percent over the
Chase Manhattan Bank N.A. prime rate.
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
from the beginning of 1996 through July 1997. In August 1997 the Company began
reimbursing Mr. Faherty for the lease payments and insurance on an automobile.
Prior to the April Amendment, Mr. Faherty's Employment Agreement
required the Company to grant to Mr. Faherty options to acquire 109,443 shares
of Common Stock in each year commencing in 1998 that the Employment Agreement
was renewed. In lieu of this annual option grant, the amendment dated April 1,
1997 granted Mr. Faherty an option to acquire 400,000 shares of Common Stock at
an exercise price of $2.125. Options to acquire 100,000 shares of Common Stock
were immediately exercisable. Options to acquire 150,000 shares of Shares become
exercisable on the earlier of (i) the date following 20 consecutive trading days
where the price of the Common Stock is at least $4.00 or (ii) December 31, 1997
if the Company's earnings before interest, taxes, depreciation and amortization
("EBITDA") for the fiscal year ended December 31, 1997 exceeds certain
pre-determined levels. These options are currently voted as a result of the
price of the Common Stock. The remainder of the options will vest based on the
Company's performance in 1998, as determined by the Board of Directors. If the
options do not vest under the foregoing criteria, then the Board of Directors is
to establish new vesting criteria.
The amendment also provides for a "parachute payment" if, within 18
months following a change in control of the Company, either the Company or Mr.
Faherty elects to terminate Mr. Faherty's employment. The amount of the
parachute payment is equal to four times his then current salary (including any
bonuses) grossed up by the amount equal to the excise tax on any portion of the
severance benefit treated as an "excess parachute payment" under the Code and
the incremental income taxes payable on the grossed up amount. In addition, upon
a change in control, no payments will be due on the loan until the end of the
sixth calendar year after the change in control. At that point, the loan will be
repayable in ten equal annual installments of principal and interest.
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 Mr. Faherty on or after reaching the age of
65 and also provide for early retirement benefits. Upon retirement, Mr. Faherty
will receive from the Company a total of 180 monthly payments which will provide
a benefit of $100,000 per annum. Upon early retirement, Mr. Faherty 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 Mr. Faherty's death 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. Yates was employed by HVC pursuant to a Service Agreement dated
January 22, 1993 and amended on June 16, 1994. We terminated the Service
Agreement on October 11, 1997. Mr. Yates claimed we had improperly terminated
his agreement. The parties are finalizing a settlement.
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, which was amended on June 4, 1997. Under this agreement as
amended, Mr. Enholm has agreed to serve as the Company's Chief Financial Officer
through June 30, 1998. Mr. Enholm's consulting agreement also has a termination
payment provision similar to the form employment agreement described below.
We employ Mr. Saril pursuant to an Employment Agreement effective as of
January 1, 1997. The Agreement provided for a base salary of $250,000 and a
$1,000 a month car allowance. The Agreement has a four-year term and contains a
parachute payment provision the same as that contained in the April Amendment to
Mr. Faherty's Employment Agreement.
We employ ten of our officers, including Messrs. Barsky and Kirby,
pursuant to a form employment agreement. All of the agreements are dated as of
January 1, 1997. The form agreement provides for a parachute payment triggered
upon a change in control if the Company terminates the officer's employment
within 18 months following a change in control. The form agreements have two or
three year terms. Mr. Barsky's employment agreement has a two-year term with a
1997 base salary of $175,000. Mr. Kirby's employment agreement has a three-year
term and a 1997 base salary of $175,000.
Stock Option Plans. The Company has five stock option plans (the 1991,
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 cannot 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 Stock Option Committee, consisting of three non-employee directors
(the "Committee"), currently administers the Plans. In general, the Committee
has the responsibility to select the persons to whom options will be granted and
will determine, subject to the terms of the Plan, the number, the exercise
period, vesting schedule and other provisions of such options.
The options are evidenced by a written agreement containing the above
terms and such other terms and conditions consistent with the Plans as the
Committee may impose. Each option, unless sooner terminated, expires no later
than 10 years (five years in the case of ISOs granted to holders of 10% of the
voting power of the Company's common stock) from the date of grant, as the
Committee may determine. The Committee has the right to amend, suspend or
terminate the Plans at any time, provided, however, that unless ratified by the
Company's stockholders within 12 months thereafter, no amendment or change in
the Plans including: (a) increasing the total number of shares which may be
issued under the Plans; (b) reducing below fair market value on the date of
grant the price per share at which any option which is an ISO may be granted;
(c) extending the term of the Plan or the period during which any option which
is an ISO may be granted or exercised; (d) altering in any way the class of
persons eligible to participate in the Plans; (e) materially increasing the
benefits accruing to participants under the Plans; or (f) with respect to
options which are ISOs, amending the Plans in any respect which would cause such
options to no longer qualify for incentive stock option treatment pursuant to
the Internal Revenue Code of 1986, as amended, will be effective.
The Directors Plan, as amended, provides for the automatic annual
issuance of 10,000 options to each non-employee director on the last business
day of the calendar year. The exercise price of options issued under the
Directors' Plan is equal to the closing price of the Company's common stock on
the date of grant. In 1997, 10,000 options were issued to each of Messrs. Yates,
Liebmann, Ericson, Nolan and Miller, non-employee directors of the Company.
Messrs. Liebmann, Nolan and Miller are the members of the Stock Option
Committee.
Restricted Stock Incentive Plan. In 1995, the Company established a
restricted stock plan and granted 175,000 shares of restricted stock to key
executives. Under the restricted stock plan, the restricted stock vests in the
fifth year after grant if the Company continues to employ the executive. Messrs.
Saril, Kirby and Barsky were granted 40,000, 36,000 and 27,000 shares,
respectively of restricted stock under the plan. The Company has made no further
grants under the restricted stock plan since the original grant.
The following table sets forth stock options that the Company granted
to the named executive officers during 1997.
<TABLE>
<CAPTION>
Option/Grants in Last Fiscal Year
Individual Grants
- ------------------------------------------------------------------------------------------------------------------------
Number of Potential Realizable
Shares of Total Value at Assumed Annual
Common Options Rates of Stock Price
Stock Granted to Appreciation for Option
Underlying Employees Exercise Term
Options in Fiscal or Base
Granted Year Price Expiration 5% 10%
Name (#) (%) ($/Sh) Date ($) ($)
- ----------------------- ------------- -------------- ---------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
J. Roger Faherty 400,000 1 45.1 2.125 04/01/07 1,385,000 2,205,000
R. Christopher Yates 10,000 2 1.1 4.000 12/29/07 65,000 104,000
Steve Saril 50,000 3 5.6 2.125 04/01/07 173,000 276,000
60,000 4 6.8 2.125 04/01/07 208,000 331,000
Harlyn C. Enholm 13,500 5 1.5 2.125 04/01/07 47,000 74,000
25,000 3 2.8 2.125 04/01/07 87,000 138,000
Daniel J. Barsky 21,000 5 2.4 2.125 04/01/07 73,000 116,000
Rich Kirby 21,000 5 2.4 2.125 04/01/07 73,000 116,000
</TABLE>
1) 100,000 options were immediately exercisable. 150,000 options become
exercisable on the earlier of (i) the date following 20 consecutive
trading days where the price of the Common Stock is at least $4.00 or
(ii) December 31, 1997 if the Company's earnings before interest,
taxes, depreciation and amortization ("EBITDA") for the fiscal year
ended December 31, 1997 exceeds certain pre-determined levels. These
options are currently exercisable. The remainder of the options will
vest based on the Company's performance in 1998, as determined by the
Board of Directors.
2) Half of the options were vested on the grant date; the other half will
vest on the anniversary of the grant date.
3) Fully vested upon grant.
4) All options will vest in six years following grant. As to half of these
options, 75% will vest earlier if the Spice Networks revenues meet
certain target levels and 25% will vest earlier if the Company's EBITDA
meets certain target levels. The early vesting criteria for the other
half of the options is to be determined based on 1998 performance.
5) All options will vest in six years following grant. Half of the options
will vest earlier if the Company's EBITDA meets certain target levels.
The early vesting criteria for the other half of the options is to be
determined based on 1998 performance.
<PAGE>
<TABLE>
<CAPTION>
Aggregate Options Exercised in Last Fiscal Year
and Year End Option Value
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
FY-End FY-End
--------------- -----------------
Shares Acquired Value Exercisable/ Exercisable/
on Exercise Realized Unexercisable Unexercisable(1)
Name (#) ($) (#) ($)
- ----------------------------------- ------------------ ------------------ --------------- -----------------
<S> <C> <C> <C> <C>
J. Roger Faherty None None 845,666 3,382,664
181,750 727,000
R. Christopher Yates None None 38,702 154,808
28,700 114,800
Steve Saril None None 261,000 1,044,000
75,000 300,000
Harlyn C. Enholm None None 34,482 137,928
22,980 91,920
Daniel J. Barsky None None 57,500 230,000
28,500 114,000
Rich Kirby None None 108,000 432,000
33,000 132,000
</TABLE>
(1) Based on the last trade price on December 31, 1997 of $4.00 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 had retained Nationwide Services Company to invest the funds in the
401(k) Plan and Geller & Wind to administer the plan. Both of these parties were
replaced on November 1, 1997 with Dean Witter Reynolds.
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
1997 other than John R. Sharpe and Harlyn C. Enholm.
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, the
Company's Compensation Committee has made recommendations relating to executive
compensation to the Board of Directors. The Compensation Committee members
currently are Messrs. Ericson, Miller and Liebmann, non-employee Directors of
the Company. Mr. Nolan resigned as an officer of the Company on
December 31, 1995.
<PAGE>
PERFORMANCE GRAPH
The graph below compares the cumulative total shareholder return on the
common stock for the period from December 31, 1992 to December 31, 1997 with the
cumulative total return on the Nasdaq Stock Market-United States Index and both
an old and new 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 December 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
12/92 12/93 12/94 12/95 12/96 12/97
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Spice Entertainment Companies, Inc. 100 134 186 77 29 66
New Peer Group 100 184 113 125 136 269
Old Peer Group 100 193 146 358 172 131
Nasdaq Stock Market (U.S.) 100 115 112 159 195 240
</TABLE>
The Company changed peer groups at December 31, 1997 as
compared to the same period at December 31, 1996 in order to reflect the peer
group used by the Company's investment advisor in evaluating the position of the
Company prior to entering into the Proposed Transaction. Both the old and new
peer groups are comprised of those companies which compete against the Company
in the interactive television and pay-per-view industries. None of the companies
in either peer group is fully comparable with the Company's business. The
returns of each company within the peer groups have been weighted according to
their respective stock market capitalization for purposes of arriving at both
old and new peer group averages. The members of the old peer group are as
follows: Macromedia, Inc., Hypermedia Communications, Lodgenet Entertainment
Corp., IWERKS Entertainment Inc., Creative Program Tech Venture, Videotron Group
Ltd., ACTV Inc., NTN Communications Inc, Interactive Network Inc. and Playboy
Enterprises, Inc. The members of the new peer group are as follows: BET Holdings
Inc., Lodgenet Entertainment Corp., NTN Communications Inc., On Command Corp.,
Playboy Enterprises, Inc., Shop-At-Home Inc., Tele-Communications Inc., United
Video Satellite Group and Valuevision International Inc.
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 31, 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>
Shares
Issuable
upon
Exercise of
Options and
Executive Officers, Warrants Shares Percentage of
Directors and 5% Within 60 Beneficially Shares
Shareholders Days Owned Outstanding(1)
- -------------------------------------------------------------- ------------- -------------- -----------------
<S> <C> <C> <C> <C>
J. Roger Faherty 845,666 1,141,172 2 9.18
Leland H. Nolan 717,916 1,010,192 8.21
Dean R. Ericson 95,000 95,000 0.81
Rudy R. Miller 65,000 65,000 0.56
Steve Saril 261,000 322,567 3 2.72
R. Christopher Yates 38,702 410,113 3.53
Stephen K. Liebmann 55,000 65,000 0.56
Harlyn C. Enholm 34,482 34,482 0.30
Daniel J. Barsky 57,500 84,500 4 0.73
Rich Kirby 108,000 144,000 5 1.23
Lindemann Capital Advisors, LLC 6 0 1,568,016 13.54
T. Rowe Price New Horizons, Fund, Inc.7 0 650,000 5.61
All directors and executive officers as a group (11 persons) 2,280,416 3,374,176 24.34%
</TABLE>
1) Assumes exercise of options exercisable within sixty days owned by such
person and the exercise of no other options or warrants.
2) Mr. Faherty's shares do not include the 95,897 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.
3) Includes 40,000 shares of Restricted Stock.
4) Includes 27,000 shares of Restricted Stock.
5) Includes 36,000 shares of restricted Stock.
6) The information concerning beneficial ownership by T. Rowe Price New
Horizons Fund, Inc. was obtained from a Schedule 13G filed by such
stockholder. Pursuant to Schedule 13G filed, the securities are owned by
various individual and institutional investors including T. Rowe Price New
Horizons Fund, Inc., which T. Rowe Price Associates, Inc. (Price
Associates) serves as investment advisor with power to direct investments
and/or sole power to vote the securities.
7) The information concerning beneficial ownership by Lindemann Capital
Advisors, LLC was obtained from a Schedule 13G and a Form 3 filed by such
stockholder. Pursuant to the Form 3, the stockholder reported that the
shares are held in accounts managed by Lindemann Capital Advisors, LLC.
Adam M. Lindemann, as Managing Member of the Lindemann Capital Advisors,
LLC, may be deemed to have a pecuniary interest in all or a portion such
shares.
The business address for Messrs. Faherty, Saril, Enholm, Barsky and
Kirby is c/o Spice Entertainment Companies, Inc., 536 Broadway, 7th Floor, New
York, NY 10012. The business address for the other persons listed above is:
<TABLE>
<CAPTION>
Name Business Address
- --------------------------------------- -------------------------------------------------------------
<S> <C>
Leland H, Nolan 17 Thompson Street, New York, NY 10012
Dean Ericson 5429 South Krameria Street, Englewood, CO 80111
Rudy R. Miller 4909 East McDowell Road, Phoenix, AZ 85008
R. Christopher Yates Woodburn Cottage, Pump Lane North, Marlow, Bucks UK SL7 3RDJ
Lindemann Capital Advisors, LLC 767 Fifth Avenue, New York, NY 10153
T. Rowe Price New Horizons, Fund, Inc. P.O. Box 17218, Baltimore, MD 21202
</TABLE>
Item 13. Certain Relationships and Related Transactions.
During 1995, Messrs. Faherty and Nolan borrowed $215,000 and $80,000,
respectively, from the Company. Through the end of 1997, all of the loans had
an interest rate the same as the interest rate the Company pays on its loan
from its senior secured lender. Mr. Nolan's loan will be repaid during 1998.
Pursuant to the Sixth Amendment to Mr. Faherty's Employment Agreement,
the maturity date on Mr. Faherty's loan was extended to December 31, 1998, the
maximum principal amount, including accrued interest through December 31, 1997
was increased to $282,778 and could be increased only for accrued interest.
Under the April 1, 1997 amendment to Mr. Faherty's Employment Agreement, if
there is a change in control, Mr. Faherty's loan will be repaid in ten equal
installments of principal and interest commencing five years following the
change in control. In 1998, the interest rate on Mr. Faherty's loan was set at
the Chase Manhattan Bank N.A. prime rate plus one percent.
Management believes that the terms of the transactions described above
are no more favorable than could be obtained in transactions between
non-affiliated parties.
<PAGE>
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 Form 8-A.
3.02 By-Laws of the Company. Incorporated by reference to Exhibit 2.2 of
the Form 8-A.
3.03 Certificate of Merger dated May 13, 1992 merging Jericap, Inc. into
Graff Pay-Per-View Inc. Incorporated by reference to Exhibit 3.03 of
the December 31, 1996 Form 10-K.
3.04 Certificate of Amendment of Certificate of Incorporation dated
November 26, 1996. Incorporated by reference to Exhibit 3.04
of the December 31, 1996 Form 10-K.
3.05 Amended and Restated Bylaws of Spice Entertainment Companies, Inc. as
adopted June 13, 1997. Incorporated by reference to Exhibit 3.05 of
the Current Report on Form 8-K dated June 13, 1997.
4.01 Specimen Certificate representing the Common Stock, par value $.01 per
share. Incorporated by reference to Exhibit 1 of the Form 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 597,000 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
4.11 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 4.12 of the Current Report on Form 8-K dated
February 13, 1997.
4.09 Rights Agreement, dated as of June 13, 1997, between Spice
Entertainment Companies, Inc. and American Stock Transfer & Trust, as
Rights Agent which includes as Exhibit A the Form of Certificate of
Designations of Series Junior Participating Preferred Stock of Spice
Entertainment Companies, Inc., as Exhibit B the Form of Right
Certificate. Incorporated by reference to Exhibit 4.09 of the Current
Report on Form 8-K dated June 13, 1997.
4.10 Amendment Number One to Amended and Restated Loan and Security
Agreement dated November 14, 1997 between Darla L.L.C. and Spice
Entertainment Companies, Inc. Incorporated by reference to Exhibit
4.13 of the Form 10-Q dated September 30, 1997.
10.01 Amended 1991 Management Stock Option Plan. Incorporated by reference
to Exhibit 10 of the Form 10-Q dated March 31, 1992.
10.02 Adoption Agreement and 401(k) Tax Deferred Savings Plan between Dean
Witter and Spice Entertainment Companies, Inc.
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 December 31, 1992 Form 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 December 31, 1992
Form 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 December 31, 1992 Form 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
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 Form S-1.
10.08 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 Form 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 December 31, 1993
Form 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 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 Form 10-K.
10.12 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.
10.13 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.
10.14 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 Current Report on Form 8-K dated September 12, 1995.
10.15 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.
10.16 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.
10.17 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.
10.18 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.
10.19 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.
10.20 Telephone Services Agreement made as of October 20, 1995 by and between
Capital Distribution, Inc. d/b/a Cupid Television Network, and Spice,
Inc. Incorporated by reference to Exhibit 10.24 of the December 31,
1996 Form 10-K/A-1.
10.21 Sublease Agreement for Transponder Capacity by and between Asia TV
Limited, The Home Video Channel Limited and Spice Entertainment
Companies dated May 2, 1997.
10.22 Production Agreement between VCA Labs, Inc. and Media Licensing, Inc.
dated April 20, 1995. Incorporated by reference to Exhibit 10.26 of
the December 31, 1996 Form 10-K/A-1.
10.23 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 dated February 13, 1997.
10.24 Service Agreement dated January 22, 1993 between The Home Video Channel
Limited and Richard Christopher Yates as amended on June 16, 1994.
Incorporated by reference to Exhibit 10.28 of the December 31, 1996
Form 10-K/A-1.
10.25 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.
Incorporated by reference to Exhibit 10.29 of the December 31, 1996
Form 10-K/A-1.
10.26 Option Agreement for J. Roger Faherty dated April 1, 1997.
Incorporated by reference to Exhibit 10.30 of Form 10-Q dated
September 30, 1997.
10.27 Fifth Amendment to Employment Agreement dated April 1, 1997 between J.
Roger Faherty and Spice Entertainment Companies, Inc. Incorporated by
reference to Exhibit 10.31 of Form 10-Q dated September 30, 1997.
10.28 Employment Agreement effective as of January 1, 1997 between Steve
Saril and Spice Entertainment Companies, Inc. Incorporated by reference
to Exhibit 10.32 of Form 10-Q dated September 30, 1997.
10.29 Form of Employment Agreement for Senior Officers effective as of
January 1, 1997. Incorporated by reference to Exhibit 10.33 of Form
10-Q dated September 30, 1997.
10.30 Form of Warrant to Purchase Shares for Warrants granted on March 26,
1997, April 4, 1997 and June 3, 1997. Incorporated by reference to
Exhibit 10.34 of Form 10-Q dated September 30, 1997.
10.31 Form of Option Agreement for April 1, 1997 Grant to Senior Officers.
Incorporated by reference to Exhibit 10.35 of Form 10-Q
dated September 30, 1997.
10.32 Sixth Amendment to Employment Agreement dated April 1, 1997 between
J. Roger Faherty and Spice Entertainment Companies, Inc.
10.33 Letter Agreement dated January 19, 1998 for Astra 1B Transponder
Services to commence August 1, 1998.
16.01 Letter regarding change in Certifying Account. Incorporated by
reference to Exhibit 16.01 of the Current Report of Form 8-K
dated January 16, 1997.
20.01 Summary of Right to Purchase shares of Preferred Stock of Spice
Entertainment Companies, Inc. Incorporated by reference to Exhibit
20.01 on the Current Report of Form 8-K dated June 13, 1997.
21.01 Subsidiaries of the Registrant.
23.01 Consent of Grant Thornton LLP
23.02 Consent of Coopers & Lybrand L.L.P.
27.00 Summary Financial Data Schedule.
(b) Reports on Form 8-K None.
99.01 Text of Press Release dated February 4, 1998. Incorporated by
reference to Exhibit 99.01 of the Current Report on Form 8-K
dated February 4, 1998.
<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, 1998
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, 1998
- ---------------------------------
Leland H. Nolan
/s/ Dean R. Ericson Director April 15, 1998
- ---------------------------------
Dean R. Ericson
/s/ Steve Saril Director April 15, 1998
- ---------------------------------
Steve Saril
/s/ Rudy R. Miller Director April 15, 1998
- ---------------------------------
Rudy R. Miller
/s/ R. Christopher Yates Director April 15, 1998
- ---------------------------------
R. Christopher Yates
/s/ Stephen K. Liebmann Director April 15, 1998
- ---------------------------------
Stephen K. Liebmann
PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER:
Executive Vice
/s/ Harlyn C. Enholm President and April 15, 1998
- --------------------------------- Chief Financial Officer
Harlyn C. Enholm
<PAGE>
SPICE ENTERTAINMENT COMPANIES, INC.
Peer Group Cumulative Total Return
(Weighted Average by Market Value)
<TABLE>
<CAPTION>
% Peer Group;
New Peer Group Market
Cumulative Total Return Capitalization
------------------------------------------------------- -----------------
1992 1993 1994 1995 1996 1997 1997
------ ------ ------- ------- ------- ------ -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Peer Group Weighted Average ......... 100 184 113 125 136 269 100
6,129
BET Holdings Inc. ................... BTV 100 145 111 168 211 401 4.74
Lodgenet Entertainment Corp. ........ LNET 100 87 45 57 106 66 3.22
NTN Communications Inc. ............. NTN 100 203 122 91 77 16 1.39
On Command Corp. .................... ONCO 100 68 56 7.53
Playboy Enterprises, Inc. ........... PLA 100 176 142 114 132 227 2.53
Shop At Home Inc. ................... SATH 100 440 360 400 420 680 0.45
Tele Communications Inc. ............ LBTYA 100 149 159 356 70.78
United Video Satellite Group ........ UVSGA 100 85 157 177 230 485 6.81
Valuevision International Inc. ...... VVTV 100 879 271 318 307 204 2.53
</TABLE>
<TABLE>
<CAPTION>
% Peer Group;
Old Peer Group Market
Cumulative Total Return Capitalization
------------------------------------------------------- -----------------
1992 1993 1994 1995 1996 1997 1997
------ ------ ------- ------- ------- ------ -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Peer Group Weighted Average ......... 100 193 146 358 172 131 100
1,223
ACTV Inc. ........................... IATV 100 312 171 176 153 81 3.13
Creative Program Tech Venture ....... CPTV 100 200 65 0.28
Hypermedia Communications ........... HYPR 100 160 100 65 28 23 0.34
Interactive Network Inc. ............ INNN 100 67 233 0.15
IWERKS Entertainment Inc. ........... IWRK 100 80 14 19 15 7 4.74
Lodgenet Entertainment Corp. ........ LNET 100 87 45 57 106 66 16.15
Macromedia Inc. ..................... MACR 100 97 148 606 209 143 55.55
NTN Communications Inc. ............. NTN 100 203 122 91 77 16 6.98
Playboy Enterprises, Inc. ........... PLA 100 176 142 114 132 227 12.69
Videotron Group Ltd. ................ VDO 100 158 163 124 143 185 --
</TABLE>
<TABLE>
<CAPTION>
Cumulative Total Return
Summary
-------------------------------------------------------
1992 1993 1994 1995 1996 1997
------ ------ ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Spice Entertainment Companies, Inc. . 100 134 186 77 29 66
NEW PEER GROUP ...................... 100 184 113 125 136 269
OLD PEER GROUP ...................... 100 193 146 358 172 131
NASDAQ STOCK MARKET - United States . 100 115 112 159 195 240
</TABLE>
<PAGE>
SPICE ENTERTAINMENT COMPANIES, INC.
and SUBSIDIARIES
Consolidated Financial Statements
for the years ended
December 31, 1997, 1996 and 1995
<PAGE>
INDEX TO FINANCIAL STATEMENTS
AND SCHEDULE
Page
Spice Entertainment Companies, Inc. and Subsidiaries Number(s)
---------
Reports of Independent Accountants F-1 -- F-2
Consolidated Balance Sheets at December 31, 1996 and 1995 F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 F-6 -- F-7
Notes to the Consolidated Financial Statements F-8 -- F-30
Consolidated Financial Statement Schedule F-31
Valuation and Qualifying Accounts Reserves for the years
ended December 31, 1997, 1996 and 1995 F-32
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors
Spice Entertainment Companies, Inc.
We have audited the accompanying consolidated balance sheets of Spice
Entertainment Companies, Inc. and Subsidiaries as of December 31, 1997 and 1996,
and the related statements of earnings, stockholders' equity, and cash flows for
the years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 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, 1997 and 1996,
and the consolidated results of their operations and their consolidated cash
flows for the years then ended in conformity with generally accepted accounting
principles.
We have also audited Schedule II for the years ended December 31, 1997 and 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 26, 1998
<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
statement Schedule II of SPICE ENTERTAINMENT COMPANIES, INC. and Subsidiaries
(the "Company") (formerly Graff Pay-Per-View Inc.) for the year ended December
31, 1995. These financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our 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 results of their
operations and their consolidated cash flows for the year ended December 31,
1995, in conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
New York, New York
March 8, 1996 except for
Note 2 as to which
the date is April 3, 1996.
<PAGE>
SPICE ENTERTAINMENT COMPANIES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
- ------------------------------------------------------------------------------------------------------------------
ASSETS:
Current assets:
<S> <C> <C>
Cash and cash equivalents .................................................... $ 2,810,000 $ 2,663,000
Accounts receivable, less allowance for doubtful accounts of
$2,601,000 in 1997 and $1,736,000 in 1996 .................................. 4,336,000 4,801,000
Income tax refunds receivable ................................................ 37,000 28,000
Prepaid expenses and other current assets .................................... 954,000 1,325,000
Deferred subscription costs .................................................. 131,000 132,000
Due from related parties and officers ........................................ 365,000 23,000
Net assets of discontinued operations ........................................ -- 2,550,000
------------ ------------
Total current assets .......................................... 8,633,000 11,522,000
Property and equipment ............................................................ 6,602,000 61,948,000
Due from related parties .......................................................... -- 294,000
Library of movies ................................................................. 4,580,000 3,797,000
Cost in excess of net assets acquired, net of accumulated
amortization of $2,622,000 in 1997 and $1,931,000 in 1996 ....................... 10,246,000 11,399,000
Deferred refinancing costs ........................................................ 380,000 --
Other assets ...................................................................... 697,000 352,000
------------ ------------
Total Assets .................................................. $ 31,138,000 $ 89,312,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of obligations under capital leases ........................... $ 855,000 $ 4,926,000
Current portion of long-term debt ............................................. 2,998,000 817,000
Royalties payable ............................................................. -- 2,322,000
Accounts payable .............................................................. 1,928,000 2,319,000
Accrued interest expenses payable ............................................. 176,000 1,118,000
Accrued cost of discontinued operations ....................................... -- 1,800,000
Accrued legal and other settlement fees ....................................... 928,000 401,000
Accrued expenses and other current liabilities ................................ 2,468,000 1,994,000
Current portion of accrued restructuring costs ................................ 700,000 820,000
Deferred subscription revenue ................................................. 604,000 1,121,000
------------ ------------
Total current liabilities ..................................... 10,657,000 17,638,000
Obligations under capital leases .................................................. 780,000 53,759,000
Long-term debt .................................................................... 10,452,000 14,652,000
Accrued restructuring costs ....................................................... -- 700,000
Deferred compensation ............................................................. 293,000 269,000
------------ ------------
Total liabilities ............................................. 22,182,000 87,018,000
------------ ------------
Commitments and contingencies
Stockholders' equity
Preferred stock, $.01 par value; authorized 10,000,000 shares; 24,250 issued
and outstanding at December 31, 1997 (Liquidation preference of $2,617,000).. -- --
Common stock, $.01 par value; authorized 25,000,000 shares; 10,659,198 and
11,339,948 shares issued and outstanding at December 31, 1997 and December
31, 1996 .................................................................... 107,000 113,000
Additional paid-in capital .................................................... 25,362,000 22,645,000
Unearned compensation ......................................................... (414,000) (765,000)
Accumulated deficit ........................................................... (17,088,000) (21,338,000)
Cumulative translation adjustment ............................................. 989,000 1,639,000
------------ ------------
Total stockholders' equity .................................... 8,956,000 2,294,000
------------ ------------
Total liabilities and stockholders' equity .................... $ 31,138,000 $ 89,312,000
============ ============
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
<PAGE>
SPICE ENTERTAINMENT COMPANIES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues: .............................................................. $ 33,596,000 $ 33,213,000 $ 43,292,000
------------ ------------ ------------
Expenses:
Cost of goods sold ................................................... -- 94,000 196,000
Salaries, wages and benefits ......................................... 7,786,000 7,592,000 9,722,000
Producer royalties and library amortization .......................... 2,748,000 5,481,000 6,662,000
Satellite costs ...................................................... 6,744,000 1,884,000 10,191,000
Selling, general and administrative expenses ......................... 10,240,000 11,354,000 17,646,000
Depreciation of fixed assets and amortization of goodwill ............ 3,654,000 7,499,000 2,063,000
Provision for write downs and non-recurring items of:
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 ............................................... 31,172,000 33,904,000 54,973,000
------------ ------------ ------------
Total income (loss) from operations ......................... 2,424,000 (691,000) (11,681,000)
Other (income) expense:
Interest expense ..................................................... 3,609,000 6,418,000 914,000
Minority interest .................................................... (680,000) (1,062,000) --
Gain from transponder lease amendment ................................ (2,348,000) -- --
Gain on sale of majority interest of DSTV ............................ (352,000) -- --
Gain on Nethold settlement ........................................... (740,000) -- --
(Gain) loss related to disposition of AGN ............................ (1,712,000) (875,000) 2,039,000
------------ ------------ ------------
Income (loss) from continuing operations before
provision for income taxes and extraordinary gain .................... 4,647,000 (5,172,000) (14,634,000)
Provision for income taxes ............................................. 348,000 192,000 734,000
------------ ------------ ------------
Income (loss) from continuing operations
before extraordinary gain ................................. 4,299,000 (5,364,000) (15,368,000)
Discontinued operations, net of income taxes
Income from discontinued operations of SEG ........................... -- 35,000 242,000
Loss on disposal of SEG .............................................. -- (2,571,000) --
------------ ------------ ------------
Income (loss) from discontinued operations .................. -- (2,536,000) 242,000
------------ ------------ ------------
Extraordinary gain on debt restructuring ............................... 143,000 -- --
------------ ------------ ------------
Net income (loss) ...................................................... 4,442,000 (7,900,000) (15,126,000)
Dividends on preferred stock ........................................... 192,000 -- --
------------ ------------ ------------
Net income (loss) attributable to common stock ......................... $ 4,250,000 $ (7,900,000) $(15,126,000)
============ ============ ============
Income (Loss) Per share,
Basic
From continuing operations ........................................ $ 0.39 ($ 0.48) ($ 1.31)
Extraordinary item ............................................... 0.01 -- --
Discontinued operations ........................................... -- (0.22) 0.02
------------ ------------ ------------
Income (loss) per common share .................................. $ 0.40 ($ 0.70) ($ 1.29)
============ ============ ============
Diluted
From continuing operations ........................................ $ 0.35 ($ 0.48) ($ 1.31)
Extraordinary item ................................................ $ 0.01 -- --
Discontinued operations ........................................... -- (0.22) 0.02
------------ ------------ ------------
Income (loss) per common share .................................. $ 0.36 ($ 0.70) ($ 1.29)
============ ============ ============
Weighted average number of shares outstanding,
Basic ............................................................... 10,706,000 11,351,000 11,747,000
============ ============ ============
Diluted ............................................................. 12,237,000 11,351,000 11,747,000
============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SPICE ENTERTAINMENT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1997, 1996 and 1995
-------------------------------------------------------------------------------------------
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, 1995 $ 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
adjustment (82,000) (82,000)
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
issued 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
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
Issuance of Preferred Stock
and warrants in connection
with the debt restructuring 3,528,000 3,528,000
Issuance of warrants in
connection with a consulting
agreement 450,000 450,000
Shares issued in connection
with the exercise of
employee options 1,000 129,000 130,000
Pro rata share of Restricted
Stock granted to executive
officers 205,000 205,000
Cancellation of Restricted
Stock issued to an
executive officer (259,000) 146,000 (113,000)
Treasury stock acquired in
connection with the sale
of SEG (1,138,000) (1,138,000)
Retirement of treasury
stock (7,000) (1,131,000) 1,138,000 -
Net income for the period 4,442,000 4,442,000
Dividend (192,000) (192,000)
Foreign currency translation adjustment (650,000) (650,000)
---------- ----------- ------------- ------------ ----------- ----------- ------------
Balance at December 31, 1997 $ 107,000 $25,362,000 $ (414,000) $(17,088,000) $ 989,000 $ - $ 8,956,000
========== =========== ============= ============ =========== =========== ============
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,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss) ............................................................. $ 4,442,000 $ (7,900,000) $(15,126,000)
------------ ------------- ------------
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
(Income) loss from discontinued operations .................................... -- 2,536,000 (242,000)
Write-down of goodwill related to PSP Holding, Inc. acquisition ................ -- -- 871,000
Write-down of film and CD-ROM costs ............................................ -- -- 3,967,000
Provision for investment in American Gaming Network ............................ -- (775,000) 2,039,000
Depreciation and amortization of fixed assets .................................. 2,963,000 6,834,000 1,148,000
Gain on sale of property and equipment ......................................... -- (47,000) --
Gain on transponder lease amendment ............................................ (2,348,000) -- --
Extraordinary gain on debt restructuring ....................................... (143,000) -- --
Gain on sale of majority interest of DSTV ...................................... (352,000) -- --
Amortization of goodwill and other intangibles ................................. 691,000 661,000 914,000
Amortization of films and CD-ROM cost .......................................... -- 400,000 1,681,000
Amortization of library of movies .............................................. 2,311,000 1,638,000 1,539,000
Provision for bad debts ........................................................ 865,000 558,000 847,000
Amendment fees charged to Darla loan 150,000 -- --
Decrease in income tax (benefit) provision, net ................................ -- 467,000 (495,000)
Amortization of debt discounts and deferred financing costs .................... 243,000 -- 50,000
Compensation satisfied through the issuance of common stock .................... 205,000 178,000 576,000
Cancellation of restricted stock granted to an executive officer ............... (113,000) -- --
Consulting expense satisfied through the issuance of warrants 450,000
Charge for contributed services ................................................ -- -- 72,000
Deferred compensation expense .................................................. 24,000 71,000 66,000
Minority interest .............................................................. (680,000) (1,062,000) --
Other, net ..................................................................... -- 111,000 --
Changes in assets and liabilities (excluding the effects of acquisitions):
Decrease (increase) in accounts receivable ................................ (301,000) 2,164,000 279,000
Increase in tax refunds receivable......................................... (9,000) -- --
Decrease (increase) in prepaid expenses and other current assets .......... (57,000) 517,000 (760,000)
Decrease in deferred subscription costs ................................... 1,000 379,000 542,000
Increase in film and CD-ROM costs ......................................... -- -- (2,790,000)
(Increase) decrease in other assets ....................................... (6,000) (4,000) 488,000
(Decrease) increase in royalties payable .................................. (2,322,000) (289,000) 432,000
Accrual (payments) of restructuring costs ................................. (820,000) (2,135,000) 3,655,000
Decrease in deferred subscription revenue ................................. (517,000) (1,216,000) (854,000)
(Decrease) increase in accounts payable and accrued expenses .............. 725,000 (95,000) 1,562,000
------------ ------------ ------------
Total adjustments ................................................ 960,000 10,891,000 15,587,000
------------ ------------ ------------
Net cash provided by operating activities from
continuing operations .......................................... 5,402,000 2,991,000 461,000
Net cash provided by operating activities from
discontinued operations ........................................ -- 932,000 1,542,000
------------ ------------ ------------
Net cash provided by operating activities ........................ 5,402,000 3,923,000 2,003,000
------------ ------------ ------------
Cash flows from investment activities:
Investment in subsidiaries and J.V. ....................................... -- -- (3,656,000)
Purchase of property and equipment ........................................ (848,000) (1,094,000) (4,451,000)
Proceeds from sale of property and equipment .............................. -- 135,000 --
Proceeds from the sale of TeleSelect ...................................... -- 3,177,000 --
DSTV cash balance on date of sale of majority interest .................... (227,000) -- --
Purchase of rights to libraries of movies ................................. (2,624,000) (2,444,000) (2,342,000)
------------ ------------ ------------
Net cash used in investing activities from continuing
operations ..................................................... (3,699,000) (226,000) (10,449,000)
Net cash used in investing activities from discontinued
operations ..................................................... -- (473,000) (798,000)
------------ ------------ ------------
Net cash used in investing activities ............................ (3,699,000) (699,000) (11,247,000)
------------ ------------ ------------
</TABLE>
<PAGE>
SPICE ENTERTAINMENT COMPANIES, INC., and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS --(Continued)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1997 1996 1995
------------ ------------- ------------
Cash flows from financing activities:
<S> <C> <C> <C>
Proceeds from issuance of common stock and detachable warrants .............. 130,000 27,000 32,000
Proceeds from borrowing of long-term debt, credit line and
capital lease obligations ............................................ 1,015,000 1,377,000 12,815,000
Decrease (increase) in loans receivable from related parties ................ (48,000) 523,000 (840,000)
Repayment of long-term debt and capital leases obligations .................. (3,060,000) (4,321,000) (1,658,000)
Deferred refinancing costs .................................................. (623,000) -- --
Proceeds from capital contribution of a third party ......................... 1,030,000 1,000,000 --
------------ ----------- ------------
Net cash provided by (used in) financing activities from
continuing operations ............................................ (1,556,000) (1,394,000) 10,349,000
Net cash used in financing activities from
discontinued operations .......................................... -- (459,000) (744,000)
------------ ----------- ------------
Net cash provided by (used in) financing activities ................ (1,556,000) (1,853,000) 9,605,000
------------ ----------- ------------
Net increase in cash and cash equivalents .......................... 147,000 1,371,000 361,000
Cash and cash equivalents, beginning of the year .................................. 2,663,000 1,292,000 931,000
------------ ----------- ------------
Cash and cash equivalents, end of the year ........................ $ 2,810,000 $ 2,663,000 $ 1,292,000
============ =========== ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest .................................................................... $ 2,902,000 $ 5,718,000 $ 1,323,000
============ =========== ============
Income taxes ................................................................ $ 13,000 $ 3,000 $ 1,256,000
============ =========== ============
Supplemental schedule of non-cash investing and financing activities:
Capital lease obligations ........................................................ $(52,342,000) $ 1,163,000 $ 60,127,000
Fair market value of 15,000 shares issued to purchase
foreign library rights ......................................................... -- -- 109,000
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 .................... (258,000) (380,000) 1,527,000
Issuance of preferred stock and warrants in connection with the debt
restructuring................................................................... 3,528,000 -- --
Preferred stock dividends ........................................................ (192,000) -- --
Acquired 100,000 shares of Multimedia Games' common stock through
issuance of a note payable .................................................... -- -- 200,000
Foreign currency translation adjustment .......................................... (650,000) 1,429,000 (82,000)
Net assets distributed and treasury stock acquired with the disposal of SEG ...... 1,138,000 -- --
Other assets acquired and liabilities settled with a charge to the credit line ... (682,000) -- --
Net assets transferred with the sale of the majority interest of DSTV............. 352,000 -- --
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
SPICE ENTERTAINMENT COMPANIES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization.
Spice Entertainment Companies, Inc. and its subsidiaries (collectively
"Spice" or the "Company") is a leading international provider of adult
television entertainment. During 1996 and 1997, the Company discontinued or
phased out certain business units and activities as a result of the Company's
restructuring plan developed in 1995 (Notes 2 and 4).
Formed in 1987, the Company operates through four operating units:
Spice Networks - domestic adult pay-per-view networks, Spice International -
international adult networks and programming, Spice Direct - direct to the
consumer products and services and Spice Productions - adult film production and
licensing.
Spice Networks operates three domestic adult pay-per-view television
networks, Spice, the Adam & Eve Channel and Spice Hot (which was launched in
October 1997) ("Spice Networks"). The Spice Networks were available to
approximately 18 million and 16 million addressable households on December 31,
1997 and 1996, respectively. The addressable households included 3.2 million and
2.3 million households equipped with satellite dishes (the direct to home
("DBS") market) on December 31, 1997 and 1996, respectively.
Spice International is responsible for distributing of the Company's
adult television networks and programming outside of the United States. In
Europe, the Company operates and distributes The Adult Channel, originated from
the United Kingdom. The Adult Channel is distributed in the U.K. and European
cable and the DTH markets. The Company operates The Home Video Channel ("HVC"),
a subscription movie service distributed with The Adult Channel in the United
Kingdom cable market. The Company also distributes the Spice and Spice Hot
networks in Latin America and distributes Spice programming in Japan.
Spice Direct is responsible for marketing the Company's products and
services directly to consumers. The Company, through agreements with third
parties, provides audiotext services promoted on the Spice Networks. 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. Spice Direct also operates Cyberspice, an adult Internet website.
Spice Productions jointly produces and licenses adult films from the
leading producers of adult films both in this country and abroad. Spice
Productions also produces approximately two adult films per month. The Company
owns one of the world's largest adult film libraries which the Company exhibits
on the Spice Networks and The Adult Channel and which the Company licenses to
third parties.
In 1997 and 1996, approximately 56% and 68% of total revenue was from
cable markets, approximately 14% and 19% of total revenue was from the DBS and
DTH markets, approximately 15% and 2% of total revenue was from the sale of
excess transponder capacity and other related services, and a majority of the
remaining 15% and 11% of total revenue was from audiotext services and other
worldwide programming distribution. Substantially all of the cable, DBS and DTH
revenue was from the United States and the United Kingdom.
For the year ended December 31, 1997 the Company reported net income
from continuing operations of $4.3 million as compared to a net loss from
continuing operations of $5.4 million in 1996. The 1997 net income from
continuing operations was primarily attributable to non-recurring gains of $5.2
million and operating income of $2.4 million offset by interest expense of $3.6
million. The 1996 net loss from continuing operations was primarily attributable
to an operating loss of $0.7 and interest expense of $6.4 million offset by
minority interest of $1.1 million and a non-recurring gain of $0.9 million. The
improvement in operating results was primarily attributable to three main
factors; increase in non-recurring gains, the Company's sale of excess
transponder and playback capacity to a third party and reduced expenses
attributable to domestic transponder services resulting from the amendment of
the Company's transponder lease and the corresponding change in it's
classification from a capital to an operating lease.
The accompanying financial statements have been prepared assuming that
the Company will be able to meet its obligations in the ordinary course of
business. At December 31, 1997, the Company had a working capital
<PAGE>
SPICE ENTERTAINMENT COMPANIES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
deficit of $2,024,000. In the first quarter of 1998 the Company realized
approximately $3.2 million from the exercise of stock options The Company also
paid off the revolving line of credit in the first quarter of 1998 (Note 6).
Section 505 of the Telecommunications Act of 1996 became effective on
May 18, 1997. The section requires cable operators to fully scramble both the
audio and video signal of television channels broadcasting substantial amounts
of adult programming or block the channels between 6:00 a.m. and 10:00 p.m. As a
result of the reduced carriage for channels not in full compliance with the new
scrambling requirements the Spice Networks cable revenues were adversely
affected in 1997 by approximately $600,000.
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 7). This equipment enabled the Company
to digitally compress its domestic television networks onto a single
transponder, significantly reducing the total costs of the company's domestic
networks. In September, 1996 the Company started selling the excess transponder
capacity bundled with playback, programming and other related service to third
parties. In 1997 and 1996 the Company realized approximately $5.2 million and
$0.6 million of revenue from the sale of these services, respectively. The
Company, in 1997, also realized significant cost reductions totaling
approximately $1.4 million which resulted from AT&T's preemption of one of the
transponders in January, 1997 (Note 7).
2. Acquisitions, Joint Ventures and Divestitures.
Spector Entertainment Group. On August 31, 1995, the Company acquired
Spector Entertainment Group, Inc. ("SEG") in exchange for 700,000 shares of the
Company's Common Stock. The August 31, 1995 transaction was accounted for as a
pooling of interest whereby the financial statements for all periods prior to
the acquisition were restated to include SEG in the Company's consolidated
financial statements. On February 7, 1997, the Company split off SEG to its
former shareholders in exchange for the 700,000 shares of the Company's Common
Stock that they previously received in the acquisition. SEG is accounted for as
a discontinued operation in the accompanying consolidated financial statements
(Note 4).
Adam & Eve Communications, Inc. On April 13, 1995, the Company acquired
Adam & Eve Communications, Inc. ("AEC") in exchange for 820,000 shares of the
Company's 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.
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.
On June 3, 1997, the parties executed an agreement to dissolve the
partnership. Under the terms of the dissolution agreement, WCTV agreed to pay
the Company $580,000, representing past and future transponder services, and
contribute an additional $1,030,000 to the partnership. The additional
contribution was used to wind down CVSP.
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
the Company's common stock. 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 1997 sold a portion
of the rights to the film library to the former owners of CPV for $170,000.
Guest Cinema, Inc. In January 1994, the Company acquired through the
merger of PSP Holding, Inc. ("PSP") into its wholly-owned subsidiary, Guest
Cinema, Inc., a hotel/motel pay-per-view system. As part of the restructuring
plan instituted in the last quarter of 1995, the Company ceased distribution of
this system because the Company projected continued losses in the business.
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 "MGAM Warrant"). The parties were unable to agree on a
business plan or a strategy for the continued operation of AGN.
Pursuant to a Purchase Agreement dated June 28, 1996, the parties
reached a settlement 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 the MGAM Warrant 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.
The MGAM stock price increased significantly in 1997. In September,
1997, the Company exercised the MGAM Warrant and sold the 175,000 shares of MGAM
stock it received on exercise of the MGAM Warrant. The Company realized a gain
on the sale of $1,316,000.
In December, 1997, the Company realized a gain of $396,000 as a result
of AGN's election to pay the discounted value of the note receivable. The
Company had deferred the gain because collection of the note was less than
probable at the time of the June 1996 settlement.
Danish Satellite TV a/s In February 1995, the Company formed Danish
Satellite TV a/s ("DSTV"), a wholly-owned subsidiary of HVC, and launched
EUROTICA. EUROTICA is a subscription network based in Denmark which features
explicit adult movies. The EUROTICA network is distributed to the European
direct to home ("DTH") and cable markets.
Effective July 31, 1997, the Company sold 51% of its interest in DSTV
to Multimedia General Entertainment S.A. ("MGE"), the Company realized a gain of
$352,000 comprised of $45,000 in cash with the remainder as a result of changing
DSTV to the equity method of accounting.
TeleSelect B.V. The Company, Philips Media B.V. ("Philips") and Royal
PTT Netherlands NV ("KPN") established TeleSelect B.V. ("TeleSelect"), a
Netherlands joint venture, to create joint ventures with European cable
operators to enable them to provide conditional access services such as
pay-per-view, near video on demand and electronic retailing to their
subscribers. On April 3, 1996, the Company received $3.2 million of proceeds
from the sale of its TeleSelect interest of which $1 million was utilized to pay
down long-term debt and the remaining funds were utilized to pay trade payables.
3. Summary of Significant Accounting Policies.
Consolidation. The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries and majority-owned
partnership. All significant intercompany transactions have been eliminated.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments. The carrying amounts for cash and
cash equivalents, accounts receivable, royalties payable, accounts payable and
accrued expenses reflected in the financial statements approximate fair value
because of the short maturity of these items. See Notes 6 and 7 for a discussion
of the fair value of the Company's long-term debt and capitalized lease
obligations at December 31, 1997.
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 cash is deposited in major banks and the Company's
trade receivables are primarily with large domestic publicly traded corporations
with substantial assets there by limiting the Company's credit risk. At December
31, 1997 the Company had trade receivables with two large system operators which
approximated 15% of the total trade receivables. In addition the Company had a
net trade receivable with Emerald Media, Inc. ("EMI"), which represented 17% of
the net trade receivables.
For the year ended December 31, 1997, the Company derived a significant
portion of it's revenue (approximately 54%) from five multiple systems
operators, Direct TV and EMI. The loss of one or more of these customers could
have a material adverse impact on the Company's results of operations. The 1997
revenue from EMI represents approximately 14% of the total for the year (Note
11).
Valuation of Long-Term Assets. The Company adopted Statement of
Financial Accounting Standards No. 121 ("SFAS No. 121"), "Accounting 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, 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 determined
that no provision was necessary for the impairment of long-lived assets at
December 31, 1997.
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 by comparing the carrying value to the sum of the projected
future cash flows.
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 and
leasehold improvements are amortized over the shorter of the estimated useful
life or the lease term. 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.
Revenue from the sale of transponder, playback and other related
services is recognized in the period the service is performed.
Subscription revenues are deferred and amortized over the life of
the subscription. At December 31, 1997 and 1996 deferred subscription revenues
were $604,000 and $1,121,000, respectively.
Deferred subscription costs of $131,000 and $132,000 at December 31,
1997 and 1996, 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.
Producer Royalties. The Company, through its CVS network, had entered
into contractual agreements with producers or film makers in order to obtain the
rights to license films. The producer agreements required that producer
royalties be paid a percentage of the revenues. The producer royalties were
recorded in the period the film or event was exhibited.
Amortization of Library of Movies. The Company capitalizes the
acquisition costs for the rights to movie titles purchased or licensed. The
acquisition costs are amortized on a straight-line basis over the shorter of the
useful life or the license period, ranging from one to five years.
Minority Interest. The Company owns a minority interest in DSTV
resulting from the sale of a majority interest in July 1997 (Note 2). DSTV's
minority interest is currently accounted for using the equity method. At
December 31, 1997 the Company carried its minority interest in DSTV at zero in
the consolidated balance sheet because of the uncertainty of realizing any
profits from its investment.
Income (Loss) per Share. As of December 31, 1997, the Company has
adopted the provisions of Statement of Financial Accounting Standards No. 128
("SFAS No. 128"), "Earnings Per Share." Basic earnings per share exclude
dilution and are computed by dividing income attributable to common shareholders
by the weighted-average common shares outstanding for the period. Diluted
earnings per share reflect the weighted-average common shares outstanding plus
the potential dilutive effect of securities or contracts which are convertible
to common shares, such as options, warrants, and convertible preferred stock.
<PAGE>
The following table represents the required disclosure of the
reconciliation of the numerators and denominators of the basic and diluted EPS
compilations:
<TABLE>
<CAPTION>
For the Year Ended December 31, For the Year Ended December 31,
1997 1996
---------------------------------------- ------------------------------------------
------------ -------------- ------------ -------------- -------------- -----------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------ -------------- ------------ -------------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Income before extraordinary gain $4,299,000 ($7,900,000)
Less: Preferred stock dividends 192,000 -
------------ --------------
Basic EPS
Income before extraordinary gain
attributable to common
stockholders 4,107,000 10,706,000 $0.39 ($7,900,000) 11,351,000 ($0.70)
============ ===========
Effect of Dilutive Securities
Securities assumed converted
Options - 2,125,000 - -
Warrants - 755,000 - -
Preferred stock 192,000 863,000 - -
Less securities assumed repurchased - (2,212,000) - -
------------ -------------- -------------- --------------
Diluted EPS
Income before extraordinary gain
attributable to common stockholders
& assumed conversions $4,299,000 12,237,000 $0.35 ($7,900,000) 11,351,000 ($0.70)
============ ============== ============ ============== ============== ===========
</TABLE>
Options and warrants to purchase shares of common stock of 2,166,126
and 220,000, respectively, remain outstanding at December 31, 1997, but were not
included in the computation of diluted EPS because to do so would have been
antidilutive for the periods presented. At December 31, 1996 and 1995, all
options and warrants were excluded from the calculation of diluted EPS because
their effect was antidilutive (Note 8).
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 1997 presentation.
New Accounting Pronouncement. The Company will implement the provisions
of Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income Summary ("Statement 130") for financial statements issued for fiscal
years beginning after December 15, 1997. Statement 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. Management is evaluating the effect that adoption of Statement 130
will have on the Company's financial statements.
The Company will implement the provisions of Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information ("Statement 131") for financial statements issued for
periods beginning after December 15, 1997. Statements 131, which is based on the
management approach to segment reporting, includes requirements to report
selected segment information quarterly and entity-wide disclosures about
products and services, major customers, and the material countries in which the
entity holds assets and reports revenues. Management is evaluating the effect
that adoption of Statement 131 will have on the Company's financial statements.
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 Company finalized the split off
of SEG on February 7, 1997.
In 1996, the results of operations for SEG were classified as
discontinued operations for all periods presented in the Consolidated Statement
of Operations. The components of the net assets of SEG which were included in
the Consolidated Balance Sheet as Net Assets of Discontinued Operations at
December 31, 1996 are as follows:
Current assets $ 658,000
Property, plant and equipment, net 3,977,000
Other assets 801,000
Current liabilities (1,951,000)
Long-term debt (920,000)
Deferred taxes (15,000)
-----------
Net Assets $ 2,550,000
===========
The revenues of SEG for 1996 and 1995 were $7,885,000 and $7,766,000,
respectively. Included in the loss of disposal on SEG recorded in 1996 was
$403,000 of operating losses subsequent to the measurement date.
In addition, the Company terminated the operations of CPV Productions,
Inc. at the end of 1996. The Company had suspended production of movies at the
beginning of 1996 due to a shortage of capital but continued to license and
distribute its existing film library in 1997.
Consistent with the plan developed in 1996 to focus on the Company's
core businesses, the Company continued to evaluate non-strategic operating units
in 1997. This resulted in the termination of the CVS network and the subsequent
dissolving of the CVS partnership. In addition, the Company sold a majority
interest of DSTV in 1997.
5. Property and Equipment.
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
Useful Lives in
Years 1997 1996
------------------ --------------- ----------------
<S> <C> <C> <C>
Satellite transponders (Note 7) 12 $ - $ 58,663,000
Equipment 5 8,538,000 9,716,000
Furniture and fixtures 7 491,000 510,000
Leasehold improvements Life of lease or
shorter 2,515,000 2,564,000
--------------- ----------------
11,544,000 71,453,000
Less accumulated depreciation and amortization 4,942,000 9,505,000
--------------- ----------------
$ 6,602,000 $ 61,948,000
=============== ================
</TABLE>
Certain of the aforementioned equipment having a net book value of $0.8
million and $54.6 million is collateral for the equipment loans and capital
leases at December 31, 1997 and 1996, respectively.
<PAGE>
6. Long-Term Debt.
Long-term debt consists of the following:
December 31,
--------------------------------
1997 1996
-------------- -------------
Darla term loan (a) $ 11,011,000 $ -
Darla revolving credit line (a) 1,974,000 -
PNC term loan (a) 440,000 -
PNC revolving credit line (b) - 14,621,000
7% note payable (c) - 668,000
10% note payable 25,000 80,000
11% note payable - 100,000
-------------- -------------
13,450,000 15,469,000
Less current portion 2,998,000 817,000
-------------- -------------
Long-term portion $ 10,452,000 $ 14,652,000
============== =============
The annual maturities of long-term debt at December 31, 1997 are as
follows:
Years Ending December 31, Payment
---------------------------------------- -------------------
1998 $ 2,998,000
1999 10,452,000
-------------------
Total $ 13,450,000
===================
a) On January 15, 1997, the Company consummated agreements with PNC Bank N.A.
("PNC") and Darla L.L.C. ("Darla"), as assignee, which resulted in the
replacement of the Company's credit facility with PNC. PNC settled the
outstanding balance of the credit facility, totaling $14.6 million, for
$9.6 million in cash, a new $400,000 term loan and 597,000 warrants
exercisable at $2.06 per share. The new PNC agreement canceled the 100,000
warrants previously issued to PNC, which had an exercise price of $3.88 per
share.
The Darla agreement provided a term loan of $10.5 million, of which $9.6
million was used to satisfy the cash portion of the PNC Agreement and $0.9
million which financed loan acquisition fees. Additionally, this agreement
included a revolving line of credit totaling $3.5 million of which $1.9
million had been drawn down as of December 31, 1997. The revolving line of
credit was paid off in the first quarter of 1998. The term loan is
scheduled to mature in July 1999. The loans bear interest at 5% over the
Citibank prime rate but not less than 13%. Three percentage points of the
interest may be accrued and added to the principal of the loan and will be
forgiven if the Darla credit facility is paid in full before January 15,
1999.
In addition to the loan acquisition fees, Darla received 24,250 shares of
cumulative preferred stock with a face value of $2,425,000 (Note 8).
The new PNC term loan entered into on January 15, 1997 had a principal
balance of $400,000, bears interest at 10% (payable at maturity) and
matures on January 15, 1999. At December 31, 1997 the principal and accrued
interest, which is added to the term loan, had a balance of $440,000.
The Darla loans are secured by all of the Company's assets, including the
stock of its subsidiaries. The loan also restricts payment of common stock
dividends. The Darla loan agreement contains various financial covenants
including minimum levels of revenues and adjusted EBITDA for each quarter.
The Company did not meet these covenants for the quarter ended September
30, 1997. On November 14, 1997, Darla and the Company executed an amendment
to the Darla loan agreement which waived the financial covenant violations
for the quarter ended September 30, 1997 and revised the revenue and
adjusted EBITDA covenants for the balance of the term. The company is
currently exploring various alternatives to replace or satisfy its current
credit facility. The Company, based on its prior refinancing experience,
believes that the credit facility will be refinanced.
b) 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 was
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 January 15,
1997. The term loan and revolving credit line were 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.
c) 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 was payable over 12 months at
$65,000 per month including interest at 7% per annum and was paid off in
1997.
7. Obligation Under Capital Leases.
Minimum annual rentals under capital leases for the five years
subsequent to 1997, in the aggregate, are as follows:
Years ending December 31,
--------------------------------------------------------------------
1998 $ 1,050,000
1999 809,000
2000 37,000
------------------
Net minimum lease payments 1,896,000
Less amount representing interest 261,000
------------------
Present value of minimum lease obligations 1,635,000
Current portion of lease obligations 855,000
------------------
Long-term portion of lease obligations $ 780,000
==================
a) Effective as of December 1995, the Company entered into a non-cancelable
lease agreement for five transponders on the AT&T satellite Telstar 402R
for a monthly payment of $635,000. The original term of the agreement was
for the useful life of the satellite's geo-stationary orbit, estimated to
be twelve years. At December 31, 1996, 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 January 11, 1997, as a result of AT&T losing contact with and declaring
Telstar 401 permanently out of service, AT&T pre-empted one of the
Company's unprotected transponders and transferred it to another AT&T
customer. This resulted in the reduction of the Company's satellite
transponder payments from $635,000 to $520,000 per month.
On March 31, 1997, the Company and Loral (which acquired AT&T's satellite
business) amended the Skynet Transponder Services Agreement (the
"Transponder Agreement"). The term of the Transponder Agreement, which was
to originally expire at the end of the satellite's useful life, was
shortened to October 31, 2004. In consideration of the amendment, the
Company granted Loral the right to pre-empt one of the Company's
transponders after September 1, 1997. As a result of the amendment, the
Transponder Agreement has been classified as an operating lease commencing
on March 31, 1997.
As a result of the two events described above, the Company realized a
non-recurring gain of approximately $2.3 million in 1997.
b) In 1995, the Company entered into a financing agreement, accounted for as a
capital lease, totaling $2,078,000 with IBM to construct a master control
and digital playback center, at its New York facility. In 1995, the Company
made payments totaling $435,000 on the obligation. As a result of certain
delays, changes in equipment requirements and other factors, the original
lease agreement was superseded in the fourth quarter of 1996 with a new
lease which requires 36 payments of approximately $37,000, commencing on
February 1, 1997. The lease obligation at December 31, 1997 and 1996 was
$794,000 and $1,083,000, respectively.
c) On August 14, 1996, the Company entered into an equipment lease agreement
for approximately $1.8 million of equipment from Vendor Capital Group. The
lease was accounted for as a capital lease. The equipment included a
Digicipher encoder and approximately 1,200 decoder boxes which were
provided to the Company's cable systems customers. This equipment enabled
the Company to digitally compress its domestic television networks onto one
transponder, significantly improving the operating results of the Spice
Networks. The lease obligation at December 31, 1997 and 1996 was $841,000
and $1,327,000, respectively.
8. Capital Transactions.
Common Stock. On February 7, 1997 the Company reacquired 700,000 shares
of its common stock in the transaction to spin-off SEG, the shares were
subsequently retired in 1997 (refer to Note 2).
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 1997 and
1996 the Company canceled 30,000 and 44,000 shares of the restricted stock,
respectively, as part of a termination agreement with two 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, 1997 of $414,000 has been included as a
reduction in stockholders' equity.
Preferred Stock. On January 15, 1997, as part of the Darla transaction,
the Company issued 24,250 shares of cumulative, convertible Series A Preferred
Stock ("Preferred Stock"), with a $100 face and liquidation value per share and
an 8.0% cumulative dividend, payable in additional shares of Preferred Stock at
the Company's discretion. After two years, the Preferred Stock is convertible
into the Company's Common Stock at a 10% discount from the then current market
price of the Company's Common Stock.
Warrants. On January 15, 1997, under the new PNC loan agreement, the
Company granted PNC 597,000 warrants to acquire the Company's stock at $ 2.06
per share and canceled the 100,000 warrants, with an exercise price of $3.88 per
share, previously issued to PNC. The 597,000 warrants issued to PNC expire on
March 25, 2002. On March 26, 1997, the Company also granted, to three
consultants involved in the debt restructuring, 200,000 warrants to acquire the
Company's common stock exercisable at a price of $3.50 per share. The warrants
issued to the consultants expire on March 25, 2002.
In 1997 the Company also granted to consultants 250,000 warrants to
acquire the Company's common stock at exercise prices ranging from $2.25 to
$2.63. These warrants expire on March 25, 2002.
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.
During 1997 the Company also canceled 118,750 warrants, granted prior
to 1997, with exercise prices ranging from $3.33 to $6.50 per share.
Changes in warrants outstanding are summarized as follows:
Warrants
-------------------------------------
Exercise Price
Shares Range
--------------- ------------------
Balance January 1, 1995 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
Granted 1,047,000 $2.25-$3.50
Exercised -
Canceled (118,750) $3.33-$12.03
===============
Balance December 31, 1997 1,067,000
===============
At December 31, 1997, 1996 and 1995, all of the warrants outstanding on
the respective dates were exercisable.
Options. The Company has five stock option plans (the 1992, 1993, 1994,
1995 and the Director's Plan) (collectively the "Plans") for officers,
employees, directors and consultants of the Company or any of its subsidiaries.
Options granted to employees may be either incentive stock options (ISO's) or
non-ISO's; ISO's may not have an exercise price less than 100% of fair market
value of the Company's common stock on the grant date and all options may not
have an exercise price of less than 110% of fair market value on the grant date
in the case of options granted to holders of 10% or more of the voting power of
the Company's stock on the grant date. The aggregate fair market value, as
determined on the grant date, of ISO's that may become exercisable in any one
year can not exceed $100,000. Options canceled subsequent to issuance are
returned to the Plan and are available for re-issuance as determined by the
Stock Option Committee.
The options are evidenced by a written agreement containing the above
terms and such other terms and conditions consistent with the Plans as the
Board or Committee may impose. Each option, unless sooner terminated, shall
expire no later than 10 years (five years in the case of ISO's granted to
holders of 10% of the voting power of the Company's common stock) from the date
of grant, as the Board or Committee may determine.
The Plans in effect on December 31, 1997, 1996 and 1995 authorize the
granting of stock options to purchase an aggregate of 4,000,000 shares of the
Company's common stock, respectively. At December 31, 1997, 1996 and 1995 there
were a total of 617,410, 126,588 and 1,213,987 shares, respectively, remaining
for future grants under the four plans.
The Directors' Plan authorizes the automatic annual issuance to each
non-employee director of options to acquire 10,000 shares of the Company's
common stock on each December 31, at an exercise price equal to the market price
of the stock on that date. The plan was adopted in 1994 and authorizes the
granting of a total of 100,000 stock options. On December 31, 1997 no options
were available for future grant under this plan.
On April 1, 1997, outside the aforementioned plans, the Company granted
600,000 options to acquire the Company's common stock exercisable at $2.13 per
share. Mr. Faherty, the Chairman and Chief Executive Officer, was granted
400,000 options pursuant to his employment agreement (Note 10) and the remaining
were issued to the Company's senior management.
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 Year ended
December 31, 1997 December 31, 1996 December 31, 1995
----------------------- --------------------- ---------------------
<S> <C> <C> <C>
Net income (loss) attributable to Common
Stock
As reported $4,250,000 ($7,900,000) ($15,126,000)
Pro forma $3,350,000 ($9,748,000) ($18,283,000)
Basic: income (loss) per share
As reported $0.40 ($0.70) ($1.29)
Pro forma $0.31 ($0.86) ($1.56)
</TABLE>
These pro forma amounts may not be representative of future disclosure
because they do not take into effect pro forma compensation expense related to
grants made before 1995. The fair value of these options was estimated at the
date of grant using the Black-Scholes option valuation model and using
assumptions for the years ended December 31, 1997, 1996 and 1995; respectively;
expected volatility of 60%, 63% and 61%; risk-free interest rates of 5.6%, 5.6%
and 5.%; and expected life of 7 years. The weighted average fair value of
options granted during the year ended December 31, 1997, 1996 and 1995 for which
the exercise price equals the market price on the grant date was $1.62, $2.05
and $2.67, respectively, and the weighted average exercise prices were $2.41,
$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, 1995 .... 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
Granted ........................ 886,500 2.41
Exercised ...................... (49,270) 2.62
Canceled ....................... (349,597) 3.34
---------------
Balance at December 31, 1997 ... 4,397,645 3.11
===============
<PAGE>
The following table summarizes information concerning currently
outstanding and exercisable stock options at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------- ---------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Ranges of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- ------------------- ---------------- ----------------- ------------ ----------------- ------------
<S> <C> <C> <C> <C> <C>
$.83 - $1.75 335,249 7.58 years $1.49 231,805 $1.37
$2.13 - $2.75 1,896,270 6.57 years $2.44 1,458,583 $2.50
$3.33 - $3.88 1,843,505 7.31 years $3.85 1,764,581 $3.85
$4.33 - $4.63 296,621 8.39 years $4.22 276,621 $4.24
$8.38 - $9.25 26,000 7.47 years $8.71 26,000 $8.71
</TABLE>
At December 31, 1997, 1996 and 1995, there were 3,757,590, 2,859,330,
and 1,695,113 of options that are exercisable, respectively.
Stockholders Rights Plan. During 1997, the Company adopted a
Stockholders Rights Plan. The Stockholders Rights Plan gives the Company time to
analyze a potential hostile take-over and to force a hostile acquirer to
negotiate with the Company's Board of Directors. The Stockholders Rights Plan
achieves these goals by providing for the issuance of rights to each stockholder
which are attached to the Common Stock. If a person acquires a specified
percentage of the Company's Common Stock or commences a tender offer for the
Company which has not been approved by the Board of Directors, the Board of
Directors can cause the rights to detach. The detached rights give the Company's
stockholders, other than the hostile acquirer, the right to acquire stock at a
price that will result in a substantial reduction in the value of the hostile
acquirer's Common Stock and make it much more expensive to acquire control of
the Company.
9. Income Taxes.
The components of income tax expense (benefit) follow:
Years Ended December 31,
--------------------------------
1997 1996 1995
--------- -------- ---------
Current
Federal ................. $ (9,000) $ 89,000 $(356,000)
State and Local ......... 12,000 50,000 240,000
Foreign ................. 345,000 53,000 850,000
--------- -------- ---------
348,000 192,000 734,000
--------- -------- ---------
Deferred
Federal ................. -- -- --
State and Local ......... -- -- --
--------- -------- ---------
-- -- --
--------- -------- ---------
Total Income Taxes ........... $ 348,000 $192,000 $ 734,000
========= ======== =========
The following is a reconciliation between the statutory federal income
tax for each of the past three years and the Company's effective tax rate:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Income tax provision (benefit) at federal statutory rate ........................ 34% (34%) (34%)
State and local income taxes net of federal tax benefit ......................... 0% 1% 0%
Foreign income taxes ............................................................ 1% 1% 2%
Foreign income, excluded, net of federal tax benefit ............................ (1%) 0% (2%)
Amortization of Goodwill ........................................................ 5% 12% 4%
Non-deductible business meals and entertainment ................................. 1% 1% 0%
(Decrease) increase due to the change in the valuation
allowance ..................................................................... (37%) 14% 22%
Other items ..................................................................... 1% 1% 3%
------------ ----------- -----------
Effective tax rate .............................................................. 4% (4%) (5%)
============ =========== ===========
</TABLE>
The Company's foreign subsidiaries has accumulated earnings, however,
the Company does not intend to repatriate the earnings, so no taxes have been
provided for. Therefore, no U.S. Federal income taxes have been provided
relating to the foreign subsidiaries. The foreign income subject to foreign
taxes was approximately $930,000 in 1997 and $161,000 in 1996.
As of December 31, 1997, the Company has available, for Federal income
tax purposes, unused net operating loss carryforwards of $7,937,000 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.
At December 31, 1997, the Company assessed its past earnings history,
trends and projections and, as a result of the uncertainty surrounding the use
of the NOL carryforwards, reserved through the valuation allowance all of the
deferred tax assets. However, the subsequent event described in Note 14 may
cause the deferred tax assets that are fully reserved to be partially or
completely utilized. The valuation allowance at December 31, 1997 and 1996 was
$4,320,000 and 5,885,000, respectively.
The components of the net deferred tax assets are as follows:
December 31,
--------------------------
1997 1996
----------- -----------
Deferred tax assets
Bad debts ................................ $ 868,000 $ 620,000
Deferred compensation expense ............ 117,000 107,000
Net operating loss carry-forwards ........ 2,886,000 1,696,000
Foreign tax carry-forwards ............... 89,000 52,000
AMT credit carry-forward ................ 107,000 107,000
Deferred debt restructuring costs ....... 947,000 --
Satellite lease classification .......... -- 798,000
Accrual for restructuring changes ........ 280,000 2,159,000
Restricted stock not vested .............. 189,000 153,000
Accrued loss on Disposal of SEG .......... -- 370,000
Amortization of Library of films ......... -- 245,000
Non-deductible capital losses ............ -- 466,000
Valuation allowance ...................... (4,320,000) (5,885,000)
----------- -----------
Total deferred tax asset ............ 1,163,000 888,000
----------- -----------
Deferred tax liability ...................... -- --
Tax depreciation in excess of book ....... (1,163,000) (888,000)
----------- -----------
Total deferred tax liability ........ (1,163,000) (888,000)
----------- -----------
Net deferred tax assets .................. $ -- $ --
=========== ===========
10. 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 and provides for a parachute payment if, within 18 months
following a change in control of the Company, Mr. Faherty or the Company elects
to terminate his employment. 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 $282,000, 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).
Effective December 31, 1995, Messrs. Graff and Nolan resigned as
officers of the Company. Pursuant to the terms of their resignation and
termination agreements, 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,
Messrs. Graff and Nolan 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 13).
At December 31, 1997, Messrs. Faherty and Nolan had loans outstanding
with the Company, in the amounts of $282,000 and $83,000, respectively, which
are required to be repaid during 1998. The loans bear interest at one over
prime. At December 31, 1997, the interest rate was 11%.
Mr. Christopher Yates (President of HVC and a director of the Company)
was employed by HVC pursuant to a Service Agreement dated January 22, 1993 and
amended on June 16, 1994. The agreement expired on one-year prior notice
provided such notice occurred after March 1, 1997 and provided for a lump sum
severance payment of 125,000 British Pounds. The Company and Mr. Yates could not
agree on the terms of an extension to Mr. Yates' employment agreement and Mr.
Yates was terminated on October 11, 1997. Mr. Yates claimed the Company had
improperly terminated his agreement and the parties are currently negotiating a
settlement.
Certain other officers of the Company are employed pursuant to
employment agreements ranging from two to four years. These agreements generally
provide for up to one year severance and contain parachute payment provisions
that are triggered upon a change in control if the Company terminates the
officer's employment within 18 months following a change in control.
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 participant. The expense
incurred for the years ended December 31, 1997, 1996 and 1995 amounted to
$24,000, $71,000 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,
1997, the aggregate minimum rental commitments under non-cancelable operating
leases were approximately as follows:
Satellite
Years Ending Office Facilities Transponder
December 31 Total and Equipment and Uplink
- ----------------- -------------- -------------- ----------------
1998 $ 9,058,000 $ 596,000 $ 8,462,000
1999 7,129,000 517,000 6,612,000
2000 6,731,000 466,000 6,265,000
2001 6,688,000 448,000 6,240,000
2002 6,682,000 442,000 6,240,000
Thereafter 11,788,000 348,000 11,440,000
-------------- -------------- ----------------
Total $ 48,076,000 $ 2,817,000 $ 45,259,000
============== ============== ================
Total expense under operating leases amounted to $7,691,000, $3,220,000
and $9,418,000 for the years ended 1997, 1996 and 1995, respectively.
As a result of the Loral transponder lease being classified as a
capital lease until March 31, 1997 (Note 7), the transponder payments totaling
$1,598,000 and $7,620,000, for 1997 and 1996, were reported as a reduction of
capital lease obligations. If the Loral transponder lease was classified as an
operating lease from its inception, the Company would have reported additional
satellite expenses of approximately $1.6 million and $7.6 million in 1997 and
1996. In addition, the Company would have reported a decrease in depreciation of
$1.0 million and $5.3 million as well as and a decrease in interest expense of
$0.9 million and $5.0 million, respectively.
On January 19, 1998 the Company, through its HVC subsidiary, secured
long-term transponder capacity on transponder 24 of the Sky Astra 1B Satellite.
The lease starts on August 1, 1998 and terminates on December 31, 2002 and calls
for monthly lease payments of 75,000 British Pounds or approximately $125,000.
The Channel will continue to be broadcasted daily from midnight to 4:00 am.
Contracts with Producers. 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.
11. Significant Customer.
On September 1, 1996, pursuant to short term agreements, the Company
began providing transponder services bundled with playback, programming and
other related services to Emerald Media, Inc. ("EMI"). EMI owns and operates
EUROTICA, a premium television network featuring explicit version adult movies
which are distributed to the domestic DTH market. EMI also granted the Company
an option to acquire its stock or business for $755,000 ("EMI Option"). EMI
expanded its operations and, at December 31, 1997, operated four explicit
television networks in the DTH market. The Company's agreements with EMI have
been modified and at December 31, 1997, the Company provided transponder
services on three transponders and playback and other services for four of EMI's
networks from the Company's master control and digital playback facility.
In 1997 and 1996 the Company recognized revenue of $4.7 million and
$0.6 million, respectively, from EMI.
12. Retirement Plan.
On January 13, 1993, the Company established a 401(k) tax deferred
savings plan (the "Plan") for all employees of the Company on March 1, 1993.
Employees are eligible to participate in the Plan after completing one year of
service. Eligible employees may elect to contribute up to 15% of their annual
compensation to the Plan, up to the maximum allowed by law. The Company declared
for 1997 and 1995 a discretionary matching contribution equal to 25% of the
amount of the salary reduction employees elect to defer, up to the first 4% of
compensation. For the year ended December 31, 1997 and 1995, the Company
incurred a 401(k) contribution expense of approximately $25,600 and 42,000,
respectively. The Company made no matching discretionary contribution during the
year ended December 31, 1996.
13. 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 which are in force through 1998 (Note 10). 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.
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
activity of each component for the years 1996 and 1997 were as follows:
<TABLE>
<CAPTION>
December 31, Cash December 31, Cash December 31,
1995 Outflows 1996 Outflows 1997
---------- ---------- ---------- -------- -----------
Corporate
<S> <C> <C> <C> <C> <C>
Salaries ................................. $2,750,000 $1,301,000 $1,449,000 $749,000 $700,000
Facilities and Other ..................... 250,000 179,000 71,000 71,000 --
CPV
Salaries ................................. 464,000 464,000 -- -- --
Facilities and Other ..................... 191,000 191,000 -- -- --
---------- ---------- ---------- -------- -----------
Total ............................... $3,655,000 $2,135,000 $1,520,000 $820,000 $700,000
========== ========== ========== ======== ===========
</TABLE>
14. Subsequent Event.
On February 3, 1998, the Company and Playboy Enterprises, Inc.
("Playboy") executed a letter agreement with attached term sheet for a
transaction ("Proposed Transaction") that, if consummated, will result in
Playboy acquiring the Company. The Proposed Transaction provides for Playboy's
acquisition of all of the outstanding shares of the Company's Common Stock for
cash and Playboy stock. The total transaction value, including the assumption of
debt, is expected to be approximately $95 million. For each share of the
Company's Common Stock, Company stockholders will receive the following;
-- $3.60 in cash;
-- 0.1524 shares of Playboy Class B Stock, subject to a
collar designed to provide a minimum value of $2.11 or a
maximum value of $2.69 per share of Common Stock; and
-- one share of the stock of "Spinco," a newly formed corporation.
The cash portion of the consideration is subject to certain downward
adjustments if Spinco receives working capital from the Company, if one-half of
the receivable from EMI as of January 31, 1998 has not been repaid or if the
Company incurs income taxes as a result of the spin-off transaction that are not
offset by its net operating and current tax losses and deductions generated by
the Proposed Transaction.
The Company will transfer to Spinco its digital operations center for
video and Internet broadcasts (the "Operations Facility"), its option to acquire
the outstanding stock of EMI, and certain rights to a library of adult films. It
is anticipated that the Company will distribute the Spinco stock prior to
Playboy's acquisition of Spice and that Spinco will exercise the EMI Option
after the acquisition is consummated.
Spinco will retain rights to distribute explicit programming in the
U.S., Canada and sovereign islands of the Caribbean in the C-band DTH market.
Spinco will also retain EMI's explicit Internet websites and will have C-band
DTH broadcast rights to the explicit version of films from the Company's
existing library and for use on EMI's websites. Spinco will also have the right
to the explicit version of titles licensed by Playboy under any of the Company's
existing production agreements on a royalty-free basis. Playboy will enter into
a service contract with Spinco under which Playboy will contract for twelve
months of playback services from the Operations Facility for all of Spice's
cable network services that Playboy continues to distribute.
The parties anticipate that definitive agreements will be executed
shortly. A closing is planned for the end of the second quarter.
<PAGE>
15. Geographic Data.
Revenues and operating profit (loss) from continuing operations and
identifiable assets by geographic area were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues
United States .................... $ 27,384,000 $ 26,000,000 $ 32,939,000
Europe ........................... 5,891,000 7,213,000 10,353,000
Asia and other ................... 321,000 -- --
------------ ------------ ------------
$ 33,596,000 $ 33,213,000 $ 43,292,000
============ ============ ============
Operating Profit (loss)
United States .................... $ 2,769,000 $ 517,000 ($13,511,000)
Europe ........................... (495,000) (1,208,000) 1,830,000
Asia and other ................... 150,000 -- --
------------ ------------ ------------
$ 2,424,000 $ (691,000) ($11,681,000)
============ ============ ============
Identifiable Assets
United States .................... $ 17,767,000 $ 73,755,000 $ 81,529,000
Europe ........................... 13,371,000 15,557,000 17,670,000
------------ ------------ ------------
$ 31,138,000 $ 89,312,000 $ 99,199,000
============ ============ ============
</TABLE>
<PAGE>
SPICE ENTERTAINMENT COMPANIES, INC. and SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Page
Schedule Numbers(s)
- -------- ----------
II. Valuation and Qualifying Accounts and Reserves F-32
All other schedules are omitted since the required information is not
present or is not presented in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements.
<PAGE>
SCHEDULE II
SPICE ENTERTAINMENT COMPANIES, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
for the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- ------------- ------------ --------------- ---------------
Additions
Balance at Charged to Balance
Beginning of Costs and End
Description Period Expenses Deductions* of Period
----------- ------------- ------------ --------------- ---------------
<S> <C> <C> <C> <C>
Fiscal year ended December 31, 1997
Allowance for Doubtful Accounts $ 1,736,000 $ 1,824,000 $ 959,000 $ 2,601,000
------------- ------------ --------------- ---------------
$ 1,736,000 $ 1,824,000 $ 959,000 $ 2,601,000
============= ============ =============== ===============
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
============= ============ =============== ===============
*Write-off of uncollectable trade receivables.
</TABLE>
NON-STANDARDIZED 401(k) PLAN
DEAN WITTER VIP PLUS
ADOPTION AGREEMENT #009
NON-STANDARDIZED 401(k) PLAN
(Pages 1 to 18)
(PAIRED PROFIT SHARING PLAN)
The undersigned, Spice Entertainment Companies, Inc. ("Employer"), by
executing this Adoption Agreement, elects to become a participating Employer in
the Dean Witter Versatile Investment Program Defined Contribution Master Plan
(basic plan document #01) by adopting the accompanying Plan and Trust in full as
if the Employer were a signatory to that Agreement. The Employer makes the
following elections granted under the provisions of the Master Plan.
ARTICLE I
DEFINITIONS
1.02 TRUSTEE. The Trustee executing this Adoption Agreement is:
[Choose (a) or (b)]
[ ] (a) A discretionary Trustee. See Section 10.03(A) of the Plan.
[X] (b) A nondiscretionary Trustee. See Section 10.03(B) of the Plan.
[Note: The Employer may not elect Option (b) if a Custodian
executes the Adoption Agreement.]
1.03 PLAN. The name of the Plan as adopted by the Employer is Spice
Entertainment Companies, Inc. 401 (k) Tax Deferred Savings Plan.
1.07 EMPLOYEE. The following Employees are not eligible to participate in
the Plan: [Choose (a) or at least one of (b) through (g)]
[ ] (a) No exclusions.
[X] (b) Collective bargaining employees (as defined in Section 1.07 of the
Plan). [Note: If the Employer excludes union employees
from the Plan, the Employer must be able to provide evidence that
retirement benefits were the subject of good faith
bargaining.]
[X] (c) Nonresident aliens who do not receive any earned income [as
defined in Code Section 911(d)(2)] from the Employer which
constitutes United States source income [as defined in Code Section
861(a)(3)].
[ ] (d) Commission Salesmen.
[ ] (e) Any Employee compensated on a salaried basis.
[ ] (f) Any Employee compensated on an hourly basis.
[ ] (g) (Specify) ___________________________________.
Leased Employees. Any Leased Employee treated as an Employee under Section 1.31
of the Plan, is: [Choose (h) or (i)]
[X] (h) Not eligible to participate in the Plan.
[ ] (i) Eligible to participate in the Plan, unless excluded by reason of
an exclusion classification elected under this Adoption Agreement
Section 1.07.
Related Employers. If any member of the Employer's related group (as defined in
Section 1.30 of the Plan) executes a Participation Agreement to this Adoption
Agreement, such member's Employees are eligible to participate in this Plan,
unless excluded by reason of an exclusion classification elected under this
Adoption Agreement Section 1.07. In addition:
[Choose (j) or (k)]
[X] (j) No other related group member's Employees are eligible to participate
in the Plan.
[ ] (k) The following nonparticipating related group member's Employees
are eligible to participate in the Plan unless excluded by reason of an
exclusion classification elected under this Adoption Agreement Section
1.07: _______________________________________________________________.
1.12 COMPENSATION.
Treatment of elective contributions. [Choose (a) or (b)]
[X] (a) "Compensation" includes elective contributions made by the Employer on
the Employee's behalf.
[ ] (b) "Compensation" does not include elective contributions.
Modifications to Compensation definition. [Choose (c) or at least one of (d)
through (j)]
[ ] (c) No modifications other than as elected under Options (a) or (b).
[ ] (d) The Plan excludes Compensation in excess of $__________________.
[ ] (e) In lieu of the definition in Section 1.12 of the Plan,
Compensation means any earnings reportable as W-2 wages for Federal
income tax withholding purposes, subject to any other election under
this Adoption Agreement Section 1.12.
[X] (f) The Plan excludes bonuses.
[ ] (g) The Plan excludes overtime.
[ ] (h) The Plan excludes Commissions.
[ ] (i) Compensation will not include Compensation from a related employer
(as defined in Section 1.30 of the Plan) that has not executed
a Participation Agreement in this Plan unless, pursuant to Adoption
Agreement Section 1.07, the Employees of that related employer are
eligible to participate in this Plan.
[ ] (j) (Specify) ____________________________.
If, for any Plan Year, the Plan uses permitted disparity in the contribution or
allocation formula elected under Article III, any election of Options (f), (g),
(h) or (j) is ineffective for such Plan Year with respect to any Non highly
Compensated Employee.
Special definition for matching contributions. "Compensation" for purposes of
any matching contribution formula under Article III means: [Choose (k) or (l)
only if applicable]
[X] (k) Compensation as defined in this Adoption Agreement Section 1.12.
[ ] (l) (Specify) _____________________________________________________.
Special definition for salary reduction contributions. An Employee's salary
reduction agreement applies to his Compensation determined prior to the
reduction authorized by that salary reduction agreement, with the following
exceptions: [Choose (m) or at least one of (n) or (o), if applicable]
[X] (m) No exceptions.
[ ] (n) If the Employee makes elective contributions to another plan
maintained by the Employer, the Advisory Committee
will determine the amount of the Employee's salary reduction
contribution for the withholding period: [Choose (1) or (2)]
[ ] (1) After the reduction for such period of elective contributions to the
other plan(s).
[ ] (2) Prior to the reduction for such period of
elective contributions to the other plan(s).
[ ] (o) (Specify) _________________________________.
1.17 PLAN YEAR/LIMITATION YEAR.
Plan Year. Plan Year means:
[Choose (a) or (b)]
[X] (a) The 12 consecutive month period ending every 12/31.
[ ] (b) (Specify) _________________________________________.
Limitation Year. The Limitation Year is: [Choose (c) or (d)]
[X] (c) The Plan Year.
[ ] (d) The 12 consecutive month period ending every
.
1.18 EFFECTIVE DATE.
New Plan. The "Effective Date" of the Plan is ___________________.
Restated Plan. The restated Effective Date is 11/1/97.
This Plan is a substitution and amendment of an existing retirement plan(s)
originally established 1/1/93.
[Note: See the Effective Date Addendum.]
1.27 HOUR OF SERVICE. The crediting method for Hours of Service is:
[Choose (a) or (b)]
[X] (a) The actual method.
[ ] (b) The ________________________________ equivalency method, except:
[ ] (1) No exceptions.
[ ] (2) The actual method applies for purposes of:
(Choose at least one)
[ ] (i) Participation under Article II.
[ ] (ii) Vesting under Article V.
[ ] (iii) Accrual of benefits under Section 3.06.
[Note: On the blank line, insert "daily," "weekly," "semi-monthly payroll
periods" or "monthly."]
1.29 SERVICE FOR PREDECESSOR EMPLOYER. In addition to the predecessor
service the Plan must credit by reason of Section 1.29 of the Plan,
the Plan credits Service with the following predecessor employer(s):
N/A. Service with the designated predecessor employer(s) applies:
[Choose at least one of (a) or (b); (c) is available only in addition
to (a) or (b)].
[ ] (a) For purposes of participation under Article II.
[ ] (b) For purposes of vesting under Article V.
[ ] (c) Except the following Service: _____.
[Note: If the Plan does not credit any predecessor service under this
provision, insert "N/A" in the first blank line. The Employer
may attach a schedule to this Adoption Agreement, in the same format
as this Section 1.29, designating additional predecessor employers
and the applicable service crediting elections.]
1.31 LEASED EMPLOYEES. If a Leased Employee is a Participant in the Plan
and also participates in a plan maintained by the leasing
organization:
[Choose (a) or (b)]
[X] (a) The Advisory Committee will determine the Leased Employee's
allocation of Employer contributions under Article III without taking
into account the Leased Employee's allocation, if any, under the
leasing organization's plan.
[ ] (b) The Advisory Committee will reduce a Leased Employee's allocation
of Employer nonelective contributions (other than designated qualified
nonelective contributions) under this Plan by the Leased Employee's
allocation under the leasing organization's plan, but only to the
extent that allocation is attributable to the Leased Employee's service
provided to the Employer. The leasing organization's plan:
[ ] (1) Must be a money purchase plan which would satisfy the definition
under Section 1.31 of a safe harbor plan, irrespective of whether
the safe harbor exception applies.
[ ] (2) Must satisfy the features and, if a defined benefit plan, the method
of reduction described in an addendum to this Adoption Agreement,
numbered 1.31.
ARTICLE II
EMPLOYEE PARTICIPANTS
2.01 ELIGIBILITY.
Eligibility conditions. To become a Participant in the Plan, an
Employee must satisfy the following eligibility conditions:
[Choose (a) or (b) or both; (c) is optional as an additional election]
[X] (a) Attainment of age 21 (specify age, not exceeding 21).
[X] (b) Service requirement. [Choose one of (1) through (3)]
[X] (1) One Year of Service.
[ ] (2) ___________________________________ months (not exceeding 12)
following the Employee's Employment Commencement Date.
[ ] (3) One Hour of Service.
[ ] (c) Special requirements for non-401(k) portion of plan. [Make elections
under (1) and under (2)]
(1) The requirements of this Option (c) apply to participation in:
[Choose at least one of (i) through (iii)]
[ ] (i) The allocation of Employer nonelective contributions and
Participant forfeitures.
[ ] (ii) The allocation of Employer matching contributions (including
forfeitures allocated as matching contributions).
[ ] (iii) The allocation of Employer qualified nonelective contributions.
(2) For participation in the allocations described in (1), the eligibility
conditions are:
[Choose at least one of (i) through (iv)]
[ ] (i) _________ (one or two) Year(s)of Service, without an
intervening Break in Service (as described in Section
2.03(A) of the Plan) if the requirement is two Years of
Service.
[ ] (ii) _________________________________ months (not exceeding 24)
following the Employee's Employment Commencement Date.
[ ] (iii) One Hour of Service.
[ ] (iv) Attainment of age __________________. (Specify age, not
exceeding 21.)
Plan Entry Date. "Plan Entry Date" means the Effective Date and: [Choose (d),
(e) or (f)]
[ ] (d) Semi-annual Entry Dates. The first day of the Plan Year and the first
day of the seventh month of the Plan Year.
[ ] (e) The first day of the Plan Year.
[X] (f) (Specify entry dates): As of 1/1, 4/1, 7/1 and 10/1.
Time of Participation. An Employee will become a Participant [and, if
applicable, will participate in the allocations described in Option (c)(1)],
unless excluded under Adoption Agreement Section 1.07, on the Plan Entry Date
(if employed on that date): [Choose (g), (h) or (i)]
[X] (g) immediately following
[ ] (h) immediately preceding
[ ] (i) nearest
the date the Employee completes the eligibility conditions described in Options
(a) and (b) [or in Option (c)(2) if applicabl of this Adoption Agreement
Section 2.01. [Note: The Employer must coordinate the selection of (g), (h) or
(i) with the "Plan Entry Date" selection in (d), (e) or (f). Unless otherwise
excluded under Section 1.07, the Employee must become a Participant by the
earlier of: (1) the first day of the Plan Year beginning after the date the
Employee completes the age and service requirements of Code Section 410(a); or
(2) 6 months after the date the Employee completes those requirements.]
Dual eligibility. The eligibility conditions of this Section 2.01 apply to:
[Choose (j) or (k)]
[X] (j) All Employees of the Employer, except:
(Choose (1) or (2)]
[X] (1) No exceptions.
[ ] (2) Employees who are Participants in the Plan as of the Effective Date.
[ ] (k) Solely to an Employee employed by the Employer after ________________.
If the Employee was employed by the Employer on or before the specified
date, the Employee will become a Participant: [Choose (1), (2) or (3)]
[ ] (1) On the latest of the Effective Date, his Employment Commencement
Date or the date he attains age (not to exceed 21).
[ ] (2) Under the eligibility conditions in effect under the Plan
prior to the restated Effective Date. If the restated Plan
required more than one Year of Service to participate, the
eligibility condition under this Option (2) for participation in
the Code Section 401(k) arrangement under this Plan is one Year of
Service for Plan Years beginning after December 31, 1988. (For
restated plans only.)
[ ] (3) (Specify) _______________________________________________________.
2.02 YEAR OF SERVICE - PARTICIPATION.
Hours of Service. An Employee must complete:
[Choose (a) or (b)]
[X](a) 1,000 Hours of Service.
[ ](b) _______________________Hours of Service during an eligibility
computation period to receive credit for Year of Service.
[Note: The Hours of Service requirement may not exceed 1,000.]
Eligibility computation period. After the initial eligibility computation
period described in Section 2.02 of the Plan, the Plan measures the eligibility
computation period as: [Choose (c) or (d)]
[X] (c) The 12 consecutive month period beginning with each anniversary of an
Employee's Employment Commencement Date.
[ ] (d) The Plan Year, beginning with the Plan Year which includes the first
anniversary of the Employee's Employment Commencement Date.
2.03 BREAK IN SERVICE - PARTICIPATION. The Break in Service rule described
in Section 2.03(B) of the Plan:
[Choose (a) or (b)]
[X] (a) Does not apply to the Employer's Plan.
[ ] (b) Applies to the Employer's Plan.
2.06 ELECTION NOT TO PARTICIPATE. The Plan: [Choose (a) or (b)]
[X] (a) Does not permit an eligible Employee or a Participant to elect not to
participate.
[ ] (b) Does permit an eligible Employee or a Participant to elect not to
participate in accordance with Section 2.06 and with the following
rules:
[Complete (1), (2), (3) and (4)]
(1) An election is effective for a Plan Year if filed no later than
______________________________. .
(2) An election not to participate must be effective for at least
__________ Plan Year(s).
(3) Following a reelection to participate, the Employee or Participant:
[ ] (i) May not again elect not to participate for any subsequent Plan Year.
[ ] (ii) May again elect not to participate, but not earlier than
_____________________ following the Plan Year in which the reelection
first was effective.
(4) (Specify) ___________________________________________________
____________________________________________________________.
(Insert "N/A" if no other rules apply.)
ARTICLE III
EMPLOYER CONTRIBUTIONS AND FORFEITURES
3.01 AMOUNT.
Part I. [Options (a) through (g)] Amount of Employer's
contribution. The Employer's annual contribution to the
Trust will equal the total amount of deferral contributions,
matching contributions, qualified nonelective contributions and
nonelective contributions, as determined under this Section 3.01.
[Choose any combination of (a), (b), (c) and (d), or choose (e)]
[X] (a) Deferral contributions (Code Section 401(k) arrangement). [Choose (1)
or (2) or both]
[X] (1) Salary reduction arrangement. The Employer must contribute the amount
by which the Participants have reduced their Compensation for the Plan
Year, pursuant to their salary reduction agreements on file with the
Advisory Committee. A reference in the Plan to salary reduction
contributions is a reference to these amounts.
[ ] (2) Cash or deferred arrangement. The Employer will contribute on behalf
of each Participant the portion of the Participant's proportionate
share of the cash or deferred contribution which he has not elected to
receive in cash. See Section 14.02 of the Plan. The Employer's cash
or deferred contribution is the amount the Employer may from time to
time deem advisable which the Employer designates as a cash or
deferred contribution prior to making that contribution to the Trust.
[X] (b) Matching contributions. The Employer will make matching
contributions in accordance with the formula(s) elected in Part II of
this Adoption Agreement Section 3.01.
[ ] (c) Designated qualified nonelective contributions. The Employer, in
its sole discretion, may contribute an amount which it designates as
a qualified nonelective contribution.
[ ] (d) Nonelective contributions.
[Choose any combination of (1) through (4)]
[ ] (1) Discretionary contribution. The amount (or additional amount) the
Employer may from time to time deem advisable.
[ ] (2) The amount (or additional amount) the Employer may from time to
time deem advisable, separately determined for each of the following
classifications of Participants: [Choose (i) or (ii)]
[ ] (i) Nonhighly Compensated Employees and Highly Compensated
Employees.
[ ] (ii)(Specify classifications.
Under this Option (2), the Advisory Committee will allocate the amount
contributed for each Participant classification in accordance with Part II of
Adoption Agreement Section 3.04, as if the Participants in that classification
were the only Participants in the Plan.
[ ] (3) ________________ % of the Compensation of all Participants under
the Plan, determined for the Employer's taxable year for which
it makes the contribution.
[Note: The percentage selected may not exceed 15%.]
[ ] (4) _________________% of Net Profits but not more than $________________.
[ ] (e) Frozen Plan. This Plan is a frozen Plan effective ____________. The
Employer will not contribute to the Plan with respect to any period
following the stated date.
Net Profits. The Employer: [Choose (f) or (g)]
[X] (f) Need not have Net Profits to make its annual contribution under this
Plan.
[ ] (g) Must have current or accumulated Net Profits exceeding $_____________
to make the following contributions: (Choose at least one)
[ ] (1) Cash or deferred contributions described in Option (a)(2).
[ ] (2) Matching contributions described in Option (b), except:
______________________________________________________________.
[ ] (3) Qualified nonelective contributions described in Option (c).
[ ] (4) Nonelective contributions described in Option (d).
The term "Net Profits" means the Employer's net income or profits for any
taxable year determined by the Employer upon the basis of its books of account
in accordance with generally accepted accounting practices consistently applied
without any deductions for Federal and state taxes upon income or for
contributions made by the Employer under this Plan or under any other employee
benefit plan the Employer maintains. The term "Net Profits" specifically
excludes N/A . [Note: Enter "N/A" if no exclusions apply.]
If the Employer requires Net Profits for matching contributions and the Employer
does not have sufficient Net Profits under Option (g), it will reduce the
matching contribution under a fixed formula on a prorata basis for all
Participants. A Participant's share of the reduced contribution will bear the
same ratio as the matching contribution the Participant would have received if
Net Profits were sufficient bears to the total matching contribution all
Participants would have received if Net Profits were sufficient. If more than
one member of a related group (as defined in Section 1.30) execute this Adoption
Agreement, each participating member will determine Net Profits separately but
will not apply this reduction unless, after combining the separately determined
Net Profits, the aggregate Net Profits are insufficient to satisfy the matching
contribution liability. "Net Profits" includes both current and accumulated Net
Profits.
Part II. [Options (h) through (j)] Matching contribution formula.
[Note: If the Employer elected Option (b), complete Options (h),
(i) and (j).]
[X] (h) Amount of matching contributions. For each Plan Year, the Employer's
matching contribution is:
[Choose any combination of (1), (2), (3), (4) and (5)]
[ ] (1) An amount equal to ________% of each Participant's eligible
contributions for the Plan Year.
[ ] (2) An amount equal to _____% of each Participant's first tier of
eligible contributions for the Plan Year, plus the following
matching percentage(s) for the following subsequent tiers of
eligible contributions for the Plan Year: ________.
[X] (3) Discretionary formula.
[X] (i) An amount (or additional amount) equal to a matching
percentage the Employer from time to time may deem
advisable of the Participant's eligible contributions
for the Plan Year.
[ ] (ii) An amount (or additional amount) equal to a
matching percentage the Employer from time to time may
deem advisable of each tier of the Participant's
eligible contributions for the Plan Year.
[ ] (4) An amount equal to the following percentage of each
Participant's eligible contributionsfor the Plan Year, based
on the Participant's Years of Service:
Number of Years of Service Matching Percentage
__________________________ ___________________
__________________________ ___________________
__________________________ ___________________
__________________________ ___________________
The Advisory Committee will apply this formula by determining Years of Service
as follows: _________________________________________________________________
______________________________________________________________________________.
[ ] (5) A Participant's matching contributions may not: [Choose (i) or (ii)]
[ ] (i) Exceed.
[ ] (ii) Be less than __________.
Related Employers. If two or more related employers (as defined in Section 1.30)
contribute to this Plan, the related employers may elect different matching
contribution formulas by attaching to the Adoption Agreement a separately
completed copy of this Part II. [Note: Separate matching contribution formulas
create separate current benefit structures that must satisfy the minimum
participation test of Code Section 401(a)(26).]
[X] (i) Definition of eligible contributions. Subject to the requirements
of Option (j), the term "eligible contributions "means:
[Choose any combination of (1) through (3)].
[X] (1) Salary reduction contributions.
[ ] (2) Cash or deferred contributions (including any part of
the Participant's proportionate share of the cash or deferred
contribution which the Employer defers without the
Participant's election).
[ ] (3) Participant mandatory contributions, as designated in Adoption
Agreement Section 4.01. See Section 14.04 of the Plan.
[X] (j) Amount of eligible contributions taken into account. When
determining a Participant's eligible contributions taken
into account under the matching contributions formula(s),
the following rules apply: [Choose any combination of (1)
through (4)]
[X] (1) The Advisory Committee will take into account all eligible
contributions credited for the Plan Year.
[ ] (2) The Advisory Committee will disregard eligible contributions
exceeding: ______________________.
[ ] (3) The Advisory Committee will treat as the first tier of eligible
contributions, an amount not exceeding: ________________________.
The subsequent tiers of eligible contributions are: _____________
_________________________________________________________________.
[ ] (4) (Specify) _______________________________________________________.
Part III. [Options (k) and (l)]. Special rules for Code Section 401(k)
Arrangement. [Choose (k) or (l), or both, as applicable]
[X] (k) Salary Reduction Agreements. The following rules and restrictions
apply to an Employee's salary reduction agreement:
[Make a selection under (1), (2), (3) and (4)]
(1) Limitation on amount. The Employee's salary reduction
contributions:
[Choose (i) or at least one of (ii) or (iii)]
[ ] (i) No maximum limitation other than as provided in the Plan.
[X] (ii) May not exceed 15% of Compensation for the Plan
Year, subject to the annual additions limitation described in
Part 2 of Article III and the 402(g)limitation described in
Section 14.07 of the Plan.
[X] (iii) Based on percentages of Compensation must equal at least 1%.
(2) An Employee may revoke, on a prospective basis, a salary reduction
agreement:
[Choose (i), (ii), (iii) or (iv)]
[ ] (i) Once during any Plan Year but not later than _______ of the Plan Year.
[ ] (ii) As of any Plan Entry Date.
[ ] (iii) As of the first day of any month.
[X] (iv) (Specify, but must be at least once per Plan Year) as of any
pay period with 30 days prior notice.
(3) An Employee who revokes his salary reduction agreement may
file a new salary reduction agreement with an effective date:
[Choose (i), (ii), (iii) or (iv)]
[ ] (i) No earlier than the first day of the next Plan Year.
[X] (ii) As of any subsequent Plan Entry Date.
[ ] (iii) As of the first day of any month subsequent to the month in which he
revoked an Agreement.
[ ] (iv) (Specify, but must be at least once per Plan Year following the Plan
Year of revocation) ________________________________________________.
(4) A Participant may increase or may decrease, on a prospective
basis, his salary reduction percentage or dollar amount:
[Choose (i), (ii), (iii) or (iv)]
[ ] (i) As of the beginning of each payroll period.
[ ] (ii) As of the first day of each month.
[X] (iii) As of any Plan Entry Date.
[ ] (iv) (Specify, but must permit an increase or a decrease at least once
per Plan Year:) ____________________________________________________.
[ ] (l) Cash or deferred contributions. For each Plan Year for which the
Employer makes a designated cash or deferred contribution, a
Participant may elect to receive directly in cash not more than the
following portion [or, if less, the 402(g) limitation described in
Section 14.07 of the Plan] of his proportionate share of that cash or
deferred contribution: [Choose (1) or (2)]
[ ] (1) All or any portion.
[ ] (2) _____________________%.
3.04 CONTRIBUTION ALLOCATION. The Advisory Committee will allocate
deferral contributions, matching contributions, qualified nonelective
contributions and nonelective contributions in accordance with Section
14.06 and the elections under this Adoption Agreement Section 3.04.
Part I. [Options (a) through (d)]. Special Accounting Elections. (Choose
whichever elections are applicable to the Employer's Plan)
[X] (a) Matching Contributions Account. The Advisory Committee will allocate
matching contributions to a Participant's:
[Choose (1) or (2); (3) is available only in addition to (1)]
[X] (1) Regular Matching Contributions Account.
[ ] (2) Qualified Matching Contributions Account.
[ ] (3) Except, matching contributions under Option(s) __________ of Adoption
Agreement Section 3.01 are allocable to the Qualified Matching
Contributions Account.
[X] (b) Special Allocation Dates for Salary Reduction Contributions. The
Advisory Committee will allocate salary reduction contributions
as of the Accounting Date and as of the following additional
allocation dates: monthly.
[X] (c) Special Allocation Dates for Matching Contributions. The Advisory
Committee will allocate matching contributions as of the
Accounting Date and as of the following additional allocation dates:
N/A.
[ ] (d) Designated Qualified Nonelective Contributions - Definition of
Participant. For purposes of allocating the designated
qualified nonelective contribution, "Participant" means:
[Choose (1), (2) or (3)]
[ ] (1) All Participants.
[ ] (2) Participants who are Nonhighly Compensated Employees for the Plan Year.
[ ] (3) (Specify) ____________________________________________________________.
Part II. Method of Allocation - Nonelective Contribution. Subject to any
restoration allocation required under Section 5.04, the Advisory Committee will
allocate and credit each annual nonelective contribution (and Participant
forfeitures treated as nonelective contributions) to the Employer Contributions
Account of each Participant who satisfies the conditions of Section 3.06, in
accordance with the allocation method selected under this Section 3.04. If the
Employer elects Option (e)(2), Option (g)(2) or Option (h), for the first 3% of
Compensation allocated to all Participants, "Compensation" does not include any
exclusions elected under Adoption Agreement Section 1.12 (other than the
exclusion of elective contributions), and the Advisory Committee must take into
account the Participant's Compensation for the entire Plan Year. [Choose an
allocation method under (e), (f), (g) or (h); (i) is mandatory if the Employer
elects (f), (g) or (h); (j) is optional in addition to any other election.]
[ ] (e) Non-integrated Allocation Formula. [Choose (1) or (2)]
[ ] (1) The Advisory Committee will allocate the annual nonelective
contributions in the same ratio that each Participant's
Compensation for the Plan Year bears to the total Compensation of
all Participants for the Plan Year.
[ ] (2) The Advisory Committee will allocate the annual nonelective
contributions in the same ratio that each Participant's
Compensation for the Plan Year bears to the total Compensation of
all Participants for the Plan Year. For purposes of this Option
(2), "Participant" means, in addition to a Participant who
satisfies the requirements of Section 3.06 for the Plan Year, any
other Participant entitled to a top heavy minimum allocation under
Section 3.04(B), but such Participant's allocation will not exceed
3% of his Compensation for the Plan Year.
[ ] (f) Two-Tiered Integrated Allocation Formula - Maximum Disparity.
First, the Advisory Committee will allocate the annual Employer
nonelective contributions in the same ratio that each Participant's
Compensation plus Excess Compensation for the Plan Year bears to the
total Compensation plus Excess Compensation of all Participants for the
Plan Year. The allocation under this paragraph, as a percentage of each
Participant's Compensation plus Excess Compensation, must not exceed
the applicable percentage (5.7%, 5.4% or 4.3%) listed under the Maximum
Disparity Table following Option (i).
The Advisory Committee then will allocate any remaining nonelective
contributions in the same ratio that each Participant's Compensation
for the Plan Year bears to the total Compensation of all Participants
for the Plan Year.
[ ] (g) Three-Tiered Integrated Allocation Formula. First, the Advisory
Committee will allocate the annual Employer nonelective contributions
in the same ratio that each Participant's Compensation for the Plan
Year bears to the total Compensation of all Participants for the Plan
Year. The allocation under this paragraph, as a percentage of each
Participant's Compensation may not exceed the applicable percentage
(5.7%, 5.4% or 4.3%) listed under the Maximum Disparity Table following
Option (i). Solely for purposes of the allocation in this first
paragraph, "Participant" means, in addition to a Participant who
satisfies the requirements of Section 3.06 for the Plan Year: [Choose
(1) or (2)]
[ ] (1) No other Participant.
[ ] (2) Any other Participant entitled to a top heavy minimum
allocation under Section 3.04(B), but such Participant's
allocation under this Option (g) will not exceed 3% of his
Compensation for the Plan Year.
As a second tier allocation, the Advisory Committee will allocate the
nonelective contributions in the same ratio that each Participant's Excess
Compensation for the Plan Year bears to the total Excess Compensation of all
Participants for the Plan Year. The allocation under this paragraph, as a
percentage of each Participant's Excess Compensation, may not exceed the
allocation percentage in the first paragraph.
Finally, the Advisory Committee will allocate any remaining nonelective
contributions in the same ratio that each Participant's Compensation for the
Plan Year bears to the total Compensation of all Participants for the Plan Year.
[ ] (h) Four-Tiered Integrated Allocation Formula. First, the Advisory
Committee will allocate the annual Employer nonelective contributions
in the same ratio that each Participant's Compensation for the Plan
Year bears to the total Compensation of all Participants for the Plan
Year, but not exceeding 3% of each Participant's Compensation. Solely
for purposes of this first tier allocation, a "Participant" means, in
addition to any Participant who satisfies the requirements of Section
3.06 for the Plan Year, any other Participant entitled to a top heavy
minimum allocation under Section 3.04(B) of the Plan.
As a second tier allocation, the Advisory Committee will allocate the
nonelective contributions in the same ratio that each Participant's Excess
Compensation for the Plan Year bears to the total Excess Compensation of all
Participants for the Plan Year, but not exceeding 3% of each Participant's
Excess Compensation.
As a third tier allocation, the Advisory Committee will allocate the annual
Employer contributions in the same ratio that each Participant's Compensation
plus Excess Compensation for the Plan Year bears to the total Compensation plus
Excess Compensation of all Participants for the Plan Year. The allocation under
this paragraph, as a percentage of each Participant's Compensation plus Excess
Compensation, must not exceed the applicable percentage (2.7%, 2.4% or 1.3%)
listed under the Maximum Disparity Table following Option (i).
The Advisory Committee then will allocate any remaining nonelective
contributions in the same ratio that each Participant's Compensation for the
Plan Year bears to the total Compensation of all Participants for the Plan Year.
[ ] (i) Excess Compensation. For purposes of Option (f), (g) or (h),
"Excess Compensation" means Compensation in excess of the following
Integration Level: [Choose (1) or (2)]
[ ] (1) ____________________% (not exceeding 100%) of the taxable wage base,
as determined under Section 230 of the Social Security Act, in
effect on the first day of the Plan Year: [Choose any combination
of (i) and (ii) or choose (iii)]
[ ] (i) Rounded to _________________ (but not exceeding the taxable wage
base).
[ ] (ii) But not greater than $_________________.
[ ] (iii) Without any further adjustment or limitation.
[ ] (2) $__________________________________
[Note: Not exceeding the taxable wage base for the Plan Year in which
this Adoption Agreement first is effective.]
Maximum Disparity Table. For purposes of Options (f), (g) and (h), the
applicable percentage is:
Integration Level Applicable Percentages Applicable
(as percentage of for Option (f) Percentages
taxable wage base) or Option (g) for Option (h)
100% 5.7% 2.7%
More than 80%
but less than 100% 5.4% 2.4%
More than 20%
(but not less than
$10,001) and not
more than 80% 4.3% 1.3%
20% (or $10,000,
if greater) 5.7% 2.7%
or less
[ ] (j) Allocation offset. The Advisory Committee will reduce a
Participant's allocation otherwise made under Part II of this
Section 3.04 by the Participant's allocation under the following
qualified plan(s) maintained by the Employer:
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________.
The Advisory Committee will determine this allocation reduction:
[Choose (1) or (2)]
[ ] (1) By treating the term "nonelective contribution" as including all
amounts paid or accrued by the Employer during the Plan Year to the
qualified plan(s) referenced under this Option (j). If a
Participant under this Plan also participates in that other plan,
the Advisory Committee will treat the amount the Employer contributes
for or during a Plan Year on behalf of a particular Participant under
such other plan as an amount allocated under this Plan to that
Participant's Account for that Plan Year. The Advisory Committee
will make the computation of allocation required under the
immediately preceding sentence before making any allocation of
nonelective contributions under this Section 3.04.
[ ] (2) In accordance with the formula provided in an addendum to this
Adoption Agreement, numbered 3.04(j).
Top Heavy Minimum Allocation - Method of Compliance. If a Participant's
allocation under this Section 3.04 is less than the top heavy minimum allocation
to which he is entitled under Section 3.04(B): [Choose (k) or (l)]
[X] (k) The Employer will make any necessary additional contribution to the
Participant's Account, as described in Section 3.04(B)(7)(a) of the
Plan.
[ ] (l) The Employer will satisfy the top heavy minimum allocation under the
following plan(s) it maintains:______________________________________.
However, the Employer will make any necessary additional contribution
to satisfy the top heavy minimum allocation for an employee covered
only under this Plan and not under the other plan(s) designated in this
Option (l). See Section 3.04(B)(7)(b) of the Plan.
If the Employer maintains another plan, the Employer may provide in an addendum
to this Adoption Agreement, numbered Section 3.04, any modifications to the Plan
necessary to satisfy the top heavy requirements under Code Section 416.
Related employers. If two or more related employers (as defined in Section 1.30)
contribute to this Plan, the Advisory Committee must allocate all Employer
nonelective contributions (and forfeitures treated as nonelective contributions)
to each Participant in the Plan, in accordance with the elections in this
Adoption Agreement Section 3.04: [Choose (m) or (n)]
[X] (m) Without regard to which contributing related group member employs the
Participant.
[ ] (n) Only to the Participants directly employed by the contributing
Employer. If a Participant receives Compensation from more than one
contributing Employer, the Advisory Committee will determine the
allocations under this Adoption Agreement Section 3.04 by prorating
among the participating Employers the Participant's Compensation and,
if applicable, the Participant's Integration Level under Option (i).
3.05 FORFEITURE ALLOCATION. Subject to any restoration allocation required
under Sections 5.04 or 9.14, the Advisory Committee will allocate a
Participant forfeiture in accordance with Section 3.04:
[Choose (a) or (b); (c) and (d) are optional in addition to (a) or (b)]
[ ] (a) As an Employer nonelective contribution for the Plan Year in
which the forfeiture occurs, as if the Participant forfeiture were an
additional nonelective contribution for that Plan Year.
[ ] (b) To reduce the Employer matching contributions and nonelective
contributions for the Plan Year:
[Choose (1) or (2)]
[ ] (1) in which the forfeiture occurs.
[ ] (2) immediately following the Plan Year in which the forfeiture occurs.
[ ] (c) To the extent attributable to matching contributions: [Choose (1), (2)
or (3)].
[ ] (1) In the manner elected under Options (a) or (b).
[ ] (2) First to reduce Employer matching contributions for the Plan Year:
[Choose (i) or (ii)]
[ ] (i) in which the forfeiture occurs.
[ ] (ii) immediately following the Plan Year in which the
forfeiture occurs, then as elected in Options (a) or (b).
[ ] (3) As a discretionary matching contribution for the Plan Year in which
the forfeiture occurs, in lieu of the manner elected under Options
(a) or (b).
[ ] (d) First to reduce the Plan's ordinary and necessary administrative
expenses for the Plan Year and then will allocate any remaining
forfeitures in the manner described in Options (a), (b) or (c),
whichever applies.
If the Employer elects Option (c), the forfeitures used to reduce Plan expenses:
[Choose (1) or (2)]
[ ] (1) relate proportionately to forfeitures described in Option (c) and to
forfeitures described in Options (a) or (b).
[ ] (2) relate first to forfeitures described in Option ____________.
Allocation of forfeited excess aggregate contributions. The Advisory Committee
will allocate any forfeited excess aggregate contributions (as described in
Section 14.09): [Choose (e), (f) or (g)]
[X] (e) To reduce Employer matching contributions for the Plan Year:
[Choose (1) or (2)].
[ ] (1) in which the forfeiture occurs.
[X] (2) immediately following the Plan Year in which the forfeiture
occurs.
[ ] (f) As Employer discretionary matching contributions for the Plan
Year in which forfeited, except the Advisory Committee will not
allocate these forfeitures to the Highly Compensated Employees who
incurred the forfeitures.
[ ] (g) In accordance with Options (a) through (d), whichever applies,
except the Advisory Committee will not allocate these forfeitures under
Option (a) or under Option (c)(3) to the Highly Compensated Employees
who incurred the forfeitures.
3.06 ACCRUAL OF BENEFIT.
Compensation taken into account. For the Plan Year in which the
Employee first becomes a Participant, the Advisory Committee will
determine the allocation of any cash or deferred contribution,
designated qualified nonelective contribution or nonelective
contribution by taking into account: [Choose (a) or (b)]
[ ] (a) The Employee's Compensation for the entire Plan Year.
[X] (b) The Employee's Compensation for the portion of the Plan Year in which
the Employee actually is a Participant in the Plan.
Accrual Requirements. Subject to the suspension of accrual requirements of
Section 3.06(E) of the Plan, to receive an allocation of cash or deferred
contributions, matching contributions, designated qualified nonelective
contributions, nonelective contributions and Participant forfeitures, if any,
for the Plan Year, a Participant must satisfy the conditions described in the
following elections: [Choose (c) or at least one of (d) through (f)]
[ ] (c) Safe harbor rule. If the Participant is employed by the Employer
on the last day of the Plan Year, the Participant must complete at
least one Hour of Service for that Plan Year. If the Participant is not
employed by the Employer on the last day of the Plan Year, the
Participant must complete at least 501 Hours of Service during the Plan
Year.
[X] (d) Hours of Service condition. The Participant must complete the
following minimum number of Hours of Service during the Plan Year:
[Choose at least one of (1) through (5)]
[X] (1) 1,000 Hours of Service.
[ ] (2) (Specify, but the number of Hours of Service may not exceed 1,000)
____________________________.
[X] (3) No Hour of Service requirement if the Participant terminates
employment during the Plan Year on account of:
[Choose (i), (ii) or (iii)]
[X] (i) Death.
[X] (ii) Disability.
[X] (iii) Attainment of Normal Retirement Age in the current Plan Year or in a
prior Plan Year.
[ ] (4) ______ Hours of Service (not exceeding 1,000) if the Participant
terminates employment with the Employer during the Plan Year,
subject to any election in Option (3).
[ ] (5) No Hour of Service requirement for an allocation of the following
contributions: ___________________.
[X] (e) Employment condition. The Participant must be employed by the
Employer on the last day of the Plan Year, irrespective of whether
he satisfies any Hours of Service condition under Option (d),
with the following exceptions:
[Choose (1) or at least one of (2) through (5)]
[ ] (1) No exceptions.
[X] (2) Termination of employment because of death.
[X] (3) Termination of employment because of disability.
[X] (4) Termination of employment following attainment of Normal Retirement Age.
[ ] (5) No employment condition for the following contributions: _____________.
[ ] (f) (Specify other conditions, if applicable) ____________________________
______________________________________________________________________.
Suspension of Accrual Requirements. The suspension of accrual requirements of
Section 3.06(E) of the Plan:
[Choose (g), (h) or (i)]
[X] (g) Applies to the Employer's Plan.
[ ] (h) Does not apply to the Employer's Plan.
[ ] (i) Applies in modified form to the Employer's Plan, as described in
an addendum to this Adoption Agreement, numbered Section 3.06(E).
Special accrual requirements for matching contributions. If the Plan allocates
matching contributions on two or more allocation dates for a Plan Year, the
Advisory Committee, unless otherwise specified in Option (l), will apply any
Hours of Service condition by dividing the required Hours of Service on a
prorata basis to the allocation periods included in that Plan Year. Furthermore,
a Participant who satisfies the conditions described in this Adoption Agreement
Section 3.06 will receive an allocation of matching contributions (and
forfeitures treated as matching contributions) only if the Participant satisfies
the following additional condition(s):
[Choose (j) or at least one of (k) or (l)]
[X] (j) No additional conditions.
[ ] (k) The Participant is not a Highly Compensated Employee for the Plan Year.
This Option (k) applies to:
[Choose (1) or (2)]
[ ] (1) All matching contributions.
[ ] (2) Matching contributions described in Option(s)_______________of Adoption
Agreement Section 3.01.
[ ] (l) (Specify) ___________________________________________________________
_____________________________________________________________________
_____________________________________________________________________.
3.15 MORE THAN ONE PLAN LIMITATION. If the provisions of Section 3.15
apply, the Excess Amount attributed to this Plan equals:
[Choose (a), (b) or (c)]
[ ] (a) The product of:
(i) the total Excess Amount allocated as of such date (including any
amount which the Advisory Committee would have allocated but for
the limitations of Code Section 415), times.
(ii) the ratio of (1) the amount allocated to the Participant as of
such date under this Plan divided by (2) the total amount
allocated as of such date under all qualified defined contribution
plans (determined without regard to the limitations of Code
Section 415).
[ ] (b) The total Excess Amount.
[X] (c) None of the Excess Amount.
3.18 DEFINED BENEFIT PLAN LIMITATION.
Application of limitation. The limitation under Section 3.18 of the
Plan: [Choose (a) or (b)]
[X] (a) Does not apply to the Employer's Plan because the Employer does
not maintain and never has maintained a defined benefit plan covering
any Participant in this Plan.
[ ] (b) Applies to the Employer's Plan. To the extent necessary to satisfy
the limitation under Section 3.18, the Employer will reduce:
[Choose (1) or (2)]
[ ] (1) The Participant's projected annual benefit under the defined benefit
plan under which the Participant participates.
[ ] (2) Its contribution or allocation on behalf of the Participant to the
defined contribution plan under which the Participant participates and
then, if necessary, the Participant's projected annual benefit under
the defined benefit plan under which the Participant participates.
[Note: If the Employer selects (a), the remaining options in this Section 3.18
do not apply to the Employer's Plan.]
Coordination with top heavy minimum allocation. The Advisory Committee will
apply the top heavy minimum allocation provisions of Section 3.04(B) of the Plan
with the following modifications: [Choose (c) or at least one of (d) or (e)]
[ ] (c) No modifications.
[ ] (d) For Non-Key Employees participating only in this Plan, the top
heavy minimum allocation is the minimum allocation described in Section
3.04(B) determined by substituting ____%(not less than 4%) for "3%,"
except: [Choose (i) or (ii)].
[ ] (i) No exceptions.
[ ] (ii) Plan Years in which the top heavy ratio exceeds 90%.
[ ] (e) For Non-Key Employees also participating in the defined benefit plan,
the top heavy minimum is: [Choose (1) or (2)]
[ ] (1) 5% of Compensation (as determined under Section 3.04(B) of the Plan)
irrespective of the contribution rate of any Key Employee, except:
[Choose (i) or (ii)]
[ ] (i) No exceptions.
[ ] (ii) Substituting "7 1/2%" for "5%" if the top heavy ratio does
not exceed 90%.
[ ](2) 0%.
[Note: The Employer may not select this Option (2) unless the
defined benefit plan satisfies the top heavy minimum benefit
requirements of Code Section 416 for these Non-Key Employees.]
Actuarial Assumptions for Top Heavy Calculation. To determine the top heavy
ratio, the Advisory Committee will use the following interest rate and mortality
assumptions to value accrued benefits under a defined benefit plan: __________.
If the elections under this Section 3.18 are not appropriate to satisfy the
limitations of Section 3.18, or the top heavy requirements under Code
Section 416, the Employer must provide the appropriate provisions in an
addendum to this Adoption Agreement.
ARTICLE IV
PARTICIPANT CONTRIBUTIONS
4.01 PARTICIPANT NONDEDUCTIBLE CONTRIBUTIONS. The Plan:
[Choose (a) or (b); (c) is available only with (b)]
[X] (a) Does not permit Participant nondeductible contributions.
[ ] (b) Permits Participant nondeductible contributions, pursuant to Section
14.04 of the Plan.
[ ] (c) The following portion of the Participant's nondeductible contributions
for the Plan Year are mandatory contributions under Option (i)(3) of
Adoption Agreement Section 3.01: [Choose (1) or (2)]
[ ] (1) The amount which is not less than: _____________.
[ ] (2) The amount which is not greater than: __________.
Allocation dates. The Advisory Committee will allocate nondeductible
contributions for each Plan Year as of the Accounting Date and the following
additional allocation dates: [Choose (d) or (e)]
[ ] (d) No other allocation dates.
[ ] (e) (Specify) __________________________________________________________
____________________________________________________________________.
As of an allocation date, the Advisory Committee will credit all nondeductible
contributions made for the relevant allocation period. Unless otherwise
specified in (e), a nondeductible contribution relates to an allocation period
only if actually made to the Trust no later than 30 days after that allocation
period ends.
4.05 PARTICIPANT CONTRIBUTION - WITHDRAWAL/DISTRIBUTION. Subject to the
restrictions of Article VI, the following distribution options
apply to a Participant's Mandatory Contributions Account, if any,
prior to his Separation from Service:
[Choose (a) or at least one of (b) through (d)]
[ ] (a) No distribution options prior to Separation from Service.
[ ] (b) The same distribution options applicable to the Deferral
Contributions Account prior to the Participant's Separation from
Service, as elected in Adoption Agreement Section 6.03.
[ ] (c) Until he retires, the Participant has a continuing election to
receive all or any portion of his Mandatory Contributions Account if:
[Choose (1) or at least one of (2) through (4)]
[ ] (1) No conditions.
[ ] (2) The mandatory contributions have accumulated for at least _________
Plan Years since the Plan Year for which contributed.
[ ] (3) The Participant suspends making nondeductible contributions for a
period of _____________ months.
[ ] (4) (Specify) _________________________________________________________
___________________________________________________________________.
[ ] (d) (Specify) _________________________________________________________
___________________________________________________________________.
ARTICLE V
TERMINATION OF SERVICE - PARTICIPANT VESTING
5.01 NORMAL RETIREMENT. Normal Retirement Age under the Plan is:
[Choose (a) or (b)]
[ ] (a) (State age, but may not exceed age 65) _______________.
[X] (b) The later of the date the Participant attains 65 years of age or
the 5th anniversary of the first day of the Plan Year in which the
Participant commenced participation in the Plan. (The age selected may
not exceed age 65 and the anniversary selected may not exceed the 5th.)
5.02 PARTICIPANT DEATH OR DISABILITY. The 100% vesting rule under Section
5.02 of the Plan:
[Choose (a) or choose one or both of (b) and (c)]
[ ] (a) Does not apply.
[X] (b) Applies to death.
[X] (c) Applies to disability.
5.03 VESTING SCHEDULE.
Deferral Contributions Account/Qualified Matching Contributions
Account/Qualified Nonelective Contributions Account/Mandatory
Contributions Account. A Participant has a 100% Nonforfeitable
interest at all times in his Deferral Contributions Account, his
Qualified Matching Contributions Account, his Qualified Nonelective
Contributions Account and in his Mandatory Contributions Account.
Regular Matching Contributions Account/Employer Contributions Account. With
respect to a Participant's Regular Matching Contributions Account and Employer
Contributions Account, the Employer elects the following vesting schedule:
[Choose (a) or (b); (c) and (d) are available only as additional option)]
[ ] (a) Immediate vesting. 100% Nonforfeitable at all times. [Note: The
Employer must elect Option (a) if the eligibility conditions under
Adoption Agreement Section 2.01(c) require 2 years of service or more
than 12 months of employment.]
[X] (b) Graduated Vesting Schedules.
Top Heavy Schedule
(Mandatory)
Years of Nonforfeitable
Service Percentage
------------- -----------------
Less than 1 0
1 25
2 50
3 75
4 100
5 -----
6 or more
Non Top Heavy Schedule
(Optional)
Years of Nonforfeitable
Service Percentage
----------------- ------------------
Less than 1 _______
1 _______
2 _______
3 _______
4 _______
5 _______
6 _______
7 or more 100%
[ ] (c) Special vesting election for Regular Matching Contributions Account.
In lieu of the election under Options (a) or (b), the Employer elects
the following vesting schedule for a Participant's Regular Matching
Contributions Account: [Choose (1) or (2)]
[ ] (1) 100% Nonforfeitable at all times.
[ ] (2) In accordance with the vesting schedule described in the addendum to
this Adoption Agreement, numbered 5.03(c).
[Note: If the Employer elects this Option (c)(2), the addendum must
designate the applicable vesting schedule(s) using the same format
as used in Option (b).]
[Note: Under Options (b) and (c)(2), the Employer must complete a Top Heavy
Schedule which satisfies Code Section 416. The Employer, at its option, may
complete a Non Top Heavy Schedule. The Non Top Heavy Schedule must satisfy
Code Section 411(a)(2). Also see Section 7.05 of the Plan.]
[ ] (d) The Top Heavy Schedule under Option (b) [and, if applicable, under
Option (c)(2)] applies:
[Choose (1) or (2)]
[ ] (1) Only in a Plan Year for which the Plan is top heavy.
[ ] (2) In the Plan Year for which the Plan first is top heavy and then in all
subsequent Plan Years.
[Note: The Employer may not elect Option (d) unless it has completed a Non Top
Heavy Schedule.]
Minimum vesting. [Choose (e) or (f)]
[X] (e) The Plan does not apply a minimum vesting rule.
[ ] (f) A Participant's Nonforfeitable Accrued Benefit will never be less
than the lesser of ________ or his entire Accrued Benefit,
even if the application of a graduated vesting schedule under
Options (b) or (c) would result in a smaller Nonforfeitable Accrued
Benefit.
Life Insurance Investments. The Participant's Accrued Benefit attributable to
insurance contracts purchased on his behalf under Article XI is: [Choose (g) or
(h)] N/A
[ ] (g) Subject to the vesting election under Options (a), (b) or (c).
[ ] (h) 100% Nonforfeitable at all times, irrespective of the vesting election
under Options (b) or (c)(2).
5.04 CASH-OUT DISTRIBUTIONS TO PARTIALLY-VESTED PARTICIPANTS/RESTORATION OF
FORFEITED ACCRUED BENEFIT. The deemed cash-out rule described in
Section 5.04(C) of the Plan: [Choose (a) or (b)]
[X] (a) Does not apply.
[ ] (b) Will apply to determine the timing of forfeitures for 0% vested
Participants. A Participant is not a 0% vested Participant if he has
a Deferral Contributions Account.
5.06 YEAR OF SERVICE - VESTING.
Vesting computation period. The Plan measures a Year of Service on the
basis of the following 12 consecutive month periods:
[Choose (a) or (b)]
[ ] (a) Plan Years.
[X] (b) Employment Years. An Employment Year is the 12 consecutive
month period measured from the Employee's Employment Commencement Date
and each successive 12 consecutive month period measured from each
anniversary of that Employment Commencement Date. Hours of Service.
The minimum number of Hours of Service an Employee must complete during
a vesting computation period to receive credit for a Year of Service
is: [Choose (c) or (d)]
[ ] (c) 1,000 Hours of Service.
[ ] (d) _____ Hours of Service.
[Note: The Hours of Service requirement may not exceed 1,000.]
5.08 INCLUDED YEARS OF SERVICE - VESTING. The Employer specifically
excludes the following Years of Service: [Choose (a) or at least one
of (b) through (e)]
[X] (a) None other than as specified in Section 5.08(a) of the Plan.
[ ] (b) Any Year of Service before the Participant attained the age of_____.
[Note: The age selected may not exceed age 18.]
[ ] (c) Any Year of Service during the period the Employer did not maintain this
Plan or a predecessor plan.
[ ] (d) Any Year of Service before a Break in Service if the number of
consecutive Breaks in Service equals or exceeds the greater of 5 or the
aggregate number of the Years of Service prior to the Break. This
exception applies only if the Participant is 0% vested in his Accrued
Benefit derived from Employer contributions at the time he has a Break
in Service. Furthermore, the aggregate number of Years of Service
before a Break in Service do not include any Years of Service not
required to be taken into account under this exception by reason of
any prior Break in Service.
[ ] (e) Any Year of Service earned prior to the effective date of ERISA
if the Plan would have disregarded that Year of Service on account of
an Employee's Separation from Service under a Plan provision in effect
and adopted before January 1, 1974.
ARTICLE VI
TIME AND METHOD OF PAYMENTS OF BENEFITS
Code Section 411(d)(6) Protected Benefits. The elections under this Article VI
may not eliminate Code Section 411(d)(6) protected benefits. To the extent the
elections would eliminate a Code Section 411(d)(6) protected benefit, see
Section 13.02 of the Plan. Furthermore, if the elections liberalize the
optional forms of benefit under the Plan, the more liberal options apply on the
later of the adoption date or the Effective Date of this Adoption Agreement.
6.01 TIME OF PAYMENT OF ACCRUED BENEFIT.
Distribution date. A distribution date under the Plan means the first
day of the month following request for distribution, or as soon as
administratively feasible [Note: The Employer must specify the
appropriate date(s). The specified distribution dates primarily
establish annuity starting dates and the notice and consent periods
prescribed by the Plan. The Plan allows the Trustee an
administratively practicable period of time to make the actual
distribution relating to a particular distribution date.]
Nonforfeitable Accrued Benefit Not Exceeding $3,500. Subject to the
limitations of Section 6.01(A)(1), the distribution date for distribution of
a Nonforfeitable Accrued Benefit not exceeding $3,500 is: [Choose (a), (b),
(c), (d) or (e)]
[ ] (a) ________________________________________ of the________________
Plan Year beginning after the Participant's Separation from Service.
[ ] (b) ________________________________________ following the Participant's
Separation from Service.
[ ] (c) ________________________________________ of the Plan Year after the
Participant incurs _____________________________ Break(s) in Service
(as defined in Article V).
[ ] (d) ________________________________________ following the Participant's
attainment of Normal Retirement Age, but not earlier than __________
days following his Separation from Service.
[X] (e) (Specify) The first administratively feasible date after the
end of the quarter in which the participant separates from service.
Nonforfeitable Accrued Benefit Exceeds $3,500. See the elections under Section
6.03.
Disability. The distribution date, subject to Section 6.01(A)(3), is: [Choose
(f), (g) or (h)]
[ ] (f) after the Participant terminates employment because of disability.
[X] (g) The same as if the Participant had terminated employment without
disability.
[ ] (h) (Specify) _______________________________________________________.
Hardship. [Choose (i) or (j)]
[X] (i) The Plan does not permit a hardship distribution to a Participant
who has separated from Service.
[ ] (j) The Plan permits a hardship distribution to a Participant who has
separated from Service in accordance with the hardship
distribution policy stated in:
[Choose (1), (2) or (3)]
[ } (1) Section 6.01(A)(4) of the Plan.
[ ] (2) Section 14.11 of the Plan.
[ ] (3) The addendum to this Adoption Agreement, numbered Section 6.01.
Default on a Loan. If a Participant or Beneficiary defaults on a loan made
pursuant to a loan policy adopted by the Advisory Committee pursuant to Section
9.04, the Plan: [Choose (k), (l) or (m)]
[X] (k) Treats the default as a distributable event. The Trustee, at the
time of the default, will reduce the Participant's Nonforfeitable
Accrued Benefit by the lesser of the amount in default (plus accrued
interest) or the Plan's security interest in that Nonforfeitable
Accrued Benefit. To the extent the loan is attributable to the
Participant's Deferral Contributions Account, Qualified Matching
Contributions Account or Qualified Nonelective Contributions Account,
the Trustee will not reduce the Participant's Nonforfeitable Accrued
Benefit unless the Participant has separated from Service or unless the
Participant has attained age 59 1/2.
[ ] (l) Does not treat the default as a distributable event. When an
otherwise distributable event first occurs pursuant to Section 6.01 or
Section 6.03 of the Plan, the Trustee will reduce the Participant's
Nonforfeitable Accrued Benefit by the lesser of the amount in default
(plus accrued interest) or the Plan's security interest in that
Nonforfeitable Accrued Benefit.
[ ] (m) (Specify) __________________________________________________________
____________________________________________________________________.
6.02 METHOD OF PAYMENT OF ACCRUED BENEFIT. The Advisory Committee will
apply Section 6.02 of the Plan with the following modifications:
[Choose (a) or at least one of (b), (c), (d) and (e)]
[X] (a) No modifications.
[ ] (b) Except as required under Section 6.01 of the Plan, a lump sum
distribution is not available: ________________________________
____________________________________________________________________.
[ ] (c) An installment distribution:
[Choose (1) or at least one of (2) or (3)]
[ ] (1) Is not available under the Plan.
[ ] (2) May not exceed the lesser of ______________________________ years or
the maximum period permitted under Section 6.02.
[ ] (3) (Specify)_____________________________________________________________.
[ ] (d) The Plan permits the following annuity options: ___________________
____________________________________________________________________.
Any Participant who elects a life annuity option is subject to the requirements
of Sections 6.04(A),(B), (C) and (D) of the Plan. See Section 6.04(E).
[Note: The Employer may specify additional annuity options in an addendum to
this Adoption Agreement, numbered 6.02(d).]
[ ] (e) If the Plan invests in qualifying Employer securities, as
described in Section 10.03(F), a Participant eligible to elect
distribution under Section 6.03 may elect to receive that distribution
in Employer securities only in accordance with the provisions of the
addendum to this Adoption Agreement, numbered 6.02(e).
6.03 BENEFIT PAYMENT ELECTIONS.
Participant Elections After Separation from Service. A Participant
who is eligible to make distribution elections under Section 6.03 of
the Plan may elect to commence distribution of his Nonforfeitable
Accrued Benefit: [Choose at least one of (a) through (c)]
[ ] (a) As of any distribution date, but not earlier than _________ of the
______ Plan Year beginning after the Participant's Separation
from Service.
[X] (b) As of the following date(s):
[Choose at least one of Options (1) through (6)]
[ ] (1) Any distribution date after the close of the Plan Year in which the
Participant attains Normal Retirement Age.
[ ] (2) Any distribution date following his Separation from Service with the
Employer.
[ ] (3) Any distribution date in the __________________________________ Plan
Year(s) beginning after his Separation from Service.
[ ] (4) Any distribution date in the Plan Year after the Participant incurs
__________ Break(s) in Service (as defined in Article V).
[ ] (5) Any distribution date following attainment of ____ age _____ and
completion of at least _____________________ Years of Service (as
defined in Article V).
[X] (6) (Specify) As of any distribution date, or as soon as administratively
feasible ____________________________________________________________.
[ ] (c) (Specify) ___________________________________________________________.
The distribution events described in the election(s) made under Options (a), (b)
or (c) apply equally to all Accounts maintained for the Participant unless
otherwise specified in Option (c).
Participant Elections Prior to Separation from Service - Regular Matching
Contributions Account and Employer Contributions Account. Subject to the
restrictions of Article VI, the following distribution options apply to a
Participant's Regular Matching Contributions Account and Employer Contributions
Account prior to his Separation from Service:
[Choose (d) or at least one of (e) through (h)]
[ ] (d) No distribution options prior to Separation from Service.
[ ] (e) Attainment of Specified Age. Until he retires, the Participant has a
continuing election to receive all or any portion of his
Nonforfeitable interest in these Accounts after he attains: [Choose (1)
or (2)]
[ ] (1) Normal Retirement Age.
[X] (2) 59 1/2 years of age and is at least 100% vested in these Accounts.
[Note: If the percentage is less than 100%, see the special vesting
formula in Section 5.03.]
[ ] (f) After a Participant has participated in the Plan for a period of not
less than _____ years and he is 100% vested in these Accounts, until he
retires, the Participant has a continuing election to receive all or
any portion of the Accounts.
[Note: The number in the blank space may not be less than 5.]
[X] (g) Hardship. A Participant may elect a hardship distribution prior
to his Separation from Service in accordance with the hardship
distribution policy:
[Choose (1), (2) or (3); (4) is available only as an additional option]
[ ] (1) Under Section 6.01(A)(4) of the Plan.
[X] (2) Under Section 14.11 of the Plan.
[ ] (3) Provided in the addendum to this Adoption Agreement, numbered Section
6.03.
[ ] (4) In no event may a Participant receive a hardship distribution before he
is at least _____% vested in these Accounts.
[Note: If the percentage in the blank is less than 100%, see the
special vesting formula in Section 5.03.]
[ ] (h) (Specify) __________________________________________________________
___________________________________________________________________.
[Note: The Employer may use an addendum, numbered 6.03, to provide additional
language authorized by Options (b)(6), (c),(g)(3) or (h) of this Adoption
Agreement Section 6.03.]
Participant Elections Prior to Separation from Service - Deferral Contributions
Account, Qualified Matching Contributions Account and Qualified Nonelective
Contributions Account. Subject to the restrictions of Article VI, the following
distribution options apply to a Participant's Deferral Contributions Account,
Qualified Matching Contributions Account and Qualified Nonelective Contributions
Account prior to his Separation from Service: [Choose (i) or at least one of (j)
through (l)]
[ ] (i) No distribution options prior to Separation from Service.
[X] (j) Until he retires, the Participant has a continuing election to
receive all or any portion of these Accounts after he attains:
[Choose (1) or (2)]
[ ] (1) The later of Normal Retirement Age or age 59 1/2.
[X] (2) Age 59 1/2 (at least 59 1/2).
[X] (k) Hardship. A Participant, prior to this Separation from Service,
may elect a hardship distribution from his Deferral Contributions
Account in accordance with the hardship distribution policy under
Section 14.11 of the Plan.
[ ] (l) (Specify) _________________________________________________________
___________________________________________________________________.
[Note: Option (l) may not permit in service distributions prior to
age 59 1/2 (other than hardship) and may not modify the hardship
policy described in Section 14.11.]
Sale of trade or business/subsidiary. If the Employer sells substantially all of
the assets [within the meaning of Code Section 409(d)(2)] used in a trade or
business or sells a subsidiary [within the meaning of Code Section 409(d)(3)],
a Participant who continues employment with the acquiring corporation is
eligible for distribution from his Deferral Contributions Account, Qualified
Matching Contributions Account and Qualified Nonelective Contributions Account:
[Choose (m) or (n)].
[X] (m) Only as described in this Adoption Agreement Section 6.03 for
distributions prior to Separation from Service.
[ ] (n) As if he has a Separation from Service. After March 31, 1988, a
distribution authorized solely by reason of this Option (n) must
constitute a lump sum distribution, determined in a manner
consistent with Code Section 401(k)(10) and the applicable Treasury
regulations.
6.04 ANNUITY DISTRIBUTIONS TO PARTICIPANTS AND SURVIVING SPOUSES. The
annuity distribution requirements of Section 6.04: [Choose (a) or
(b)]
[X] (a) Apply only to a Participant described in Section 6.04(E) of the Plan
(relating to the profit sharing exception to the joint and survivor
requirements).
[ ] (b) Apply to all Participants.
ARTICLE IX
ADVISORY COMMITTEE - DUTIES WITH RESPECT TO PARTICIPANTS' ACCOUNTS
9.10 VALUE OF PARTICIPANT'S ACCRUED BENEFIT. If a distribution (other than
a distribution from a segregated Account and other than a corrective
distribution described in Sections 14.07, 14.08, 14.09 or 14.10 of the
Plan) occurs more than 90 days after the most recent valuation date,
the distribution will include interest at: [Choose (a), (b) or (c)]
[X] (a) -0-% per annum.
[Note: The percentage may equal 0%.]
[ ] (b) The 90 day Treasury bill rate in effect at the beginning of the
current valuation period.
[ ] (c) (Specify)___________________________________________________________
___________________________________________________________________.
9.11 ALLOCATION AND DISTRIBUTION OF NET INCOME GAIN OR LOSS. Pursuant
to Section 14.12, to determine the allocation of net income, gain
or loss: (Complete only those items, if any, which are applicable to
the Employer's Plan)
[X] (a) For salary reduction contributions, the Advisory Committee will:
[Choose (1), (2), (3), (4) or (5)]
[ ] (1) Apply Section 9.11 without modification.
[ ] (2) Use the segregated account approach described in Section 14.12.
[X] (3) Use the weighted average method described in Section 14.12, based
on a daily weighting period.
[ ] (4) Treat as part of the relevant Account at the beginning of the
valuation period ____% of the salary reduction contributions:
[Choose (i) or (ii)]
[ ] (i) made during that valuation period.
[ ] (ii) made by the following specified time: _____________________________
___________________________________________________________________.
[ ] (5) Apply the allocation method described in the addendum to this Adoption
Agreement numbered 9.11(a).
[X] (b) For matching contributions, the Advisory Committee will: [Choose (1),
(2), (3) or (4)]
[ ] (1) Apply Section 9.11 without modification.
[X] (2) Use the weighted average method described in Section 14.12, based on a
daily weighting period.
[ ] (3) Treat as part of the relevant Account at the beginning of the valuation
period ___________% of the matching contributions allocated during the
valuation period.
[ ] (4) Apply the allocation method described in the addendum to this Adoption
Agreement numbered 9.11(b).
[ ] (c) For Participant nondeductible contributions, the Advisory Committee
will: [Choose (1), (2), (3), (4) or (5)]
[ ] (1) Apply Section 9.11 without modification.
[ ] (2) Use the segregated account approach described in Section 14.12.
[ ] (3) Use the weighted average method described in Section 14.12, based on a
_____________________ weighting period.
[ ] (4) Treat as part of the relevant Account at the beginning of the valuation
period___________________% of the Participant nondeductible
contributions: [Choose (i) or (ii)]
[ ] (i) made during that valuation period.
[ ] (ii) made by the following specified time: _________________________
________________________________________________________________.
[ ] (5) Apply the allocation method described in the addendum to this Adoption
Agreement numbered 9.11(c).
ARTICLE X
TRUSTEE AND CUSTODIAN, POWERS AND DUTIES
10.03 INVESTMENT POWERS. Pursuant to Section 10.03[F] of the Plan, the
aggregate investments in qualifying Employer securities and in
qualifying Employer real property:
[Choose (a) or (b)]
[X] (a) May not exceed 10% of Plan assets.
[ ] (b) May not exceed _______% of Plan assets. [Note: The percentage may not
exceed 100%.]
10.14 VALUATION OF TRUST. In addition to each Accounting Date, the Trustee
must value the Trust Fund on the following valuation date(s):
[Choose (a) or (b)]
[ ] (a) No other mandatory valuation dates.
[X] (b) (Specify) 3/31, 6/30 and 9/30.
EFFECTIVE DATE ADDENDUM
(Restated Plans Only)
The Employer must complete this addendum only if the restated Effective Date
specified in Adoption Agreement Section 1.18 is different than the restated
effective date for at least one of the provisions listed in this addendum. In
lieu of the restated Effective Date in Adoption Agreement Section 1.18, the
following special effective dates apply: (Choose whichever elections apply)
[ ] (a) Compensation definition. The Compensation definition of Section 1.12
(other than the $200,000 limitation) is effective for Plan Years
beginning after ____________________________.
[Note: May not be effective later than the first day of the first
Plan Year beginning after the Employer executes this Adoption
Agreement to restate the Plan for the Tax Reform Act of 1986, if
applicable.]
[ ] (b) Eligibility conditions. The eligibility conditions specified in
Adoption Agreement Section 2.01 are effective for Plan Years beginning
after _____________________________.
[ ] (c) Suspension of Years of Service. The suspension of Years of
Service rule elected under Adoption Agreement Section 2.03 is effective
for Plan Years beginning after ____________________________________ .
[ ] (d) Contribution/allocation formula. The contribution formula elected
under Adoption Agreement Section 3.01 and the method of allocation
elected under Adoption Agreement Section 3.04 is effective for Plan
Years beginning after ________________________ .
[ ] (e) Accrual requirements. The accrual requirements of Section 3.06 are
effective for Plan Years beginning after __________________________.
-
[ ] (f) Employment condition. The employment condition of Section 3.06 is
effective for Plan Years beginning after ___________________________
____________________________________________________________________.
[ ] (g) Elimination of Net Profits. The requirement for the Employer not
to have net profits to contribute to this Plan is effective for Plan
Years beginning after ________________________________________________.
[Note: The date specified may not be earlier than December 31, 1985.]
[ ] (h) Vesting Schedule. The vesting schedule elected under Adoption
Agreement Section 5.03 is effective for Plan Years
beginning after _____________________________________________________.
[ ] (i) Allocation of Earnings. The special allocation provisions elected
under Adoption Agreement Section 9.11 are effective for Plan Years
beginning after ____________________________________________________ .
[ ] (j) (Specify) _______________________________________________________.
For Plan Years prior to the special Effective Date, the terms of the
Plan prior to its restatement under this Adoption Agreement will control
for purposes of the designated provisions. A special Effective Date
may not result in the delay of a Plan provision beyond the
permissible Effective Date under any applicable law requirements.
Execution Page
The Trustee (and Custodian, if applicable), by executing this Adoption
Agreement, accepts its position and agrees to all of the obligations,
responsibilities and duties imposed upon the Trustee (or Custodian) under the
Master Plan and Trust. The Employer hereby agrees to the provisions of this Plan
and Trust, and in witness of its agreement, the Employer by its duly authorized
officers, has executed this Adoption Agreement, and the Trustee (and Custodian,
if applicable) signified its acceptance, on this ____________________ day of
________________, 19__.
Name and EIN of Employer: ____________________________________________________
______________________________________________________________________________
Signed: ______________________________________________________________________
Name(s) of Trustee: DEAN WITTER TRUST COMPANY
Signed: ______________________________________________________________________
Name of Custodian: ___________________________________________________________
Signed: ______________________________________________________________________
[Note: A Trustee is mandatory, but a Custodian is optional. See Section 10.03
of the Plan.]
Plan Number. The 3-digit plan number the Employer assigns to this Plan for
ERISA reporting purposes (Form 5500 Series)is: 001.
Use of Adoption Agreement. Failure to complete properly the elections in this
Adoption Agreement may result in disqualification of the Employer's Plan. The
3-digit number assigned to this Adoption Agreement is solely for the Master Plan
Sponsor's recordkeeping purposes and does not necessarily correspond to the plan
number the Employer designated in the prior paragraph.
Master Plan Sponsor. The Master Plan Sponsor identified on the first page of the
basic plan document will notify all adopting employers of any amendment of this
Master Plan or of any abandonment or discontinuance by the Master Plan Sponsor
of its maintenance of this Master Plan. For inquiries regarding the adoption of
the Master Plan, the Master Plan Sponsor's intended meaning of any plan
provisions or the effect of the opinion letter issued to the Master Plan
Sponsor, please contact the Master Plan Sponsor at the following address and
telephone number: Dean Witter, 5 World Trade Center, NYC, NY 10048 - (212)
392-2222.
Reliance on Opinion Letter. The Employer may not rely on the Master Plan
Sponsor's opinion letter covering this Adoption Agreement. For reliance on the
Plan's qualification, the Employer must obtain a determination letter from the
applicable IRS Key District office.
_____________________________________________________
(Plan Administrator's Dean Witter VIP Account Number)
PARTICIPATION AGREEMENT
For Participation by Related Group Members (Plan Section 1.30)
The undersigned Employer, by executing this Participation Agreement, elects
to become a Participating Employer in the Plan identified in Section 1.03 of the
accompanying Adoption Agreement, as if the Participating Employer were a
signatory to that Agreement. The Participating Employer accepts, and agrees to
be bound by, all of the elections granted under the provisions of the Master
Plan as made by, the Signatory Employer to the Execution Page of the Adoption
Agreement.
1. The Effective Date of the undersigned Employer's participation in the
designated Plan is: _________________________________________________.
2. The undersigned Employer's adoption of this Plan constitutes:
[ ](a) The adoption of a new plan by the Participating Employer.
[ ](b) The adoption of an amendment and restatement of a plan
currently maintained by the Employer, identified as
_________________________________________________________
_________________________________________________________,
and having an original effective date of ________________.
Dated this __________________________________ day of _______, 19_____.
Name of Participating Employer: ____________________________________________
____________________________________________________________________________
Signed: /s/ Daniel J. Barsky
--------------------------------------------------------------------
Participating Employer's EIN: ______________________________________________
Acceptance by the Signatory Employer to the Execution Page of the Adoption
Agreement and by the Trustee.
Name of Signatory Employer: ________________________________________________
____________________________________________________________________________
Signed : _________________________________________Date _____________________
Name(s) of Trustee: Dean Witter Trust Company ______________________________
____________________________________________________________________________
Signed: /s/John Van Heuvelen Date 10/31/97
------------------------------------ ----------------
[Note: Each Participating Employer must execute a separate Participation
Agreement. See the Execution Page of the Adoption Agreement for important
Master Plan information.]
SUB-LEASE FOR TRANSPONDER CAPACITY ON ASTRA 1D SATELLITE - TRANSPONDER 54
(4 HOURS EVERYDAY STARTING FROM 0000 HRS)
THIS AGREEMENT is made the 2nd day of May, 1997 BETWEEN:
1. ASIA TV LIMITED of Unit 8, Belvue Business Centre, Belvue Road, Northolt,
Middlesex UB5 5QQ, ("the Lessor")
and
2. THE HOME VIDEO CHANNEL LIMITED of Aquis House, Station Road, Hayes,
Middlesex UB3 4DX (the "Guarantor")
and
3. SPICE ENTERTAINMENT COMPANIES, INC. of 536 Broadway, New York, NY 10012,
USA (the "Sub-Lessee").
WHEREAS:
A. By a Contract for the use of Transponder Capacity dated 26th December 1994
between Societe Europeenne des Satellites SA ("SES") and the Lessor, SES
granted to the Lessor the right to use a transponder on an ASTRA satellite
for the unidirectional transmission and relay of the Lessor's uplink
signals carrying the Television Service (as define therein) on the terms
set out therein.
B. The Lessor has agreed (subject always to the consent of SES and to the
terms of this Agreement) to sub-let the said transponder exclusively for
four hours per day to the Sub-Lessee to enable the Sub-Lessee to make use
of the transponder for the Sub-Lessee's Television Service and the
Sub-Lessee has agreed to undertake certain duties and obligations as
hereinafter specified.
C. SES has consented to the Lessor sub-leasing such rights to the Sub-Lessee
pursuant to a letter agreement between the Lessor and SES date [ ].
NOW IT IS HEREBY AGREED AS FOLLOWS:
1. DEFINITIONS.
1.1 Unless the context otherwise requires the following
expressions shall have the following meanings:
(i) "the contract" means the contract (as the same may be amended from time
to time) for the use of Transponder Capacity dated 26th December 1994
between SES and the Lessor in respect of Transponder 54 on ASTRA
satellite 1D or such other transponder as may be allocated to the
Lessor pursuant to that contract;
(ii) "the Term" means the period commencing on 1st June 1997 and continuing
thereafter until the lawful termination of this Agreement;
(iii) "the Transponder" means such transponder as SES shall make available to
Lessor pursuant to the terms of the Contract;
(iv) "Rights" means all rights of the Lessor under the Contract;
(v) "the Television Service" means the Sub-Lessee's television programmes
(including advertisements) comprising video and associated audio
signals transmitted to viewers in one direction only as such service is
specifically described in Schedule 2 attached and currently known as
"the Adult Channel";
(vi) "Transmission Period" means four (4) hours starting from 0000 hours
(midnight) UK local time every day during the Term, and during which
the Television Service will commence a minimum of two (2) minutes after
the Lessor's service (ZEE TV) broadcast ends;
(vii) "The Charge" shall mean the amounts payable in accordance with clause 3
of this Agreement.
(viii) "Associate" shall mean officer, employee, customer, service provider,
consultant, supplier, agent, contract, sub-contractor, including the
operator of the Television service, if any, and the uplink service
providers;
(ix) "Sub-Lessee's Signals" shall mean the baseband signals, carrying the
Television Service, produced by the Sub-Lessee and transmitted to the
Uplink Facilities for onward transmission via the Transponder and
conforming to Schedule II of the Contract;
(x) "Sub-Licencee's Uplink Signal" shall mean the uplink signals
transmitted from the Uplink Facilities to the Transponder and
conforming to Schedule II of the Contract;
(xi) "Uplink Facilities" shall mean all equipment and ancillary facilities
used to transmit the Sub-Lessee's Uplink Signals to the Satellite
conforming to Schedule II of the Contract;
(xii) "Satellite" shall mean the satellite on which the transponder is sited.
1.2 The expressions "Degradation," "Minimum Transponder Performance,"
"Pre-emption," "Received Signal Power" and "Spare TWTA" defined in clause 1 of
the Contract shall have the same meaning where used in this Agreement.
2. GRANT OF SUBLEASE.
2.1 In consideration of the Sub-Lessee paying the Charge to the
Lessor as set out in clause 3 below and subject to the consent of SES continuing
during the Term, the Lessor hereby grants to the Sub-Lessee the full and
exclusive right during the Term to use the Transponder in order to broadcast the
Television Service during the Transmission Period. For the avoidance of doubt,
the rights herein granted to the Sub-Lessee are in respect of the use of the
Transponder for the Television Service and for no other purpose whatsoever.
2.2 The Sub-Lessee's Television Service shall commence at least two
minutes after the Lessor's service (ZEE TV) ends and in any event not before
0002 hours UK local time. For the first two (2) minutes of the Transmission
Period the Sub-Lessee shall transmit the following:
(a) For the first 30 seconds a screen with colour bars, a clock and with
the words "Next Service Starts";
(b) For the next 30 seconds the name of the Sub-Lessee's service will be
included in the colour bar screen;
(c) For the next 60 seconds a warning regarding the contents and the start
of the Sub-Lessee's Television Service; and
Any change to the above shall be with the prior written consent of the
Lessor, such consent not to be unreasonably withheld.
2.3 The Lessor hereby consents to a change in the name of The
Television Service that incorporates Spice or Spice combined with The Adult
Channel. Approval of any other change in name of the Television service shall
not be unreasonably withheld.
2.4 For the avoidance of doubt and notwithstanding anything to the
contrary contained in this Agreement, the Sub-Lessee shall have no greater
rights against the Lessor in respect of the use of the Transponder that the
Lessor shall have against SES by virtue of the Contract. This clause 2.4 does
not affect the terms of clause B.
2.5 In the event the Lessor obtains the use of an alternate transponder or in
the case of digital - part transponder either on the ASTRA satellites or any
other satellite, the Lessor shall, if possible, offer to the Sub-Lessee the
rights to use the alternate transponder or part transponder for the Transmission
Period on terms and conditions to be agreed between the parties.
2.6 The Sub-Lessee hereby acknowledges for the avoidance of doubt that
the Lessor shall not be responsible for providing any uplinking services and/or
facilities to the Sub-Lessee for its Television Service. The Sub-Lessee shall be
responsible and liable for providing its own uplinking service and facilities
for its Television Service.
3. CHARGE
3.1 The Charge shall be the sum of 1,125,000.00 Pounds (Pounds One
Million One Hundred Twenty Five Thousand only) per annum and shall be due and
payable quarterly in advance. The sum of 93,750.00 Pounds (Pounds Ninety Three
Thousand Seven Hundred and Fifty only) representing the Charge for one month
shall be due and payable on execution of this Agreement. The sum of 187,500.00
Pounds (Pounds One Hundred Eighty Seven Thousand and Five Hundred only)
representing the balance amount due for the first quarter and thereafter for
each subsequent quarter, the quarterly Charge, shall be due and payable seven
(7) working days before the commencement of the relevant quarter and the
sub-Lessee shall ensure that the Lessor is in receipt of cleared funds on or
before the seventh working day of each relevant quarter. The Charge is to be
pro-rated for period of less than a quarter on expiry or termination. On the
first anniversary of this Agreement and on each anniversary thereafter, the
Charge is to be increased by a percentage equal to the percentage increase in
the UK RPI as published by Her majesty's Government for the previous twelve (12)
months.
3.2 The Charge payable is expressed exclusive of VAT which shall be
payable upon delivery of a proper VAT invoice.
3.3 If the Sub-lessee fails to pay the Charge within the period
referred to in clause 3.1 above, the Lessor shall, without prejudice to its
other rights, be entitled to charge interest at a rate of four(4) percent per
annum above the base lending rate of National Westminster Bank Plc on all
amounts calculated on a daily basis (both before and after judgment) from the
date the Charge is due and payable until payment.
3A. Guarantee.
3A.1 In consideration of the Sub-Lessee entering into this Agreement,
the Guarantor hereby unconditionally guarantees to the Lessor and its
successors, transferees and assigns as primary obligor and not as surety the due
proper and punctual performance and observance by the Sub-Lessee of all the
Sub-Lessee's obligations to the Lessors contained in or arising under this
Agreement or arising from any termination or breach of this Agreement.
3A.2 If the Sub-Lessee shall make default in the payment when due of
any amount payable to the Lessor under this Agreement or arising from the
termination or breach thereof, the Guarantor shall forthwith on demand by the
Lessor unconditionally pay to the Lessor an amount equal to the amount payable
by the Sub-Lessee.
3A.3 As an independent and primary obligation, without prejudice to
Clause 3A.1 the Guarantor hereby unconditionally and irrevocably agrees to
indemnify the Lessor and keep it indemnified against all and any loss, costs,
claims, liabilities, damages, demands and expenses suffered or incurred by the
Lessor arising from any failure of the Sub-Lessee to comply with any of its
obligations under this Agreement or by reason of the Sub-Lessee not being at any
time, or ceasing to be, liable in respect of the obligations and liabilities
purported to be assumed by it in accordance with the terms of this Agreement.
3A.4 The guarantee and indemnity contained in this clause [3A] shall be
a continuing guarantee and indemnity and shall continue in full force and effect
until all obligations of the Sub-Lessee arising under this Agreement and all
monies owing or payable or purported to be owing or payable by the Sub-Lessee
under this Agreement or arising from any termination or breach thereof have been
paid, discharged or satisfied in full and notwithstanding any insolvency of the
Sub-Lessee.
3A.5 No release, settlement, discharge or arrangement which may at any
time be given or made in relation to the liabilities of the Sub-Lessee under
this Agreement or in relation to any termination or breach thereof shall
prejudice or affect the rights of the Lessor to recover from the Guarantor to
the full extent of the guarantee and indemnity contained in clause [ ].
3A.6 The guarantee and indemnity contained in this clause [3A] will be
subject to the limitations of liability contained in clause 8 as if, for these
purposes, the Sub-Lessee were replace in that clause by the Gurantor.
X. DEGRADATION
X.1 Where pursuant to clause 6.1 of the contract the Lessor receives a
payment from SES due to the Degradation of the Transponder during any period
which includes the Transmission Period on any day, the Lessor shall pay to the
Sub-Lessee a part of that payment calculated in accordance with the following
formula:
a/b x P
where:
"P" is the payment received by the Lessor from SES;
"b" is the total number of hours of Degradation in respect of which the
rebate paid by SES has been calculated.
"a" is the total number of hours (being part of the total in respect of
which the rebate has been calculated) of Degradation which are also part of any
Transmission Period.
X.2 Degradation shall not constitute a breach of Contract on the part
of Lessor. Save as set out in [X.1], Sub-Lessee shall have no right or remedy
against Lessor in the event of Degradation.
Y. UNAVAILABILITY
Y.1 The Transponder shall be regarded as unavailable if:
Y.1.1 the Received Signal Power falls below the Minimum
Transponder Performance by more than 1.5 dB;
Y.1.2 the interruption of the Television Service by reason
of any matter describe in clause 9.1(iii) of the Contract exceeds thirty minutes
in any calendar quarter;
Y.1.3 any failure of the satellite on which the Transponder
is sited causes an interruption of transmission of the Television Service;
and the expression "Unavailable" and "Unavailability" shall be construed
accordingly.
Y.2 Where pursuant to clause 7.2 of he Contract the Lessor receives a
payment from SES due to the Unavailability of the Transponder during any period
which includes the Transmission Period on any day, the Lessor shall pay to the
Sub-Lessee a part of that payment calculated in accordance with the following
formula:
a/b x P
where:
"P" is the payment received y the Lessor from SES;
"b" is the total number of hours of Unavailability in respect of which
the rebate paid by SES has been calculated;
"a" is the total number of hours (being part of the total in respect of
which the rebate has been calculate) of Unavailability which are also
part of any Transmission Period.
Y.3 If the Transponder become Unavailable for (i) a period of 30 or
more consecutive days, or (ii) a continuous period of at least fifteen minutes
per day and such Unavailability occurs during thirty or more days (whether
consecutive or not) in any 90 day period, then the Sub-Lessee may terminate this
Agreement in which case clause [ ] shall apply [rebate of forward payments].
Y.4 Unavailability shall not constitute a breach of contract on the
part of Lessor. Clauses [Y.2] and [Y.3] shall be the Sub-Lessee's sole remedies
in the event of Unavailability and Lessor shall have no further obligation to
Sub-Lessee by reason of the Unavailability.
Z. EXCLUDING CIRCUMSTANCES.
Clauses X.1, Y.2 and Y.3 shall not apply:
Z.1 to a Degradation of Unavailability caused by an act or
omission of the Sub-Lessee or any of its Associates;
Z.2 where the Sub-Lessee's Signal, the Sub-Lessee's Uplink Signals or
the Uplink Facilities do not comply with Schedule II of the Contract or where
the Sub-Lessee's Signals are not received by the Uplink Facilities or the
Sub-Lessee's Uplink Signals are not received by the Transponder due to no fault
of SES or the Lessor.
ZZ. INTERRUPTION, TESTING AND MONITORING.
ZZ.1 SES shall be entitled to interrupt the Television Service and to
require that Sub-Lessee cease transmission of the Sub-Lessee Uplink Signals in
the circumstances set out in clause 9.1 of the Contract. Any such interruption
or cessation of transmission shall not constitute a breach of contract on the
part of Lessor. Sub-Lessee covenants with Lessor that it will cooperate with SES
and Lessor where such interruption or cessation is required by SES.
ZZ.2 Lessor or SES shall not be entitled to interrupt the Television
Service or to require the Sub-Lessee to cease transmission of the Sub-Lessee
Uplink Signal if the Sub-Lessee is in breach of its obligations hereunder.
ZZ.3 Sub-Lessee will procure that the operator of the Uplink Facilities
shall assist SES in making any tests to ensure that such Facilities and the
Sub-Lessee Uplink Signals comply with Schedule II of the Contract and do not
interfere with or damage the Satellite or any of its Transponders.
A. PRE-EMPTION.
A.1 The Sub-Lessee shall be subject to the rules of the pre-emptability
set out in Schedule VII of the Contract and no action taken by SES pursuant to
that Schedule shall result in the Lessor being in breach of this Agreement.
A.2 In the event that the Lessor become a non-pre-emptable customer of
SES pursuant to the provisions of clause 10.2 of the Contract, the Sub-Lessee
shall not be subject to the provisions of Schedule VII-D of the Contract.
B. USE OF TRANSPONDER.
B.1 The Sub-Lessee shall procure that the Sub-Lessee Signals and
Sub-Lessee Uplink Signals and Uplink Facilities comply with Schedule II of the
Contract and do not interfere with or damage the Satellite or any of its
transponders.
B.2 The Sub-Lessee shall not use the Transponder in any way not
specified in this Agreement.
BB. LIMITED ALTERNATIVE TRANSPONDER CAPACITY OFFERED BY SES
BB.1 In the event that the Transponder is pre-empted, Degrades or is Unavailable
and SES offers to Lessor the use of an alternative Transponder but for less than
24 hours on any day, then if that alternative capacity is accepted by Lessor and
the replacement transponder is available during any day for any part of the
Transmission Period and if SES so consent, Sub-Lessee shall be entitle to the
exclusive use of the replacement transponder for the broadcast of the Television
Service insofar as the transponder is available during the Transmission Period
or any part or parts of it on any day and such use shall be governed by the
terms of this Agreement.
BB.2 For the avoidance of doubt, where a replacement transponder is
made available to Lessor in the circumstances envisaged by [BB.1], Lessor shall
not be obliged to permit the use by Sub-Lessee of that transponder where an dot
the extent that the transponder is available outside of the Transmission Period
on any day.
BB.3 Where a replacement transponder is made available to Lessor in the
circumstances envisaged by [BB.1], the parties will negotiate in good faith with
a view to assisting each other fairly in the amelioration of any detriment cause
by such circumstances or by the terms of this clause.
C. AUTOMATIC TERMINATION DUE TO SES LOSS OF FRANCHISE.
C.1 This Agreement shall automatically terminate in the even the
Contract is terminated pursuant to clause 13 thereof. In the event of such
termination of this Agreement, the Lessor shall be discharged of all liability
and obligation to the Sub-Lessee save in respect of breaches occurring prior to
the termination.
4. LESSOR'S WARRANTIES AND UNDERTAKINGS.
4.1 The Lessor hereby warrant and undertakes that it possess full power
and authority to enter into and perform this Agreement and that it will
throughout the Term comply with the terms of the Contract and use its reasonable
endeavours to maintain all consents granted by SES.
4.2 The Lessor shall not amend the Contract so as to prejudice the
rights of the Sub-lessee unless it is required by SES. The Lessor shall
immediately notify the Sub-Lessee of any such proposed amendments and will at
the request of the Sub-Lessee use its reasonable endeavours to resist such
proposed amendments at the sole expense and cost of the Sub-Lessee.
4.3 Lessor undertakes forthwith to pass on to Sub-Lessee any notice other
information received by it from SES in relation to the Contract where such
information could reasonably be expected to have detrimental impact on the
business of Sub-Lessee including (without limitation) notice of change of
pre-emptability status, notice of down time, notice of sun spot activity, notice
of spare capacity, notices of interruption, Unavailability and pre-emption and
information obtained from SES's monitoring of the same, provided that Lessor
shall not be obliged to pass on any material which is commercially sensitive or
confidential to it.
5. SUB-LESSEE'S WARRANTIES AND UNDERTAKINGS.
The Sub-Lessee hereby warrants and undertake throughout the Term:
(a) that it possess full power and authority to enter into and
perform this Agreement and that it has not and will not during
the Term enter into an agreement or arrangement which does or
might tend to limit the full performance of its obligations
hereunder and that it is and will remain in full compliance
with all applicable laws and regulations;
(b) that it has and will retain SES's consent to transmit its
service on the Transponder and that SES has given its prior
approval to the use of the Videocrypt encryption system;
(c) comply in all respects with Clause 12 of the Contract as if
references in that clause to the "Customer" were references to
"the Sub-Lessee," references to the "Agreement" were
references to this Agreement, reference to "SES" were a
reference to "the Lessor" and references to the Television
Service shall mean that Service as defined herein.
(d) that it or its wholly-owned subsidiary (the "Guarantor") will
remain the broadcaster of the Television Service and will be
responsible for obtaining and ensuring compliance with the
terms of its non-domestic satellite license issued by the
Independent Television Commission;
(e) that it shall be fully responsible for the content of the
Television service and shall be solely responsible for
obtaining all necessary consents and licenses for the use of
all material contained or utilized in the Television Service
without limitation all copyright contractual and regulatory
clearances necessary for the encryption and broadcast of the
Television service and all material comprised in the same;
(f) that the Television Service will comply with the ITC Code of
programming and all other ITC guidelines, notifications; and
does not and will not contain material which is defamatory or
which will or might expose the Lessor and/or SES to any
proceedings whatsoever of a civil nature from third parties or
to criminal proceedings.
(g) that not more than the first ten (10) minutes of the
Sub-Lessee service may be unencrypted and that such
unencrypted service shall comply with the ITC Code of
Programming and all other ITC guidelines, notifications; and
such service shall not be defamatory;
(h) that it shall seek the prior written consent and approval of
the Less or should it decide to make any reference to the
Lessor or to See TV in marketing, promoting or advertising its
Television Service or that its service is available
immediately after the Lessor's service or after ZEE TV; and
(i) to provide free of charge to the Lessor each a total of three
smart cards to receive the Television Service in order that
the Lessor may monitor the Television Service. HVC
Acknowledges that it has already provided smart cards to SES
to enable it to monitor its Service and if SES requires
further cards or decoding equipment it will provide the same
to SES for such monitoring purposes and
(j) For the avoidance of doubt, that it will not in any way
restrict or prevent use of the Transponder by the Lessor
during any period outside the Transmission period.
6. INDEMNITIES.
The Sub-Lessee shall indemnify and hold harmless the Lessor against all
liabilities, claims, demands, action, expenses costs (including all legal costs
on an indemnity basis as between solicitor and client), damages and losses in
respect of any damage to the Lessor or any liability to any third party for
which the Lessor is liable in either case arising directly from any breach of
any obligation representation or warranty, by the Sub-Lessee hereunder. This is
subject to clause 8.
7. TERMINATION.
7.1 This Agreement shall automatically terminate in the event that
the Contract expires by effluxion of time.
7.2 Either party shall be entitled to terminate this Agreement
forthwith by notice of writing if the other:
(a) is in material breach of its obligations hereunder
and such breach is incapable of remedy or is not
remedied (if capable of remedy) within thirty (30)
days of receipt of written notice specifying the
breach and requiring it to be remedied;
(b) goes into receivership or liquidation (other than for
the purposes of amalgamation or reconstruction) or
becomes insolvent or makes any composition or
arrangement with its creditors.
7.2 Either Party shall be entitled to terminate this Agreement by
giving six months notice to the other party without giving any reason, such
notice not to expire within 18 months from 1st June 1997.
7.3 The Lessor shall be entitled to terminate this Agreement forthwith
by notice in writing at any time to the Sub-Lessee upon the occurrence of any of
the following events:
(a) if the sub-Lessee has not paid the Charge owed within seven
(7) days of the commencement of the relevant quarter after
receipt of a notice from the Lessor requiring payment, such
notice to be served at any time after the Charge has become
due and payable in accordance with clause 3.1;
(b) if the Sub-Lessee is in material breach of the terms and
conditions of the Contract and the Lessor has requested
compliance in writing by notice and this has not been complied
with within thirty (30) days. For the avoidance of doubt,
temporary technical failures of the Television Service, the
uplink, the encryption of the two minute opening screens
(referred to in clause 2.2 of this Agreement) shall not
constitute a material breach of this Agreement unless such
failure lasts for 30 days or more;
(c) if the Contract is terminated for any reason other than a
breach of the Contract by the Lessor and is not replaced
forthwith by a contract with an alternative carrier which
would allow the Lessor to sub-lease to the Sub-Lessee rights
similar to the rights in this Agreement at no extra cost and
otherwise on terms reasonably comparable to those contained
herein;
(d) if the consent of SES to the grant of the rights contemplated
in clause above is withdrawn for any reason, subject to clause
4.1;
(e) if the sub-Lessee does not comply with the Television Service
description as set out in Schedule II within fourteen (14)
days of SES, through the Lessor, requesting compliance in
writing:
7.4 If this Agreement or the Contract is terminated by either party
for any reason during a quarter which has not expired and or which the
Sub-Lessee has paid the Charge in accordance with clause 3 and the Agreement or
Contract is not replaced forthwith, the Lessor shall within fourteen (14) days
repay to the Sub-Lessee the Charge pro-rated for the remainder of that quarter
PROVIDED THAT the Lessor shall not be prevented from setting off any such sum
due to the Sub-Lessee against such liability as Sub-Lessee may have to it by
reason of any breach of this Agreement. Interest at the rate of four (4) percent
per annum about the base lending rate of Nation Westminster Bank Plc shall
accrue from day to day (both before and after judgment) if such sum is not paid
on the due date.
8. LIMITATION OF LIABILITY.
8.1 Neither party shall be liable to the other in any way whatsoever
for loss of profits, business or anticipated savings or for any indirect or
consequential loss whatsoever.
8.2 In the event that the Lessor is in breach of this Agreement or
the Contract the liability of Lessor shall:
(a) in the event that the breach occurs (or commences, if
continuing) prior to 1 June 1998, be limited to 1,687,500
Pounds x P/18, where "P" means the number of full calendar
months between the date of the breach and 1 December 1998; and
(b) in the event that the breach occurs (or commences, if
continuing) after 1 June 1998, be limited to 562,500 Pounds.
This clause shall be without prejudice to the obligation of
Lessor to repay Charges pursuant to clause 7.4.
8.3 In the event that the Sub-Lessee is in breach of this
Agreement or the Contract the liability of Sub-Lessee shall:
(a) in the event that the breach occurs (or commences, if
continuing) prior to 1 June 1998, be limited to 1,687,500 x
P/18, where "P" means the number of full calendar months
between the date of the breach and 1 December 1998; and
(b) in the event that the breach occurs (or commences, if
continuing) after 1 June 1998, be limited to 562,500 Pounds.
In either case, in addition to the maximum amount specified,
Sub-Lessee shall be liable also for the amount of any Charge (due and payable
pursuant to clause 3 prior to the date of the breach) that has not been paid and
that related to a period of rental prior to the date of breach.
8.4 Notwithstanding anything stated in 8.1, the Lessor shall not be
liable to the Sub-Lessee for any breach of this Agreement caused by any breach
of the Contract on the part of SES. However, the Lessor shall pay to the Lessee
one-sixth of the difference between the amount of any such damages which it may
recover from SES in respect of a breach by that company of the Contract (whether
recovered by way of legal proceedings or agreement) and the amount of all
expenses incurred by the Lessor in recovering such damages.
8A.1 Nothing in clause 8 shall prevent the Lessor from setting off any
amounts due to it in respect of the Charges payable pursuant to clause 3 prior
to the date of breach yet unpaid against any liability it might otherwise have
to the Sub-Lessee.
8A.2 Nothing in clause 8 shall prevent the Sub-Lessee from setting off
any amount payable to it pursuant to clause 7.4 against any liability it might
otherwise have to the lessor.
9. FORCE MAJEURE.
9.1 Neither the Lessor nor the Sub-Lessee shall be considered to be in
breach or be liable for any damage suffered as a result of the failure to
perform any obligation under this agreement if, and for so long as, such failure
is the result of an event of force majeure, which shall be an event beyond the
control of that party.
10. ENTIRE AGREEMENT.
10.1 This Agreement together with the Schedules sets forth the entire
Agreement between the parties in connection with the subject matter hereof and
no oral representations warranties or promises shall be implied as terms of the
Agreement.
11. NOTICES.
11.1 Any notice given under the provisions of this agreement shall be
in writing and shall be sent to the address of the party to be served as above
written or such other address of which notice has previously been given to the
other party. All notices addressed to the Lessor shall be marked for the
attention of the Head of Legal and Business Affairs. All notices shall be
delivered by hand or sent by facsimile or, within the United Kingdom, by
registered or recorded delivery, or outside the United Kingdom, by registered
air mail letter. All notices shall be deemed to have been served at the time of
delivery or at the time of receipt (if delivered by facsimile), unless delivered
or received after 3:30 p.m. in which case service shall be deemed on the next
day following delivery.
12. NON-PARTNERSHIP.
12.1 Nothing contained herein shall be deemed to create, and the
parties hereto do not intend to create, any relationship of partnership, joint
venture or agency, nor shall any similar relationship be deemed to exist between
the Lessor and the Sub-Lessee.
13. ASSIGNMENT.
13.1 The Sub-Lessee shall not assign, transfer, sublet, or otherwise
allow any third parties to directly or indirectly exercise its rights in whole
or in part under this agreement except with the prior approval of the Lessor.
13.2 A change in the control of the Sub-Lessee shall be considered as
an assignment and unless the Lessor has given its prior written consent, the
Lessor shall have the right to terminate.
14. JURISDICTION AND PROPER LAW.
14.1 This Agreement shall be governed and construed in accordance with
the laws of England and Wales and the parties shall submit all disputes in
relation to or arising out of it to the non-exclusive jurisdiction of the Courts
of England and Wales or the Courts of the State of [New York].
IN WITNESS WHEREOF the parties have executed this Agreement on the day
and year set forth above.
SIGNED by /s/ K. Digvijay Singh)
for and on behalf of )
ASIA TV LIMITED in)
presence of: /s/ Sunil Potchif)
SIGNED by /s/ R.C. Yates)
for and on behalf of)
THE HOME VIDEO CHANNEL)
LIMITED in the presence)
of: /s/ David Porter)
SIGNED by /s/ R.C. Yates)
for and on behalf of)
SPICE ENTERTAINMENT)
COMPANIES INC. in the)
presence of: /s/ David Porter)
<PAGE>
SCHEDULE 1
THE CONTRACT
<PAGE>
SCHEDULE II
TELEVISION SERVICE
1. Name of the Lessor: Asia TV Limited.
2. Name of Sub-Lessee: Spice Entertainment Companies, Inc.
3. Name of Television Service: The Adult Channel (or as changed from time
to time)
4. Types of Programming: Entertainment, non-explicit adult feature films &
adult television programmes.
5. Licence: ITC Licence NDS 032
6. Language: Primarily English
7. Transmission Period: daily for 4 hours starting from 0000 (midnight) UK
local time.
8. Capacity Used: Main video carrier together with the 7.02 and 7.20 MHZ
sub-carriers.
9. Uplink: British Telecom Plc, Madeley, England, or such other as
notified from time to time by the Sub-Lessee.
10. Encryption: Videocrypt system, or such other as notified from time to time
by the Sub-Lessee provided that the prior approval of SES has been
obtained. The service shall necessarily be encrypted except the opening
promotional segment of not more than ten minutes, such unencrypted service
to comply with clause 2.2 of the Agreement.
11. Source of Income: Subscription and Advertising.
12. Target territories: ASTRA 1D footprint.
13. Start Date: 1st June 1997
14. Expiry Date: not before 30th November 1998 and thereafter on six months
notice. The sub-Lessee's shall use the Transponder exclusively in
connection with the Television Service and the Sub-Lessee shall not change
the content of the Television Service without the prior written SSS
approval of the Lessor, SES and the Government of Luxembourg.
SIXTH AMENDMENT
TO
EMPLOYMENT AGREEMENT
This Sixth Amendment, dated as of December 31, 1997, is to that certain
Employment Agreement made and entered into as of June 1, 1992, (as heretofore
amended, the "Employment Agreement") by and between SPICE ENTERTAINMENT
COMPANIES, INC. (f/k/a GRAFF PAY-PER-VIEW INC.), a Delaware corporation (the
"Company") and J. ROGER FAHERTY (the "Executive").
Introduction
The parties entered into the Employment Agreement on June 1, 1992, a
First Amendment thereto as of February 22, 1993, a Second Amendment thereto as
of June 15, 1993 and a Third Amendment thereto as of March 23, 1995 ("Third
Amendment"), a Fourth Amendment thereto as of January 1, 1996 ("Fourth
Amendment") and a Fifth Amendment thereto as of April 1, 1997 ("Fifth
Amendment") and now desire to further amend certain provisions of the Employment
Agreement, setting forth herein the revised terms and conditions of the
Executive's continued employment by the Company and its subsidiaries from and
after the date of this Agreement.
The Fourth Amendment provided for, among other things, the addition of
a loan provision to the Employment Agreement. The Fourth Amendment also provided
that any loan thereunder would have a maturity date of December 31, 1996.
Pursuant to a letter from the Chairman of the Company's Compensation Committee
dated December 31, 1996 (the "Extension Letter"), the Company extended the
maturity date of the loan to December 31, 1997. The parties wish to further
amend the loan provision and adjust Executive's salary for 1998.
Accordingly, in consideration of the mutual covenants and agreements
set forth herein and the mutual benefits to be derived herefrom, and intending
to be legally bound hereby, the Company and the Executive agree as follows:
1. Definitions. All defined terms used in this Amendment, unless
otherwise defined herein, shall have the meanings ascribed to them in the
Employment Agreement.
2. Adjustment in Base Salary. Section 3(a) of the employment Agreement
shall be amended to reflect that Executive's Base Salary shall be $367,500 for
the year ending December 31, 1998 and shall thereafter be adjusted as otherwise
provided for in Section 3(a), as amended by the Fourth Amendment.
3. Loans. Section 3(e) of the Employment Agreement as heretofore
amended, is hereby amended in its entirety to read as follows:
"3(e) Loans. As at December 31, 1997 the Company had loaned
Executive, including accrued interest, an aggregate of
$282,277.72. Executive and Company agree that the principal
amount of the loan shall not be increased other than as a
result of interest which Executive may elect to accrue and add
to the outstanding principal balance. Commencing January 1,
1998, the loan shall bear interest at the prime rate announced
by Chase Manhattan Bank, N.A., from time to time, as its prime
lending rate, plus one percent."
4. Miscellaneous.
(a) Integration: Modification. The Employment Agreement, as
amended by this Amendment and the previous amendments, constitutes the entire
understanding and agreement between the Company and the Executive regarding its
subject matter and supersedes all prior negotiations and agreements, whether
oral or written, between them with respect to its subject matter. This Agreement
may not be modified except by a written agreement signed by the Executive and a
duly authorized officer of the Company.
(b) Counterparts. This Amendment may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed by the Executive
and on behalf of the Company by its duly authorized officer on the date first
written above.
SPICE ENTERTAINMENT COMPANIES, INC.
By: /s/ Daniel J. Barsky
------------------------------------
Name: Daniel J. Barsky
Title: Senior Vice President &
General Counsel
EXECUTIVE
/s/ J. Roger Faherty
------------------------------------
J. Roger Faherty
19 January 1998
TO: Home Video Channel Ltd.
Aquis House
Station Road
Hayes
Middlesex
UB3 4DX
("HVC")
FROM: British Sky Broadcasting Limited
Grant Way
Isleworth
Middlesex
TW7 5QD
("Sky")
Dear Sirs
Re: THE ADULT CHANNEL (the "Channel")
We refer to the following documents:
(a) A letter from Sky to HVC dated 21 August 1997, signed by both parties
(the "Letter).
(b) An agreement between Societe Europeene des Satellites SA ("SES") and
Sky dated 30 August 1996 for the use of analogue transponder capacity
on ASTRA 1B Satellite (the "Head Lease").
1. The Letter sets out, without limitation, the main commercial terms on which
Sky will sub-lease to HVC certain Astra non-pre-emptible capacity on
Transponder 24 of the Astra 1B satellite (the "Capacity") for the purpose
of the transmission of the Channel.
2. This letter of agreement ("Agreement") confirms the key commercial terms
as follows (subject to paragraph 5 below):
(i) The Capacity will be provided from 1 August 1998 to the expiry
of the term of the Head Lease or 31 December 2002, whichever
is the earlier (the "Term).
(ii) The Capacity will be provided in analogue form on Transponder
24 of Astra 1B.
(iii) The hours of transmission of the Channel will be from midnight
to 0400, seven (7) days per week.
(iv) HVC will pay to Sky 900,000 Pounds plus UK Value Added Tax
("VAT") per annum during the Term in consideration of the
provision of the Capacity. The said sum shall, with effect
from 1 August 1999 be subject to corresponding increases to
the Retail Prices Index ("RPI") during the preceding twelve
months. Payment will be made each year during the Term by HVC
in twelve equal monthly installments in advance on the first
day of each month, commencing on 1 August 1998. For the
avoidance of doubt, failure by HVC to broadcast the Channel
during the Term shall not relieve it in any way of its
obligations to make payment to Sky hereunder.
(v) HVC will pay to Sky 66,000 Pounds plus VAT per annum during
the term in consideration of the provision by Sky of uplinking
services to Transponder 24 on Astra 1B. The said sum shall,
with effect from 1 August 1999 be subject to corresponding
increases to the RPI during the preceding twelve months.
Payment will be made each year during the Term by HVC in
twelve equal monthly installments in advance on the first day
of each month, commencing on 1 August 1998. For the avoidance
of doubt, HVC shall at all times during the term be
responsible at its sole cost for delivering the Channel's
signal to Sky's uplink site.
3. Sky and HVC will use their respective best endeavours to execute a long
form transponder agreement in respect of the Capacity and an agreement in
respect of the applicable uplink services (the "New Agreements"} by a ate
no later than 00:01 on 1 August 1998 (the "Start Date"), to give effect to
the matters referred to in paragraph 2 above.
4. If the New Agreements have not been executed by the Start Date, Sky and HVC
will continue to use their best endeavours to execute such documents as
soon as possible after the Start Date and, until such times as the New
Agreements are executed, Sky shall, as from the Start Date, sub-lease the
Capacity to HVC and provide the corresponding uplinking services and the
terms on which Sky shall do so shall be as follows:
(i) Each of the provisions of paragraph 2 above shall apply in its
entirety.
(ii) In respect of the Capacity, HVC shall do all that is necessary
to conform with all material terms of the Head Lease as if it
were an original party thereto and shall indemnify and keep
Sky fully indemnified in respect of any breach by Sky of the
Head Lease cause by an act or omission of HVC.
(iii) In respect of the uplinking services, HVC will comply with all
the provisions of Sky's standard form uplinking agreement for
Transponder 24 from time to time, a copy of which will be
provided by Sky to HVC prior to the Start Date if a long form
agreement in respect of uplinking services has not been
executed by parties prior to the Start Date.
5. The provision by Sky to HVC of the Capacity is conditional upon Sky first
being able to obtain such consents as may be necessary from SES in respect
thereof and Sky agrees to use all reasonable endeavours to obtain such
consent prior to the Start Date.
6. In the event of any conflict between the Letter, this Agreement and any
other document signed by the parties relating to the provision of capacity
and uplinking for the Channel, the terms and conditions of this Agreement
shall prevail.
7. The contents of this Agreement shall be confidential and shall at all times
remain so prior to, during and after the expiry of the Term save to the
extent that it is necessary for the parties to communicate to subscribers
and potential subscribers the fact that the Channel will, from the Start
Date, move from Transponder 54 to Transponder 24 and save as may be
required to be disclosed by any applicable law or regulation or
requirements of any relevant stock exchange or regulatory authority.
8. This Agreement is legally binding on Sky and HVC and shall be governed by
English law.
9. Sky may assign or sub-licence its rights thereunder without restriction.
HVC shall not assign, sub-let, licence or otherwise allow any third party
to exercise any of its rights under this Agreement without having first
obtained the prior written consent of Sky, such consent not to be
unreasonably withheld or delayed.
10. To the extent that any provision of this Agreement constitutes a
restriction or an information provision within the meaning of the
Restrictive Trade Practices Act 1976 so as to make this Agreement
registrable under that Act, no such provision shall come into effect until
such time as particulars of this Agreement have been furnished to the
Director General of Fair Trading, in accordance with that Act.
/s/ D. Stewart 2/2/98
- ----------------------------------------------------- -----------------
For and on behalf of British Sky Broadcasting Date
Limited
/s/ Jeremy Yates 29/01/98
- ----------------------------------------------------- -----------------
For and on behalf of Home Video Channel Date
Limited
<TABLE>
<CAPTION>
SPICE ENTERTAINMENT COMPANIES, INC.
Subsidiaries of the Registrant
State or Jurisdiction of
Subsidiary Incorporation
- ----------------------------------------------------- --------------------------------------
<S> <C>
DOMESTIC:
CPV Productions, Inc. Delaware
Cyberspice, Inc. Delaware
Magic Hour Productions, Inc. Delaware
Spice Direct, Inc. Delaware
Spice International, Inc. Delaware
Spice Networks, Inc. New York
Spice Productions, Inc. Nevada
FOREIGN:
The Home Video Channel Limited England and Wales
</TABLE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated March 26, 1998 accompanying the consolidated
financial statements of Spice Entertainment Companies, Inc. and Subsidiaries
(the "Company") by reference included in the Annual Report on Form 10-K for the
year ended December 31, 1997. We hereby consent to the incorporation by
reference of said report in the Registration Statements of the Company on Form
S-8 (File No. 333-03545, effective May 10, 1996).
GRANT THORNTON LLP
New York, New York
March 26, 1998
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement of
Spice Entertainment Companies, Inc. and Subsidiaries, (formerly Graff Pay-Per-
View Inc.) on Form S-3 (File Nos. 33-80824, 33-82806, and 33-93534) of our
report dated March 8, 1996 and April 3, 1996, respectively, on our audit of the
consolidated financial statements and financial statement Schedule II of Spice
Entertainment Companies, Inc. as of December 31, 1995, and for the year then
ended, which report is included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
New York, New York
April 15, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
SUMMARY FINANCIAL DATA SCHEDULE
FOR THE YEAR ENDED DECEMBER 31, 1997
This schedule contains summary financial information extracted from the Form
10-K for the year ended December 31, 1997 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,810,000
<SECURITIES> 0
<RECEIVABLES> 4,336,000
<ALLOWANCES> 2,601,000
<INVENTORY> 0
<CURRENT-ASSETS> 8,633,000
<PP&E> 6,602,000
<DEPRECIATION> 4,942,000
<TOTAL-ASSETS> 31,138,000
<CURRENT-LIABILITIES> 10,657,000
<BONDS> 15,085,000
0
0
<COMMON> 107,000
<OTHER-SE> 8,849,000
<TOTAL-LIABILITY-AND-EQUITY> 31,138,000
<SALES> 0
<TOTAL-REVENUES> 33,596,000
<CGS> 0
<TOTAL-COSTS> 31,172,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,824,000
<INTEREST-EXPENSE> 3,609,000
<INCOME-PRETAX> 4,647,000
<INCOME-TAX> 348,000
<INCOME-CONTINUING> 4,299,000
<DISCONTINUED> 0
<EXTRAORDINARY> 143,000
<CHANGES> 0
<NET-INCOME> 4,442,000
<EPS-PRIMARY> 0.40
<EPS-DILUTED> 0.36
</TABLE>
