<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to ______
Commission File Number 0-15445
THE BOX WORLDWIDE, INC.
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Florida 59-2605267
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1221 Collins Avenue, Miami Beach, Florida 33139
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(305)-674-5000
- --------------------------------------------------------------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Number of Shares Outstanding
Class on May 9, 1997
----- ----------------------------
Common Stock, Par Value $.001 Per Share 24,001,781
Transitional Small Business Disclosure Format: Yes No X
--- ---
<PAGE> 2
THE BOX WORLDWIDE, INC.
INDEX
<TABLE>
PART I FINANCIAL INFORMATION PAGE
<S> <C>
Item 1 Financial Statements
Consolidated Balance Sheet at March 31,
1997 (Unaudited) 3
Consolidated Statements of Operations for the
Three Months ended March 31, 1997 and 1996
(Unaudited) 4
Consolidated Statements of Cash Flows for the
Three Months ended March 31, 1997 and 1996
(Unaudited) 5
Notes to Financial Statements 6
Item 2 Management's Discussion and Analysis or
Plan of Operation 9
SIGNATURES 20
</TABLE>
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<PAGE> 3
THE BOX WORLDWIDE, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31,
1997
----------
<S> <C>
ASSETS:
- -------
CURRENT ASSETS
Cash and cash equivalents $ 4,316,162
Accounts receivable, less allowances for
doubtful accounts of $380,000 2,799,603
Prepaid expenses and other current assets 469,949
------------
TOTAL CURRENT ASSETS 7,585,714
------------
RECEIVABLE FROM OFFICER - LONG TERM 102,034
PROPERTY AND EQUIPMENT, NET 8,291,535
DEFERRED COSTS AND OTHER ASSETS, NET 1,188,532
INVESTMENT IN AND ADVANCES TO
UNCONSOLIDATED COMPANY 246,140
------------
TOTAL ASSETS $ 17,413,955
============
LIABILITIES AND STOCKHOLDERS' EQUITY:
- -------------------------------------
CURRENT LIABILITIES
Accounts payable $ 1,446,828
Accrued expenses 2,482,613
------------
TOTAL CURRENT LIABILITIES 3,929,441
------------
COMMITMENTS AND CONTINGENCIES
6% CONVERTIBLE REDEEMABLE PREFERRED STOCK
$0.15 par value, $1.50 stated value, 1,800,000 shares
authorized, 1,666,667 issued and outstanding
including $46,130 of cumulative dividend payable 2,336,258
------------
STOCKHOLDERS' EQUITY
8% Cumulative convertible preferred
stock, $1.00 par value, 200,000 shares
authorized, none issued --
Common stock, $.001 par value,
40,000,000 shares authorized, 24,001,781
shares issued and outstanding 24,002
Additional paid in capital - Common Stock 30,238,761
Accumulated deficit (19,100,110)
Cumulative foreign currency translation (14,397)
------------
TOTAL STOCKHOLDERS' EQUITY 11,148,256
------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 17,413,955
============
</TABLE>
See Notes to Financial Statements
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<PAGE> 4
THE BOX WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
------------------------------
MARCH 31, MARCH 31,
1997 1996
----------- ----------
<S> <C> <C>
REVENUES
Advertising revenues $ 2,349,717 $ 1,995,575
Net viewer revenues 2,046,681 2,779,085
Other revenues 109,548 62,438
------------ ------------
4,505,946 4,837,098
Interest income 166,256 113,227
------------ ------------
4,672,202 4,950,325
------------ ------------
COSTS AND EXPENSES
Affiliate fees, site costs and
telephone service 1,491,872 1,410,051
Distribution, general and
administrative 3,755,930 3,931,421
Satellite transponder and rent
paid to related parties 118,020 345,689
Depreciation and amortization 516,329 239,043
------------ ------------
5,882,151 5,926,204
------------ ------------
INCOME BEFORE INTEREST IN LOSSES OF
UNCONSOLIDATED COMPANIES (1,209,949) (975,879)
INTEREST IN LOSSES OF UNCONSOLIDATED
COMPANIES (171,264) (247,015)
------------ ------------
NET INCOME (1,381,213) (1,222,894)
Deduct required dividend on 6% convertible
redeemable preferred stock (37,500) 0
------------ ------------
Net income attributable to common stock $ (1,418,713) $ (1,222,894)
============ ============
Net income per common share after deduction for
required dividend on 6% convertible redeemable
preferred stock $ (0.06) $ (0.05)
============ ============
Weighted average number of common shares
outstanding 24,001,781 23,944,281
============ ============
</TABLE>
See Notes to Financial Statements
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<PAGE> 5
THE BOX WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
----------------------------
MARCH 31, MARCH 31,
1997 1996
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $(1,381,213) $(1,222,894)
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 516,329 239,043
Interest in losses of unconsolidated companies 171,264 247,015
Change in assets and liabilities: 0
(Increase) decrease in accounts receivable (281,961) 855,033
Increase in prepaid expenses and other current assets (143,752) (458,250)
Decrease in accounts payable and accrued expenses (683,006) (732,194)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,802,339) (1,072,247)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,095,041) (883,684)
Increase in deferred costs (99,366) 0
Disposal of equipment 1,781 15,756
Increase in investment in and advances to unconsolidated companies (143,933) (250,494)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (2,336,559) (1,118,422)
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 3,656 (13,056)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,135,242) (2,203,725)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 8,451,404 6,712,402
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,316,162 $ 4,508,677
=========== ===========
</TABLE>
See Notes to Financial Statements
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<PAGE> 6
THE BOX WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS
1. The financial information included herein is submitted pursuant to the
requirements of Form 10-QSB and does not include all disclosures required
by generally accepted accounting principles. It is suggested that these
unaudited financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1996. The accompanying
interim financial statements reflect all normal recurring adjustments which
are, in the opinion of management, necessary for a fair statement of the
results for the interim periods presented. The results of operations for
interim periods are not necessarily indicative of the results to be
obtained for the entire year.
2. Net loss per share computations are based on the weighted average shares of
common stock outstanding during the quarter. Common stock equivalents were
not considered in the computation of net income or loss per share as their
effect would be to decrease net loss per share.
3. The consolidated financial statements include the balance sheet and
operating results of the Company's wholly-owned subsidiaries, VJN LPTV
CORP. (incorporated in February, 1994), The Box Worldwide Europe, B.V.,
(incorporated in August, 1995), Video Jukebox Network Europe,
Ltd. (incorporated in January, 1996), The Box Worldwide-Latin America, Inc.
(incorporated in January, 1996), and The Box Italy, srl (incorporated in
January 1997); and include on the equity method the operating results of
Video Jukebox Network International, Limited ("VJNIL") for the first three
months of 1996. The Company also accounts for its 50% owned subsidiary, The
Box Holland (incorporated in October, 1995), on the equity method of
accounting. All significant consolidating and eliminating entries have been
included.
UNCONSOLIDATED SUBSIDIARIES:
THE BOX HOLLAND --- The following is a summary of the balance sheet as of
March 31, 1997 and operating results for the quarters ended March 31, 1997
and 1996, respectively, of The Box Holland:
Three Months Ended
------------------------------
March 31, 1997 March 31, 1996
-------------- --------------
Current assets $ 202,691
Noncurrent assets 746,168
---------
$ 948,859
=========
Current liabilities $ 226,857
Equity, advances and notes
payable to shareholders 722,002
---------
$ 948,859
=========
Net revenues $ 198,411 $ 16,674
========= =========
Net operating loss $(342,529) $(221,083)
========= =========
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<PAGE> 7
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. (CONTINUED)
The Company recorded interest income of approximately $84,000 during the
quarter ended March 31, 1997, related to a $883,000 loan outstanding with
The Box Holland, Inc. during the period. Interest from inception of the
loan in 1995 to date had not been previously recognized.
VJNIL --- In September 1991, VJNIL, which began operations in 1992, was
founded in the United Kingdom to develop and launch a United Kingdom
version of the Company's music video television programming. The Company
had beneficially owned 91% of the outstanding common stock of VJNIL from
inception. On June 30, 1995, the Company purchased the remaining nine
percent of VJNIL from its minority shareholder in exchange for 225,000
shares of the Company's common stock, which were valued at $267,187 on that
day. Also on June 30, 1995, the Company completed the sale of a 50 percent
equity interest in VJNIL to a wholly-owned subsidiary of Ticketmaster
Corporation ("Ticketmaster") for $2,225,000 in cash. Legal and investment
banking expenses related to this transaction totaled approximately
$429,000. As part of this transaction, Ticketmaster loaned to VJNIL
$1,500,000 which approximated the aggregate amount of the advances that had
been made from time to time by the Company to VJNIL. Such loan from
Ticketmaster and advances by the Company were secured by all of the assets
of VJNIL and accrued interest at the rate of prime plus one percent.
Simultaneously, an administrative services agreement was executed among the
Company, VJNIL and Ticketmaster through which Ticketmaster purchased a
portion of its 50 percent equity interest in VJNIL by issuing to VJNIL a
promissory note payable in the amount of 625,400 pounds sterling (the
equivalent of U.S. $1 million). This administrative services agreement,
which was to expire June 30, 2000, required Ticketmaster to provide VJNIL
with strategic and marketing related services, particularly with respect to
sponsorship and promotional opportunities, advertising sales, merchandising
and other home shopping projects undertaken by VJNIL. Principal amounts due
under the promissory note did not accrue interest and monthly payments of
principal were forgiven in full while Ticketmaster provided services to
VJNIL under the administrative agreement.
The Company's remaining investment in VJNIL had been accounted for on the
equity method of accounting effective June 30, 1995. Prior to June 30,
1995, the subsidiary's assets, liabilities and operations had been
consolidated with the Company.
On October 30, 1996, the Company completed the sale of its remaining 50%
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<PAGE> 8
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. (CONTINUED)
equity interest in VJNIL to EMAP plc, a United Kingdom media and
entertainment company. EMAP paid VJN $4,550,000 in cash for VJN's 50%
remaining investment, plus reimbursed VJN $1,500,000 for the Company's
outstanding loan to VJNIL plus approximately $200,000 in accrued interest
related to the loan. The Company also received a one-time $100,000
licensing payment for trademark and other intellectual property rights in
the United Kingdom and Ireland. The Company paid approximately $400,000 in
investment fees and legal fees related to this transaction.
The following is a summary of VJNIL's balance sheet as of March 31, 1996
and operating results for the first quarter ended March 31, 1996,
respectively, during which period the Company's share of these results were
accounted for on the equity method by the Company:
Three Months Ended
March 31, 1996
------------------
Current assets $ 1,238,705
Noncurrent assets 921,210
-----------
$ 2,159,915
===========
Current liabilities 583,421
Noncurrent liabilities 3,269
Equity, advances and notes
payable to shareholders 1,573,225
-----------
$ 2,159,915
===========
Net revenues $ 492,114
===========
Net operating loss $ (319,813)
===========
The difference between the Company's recorded net investment in and
advances to VJNIL at March 31, 1996 and the underlying equity in VJNIL's
net assets relates primarily to previously recognized net losses prior to
the sale of 50% of its interest in VJNIL. The Company recorded interest
income of approximately $37,000 during the quarter ended March 31, 1996,
related to a $1,500,000 loan outstanding with VJNIL during the period.
-8-
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 1996.
OVERVIEW:
Due to the wide brand recognition of THE BOX, the Company changed its corporate
name to The Box Worldwide, Inc. effective February 20, 1997. A corporate
restructuring has segregated domestic operations from the international
operations and from the purely corporate functions. This restructuring allows
the Company to organize its investments, operating structures and branding of
its trademarks and technology in a more efficient and economical manner.
Domestic operations are reflected through a new wholly-owned subsidiary, The Box
Worldwide - USA, Inc., formed as a Delaware corporation in March 1997.
Previously established subsidiaries, The Box Worldwide - Europe, B.V. and The
Box Worldwide - Latin America, Inc., contain the operating results and
development costs (through allocation from the parent company) for those
respective regions; results from these two subsidiaries, along with all other
international regions and the general international development costs together
constitute "international operations and development", as referred to throughout
this document.
Costs of international development and general corporate charges, to the extent
they are not allocable to a reporting unit, are reported through the corporate
division of the Company. For the results for the quarter ended March 31, 1996,
however, no such expense allocations from the parent company to domestic and
international operations were made. For comparability with the current period's
results, all direct international and corporate expenses for the prior year
period have been segregated.
For the quarter ended March 31, 1997, the Company realized a consolidated net
loss of $1,381,213 as compared to a net loss of $1,222,894 for the quarter ended
March 31, 1996. This consolidated loss is composed of the following items:
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------
March 31, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
Loss from domestic operations $ (469,826) $ (237,679)
Loss from international development
and operations (870,242) (706,519)
Net corporate expenses (41,145) (278,696)
----------- -----------
Consolidated net loss $(1,381,213) $(1,222,894)
=========== ===========
</TABLE>
As noted above, the 1997 results reflect allocations of certain corporate
charges to
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<PAGE> 10
RESULTS OF OPERATIONS (CONT'D)
domestic and international operations, whereas no such allocations were made in
1996.
Management believes that these allocations more accurately reflect the true cost
to the domestic and international operating units for services provided by the
parent company. If these allocations had not been recorded, the first quarter
losses for 1997 from domestic operations and international development and
operations would have been $265,218 and $115,756 lower, respectively.
Please refer to the following Supplemental Schedule of Revenue and Expenses by
Segment for further detail:
THE BOX WORLDWIDE, INC.
SUPPLEMENTAL SCHEDULE OF REVENUE AND EXPENSES BY SEGMENT
FOR QUARTERS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
CONSOLIDATED THE BOX WORLDWIDE-USA, INC.
------------------------------ -----------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Advertising revenues $ 2,349,717 $ 1,995,575 $ 2,349,717 $ 1,995,575
Net viewer revenues 2,046,681 2,779,085 1,972,379 2,779,085
Other revenues 109,548 62,438 16,843 32,984
----------- ----------- ----------- -----------
4,505,946 4,837,098 4,338,939 4,807,644
Interest income 166,256 113,227 0 0
----------- ----------- ----------- -----------
4,672,202 4,950,325 4,338,939 4,807,644
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Affiliate fees, site costs and
telephone service 1,491,872 1,410,051 1,431,424 1,398,332
Distribution, general and
administrative 3,755,930 3,931,421 2,843,427 3,070,994
Satellite transponder and rent
paid to related parties 118,020 345,689 118,020 345,689
Depreciation and amortization 516,329 239,043 415,894 230,308
----------- ----------- ----------- -----------
5,882,151 5,926,204 4,808,765 5,045,323
----------- ----------- ----------- -----------
INCOME BEFORE INTEREST IN LOSS OF
UNCONSOLIDATED COMPANIES (1,209,949) (975,879) (469,826) (237,679)
----------- ----------- ----------- -----------
INTEREST IN LOSS OF UNCONSOLIDATED
COMPANIES (171,264) (247,015) 0 0
----------- ----------- ----------- -----------
NET LOSS $(1,381,213) $(1,222,894) $ (469,826) $ (237,679)
=========== =========== =========== ===========
<CAPTION>
INTERNATIONAL DEVELOPMENT
& OPERATIONS CORPORATE
------------------------------ -----------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
REVENUES
Advertising revenues $ 0 $ 0 $ 0 $ 0
Net viewer revenues 74,302 0 0 0
Other revenues 81,618 7,499 11,087 21,955
----------- ----------- ----------- -----------
155,920 7,499 11,087 21,955
Interest income 0 0 166,256 113,227
----------- ----------- ----------- -----------
155,920 7,499 177,343 135,182
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Affiliate fees, site costs and
telephone service 60,448 11,719 0 0
Distribution, general and
administrative 751,612 446,549 160,891 413,878
Satellite transponder and rent
paid to related parties 0 0 0 0
Depreciation and amortization 42,838 8,735 57,597 0
----------- ----------- ----------- -----------
854,898 467,003 218,488 413,878
----------- ----------- ----------- -----------
INCOME BEFORE INTEREST IN LOSS OF
UNCONSOLIDATED COMPANIES (698,978) (459,504) (41,145) (278,696)
----------- ----------- ----------- -----------
INTEREST IN LOSS OF UNCONSOLIDATED
COMPANIES (171,264) (247,015) 0 0
----------- ----------- ----------- -----------
NET LOSS $ (870,242) $ (706,519) $ (41,145) $ (278,696)
=========== =========== =========== ===========
</TABLE>
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<PAGE> 11
RESULTS OF OPERATIONS (CONT'D)
REVENUES:
Advertising Revenues:
Domestic advertising revenues increased by approximately $354,000 for the
quarter ended March 31, 1997 as compared with the same 1996 period. National
advertising improved 36%, or approximately $499,000, for the quarter ended March
31, 1997 from the comparable period in 1996. Proctor and Gamble, Coca Cola, MCI,
Nintendo, Nike, Nordic Trak, AT&T and various other national consumer goods and
services all advertised on THE BOX during the first quarter of 1997.
Record advertising decreased approximately $145,000 in the first quarter of 1997
as compared to the same quarter of 1996. Part of this decrease occurred due to
the change in music mixes throughout the Company's localized interactive boxes.
In the past the Company had relied almost exclusively on record advertising of
urban and rap artists which is no longer compatible with the programming offered
on all boxes. Minimal new music product was released during the first quarter of
1997, also resulting in lower advertising levels. During April 1997, the
Company's top management and record advertising sales team have participated in
presentations to eighty five percent of all the major record labels. With these
presentations, management informed the record labels of the Company's music mix
changes, digital technology changes and overall localized programming strategy
that will enable the labels to promote ALL their music product on THE BOX rather
than the narrow niche of urban and rap music. Management believes that the
presentations were well received and, while it cannot be assured, record label
advertising is expected to improve throughout 1997.
Nearly $6.4 million in domestic advertising has already been booked for the
year. International advertising is anticipated to begin to contribute positively
to consolidated operations in 1997, due to subscriber increases in existing
international operations and the March 1997 broadcast launch of The Box Italy.
However, there can be no assurance that all booked revenue will actually be
aired and earned or that the international growth will result in increased
advertising.
NET VIEWER REVENUES:
The decrease in net viewer revenues of $732,000 results from the net effect of
reduced domestic gross viewer revenues (negative effect of $1,132,000), as
offset by the related reduction in the telephone service provider's billing and
collection charges (positive effect of $143,000), the increase in international
viewer revenues (positive effect of $74,000) and the reduction in chargebacks
experienced when consumers failed to pay for their requested videos (positive
effect of $183,000).
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<PAGE> 12
RESULTS OF OPERATIONS (CONT'D)
Gross domestic viewer revenues, which resulted from the interactive telephone
calls to THE BOX for video selections, decreased from $3,503,000 to $2,371,000,
a difference of approximately $1,132,000 or 32% from the first quarter of 1996
to the first quarter of 1997. Approximately $235,000 related to the loss of
carriage on a Detroit cable system. The remaining decrease resulted from a lower
average performance per box during the first quarter of 1997. This decrease in
average performance may be attributed to factors involving both the Company and
the music industry. THE BOX removed certain violent or sexually explicit videos
from its playlists, which historically generated a significant number of viewer
requests. The Company also has introduced request emulation when no viewer
requests were in the queue. Finally, the transactional revenue has been
negatively affected by airtime required for increased advertising and for
additional programming elements such as Box Big Break (on-air spots featuring
local artists) and other elements designed to strengthen viewing of THE BOX.
As the Company moves forward to improve its product, the interests of various
constituencies must be balanced. This involves attracting and maintaining
viewers and remaining cognizant of the concerns of cable operators and
advertisers. While many requests on THE BOX were directed towards controversial
videos, their frequent play resulted in the loss of cable distribution. To
address this issue, THE BOX has implemented a more stringent standard for video
content while at the same time maintaining its reputation for innovative
programming.
THE BOX also is taking additional steps to balance its appeal to both the
passive and the transacting audiences. Request emulation and pre-programmed
segments are increasing the attractiveness of the service to non-transacting
viewers which make up the bulk of THE BOX audience. These viewers are looking
for engaging and continuous programming, prefer less emphasis on a static
request menu and want fewer repetitive plays of the same music video selection.
The needs of advertisers and cable operators are generally more closely aligned
with these non-transacting viewers. However, some form of the menu with a call
to action is important to prompt requests from transactional viewers. The
Company continues to make enhancements to serve both audience groups.
In addition to taking viewer requests via 900 service, the Company introduced a
new program in 1996 to allow customers who would like to exceed the Company's
900 service credit limit to establish a prepaid account for the selection of
videos. In addition to generating additional viewer revenue, this program has
been designed to eliminate customer chargebacks and billing charges from service
providers, as well as reduce transport costs. Initiated as a test, this program
slowly expanded during 1996 so that, by the end of that year, it was available
to all customers. This new prepaid video program provided 27.7% of gross viewer
revenue in the current period, as compared with 6.3% in the first quarter of
1996, when it was first introduced on a test basis. Revenue from this program is
recognized only as videos are selected, while prepaid account balances are
included in current liabilities.
With lower domestic viewer revenues, the billing and collection charges imposed
by the
-12-
<PAGE> 13
RESULTS OF OPERATIONS (CONT'D)
Company's telephone service provider were reduced proportionately. Therefore, an
offset to the decrease in domestic gross revenue is the reduction in billing
charges of approximately $143,000. Besides the lower revenue level, the Company
has been successful in renegotiating with the telco providers to reduce billing
and collection charges from eight to seven percent during the first quarter of
1997. Further, revenue from the prepaid video program is not subject to billing
and collection charges, and therefore the increase in revenue from this program
as a percentage of total gross viewer revenue has also contributed to the
reduction in these charges.
An additional component of net viewer revenues relates to the adverse effect of
domestic customers who deny having made music video requests on THE BOX. In the
Company's current international markets, consumers are not allowed to refute
these charges, so the chargebacks are only occurring domestically. In an effort
to reduce chargebacks from telephone companies, the Company is in its third year
of call blocking for previous non-paying customers and applying credit
limitations for all its interactive viewers. After nearly three years of these
procedures, the Company has seen the chargeback rate reduced from over 16.7% in
1994, to approximately 12% for 1995 and thereafter. Chargebacks for the quarter
ended March 31, 1997 totaled approximately $278,000 as compared to $461,000 for
the same prior year period. Revenue from the prepaid video program is not
subject to customer chargebacks since all money is collected before the videos
air, and therefore the increase in revenue from this program as a percentage of
total gross viewer revenue has also contributed to the reduction in these
charges.
Net viewer revenue from international boxes increased by a net of $74,000 due to
the 1996 international launches in Argentina, Chile, Peru and Venezuela, none of
which were in operation during first quarter 1996, and the 1997 launch in New
Zealand.
OTHER REVENUE:
Miscellaneous revenues for the first quarter 1997 included $70,000 in domestic
and international cable carriage fees, $17,000 for production services provided
to our unconsolidated Holland affiliate, $11,000 in gains on the sale of some
minor equipment, merchandise revenue of approximately $6,000 from the closeout
of the Company's retail store outlet, revenue totaling $4,000 from the music
compilations marketed under the Company's BOXtunes label and miscellaneous other
revenue of approximately $1,000. Interest income totaled approximately $166,000
in the first quarter of 1997, which included $84,000 on an outstanding loan to
our Holland affiliate. Interest from inception of the loan in 1995 to date had
not been previously recognized.
-13-
<PAGE> 14
RESULTS OF OPERATIONS (CONT'D)
COSTS AND EXPENSES:
AFFILIATE FEES, SITE COSTS AND TELEPHONE SERVICES:
Expenses for affiliate fees, site costs and telephone services were 72.9% and
50.7% of net viewer revenues for the quarters ended March 31, 1997 and 1996,
respectively. These expenses as a percentage of net viewer revenues are up
significantly for 1997 since a large portion of the affiliation fees, site costs
and telecommunications charges are fixed per location. With the reduced level of
domestic viewer transactional revenues, these expenses as a percentage of
revenues increased in the first quarter of 1997. These expenses totaled $82,000
more for first quarter 1997 as compared with the same prior year period. The
total increase resulted from increased expenditures for domestic and
international operations of $33,000 and $49,000, respectively.
The domestic growth in expenses of approximately $33,000 between the quarters
ended March 31, 1997 and 1996 was due to the net effect of the following:
o A decrease in low power television affiliation fees of approximately
$99,000. Of this decrease, $34,000 relates to the discontinued affiliation
with a New York City low power station broadcasting from Queens. This
affiliation was terminated on January 31, 1997 to reduce carriage fee
expenditures since the other two low power affiliates in New York City had
improved their signals and were covering a majority of the market at lower
affiliation fees. The remainder of the decrease in low power affiliation
fees correlates with the reduction in net viewer revenue.
o An increase in satellite transponder and uplink fees of $166,000 paid for
satellite service of THE BOX. Beginning in April 1996, the Company entered
into an agreement for such service with an unrelated third party. In prior
years and through the end of March 1996, the fees for satellite transponder
and uplink services were paid to a related party and were included in the
related party expenditure category in the financial statements.
o An increase in the cable affiliation fees of approximately $98,000 resulted
from credits recognized in the quarter ended March 31, 1996 related to the
removal of the Company's programming from the New York City system in 1996,
with no comparable item in the same current year period.
o An $8,000 increase in the low power television site costs due to new
launches.
o A decrease of $237,000 in domestic transport costs due to a combination of
-14-
<PAGE> 15
RESULTS OF OPERATIONS (CONT'D)
reduced levels of viewer transactional revenues and rerouting of certain
telephone calls in-house that were previously handled by outside service
bureaus. In the future, the Company expects to realize significant savings
through the continued movement of these calls to an in-house operation.
o An increase in telecommunications expense of $97,000 due mainly to the
fixed VSAT transmission charges associated with the new digital box
operations. While these expenses will provide for higher telecommunications
expenses in 1997, the net cost savings of updating each Box location by
VSAT satellite as opposed to the development, production and distribution
of 3/4-inch tapes and laser discs required under the old analog technology
are expected to total approximately $82,000 per month.
International expenses for affiliate fees, site costs and telephone services
increased by $49,000 due to the start-up of new international operations in the
second half of 1996 and the first quarter of 1997 that were not in existence
during the first quarter of 1996.
DISTRIBUTION, GENERAL AND ADMINISTRATIVE:
Consolidated distribution, general and administrative expenses for the quarter
ended March 31, 1997 decreased by approximately $175,000, from $3,931,000 in
1996 to $3,756,000 in 1997. This decrease can be divided into the net effect of
these components: a decrease in domestic expenditures of approximately $227,000;
an increase of approximately $305,000 related to international development
operating expenses; and a decrease in corporate expenses of $253,000 (after
allocation to domestic and international units).
As part of the Company's corporate restructuring, corporate expenses have been
segregated from expenses relating to domestic and international development and
operations. These corporate costs primarily consist of parent company personnel,
administrative expenses, legal fees and the continuing development cost of the
digital box and related technology. All charges which relate to domestic and
international expenditures, which are essentially all charges except for the
corporate costs of a public company, have been allocated to the operating units
beginning with the first quarter of 1997. For the three month periods ended
March 31, 1997 and 1996, the net corporate charges were as follows:
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------
March 31, 1997 March 31, 1996
-------------- ---------------
<S> <C> <C>
Total corporate charges $ 541,865 $413,878
Allocated to The Box Worldwide-USA, Inc. (265,218) --
Allocated to international operations (115,756) --
--------- --------
Net corporate charges $ 160,891 $413,878
========= ========
</TABLE>
-15-
<PAGE> 16
RESULTS OF OPERATIONS (CONT'D)
The increase in total corporate charges from $414,000 in 1996 to $542,000 for
first quarter 1997 ($128,000) consisted of the following items:
o An increase in compensation of $39,000 relating mostly to the transfer of
certain operational functions to the parent company in 1997.
o Higher legal costs of $62,000 relating to the corporate reorganization and
other legal matters.
o Increased travel and industry event participation of $21,000.
o Increased occupancy related costs of $6,000.
Distribution, general and administrative expenses for domestic operations
decreased by $227,000 for the first quarter of 1997 as compared with the same
prior year period. The majority of the savings ($174,000) related to lower
salaries and benefits realized primarily due to three factors: (i) the departure
of the Executive Vice President, Programming in 1996 ($85,000); (ii) the
transfer of certain staff from domestic operations to corporate and
international operations ($20,000); and (iii) a general reduction of domestic
staff due to the elimination of a number of positions ($69,000).
Further decreases were experienced in trade advertising, consumer marketing,
research, industry events and travel and entertainment expenses of approximately
$289,000 as a result of the Company deferring the development of its new
marketing campaign until the latter part of 1997. Participation in several
industry trade events also were reduced in order to control costs. While trade
advertising will likely increase in 1997, the costs for trade events should
remain low and possibly even decrease given the reduction of cable industry
state association shows.
Domestic legal expenses decreased by approximately $9,000 in 1997 as compared
with 1996. A decrease of $115,000 in production, discs and shipping costs
resulted from more in-house production and the use of VSAT technology to update
the Digital Box programming. Music costs associated with the Company's revenues
decreased approximately $20,000 for the first quarter of 1997 as compared with
the first quarter of 1996 due to the lower overall revenue levels.
Cost of sales associated with merchandise sold through the Company's retail
operation was approximately $17,000 lower for the quarter ended March 31, 1997,
as compared with the same prior year period. The Company closed the store at the
end of the first quarter of 1997, because it was unprofitable. This deletion of
operations is expected to save the Company over $100,000 in operating
expenditures for 1997.
Offsetting these domestic decreases, increased national and direct response
advertising
-16-
<PAGE> 17
RESULTS OF OPERATIONS (CONT'D)
sales revenues in the first quarter of 1997, as compared with the same period in
1996, resulted in higher agency commissions of approximately $72,000. The
Company also expended approximately $60,000 more in operations, office and
administrative costs during the quarter ended March 31, 1997 than to the same
prior year period. These increased charges related to increased use of
consultants for internet development, marketing and public relations ($59,000),
and higher property taxes relating to new digital box equipment ($12,000) offset
by lower costs of office administration ($11,000). As discussed above, corporate
overhead of approximately $265,000 was allocated to domestic operations in the
first quarter of 1997, with no comparable amount allocated in the first quarter
of 1996.
Distribution, general and administrative expenses for our consolidated
international development and operations increased by approximately $305,000 for
the quarter ended March 31, 1997, as compared to the same prior year period.
These expenses related to operations in Argentina, Chile, Peru and Venezuela,
which launched in 1996 and incurred minimal expenses in 1996, and start-up
operations in New Zealand in 1997. The increased expenditures involved were:
operations, office and administration ($112,000); salaries and benefits
($9,000); legal ($37,000); production, discs, tapes and shipping ($43,000); and
corporate allocations of $116,000. These increases were offset by a decrease in
marketing, research, trade advertising, travel and events of $12,000.
SATELLITE TRANSPONDER AND RENT PAID TO RELATED PARTIES:
Related party expenditures decreased from $346,000 for the first quarter of 1996
to $118,000 for the same current year period. Satellite transponder and service
fees for the Company's satellite distributed programming resulted in related
party expenditures of $220,500 for the quarter ended March 31, 1996 with no
comparable expense in 1997. WTCI, a subsidiary of Tele-Communications, Inc., is
now providing the satellite transponder and uplink services via the Hughes'
satellite Galaxy 7, transponder 13. Beginning in January 1997, the fee charged
by WTCI was $55,000 per month and such expense was included in the financial
statements under "Affiliate fees, site costs and telephone service." The Company
is negotiating a long-term agreement with WTCI for these services, which are now
provided on a month-to-month basis.
In 1997 and 1996, the Company incurred rental expense of approximately $118,000
and $125,200, respectively, payable to Island Trading Company, Inc. for its
corporate headquarters location.
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization expenses for the quarter ended March 31, 1997
-17-
<PAGE> 18
RESULTS OF OPERATIONS (CONT'D)
increased by approximately $277,000 due to capital expenditures for the
development, equipment and installation costs associated with the new digital
boxes launched in 1996 and 1997, as well as certain capital expenditures
relating to international operations.
LIQUIDITY AND CAPITAL RESOURCES:
The Company's current ratio (current assets to current liabilities) was 1.93 to
1.00 at March 31, 1997 as compared to 2.79 to 1.00 at March 31, 1996. At March
31, 1997, the Company's current assets exceeded its current liabilities by
approximately $3,656,000.
The Company utilized approximately $7.0 million in cash during 1996 and first
quarter 1997, for equipment, software development and leasehold improvements.
These expenditures related mainly to the initial wave of development and
installation of the Company's digital box technology, including base digital
support equipment and enhancement to its in-house computer system during the
past twelve months, plus costs associated with expanding the Company's office
space in New York and Miami Beach. The Company believes that the newly developed
technology, known as the Digital Box, is a critical element of the Company's
future. The marketing advantages provided by the Digital Box will allow enhanced
localized programming and advertising plus programming improvements through
enhanced audio and video quality, superior graphic quality, consumer friendly
responsiveness (such as nearly immediate video play), and operational
efficiencies, such as reduction of expenses associated with the manual process
of tapes, discs, weekly change outs of music product and limited availability
for advertising. The Company now has replaced all domestic analog boxes in the
field with the Digital Box except for certain low performing boxes, which were
switched to the Company's satellite box feed at a cost of approximately $2,500
per location. There can be no assurance that this new technology will result in
additional distribution, additional advertising sales or higher viewership. In
the future, a digital rather than analog box will be deployed at new domestic
affiliate locations. Analog box equipment taken out of domestic service is now
available for deployment internationally, reducing the Company's cash
requirements for expansion in new and existing international markets.
Approximately $993,000 was spent during first quarter 1997 in advances of
operating expenses for the Company's international operations, specifically
Holland, Argentina, Venezuela, Chile, Peru, New Zealand and Italy. Another
$175,000 was spent for corporate international development expenses.
In February 1996, the Company entered into a five-year agreement with an
unaffiliated party to purchase satellite receiving equipment and satellite
transponder time for sending digitized video segments from the Company's
headquarters to the various box unit locations at cable head end and broadcast
station sites. The minimum cash
-18-
<PAGE> 19
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
commitment of the Company under this agreement is approximately $1.9 million, of
which approximately $980,000 has already been paid through April 1997.
The Company has used, and plans to continue to use funds received from the 1995
and 1996 sales of its former United Kingdom subsidiary to: (i) fully implement
the Digital Box, replacing virtually all domestic analog boxes in the field with
a Digital Box or a conversion to satellite service; (ii) expand the distribution
of the Company's programming by constructing and installing additional box units
with the new digital technology; (iii) advertise, market and promote the
Company's programming including the staffing of a larger marketing and sales
staff; (iv) research, develop, maintain and improve the Company's software and
equipment including the continued development of the Digital Box; (v) fund
working capital; and (vi) fund certain international programming ventures, such
as The Box - Italy which was launched in March 1997. It is estimated that The
Box - Italy will require nearly $1.2 million in cash and equipment contributions
within its first eighteen months of operation.
Management has and will continue to undertake several operational measures in an
effort to continue to improve the Company's liquidity and cash flow position.
With full implementation of the Digital Box, the Company will save approximately
$82,000 in operating costs per month, or annual savings of $984,000. In 1995,
the Company completed the renegotiation of affiliation agreements with the two
largest multiple system operators. While considerable savings have resulted from
the renegotiation of these agreements and all new agreements are signed at these
similar reduced monthly guaranteed affiliation payments, it is not known if the
Company may be required to incur additional costs in order to gain distribution
in certain key markets.
Chargebacks of the Company's phone call revenue have been reduced by blocking
requests of viewers who have a history of denying having made music video
requests and applying credit limits on new customer accounts. As the Company
obtains additional information about its customer base and improves upon the
time taken by the Company's phone provider to report denied payments, the
Company believes it will be able to continue to reduce or at least maintain the
current chargeback levels. With the implementation of the new prepaid video
program, the Company has realized reduced chargebacks, reduced transport and
telecommunications expenses as well as elimination of the seven percent billing
fee imposed on all gross transactional revenue handled by the Company's current
telephone service provider. The Company also plans to handle all transactional
calls through its own telephone system. While exact cost savings are not known,
and cannot be assured, significant savings are expected when such a complete
transfer occurs.
The Company believes that its current financial position, with its current level
of operations, will be sufficient to meet its cash requirements over the next
twelve months.
-19-
<PAGE> 20
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE BOX WORLDWIDE, INC.
-----------------------
(REGISTRANT)
Date: May 12, 1997 By: /s/Alan McGlade
---------------------------------
Alan McGlade
President and Chief Executive Officer
Date: May 12, 1997 By: /s/Luann M. Hoffman
---------------------------------
Luann M. Hoffman
Chief Financial and
Administrative Officer
-20-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 4,316,162
<SECURITIES> 0
<RECEIVABLES> 3,179,603
<ALLOWANCES> 380,000
<INVENTORY> 0
<CURRENT-ASSETS> 7,575,714
<PP&E> 17,123,326
<DEPRECIATION> 8,831,791
<TOTAL-ASSETS> 17,413,955
<CURRENT-LIABILITIES> 3,929,441
<BONDS> 0
2,336,258
0
<COMMON> 24,002
<OTHER-SE> 11,124,254
<TOTAL-LIABILITY-AND-EQUITY> 17,413,955
<SALES> 0
<TOTAL-REVENUES> 4,672,202
<CGS> 1,491,872
<TOTAL-COSTS> 4,390,279
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,381,213)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,381,213)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,381,213)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> 0
</TABLE>
