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 June 30, 1996
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
filing requirements for the past 90 days.
Yes X No
Number of shares outstanding of Registrant's Common Stock as of July 31, 1996:
11,339,928
<PAGE>
PART I
ITEM 1: FINANCIAL STATEMENTS
GRAFF PAY-PER-VIEW INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
June 30, December 31,
1996 1995
----------------------------------------------------------------------------------------------------------
(Unaudited)
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $2,096,000 $1,483,000
Accounts receivable, net of allowance for doubtful accounts 6,883,000 7,836,000
Income tax refunds receivable 570,000 570,000
Film and CD-ROM costs, net 34,000 400,000
Prepaid expenses and other current assets 2,461,000 2,391,000
Deferred subscription costs 273,000 511,000
Due from related parties 468,000 364,000
Investment in TeleSelect, asset held for sale 3,177,000
------------------- -------------------
Total current assets 12,785,000 16,732,000
Property and equipment, net of accumulated depreciation 67,782,000 70,771,000
Due from related parties 507,000 621,000
Library of movies 3,429,000 2,990,000
Cost in excess of net assets acquired, net of
accumulated amortization 10,657,000 10,961,000
Other assets 824,000 403,000
------------------- -------------------
Total assets $95,984,000 $102,478,000
=================== ===================
Liabilities and Stockholders' Equity Current liabilities:
Current portion of obligations under capital leases $3,792,000 $3,978,000
Current portion of long-term debt 15,669,000 2,540,000
Royalties payable 2,114,000 2,611,000
Accounts payable 4,047,000 3,722,000
Accrued expenses payable 2,681,000 2,241,000
Current portion of accrued restructuring costs 1,271,000 2,205,000
Deferred subscription revenue 1,463,000 2,337,000
------------------- -------------------
Total current liabilities 31,037,000 19,634,000
Obligations under capital leases 54,943,000 56,230,000
Long-term debt 1,421,000 16,897,000
Accrued restructuring costs 1,050,000 1,450,000
Deferred Income 400,000
Deferred compensation 246,000 198,000
-------------------
-------------------
Total liabilities 89,097,000 94,409,000
------------------- -------------------
Minority Interest 558,000
-------------------
Stockholders' equity
Common stock, $.01 par value; authorized 25,000,000 shares; 11,383,928
and 11,357,928 shares issued and outstanding at
June 30, 1996 and December 31, 1995, respectively 113,000 114,000
Additional paid-in capital 22,645,000 22,997,000
Unearned compensation (879,000) (1,323,000)
Accumulated (deficit) (15,266,000) (13,438,000)
Cumulative translation adjustments 193,000 210,000
------------------- -------------------
6,806,000 8,560,000
Stockholders' loan collateralized by common stock (477,000) (491,000)
------------------- -------------------
Total stockholders' equity 6,329,000 8,069,000
------------------- -------------------
Total liabilities and stockholders' equity $95,984,000 $102,478,000
=================== ===================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
<TABLE>
GRAFF PAY-PER-VIEW INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS of OPERATIONS
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
-------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues: $10,582,000 $13,692,000 $20,654,000 $26,649,000
------------ ------------ ------------ -----------
Operating expenses:
Cost of goods sold 236,000 315,000 347,000 440,000
Salaries, wages and benefits 2,513,000 2,696,000 5,102,000 5,311,000
Producer royalties and film cost amortization 1,460,000 1,615,000 2,837,000 3,242,000
Satellite, uplinking and playback expenses 1,059,000 3,140,000 2,170,000 6,572,000
Selling, general and administrative expenses 2,961,000 4,527,000 5,829,000 8,594,000
Depreciation of fixed assets and amortization
of goodwill 2,051,000 652,000 4,072,000 1,258,000
------------ ------------- ------------ ----------
Operating expenses 10,280,000 12,945,000 20,357,000 25,417,000
------------ ------------- ------------ ----------
Total income from operations 302,000 747,000 297,000 1,232,000
Interest expense 1,681,000 274,000 3,410,000 492,000
Minority Interest (298,000) (463,000)
Gain on Disposition of AGN (875,000) (875,000)
------------- ------------- ------------- ----------
Income (loss) before provision for income taxes (206,000) 473,000 (1,775,000) 740,000
Provision for income taxes 11,000 147,000 53,000 269,000
------------- -------------- ------------- ----------
Net income (loss) ($217,000) $326,000 ($1,828,000) $471,000
============= ============== ============= ==========
Earnings (loss) per common and common
equivalent share, primary ($0.02) $0.03 ($0.16) $0.04
============= ============== ============= ==========
Earnings (loss) per common and common equivalent
share, fully diluted $0.03 $0.04
============== ==========
Weighted average number of shares outstanding,
primary 11,366,000 12,543,000 11,362,000 12,566,000
============= ============== ============== ===========
Weighted average number of shares outstanding,
fully diluted 12,543,000 12,566,000
============== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
GRAFF PAY-PER-VIEW and SUBSIDIARIES
CONSOLIDATED STATEMENT of STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(Unaudited)
<TABLE>
Foreign
Additional Currency
Common Paid-in Unearned Accumulated Transaction
Stock Capital Compensation Deficit Adjustment Total
------------ ------------- -------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $114,000 $22,997,000 ($1,323,000) ($13,438,000) $210,000 $8,560,000
Shares issued in connection with
the exercise of employee options 27,000 27,000
Pro rata share of Restricted Stock
granted to executive officers 64,000 64,000
Cancellation of Restricted Stock
issued to an executive officer (1,000) (379,000) 380,000
Net loss for the period (1,828,000) (1,828,000)
Foreign currency translation
adjustment (17,000) (17,000)
------------ --------------- ----------- --------------- -------------- ------------
113,000 22,645,000 (879,000) (15,266,000) 193,000 6,806,000
Less shareholders' loans (477,000)
============ ============ =========== =============== ============= ============
Balance at June 30, 1996 $113,000 $22,645,000 ($879,000) ($15,266,000) $193,000 $6,329,000
============ ============= =========== =============== ============= ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
GRAFF PAY-PER-VIEW INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
SIX MONTHS ENDED
JUNE 30,
1996 1995
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) ($1,828,000) $471,000
-------------------------- ----------------------
Adjustments to reconcile net income to net cash used in operating activities:
Minority interest (463,000)
Gain on disposition of AGN (875,000)
Other, net 31,000 6,000
Depreciation and amortization of fixed assets 3,750,000 803,000
Amortization of goodwill 322,000 450,000
Amortization of film costs and CD-ROM costs 335,000 832,000
Amortization of library of movies 629,000 502,000
Contributed capital 72,000
Provision for bad debts 28,000 78,000
Deferred compensation expense 47,000 33,000
Changes in assets and liabilities:
Decrease in accounts receivable 925,000 158,000
Decrease (increase ) in film and CD-ROM costs 31,000 (2,133,000)
Increase in prepaid expenses and other current assets (55,000) (762,000)
Decrease in deferred subscription cost 238,000 43,000
(Increase) decrease in other assets (22,000) 30,000
(Decrease ) increase in royalties payable (497,000) 143,000
Increase (decrease) in accounts payable and accrued expenses 766,000 (1,499,000)
(Decrease) increase in deferred subscription revenue (874,000) 1,409,000
Decrease in accrued restructuring costs (1,334,000)
-------------------------- ------------------------
Total adjustments 2,982,000 165,000
-------------------------- ------------------------
Net cash provided by operating activities 1,154,000 636,000
-------------------------- ------------------------
Cash flows from investing activities:
Purchase of property and equipment (741,000) (3,009,000)
Investment in library of movies (983,000) (1,031,000)
Investment in TeleSelect (67,000) (799,000)
Proceeds on sale of equipment 3,244,000
-------------------------- ------------------------
-------------------------- ------------------------
Net cash (used in) provided by investing activities 1,453,000 (4,839,000)
-------------------------- ------------------------
Cash flows from financing activities:
Proceeds from the issuance of common stock and detachable warrants 27,000 39,000
Proceeds from capital contributed to CVSP by a third party 1,000,000
Proceeds from the issuance of debt 5,335,000
Decrease (increase) in loans receivable from related parties 25,000 (320,000)
Repayment of long-term debt (1,572,000) (1,136,000)
Repayment of obligation under capital leases (1,474,000)
-------------------------- ------------------------
Net cash (used in) provided by financing activities (1,994,000) 3,918,000
-------------------------- ------------------------
Net increase (decrease) in cash and cash equivalents 613,000 (285,000)
Cash and cash equivalents, beginning of the period 1,483,000 1,598,000
-------------------------- ------------------------
Cash and cash equivalents, end of the period $2,096,000 $1,313,000
========================== ========================
Supplemental Schedule of non-cash items:
Equity adjustment on translation on foreign currency $17,000 $380,000
========================== ========================
Compensation expense from capital associated with the vesting of shares
of restricted stock granted to the senior management $64,000
==========================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
GRAFF PAY-PER-VIEW INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
1. In the opinion of Graff Pay-Per-View Inc. and its wholly-owned subsidiaries
and majority-owned affiliates (the "Company"), the accompanying consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position as of
June 30, 1996 and the results of operations and cash flows for the three and six
months then ended.
2. The results of operations for the three and six months ended June 30,
1996 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. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. These
consolidated financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's December 31,
1995 annual report on Form 10K/A-1.
4. In early 1995, the Company entered into an agreement with AT&T to
provide satellite services for its domestic networks. The purpose of this new
agreement was twofold: 1) to replace the existing service provider which was at
a much higher per transponder rate and, 2) to transition the Company's
transponder requirements to AT&T's new Telstar 402R satellite which was
scheduled to be in operation by December 1995. During the transition period
(which occurred in the first half of 1995) the Company incurred from the
existing satellite provider approximately $1.0 million of added satellite costs
by providing dual satellite coverage to its customers thereby ensuring
continuous service. The accounting treatment accorded these additional costs
during the interim periods of 1995 was inconsistent with generally accepted
accounting principles. Accordingly, the Company has restated the quarterly
results of operations for 1995. The effect of this restatement was to reduce net
income for the six months and three months ended June 30, 1995 by $0.6 million
or $.05 per share and $0.3 million or $.02 per share, respectively. This
restatement will continue for the third and fourth quarters of 1995 when the
reduction of net income reflected during the first half of 1995 will reverse
itself.
In addition, in the second quarter of 1995, The Home Video Channel, Ltd.
("HVC") the Company's wholly-owned U.K. subsidiary received free satellite
services as an inducement from its satellite provider to move from one
transponder to another within the same satellite grouping. The free satellite
time was not reflected in the 1995 financial statements in accordance with
generally accepted accounting principles. Accordingly, the Company has also
restated the results of operation for 1995 to properly reflect these free
satellite services. The effect of this restatement was to reduce net income for
both the six months and three months ended June 30, 1995 by $0.2 million or $.02
per share.
<PAGE>
GRAFF PAY-PER-VIEW INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 - Continued
5. The following summary is presented to reconcile revenue and earnings for
the three and six months ended June 30, 1995 as previously reported by the
Company with the amounts currently presented in the Statement of Operations due
to the acquisition of Spector Entertainment Group, Inc. ("SEG") on August 31,
1995 (which was accounted for as a pooling of interests) as well as the
correction of certain accounting treatments (see Note 4):
For the Six Months Ended June 30, 1995
<TABLE>
Correction of
Previously Accounting
Stated SEG Treatment Restated
---------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Revenue $23,084,000 $3,565,000 $ - $26,649,000
Net Income $1,027,000 $264,000 ($820,000) $471,000
EPS-Primary $0.09 - ($0.07) $0.04
Weighted Average Number
of Shares Outstanding -
Primary 11,866,000 700,000 12,566,000
For the Three Months Ended June 30, 1995
Correction of
Previously Accounting
Stated SEG Treatment Restated
---------------- ---------------- --------------- ----------------
Revenue $11,465,000 $2,227,000 $ - $13,692,000
Net Income $445,000 $341,000 ($460,000) $326,000
EPS-Primary $0.04 - ($0.04) $0.03
Weighted Average Number
of Shares Outstanding -
Primary 11,843,000 700,000 - 12,543,000
</TABLE>
6. On March 6, 1996, the Company contributed the assets of the CABLE VIDEO STORE
network and certain other assets to CVS Partners, a newly formed partnership
owned 75% by the Company and 25% by WilTech Cable Television Services, Inc.
("WCTV"), a wholly-owned subsidiary of The WilTech Group, Inc. ("WilTech"). WCTV
has two calls to acquire portions of the Company's partnership interest in CVS
Partners at formula determined prices; if both calls are exercised, the
Company's partnership interest will be reduced to 20%.
As part of the contribution, the Company entered into a Services
Agreement with CVS Partners to provide certain sales, marketing, administrative
and operational services to CVS Partners and granted CVS Partners a royalty free
license of the CABLE VIDEO STORE name and related identity. WCTV is required to
contribute approximately $2.6 million to CVS Partners' capital (of which $1.0
million has been contributed as of June 30, 1996), part in cash and part by a
credit for services to be provided to CVS Partners pursuant to Services
Agreement between Vyvx, Inc., an affiliate of WCTV, and CVS Partners to provide
services relating to the installation and operation of video file services,
<PAGE>
transmission services, satellite uplink services and local access services
from the playback to the uplink facility.
7. The Company, Phillips Media B.V. ("Phillips") and Royal PTT Netherlands NV
("KPN") established TeleSelect B.V. ("TeleSelect"), a Netherlands joint venture,
to create joint ventures with European cable operators to enable them to provide
conditional access services. On April 3, 1996, the Company sold its TeleSelect
interest to Phillips and KPN for $3.2 million, an amount roughly equal to its
cash investment in TeleSelect. One million dollars of the proceeds were utilized
to pay down long-term debt and the remaining funds were used for working
capital.
8. The Company has a line of credit from Midlantic Bank, N.A. ("Midlantic")
which at June 30, 1996 amounts to $14.6 million. No further funds are available.
At December 31, 1995, the Company had violated certain financial covenants.
Pursuant to a Third Amendatory Agreement dated March 29, 1996, Midlantic has (i)
extended the term of the loan until January 2, 1997, (ii) waived certain
financial covenant violations through the date of the agreement and (iii)
eliminated all of the financial covenants for the balance of the loan's term
except for the net worth covenant and a covenant requiring the Company to
maintain specified levels of cash flows. The revised net worth covenant, which
was revised in accordance with the Company's projections, requires the Company
to maintain a net worth of at least $6.75 million as of December 31, 1995, $5.75
million from January 1, 1996 through June 29, 1996 and at least $6.0 million
through January 2, 1997. The cash flow covenant requires the Company to maintain
specified levels of cash flows in accordance with a cash flow report prepared by
the Company and approved by Midlantic. Midlantic also consented to certain
transactions relating to the restructuring and other transactions.
9. The accompanying financial statements have been prepared assuming that the
Company will be able to meet its obligations in the ordinary course of business.
Management believes that the restructuring undertaken at the end of 1995 and the
during the first quarter of 1996 and further planned reductions in overhead and
labor costs will contribute towards achieving improved cash flows and operating
results. The Company reported income from operations of $297,000 for the six
months ending June 30, 1996 and currently funds its operations from cash flows.
While the Company is servicing the interest on its line of credit from
Midlantic, the Company does not currently have the resources available to repay
the principal of this obligation when it matures on January 2, 1997. When the
loan matures, the Company will be required to obtain replacement financing or
alternative sources of capital. There is no assurance that the Company will be
able to obtain such financing or, if obtained, that the terms of any such
financing or alternative sources of capital will not be more costly then the
Company's current cost of capital. Midlantic has liens on substantially all of
the Company's assets. If the Company is unable to locate replacement financing,
Midlantic could exercise its rights as a secured creditor and foreclose on its
lien or force the Company into bankruptcy.
<PAGE>
10. The accrued restructuring reserve at January 1, 1996, March 31, 1996 and
June 30, 1996 was approximately $3.7 million, $3.0 million and $2.3 million,
respectively. The accrued restructuring reserve is comprised of corporate level
restructuring and the suspension of production activities formerly conducted by
CPV Productions, Inc. ("CPV"). Each component involved contraction of the
Company's workforce and facilities and other miscellaneous costs associated with
the restructuring. The balances of each component at December 31, 1995, March
31, 1996 and June 30, 1996 were as follows:
<TABLE>
December 31, March 31, June 30,
Corporate 1995 1996 1996
---------------------- ---------------------- -----------------------
<S> <C> <C> <C>
Salaries $2,750,000 $2,454,000 $2,045,000
Facilities and Other 250,000 144,000 84,000
CPV
Salaries 464,000 326,000 175,000
Facilities and Other 191,000 85,000 17,000
---------------------- ---------------------- -----------------------
Total $3,655,000 $3,009,000 $2,321,000
---------------------- ---------------------- -----------------------
</TABLE>
11. Pursuant to a joint venture agreement dated June 28, 1995, the Company
formed American Gaming Network, J.V. ("AGN") with TV Games, Inc. ("TVG"), a
wholly-owned subsidiary of Multimedia Games, Inc. ("MGAM"), to jointly develop
and promote high stakes proxy play Class II tribal bingo games. The Company
contributed approximately $1.4 million of intellectual property and working
capital to AGN's capital. The Company had acquired the intellectual property
from MGAM for cash and notes. In related transactions, the Company acquired for
cash and notes 275,000 shares of MGAM's outstanding stock and a warrant to
acquire an additional 175,000 shares at an exercise price of $3.50 per share.
The parties were unable to agree on a business plan or a strategy for going
forward with AGN.
Pursuant to a Purchase Agreement dated June 28, 1996, the parties
resolved their differences with the Company giving up its interest in AGN and
the 275,000 shares of MGAM stock in exchange for (i) the cancellation of an
aggregate of $775,000 of liabilities owed to MGAM and TVG, (ii) $100,000
pursuant to a note due on July 25, 1996 and (iii) $400,000 due pursuant to a
note due in three years. The Company retained a warrant to acquire 175,000
shares of common stock of MGAM stock and the parties released each other. Due to
the likelihood that the parties would not proceed forward with AGN and as part
of the Company's restructuring at December 31, 1995, the Company wrote off its
investment in AGN and the MGAM stock. As a result of the foregoing transaction,
the Company recognized a nonrecurring gain of $875,000 in the second quarter and
will recognize an additional nonrecurring gain of $400,000 when the $400,000
note is paid.
<PAGE>
12. Pursuant to an Equipment Lease dated August 14, 1996, the Company leased
approximately $1.7 million of equipment from Vendor Capital Group. The lease
will be accounted for as a capital lease. The equipment included a Digicipher
encoder and approximately 1,200 decoder boxes which are being provided to the
Company's cable systems customers. This equipment will enable the Company to
digitally compress its domestic television networks, freeing up two transponders
for other uses.
<PAGE>
Item 2: Management Discussion and Analysis of
Graff Pay-Per-View Inc. and Subsidiaries
Financial Condition and Results of Operations
Results of Operations
The Consolidated Statements of Operations include the results of
Spector Entertainment Group, Inc., ("SEG") a wholly-owned subsidiary, which was
acquired by merger on August 31, 1995 and CVS Partners, a partnership in which
the Company owns, since March 1, 1996, a 75% interest. The SEG acquisition was
accounted for as pooling of interest, whereby the financial statements for all
the periods prior to the combination were restated to reflect the combined
operations.
Revenues
Total revenues for the six months ended June 30, 1996 decreased by
approximately $6.0 million (22.5%) to approximately $20.7 million compared to
total revenues of approximately $26.6 million for the six months ended June 30,
1995. Total revenues for the three months ended June 30, 1996 decreased by
approximately $3.1 million (22.7%) to approximately $10.6 million compared to
total revenue of approximately $13.7 million for the three months ended June 30,
1995. The decrease in revenue is primarily attributable to a decline in revenues
from the Company's adult networks in the domestic C-Band direct to home ("TVRO")
market, the United Kingdom direct to home markets and the curtailment of film
and television production and distribution by CPV as a part of the Company's
restructuring plan. Offsetting these declines were revenues from the domestic
direct broadcast satellite system market and EUROTICA, the Company's recently
launched European satellite delivered network, of $1.1 million and $0.6 million
for the six month and three month periods, ending June 30, 1996, respectively.
The Company did not realize revenues from either of these sources during the
corresponding prior year periods.
In the domestic C-band TVRO market, several competing adult explicit
services were launched during 1994 and 1995. The explicit adult services compete
directly with the SPICE and THE ADAM & EVE CHANNEL (the "SPICE Networks") in the
domestic C-band TVRO market and have resulted in a decline in revenues of
approximately $2.8 million and $1.3 million for the six and three months ended
June 30, 1996 as compared to the same periods for 1995 in this market. These
explicit adult services are not distributed by cable operators and therefore, do
not have an impact on the SPICE Networks' revenues in the cable market. As a
result of this decline in revenues, the Company will cease distributing the
SPICE Networks as analog services commencing September 1, 1996, effectively
removing approximately $125,000 of revenues a month. The Company is exploring
various strategies in the C-Band TVRO market to combat the loss of revenues.
<PAGE>
Item 2: Management Discussion and Analysis of
Graff Pay-Per-View Inc. and Subsidiaries
Financial Condition and Results of Operations - Continued
In the United Kingdom, two new competing adult services were launched
in the second half of 1995. The new adult services compete directly with THE
ADULT CHANNEL, the Company's United Kingdom satellite delivered adult network.
In addition, THE ADULT CHANNEL switched satellites to a satellite which could
not be viewed by several of its existing subscribers. These two factors have
resulted in a decline in revenues of approximately $1.9 million and $1.0 million
for the six and three months periods ended June 30, 1996, respectively, as
compared to the same period in 1995.
Revenues from the SPICE Networks cable market decreased by
approximately $0.6 million and $0.3 million for the six and three month periods
ended June 30, 1996 , respectively, as compared to the same periods in 1995. The
Company was able to increase the number of addressable households with access to
the SPICE Networks at June 30, 1996 by approximately 11% over the number of such
addressable households at June 30, 1995 even though the Company lost
approximately 8% of its addressable subscriber base on July 1, 1995. The
increase in addressable subscribers did not translate into greater revenues due
to normal delays in realizing revenues from new subscribers and a reduction in
the Company's share of revenues from cable sales of the SPICE Networks. This
reduction in license fees is a result of increased competition in the Company's
market segment and the growing concentration in the ownership of cable systems
by multiple system operators ("MSOs"). Management expects this downward trend to
slow and for license fees to stabilize as a result of the Company entering into
long-term agreements with several of the major MSOs.
Expenditures
Salaries, wages and benefits decreased by approximately $0.2 million to
approximately $5.1 million for the six months ended June 30, 1996 as compared to
approximately $5.3 million for the same period in 1995. Salaries, wages and
benefits for the three months ended June 30, 1996 decreased by approximately
$0.2 million to approximately $2.5 million as compared to approximately $2.7
million in the same period for 1995. Salaries did not decline significantly for
the period ending June 30, 1996 compared to a similar period in 1995 because the
reduction in salaries from the restructuring plan were primarily attributable to
employees hired during the second half of the year. The Company expects to
realize substantial reductions in salaries, wages and benefits from the
restructuring plan in the second half of 1996.
Producer royalties and film cost amortization in the six and three
months ended June 30, 1996 have decreased by approximately $0.40 million and
$0.16 million as compared to the same periods in 1995. The decline is primarily
attributable to the reduction in film cost amortization resulting from the
decision to write down CPV's film and CD-ROM costs in the fourth quarter of
1995. Offsetting the decline was an increase in producer royalties associated
with the CABLE VIDEO STORE Network resulting from an increase in network
revenues.
<PAGE>
In December, 1995, the Company entered into a service agreement with
AT&T for the use of 5 transponders on Telstar 402R for the satellite's useful
life, estimated to be 12 years. The Company is using the transponders for
broadcast of its domestic networks and the SEG services. The transponder
agreement is being accounted for as a capital lease as required by Statement of
Financial and Accounting Standards No. 13, "Accounting for Leases". As a result,
the Company is required to establish an asset and a corresponding offsetting
interest bearing obligation equal to $58.7 million, the present value of the
expected future minimum lease payments at the lease inception. The asset is
depreciated, on the straight-line method, over the satellite's estimated 12 year
useful life. The actual lease payments are applied against the principal and
interest of the obligation similar to a fully amortizing mortgage loan. For the
quarter ending June 30, 1996 the Company recognized total expenses attributable
to the lease of approximately $5.2 million comprised of depreciation expense of
approximately $2.7 million and interest expense of approximately $2.5 million.
Had the lease been accounted for as an operating lease, the Company would have
recognized approximately $1.0 million less in total expenses attributable to the
AT&T transponder lease during the first half of 1996.
Satellite, playback and uplink expenses for the six and three months
ended June 30, 1996 have decreased by approximately $4.4 million and $2.1
million, respectively, as compared to the same periods in 1995. The decrease is
primarily attributable to the capitalized AT&T transponder lease as compared to
the treatment during the first half of 1995 when domestic transponder expenses
were accounted as operating leases.
Had the AT&T lease been accounted for as an operating lease, the
Company's satellite expense for the six months ended June 30, 1996 would have
been approximately the same as the same period in 1995. The increase in the
number of domestic and foreign transponders used by the Company has been
effectively offset by a reduction in the per transponder cost of its domestic
transponders.
In February 1995, the Company launched EUROTICA, a European satellite
delivered subscription network based in Denmark. Certain startup costs and
satellite expenditures associated with this service were deferred. The total of
these deferred costs and expenditures amounted to approximately $0.7 million as
of June 30, 1995. During the third and fourth quarters of 1995 it was determined
that these deferred startup costs had limited future value and were expensed as
operating costs.
Selling, general and administrative expenses for the six and three
months ended June 30, 1996 have decreased by approximately $2.8 million and $1.6
million, respectively, as compared to the same periods in 1995. The decreases
are primarily attributable to the implementation of the restructuring plan.
<PAGE>
Depreciation of fixed assets and the amortization of goodwill for the
six and three months ended increased by approximately $2.8 million and $1.4
million, respectively, as compared to the same periods in 1995. Approximately
$2.7 million and $1.4 million for the six and three months, respectively, ended
June 30, 1996 was attributable to accounting for the AT&T transponder lease as a
capital lease.
Interest expense increased by approximately $2.9 million to
approximately $3.4 million for the six months ended June 30, 1996 as compared to
the same period in 1995. Interest expense increased by approximately $1.4
million to approximately $1.7 million for the three months ended June 30, 1996
as compared to the same period in 1995. Approximately $2.5 million and $1.3
million of the increase for the six and three months ended June 30, 1996,
respectively, is attributable to accounting for the AT&T transponder lease as a
capital lease and $0.4 million and $0.1 million of the increase is attributable
to additional borrowings under the line of credit from Midlantic.
Liquidity and Capital Resources
At June 30, 1996, the Company had a working capital deficit of
approximately $18.3 million compared to a $2.9 million deficit at December 31,
1995. The decrease in working capital is primarily attributable to the
classification of all of the $14.6 million of the Midlantic loan as current at
June 30, 1996 as compared to only $1.1 million classified as current and $14.5
million classified as long-term at December 31, 1995.
The Company has a line of credit from Midlantic which amounts to $14.6
million. No further funds are available. At December 31, 1995, the Company had
violated certain covenants. Pursuant to a Third Amendatory Agreement dated March
29, 1996, Midlantic has waived those violations through the date of the
agreement, eliminated all of the financial covenants for the balance of the
loan's term except for two financial covenants, net worth and cash flow
requirements, which were revised in accordance with the Company's projections,
extended the term of the loan until January 2, 1997 and consented to certain
transactions.
The Company has reduced expenses in the areas of salaries and overhead
which together with its sale of its TeleSelect interest currently allows the
Company to fund day-to-day operations. The Company plans to continue to reduce
expenses in the areas which the Company projects will have a positive impact on
future liquidity. The Company is currently in discussions with parties and is
evaluating its alternatives concerning additional financing to repay its bank
debt and to fund the expansion of its core businesses and other future projects.
There are no assurances that the Company will be able to secure alternate
financing and to repay all or a portion of the Midlantic indebtedness with such
financing.
<PAGE>
The accrued restructuring reserve at January 1, 1996, March 31, 1996
and June 30, 1996 was approximately $3.7 million, $2.5 million and $2.3 million,
respectively. The accrued restructuring reserve is comprised of corporate level
restructuring and the suspension of production activities formerly conducted by
CPV.
The cash outflows associated with the accrued restructuring reserve
aggregated approximately $0.6 million for the first quarter of 1996, and $0.7
million for the second quarter of 1996. Company management estimates the cash
outflows associated with the restructuring will aggregate $0.5 million and $0.4
million for the quarters ended September 30, 1996 and December 31, 1996,
respectively, and $0.8 million in 1997, and $0.7 million in 1998. Anticipated
expense savings from the restructuring are estimated to aggregate approximately
$6 million in 1996 when compared to 1995, with a majority of the expense savings
in 1996 to occur in the second half of the year.
Stockholders' equity at June 30, 1996 was approximately $6.3 million
compared to approximately $8.1 million at December 31, 1995. The decline in
stockholders' equity was primarily attributable to interest expense of
approximately $3.4 million (see "Transponder Lease") which was offset by
minority interest of approximately $0.5 million and a gain on disposition of AGN
of approximately $0.9 million. The Company's income from operations was
approximately $0.3 million for the six months ended June 30, 1996.
Net cash provided in operating activities was approximately $1.2
million for the six months ended June 30, 1996 as compared to net cash provided
by operating activities of approximately $0.6 million for the six months ended
June 30, 1995. The increase in cash from operating activities was primarily
attributable to the increased depreciation and amortization of fixed assets and
the decrease in film and CD-ROM costs for the six months ended June 30, 1996 as
compared to the same period in 1995. Also contributing to the increase in cash
provided by operating activities was the increase in amounts owed to its
suppliers. Offsetting these increases to cash provided by operations are
outflows associated with the accrued restructuring reserve at December 31, 1995,
gain on disposition of AGN and losses allocated to the minority partner in CVS
Partners for the six months ended June 30, 1996.
Net cash provided by investing activities was approximately $1.5
million for the six months ended June 30, 1996 as compared to approximately $4.8
million used in investing activities for the six months ended June 30, 1995. The
increase in cash provided by investing activities is primarily attributable to
the sale of TeleSelect in April of 1996. Contributing to the increase was the
decline in purchases of property and equipment and investment in TeleSelect in
the six months ended June 30, 1996 as compared to the same period in 1995.
<PAGE>
Net cash used in financing activities was approximately $2.0 million
for the six months ended June 30, 1996 as compared to approximately $3.9 million
provided by financing activities for the six months ended June 30, 1995. The
decrease in cash provided from investing activities is primarily attributable to
repayments of a portion of the amount borrowed from Midlantic in the six months
ended June 30, 1996 as compared to additional borrowings in the same period in
1995. Contributing to the decrease in cash provided by financing activities was
the treatment of the Company's domestic satellite lease in 1996 as a capital
lease. Offsetting these declines is the capital contribution to CVS Partners by
the minority partner.
<PAGE>
PART II - OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits - Exhibit 11.01 - Compensation of Earnings Per Share
Exhibit 27.01 - Financial Data Schedule
(b) Reports on Form 8-K - None
<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:
Harlyn C. Enholm
Executive Vice President
and Chief Financial Officer
August 19, 1996
<PAGE>
Exhibit 11.01
GRAFF PAY-PER-VIEW INC. and SUBSIDIARIES
COMPUTATION of EARNINGS PER SHARE
FOR THE SIX MONTHS ENDED JUNE 30, 1996 and 1995
(Unaudited)
<TABLE>
1996 1995
---------------------- ----------------------
Primary
<S> <C> <C>
Net Income ($1,828,000) $386,000
---------------------- ----------------------
Weighted average number of common shares outstanding 11,366,000 11,484,000
Issued common shares assuming that warrants and options outstanding at
the end of the period were exercised 2,472,000
Common shares assumed to be repurchased with proceeds from the exercise
of warrants and options subject to 20% limitation under the modified (1,390,000) 2
treasury stock method
---------------------- ----------------------
Weighted average number of common shares and equivalents outstanding 11,366,000 12,566,000 1
====================== ======================
Earnings per share ($0.02) $0.03
====================== ======================
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 during the period $10.08
======================
Proceeds from exercise of options and warrants $14,006,000
======================
Common shares repurchased 1,390,000 2
======================
Fully Diluted:
Net Income $386,000
----------------------
Weighted average number of common shares outstanding 11,484,000
Issued common shares assuming that warrants and options outstanding at
the end of the period were exercised and converted 2,472,000
Common shares assuming that warrants and options outstanding at the end
of the period were exercised and converted 2,472,000
Common shares assumed to be repurchased with proceeds from the exercise
of warrants and options subject to 20% limitation under the modified (1,390,000) 2
treasury stock method
----------------------
Weighted average number of common shares and equivalents outstanding 12,566,000 1
======================
Earnings per share $0.03
======================
Notes to Fully Diluted 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 $10.08
======================
Proceeds from the exercise of options and warrants $14,006,000
======================
Common shares repurchased 1,390,000
======================
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,096,000
<SECURITIES> 0
<RECEIVABLES> 6,883,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 12,785,000
<PP&E> 67,782,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 95,984,000
<CURRENT-LIABILITIES> 31,037,000
<BONDS> 75,825,000
0
0
<COMMON> 113,000
<OTHER-SE> 6,216,000
<TOTAL-LIABILITY-AND-EQUITY> 95,984,000
<SALES> 0
<TOTAL-REVENUES> 20,654,000
<CGS> 347,000
<TOTAL-COSTS> 20,357,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,410,000
<INCOME-PRETAX> (1,775,000)
<INCOME-TAX> 53,000
<INCOME-CONTINUING> (1,828,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,828,000)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> 0
</TABLE>
