<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended September 30, 1995
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
Commission file number 0-21150
-------
GRAFF PAY-PER-VIEW INC.
-----------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 11-2917462
- --------- ----------
(STATE OF OTHER JURISDICTION OF (I.R.S. EMPLOYER
OR ORGANIZATION) IDENTIFICATION NO.)
536 BROADWAY, NEW YORK, NY 10012
---------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(212) 941-1434
---------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--
Number of outstanding of Registrant's Common Stock as of November 1, 1995:
12,071,543
<PAGE>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 1,165,887 $ 1,598,282
ACCOUNTS RECEIVABLE, NET 8,889,124 9,082,458
FILM AND CD-ROM COSTS, NET 2,358,721 941,459
PREPAID EXPENSES AND OTHER CURRENT
ASSETS 2.703,880 2,102,017
DEFERRED SUBSCRIPTION COSTS 862,638 1,053,043
DUE FROM RELATED PARTIES AND OFFICERS 362,749
------------------------------
TOTAL CURRENT ASSETS 16,342,999 14,777,259
PROPERTY AND EQUIPMENT, NET 10,708,668 7,281,200
DUE FROM RELATED PARTIES 485,587 542,931
FILM AND CD-ROM COSTS, NET 2,687,761 2,316,306
INTANGIBLE ASSETS:
LIBRARY OF MOVIES 2,351,732 1,558,151
COST IN EXCESS OF NET ASSETS ACQUIRED,
NET OF ACCUMULATED AMORTIZATION 12,301,276 12,770,967
INVESTMENT IN TELESELECT 3,146,247
INVESTMENT IN AMERICAN GAMING NETWORK,
J.V. 1,000,000
OTHER ASSETS 1,068,796 1,750,925
------------------------------
TOTAL ASSETS $50,093,066 $40,997,739
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
CURRENT PORTION OF LONG-TERM DEBT 2,460,360 4,439,069
ROYALTIES PAYABLE 2,512,822 2,178,856
ACCOUNTS PAYABLE 3,815,465 2,927,173
ACCRUED EXPENSES PAYABLE 1,233,536 1,470,218
DEFERRED SUBSCRIPTION REVENUE 2,512,508 3,191,256
------------------------------
TOTAL CURRENT LIABILITIES 12,534,691 14,206,572
LONG-TERM DEBT 14,317,181 3,198,593
DEFERRED COMPENSATION 181,531 132,366
------------------------------
TOTAL LIABILITIES 27,033,403 17,537,531
------------------------------
STOCKHOLDERS' EQUITY
COMMON STOCK, $.01 PAR VALUE;
AUTHORIZED 25,000,000 SHARES,
12,071,543 ISSUED AND OUTSTANDING
SHARES AT SEPTEMBER 30, 1995 AND
11,116,588 SHARES ISSUED
AND OUTSTANDING AT DECEMBER 31, 1994 120,716 111,166
ADDITIONAL PAID-IN CAPITAL 23,364,091 20,887,916
UNEARNED COMPENSATION (1,399,407)
ACCUMULATED EARNINGS 1,041,279 2,169,315
FOREIGN CURRENCY TRANSLATION ADJUSTMENT 556,921 291,811
------------------------------
23,683,600 23,460,208
LESS SHAREHOLDERS' LOANS (623,937)
------------------------------
TOTAL STOCKHOLDERS' EQUITY 23,059,663 23,460,208
------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $50,093,066 $40,997,739
==============================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
2
<PAGE>
GRAFF PAY-PER-VIEW AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1995 1994
-------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES: $ 12,540,333 $13,194,769 $39,189,561 $36,635,111
-------------------------------------------------------
OPERATING EXPENSES:
COST OF GOODS SOLD 32,474 195,655 472,412 480,068
SALARIES, WAGES AND BENEFITS 2,812,597 2,311,067 8,123,127 6,312,710
PRODUCER ROYALTIES AND FILM COST 1,440,167 1,666,609 4,682,106 5,197,031
AMORTIZATION
SATELLITE, UPLINKING AND PLAYBACK 3,822,496 3,566,243 9,173,619 10,058,089
EXPENSES
SELLING, GENERAL AND 4,986,036 3,576,127 13,581,257 10,448,470
ADMINISTRATIVE EXPENSES
DEPRECIATION OF FIXED ASSETS AND
AMORTIZATION OF GOODWILL 715,360 431,016 1,972,908 1,208,446
-------------------------------------------------------
OPERATING EXPENSES 13,809,130 11,746,717 38,005,429 33,704,814
-------------------------------------------------------
TOTAL INCOME (LOSS) FROM (1,268,797) 1,448,052 1,184,132 2,930,297
OPERATIONS
INTEREST EXPENSE 322,615 125,052 814,641 316,593
MINORITY INTEREST 190,447 598,780
-------------------------------------------------------
INCOME (LOSS) BEFORE PROVISION FOR (1,591,412) 1,132,553 369,491 2,014,924
INCOME TAXES
PROVISION FOR INCOME TAXES 347,395 249,696 1,016,927 831,166
-------------------------------------------------------
NET INCOME ($1,938,807) $ 882,857 ($647,436) $ 1,183,758
(LOSS)
=======================================================
EARNINGS (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE, PRIMARY ($0.15) $0.07 ($0.05) $0.10
=======================================================
EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE, ASSUMING FULL DILUTION $0.07 $0.10
============== ==============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING, PRIMARY 12,749,016 11,842,720 12,749,109 11,846,454
=======================================================
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING, ASSUMING FULL DILUTION 12,014,140 12,017,874
============== ==============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
3
<PAGE>
GRAFF PAY-PER-VIEW AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
---------------------- FOREIGN
ADDITIONAL UNEARNED ACCUMULATED TRANSLATION
SHARES AMOUNT PAID-IN CAPITAL COMPENSATION EARNINGS ADJUSTMENT TOTAL
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 11,116,588 $111,166 $20,887,916 $2,169,315 $291,811 $23,460,208
SHARES ISSUED IN
CONNECTION WITH
THE EXERCISE OF
EMPLOYEE OPTIONS 7,000 70 27,660 27,730
SHARES ISSUED IN
CONNECTION WITH
A CONSULTING AGREEMENT 21,000 210 223,790 224,000
SHARES ISSUED TO AN
EMPLOYEE IN CONNECTION
WITH A BONUS 1,200 12 11,388 11,400
SHARES ISSUED IN
CONNECTION WITH
THE EXERCISE OF SENIOR
MANAGEMENT OPTIONS 748,755 7,488 616,449 623,937
CONTRIBUTED SERVICES BY
SHAREHOLDERS 46,300 46,300
CONVERSION OF AEC INTEREST
PAYABLE TO EQUITY 25,733 25,733
RESTRICTED STOCK GRANTED TO
EXECUTIVE OFFICERS 177,000 1,770 1,524,855 (1,399,407) 127,218
LESS DIVIDENDS PAID TO THE
FORMER SHAREHOLDERS OF SEG (480,600) (480,600)
NET LOSS FOR THE PERIOD (647,436) (647,436)
FOREIGN CURRENCY
TRANSLATION ADJUSTMENT 265,110 265,110
-------------------------------------------------------------------------------------------------------
12,071,543 $120,716 $23,364,091 ($1,399,407) $1,041,279 $556,921 $23,683,600
LESS SHAREHOLDERS' LOANS ($623,937)
-------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30,
1995 12,071,543 $120,716 $23,364,091 ($1,399,407) $1,041,279 $556,921 $23,059,663
=======================================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
4
<PAGE>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1995 1994
--------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) ($647,436) $ 1,183,758
--------------------------
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH USED IN OPERATING ACTIVITIES:
MINORITY INTEREST 598,780
DEPRECIATION AND AMORTIZATION 1,290,367 924,281
AMORTIZATION OF GOODWILL 682,270 310,028
AMORTIZATION OF FILM COSTS AND
CD-ROM COSTS 1,182,692 807,876
AMORTIZATION OF LIBRARY OF MOVIES 759,910 45,000
CONTRIBUTED CAPITAL 72,034 208,200
PROVISION FOR BAD DEBTS 236,397 51,582
COMPENSATION SATISFIED THROUGH THE
ISSUANCE OF COMMON STOCK 264,212 43,000
DEFERRED COMPENSATION EXPENSE 49,165 49,165
GAIN ON SALE OF EQUIPMENT (7,900) (189,496)
OTHER, NET 3,882
CHANGES IN ASSETS AND LIABILITIES:
INCREASE IN ACCOUNTS RECEIVABLE (43,063) (2,775,218)
INCREASE IN FILM COSTS (2,971,409) (1,473,245)
(INCREASE) DECREASE IN LOANS
RECEIVABLE FROM OFFICERS (305,405) 470,675
(INCREASE) DECREASE IN PREPAID
EXPENSES AND OTHER CURRENT
ASSETS 243,935 (180,922)
DECREASE IN DEFERRED
SUBSCRIPTION COST 190,405
INCREASE (DECREASE) IN
ROYALTIES PAYABLE 333,966 (1,230,387)
DECREASE IN ADVANCE (275,000)
INCREASE IN ACCOUNTS PAYABLE
AND ACCRUED EXPENSES 651,611 143,060
(DECREASE) INCREASE IN
DEFERRED SUBSCRIPTION REVENUE (678,748) 161,152
--------------------------
TOTAL ADJUSTMENTS 1,950,439 (2,307,587)
--------------------------
NET CASH PROVIDED BY
(USED IN) OPERATING
ACTIVITIES 1,303,003 (1,123,829)
--------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
PURCHASE OF PROPERTY AND EQUIPMENT (3,770,976) (2,734,337)
PROCEEDS FROM THE SALE OF EQUIPMENT 4,708 781,500
INVESTMENT IN LIBRARY OF MOVIES (1,553,491) (498,703)
INVESTMENT IN TELESELECT (2,526,247)
INCREASE IN OTHER ASSETS (393,750) (248,731)
INVESTMENT IN AMERICAN GAMING
NETWORK (425,000)
--------------------------
NET CASH USED IN
INVESTING ACTIVITIES (8,664,756) (2,700,271)
--------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM THE ISSUANCE OF
COMMON STOCK AND DETACHABLE
WARRANTS 27,730 2,628,150
PROCEEDS FROM SALE OF TREASURY STOCK 125,665
PROCEEDS FROM THE ISSUANCE OF
LONG-TERM DEBT 9,085,000 1,854,000
DIVIDENDS PAID TO MINORITY
SHAREHOLDERS OF HVC (848,827)
REPAYMENT OF LONG-TERM DEBT (1,677,772) (735,429)
REPURCHASE OF OUTSTANDING WARRANTS (25,000)
DISTRIBUTION TO THE FORMER
SHAREHOLDERS OF SEG (480,600)
--------------------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 6,929,358 3,023,559
--------------------------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (432,395) (800,541)
CASH AND CASH EQUIVALENTS, BEGINNING OF
THE PERIOD 1,598,282 2,251,180
--------------------------
CASH AND CASH
EQUIVALENTS, END OF THE
PERIOD 1,165,887 1,450,639
==========================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
CONTINUED
5
<PAGE>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1995 1994
----------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
CASH PAID DURING THE PERIOD FOR:
<S> <C> <C>
INTEREST $ 447,243 $121,049
======================
INCOME TAXES $ 980,228 $123,066
======================
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
ISSUANCE OF 30,000 SHARES OF COMMON
STOCK AT FAIR MARKET VALUE IN
CONVERSION OF A CONVERTIBLE NOTE $150,000
ISSUANCE OF 12,500 SHARES OF COMMON
STOCK IN CONNECTION WITH THE
PURCHASE OF PSP COMMUNICATIONS $ 93,750
ISSUANCE OF 125,000 SHARES AT FAIR
MARKET VALUE IN CONNECTION WITH THE
PURCHASE OF PSP HOLDINGS $953,125
LIABILITIES ASSUMED FROM THE
PURCHASE OF PSP HOLDINGS $ 75,000
ISSUED COMMON STOCK AS COMPENSATION
FOR SERVICE RENDERED BY CONSULTANT $ 18,000
ISSUED COMMON STOCK FOR BONUS TO
EMPLOYEE $ 11,400
ACQUIRED EQUIPMENT THROUGH
EXECUTION OF CAPITAL LEASE $ 885,737 $ 38,873
ISSUANCE OF 748,755 SHARES OF
COMMON STOCK IN CONNECTION WITH
THE EXERCISE OF SENIOR MANAGEMENT
OPTIONS IN EXCHANGE FOR NOTES
RECEIVABLE $ 623,937
ISSUANCE OF 21,000 SHARES OF COMMON
STOCK AT FAIR MARKET VALUE IN
CONNECTION WITH A CONSULTING
AGREEMENT $ 224,000
EQUITY ADJUSTMENT ON TRANSLATION ON
FOREIGN CURRENCY $ 265,110 $204,546
ISSUANCE OF 177,000 SHARES OF
RESTRICTED STOCK TO SENIOR
MANAGEMENT OF WHICH,
$127,219 WAS RECOGNIZED AS
COMPENSATION EXPENSE AT
SEPTEMBER 30, 1995 $1,526,625
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
6
<PAGE>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 - CONTINUED
(UNAUDITED)
1. In the opinion of Graff Pay-Per-View Inc. and its wholly-owned subsidiaries
(the "Company"), which include Adam and Eve Communications, Inc. and Spector
Entertainment Group, Inc., the accompanying consolidated financial statements
contain all adjustments (consisting of only normal recurring accruals) necessary
to present fairly the financial position as of September 30, 1995 and the
results of operations for the three and nine months then ended and cash flows
for the nine months then ended. The Company violated various covenants of its
loan with Midlantic Bank, N.A. ("Midlantic"). Midlantic has agreed to waive
these defaults through December 30, 1995 and agreed to discuss in good faith the
financial covenants. The Company believes it will be successful renegotiating
the financial covenants and has classified the loan as long term.
2. The results of operations for the three and nine months ended September 30,
1995 are not necessarily indicative of the results to be expected for the full
year.
3. The accompanying financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany transactions and balances
have been eliminated in consolidation. As of July 31, 1994, the Company acquired
the balance of the equity in The Home Video Channel Limited ("HVC"); as a
consequence the minority interest previously reported is no longer applicable
subsequent to July 31, 1994.
4. On April 13, 1995, pursuant to a Merger Agreement and Plan of Reorganization
dated April 7, 1995, by and among Adam & Eve Communications, Inc. ("AEC"),
Russell J. Hampshire, John J. Gallagher and Nolan Quan, Graff Pay-Per-View Inc.
and Spice, Inc. ("Spice"), a wholly-owned subsidiary of the Company, AEC was
merged with and into Spice (the "AEC Merger"). The AEC shareholders received in
the AEC Merger an aggregate of 820,000 shares of the Company's common stock,
par value $.01 ("Common Stock") . This price was determined by arms' length
negotiations with the AEC shareholders, who prior to the AEC Merger were
unrelated to the Company. This transaction was accounted for as a pooling of
interest, whereby the financial statements for all the periods prior to the
combination were restated to reflect the combined operations.
Prior to the AEC Merger, AEC operated a pay-per-view network featuring
cable version adult films and programming in the United States. The Company
continues to operate this network. As a result of the AEC Merger, the Company
gained access to licenses of approximately 200 adult titles from VCA Labs, Inc.
("VCA"), an affiliate of a principal AEC shareholder and others, and increased
its subscriber base.
As of August 31, 1995, pursuant to a Merger Agreement and Plan of
Reorganization dated August 9, 1995 by and among Spector Entertainment Group,
Inc. ("SEG"), Edward M. Spector, the Company and Newco SEG, Inc., a newly-formed
wholly-owned subsidiary of the Company ("Newco"), Newco was merged into SEG and
the surviving corporation (which will continue under the name Spector
Entertainment Group, Inc.) became a wholly-owned subsidiary of the Company (the
"SEG Merger"). After the SEG Merger, Edward M. Spector was elected to the
Company's Board of Directors. The former SEG shareholders received in the SEG
Merger an aggregate of 700,000 shares of Common Stock. This price was
determined by arms' length negotiations with the SEG shareholders, who, prior to
the SEG Merger, were unrelated to the
7
<PAGE>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 - CONTINUED
(UNAUDITED)
Company. This transaction was accounted for as a pooling of interest, whereby
the financial statements for all prior periods were restated to reflect the
combined operations.
SEG provides television production and communications services,
systems and equipment to the sports, entertainment and pari mutuel wagering
industries. Since the SEG Merger, SEG has continued in its previous business
and continues to operate from leased facilities owned by Margate Associates, an
affiliated entity owned by the Spector family.
The former SEG shareholders also own United Transactive Systems, Inc.
("UTI") (formerly known as Spector Information Systems, Inc.), which holds an
interest in a partnership with Medtech Broadcast Inc. The partnership was
formed to distribute information, news and other programming using a proprietary
point to multipoint secure data distribution system. Pursuant to a letter
agreement dated August 13, 1995, as amended by a letter agreement dated August
31, 1995, between UTI shareholders and the Company, the UTI shareholders granted
the Company an option to acquire the UTI stock in exchange for a minimum of
100,000 shares of Common Stock and a maximum of 300,000 shares of Common Stock
equal in value to 25% multiplied by UTI's earnings before interest, taxes and
depreciation in excess of $400,000 for the preceding 12 month period. If the
Company does not exercise its option, the UTI shareholders may put the UTI
shares to the Company (except in certain circumstances) for the number of shares
of Common Stock determined under the foregoing.
The following reconciles revenue and earnings as previously reported
by the Company with the combined amounts currently presented in the Statement of
Operations.
NINE MONTHS ENDED SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
ORIGINALLY STATED AEC SEG RESTATED
----------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE $29,196,534 $2,020,729 $5,417,848 $36,635,111
NET INCOME (LOSS) $ 1,714,864 ($580,074) $48,968 $ 1,183,758
EPS - PRIMARY $ 0.17 $ 0.10
WEIGHTED AVERAGE
NUMBER OF SHARES 10,326,454 820,000 700,000 11,846,454
THREE MONTHS ENDED SEPTEMBER 30, 1994
ORIGINALLY STATED AEC SEG RESTATED
----------------------------------------------------------
REVENUE $10,301,603 $ 811,567 $2,081,599 $13,194,769
NET INCOME (LOSS) $ 1,106,108 ($129,557) ($93,694) $ 882,857
EPS - PRIMARY $ 0.11 $ 0.07
WEIGHTED AVERAGE
NUMBER OF SHARES 10,322,720 820,000 700,000 11,842,720
</TABLE>
5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
8
<PAGE>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 - CONTINUED
(UNAUDITED)
Revenue Recognition and Producer Royalty Expenses:
Pay-per-view revenues are recognized in the periods in which the films
or events are aired by the cable systems which have license agreements with the
Company.
Subscription revenues are deferred and amortized over the life of the
subscription. At September 30, 1995 and December 31, 1994, deferred
subscription revenues were $2,512,508 and $3,191,256, respectively.
Deferred subscription costs of $862,638 and $1,053,043 at September
30, 1995 and December 31, 1994, respectively, are deferred and amortized over
the life of the subscription.
The Company has entered into contractual agreements with producers or
film makers in order to obtain the rights to license films or events to the
cable systems, home backyard satellite dish market and hotels. The producer
agreements require that royalties be paid on the basis of either a percentage of
the revenues ("the producer royalty splits") or a flat fee for a specified
period, generally one or two years. The producer royalty splits are recorded in
the period the film or event is exhibited. Royalties paid on a flat fee basis
are amortized by the straight-line method over the term of the licensing period,
thus matching the cost of the flat fee over the related revenue stream.
The Company has entered contracts with four major adult motion picture
producers. The contracts state that the Company will license world-wide pay-TV
rights in perpetuity. The Company amortizes these titles using the income
forecast method.
The Company recognizes revenue in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 53, Financial Reporting by Producers
and Distributors of Motion Picture films. Revenue is recognized when film
rights are distributed. The Company recognizes revenue from the sales of video
cassettes and CD-ROMs when units are shipped. Film and CD-ROM costs are
amortized using the income forecast method.
SEG recognizes revenue when services are performed. Most of SEG's
revenue is generated under long-term contracts with remaining terms from 1 to 7
years. SEG provides services for all the customers' scheduled events under
these non-cancelable contracts for the term of the contract.
9
<PAGE>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 - CONTINUED
(UNAUDITED)
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
USEFUL LIVES IN SEPTEMBER 30, DECEMBER 31,
YEARS 1995 1994
---------------------------------------------------
<S> <C> <C> <C>
EQUIPMENT 5-10 $12,895,721 $ 9,897,813
FURNITURE AND FIXTURES 7 772,831 517,813
LEASEHOLD IMPROVEMENTS LIFE OF LEASE OR
SHORTER 2,497,169 1,111,593
------------------------------
$16,165,721 $11,527,219
LESS, ACCUMULATED
DEPRECIATION AND
AMORTIZATION (5,457,053) (4,246,019)
------------------------------
$10,708,668 $ 7,281,200
==============================
</TABLE>
7. LONG-TERM DEBT AND NOTES PAYABLE
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
-----------------------------
<S> <C> <C>
9.9% NOTE PAYABLE (A) $ 693,750 $ 862,500
REVOLVING LINE OF CREDIT (A) 10,780,000 2,565,000
8% - 11% NOTES PAYABLE 303,122 357,295
8.75% NOTE PAYABLE (B) 776,325
8.5% NOTE PAYABLE (C) 2,688,957 2,887,500
8% NOTES PAYABLE (D) 775,000
CAPITAL LEASE (E) 1,385,737
10% - 12% EQUIPMENT LOANS 150,975 189,042
-----------------------------
16,777,541 7,637,662
LESS CURRENT PORTION 2,460,360 4,439,069
-----------------------------
$14,317,181 $3,198,593
=============================
</TABLE>
The aggregate principal payments of the aforementioned long-term debt
maturing in each of the year's subsequent to September 30, 1995, including
estimated payments on debt with contingent terms, are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
SEPTEMBER 30, PAYMENT
- ---------------- -----------
<S> <C>
1996 $ 2,460,360
1997 12,543,522
1998 1,555,976
1999 217,683
-----------
$16,777,541
===========
</TABLE>
10
<PAGE>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 - CONTINUED
(UNAUDITED)
(a) On October 21, 1994 the Company entered into a loan agreement, which was
amended and restated on December 9, 1994 and again on August 13, 1995, with
Midlantic for a term loan with the principal sum of $900,000 and a
revolving credit line not exceeding $15,000,000 of which $4,220,000 was
available at September 30, 1995. The term loan bears interest at 9.90% and
is repayable in forty-eight monthly payments of $18,750. Interest on the
revolving credit line is based on either prime plus 1% or the 30, 60, or 90
day LIBOR plus 3% which is selected by the Company at the time of each
drawdown. Interest payments are made quarterly and the revolving credit
line will expire on December 31, 1996. The term loan and revolving credit
line are collateralized by the stock of the Company's subsidiaries.
Under the most restrictive covenants of the Midlantic loan agreement, the
Company must maintain a consolidated net worth of $22,000,000 from June 30,
1995 through December 30, 1995, $28,000,000 from December 31, 1995 to June
29, 1996, $33,000,000 from June 30, 1996 through December 30, 1996 and
$39,000,000 on December 31, 1996 and thereafter. The Company must also
maintain a senior debt leverage ratio of 2.00 to 1.00 or less at any time.
Also, its ratio of total liabilities to net worth cannot exceed 1.10 to
1.00 through December 30, 1995, 1.00 to 1.00 from December 31, 1995 through
December 30, 1996 and .75 to 1.00 on December 31, 1996 and thereafter.
The Company is in violation of various financial covenants contained in the
Midlantic loan agreement as described in note 1.
On December 8, 1994, the Company granted to Midlantic warrants to purchase
100,000 shares of Common Stock in connection with the revolving line of
credit. These warrants are currently exercisable at a price of $12.03 per
share and expire on December 8, 2004.
(b) On July 29, and November 8, 1993, the former shareholders of AEC provided
loans to AEC to fund its working capital needs. The principal sum of the
loans was $1,821,000, with interest at a rate of 1% above the prime rate
established by AEC's primary bank.
In connection with the AEC Merger, approximately $776,000 of the loans were
repaid by AEC in March and September of 1995. The balance of the notes and
accrued interest, aggregating approximately $1,176,000, was contributed to
capital for the year ended December 31, 1994. Accrued interest of $25,733
was contributed to capital during the nine months ending September 30,
1995.
(c) SEG has a loan from Imperial Bank (the "Imperial") which has a remaining
principal balance of $2,688,957 as at September 30, 1995. The loan requires
monthly principal payments of $70,209 and bears interest at Imperial's
prime rate plus 2%. SEG also has a
11
<PAGE>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 - CONTINUED
(UNAUDITED)
line of credit available from Imperial of $670,000, none of which has been
used at the end of the quarter. Prior to the SEG Merger, the loan was
guaranteed by the former SEG shareholders. After the SEG Merger, the
Company guaranteed the loan up to $2,870,000. Pursuant to an agreement
between Imperial and the Company, upon Imperial's written declaration of an
event of default, Imperial agreed to forebear for a period of nine months
from exercising any remedies provided that either SEG or the Company
continues to pay principal and interest due under the existing credit
agreements.
(d) The Company and TV Games, Inc. ("TVG"), a wholly owned subsidiary of
Multimedia Games, Inc. ("MMG"), entered into a joint venture agreement and
formed American Gaming Network, J.V. ("AGN") to develop and promote a high
stakes proxy-play Class II tribal bingo broadcast television show and other
interactive gaming products and concepts. As part of this transaction, the
Company entered into two notes payable to MMG with principal amounts of
$500,000 and $275,000.
The Company issued the $500,000 note in connection with its purchase of a
one-third interest in MMG's existing intellectual property. The Company
contributed its share of the intellectual property to AGN. The note bears
8% interest and is payable out of the Company's portion of positive cash
flow from AGN or in June 1998, whichever is sooner.
The Company issued the $275,000 note in connection with the purchase of
100,000 shares of MMG stock at $2.75 per share. The $275,000 note is due
on July 26, 1996 and bears interest at the short term applicable federal
rate, as such term is defined in Section 1274 of the Internal Revenue Code
("AFR"). In August 1995, the Company prepaid $75,000 of this note and MMG
agreed to defer a $75,000 payment originally due on September 30, 1995
pursuant to the AGN joint venture agreement until the due date of the
$275,000 note with interest at the same rate as in such note.
(e) On August 1, 1995, the Company entered into a capital lease with IBM Credit
Corp. for approximately $2,100,000 of equipment. A portion of the lease
proceeds were used to refinance approximately $500,000 of equipment
previously acquired from a third party. The capital lease provides for an
initial $562,727 payment and 35 monthly payments of $43,286. The lease
payments were determined without interest but the Company has imputed
interest at 5.0%. As of September 30, 1995, only a portion of the
equipment was delivered to the Company.
8. RELATED PARTY TRANSACTIONS
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 nine months ended September 30, 1995. This transaction
occurred prior to the AEC Merger.
12
<PAGE>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 - CONTINUED
(UNAUDITED)
Pursuant to ancillary agreements to the AEC Merger, Spice entered into a
five year consulting agreement with two former AEC shareholders for an annual
consulting fee of $60,000 each. These consultants will provide Spice with
advisory services in connection with the development and distribution of new
adult products, services, merchandising and interactive programming and assist
in the production of pictures to be licensed from VCA. The Company also entered
into a three year consulting agreement with an affiliate of a former AEC
shareholder to explore the formation of joint ventures in the area of
merchandising for an annual fee of $50,000.
SEG leases office space from Margate Associates, a general partnership
wholly-owned by the former SEG stockholders. The lease which expires August 15,
1998 provides for monthly payments of $17,200. This transaction was entered
into prior to the SEG Merger.
Future minimum payments under the office lease for years ending September
30, are as follows:
<TABLE>
<CAPTION>
<S> <C>
1996 206,400
1997 206,400
1998 189,200
--------
$602,000
========
</TABLE>
SEG leases certain operating equipment from Sportsat II, LTD.
("Sportsat"), a limited partnership wholly-owned by the former stockholders of
SEG. The lease expires on December 31, 1995 and the monthly lease payment is
$12,500. The lease is automatically renewable for another year unless
notification of intent to cancel the lease is received prior to the expiration
of the lease. Total equipment rent expense was $112,500 for the nine month
period ended September 30, 1995 and $150,000 for the year ended December 31,
1994. This transaction was entered into prior to the SEG Merger.
13
<PAGE>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 - CONTINUED
(UNAUDITED)
During 1995, three officers/directors of the Company borrowed a total
of $227,944 bearing interest at 6.79% and maturing on December 31, 1995.
<TABLE>
<CAPTION>
Due from related parties:
<S> <C> <C>
September 30, 1995 December 31, 1994
---------------------------------------
Due from officers and directors $248,374 $179,900
Due from Margate Associates 117,600
Due from Buccaneer Gaming, Inc. 393,105 106,900
Due from UTI 137,041 83,900
Due from Sportsat II, LTD. 67,571 48,000
Due from others 2,245 6,631
---------------------------------------
848,336 542,931
Less current portion 362,749 0
---------------------------------------
$485,587 $542,931
=======================================
</TABLE>
9. On September 5, 1995 the Company and Spice, Inc., a wholly-owned subsidiary
of the Company, entered into a letter of intent with Penthouse International
Ltd. to form an international joint venture to be the exclusive vehicle for the
distribution of adult entertainment television networks outside of North America
using the Penthouse and Spice brand names. It is envisioned that each party
will have 50% of the equity in the new venture. It is currently contemplated
that the Company will contribute the stock of The Home Video Channel Limited to
such venture and will receive preferred stock in the new entity. It is also
contemplated that both parties will license adult movies and programming from
their respective libraries to the new entity.
14
<PAGE>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 - CONTINUED
(UNAUDITED)
10. On July 1, 1993 Pay-Per-View International, Inc. ("PPVI"), a wholly-owned
subsidiary of the Company, entered into an agreement with Coastline Films and
CPV Productions, Inc. ("CPV") to license 200 feature length motion pictures for
ten years. In consideration for the license, the Company issued 12,500 shares
of Common Stock to CPV and 37,500 shares of Common Stock to Coastline Films.
(CPV was subsequently acquired by the Company.) As additional consideration,
PPVI agreed to make certain cash payments to CPV and Coastline Films if PPVI's
subscriber base reached certain thresholds.
On August 30, 1995, PPVI entered into a Modification and Substitution
Agreement with Coastline Films and CPV. Coastline agreed that no further cash
payments would be required in exchange for Company's issuance of an additional
15,000 shares of Common Stock to Coastline Films. The parties also agreed to
reduce the number of films from 200 to 150 and to extend the terms of the film
licenses from 10 years to perpetuity.
11. During May 1995, the Company granted to several key executives 177,000
restricted shares of Common Stock ("Restricted Shares") for future services.
The Restricted Shares are non-transferable with such restriction lapsing in five
years. In accordance with generally accepted accounting principals, 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
September 30, 1995 ($1,399,407) has been included as a reduction in
stockholders' equity.
12. On October 3, 1995 the Company settled certain litigation by granting an
option to purchase 16,000 shares of Common Stock at an exercise price of $8.52
per share. The options expire October 3, 2005 and are exercisable immediately.
15
<PAGE>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
The Consolidated Statements of Operations include the results of Adam
& Eve Communications, Inc. ("AEC"), a wholly-owned subsidiary which was acquired
by merger on April 13, 1995, and Spector Entertainment Group, Inc., a wholly-
owned subsidiary, which was acquired by merger on August 31, 1995. The
acquisitions were accounted for as pooling of interests, whereby the financial
statements for all the periods prior to the combination were restated to reflect
the combined operations.
REVENUES
Revenues for the nine months ended September 30, 1995 increased by
approximately $2,555,000 (7.0%) to approximately $39,190,000 when compared to
the same period in 1994. Revenues for the three months ended September 30, 1995
decreased by approximately $654,000 (5.0%) to approximately $12,540,000 when
compared to the same period in 1994. The shortfall in revenue is due to a
combination of a decline in revenues from CPV, the C-Band direct to home market
and Cable Video Store, the Company's hit movie service.
CPV had production contracts with two cable networks in 1994 for a
total of 26 half-hour television programs (in addition to other production
agreements). In 1995, CPV was unable to secure any similar production contracts
with these networks which has resulted in the decline in its revenues. CPV is
currently in negotiations with cable networks for production of similar series
of television programs to be delivered in 1996. There are no assurances that
these production agreements will be signed or if signed, whether the level of
revenues will be similar or greater than the revenues from the 1994 production
agreements.
In the C-band direct to home market several competing adult explicit
services were launched during 1994 and 1995. These explicit adult services
compete directly with Spice and Adam & Eve in the C-band market and have
resulted in a decline in revenues in this market. There are no assurances that
the current trend will reverse. These explicit adult services are not currently
distributed by cable operators and therefore do not impact on the Spice
Networks' revenues in the cable market.
Cable Video Store also experienced a decline in revenues for the nine
and three month period ending September 30, 1995 because the Company had fewer
subscribers and there were fewer blockbuster movies as compared to the similar
periods last year.
On July 1, 1995 the Company lost 1 million Spice network subscribers
(8% of Spice network subscribers) from the Time Warner New York cable system.
This system represented revenues of approximately $2 million annually.
Subsequently, the number of Spice network subscribers has grown from the
addition of new cable systems, including other Time Warner systems and growth in
the subscriber base of existing systems. The Company believes that overall
revenues from the Spice cable market will continue to grow.
16
<PAGE>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SALARIES
Salaries, wages and benefits in the nine months ended September 30,
1995 increased by approximately $1,810,000 (28.7%) as compared to the same
period in 1994. In the three months ended September 30, 1995, the increase was
approximately $502,000 (21.7%) as compared to the same period in 1994. The
increase resulted primarily from higher levels of staffing necessary to maintain
and grow the Company's subscriber base, explore new network opportunities such
as American Gaming Network and DRAGNET (a shopping network) and explore other
business opportunities such as CD-ROMs, video dial tone delivery systems and on-
line services.
PRODUCER ROYALTIES
Producer royalties and film cost amortization in the nine months ended
September 30, 1995 have decreased by approximately $515,000 (9.9%) as compared
to the same period in 1994. In the three month period ended September 30,
1995, the decrease was approximately $226,000 (13.6%) as compared to the same
period in 1994. The decline is primarily attributable to (i) the increased use
of adult movies for which rights are held in perpetuity and amortized in
accordance SFAS No. 53 as compared with adult movies licensed for and amortized
over a two or three year period and (ii) a decline in royalties payable to the
studios attributable to the decrease in Cable Video Store revenues.
SATELLITE EXPENSE
Satellite expense for the nine months ended September 30, 1995 have
decreased by approximately $884,0000 (8.8%) as compared to the same period in
1994. In the three month period ended September 30, 1995 satellite expense
increased approximately $256,000 (7.2%) as compared to the same period in 1994.
On April 1, 1995 the Company terminated its domestic transponder lease agreement
with TVN and leased transponders from AT&T at a reduced rate. Also, in the
second quarter of 1995, HVC received a limited amount of free transponder time
from the operators of the Astra satellite because HVC voluntarily moved from one
transponder to another on the same Astra satellite grouping. The Company
launched a new European network which required a transponder in the third
quarter. The decrease in domestic satellite transponder costs was offset by the
addition of the new European transponder.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative costs increased by approximately
$3,133,000 (30.0%) in the nine months ended September 30, 1995 as compared to
the same period in 1994. In the three month period ended September 30, 1995,
the increase was approximately $1,410,000 (37.4%) as compared to the same period
in 1994. The increase is attributable to, among other items, the exploration of
international opportunities other than TeleSelect, the improvement of the
networks' on-air images, additional marketing, advertising and sales promotion
undertaken to both maintain and increase the networks' subscriber bases and
additional overhead due to the expansion of corporate headquarters. In
addition, for the nine months ended September 30, 1995, the Company incurred
substantial promotional expenses for its adult services to combat
17
<PAGE>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
new competition from other networks. Also, the Company has spent money exploring
new network opportunities including, among others, American Gaming Network and
DRAGNET, an infomercial network. There can be no assurances that these networks
will be launched or if launched that they will be profitable.
DEPRECIATION OF FIXED ASSETS AND AMORTIZATION OF GOODWILL
Depreciation of fixed assets and the amortization of goodwill
increased by approximately $764,000 (63.3%) for the nine months ended September
30, 1995 as compared to the same period in 1994. In the three month period
ended September 30, 1995, the increase was approximately $284,000 (66.0%) as
compared to the same period in 1994. The increase is primarily due to the
increased ownership of HVC resulting from the purchase of the remaining 49% for
$6,730,000 in cash and stock on August 1, 1994. The excess of the purchase
price over the fair market value of the net assets acquired is being amortized
utilizing the straight-line method over twenty years. Also, depreciation
expense has increased due to new capital improvements for the expansion of the
Company's corporate headquarters, which are amortized using the straight-line
method over the life of the lease.
INTEREST EXPENSE
Interest expense has increased by approximately $498,000 (157.3%) for
the nine months ended September 30, 1995 as compared to the same period in 1994.
In the three month period ended September 30, 1995, the increase was
approximately $198,000 (158.0%) as compared to the same period in 1994. The
increase is primarily due to additional borrowings under the revolving line of
credit from Midlantic.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At September 30, 1995 the Company had a working capital surplus of
approximately $3,808,000 compared to approximately $571,000 as at December 31,
1994. The increase in working capital surplus is primarily attributable to the
reclassification of borrowings under the revolving line of credit to long term
debt. EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) was
approximately $3,157,000 for the nine months ended September 30, 1995 as
compared to approximately $3,540,000 over the similar period last year. The
decrease in EBITDA is primarily attributable to the increase in selling, general
and administrative expenses. Stockholders' equity at September 30, 1995 was
approximately $23,060,000 compared to approximately $23,460,000 on December 31,
1994. The equity decrease resulted primarily from net losses for the period.
Net cash provided by operating activities was approximately $1,303,000
for the nine months ended September 30, 1995, compared with net cash used in
operating activities of approximately $1,124,000 in the corresponding prior
period. In the nine months ended September 30, 1995 cash from operating
activities was generated by net losses adjusted for non cash items, principally
amortization and depreciation of fixed assets and film costs, together with an
increase in accounts payable and royalties payable, offset by an increase in
film costs.
18
<PAGE>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net cash used in investing activities was approximately $8,665,000 for
the nine months ended September 30, 1995, compared with approximately $2,700,000
in the corresponding prior period. The foregoing results were primarily
attributable to the Company's increased capital expenditure in 1995 relating to
its foreign investment in TeleSelect, the expansion of the Company's corporate
headquarters, investment in AGN, and the investment in the library of movies
utilized by the networks. (The Company holds an approximately 19.99% interest in
TeleSelect B.V., a Netherlands joint venture established by the Company, Philips
Media B.V. ("Philips") and Royal PTT Netherlands N.V. ("KPN"). TeleSelect was
organized to create joint ventures with European cable operators enabling them
to provide conditional access services such as pay-per-view, video on demand and
electronic retailing to their subscribers. To date, TeleSelect has entered into
two arrangements with two cable systems to provide these services.) If
TeleSelect requires additional capital, the Company is obligated to contribute
its proportionate share.
Net cash provided by financing activities was approximately $6,929,000
for the nine months ended September 30, 1995, compared with approximately
$3,024,000 in the corresponding prior period. For the period ended September
30, 1994 financing activity primarily consisted of proceeds from the exercise of
warrants. In the period ended September 30, 1995 financing consisted primarily
of additional borrowings under the revolving line of credit from Midlantic.
On August 13, 1995, the Company and Midlantic amended and restated the
Company's loan and increased the existing revolving line of credit from $9
million to $15 million. The revolving line of credit matures on December 31,
1996. During the third quarter of 1995, the Company violated various financial
covenants contained in the Midlantic loan agreement. Midlantic has agreed to
waive these violations through December 30, 1995. The Company and Midlantic have
agreed to discuss in good faith the financial covenants contained in the loan
agreement in light of the Company's current and projected financial position.
If the Company is unable to restructure the Midlantic loan, based on
current projections the Company will likely violate certain financial covenants
in 1996 which could result in Midlantic demanding immediate repayment of the
loan. The Midlantic loan matures on December 31, 1996 when the Company will be
required to secure replacement financing or alternative sources of capital. No
assurance can be given that the Company will be successful in securing
replacement financing or alternative sources of capital.
The Company holds a 50% interest in AGN. The Company purchased
intellectual property from MMG in exchange for a $500,000 note bearing 8%
interest payable from the Company's share of cash flow from AGN, or in 36
months, whichever is sooner. The Company contributed the intellectual property
to AGN. Under the AGN joint venture agreement, the Company (or a third party
investor identified by the Company) may elect, in its sole discretion, to
provide funding to AGN of up to $2.5 million to fund AGN's operations over the
succeeding 12 months.
19
<PAGE>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On July 31, 1995, the Company acquired 175,000 shares of MMG's common
stock for $393,750 by exercising warrants. Along with the exercise of these
warrants, MMG issued the Company 175,000 new warrants with an exercise price of
$3.50 per share. In addition, the Company purchased 100,000 shares of MMG's
common stock at $2.75 per share paid by delivery of the Company's note due July
, 1996 of which $75,000 was prepaid. The Company owns approximately 10% of the
outstanding equity of MMG.
The Company is expanding its corporate headquarters to accommodate a
digital playback center. The cost of the equipment and related services is
approximately $2,000,000. On August 1, 1995, the Company entered into a capital
lease with IBM Credit Corporation for the entire amount. The lease payments
were determined with no interest but the Company will impute interest at 5.0%.
The lease requires 36 monthly payments.
The Company believes that it will have substantially drawn down on its
revolving line of credit by the end of the year. While the Company believes that
it is in a position to fund its normal day-to-day operations from operating cash
flow, the Company will need additional capital for investments required for both
AGN and/or TeleSelect and may need additional capital for other projects. If the
Company is unable to meet its required capital commitments to either of AGN or
TeleSelect, the Company's interest in such ventures may be diluted. There are no
assurances that the Company will be able to locate additional financing.
20
<PAGE>
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
10.65 - Amendatory Agreement between Midlantic Bank,
N.A. and Graff Pay-Per-View Inc. dated August 13, 1995.
11.01 - Statement of Computation of Earnings per Share.
27.01 - Financial Data Schedule
(b) Reports on Form 8-K
-------------------
Merger Agreement and Plan of Reorganization dated as of
August 9, 1995 by and among Spector Entertainment Group,
Inc. and Graff Pay-Per-View Inc. Incorporated by
reference to Exhibit 2.04 of the Company's Current
Report on Form 8-K filed on September 12, 1995.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf of the
undersigned, thereunto duly authorized.
GRAFF PAY-PER-VIEW INC.
By: /s/ Philip J. Callaghan
-----------------------
Philip J. Callaghan
Executive Vice President
and Chief Financial Officer
November 13, 1995
22
<PAGE>
EXHIBIT INDEX
Consecutively Numbered
Exhibit No. Page
- ---------- --------------------------
10.65 Amendatory Agreement between Midlantic
National Bank and Graff Pay-Per-View Inc.
dated August 13, 1995
11.01 Statement of Computation of
Earnings per Share
27.01 Financial Data Schedule
<PAGE>
Exhibit 10.65
AMENDATORY AGREEMENT
AMENDATORY AGREEMENT (the "Amendatory Agreement") dated as of August
14, 1995 between GRAFF PAY-PER-VIEW, INC., a Delaware corporation ("Borrower")
and MIDLANTIC BANK, N.A., a national banking association (the "Bank").
RECITALS:
A. Borrower and the Bank are parties to an Amended and Restated Loan
and Security Agreement dated as of December 9, 1994 (the "Loan Agreement") which
provides for a term loan in the amount of $900,000 and a revolving credit loan
in the maximum amount of $9,000,000.
B. Borrower has requested, and the Bank is willing to increase the
revolving credit loan up to a maximum amount of $15,000,000, in order to
accommodate Borrower's working capital needs.
C. The parties have agreed to amend the Loan Agreement for the
purpose of affecting the foregoing and to provide for the grant of additional
collateral to the Bank.
NOW, THEREFORE, in consideration of the foregoing, and the mutual
agreements contained herein, the parties hereby agree as follows:
1. DEFINED TERMS.
(a) Capitalized terms used in this Amendatory Agreement without
definition shall have the respective meanings assigned to such terms in the Loan
Agreement, as amended hereby.
(b) A new defined term is added to the Loan Agreement as follows:
"'HOME VIDEO CHANNEL SECURITY DOCUMENTS' shall mean all agreements
and instruments deemed necessary and appropriate by the Bank for
execution and delivery by Home Video Channel for the purpose of
Home Video Channel guarantying the payment and performance of the
Obligations and granting to the Bank a security interest in its
assets."
(c) Certain defined terms in the Loan Agreement are amended and
restated as follows:
"'COPYRIGHT SECURITY AGREEMENT' shall mean a Copyright Security
Agreement of the Obligor thereto executed and delivered on the
Closing Date, the Restatement Closing Date, or subsequent thereto
as
<PAGE>
contemplated by Section 9.10, as any of the same may be amended,
modified or supplemented from time to time."
"'OBLIGOR' shall mean each of Borrower, Spice, Inc., a New York
corporation ("Spice"), Cable Video Store, Inc., a Delaware corporation
("Video Store"), Graff Marketing Corporation, Inc., a Delaware
corporation ("Graff Marketing"), CPV Productions, Inc., a Delaware
corporation ("CPV"), Pay-Per-View International, Inc., a Delaware
corporation ("PPV International"), Guest Cinema, Inc., a Delaware
corporation ("Guest Cinema"), Cyberspice, Inc., a Delaware corporation
("Cyberspice"), Media licensing, Inc., a Nevada corporation ("Media
Licensing"), Magic Hour Pictures, Inc., a California corporation,
formerly Magic Hour Productions, Inc. ("Magic Hour"), American Gaming
Network, Inc., a Delaware corporation, ("American Gaming"), American
Interactive Games, Inc., a Delaware Corporation ("American
Interactive") and, after the execution and delivery of the Home Video
Channel Security Documents, Home Video Channel."
"'PLEDGED INTERESTS' shall mean all the issued and outstanding capital
stock of the Obligors (other than Borrower) and, upon Home Video
Channel becoming an Obligor, Borrower's indirect ownership interest in
Danish Satellite Television, Ltd.'
"'SECURITY DOCUMENTS' shall mean the Guaranty and Security Agreement,
the Pledge Agreement, each Trademark Assignment, each Copyright
Security Agreement, the Patent Assignment and the Home Video Channel
Security Documents."
"'TERMINATION DATE' shall mean December 31, 1996."
(d) All references in the Loan Agreement to Obligors shall give effect
to such term after the amendment made hereby.
2. REGARDING THE REVOLVING CREDIT LOAN.
(a) Section 3.1 of the Loan Agreement is amended and restated in its
entirety as follows:
"3.1. REVOLVING CREDIT ADVANCES. (a) Upon and subject to the terms and
conditions hereof, the Bank agrees to make available, at any time and
from time to time, until the Termination Date, for Borrower's use and
upon the request of Borrower therefor, advances (each, a "Revolving
Credit Advance"); provided, however, that after giving effect to
-------- -------
each requested Revolving Credit Advance, until Borrower complies with
the provisions of Section 5.5, the aggregate
-2-
<PAGE>
amount of Revolving Credit Advances will not exceed $13,500,000, and
after Borrower complies with Section 5.5 or the Bank waives such
requirement in writing, $15,000,000 (the maximum amount at any time in
effect is hereafter, the "Revolving Credit Maximum"). The amount
available under the Revolving Credit Loan at any time shall be subject
to reserves established in respect of Foreign Exchange Transactions in
accordance with Section 3.1(d) below."
(b) Section 3.3(a) of the Loan Agreement is deleted in its entirety.
3. AMENDMENT OF SECTION 5.
(a) Section 5.3 of the Loan Agreement is deleted in its entirety.
(b) The introductory clause to Section 5.4 of the Loan Agreement is
amended and restated as follows:
"5.4. ADDITIONAL CONDITIONS TO EACH REVOLVING CREDIT
ADVANCE. It shall be a condition to the funding of each
Revolving Credit Advance that the following conditions be
satisfied:"
(c) The Loan Agreement is amended by the addition of a new Section 5.5
as follows:
"5.5. CONDITIONS TO INCREASE OF REVOLVING CREDIT MAXIMUM TO
$15,000,000. It shall be a condition to the increase of the
Revolving Credit Maximum to $15,000,000 that Borrower shall
have provided the Bank with the following no later than
September 29, 1995, or that the Bank shall have otherwise
waived compliance with the requirements of this Section in
writing
"(a) The Home Video Channel Security Documents, in form and
substance satisfactory to the Bank and its counsel;
"(b) Results of appropriate searches disclosing no Liens on the
assets of Home Video Channel other than Permitted Encumbrances;
"(c) Evidence of appropriate corporate action by Home Video
Channel authorizing its becoming a guarantor of the Obligations
and granting a Lien on its assets in favor of the Bank;
-3-
<PAGE>
"(d) An opinion of Worsdell & Vintner, Special English counsel
to Borrower, confirming that Home Video Channel has legally and
validly become a guarantor of the Obligations and granted a
Lien on its assets in favor of the Bank; and
"(e) Evidence of insurance on the assets of Home Video Channel,
with an appropriate loss payable and additional insured clause
in favor of the Bank."
4. AMENDMENT OF SECTION 10.
(a) Section 10.7 of the Loan Agreement is amended and restated as
follows:
"10.7. INDEBTEDNESS. No Obligor shall create, incur, assume or permit
to exist any Indebtedness, whether recourse or nonrecourse, and
whether superior or junior, resulting from borrowings, loans,
advances, the granting of credit, whether secured or unsecured, except
(i) Indebtedness secured by Permitted Encumbrances, (ii) Indebtedness
to the Bank arising under or as a consequence of this Agreement or the
other Loan Documents, (iii) Indebtedness existing on the date hereof
and listed on Schedule 10.7, (iv) Indebtedness in respect of Capital
Leases and Purchase Money Loans existing on the date hereof or
hereafter incurred, provided that, in no event shall the Obligors in
the aggregate incur indebtedness for Capital Leases and Purchase Money
Loans in excess of $2,500,000 in any Fiscal Year and $ 3,500,000 in
the aggregate at any time outstanding, and in no event shall Home
Video Channel incur Indebtedness for Capital Leases and Purchase Money
Loans in excess of $250,000 in any Fiscal Year and $500,000 in the
aggregate at any time outstanding, (v) trade debt or debt to service
providers incurred in the ordinary course of business, (vi) liability
under Title IV of ERISA not required to be reflected as a liability on
Borrower's consolidated balance sheet under GAAP and (vii)
Indebtedness subordinated to the Obligations on terms satisfactory to
and approved in writing by the Bank."
(b) Section 10.12 of the Loan Agreement is amended by the addition of
a new sentence at the end thereof as follows:
"Borrower shall not, nor permit any Obligor to make an
investment in American Gaming Network joint venture, by way
of capital contribution, loan or otherwise, in excess of
$3,000,000."
(c) Section 10.14 of the Loan Agreement is amended and restated as
follows:
-4-
<PAGE>
"10.14. NET WORTH. Borrower shall not permit its consolidated net
worth, as determined in accordance with GAAP, to be less than:
"(i) $20,000,000 through June 29, 1995;
"(ii) $22,000,000 from June 30, 1995 through December 30, 1995;
"(iii) $28,000,000 from December 31, 1995 through June 29, 1996;
"(iv) $33,000,000 from June 30, 1996 through December 30, 1996;
and
"(v) $39,000,000 on December 31, 1996 and thereafter."
(d) Section 10.16 of the Loan Agreement is amended and restated as
follows:
"10.16. SENIOR DEBT LEVERAGE. Borrower shall not permit the Senior
Debt Leverage Ratio, measured at any time, to exceed 2.00 to
1.00."
(e) Section 10.18 of the Loan Agreement is amended and restated as
follows:
"10.18. LEVERAGE RATIO. Borrower shall not permit its ratio of
total liabilities to net worth, as determined in accordance with
GAAP, to exceed:
"(i) 1.10 to 1.00 through December 30, 1995;
"(ii) 1.00 to 1.00 from December 31, 1995 through December 30,
1996; and
"(iii) 0.75 to 1.00 on December 31, 1996 and thereafter."
(f) A new Section 10.19 is added to the Loan Agreement as follows:
"10.19. SPECTOR ENTERTAINMENT. If Borrower acquires the business
of Spector Entertainment Group, Inc., a California corporation
("Spector"), Borrower shall not, nor permit any Obligor to,
guaranty any Indebtedness of Spector or make loans, capital
contributions or advances of any kind to Spector."
5. CONDITIONS PRECEDENT. The Bank's execution and delivery of this
Amendatory Agreement shall be conditioned upon its simultaneous receipt (or
waiver of receipt in writing) of the following, all in form and substance
satisfactory to the Bank and its counsel:
(a) A facility fee of $25,000;
-5-
<PAGE>
(b) A new Revolving Credit Note, duly executed and delivered by
Borrower to the Bank, in replacement of the note dated December 9, 1994;
(c) An affirmation of Security Documents, duly executed and delivered
by the Obligors and, in the case of the Guaranty and Security Agreement joined
by , American Gaming and American Interactive;
(d) A Supplemental Copyright Security Agreement duly executed and
delivered by CPV;
(e) An amendment and restatement of the Pledge Agreement duly executed
and delivered by each of Borrower, PPV International, CPV and Video Store;
(f) Certificates evidencing all the issued and outstanding capital
stock of American Gaming, and American Interactive, together with stock powers
duly executed in blank;
(g) UCC-1 financing statements of American Gaming and American
Interactive deemed necessary by the Bank in its reasonable discretion in order
to perfect its security interests in the Collateral owned by American Gaming and
American Interactive;
(h) A certificate of the Secretary of each Obligor certifying (i) the
names of the officers of the applicable Obligor authorized to sign this
Amendatory Agreement and the other Loan Documents contemplated hereby, together
with true signatures of each of such officers, (ii) the resolutions of the board
of directors of each Obligor adopted and in full force and effect as of the date
hereof, authorizing the consummation of each of the transactions (including,
without limitation, the incurrence of the Obligations and the granting of the
Liens) contemplated by this Agreement and (iii) as to the absence of any
amendments to the Obligor's certificate of incorporation or by-laws since the
Closing Date;
(i) A copy of the Certificate of Incorporation of each of American
Gaming and American Interactive;
(j) Certificates of the appropriate Governmental Authorities, dated
the most recent practicable date prior to closing, showing that each Obligor is
organized and in good standing in the jurisdiction of its organization and in
each jurisdiction where it is qualified as a foreign corporation;
(k) Evidence that the insurance policies provided for in Section 7.20
of the Loan Agreement are in full force and effect (for all Obligors), with
appropriate loss payable and additional insured clauses in favor of the Bank,
certified by the insurer;
(l) Results of UCC, judgment and tax Lien searches on American Gaming
and American Interactive and disclosing no Liens other than Permitted
Encumbrances or Liens for which discharges have been obtained;
-6-
<PAGE>
(m) An opinion of Dornbush Mensch Mandelstam & Schaeffer, counsel to
Borrower;
(n) A copy of American Gaming Network Joint Venture Agreement,
certified as true and complete by an officer of American Gaming Network, Inc.;
and
(o) Such additional information and documents as the Bank may
reasonably request.
6. REPRESENTATIONS AND WARRANTIES. In order to induce the Bank to enter
into this Amendatory Agreement, Borrower hereby represents and warrants to the
Bank as follows:
(a) After giving effect to the updated Schedules attached hereto, the
representations and warranties contained in Section 7 of the Loan Agreement are
true and correct on and as of the date of this Amendatory Agreement, except
insofar as any representation or warranty is stated to speak exclusively as of a
specific prior date or for a specific prior period. After giving effect to the
transactions contemplated by this Amendatory Agreement, no Default or Event of
Default will be in existence or will occur.
(b) The execution, delivery and performance of this Amendatory
Agreement and the other Loan Documents contemplated hereby will not violate any
provision of any law or regulation, or of any writ or decree of any Governmental
Authority or any provision of any Obligor's organizational documents.
(c) Each Obligor, as applicable, has the power to execute, deliver and
perform this Amendatory Agreement and the other documents contemplated hereby
and has taken all necessary action to authorize the execution, delivery and
performance of same and the performance of the Loan Agreement, as amended hereby
and the other Loan Documents.
(d) The execution, delivery and performance of this Amendatory
Agreement and the other documents contemplated hereby do not require the consent
of any other Person or the consent, license, approval or authorization of, or
registration or declaration with, any Governmental Authority. This Amendatory
Agreement, the replacement Revolving Note and the other Loan Documents executed
and delivered in connection herewith each constitute a valid obligation of the
Obligor or Obligors thereto, legally binding upon the Obligor or Obligors and
enforceable in accordance with its terms, subject to bankruptcy, insolvency,
reorganization and other laws of general applicability relating to or affecting
creditor's rights.
(e) None of the representations, warranties or statements made to the
Bank or pursuant to this Amendatory Agreement, the Loan Agreement (prior to its
amendment hereby) or pursuant to any other documents delivered in connection
with the transactions contemplated hereby, and no report, financial statement,
projection exhibit or schedule prepared or furnished by or on behalf of Borrower
or any other Obligor contains any material misstatement of fact or omitted or
omits to state any material fact necessary to make the statements herein or
therein not misleading in light of the circumstances under which they were made.
-7-
<PAGE>
7. MISCELLANEOUS.
(a) Borrower agrees to pay on demand all costs and expenses
(including, without limitation, the reasonable fees and out-of-pocket expenses
of counsel for the Bank) in connection with the preparation, execution and
delivery of this Amendatory Agreement and the other documents to be delivered in
connection therewith.
(b) Except as specifically amended hereby, the Loan Agreement shall
remain in full force and effect and is hereby ratified and confirmed.
(c) This Amendatory Agreement shall be construed in accordance with
and governed by the laws of the State of New Jersey.
(d) This Amendatory Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute but one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Amendatory
Agreement to be duly executed and delivered by their proper and duly authorized
officers as of the day and year first above written.
GRAFF PAY-PER-VIEW, INC.
By:
-------------------------------
Name: Philip Callaghan
Title: Executive Vice President
MIDLANTIC BANK, N.A.
By:
-------------------------------
Name: Stephen A. Jarossy
Title: Vice President
-8-
<PAGE>
EXHIBIT 11.01
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1994
---------------------------
<S> <C> <C>
PRIMARY
- -------
NET INCOME ($647,436) $ 1,183,758
---------------------------
WEIGHTED AVERAGE NUMBER OF COMMON 11,712,884 10,329,014
SHARES OUTSTANDING
ISSUED COMMON SHARES ASSUMING THAT
WARRANTS AND OPTIONS OUTSTANDING 2,470,043 2,690,299
AT THE END OF THE PERIOD WERE
EXERCISED
COMMON SHARES ASSUMED TO BE REPURCHASED
WITH PROCEEDS FROM THE EXERCISE OF
WARRANTS AND OPTIONS SUBJECT TO (1,433,818) (1,172,859) /2/
20% LIMITATION UNDER THE MODIFIED
TREASURY STOCK METHOD
---------------------------
WEIGHTED AVERAGE NUMBER OF COMMON 12,749,109 11,846,454 /1/
SHARES AND EQUIVALENTS OUTSTANDING
===========================
EARNINGS PER SHARE ($0.05) $ 0.10
===========================
NOTES TO PRIMARY EARNINGS PER SHARE
- ----------------------------------------
(1) REPRESENTS THE NUMBER OF COMMON
SHARES OUTSTANDING AT THE END OF
THE PERIOD IN CONNECTION WITH THE
MODIFIED TREASURY STOCK METHOD
(2) THE COMMON SHARES ASSUMED TO BE
REPURCHASED UNDER THE MODIFIED
TREASURY METHOD ARE AS FOLLOWS:
AVERAGE PRICE PER COMMON SHARE $ 9.76 $ 8.13
DURING THE PERIOD
===========================
PROCEEDS FROM EXERCISE OF OPTIONS $13,994,065 $ 9,535,346
AND WARRANTS
===========================
COMMON SHARES REPURCHASED 1,433,818 1,172,859 /2/
===========================
FULLY DILUTED:
- --------------
NET INCOME $ 1,714,864
--------------
WEIGHTED AVERAGE NUMBER OF COMMON 10,329,014
SHARES OUTSTANDING
ISSUED COMMON SHARES ASSUMING THAT
WARRANTS AND OPTIONS OUTSTANDING AT 2,733,829
THE END OF THE PERIOD WERE EXERCISED AND
CONVERTED
COMMON SHARES ASSUMED TO BE REPURCHASED
WITH PROCEEDS FROM THE EXERCISE OF
WARRANTS AND OPTIONS SUBJECT TO
20% LIMITATION UNDER THE MODIFIED
TREASURY STOCK METHOD (1,044,969) /2/
--------------
WEIGHTED AVERAGE NUMBER OF COMMON 12,017,874 /1/
SHARES AND EQUIVALENTS OUTSTANDING
==============
EARNINGS PER SHARE $ 0.10
==============
NOTES TO FULLY DILUTED EARNINGS PER
SHARE
- ----------------------------------------
(1) REPRESENTS THE NUMBER OF COMMON
SHARES OUTSTANDING AT THE END OF THE
PERIO IN CONNECTION WITH THE
MODIFIED TREASURY STOCK METHOD
(2) THE COMMON SHARES ASSUMED TO BE
REPURCHASED UNDER THE MODIFIED TREASURY
METHOD ARE AS FOLLOWS:
AVERAGE PRICE PER COMMON SHARE $ 9.13
==============
PROCEEDS FROM EXERCISE OF OPTIONS AND $ 9,535,346
WARRANTS
==============
COMMON SHARES REPURCHASED 1,044,969
==============
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1995 OF GRAFF PAY-PER-VIEW INC.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 1165887
<SECURITIES> 0
<RECEIVABLES> 8889124
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 16342999
<PP&E> 10708668
<DEPRECIATION> 5457053
<TOTAL-ASSETS> 50093066
<CURRENT-LIABILITIES> 12534691
<BONDS> 16777541
<COMMON> 120716
0
0
<OTHER-SE> 22938947
<TOTAL-LIABILITY-AND-EQUITY> 50093066
<SALES> 0
<TOTAL-REVENUES> 39189561
<CGS> 0
<TOTAL-COSTS> 38005429
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 236397
<INTEREST-EXPENSE> 814641
<INCOME-PRETAX> 369491
<INCOME-TAX> 1016927
<INCOME-CONTINUING> (647436)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (647436)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
