SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________to________________
Commission File No. 0-21150
GRAFF PAY-PER-VIEW INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2917462
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
536 Broadway, New York, New York 10012
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (212) 941-1434
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
par value $.01
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the registrant's knowledge, in the definitive proxy statements or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ].
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 28, 1996 was $35,574,659.
The number of shares outstanding of registrant's Common Stock as of March 28,
1996 was: 11,383,928.
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THIS REPORT CONTAINS FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND 21E OF THE SECURITIES ACT OF 1934.
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF THE RISK FACTORS INDICATED IN THIS
REPORT.
ITEM 1. BUSINESS
Graff Pay-Per-View Inc. and its subsidiaries (collectively "Graff" or the
"Company") is a diversified world-wide entertainment company which owns and
operates transaction based television networks in North America and Europe,
provides telecommunications and television production services principally to
the pari-mutuel wagering industry, produces and licenses television programs and
motion pictures and together with a partner, is developing the use of emerging
video delivery systems.
Formed in 1987, the Company is a leading provider of premium entertainment
networks. The Company operates and distributes SPICE and THE ADAM & EVE CHANNEL
(collectively, the "SPICE Networks"), two domestic pay-per-view programming
services with access to over 18.3 million cable, C-band direct-to-home ("DTH")
and DIRECTV(R) direct broadcast satellite ("DBS") subscribers. In Europe, the
Company operates and distributes two subscription networks, THE ADULT CHANNEL
and EUROTICA which have approximately 172,000 and 7,000 subscribers,
respectively. In addition, the Company holds a majority interest in a
partnership which owns and operates CABLE VIDEO STORE, a domestic hit movie
pay-per-view service with access to approximately 2.5 million subscribers, and
THE HOME VIDEO CHANNEL, a subscription movie service in the United Kingdom with
approximately 71,000 subscribers. Through its wholly owned subsidiary Spector
Entertainment Group, Inc. ("SEG"), the Company is a full service provider of
telecommunications, television production and related services to the
pari-mutuel wagering, sports, entertainment, and other industries.
The Company is continuing to adapt its content for new media such as
CYBERSPICE, the Company's adult Internet website, and is developing new
transactional services for the evolving two-way interactive networks. In
addition, the Company is currently deploying emerging video delivery systems
such as file server-based enhanced pay-per-view and is utilizing other delivery
systems to achieve the widest distribution of the Company's networks and
programming.
The Company incurred a $2.7 million operating loss for 1995 before a
special restructuring charge and write down of investments totaling
approximately $10.5 million. The Company's liquidity has been affected as a
result of these losses. The Company responded to these problems with a
multi-faceted restructuring plan. The Company has curtailed unprofitable and
capital intensive initiatives, reduced the number of employees, accepted the
resignations of certain members of senior management and renegotiated its credit
facility with its principal lender. The restructuring is described in "CURRENT
DEVELOPMENTS - Restructuring" and "MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION."
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NETWORKS
SPICE AND THE ADULT CHANNEL NETWORKS
The SPICE Networks are two of the leading domestic networks in the adult
pay-per-view market place. Pay-per-view television enables a subscriber with an
addressable set top decoder box to purchase a block of programming, a movie or
an event for a set fee. Currently, the SPICE Networks are available to an
aggregate of approximately 15 million addressable subscribers in cable systems
throughout the country. The SPICE Networks have affiliation agreements with 9 of
the top 10 multiple system operators ("MSO"). The SPICE Networks are available
in the DTH market to over 2 million households and available in the over 1.3
million households that subscribe to the DIRECTV(R) DBS satellite entertainment
service.
The SPICE Networks were the first adult pay-per-view networks to be
available 24 hours a day and the first adult pay-per-view network to feature an
all movie format. The SPICE Networks pioneered the now industry standard 90
minute start times promoting customer convenience and was the first service to
offer a complementary companion adult pay-per-view service which provides
staggered start times for its movies and features.
Each of the SPICE Networks feature approximately 50 titles per month,
approximately 12 of which are first time exhibitions. There is no crossover of
programming between the two channels. The SPICE Networks feature "cable version"
adult films. Cable version adult films (as contrasted with the explicit or hard
core versions) are specially produced and edited to conform to strict,
internally developed guidelines which are generally accepted as the standard in
the industry.
While the cable operators set the retail prices, above certain minimums,
for pay-per-view services such as the SPICE Networks, management believes that
in the pay-per-view cable market, the SPICE Networks command the highest retail
prices of all pay-per-view movie services, both adult and hit movie services.
The following chart shows the Company's accessible base of addressable cable
subscribers for each of the SPICE Networks.
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The following table is an Edgar representation of the data points used in
the printed graphic prensentation.
SPICE NETWORKS
(Addressable Subs)
(MILLIONS)
SPICE THE ADAM & EVE
----- ----------------------
1989 0.8
1990 2.3
1991 3.8
1992 4.9
1993 7.3
1994 9.2 0.4
1995 11.6 3.1
(C) Paul Kagan Associates, Inc. estimates. All rights reserved.
The Company has been aggressively promoting the SPICE brand name. The logo
was completely redesigned and new interstitial programming was produced for use
between feature movies in 1995. SPICE also features special events such as the
1996 Adult Video News Awards Show which SPICE co-produced and where the SPICE
brand name was prominently featured. The SPICE Networks also provide home
shopping which is featured between movies and offer adult theme products in
provocatively staged shopping segments. These segments also offer SPICE branded
products which further promote the brand name.
The SPICE Networks sell air time to third parties who provide
adult-oriented entertainment and information through pay-per-call telephone
lines. The telephone line services are promoted with advertisements produced
exclusively for the SPICE Networks by adult film producers which enables the
Company to control the networks' on-air look.
The telephone lines are operated by third parties who are contractually
required to comply with all applicable rules and regulations. None of the
operators or administrators of the telephone lines are Company employees. The
telephone lines feature computerized audio programs and live operators on both
800 and 900 telephone lines.
The Company also operates THE ADULT CHANNEL, originated in the United
Kingdom, which is a satellite delivered subscription service available to
approximately 1.3 million cable homes and approximately 3.5 million DTH
satellite dishes in the United Kingdom. THE ADULT CHANNEL is also available to
DTH satellite dish owners throughout Continental Europe and currently has
subscribers in over a dozen countries. THE ADULT CHANNEL is available
approximately 4 hours a day. THE ADULT CHANNEL features cable version adult
movies similar to those exhibited on the SPICE Networks.
THE ADULT CHANNEL is offered from approximately 12:00AM to 4:00AM. THE HOME
VIDEO CHANNEL, which provides a tape delivered movie service is offered during
the evening hours. The Company plans to transition THE HOME VIDEO CHANNEL to a
satellite
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delivered service and will program the 12:00AM portion of THE HOME VIDEO CHANNEL
for a smooth transition to the commencement of broadcast of THE ADULT CHANNEL.
The two services can then be offered as a seamless 8:00PM to 4:00AM programming
service at a package price which management believes will increase the number of
subscribers.
In February 1995, the Company launched EUROTICA, a European satellite
delivered subscription network based in Denmark which features explicit version
adult movies and adult entertainment. EUROTICA is marketed to the DTH market
satellite dish owners and cable systems throughout Europe and has subscribers in
over 15 countries.
PROGRAMMING CONTENT. Media Licensing, Inc., ("MLI") a wholly owned
subsidiary of the Company, has an extensive library of adult films which it
acquires pursuant to license and production agreements with many of the
principal adult film producers. MLI licenses its adult films to the Company's
networks and to third parties and adapts the adult films for use in other media
such as CYBERSPICE, the Company's Internet website.
MLI has long term production agreements with two adult film producers and
more limited production agreements with other adult film producers. MLI has also
recently entered into a production agreement to have movies produced in Europe
as part of the Company's strategy to globalize its adult networks and which will
also help meet local content requirements for its European adult networks. Under
the production agreements, MLI acquires worldwide television rights
(pay-per-view and subscription rights) in perpetuity for delivery, in most
instances, using all known and to be developed methods of delivery, for both the
cable version and the explicit version of each movie. MLI may also acquire
online, Internet and other rights as part of the rights granted under the
production agreements.
MLI has license agreements with other adult film producers. Under the terms
of the license agreements, MLI will typically license the cable and explicit
version for adult films in the United States and/or Europe for between one to
three years with unlimited exhibitions in return for a flat license fee.
CABLE VIDEO STORE AND THE HOME VIDEO CHANNEL
CABLE VIDEO STORE is a domestic hit movie pay-per-view service available to
approximately 2.5 million addressable households in the United States. CABLE
VIDEO STORE licenses its motion picture from all of the major film studios and
several independent production companies.
On March 6, 1996, the Company contributed CABLE VIDEO STORE to a newly
formed partnership, CVS Partners, pursuant to a General Partnership and
Contribution Agreement with WilTech Cable Television Services, Inc. ("WCTV"), a
subsidiary of The Williams Companies, Inc. The Company currently owns a 75%
interest in CVS Partners. The Williams Companies, through its international
video services unit, Vyvx, provides audio and video transmission services to the
telecommunications industry. Vyvx owns and operates an 11,000 mile fiber-optic
network with facilities permitting interconnection to its fiber-optic network in
major U.S. cities.
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CVS Partners is continuing to operate CABLE VIDEO STORE and plans to transition
the network from a single channel satellite delivered network to an enhanced
pay-per-view network employing video file server technology. The Company is also
contributing its video dialtone and enhanced pay-per-view initiatives to CVS
Partners which are described below in "VIDEO DELIVERY SYSTEMS" which also
contains a description of an enhanced pay-per-view network.
The Company will provide sales, marketing, operational (playback, editing,
duplication, etc.), accounting and legal services to CVS Partners as part of its
contribution to CVS Partners. Vyvx has also entered into a services agreement
with CVS Partners. WCTV contributed and will contribute cash and services to CVS
Partners aggregating approximately $2.6 million.
The Company also owns and operates THE HOME VIDEO CHANNEL, a taped
delivered subscription movie service distributed in the UK through cable
systems. THE HOME VIDEO CHANNEL, which is offered in the evening hours, features
action, horror and other "B" movies licensed from independent producers. THE
HOME VIDEO CHANNEL is available to approximately 1.3 million cable subscribers
in the United Kingdom. As already noted, the Company plans to transition THE
HOME VIDEO CHANNEL to a satellite delivered service which will be packaged with
THE ADULT CHANNEL to offer eight hours of seamless programming.
PROGRAMMING CONTENT. CABLE VIDEO STORE acquires pay-per-view licenses from
major film studios, including Columbia/Tri Star, Disney, New Line, Paramount,
Twentieth Century Fox, Universal, Warner Bros., and independent studios.
Typically, a film is available for pay-per-view exhibition 30 to 45 days after
it is available to the home video cassette market and from 3 to 10 months prior
to its premiere on premium channels such as HBO and Showtime. Under the typical
pay-per-view license, the studio receives 45% to 50% of the gross revenue
generated at the consumer level from the pay-per-view purchase of a film or a
minimum per transaction, whichever is greater. The cable system typically
receives approximately 45% of the revenue and the Company retains the balance.
CABLE VIDEO STORE is granted an unlimited number of exhibitions during the
license period which is typically 30 to 60 days.
THE HOME VIDEO CHANNEL licenses its content from a variety of independent
studios and distributors. The Company believes that it can continue to license
such films in the future.
NEW INTERACTIVE NETWORKS
In the fourth quarter of 1995, the Company, in joint venture with National
Media Corporation, a publicly held infomercial company, launched DRAGNET, a
satellite delivered service providing infomercial programming in 30-minute
blocks. Infomercials either promote direct response purchases of merchandise by
viewers or provide long form advertisements for goods or services. DRAGNET is
designed to enable cable systems to easily program underutilized blocks of time
created when cable networks are off-air with income generating programming. The
network is currently available on a limited basis.
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The Company intends to digitally compress the DRAGNET signal enabling it to
share a transponder with other programming which will substantially reduce its
costs and increase its viewing hours. It is anticipated that the equipment
necessary to deliver and receive a digital signal will be available in the
second half of 1996.
The Company is exploring other programming services to adapt its content
and build on its expertise in providing transactional entertainment services. In
1994, the Company began CYBERSPICE as an online bulletin board service which
utilized the Company's adult programming and cross promoted the SPICE Networks.
CYBERSPICE was converted to a website on the Internet in the second quarter of
1995. The Company plans to convert CYBERSPICE to a pay service in the near
future. See "GOVERNMENT REGULATION, Online Services."
The Company is exploring the possibility of developing interactive
pari-mutuel wagering and gaming services by expanding on the services it
currently provides to the pari-mutuel wagering industry as discussed in
"TELECOMMUNICATIONS, TELEVISION PRODUCTION AND RELATED SERVICES - Transaction
Programming" below.
SALES AND MARKETING
With offices in four regions, the Company's sales and marketing staff has
broadened the SPICE Networks' subscriber base and increased carriage hours and
retail pricing levels of existing affiliated cable systems. The Company has
affiliation agreements with 9 of the largest 10 MSO's and 17 of the top 20 MSO's
in the United States. The largest 10 MSO's control over 75% of the domestic
addressable subscriber base. The Company has specialized sales teams for
national MSO accounts, the DTH markets and emerging video delivery systems.
The Company's marketing department has developed numerous national programs
and promotions to support the SPICE Networks. These have included customized
marketing materials, workshops at industry trade shows and regionally targeted
seminars to assist cable operators on effectively and discretely marketing the
SPICE Networks.
The Company is distributing its programming over a variety of emerging
video delivery technologies to insure the widest possible distribution of its
networks and programming. The Company is participating in most of the currently
available pay-per-view delivery media including the more traditional cable and
DTH markets and the emerging DBS system, multichannel wireless cable systems,
satellite master antenna systems, video dialtone, among others. The Company
markets its domestic networks to the in-room hotel market and licenses its adult
programming to the cruise ship industry. The Company is continuously exploring
other avenues and locales of distribution.
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NETWORK DELIVERY
Satellite Transmission. The Company generally delivers its video
programming to cable systems and other customers via satellite transmission.
Management believes that this is the most efficient delivery method currently
available for point to multipoint distribution. Satellite delivery of video
programming is accomplished as follows: The video programming is played back at
an operations facility. The program signal is then scrambled (encrypted) so that
the signal is unintelligible unless it is passed through the proper decoding
devices. The signal is then transmitted (uplinked) from an earth station to a
designated transponder on a communications satellite. The transponder receives
the program signal uplinked by the earth station, amplifies the program signal
and broadcasts (downlinks) it to satellite dishes located within the satellite's
area of signal coverage. The signal coverage of the domestic satellite utilized
by the Company is the Continental United States, portions of the Caribbean, and
Canada. Each transponder can retransmit one complete analog color television
signal, together with associated audio and data sidebands.
For cable systems, the scrambled signal received by the cable system's
satellite dish is then descrambled. The cable system then rescrambles the signal
using scrambling technology compatible with the addressable set top boxes
deployed in its system and then distributes the signal throughout its cable
system. For DTH and DBS customers, their satellite receiver contains the
descrambling equipment. To offer pay-per-view services, the set top boxes or
satellite receivers must have an electronic "address" and the cable system or
satellite service provider must be able to remotely control each customer's set
top box or satellite receiver and cause it to descramble the television signal
for a specified period of time after the customer has made a purchase of a
premium service or a pay-per-view event. The ability to control the scrambling
and descrambling of a signal from a cable system's facilities is essential for
the marketing and the delivery of pay-per-view programming services.
In Europe, subscribers purchase "smart cards" from distributors, including
appliance and electronics stores, which are then inserted into the decoders set
top boxes and when authorized, descramble the signal for a specified period of
time.
SEG also uses satellite transmission for the distribution of its video
programming as discussed in "TELECOMMUNICATIONS, TELEVISION PRODUCTION AND
RELATED SERVICES" below.
Service Providers. The Company utilizes transponder services provided
directly by AT&T pursuant to a long term services agreement for all of its
domestic networks. The Company currently uses five transponders on AT&T's
Telstar 402R Satellite.
The Home Video Channel, Ltd. ("HVC") has a contract with SES, the owner of
the Astra satellite providing transmission services for THE ADULT CHANNEL,
through January 1997. The footprint of the satellite is Western Europe.
The Company entered into an agreement with TELECOM Denmark A/S on December
20, 1994 for satellite and uplink services on its Eutelsat II F1 Satellite for
EUROTICA. This agreement continues through the life of the satellite, estimated
to continue
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through at least April 30, 1996. The Company will either remain on its existing
satellite or, if that is unavailable, will transition to another Eutelsat
satellite. The footprint of these satellites is also Western Europe.
Four Media Company ("4MC") currently provides playback and uplink services
through September 30, 1996 and month to month thereafter until the Company's
master control and digital playback center (the "Operations Facility") becomes
operational. The Company anticipates handling playback from its Operations
Facility which is expected to occur during the fourth quarter of 1996 at which
point the Company will be required to arrange for uplink services. No assurances
can be given as to when the Operations Facility will become operational.
The Company's domestic network signals (other than DRAGNET) are scrambled
using VideoCipher II encoders, which are manufactured by General Instrument
("GI") and is currently the industry standard scrambling technology. THE ADULT
CHANNEL and EUROTICA use the Videocrypt system developed by News Datacom
Limited. This is the leading scrambling system used in the United Kingdom and
Europe.
COMPETITION
DOMESTIC. The SPICE Networks have one principal competitor, Playboy
Entertainment Inc. ("Playboy"), in the domestic cable and DBS markets. The
Company believes that it currently has access to a larger subscriber base than
Playboy.
In the C-band DTH market, several adult movie pay-per-view and subscription
services have been launched in the last year and half and are in competition
with the SPICE Networks. These services exhibit explicit versions of adult
movies rather than the "cable versions" exhibited on the SPICE Networks. The
Company's revenues from the C-band DTH market have been adversely impacted by
the explicit services. In an effort to reverse this decline, the Company has
entered into a distribution agreement with one of the explicit service providers
to distribute the SPICE Networks. The Company is exploring other strategies in
the C-band DTH market to combat the loss of revenues.
Two other companies provide feature film programming services on a
pay-per-view basis in competition with CABLE VIDEO STORE (which is now owned by
a CVS Partners): Request Television and Viewer's Choice. The Company believes
that both these companies currently have a larger subscriber base and greater
resources than the Company. DIRECTV, a DBS service, provides its own feature
film service.
EUROPE. THE ADULT CHANNEL has two principal competitors both of which were
launched in the second half of 1995. This competition has impacted THE ADULT
CHANNEL's subscriber base.
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THE HOME VIDEO CHANNEL is one of several movie channels available to United
Kingdom cable operators all of which have substantially more subscribers and
greater resources than THE HOME VIDEO CHANNEL.
PRINCIPAL CUSTOMERS
Over the last few years the Company has become less dependent on its two
principal cable customers, TeleCommunications, Inc. ("TCI") and Time Warner. TCI
and Time Warner accounted for 11% and 7%, respectively, of the Company's
consolidated revenues in 1995. TCI and Time Warner accounted for 11% and 9%,
respectively, of the Company's consolidated revenues in 1994 and 17% and 14%,
respectively, of the Company's consolidated revenues in 1993.
TELECOMMUNICATIONS, TELEVISION PRODUCTION AND RELATED SERVICES.
The Company is a full service provider of telecommunications, television
production and related services primarily to the pari-mutuel wagering industry
and to a variety of other industries including the sports, entertainment and
distance learning industries. These activities are conducted by SEG, a company
acquired by the Company by merger at the end of the third quarter of 1995. SEG
also brokers unused satellite transponder capacity and provides satellite
transmission services to third parties.
SEG and an affiliate have also undertaken extensive research and
development efforts to provide interactive television programming featuring live
broadcasts of horse races and other gaming events complemented with broadcast
distributed information and which are described below under "Transaction
Programming."
TELECOMMUNICATION SERVICES.
SEG's core business is providing simulcasting and television production
services to racetracks, jai alai frontons, off track betting locations and to
the general sports, entertainment and distance learning industries. Simulcasting
is the process of uplinking the audio and video signal of a live racing event
from a track to a satellite for reception by wagering locations around the
country. SEG's simulcast services enable racetracks to simultaneously send their
signals to multiple wagering facilities including other racetracks and off track
betting facilities.
SEG has a fleet of transportable earth stations licensed by the FCC which
are deployed for the transmission of audio, video and/or data programming via
satellite throughout North America. The earth stations are typically configured
on a mobile trailer and transported to the site where the broadcast event
occurs.
Prior to SEG's acquisition by the Company, SEG obtained its satellite
transponder capacity by securing multiple short term and long term leases with a
variety of satellite
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communications providers. One of the synergies achieved by the Company's
acquisition of SEG was to provide SEG stable, long term access to the Company's
transponder capacity.
SEG also provides scrambling services for its customers including
racetrack, sports and pay-per-view networks. SEG employs a state of the art
digital compression technology (which also effectively scrambles the signal),
utilizing General Instrument's DigiCipher(TM) encoders and decoders primarily
configured for a single-channel-per-carrier ("SCPC") compression system. The
SCPC system enables SEG to uplink digitally compressed signals from diverse
locations to a single transponder. SEG also uses Scientific Atlanta BMAC
scrambling equipment for its noncompressed signals. Where the SEG transmitted
signal is compressed or scrambled, SEG has contracts that provide that SEG will
be the exclusive lessor of decoder equipment to locations authorized by the
signal owner to receive the signal. SEG is an "OEM" (original equipment
manufacturer) for a variety of equipment providers including General Instrument
and Scientific Atlanta.
TELEVISION PRODUCTION SERVICES
The television production division primarily serves the pari-mutuel racing
industry providing virtually all of the video and television equipment and
service requirements for a wagering facility. At each site, SEG provides track
side cameras, production studios, television monitors and cabling. SEG also
operates a fleet of mobile production studios which are deployed on site. SEG
provides cameramen, producers, editors and other trained personnel. For
facilities utilizing SEG's television production services, SEG provides the
closed circuit video systems to enable patrons to see and hear the live races
throughout the racetrack and enable management to oversee its operations. SEG
also produces pre- and post-race shows, replays and gaming information and
provides commercial, edit and post-production services. SEG's simulcasting and
television production services, systems and equipment are typically provided
pursuant to long term contracts.
SEG also brokers unused satellite transponder capacity and provides
satellite transmission services for other programming. These services, which are
marketed primarily to the sports, entertainment and television network
industries, enable SEG to capitalize on the Company's transponder capacity. SEG
also provides design, equipment, installation and operational services to
several off track betting facilities.
TRANSACTION PROGRAMMING
SEG and a former SEG affiliate, United Transactive Services, Inc. ("UTI"),
are currently exploring the possibility of developing network programming and
related transaction based capabilities to deliver pari-mutuel wagering and other
interactive television programming direct to the home and other locations. UTI
has rights in advanced data broadcast technology which permits cost effective,
secure, point to multi-point distribution of time sensitive data using an unused
portion of a television video signal known as the "vertical blanking interval."
(The Company has an option to acquire UTI.) This time sensitive data, which
could include newspapers, racing forms and ticker services, is removed from the
video signal using a
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proprietary device for video or hard copy display utilizing off the shelf
personal computers, facsimiles or printers. SEG is also exploring other means of
data broadcast distribution and secure transaction processing.
COMPETITION
Management believes that SEG is the only company which markets a full and
integrated array of telecommunications, television production, data broadcast
and related services to the pari-mutuel wagering industry. Management believes
that competition in the industry, as a whole, is fragmented though in the
process of consolidation.
VIDEO DELIVERY SYSTEMS
The Company, through its partnership interest in CVS Partners, is deploying
emerging video delivery systems using video file servers to facilitate enhanced
pay-per-view services. Enhanced pay-per-view services enable cable systems to
tailor the scheduling of pay-per-view programming to fit the demography of the
particular cable system serviced by the video file server and enable cable
systems to offer multiple channels of hit movies with staggered start times -
near video on demand and provide additional services such as dynamic ad
insertion. This augmented functionality is not readily obtainable with a
satellite delivered service. A video file server is a computer where digitized
compressed video programming is stored on the computer's hard drive and multiple
streams of video programming can be played back. Digitized video information
such as movies may be loaded onto a video server remotely via fiber optic
network or other means. The video file servers can be remotely controlled which
can facilitate loading new scheduling information and commands to playback video
information, purge old video files and store new video files.
The Company has installed a video file server at the US WEST video dialtone
trial in Omaha, Nebraska and is the sole provider of pay-per-view programming,
providing 11 channels of pay-per-view programming using this server. The Company
is a "video information provider" in the Southern New England Telephone ("SNET")
video dialtone trial in Hartford, Connecticut which SNET has informed the
Company it intends to terminate. The Company also has an arrangement with
Coaxial Communications to provide enhanced pay-per-view services (server-based
pay-per-view programming) for Coaxial's Columbus, Ohio cable system.
The Company's participation in the US WEST and SNET video dialtone trials
and its arrangements with Coaxial were contributed to CVS Partners. CVS Partners
plans to build on these contributions utilizing WilTech's technical expertise
and fiber optic network to transition the CABLE VIDEO STORE to a video file
server-based enhanced pay-per-view network.
Paul Kagan Associates, Inc. ("Kagan"), a research firm to the television
entertainment industries, forecasts that pay-per-view, near video on demand and
video on demand will translate into substantially higher buy rates in the hit
movie business. According to Kagan, these higher buy rates, when combined with
the forecasted growth in the roll out of addressable households,
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results in projected annual revenues in excess of $2 billion by 2000 for the
pay-per-view movie business.
The following table is an Edgar representation of the data points used in
the printed graphic prensentation.
TOTAL PAY-PER-VIEW
NEAR VIDEO ON DEMAND
VIDEO ON DEMAND
Movie Revenue
(Millions)
-------------------------------------------------
1994 $181
1995 $221
1996 $343
1997 $616
1998 $1,053
1999 $1,592
2000 $2,145
(C) Paul Kagan Associates, Inc. estimates. All rights reserved.
There can be no assurance that the Company will be successful in deploying
enhanced pay-per-view services.
LICENSING AND PROGRAMMING PRODUCTION
The Company is instituting a strategy to globalize its adult networks and
programming. MLI has an extensive library of adult films which it licenses to
its European affiliates and to third parties. This programming may also be used
to create new SPICE branded services or other adult networks. The Company is
also exploring the possibility of reuplinking its SPICE Networks signal to
satellites that service different geographical areas for rebroadcast in other
locations such as South America.
The Company, through its acquisition of Cinema Products Video, Inc.
("CPV"), was engaged in the production and distribution of television series,
programs and movies prior to the restructuring described below in "CURRENT
DEVELOPMENTS." CPV also produced CD ROMs and a digizine (a digital CD ROM
magazine). CPV's production business involved substantial upfront production
costs which were only partially recovered when the television series or films
were completed. The balance of the production costs and profits were recouped
from the sale of other rights, principally international rights. Because of the
substantial lead time before the Company recovered its production advances and
because CPV's principal customers did not renew their production agreements with
CPV in 1995, the Company elected to suspend CPV's production activities.
While the Company is exploring distribution of the CPV produced CD ROMs and
digizine, it is likely that given the disappointing growth of the CD ROM
industry, in general, and CPV's inability to obtain sufficient distribution for
its CD ROMs and the Company's current
12
<PAGE>
financial condition, it will not produce any more CD ROM products in the near
future. In addition, and as part of the Company's restructuring, the Company
terminated the employment of most of the CPV staff responsible for producing
these products and entered into a letter agreement with the former principal
CPV officers which is described in "CURRENT DEVELOPMENTS, Restructuring."
COMPETITION
Prior to the suspension of production activities, CPV produced and
distributed TV programming, feature films and interactive CD-ROMs. There are
many dependent and independent production companies that compete in these
markets and are much larger and have greater resources than the Company.
CURRENT DEVELOPMENTS
On April 13, 1995, the Company acquired, by merger, Adam and Eve
Communications, Inc. ("AEC"). Prior to the AEC merger, AEC owned and operated
THE ADAM & EVE CHANNEL, then the third largest adult pay-per-view network in the
United States. The Company combined AEC's network and subscribers with its SPICE
2 network and continues to operate the network under the name "THE ADAM & EVE
CHANNEL."
In the second quarter of 1995, the Company entered into agreements with IBM
and others to construct a master control and digital playback center (the
"Operations Facility") at its New York City headquarters. The Company
anticipates putting the Operations Facility into service in the fourth quarter
of 1996, a delay of approximately one year from the anticipated in-service date.
The delay was attributable to the late delivery of certain critical equipment
and associated software from third party vendors. Currently the Company is
negotiating with IBM and other third party vendors to reimburse the Company for
certain expenses incurred as a result of the delay.
Pursuant to a joint venture agreement dated June 28, 1995, the Company
formed American Gaming Network ("AGN") with TV Games, Inc., a wholly-owned
subsidiary of Multimedia Games, Inc. ("MGAM"), to jointly develop and promote
high stakes proxy play Class II tribal bingo games. The Company contributed
approximately $1.4 million of intellectual property, which the Company had
acquired from MGAM for cash and notes, and working capital to AGN's capital. In
related transactions, the Company acquired for cash and notes 275,000 shares of
MGAM's outstanding stock and has a warrant to acquire an additional 175,000
shares at an exercise price of $3.25 per share. The parties have been unable to
agree on a business plan or a strategy for going forward with AGN. The parties
are currently in negotiation to settle their differences. As a result, the
Company has established a reserve against its investment in AGN and the MGAM
stock.
On August 31, 1995, the Company acquired, by merger, Spector Entertainment
Group, Inc. ("SEG"). SEG provides telecommunication, television production and
related services and systems to the pari-mutuel wagering, sports, entertainment
and other industries. As part of this
13
<PAGE>
transaction, the former SEG shareholders granted the Company an option to
acquire all the outstanding stock of United Transactive Services, Inc. ("UTI")
for a formula determined number of Company shares. The UTI shareholders may put
the UTI shares to the Company in certain circumstances. UTI holds a partnership
interest with Medtech Broadcast, Inc. which was formed to distribute
information, news and other programming using a proprietary point to multipoint
secure data distribution system.
Edward M. Spector, the principal beneficial shareholder and officer of SEG
prior to the merger, became a Company director after the merger and the
Company's Chief Operating Officer on November 17, 1995.
On September 5, 1995, the Company entered into a letter of intent with
Penthouse International, Ltd. ("PIL") to form an international joint venture for
the distribution of adult entertainment television networks outside of North
America using the PENTHOUSE and SPICE brand names. The parties were unable to
agree on final documentation and have abandoned the joint venture but continue
to explore other opportunities.
On March 6, 1996, and pursuant to a General Partnership and Contribution
Agreement dated January 27, 1996, the Company contributed the assets of CABLE
VIDEO STORE and certain other assets to 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").
WilTech 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 its
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 has and will contribute approximately $2.6
million to CVS Partners' capital, part in cash and part by a credit for services
to be provided to CVS Partners pursuant to Services Agreement between WilTech
and CVS Partners.
The Company, Philips Media B.V. ("Philips") and Royal PTT Netherlands NV
("KPN") established TeleSelect B.V. ("TeleSelect"), a Netherlands joint venture,
to create joint ventures with European cable operators to enable them to provide
conditional access services such as pay-per-view, near video on demand and
electronic retailing to their subscribers. On April 3, 1996, the Company sold
its TeleSelect interest to Philips and KPN for approximately $3.244 million.
Restructuring. The Company reported a loss for 1995 of approximately $15.1
million which includes a one time restructuring charge and a write down of
investments of approximately $10.5 million and an operating loss of
approximately $2.7 million before the special charge and write-downs. The
Company's liquidity has been adversely affected as a result of these losses. As
a result of the loss, the Company violated certain of the financial covenants
under its credit facility with Midlantic Bank, N.A. ("Midlantic"). Pursuant to a
Third Amendatory Agreement dated March 29, 1996, Midlantic has waived these
violations through the date of the agreement, eliminated all of the financial
covenants for the balance of the loan's
14
<PAGE>
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 responded to the problems with a multi-faceted
restructuring plan. The Company has suspended future television and movie
production activities which were previously conducted by CPV and has eliminated
most of its staff, closed its offices and entered into a letter agreement with
its two principal officers. This agreement provides, among other things, for the
early termination of their employment agreements, a partial release from their
restrictive covenants and transfers to their affiliated entity of production of
certain television series which were partially completed. The affiliated entity
will reimburse the Company for advances made as part of the production of the
television series before their transfer.
The Company is no longer utilizing its current hotel/motel pay-per-view
technology that it acquired from PSP Holding, Inc. ("PSP"). The Company projects
that the PSP technology will not generate future cash flows sufficient to
support its investment. Management has elected to take a charge attributable to
the goodwill created upon acquisition of the PSP technology.
The Company had employed several persons who were exploring international
opportunities for the Company outside of its core network businesses. The
Company has determined to curtail these activities as a cost saving measure and
has terminated these executives' employment.
The Company's senior management has also been restructured. Roger Faherty
will continue as Chief Executive Officer and Chairman of the Board but has
agreed to a salary reduction and a Fourth Amendment to his employment agreement.
On November 17, 1995, Edward M. Spector, the former principal shareholder of
SEG, became President and Chief Operating Officer of the Company. Effective
January 1, 1996, Mark Graff and Leland H. Nolan, both of whom were Vice Chairmen
of the Company, have entered into separation agreements which provide for their
resignation as employees and officers and severance payments lower than that
provided in their original employment agreements. The Company has also reduced
its work force by approximately 30% and froze the cash salaries of its senior
staff and reduced certain benefits. The Company has consolidated its operations
and plans to sublease a portion of its corporate headquarters, subleased CPV's
offices and assigned its lease of its Dallas office to CVS Partners. These and
other cost saving steps will reduce operating expenses for 1996. The Company is
continuing to explore other streamlining and cost saving measures.
Through the formation of CVS Partners, the Company will no longer be
obligated to fund the CABLE VIDEO STORE's cash flow needs while retaining an
interest in CVS Partners. By terminating its support of the AGN venture, the
Company has eliminated any obligation it may have had to fund that venture. The
Company sold its interest in TeleSelect to the other partners, eliminating the
Company's obligation to fund its share of that venture's capital needs. Finally,
the Company has refocused on its core adult network business with the intent to
build strong brand identity to facilitate growth in the subscriber base and
revenues.
15
<PAGE>
GOVERNMENTAL REGULATION
DOMESTIC NETWORKS. Congress recently enacted the TeleCommunications Act of
1996 (the "Act"), a comprehensive overhaul of the Federal Communications Act of
1934. The Act contains several provisions which may impact the Company. (All
Section references which follow refer to the Act.)
The most significant impact of the Act on the Company's business could
result from the enforcement of Section 641 which requires full audio and video
scrambling of channels which are primarily dedicated to sexually explicit
programming. If a multi-channel video programming distributor (which includes a
cable system operator) cannot comply with the full scrambling requirement, then
the channel must be blocked during the hours when children are likely to be
watching television. The FCC issued an interim order which provides that
currently these hours are the hours between 6:00AM and 10:00PM.
The SPICE Networks feature "sexually explicit" programming within the
contemplation of Section 641. While the Company fully scrambles its signal, the
Company understands that several of its cable affiliates lack the technical
capability to fully scramble the audio portion of the signal. Were Section 641
to take effect, these cable systems would be required to block broadcast of the
SPICE Networks during the hours of 6:00AM to 10:00PM. This would have an adverse
affect on the SPICE Network revenues.
Section 641 was scheduled to take effect on March 9, 1996. The Company
filed an action in Delaware District Court challenging the constitutionality of
Section 641. On March 7, 1996, the Court granted the Company's application for a
temporary restraining order enjoining enforcement of the Section 641.
Substantially all of the Company's SPICE Network cable system affiliates did not
curtail their distribution of the SPICE Networks. A hearing on the Company's
application for a preliminary injunction and on the provision's
constitutionality is scheduled for May or June of 1996 with a review by the
Supreme Court thereafter. The Company believes that it is likely that the
provision will not take effect until the Supreme Court ultimately decides the
constitutionality of the provision, which the Company anticipates will likely
not occur until 1997. If the provision does take effect, the Company's revenues
may be adversely affected; the amount of the reduction depends on several
factors and is impossible to predict at this point in time.
The Act will also affect the Company's businesses in other ways. The
principal purpose of the Act was to promote deployment of advanced
telecommunications and information technologies in the marketplace by
deregulating pricing in the cable television industry and increasing competition
in the telecommunications industry by permitting the entry of the cable and
telephone companies into each other's markets. The effect of increased
competition on the Company's networks is unclear at this point in time.
ON-LINE SERVICES. CYBERSPICE, the Company's adult oriented online service,
also may be materially affected by the Act. The Act makes it a criminal offense
to transmit to minors "indecent" content online and over the Internet. However a
person providing adult content
16
<PAGE>
online will not be subject to prosecution under the Act if the provider has
taken good faith reasonable efforts to prevent or restrict access to minors.
Promptly following enactment, the constitutionality of this provision was
challenged by unrelated third parties and a District Court has issued a
temporary restraining order enjoining enforcement of this provision.
While it is the Company's belief that this portion of the Act will be
enjoined from enforcement and ultimately struck down on constitutional grounds,
if the challenges are unsuccessful, CYBERSPICE will be subject to the provision.
The Company is exploring the possibility of converting CYBERSPICE to a
subscription service and as part of the subscription process, the Company
intends to install safeguards limiting access to CYBERSPICE to persons who are
not minors which should satisfy the statutory safe haven.
VIDEO DELIVERY SYSTEMS. The Act substantially revised the rules applicable
to the participation by the telephone companies in the video programming
industry. Prior to the Act, the FCC issued the Video Dialtone Rules which
established the guidelines for telephone companies to apply for permission to
construct systems to provide video services over telephone lines. The Company
participated in several of the video dialtone ("VDT") trials established under
these guidelines. The guidelines proved unworkable and several telephone
companies abandoned their VDT trials.
The Act promotes the entry of telephone companies into the video
programming business by eliminating the prohibition on cross-ownership of cable
companies and telephone companies. In addition, the Act provides that a local
telephone company may provide video programming to subscribers as a radio based
multi-channel video program distributor (a wireless system) or through an "open
video system." An "open video system" must offer nondiscriminatory channel
capacity to unaffiliated programmers. The "open video system" rules should
result in the availability of channel capacity for the Company's networks. The
Company believes that increased competition may have a positive effect on the
growth of distribution channels for the Company's domestic networks.
Over the past year, the Company has distributed programming over two VDT
networks, SNET and US WEST. SNET has informed the Company that it will abandon
its VDT trial in May, 1996 and has applied for a cable franchise. The Company
and SNET are in discussion for the Company's provision of programming to the
SNET cable system. CVS Partners is continuing to provide video programming in
the US WEST VDT trial.
TELECOMMUNICATIONS, TELEVISION SERVICES AND RELATED SERVICES. SEG's
communications operations and services are generally subject to regulation by
the FCC. All SEG satellite transmission facilities, including mobile satellite
earth stations and microwave equipment, must be individually licensed and
renewed by the FCC, generally on an annual basis. The FCC prescribes technical
standards for transmission equipment which may change from time to time.
The FCC also requires a coordination process and filing for each earth
station transmitter operating in the frequency band used by some of the
satellites on which the Company provides services. This process is to
demonstrate that the earth station transmitter will not interfere with
17
<PAGE>
land-based microwave systems or other users. This requirement, in some cases,
restricts the proximity that a SEG mobile earth station can have to a customer
facility and thus may require a telephone cable or other terrestrial link to be
installed between the customer and the earth station. Transmission equipment
must also be installed in a manner that avoids harmful levels of radio frequency
radiation.
SEG's encryption services, including both the encoder hardware, software
and decoders, are all subject to regulation by the Department of Defense, Office
of Munitions Control ("OMC"). SEG utilizes a type and level of encryption
equipment and software that contains sophisticated algorithms, computer chips
and other technology that the OMC has deemed restricted for export purposes. SEG
has obtained such licenses and authorities to be exempted from such restrictions
on an on-going review and licensed basis. SEG is, therefore, able to export such
encryption equipment and software subject to particular inventory controls
imposed by OMC and the OMC licensing procedure.
EUROPEAN NETWORKS. THE ADULT CHANNEL and THE HOME VIDEO CHANNEL are
licensed by the government of the United Kingdom via the Independent Television
Commission. The licenses run until December 31, 2000 and November 12, 2001,
respectively. The Danish Government issued EUROTICA's license which runs
indefinitely. The license is subject to certain conditions, primarily scrambling
and European content quotas, with which the Company intends and expects to
comply.
CURRENCY RATES AND REGULATIONS. The Company's foreign operations are subject to
the risk of fluctuation in currency exchange rates and to exchange controls. The
Company cannot predict the extent to which such controls and fluctuations in
currency rates may affect its operations in the future or its ability to remit
dollars abroad. See Note 1 "Summary of Significant Accounting Policies - Foreign
Currency Translation" to the consolidated financial statements beginning at page
F-1 below.
EMPLOYEES
At February 29, 1996, the Company had a total of 154 employees.
18
<PAGE>
ITEM 2. PROPERTIES
The Company leases the following locations:
Headquarters:
536 Broadway
New York, New York 10012 (1) 29,750 square feet
Other offices:
2716 Ocean Park Blvd., Suite 1007
Santa Monica, CA 90405 2,625 square feet
1755 Park Street, Suite 200
Napierville, IL 60563 330 square feet
14785 Preston Road, Suite 174
Dallas, Texas 75240 (2) 2,297 square feet
HVC, LTD:
Aquis House, Station Rd.
Hayes, Middlesex UB3 4DX
United Kingdom 5,020 square feet
CPV Productions, Inc.:
1801 Avenue of Stars, Suite 240
Los Angeles, CA 90067 (3) 6,860 square feet
Spector Entertainment Group, Inc.:
6349 Palomar Oaks Court
Carlsbad, CA 92009 26,599 square feet
Danish Satellite TV a/s:
Holger Danskesvej
40000 Copenhagen, Denmark 2,925 square feet
- ----------
1. The Company is attempting to sublease approximately 5,000 square feet
of its corporate headquarters.
2. The Company assigned its lease for the Dallas office to CVS Partners upon
its formation.
3. Effective February 1, 1996, the Company reduced the size of this office
which was utilized by CPV to approximately 3,850 square feet and subleased
the office to an affiliate of the former principal officers of CPV.
19
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
In the fourth quarter of 1995, the Company settled an action, Paul
Kestenbaum v. Graff Pay-Per-View Inc., California Superior Court, Los Angeles
County (Case No. SC 034050), West District, in which plaintiff alleged, among
other things, that he had received less proceeds from the sale of the Company's
common stock than he would have had the Company complied with its contractual
commitments. Mr. Kestenbaum received the common stock as part of the Company's
acquisition of PSP Holding, Inc. The Company settled the action by paying
$10,000 of Mr. Kestenbaum's legal fees and by granting him an option to acquire
16,000 shares of the Company's common stock with an exercise price equal to the
closing price of the common stock on the date of grant.
The Company instituted a proceeding in the Delaware District Court against
the Federal Government, Graff Pay-Per-View Inc. v. Janet Reno, et. al. which was
consolidated with a prior action filed by Playboy Entertainment Group, Inc.
(Civil Action No. 96-94/96-107 JJF), challenging the constitutionality of
Section 641 of the Telecommunications Act of 1996. As described above in
"GOVERNMENT REGULATION, Domestic Networks," Section 641 requires full audio and
video scrambling of channels which are primarily dedicated to sexually explicit
programming such as the SPICE Networks. If a multi-channel video programming
distributor (which includes a cable system operator) cannot comply with the full
scrambling requirement, then the channel must be blocked during the hours when
children are likely to be watching television. On March 7, 1996, the Court
granted the Company's application for a temporary restraining order enjoining
enforcement of the Section 641. As a result, substantially all of the Company's
SPICE Network affiliates did not curtail their distribution of the SPICE
Networks. A preliminary injunction hearing and a trial are pending. If the
provision does take effect, the Company's revenues will be adversely affected;
the amount of the reduction depends on several factors and is impossible to
predict at this point in time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1995.
20
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON
EQUITY AND RELATED STOCK HOLDER MATTERS
The Company's common stock is presently traded on The Nasdaq National
Market under the symbol "GPPV".
The following table sets forth, for the calendar period indicated, the per
share range of high and low sales prices for the Company as reported on The
Nasdaq National Market.
High Low
------ -----
1994
First Quarter $11.50 $7.63
Second Quarter $ 8.50 $6.19
Third Quarter $ 9.19 $6.38
Fourth Quarter $11.25 $8.75
1995
First Quarter $11.38 $9.50
Second Quarter $12.00 $8.38
Third Quarter $10.75 $8.25
Fourth Quarter $ 7.88 $3.88
The Company currently has approximately 1,600 shareholders of record.
The Company has never paid cash dividends on its common stock and intends
to retain future earnings to support the growth of its business and, therefore,
does not anticipate paying any cash dividends in the near future. The payment of
any future cash dividend on common stock will be determined by the Company's
Board of Directors in light of conditions then existing including the Company's
earnings, financial condition, capital requirements and other factors. In
addition the Company's current agreement with Midlantic National Bank, N.A. and
Imperial Bank restricts payments of cash dividends and the Company expects that
future financing agreements to contain similar provisions that will restrict the
ability to pay cash dividends on its common stock.
21
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table is a summary of selected financial data for the Company
for the periods indicated which has been restated for mergers that were
accounted for as pooling of interest:
<TABLE>
<CAPTION>
For the Years ended December 31 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues: $51,057,543 $50,656,316 $27,362,121 $21,008,223 $17,758,315
----------- ----------- ----------- ----------- -----------
Operating Expenses:
Cost of Goods of Sold 1,429,355 787,417 1,092,933 1,014,774 874,375
Salaries, wages and 11,684,727 8,386,364 6,278,355 4,160,746 2,764,225
benefits
Producer royalties and library amortization 6,662,111 7,096,070 4,075,426 3,373,603 3,042,931
Satellite costs 12,837,849 13,264,340 8,239,326 5,399,699 4,574,622
Selling, general and administrative 18,327,746 13,883,091 8,526,488 4,640,307 3,788,477
Depreciation and Amortization of fixed
assets and goodwill 2,807,812 1,769,958 1,103,222 760,077 723,097
Provision for write-down and
non-recurring costs:
Investment in American Gaming Networks,
J.V. and Multimedia Games, Inc. 2,038,750
Goodwill related to Guest Cinema, Inc. 871,289
Film and CD-ROM costs 3,967,252
Restructuring costs 3,655,010
----------- ----------- ----------- ----------- -----------
Total Operating Expenses 64,281,901 45,187,240 29,315,750 19,349,206 15,767,727
----------- ----------- ----------- ----------- -----------
Operating (loss) income (13,224,358) 5,469,026 (1,953,629) 1,659,017 1,990,588
Interest expense 1,234,607 499,582 468,707 343,607 536,501
Minority Interest HVC 500,255
----------- ----------- ----------- ----------- -----------
(Loss) Income before provision for income
taxes, equity in undistributed earnings and
extraordinary item (14,458,965) 4,469,239 (2,422,336) 1,315,410 1,454,087
Income tax (benefit) provision 667,525 1,302,883 (49,054) 88,700 43,000
----------- ----------- ----------- ----------- -----------
Income (Loss) before equity in undistributed
earnings and extraordinary items (15,126,490) 3,166,356 (2,373,282) 1,226,710 1,411,087
Equity in the undistributed earnings of
HVC, net of the amortization of goodwill
amounting to $178,518 and deferred income
taxes $155,554 4,198
----------- ----------- ----------- ----------- -----------
Income (loss) before extraordinary items (15,126,490) 3,166,356 (2,369,084) 1,226,710 1,411,087
Extraordinary Items
Gain from forgiveness of debt 1,541,025
----------- ----------- ----------- ----------- -----------
Net income (loss) ($15,126,490) $ 3,166,356 ($2,369,084) $ 1,226,710 $ 2,952,112
=========== =========== =========== =========== ===========
Earnings (loss) per common and common
equivalent share (primary):
Income (Loss) before extraordinary item ($1.29) $0.27 ($0.26) $0.13 $0.30
Extraordinary item 0.33
----------- ----------- ----------- ----------- -----------
Net income (loss) ($1.29) $0.27 ($0.26) $0.13 $0.63
=========== =========== =========== =========== ===========
</TABLE>
CONTINUED
22
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA - CONTINUED
<TABLE>
<CAPTION>
For the Years ended December 31 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earnings per common share, assuming
full dilution:
Income before extraordinary item $0.26 $0.12 0.25
Extraordinary item 0.27
---------- ---------- ---------
Net income $0.26 $0.12 $0.52
========== ========== =========
Cash dividends declared per common share
None None None None None
========== ========== ========= ========== =========
Weighted average number of shares
outstanding:
Primary 11,747,243 11,909,359 8,953,809 9,662,484 4,672,413
========== ========== ========= ========== =========
Assuming full dilution 12,214,859 10,028,579 5,701,179
========== ========== =========
December 31 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------------
Total Assets $102,477,999 $40,997,739 $23,913,547 $13,099,460 $8,595,723
----------- ----------- ----------- ----------- ----------
Current portion of long-term debt 6,518,468 4,439,069 1,096,814 1,610,411 1,672,706
----------- ----------- ----------- ----------- ----------
Long-Term debt less current portion 73,126,980 3,198,593 3,137,186 2,201,155 2,047,184
----------- ----------- ----------- ----------- ----------
Shareholders' equity $8,068,941 $23,460,208 $8,583,275 $4,255,409 $1,136,288
=========== =========== =========== =========== ==========
</TABLE>
23
<PAGE>
ITEM 7. MANAGEMENT'S 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.
The results of opertions of 1995 were restated to reflect the operating
results for AEC and SEG, which were acquired in 1995, for the period from
January 1, 1995 to the date of consumation of the acquisitions. AEC resulted
in the restatement of revenue of $1,002,819 and a net loss of $44,089. SEG
resulted in the restatement of revenue of $4,890,089 and net income of
$374,021.
The following reconciles revenue and earnings as previously reported by the
Company with the combined amounts currently presented in the Statements of
Operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
ORIGINALLY
STATED AEC SEG RESTATED
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
REVENUE $40,359,404 $2,872,548 $7,424,364 $50,656,316
NET INCOME $3,800,118 ($846,633) 212,871 3,166,356
EARNINGS PER SHARE -
PRIMARY $0.37 $0.27
WEIGHTED AVERAGE OF
NUMBER OF SHARES
OUTSTANDING -PRIMARY 10,389,359 820,000 700,000 11,909,359
YEAR ENDED DECEMBER 31, 1993
PREVIOUSLY
RESTATED AEC SEG RESTATED
-------------- ------------- ------------- --------------
REVENUE $20,527,725 0 $6,834,396 $27,362,121
NET LOSS ($2,273,484) ($320,180) $224,580 ($2,369,084)
EARNINGS PER SHARE -
PRIMARY ($0.31) ($0.26)
WEIGHTED AVERAGE OF
NUMBER OF SHARES
OUTSTANDING - PRIMARY 7,433,809 820,000 700,000 8,953,809
</TABLE>
1995 COMPARED TO 1994
For the year ended December 31, 1995, the Company reported a net loss of
$15.1 million as compared to net income of $3.2 million in 1994. The current
year's loss is primarily attributable to a one time restructuring charge of
approximately $3.7 million and approximately $6.9 million of provisions to write
down investments including film and CD-ROM costs, the
24
<PAGE>
investments in AGN and goodwill relating to the acquisition of PSP, which owns
the technology utilized by Guest Cinema. The loss from operating activities
before these charges and interest expense amounted to $2.7 and
$1.2 million to the loss, respectively.
The restructuring charge and provisions for write down of investments
resulted from a restructuring plan intended to streamline and refocus the
Company on its profitable core businesses. The Company estimates the
restructuring will eliminate $6.0 million of operating expenses in 1996.
The restructuring terminates capital intensive or peripheral businesses and
other activities that the Company can no longer afford. The Company has
suspended exploration of new businesses throughout Europe other than those
related to the globalization of its adult networks and programming. It has
suspended production of movie and television series for 1996 by CPV and has
substantially reduced CPV's overhead. The Company suspended distribution of its
current hotel/motel pay-per-view system. The Company projects that the
technology will not generate future cash flows sufficient to support its
investment. The Company has suspended its activities in developing, marketing
and supporting AGN. The Company has also restructured its senior management and
reduced its staff.
REVENUES
Total revenues for the year ended December 31, 1995 increased by
approximately $0.4 million (0.8%) to approximately $51.1 million compared to
total revenues of $50.7 million for the year ended December 31, 1994. Despite
the increase, revenues did not meet the Company's expectations because of
declines in revenues from CPV, the C-band DTH market and CABLE VIDEO STORE.
In the C-band DTH market several competing adult explicit services were
launched during 1994 and 1995. These explicit adult services compete directly
with the SPICE Networks in the C-band market and have resulted in a decline in
revenues of $0.6 million or 8.0% in this market. These explicit adult services
are not currently distributed by cable operators and therefore, do not have an
impact on the SPICE Networks' revenues in the cable market.
Revenues from the SPICE Networks cable market increased $0.8 million
despite the loss of access to one million SPICE cable subscribers (8% of SPICE's
accessible subscriber base) on July 1, 1995 from the Time-Warner New York Cable
System. This system represented annualized revenues of approximately $2 million.
Offsetting the loss of revenue from Time Warner New York was the addition of new
cable systems, including other Time Warner systems, and growth in the subscriber
base of existing systems. While the Company was able to increase its access to
SPICE Networks addressable subscribers by approximately 50% in 1995, this
increase did not translate into significantly greater revenues because of
downward pressure on the Company's license fees including lower license fees on
the subscribers acquired as part of the AEC acquisition. This is a result of
increased competition in the Company's market segment and the growing
concentration in the ownership of cable systems. The Company believes,
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<PAGE>
however, that overall revenues from the SPICE Networks cable market will
continue to grow though no assurances can be given that this will occur.
HVC's two networks and the start up of EUROTICA contributed $1.1 and $0.6
million to the increased revenues while CPV and CABLE VIDEO STORE experienced
declines in revenues of $1.9 million and $0.6 million, respectively. HVC's
revenues were less than projected because THE ADULT CHANNEL's revenues declined
in the fourth quarter of 1995 as a result of the launch of two competitive
services in the United Kingdom.
SALARIES
Salaries, wages and benefits increased by approximately $3.3 million
(39.3%) for the year ended December 31, 1995 over the similar period in 1994.
The increase resulted primarily from higher levels of staffing believed
necessary to maintain and increase the Company's subscriber base, explore new
network opportunities, produce CD-ROMs and the Company's on-line service and
explore other business opportunities such as video dialtone delivery systems and
international ventures.
The Company has restructured its operations and has reduced its staff,
including terminating the employment agreements of all of the executives
responsible for exploring international opportunities and approximately 30 of
CPV's employees. Other key executives have agreed to salary reductions and
middle and upper management will not receive any salary increases for 1996.
Under the same restructuring, the Company reduced its salary expense by
amending employment agreements and entering into separation agreements with
two officers who resigned.
ROYALTIES
Producer royalties and library amortization decreased by approximately $0.4
million (6.2%). The decline was primarily attributable to a decline in royalties
payable to the studios attributable to the decrease in CABLE VIDEO STORE network
revenues.
SATELLITE EXPENSE
Satellite costs, which include satellite transponder, playback and uplink
costs, decreased by approximately $0.4 million (3.2%) for the year ended
December 31, 1995. On May 31, 1995, the Company terminated its domestic
transponder lease agreement with TVN. Since April 1, 1995, AT&T directly
provides transponder services to the Company at a more economic rate. Also, in
the second quarter of 1995, HVC received a limited amount of transponder time
from the operators of the Astra satellite at a nominal fee 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. The decrease in domestic satellite transponder costs was offset by
the addition of the new European transponder.
26
<PAGE>
Commencing December 1995, the Company will use five transponders pursuant
to a Transponder Services Agreement with AT&T which will be accounted for as a
capital lease.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative costs increased by approximately $4.4
million (32.0%) in the year ended December 31, 1995. The increase was
attributable to, among other items, the exploration of international
opportunities, improving the on-air images of the Company's networks, additional
marketing, advertising and sales promotion undertaken to both maintain and
increase the networks' subscriber bases and additional overhead due to the
expansion of corporate headquarters. During 1995, the Company heavily promoted
its adult services to combat new competition from other networks. The Company
also spent money exploring new network opportunities.
The restructuring entails a major cost reduction program that is designed
to reduce selling, general and administrative costs in 1996. The plan is
intended to streamline the operations of the Company's core businesses, suspend
the exploration of new businesses and significantly reduce or eliminate the
activities of non-essential capital intensive operations. The Company has also
taken steps to reduce the amount of leased space used for its operations, reduce
expenses by amending the Company's travel policies and reduce employee benefits
and other overhead expenditures.
The bad debt expense increased by approximately $0.9 million in 1995. The
increase is primarily attributable to a provision for doubtful account on a
receivable owed to the Company by XTV Television, Inc. ("XTV"). The Company has
a distribution agreement with XTV pursuant to which XTV distributes the SPICE
Networks in combination with XTV's two explicit adult services in the C-band DTH
market. In addition MLI has licensed adult movies to XTV. Due to increased
competition in XTV's market, XTV has informed the Company that it is
experiencing financial difficulty and as a result ceased paying the Company its
distribution fee commencing in the third quarter of 1995. By year end, XTV owed
the Company $0.8 million in past due distribution fees and unpaid movie license
fees. The Company is pursuing collection of these amounts but has established a
reserve against these amounts aggregating $0.8 million.
DEPRECIATION OF FIXED ASSETS AND AMORTIZATION OF GOODWILL
Depreciation of fixed assets and the amortization of goodwill increased by
approximately $1.0 million (58.6%) for the year ended December 31, 1995 as
compared to 1994. The increase is primarily due to the increased ownership of
HVC resulting from the purchase of the remaining
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<PAGE>
49% for $6.7 million in cash and stock on August 1, 1994. The excess of the
purchase price over the fair market value of the net assets acquired is being
amortized utilizing the straight-line method over twenty years. Also
contributing to the increase was depreciation incurred on new capital
improvements for the expansion of the Company's corporate headquarters, which
are being amortized using the straight-line method over the life of the lease.
INTEREST EXPENSE
Interest expense has increased by approximately $0.7 million (147.1%) for
the year ending December 31, 1995 as compared to the same period in 1994. The
increase is primarily due to additional borrowings of $12.3 million during 1995
under the revolving line of credit from Midlantic.
NON-RECURRING ITEMS
Guest Cinema - Goodwill
In January 1994, the Company acquired through the merger of PSP into its
wholly-owned subsidiary, Guest Cinema, Inc., a hotel/motel pay-per-view system.
The Company suspended distribution of this system because the Company projects
that the technology will not generate future cash flows sufficient to support
its investment. Therefore, the Company has incurred an expense of approximately
$0.9 million attributable to the writedown of goodwill created in the
acquisition of PSP.
CPV Library and CD-ROMs
The Company, through its wholly-owned subsidiary CPV, produced and
distributed television, movie productions and CD-ROMs. In the fourth quarter of
1995, the Company concluded that it was carrying the film and CD-ROM costs at a
net book value materially greater than its current projected cash flow.
Therefore, the Company has realized a one-time expense of $4.0 million to record
the impairment of its investment. Moreover, the Company has suspended any future
productions of films and television series and the creation of CD-ROMs until
such a date that the Company's liquidity position improves and it believes that
these ventures could be profitable.
American Gaming Network, J.V. and
Multimedia Games, Inc.
Pursuant to a Joint Venture Agreement dated June 28, 1995, the Company
formed American Gaming Network ("AGN") with TV Games, Inc., a wholly-owned
subsidiary of Multimedia Games, Inc. ("MGAM"), to develop and promote high
stakes proxy play Class II tribal bingo games and other interactive gaming
products. The Company contributed intellectual property and cash aggregating
approximately $1.4 million to AGN's capital.
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<PAGE>
In a related transaction, the Company exercised a warrant and purchased an
aggregate of 275,000 shares of MGAM common stock (the "MGAM Shares") for
approximately $0.4 million in cash and a note of $0.275 million payable August
30, 1996. MGAM also granted the Company additional warrants to acquire 175,000
shares of MGAM common stock (the "MGAM Warrant"). MGAM granted the Company
registration rights for the MGAM Shares and the shares underlying the MGAM
Warrant. The MGAM common stock is listed on the Nasdaq SmallCap Market.
On December 11, 1995, the parties executed a letter agreement modifying the
Joint Venture Agreement which released claims the parties had against each other
through such date. The parties have been unable to agree on a strategy or a
business plan for the next twelve months.
The parties are currently in negotiations to settle their current
differences. As a result the Company has established a reserve against its
investment in AGN. In addition there is no assurance that the MGAM Shares or the
shares underlying the MGAM Warrant, if exercised, will be registered or if
registered, whether the Company will be able to sell such shares, in the near
future. The Company has also reserved against the value of its investment in the
MGAM Shares in 1995.
Restructuring Costs
The Company, in an attempt to return to profitability, has restructured its
operations. First, the Company has suspended production of all films, television
series and CD-ROM for 1996. It will continue to license CPV's library to third
parties. As a result of the suspended productions, CPV has terminated
approximately 30 employees and has renegotiated the employment contracts with
the two key executives of CPV to provide for their early termination as
described above. The Company has recognized a charge of approximately $0.6
million in 1995 for restructuring CPV.
The Company has also terminated the employment o all of the employees
of Pay-Per-View International, Inc. ("PPVI") at the end of 1995.
PPVI employees were responsible for the development of TeleSelect and
exploring other international opportunities for the Company. In the first
quarter of 1996, the Company sold its interest in TeleSelect and suspended
exploration of new international business opportunities. As a result several
executives' employment contracts were terminated in 1995 at a total
restructuring cost of $0.3 million. The Company will continue to pursue its
strategy of globalizing its adult networks and programming.
The Company has restructured Guest Cinema by terminating the employment
contract of its President and discontinuing the marketing and use of its current
hotel/motel pay-per-view system.
Two senior executives, Mark Graff and Leland H. Nolan, have resigned as
officers of the Company effective December 31, 1995. Messrs. Graff and Nolan
have signed separation agreements (see "EXECUTIVE COMPENSATION, Employment
Agreements") which are in
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<PAGE>
force through 1998 and 1999, respectively. Messrs. Graff and Nolan will remain
as Directors. The Company has also reduced its staffing in other areas of the
Company and reduced overhead.
1994 Compared to 1993
The Consolidated Statements of Operations include the results of CPV, a
wholly-owned subsidiary which was acquired by merger on May 24, 1994. The
acquisition 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. The Consolidated Statement of Operations of 1994
include, for the first time, the results of HVC, a new wholly-owned subsidiary.
The initial investments of HVC in 1993 were accounted for by using the equity
method.
Total revenues for the year ended December 31, 1994 increased by
approximately $23.3 million (85%) to approximately $50.7 million compared to
total revenues of approximately $27.4 million for the year ended December 31,
1993. Of this increase, HVC accounted for $8.7 million. Revenues from CPV had a
dramatic increase of approximately $3.2 million to approximately $5.1 million
(170%) while SEG revenues had a modest increase of approximately $0.6 million
(8%) to approximately $7.4 million. The balance of the increase in revenue,
approximately $10.8 million, is primarily due to the growth in the domestic
subscriber base during the year, of which AEC was attributable for approximately
$2.9 million.
Cost of goods sold decreased by approximately $0.3 million (28%) as
compared to the year ending December 31, 1993.
Salaries, wages and benefits increased by approximately $2.1 million
(33.6%) for the year ended December 31, 1994 over the similar period in 1993 of
which HVC accounted for $0.9 million. The balance of the increase resulted
primarily from increased levels of staffing necessary to manage the growth of
the Company's operations.
Producer royalties and library amortization increased by approximately $3.0
million (74%), of which HVC accounted for $0.3 million. The balance of the
increase, approximately $2.7 million, resulted from increased revenues which
lead to increased producer royalty expense and additional amortization resulting
from increased film and television production in 1994.
Satellite costs, which include satellite transponder, playback and uplink
costs, increased by approximately $5.0 million (61%) for the year ended December
31, 1994 as compared to the prior year. HVC and AEC accounted for $1.4 million
and $1.1 million of the increase, respectively. SEG contributed $1.3 million to
the increase in the Satellite costs. The launch of Spice 2, which commenced
on February 1, 1994, accounted for approximately $1.1 million of the increase.
Selling, general and administrative costs increased by approximately $5.4
million (63%) for the year ended December 31, 1994 of which HVC accounted for
$3.4 million. The reason for
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<PAGE>
the increase in these expenses was the increased sales support, marketing,
advertising and sales promotion undertaken by the Company.
Depreciation of fixed assets and the amortization of goodwill increased by
approximately $0.7 million (60%) primarily due to the increased ownership of
HVC. For most of 1993, the Company owned a 25% interest in HVC. On December 16,
1993 the Company purchased an additional 26% for $1.5 million, and as of August
1, 1994, the Company purchased the remaining 51% for $6.7 million. The excess of
the purchase price over the fair value of the net assets acquired is being
amortized utilizing the straight-line method over twenty years.
Interest expense increased by approximately $31,000 (7%). Interest on the
term loan and revolving line of credit were incurred in the last quarter of
1994.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1995, the Company had a working capital of deficit
approximately $2.9 million compared to working capital of approximately $0.2
million at December 31, 1994. The Company, on December 31, 1995, had a $17.6
million indebtedness with Midlantic National Bank, N.A. and Imperial Bank.
The Company negotiated with Midlantic and Imperial to amend the loan agreements,
and as a result of these negotiations, Midlantic waived all violated
covenants through March 29, 1996, eliminated most of the financial covenants
except for a revised net worth and cash flow covenants, extended the maturity
date until January 2, 1997 and consented to certain transactions. The Company
expects to remain in compliance with the revised covenants throughout the term
of the agreement. (For additional details refer to Note 6 of the Consolidated
Financial Statements).
EBITDA (Earnings Before Interest Taxes Depreciation and Amortization
excluding Amortization of Library, Film and CD-ROM costs) had a deficit of
approximately $10.4 million for the year ended December 31, 1995 as compared to
a surplus of approximately $6.7 million over the similar period last year.
Stockholders' equity at December 31, 1995 was approximately $8.1 million
compared to approximately $23.5 million on December 31, 1994. The decline in
EBITDA and stockholders' equity was primarily attributable to one time
restructuring charges, provision for the write-down of investments totaling
$10.5 million, and losses from operating activities before special
non-recuerring items of $2.7
million.
Net cash provided by operating activities was approximately $1.5 million
for the year ended December 31, 1995, compared with net cash used in operating
activities of approximately $2.6 million in the corresponding prior period. In
1995 cash from operating activities was generated by net losses adjusted for
non-cash items, principally restructuring charges, provision for write-down of
investments and bad debts, amortization and depreciation of fixed assets, film
costs and goodwill, together with an increase in accounts payable and royalties
payable, offset by an increase in film costs.
Net cash used in investing activities was approximately $11.2 million for
the year ended December 31, 1995, compared with approximately $5.3 million in
the corresponding prior
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<PAGE>
period. The foregoing results were primarily attributable to the Company's
increased capital expenditures in 1995 relating to its foreign investment in
TeleSelect, the expansion of the Company's corporate headquarters, its
investment in AGN, and the investment in the library of movies utilized by the
networks. Subsequent to the end of 1995, the Company sold its TeleSelect
interest, eliminating its future capital commitment and raising capital to
support working capital needs.
Net cash provided by financing activities was approximately $9.6 million
for the year ended December 31, 1995, compared with approximately $7.3 million
in the corresponding prior period. In 1995, financing activities primarily
consisted of additional borrowings from the Midlantic along with additional
loans and commitments from the Imperial Bank and a capitalized equipment
lease from IBM. Offsetting these financing proceeds are principal payments
of long-term debt to the banks and other creditors.
By the end of 1995, the Company had substantially drawn down on its
revolving line of credit, having $0.12 million of available funds under the
agreement. The Company has and will continue to dramatically reduce expenses in
the areas of salaries and overhead which will impact liquidity and should allow
the Company to fund day-to-day operations in 1996. The Company is currently in
discussions with various parties and is evaluating its alternatives concerning
additional financing to fund the expansion of its core businesses, repayment of
its bank debt and other future projects. There are no assurances that the
Company will be able to secure additional financing.
ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
The information required by this Item is included in this respect at Pages
F-1 through F-33.
ITEM 9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNT
AND FINANCIAL DISCLOSURE
Not applicable.
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<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION
- ---- --- --------
J. Roger Faherty 57 Chairman of the Board of Directors,
Chief Executive Officer and Director
Edward M. Spector 61 President, Chief Operating Officer and Director
Mark Graff 45 Director
Leland H. Nolan 49 Director
Marvin Small 64 Director
Dean Ericson 50 Director
Philip J. Callaghan 43 Executive Vice President and
Chief Financial Officer
Steven Saril 43 Senior Vice President, Sales and Marketing
Richard Kirby 35 Senior Vice President, Operations
Daniel J. Barsky 40 Senior Vice President, Secretary and General Counsel
Eric M. Spector 31 Senior Vice President, Business Development
Irene Merlo Posio 28 Vice President, Finance and Controller
Mr. Faherty has been Chairman of the Board and a Director of the Company
since December 1991. He became its Chief Executive Officer in 1994. From 1988 to
1991 he was a consultant to investment bankers. Beginning in March 1990 to
December 1991, he was also a consultant to the Company.
Mr. Spector was elected President and Chief Operating Officer of the
Company on November 17, 1995 and became a Director of the Company on September
1, 1995. Mr. Spector is the founder, and continues since 1984 as the Chairman of
the Board and Chief Executive Officer of SEG. SEG is now a wholly-owned
subsidiary of the Company. Mr. Spector has over 30 years experience in the
communications, gaming and entertainment industries.
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<PAGE>
Mr. Graff, a member of the Board of Directors, is a 20-year veteran of the
film, television, and home video industries. Mr. Graff founded the Company in
1988 and held various executive positions with the Company until the end of
1995, most recently as its Vice Chairman, Domestic Initiatives. Prior to 1988,
he was instrumental in the development and production of TV series and specials
and the acquisition and distribution of home video programming.
Mr. Nolan joined the Company in 1989 and held various executive positions
until the end of 1995, most recently as its Vice Chairman, International
Initiatives. He is currently a member of the Board of Directors. Prior to
joining the Company, he was Chairman of the Board of Orange Entertainment
Company, a video production and distribution company.
Mr. Small was elected a Director of the Company on January 24, 1994. Mr.
Small is a private investor with 30 years experience in investment banking and
corporate development. He has previously served as an officer and director of
several American Stock Exchange and Nasdaq listed companies.
Mr. Ericson was elected a Director of the Company on January 24, 1994. Mr.
Ericson was a co-founder and President, since 1987, of Media Management
Services, Inc., a Denver-based consulting practice providing technology and
business development services to selected media and telecommunications
companies.
Mr. Callaghan has been the Company's Executive Vice President and Chief
Financial Officer since September 1993, having previously worked for the Company
in London since May 1992. From 1987 until 1992, Mr. Callaghan was a Board Member
and Director of Finance and Administration of MTV Europe and Managing Director
of Media Computer Systems Ltd. and In Store Radio, Ltd.
Mr. Saril has been an executive officer of the Company since 1989 and is
currently its Senior Vice President of Sales and Marketing. Between 1979 and
1989, he was a Director of National Accounts for Showtime Networks, Inc., an
operator of cable movie networks.
Mr. Kirby has been an executive officer of the Company since 1988 and is
currently its Senior Vice President of Operations. Between 1985 and 1988, Mr.
Kirby was Vice President of Operations for Reiss Media, which operates Request
Television.
Mr. Barsky has been an executive officer of the Company since 1995 and is
currently its is Senior Vice President and General Counsel and Secretary. Prior
to joining the Company, he was a partner in Dornbush Mensch Mandelstam &
Schaeffer, which acted as the Company's legal counsel from 1989 to 1994.
Mr. Eric M. Spector became Senior Vice President of Business Development in
November 1995. Mr. Spector has been a Director and Executive Vice President of
SEG since 1991. Prior to that date he was an associate at the law firm of
Brobeck, Phleger and Harrison practicing corporate law. He is the son of Mr.
Edward M. Spector.
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<PAGE>
Ms. Merlo Posio, Vice President of Finance and Controller, joined the
Company in 1992 as a Senior Accountant and was named Controller in 1994 and Vice
President of Finance in 1995. Between 1989 and 1992, she was a Senior Accountant
at McGladrey and Pullen in New York.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth, for the fiscal years ended December 31,
1995, 1994 and 1993, compensation paid by the Company for services in all
capacities to the Chief Executive Officer and the four most highly compensated
executive officers during 1995.
<TABLE>
<CAPTION>
=================================================================================================================
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-------------------------- ---------------------------
Other Annual Securities
Compensa- Restricted Underlying All Other
Name and Salary tion Stock Awards Options Compensation
Principal Position Year ($) ($) ($) (#) (10)($)
------------------ ---- ------- ------------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
J. Roger Faherty 1995 421,539 64,574 (1) (6) 19,909
Chairman and Chief 1994 400,000 75,161 (1) (6) 12,432
Executive Officer 1993 337,884 71,397 (6) 13,180
Mark Graff 1995 421,539 45,776 (2) 25,000 (7) 7,615
Vice Chairman, 1994 400,000 38,431 (2) 0 8,169
Domestic Initiatives 1993 337,884 32,772 (2) 100,000 4,818
Leland H. Nolan 1995 421,539 46,995 (3) (6) 9,765
Vice Chairman 1994 400,000 49,687 (3) (6) 16,959
International 1993 337,884 57,656 (3) (6) 9,658
Initiatives
Edward M. Spector 1995 80,769 (4) 2,197 (4) 0
President and Chief 1994 0
Operating Officer 1993 0
Philip Callaghan 1995 220,000 21,865 (5) 379,500 (8) (9) 2,200
Executive Vice 1994 177,115 23,256 (5) 0
President and 1993 125,769 (9)
Chief Financial
Officer
=================================================================================================================
</TABLE>
(1) Mr. Faherty's other annual compensation included a Company provided leased
automobile and payments of auto operating expenses amounting to $14,400,
$24,115 and $15,713, in 1995, 1994 and 1993, respectively, and deferred
compensation amounting to $36,566 each year in 1995, 1994 and 1993.
(2) Mr. Graff's other annual compensation included a Company provided leased
automobile and payment of auto operating expenses amounting to $27,854,
$22,801 and $14,381 in 1995, 1994 and 1993, respectively and deferred
compensation amounting to $9,092 each year in 1995, 1994 and 1993.
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<PAGE>
(3) Mr. Nolan's other annual compensation included a Company provided leased
automobile and payment of auto operating expenses amounting to $14,716,
$11,051 and $14,585 in 1995, 1994 and 1993, respectively and deferred
compensation amounting to $26,013, $26,013 and $26,013 for 1995, 1994 and
1993.
(4) Mr. Spector's compensation only includes compensation paid after the
Company's acquisition of SEG. Mr. Spector's other annual compensation
included automobile operating expenses amounting to $871 in 1995 and
Company paid medical benefits of $1,326 in 1995.
(5) Mr. Callaghan's other annual compensation consists of auto operating
expenses amounting to $8,500 in 1995 and $12,000 in 1994 and premiums paid
on a long-term disability policy amounting to $6,548 in 1995 and $4,002 in
1994 and Company paid medical benefits of $6,817 in 1995 and $7,254 in
1994.
(6) Messrs. Faherty and Nolan's securities underlying options include 249,585
options granted in December 1995 in replacement of the identical number of
options which were granted in 1991, exercised in April 1995 and whose
exercise was rescinded in December, 1995. Each of Messrs. Faherty and Nolan
were also granted 25,000 options in May 1995 under the 1994 Employee Stock
Option Plan. Pursuant to a repricing of options, these 25,000 options were
canceled and replaced by a like amount of options in December 1995. As part
of this repricing, 100,000 options previously granted to Messrs. Faherty
and Nolan in 1993 under the 1993 Employer Stock Options were canceled and
replaced by a like amount of options in December 1995. Mr. Faherty was also
granted 36,000 options in 1993 under the 1992 Stock Option Plan. Refer to
the ten year option repricing schedule for additional details.
(7) Mr. Graff exercised options to acquire 249,585 shares of the Company's
common stock in April 1995. In December 1995, Mr. Graff rescinded the
exercise of these options.
(8) Mr. Callaghan, subject to shareholder approval, received 44,000 shares of
restricted common stock on May 12, 1995 at a market value of $8.63 per
share. On January 2, 1996, these shares had a market value of $220,000. The
restricted common stock vests in the fifth year after the grant if the
executive continues to be employed with the Company. In addition, the
restricted common stock will vest immediately upon the death of the officer
or a change in control of the Company.
(9) Mr. Callaghan's securities underlying options include 11,000 options
granted in May 1995 under the 1994 Stock Option Plan. Pursuant to a
repricing of options, these options were canceled and replaced by an
identical number of options in December 1995. As part of this repricing,
100,000 options previously granted to Mr. Callaghan in 1994 were canceled
and replaced by an identical number of options in December 1995.
(10) All other compensation consists of premiums paid on Company provided life
insurance policies and/or employer contributions to Company's 401(k) Plan.
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<PAGE>
1995 Compensation Program for Key Executives
Subject to shareholders' approval, during May 1995, the Compensation
Committee approved the issuance of an aggregate of 177,000 shares of restricted
stock ("Restricted Stock") to key executives. Included in the restricted stock
grant was a grant to Mr. Callaghan of 44,000 shares for future services. The
Restricted Stock is non-transferable with such restrictions lapsing in five
years.
During January 1996, the Compensation Committee determined that no cash
bonuses should be paid under the performance based plan. In lieu thereof, the
Stock Option Committee granted an aggregate of 127,500 options to five
executives including 38,500 options granted to Mr. Callaghan.
Employment Agreements
Mr. Faherty is employed by the Company as its Chairman and Chief Executive
Officer pursuant to an Employment Agreement effective January 11, 1992 which was
amended effective June 15, 1993, March 23, 1994, March 23, 1995 and again as of
January 1, 1996. The agreement, as presently amended, provides for a base salary
of $350,000, with any adjustments determined annually. The agreement has a six
year term, subject to automatic renewal for additional five year terms if not
terminated each year. Under the most recent amendment, the agreement provides
for loans from the Company of up to $215,000 exclusive of accrued interest. The
loan has a maturity date of December 31, 1996 and bears interest at the same
rate the Company is paying its principal lender. The agreement also provides for
annual retirement benefits of not less than $100,000 (implemented by the
deferred compensation agreement described below) and provides for other benefits
including reimbursement for automobile costs. Mr. Faherty has waived his rights
to a reimbursement for automobile costs.
On October 1, 1992, the Company entered into deferred compensation
agreements with Messrs. Faherty, Graff and Nolan. Under the agreements the
Company is obligated to provide for retirement benefits at or after reaching the
age of 65 and also provide for early retirement benefits. Upon retirement each
executive will receive from the Company a total of 180 monthly payments which
will provide a benefit of $100,000 per annum. Upon early retirement the
executive will receive maximum benefits of $95,000 or a minimum of $50,000
annually upon retirement on or after age 55 but before the age of 65. Upon the
death of the executive prior to the age of 65 but after the age of 55 the
executive's beneficiary will receive maximum annual benefits of $95,000 or a
minimum benefit of $50,000 payable monthly. The Company will continue to fund
these agreements on behalf of Messrs. Graff and Nolan through the end of their
respective Separation Agreements, described below.
Mr. Spector is employed by the Company as a Director and Senior Executive
Officer of SEG pursuant to an employment agreement effective September 1, 1995
and expiring on August 31, 1998. He is currently serving as President and Chief
Operating Officer of Graff. The agreement provides for a base salary of
$350,000, with annual increases of not less than 5%. The
37
<PAGE>
parties have agreed to negotiate in good faith an extension to the employment
agreement during the third year of employment. During the term of employment he
shall be nominated as a member of the Board of Directors of the Company if he,
his family members, and affiliated trusts own an aggregate of at least 400,000
shares of the Company's common stock.
Effective January 1, 1996, Messrs. Graff and Nolan resigned as executive
officers of the Company and entered into Separation Agreements which terminated
their Employment Agreements. Mr. Graff will receive severance of $250,000 per
annum payable in equal installments during the period January 1, 1996 through
December 31, 1999. Mr. Nolan will receive severance of $350,000 per annum
payable in equal installments beginning January 1, 1996 through December 31,
1998. In both cases, the severance was less than that provided for in their
employment agreements. In the event the Company completes financing in excess of
$20 million, each individual may require prepayment of their severance payments.
Both individuals have loans outstanding with the Company which are required to
be repaid during 1997 in equal monthly installments.
Mr. Callaghan is employed by the Company as its Executive Vice President
and Chief Financial Officer pursuant to an employment agreement effective
September 1, 1993, for a three-year term. Under this agreement he has a base
salary of $220,000, with annual increases of no less than 5%. Mr. Callaghan
waived the annual increase in 1996.
Each of the employment and separation agreements described above prohibits
the executive from competing with the Company for a specified period after
termination of employment.
Stock Option Plans
The Company has four stock option plans (the 1992, 1993, 1994 and 1995
Plans) (collectively the "Plans") for officers, employees, directors and
consultants of the Company or any of its subsidiaries and in addition a
Directors' Plan ( the "Directors' Plan"). Options granted to employees may be
either incentive stock options (ISO's) or non-ISO's; ISO's may not have an
exercise price of not less than 100% of fair market value of the Company's
common stock on the grant date and all options may not have an exercise price of
less than 100% of fair market value on the grant date in the case of options
granted to holders of 10% or more of the voting power of the Company's stock on
the date of the grant. The aggregate fair market value, as determined on the
grant date, of ISO's that may become exercisable in any one year can not exceed
$100,000. Options canceled subsequent to issuance are returned to the Plan and
are available for re-issuance as determined by the Stock Option Committee .
The Plans are currently administered by the Stock Option Committee
consisting of two non-employee directors (the "Committee"). In general, the
Committee has the responsibility to select the persons to whom options will be
granted and will determine, subject to the terms of the Plan, the number, the
exercise period, vesting schedule and other provisions of such options.
38
<PAGE>
The options are evidenced by a written agreement containing the above terms
and such other terms and conditions consistent with the Plans as the Committee
may impose. Each option, unless sooner terminated, expires no later than 10
years (five years in the case of ISOs granted to holders of 10% of the voting
power of the Company's common stock) from the date of grant, as the Committee
may determine. The Committee has the right to amend, suspend or terminate the
Plans at any time, provided, however, that unless ratified by the Company's
stockholders within 12 months thereafter, no amendment or change in the Plans
including: (a) increasing the total number of shares which may be issued under
the Plans; (b) reducing below fair market value on the date of grant the price
per share at which any option which is an ISO may be granted; (c) extending the
term of the Plan or the period during which any option which is an ISO may be
granted or exercised; (d) altering in any way the class of persons eligible to
participate in the Plans; (e) materially increasing the benefits accruing to
participants under the Plans; or (f) with respect to options which are ISOs,
amending the Plans in any respect which would cause such options to no longer
qualify for incentive stock option treatment pursuant to the Internal Revenue
Code of 1986, as amended will be effective.
The Directors Plan, as amended, provides for the automatic annual issuance
of 10,000 options to each non-employee director on the last business day of the
calendar year. The exercise price of option issued under the Directors' Plan is
equal to the closing price of the Company's common stock on the date of grant.
In 1995, 10,000 options were issued to each of Messrs. Small and Ericson,
non-employee directors who are also the Stock Option Committee members.
Due to the decline in the market price of the Company's common stock in the
second half of 1995, the exercise price of most employee options exceeded the
market price of the stock. To maintain the incentive which underlies options
granted to employees, the Company's Stock Option Committee elected to reprice
all options held by all persons who were active employees on consultants on
November 17, 1995. The repricing took effect on December 11, 1995.
The 104,000 options repriced under the 1992 Stock Option Plan replaced
options with exercise prices ranging from $5.00 to $9.00 per share and included
36,000 options granted to Mr. Faherty. The 559,250 options repriced under the
1993 Plan replaced options with exercise prices ranging from $8.00 to $10 per
share, and included 100,000 options granted to Mr. Callaghan and 100,000 options
issued to each of Messrs. Faherty and Nolan. The repriced options represents all
options granted and outstanding under the 1993 Plan held by persons who were
employees on November 17, 1995 with the exception of 100,000 options held by Mr.
Graff with an exercise price of $9.00 per share. The 349,050 options repriced
under the 1994 replaced options with exercise prices ranging from $8.63 to $9.25
per share and included 11,000 options granted to Mr. Callaghan and 25,000
options issued to each Messrs. Faherty and Nolan. The repriced options
represents all options granted and outstanding under the 1994 Plan held by
persons who were employees on November 17, 1995, with the exception of 25,000
options held by Mr. Graff with an exercise price of $8.63 per share.
39
<PAGE>
The following table sets forth stock options that the Company repriced to
the named executive officers in 1995.
<TABLE>
<CAPTION>
TEN YEAR OPTION REPRICINGS
====================================================================================================================
LENGTH OF
ORIGINAL
NUMBER OF MARKET OPTION
SECURITIES PRICE OF EXERCISE REMAINING
UNDERLYING STOCK AT PRICE AT NEW AT DATE
OPTIONS TIME OF TIME OF EXERCISE OF
REPRICED REPRICING REPRICING PRICE REPRICING
NAME DATE (#) ($) ($) ($) (YEARS)
---- -------- --------- ---------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
J. Roger Faherty 12-11-95 36,000 3.875 5.000 3.875 7.1
Chairman and Chief 12-11-95 100,000 3.875 9.000 3.875 7.5
Executive Officer 12-11-95 25,000 3.875 8.625 3.875 9.5
- --------------------------------------------------------------------------------------------------------------------
Leland H. Nolan
Vice Chairman
International 12-11-95 100,000 3.875 9.000 3.875 7.5
Initiatives 12-11-95 25,000 3.875 8.625 3.875 9.5
- --------------------------------------------------------------------------------------------------------------------
Philip Callaghan
Executive Vice President 12-11-95 100,000 3.875 8.000 3.875 8.4
and Chief Financial 12-11-95 11,000 3.875 8.625 3.875 9.5
Officer
====================================================================================================================
</TABLE>
40
<PAGE>
The following table sets forth stock options that the Company granted or
repriced to the named executive officers during 1995.
<TABLE>
<CAPTION>
OPTION/GRANTS IN LAST FISCAL YEAR
=============================================================================================================
Potential Realizable
Value
at Assumed Annual
Rates
of Stock Price
Appreciation for
Option
Individual Grants Term
----------------- ---------------------
Number of % of Total
Shares of Options
Common Stock Granted to Exercise
Underlying Employees or Base
Options in Fiscal Price 5% 10%
Name Granted (#) Year ($/Sh) Expiration Date ($) ($)
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
J. Roger Faherty(1) 249,585 (2) 17.30 3.875 02/21/02 339,499 773,632
36,000 (5) 2.50 3.875 02/01/03 57,558 134,427
100,000 6.93 3.875 06/16/03 169,855 400,720
25,000 (3) 1.73 3.875 05/12/05 60,924 154,394
--------------------------------------------------------------------------------------------------------------
Mark Graff 25,000 1.73 8.625 05/12/05 135,605 343,651
--------------------------------------------------------------------------------------------------------------
Leland H. Nolan(1) 249,585 (1) 17.30 3.875 02/21/02 339,499 773,632
100,000 (4) 6.93 3.875 06/16/03 169,855 400,720
25,000 (5) 1.73 3.875 05/12/05 60,924 154,394
--------------------------------------------------------------------------------------------------------------
Philip Callaghan(1) 11,000 (2) 0.76 3.875 05/12/05 26,807 67,933
100,000 (3) 6.93 3.875 10/01/03 196,772 476,791
==============================================================================================================
</TABLE>
(1) Does not include options to purchase common stock that were granted and
subsequently canceled in 1995 as part of a repricing of options.
(2) In April 1995, Messrs. Faherty, Nolan and Graff, executive officers, each
exercised options to purchase 249,585 shares of common stock at $.8333 per
share. In December, 1995, the Company allowed the three executive officers
to rescind the exercise of the original options. On December 11, 1995, the
Company returned to Messrs. Faherty and Nolan the options previously
exercised by them with options with the same terms except the exercise
price of such options was $3.875 per share. Mr. Graff's separation
agreement requires that the Company issue to him at the current market
price, options to purchase 249,585 shares of common stock in replacement of
the options previously exercised.
(3) Such options are exercisable in four equal annual installments commencing
May 13, 1996, one year after the effective date of the grant. The options
were granted on May 12, 1995 as part of the 1994 Employee Stock Option Plan
and repriced on December 11, 1995 at $3.875. Refer to the ten year option
repricing schedule for additional details on repricing.
(4) The options were granted in September, 1993 and repriced at $3.875 on
December 11, 1995. The options are all currently exercisable.
41
<PAGE>
(5) Such options were granted in 1993 and are currently exercisable. Thirty-six
thousand (36,000) from the 1992 plan and 100,000 to Messrs. Faherty and
Nolan, all of which were repriced in December, 1995.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND YEAR END OPTION VALUE
===========================================================================================================
Number of Securities
Underlying Value of Unexercised
Unexercised Options In-the-Money Options
at FY-End (#) at FY-End ($)
Shares Acquired Value -------------------- --------------------
on Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable(1)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
J. Roger Faherty None None 461,716 2,308,580
277,200 1,386,000
- -----------------------------------------------------------------------------------------------------------
Mark Graff None None 176,131 880,655
277,200 1,386,000
- -----------------------------------------------------------------------------------------------------------
Leland H. Nolan None None 425,716 1,128,580
277,200 1,386,000
- -----------------------------------------------------------------------------------------------------------
Philip Callaghan None None 112,000 560,000
11,000 55,000
===========================================================================================================
</TABLE>
(1) Based on the last trade price on January 2, 1996 of $5.00 quoted by
The Nasdaq National Market.
401(K) TAX DEFERRED SAVINGS PLAN
Effective January 1, 1993, all qualified employees, including the executive
officers, are eligible to participate in the Company's 401(k) Tax Deferred
Savings Plan (the "401(k) Plan"). Under the 401(k) Plan, each employee may, at
his or her option, elect to defer (and contribute to the Plan) up to 15% of his
or her salary. At its discretion, the Company may elect to contribute a
percentage of the contributions of the employees. Contributions to the 401(k)
Plan shall be invested as determined by the Plan trustees, Messrs. Faherty,
Spector and Barsky. The trustees have retained Nationwide Services Company to
invest the 401(k) Plan funds.
FILINGS WITH SECURITIES AND EXCHANGE COMMISSION
Section 16(a) of the Securities Exchange Act of 1934 requires that
officers, directors and 10% stockholders of the Company file reports of their
ownership with the Securities and Exchange Commission. No officer or director
was late with their filings, other than Messrs. Small, Ericson, Faherty, Graff
and Nolan and Mr. Eric M. Spector.
42
<PAGE>
DIRECTOR'S COMPENSATION
The Company pays $1,000 per meeting, plus expenses and $250 per telephone
conference to non-officer directors serving on its Board of Directors. The
Company pays no additional compensation for officer-directors serving on its
Board of Directors.
COMPENSATION AND STOCK OPTION COMMITTEE REPORT
Marvin Small and Dean Ericson, non-employee directors of the Company, are
the Compensation and Stock Option Committees' (the "Committees") members. The
Committees establish the Company's compensation policy and believe that
executive compensation should:
O provide motivation to achieve strategic goals by tying executive
compensation to Company performance;
O provide compensation reasonably comparable to that offered by other
companies in the same industry as the Company and of similar size and
profitability to attract qualified executives; and
O provide long term incentives to tie the executive to the long term
interests of the Company's stockholders.
In early 1995, the Compensation Committee received a recommendation for a
compensation program for key executives and employees based on the foregoing
principles. The proposal recommended annual grants of stock options to key
executives and employees, performance-based cash bonuses tied to the performance
of the key executives and the price of the Company's common stock and the grant
of restricted stock to key executives which provides for vesting after five
years of continuous employment. The proposal was adopted in large part by the
Compensation Committee, subject to stockholders' approval for the restricted
stock grant.
As a result of the Company's financial position and performance during the
second half of 1995, the Committees determined that there would be no year end
salary adjustments for the Chief Executive Officer, J. Roger Faherty, the Vice
Chairmen Mark Graff and Leland Nolan and the Chief Financial Officer, Philip
Callaghan. The Committees later determined to reduce Mr. Faherty's salary and
the Committees accepted the resignations of Messrs. Graff and Nolan as officers.
Messrs. Graff and Nolan entered into Separation Agreements which terminated
their employment agreements and provide less severance than that provided for in
their employment agreements. The Committee also eliminated executive
prerequisites and established a schedule for the repayment of loans previously
made by the Company to Messrs. Faherty, Nolan and Graff.
The Committees also endorsed the termination of the employment of several
executives who had worked in the Company's international, hotel/motel,
television and movie production and other initiatives as part of the
Company-wide restructuring and adopted other cost saving
43
<PAGE>
measures designed to reduce the Company's cash outlays for salary and other
employee benefits. The Committees also instituted a hiring freeze.
Due to the decline in the market price of the Company's common stock in the
second half of 1995, the exercise price of most employee options exceeded the
market price of the stock. To maintain the incentive of options granted to
employees, the Stock Option Committee elected to reprice options held by all
persons who were active employees or consultants on November 17, 1995. The
repricing took effect on December 11, 1995. The options repriced under the 1992
Stock Option Plan included 36,000 options granted to Mr. Faherty. The options
repriced under the 1993 Plan included 100,000 options granted to Mr. Callaghan
and 100,000 options issued to each of Messrs. Faherty and Nolan. The options
repriced under the 1994 Plan included 11,000 options granted to Mr. Callaghan
and 25,000 options issued to each of Messrs. Faherty and Nolan. Mr. Graff's
options were not repriced.
The Committees have elected to not make any determinations as to
compensation programs for 1996 until the affects of the executive terminations
and the restructuring can be analyzed and the Company's position is stabilized.
Once this occurs, the Committees will again review the Company's compensation
programs to assure such programs are consistent with the overriding objective of
increasing stockholder value.
March 29, 1996 Marvin Small
Dean Ericson
COMPENSATION INTERLOCKS AND INSIDER PARTICIPATION
Since 1994, recommendations relating to executive compensation have been
made by the Company's Compensation Committee to the Board of Directors. The
Compensation Committee members are Messrs. Small and Ericson, non-employee
Directors of the Company.
44
<PAGE>
PERFORMANCE GRAPH
The graph below compares the cumulative total shareholder return on the
common stock for the period from August 31, 1992 to December 31, 1995 with the
cumulative total return on the Nasdaq Stock Market-United States Index and a
peer group(1) of comparable companies (the "Peer Group") selected by the Company
over the same period (assuming the investment of $100 in the common stock, the
Nasdaq Stock Market-United States Index and the Peer Group on August 31, 1992
and the reinvestment of all dividends).
The following table is an Edgar representation of the data points used in
the printed graphic presentation:
CUMULATIVE TOTAL RETURN
SUMMARY
-------------------------------------
9/92 1992 1993 1994 1995
GRAFF PAY-PER-VIEW INC. 100 242 325 450 185
PEER GROUP 100 119 229 172 386
NASDAQ STOCK MRKT - UNITED 100 118 136 133 188
STATES
(C) Paul Kagan Associates, Inc. estimates. All rights reserved.
ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's common stock as at March 1, 1996 (i) by each person
who is known by the Company to own beneficially more than 5% of the outstanding
shares of common stock, (ii) each of the Company's directors, (iii) each of the
Company's named executive officers and (iv) all officers and directors of the
Company as a group.
- ----------
(1) The peer group comprises those companies which compete against the Company
in the interactive television and pay-per-view industries. None of the companies
in the peer group is fully comparable with the Company's business. The returns
of each company have been weighted according to their respective stock market
capitalization for purposes of arriving at a peer group average. The members of
the peer group are as follows: Macromedia, Inc., Hypermedia Communications,
Lodgenet Entertainment Corp., Interfilm Inc., Iwerks Entertainment Inc.,
Creative Program Tech Venture, Videotron Group Ltd., Actv Inc., NTN
Communications Inc., Interactive Network Inc., Playboy Enterprises Inc., and Spi
Holding Inc.
45
<PAGE>
<TABLE>
<CAPTION>
============================================================================================
EXECUTIVE OFFICERS, SHARES PERCENTAGE
DIRECTORS AND 5% BENEFICIALLY OF SHARES
SHAREHOLDERS OWNED OUTSTANDING (1)
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
J. Roger Faherty(2), (7) 866,687 (6) 7.21%
Mark Graff (2) 846,714 (7) 7.22%
Leland H. Nolan(2), (8), (10) 1,033,957 (9) 8.63%
Dean Ericson(3) 25,000 (11) 0.22%
Marvin Small(4) 40,000 (12) 0.35%
Philip Callaghan(2) 156,000 (10) 1.35%
Edward M. Spector & Ilene H. Spector, 616,000 (13)
co-trustees of the Spector Family Revocable
Trust
Edward M. Spector(2) 616,000 (13) 5.87%
All directors and executive officers as a group
(14 persons) 4,028,409 (14) 30.42%
============================================================================================
</TABLE>
(1) Assumes exercise of options exercisable within sixty days owned by such
person or and the exercise of no other options or warrants.
(2) The business address of such persons, for purposes hereof, is c/o Graff
Pay-Per-View Inc., 536 Broadway 7th Floor, New York, New York 10012.
(3) The business address of such person is 5429 South Krameria Street,
Englewood, CO 80111.
(4) The business address of such person is 6428 Brandywine Lane, Oklahoma City,
OK 73116.
(5) Mr. Faherty disclaims beneficial ownership of the 334,844 shares owned by
his wife and the 22,200 shares and 30,000 shares issuable upon exercise of
outstanding options owned by his children.
(6) Includes 571,181 shares issuable upon exercise of outstanding options.
(7) Includes 285,564 shares issuable upon exercise of outstanding options.
(8) Mr. Nolan disclaims beneficial ownership of 4,638 shares owned by his
children as well as 25,500 of shares issuable upon exercise of outstanding
options owned by his wife.
(9) Includes 535,181 shares issuable upon exercise of outstanding options.
(10) Includes 44,000 shares of Restricted Stock and 112,000 shares issuable upon
exercise of outstanding options.
46
<PAGE>
(11) Includes 25,000 shares issuable upon exercise of outstanding options.
(12) Includes 15,000 shares issuable upon exercise of outstanding options.
(13) Edward M. Spector is a co-trustee and a beneficiary of the Spector Family
Revocable Trust.
(14) Includes 1,794,626 shares issuable upon exercise of outstanding options.
ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
In April 1995, Messrs. Faherty, Nolan and Graff, executive officers, each
exercised 249,585 options to acquire common stock at $0.8333 per share.
The exercise price was paid by delivery of promissory notes. In Novemeber 1995,
the Stock Option Committee granted the executive officers the right to rescind
the option exercise. The rescission resulted in return to the Company of the
common stock purchased upon exercise of the options and cancellation of the
promissory notes issued upon exercise of the options. The options were returned
to Messrs. Faherty and Nolan under the same terms and conditions except such
options have an exercise price of $3.875 per share.
During 1995, Messrs. Faherty, Graff and Nolan borrowed $215,000, $24,000
and $82,000, respectively from the Company. Pursuant to the Fourth Amendment to
Mr. Faherty's Employment Agreement, Mr. Faherty will repay his loan by December
31, 1996. Pursuant to the Separation Agreements entered into between the Company
and each of Messrs. Nolan and Graff, their loans will be paid in monthly
installments beginning January 1997. All of the loans bear interest at the same
rate the Company pays on its loan from its senior secured lender.
As part of the SEG merger, the former SEG shareholders granted the Company
an option to acquire all the outstanding stock of United Transactive Services,
Inc. ("UTI") for a formula determined number of Company shares. The UTI
shareholders may put the UTI shares to the Company in certain circumstances.
SEG has a note receivable from Buccaneer Games, Inc. ("Buccaneer"), a
developmental corporation, owned by an affiliate of SEG prior to its acquisition
by the Company, due in five equal annual installments commencing September,
1996. Substantially all of the loan was made prior to the Company's acquisition,
by merger, of SEG.
47
<PAGE>
PART IV
ITEM 14. FINANCIAL STATEMENTS, FINANCIAL
STATEMENT SCHEDULES AND EXHIBITS
(a) 1. Financial Statements of the Company.
2. Financial Statements Schedules.
3. Exhibits.
2.01 Merger Agreement and Plan of Reorganization dated as of January 17, 1992
among Jericap, Inc., Jericap Merger Corp., Graff Pay-Per-View Inc., J.
Roger Faherty, Mark Graff and Leland H. Nolan. Incorporated by reference
to Exhibit 2.1 of the Company's Current Report on Form 8-K dated March 9,
1992.
2.02 Merger Agreement and Plan of Reorganization dated as of May 14, 1992
between Jericap, Inc. and the Company. Incorporated by reference to
Exhibit 2.3 of the Company's Registration Statement on Form 8-A dated
January 26, 1993 (the "8-A").
3.01 Certificate of Incorporation of the Company. Incorporated by reference to
Exhibit 2.2 of the 8-A.
3.02 By-Laws of the Company. Incorporated by reference to Exhibit 2.2 of the
8-A.
3.03 Certificate of Merger dated February 21, 1992 between Jericap Merger
Corp. and Graff Pay-Per-View Inc. Incorporated by reference to Exhibit
3.1 of the Company's Current Report on Form 8-K dated March 9, 1992.
3.04 Certificate of Merger dated May 15, 1992 between Jericap, Inc. and the
Company. Incorporated by reference to Exhibit 3.1 of the Company's
Quarterly Report on Form 10-Q for the Quarterly period ended March 31,
1992 (the "March, 1992 10-Q").
4.01 Specimen Certificate representing the common stock, par value $.01 per
share. Incorporated by reference to Exhibit 1 of the 8-A.
4.02 Form of Share Purchase Warrant Series A issued to purchasers of the
Company's "Bridge Notes" in 1989. Incorporated by reference to Exhibit
4.02 of the Company's Annual Report on Form 10-K for the year ended
December 31, 1992 (the "1992 10-K").
48
<PAGE>
4.03 Form of Share Purchase Warrant. Issued to purchasers of Senior Secured
Notes in 1991. Incorporated by reference to Exhibit 4.02 of the 1992
10-K.
4.04 Form of Share Purchase Warrant issued to Fahnestock & Co., Inc.
Incorporated by reference to Exhibit 4.05 of the Company's Registration
Statement on Form S-1, Registration No. 33-65394 effective December 9,
1993 (the "1993 S-1").
4.05 Waveland Convertible Notes. Incorporated by reference to Exhibit 4.05
Annual Report on Form 10-K for the year ended December 31, 1993 (the
"1993 10-K").
5.01 Opinion of Parker Duryee Rosoff & Haft.*
10.01 Amended 1991 Management Stock Option Plan. Incorporated by reference to
Exhibit 10 of the March, 1992 10-Q.
10.02 Form of Stock Option Agreement for the 1991 Plan. Incorporated by
reference to Exhibit 10.02 of the 1992 10-K.
10.03 The Company's 401(k) Tax Deferred Savings Plan. Incorporated by reference
to Exhibit 10.03 of the 1992 10-K.
10.04 Employment Agreement dated as of June 1, 1992 between the Company and J.
Roger Faherty. Incorporated by reference to Exhibit 10.04 of the 1992
10-K.
10.05 First Amendment dated as of February 22, 1993 to Employment Agreement
dated as of June 1, 1992 between the Company and J. Roger Faherty.
Incorporated by reference to Exhibit 10.05 of the 1992 10-K.
10.06 Deferred Compensation Agreement dated as of October 1, 1992 between the
Company and J. Roger Faherty. Incorporated by reference to Exhibit 10.06
of the 1992 10-K.
10.07 Employment Agreement dated as of June 1, 1992 between the Company and
Mark Graff. Incorporated by reference to Exhibit 10.07 of the 1992 10-K.
10.08 First Amendment dated as of February 22, 1993 to Employment Agreement
dated as of June 1, 1992 between the Company and Mark Graff. Incorporated
by reference to Exhibit 10.08 of the 1992 10-K.
10.09 Deferred Compensation Agreement dated as of October 1, 1992 between the
Company and Mark Graff. Incorporated by reference to Exhibit 10.09 of the
1992 10-K.
10.10 Employment Agreement dated as of June 1, 1992 between the Company and
Leland H. Nolan. Incorporated by reference to Exhibit 10.10 of the 1992
10-K.
49
<PAGE>
10.11 First Amendment dated as of February 22, 1993 to Employment Agreement
dated as of June 1, 1992 between the Company and Leland H. Nolan.
Incorporated by reference to Exhibit 10.11 of the 1992 10-K.
10.12 Deferred Compensation Agreement dated as of October 1, 1992 between the
Company and Leland H. Nolan. Incorporated by reference to Exhibit 10.12
of the 1992 10-K.
10.13 Employment Agreement dated as of November 1, 1992 between the Company and
Barry Teiman. Incorporated by reference to Exhibit 10.13 of the 1993 S-1.
10.14 Investment and Option Agreement dated as of January 22, 1993 between R.
C. Yates, A. D. Wren, S. P. Kay, the Company and The Home Video Channel
Limited. Incorporated by reference to Exhibit 2.1 of the Company's
Current Report on Form 8-K dated February 22, 1993.
10.15 Company Note dated December 24, 1992 for $600,000 to Waveland
Corporations NV, with extension letter and associated Warrant.
Incorporated by reference to Exhibit 10.14 of the 1992 10-K.
10.16 Form of Subscription Agreement relating to 1992-1993 Private Placement.
Incorporated by reference to Exhibit 10.16 of the 1993 S-1.
10.17 Extension Letters dated May 24, and June 23, 1993 for loan from Waveland
Corporation. Incorporated by reference to Exhibit 10.17 of the 1993 S-1.
10.18 Employment Agreement dated as of May 1, 1993 between the Company and
Paula Sullivan. Incorporated by reference to Exhibit 10.18 of the 1993
S-1.
10.19 1993 Employees Stock Option Plan. Incorporated by reference to Exhibit
10.19 of the 1993 S-1.
10.20 Second Amendment dated as of June 15, 1993 to Employment Agreement dated
as of June 1, 1992 between the Company and J. Roger Faherty. Incorporated
by reference to Exhibit 10.20 of the 1993 S-1.
10.21 Second Amendment dated as of June 15, 1993 to Employment Agreement dated
as of June 1, 1992 between the Company and Mark Graff. Incorporated by
reference to Exhibit 10.21 of the 1993 S-1.
10.22 Second Amendment dated as of June 15, 1993 to Employment Agreement dated
as of June 1, 1992 between the Company Leland H. Nolan. Incorporated by
reference to Exhibit 10.22 of the 1993 S-1.
10.23 Form of Stock Option Agreement for the 1993 Plan. Incorporated by
reference to Exhibit 10.23 of the 1993 S-1.
50
<PAGE>
10.24 Employment Agreement dated as of June 1, 1992 between Richard Kirby and
the Company. Incorporated by reference to Exhibit 10.24 of the 1933 S-1.
10.25 Employment Agreement dated as of November 1, 1992 between Michael Solomon
and the Company. Incorporated by reference to Exhibit 10.25 of the 1993
S-1.
10.26 Employment Agreement dated as of January 4, 1993 between Robert Ragusa
and the Company. Incorporated by reference to Exhibit 10.26 of the 1993
S-1.
10.27 Letter Agreement dated July 28, 1993 between TVN Entertainment Corp. and
the Company, Cable Video Store, Inc. and Spice, Inc. amending earlier
agreements. Incorporated by reference to Exhibit 10.27 of the 1993 S-1.
10.28 Satellite Services and Marketing Agreement dated as of September 22, 1992
by and between TVN Entertainment Corp. and Cable Video Store, Inc.
Incorporated by reference to Exhibit 10.28 of the 1993 S-1.
10.29 Transmission and Space Segment Agreement dated as of September 22, 1992
by and between Spice, Inc. and TVN Entertainment Corp. Incorporated by
reference to Exhibit 10.29 of the 1993 S-1.
10.30 TVRO Direct Marketing Agreement dated as of September 22, 1992 by and
between Spice, Inc., and TVN Entertainment Corp. Incorporated by
reference to Exhibit 10.30 of the 1993 S-1.
10.31 Promissory Notes and Loan Agreements dated March 5, 1993 with Chemical
Bank. Incorporated by reference to Exhibit 10.01 of the Company's
Quarterly Report on Form 10-Q for the period ended June 30, 1993.
10.32 License Agreement dated as of July 1, 1993 between Cinema Products Video,
Inc. and Pay-Per-View International, Inc. Incorporated by reference to
Exhibit 10.33 of the 1993S-1.
10.33 Employment Agreement dated as of September 1, 1993 between the Company
and Philip J. Callaghan. Incorporated by reference to Exhibit 10.34 of
the 1993 S-1.
10.34 Extension Letter dated July 23, 1993 for loan from Waveland Corporation.
Incorporated by reference to Exhibit 10.35 of the 1993 S-1.
10.35 Letter of Intent dated August 12, 1993 between the Company and Philips
Consumer Electronics International B.V. Incorporated by reference to
Exhibit 10.36 of the 1993 S-1.
51
<PAGE>
10.36 Letter Agreement dated as of November 6, 1993 between the Company and
Waveland Corporation relating to the exchange of Convertible Notes for
the debt to Waveland. Incorporated by reference to Exhibit 10.36 of the
1993 10-K.
10.37 Agreement between Graff Pay-Per-View Inc. and AT&T Communications, Inc.,
concerning Skynet Transponder Service dated as of January 3, 1994.
Incorporated by reference to Exhibit 10.37 of the 1993 10-K.
10.38 Merger Agreement and Plan of Reorganization dated December 14, 1993 by
and PSP Holding, Inc., Stefan Herrmann, Paul T. Kestenbaum, Peter
Heidenfelder, Alfred D. Crowell, Graff Pay-Per-View Inc. and Guest
Cinema, Inc. Incorporated by reference to Exhibit 2.2 of the Company's
Current Report on Form 8-K dated January 17, 1994.
10.39 Agreement between Graff Pay-Per-View Inc. and Four Media Company dated
January 31, 1994. Incorporated by reference to Exhibit 10.39 of the 1993
10-K.
10.40 Agreement between Graff Pay-Per-View Inc. and Cinema Products Video dated
January 31, 1994. Incorporated by reference to Exhibit 10.40 of the 1993
10-K.
10.41 Third Amendment dated as of March 23, 1994 to Employment Agreement dated
as of June 1, 1992 between the Company and J. Roger Faherty. Incorporated
by reference to Exhibit 10.41 of the 1993 10-K.
10.42 Third Amendment dated as of March 23, 1994 to Employment Agreement dated
as of June 1, 1992 between the Company and Mark Graff. Incorporated by
reference to Exhibit 10.42 of the 1993 10-K.
10.43 Third Amendment dated as of March 23, 1994 to Employment Agreement dated
as of June 1, 1992 between the Company and Leland H. Nolan. Incorporated
by reference to Exhibit 10.43 of the 1993 10-K.
10.44 Merger Agreement and Plan of Reorganization dated as of May 26, 1994 by
and among CPV, Magic Hour Productions, Inc., Marc Greenberg, Richard
Goldberg, Registrant and Graff Merger Corp. Incorporated by reference to
Exhibit 2.01 of the Company's Current Report on Form 8-K filed June 10,
1994 (the "June, 1994 8-K").
10.45 Merger Agreement and Plan of Reorganization dated as of April 15, 1994 by
and among PSP Communications, Inc., Stefan Herrmann, Peter Heidenfelder,
Paul T. Kestenbaum, Alfred D. Crowell, Registrant and Guest Cinema, Inc.
Incorporated by reference to Exhibit 2.02 of the June, 1994 8-K.
10.46 Employment Agreement dated as of May 27, 1994 between Marc Greenberg and
Graff Merger Corp. Incorporated by reference to Exhibit 10.01 of the
June, 1994 8-K.
52
<PAGE>
10.47 Employment Agreement dated as of May 27, 1994 between Richard Goldberg
and Graff Merger Corp. Incorporated by reference to Exhibit 10.02 of the
June, 1994 8-K.
10.48 1994 Employees' Stock Option Plan. Incorporated by reference to Exhibit 1
to the Company's Proxy Statement (the "1994 Proxy Statement") for its
Annual Meeting of Stockholders held June 22, 1994.
10.49 Directors' Stock Option Plan. Incorporated by reference to Exhibit 2 to
the 1994 Proxy Statement.
10.50 Agreement dated as of May 1, 1993 between CPV d/b/a Cinema Products Video
and Showtime Networks Inc. as amended by amendments dated as of February
1, 1994 and March 18, 1994. Incorporated by reference to Exhibit 10.49 of
the Company's Registration Statement on Form S-3, Registration No.
33-80824, effective August 10, 1994.
10.51 Loan and Security Agreement $900,000 Term Loan and $2,500,000 Revolving
Credit facility dated October 21, 1994 with Midlantic National Bank, N.A.
Incorporated by reference to Exhibit 10.01 of the September 30, 1994
10-Q.
10.52 Amended and restated Loan Agreement dated as of December 9, 1994 with
Midlantic National Bank, N.A. Incorporated by reference to Exhibit 10.44
of the December 31, 1994 10-K.
l0.53 Employment Agreement dated January 1, 1995 between the Company and Daniel
J. Barsky. Incorporated by reference to Exhibit 10.48 of the December 31,
1994 10-K.
10.54 Employment Agreement dated as of January 1, 1995 between the Company and
Irene Merlo. Incorporated by reference to Exhibit 10.49 of the December
31, 1994 10-K.
10.55 Letter Agreement between Spice, Inc., and Graff-Pay-Per-View Inc., Adam &
Eve Communications, Inc., PHE, Inc., VCA Labs, Inc., Nolan Quan, John J.
Gallagher, Philip Harvey and Russell J. Hampshire dated January 26, 1995.
Incorporated by reference to Exhibit 10.46 of the December 31, 1994 Form
10-K.
10.56 Agreement between AT&T Corp. and Graff Pay-Per-View Inc. concerning
Skynet Transponder Service dated February 7, 1995. Incorporated by
reference to Exhibit 10.45 of the December 31, 1994 10-K.
10.57 Letter Agreement by and between Graff Pay-Per-View Inc., Spice, Inc. and
Cable Video Store, Inc. and TVN Entertainment Corporation dated March 27,
1995. Incorporated by reference to Exhibit 10.57 of the Company's
Registration Statement on Form S-3, Registration No. 33-93534, effective
July 5, 1995.
53
<PAGE>
10.58 Merger Agreement and Plan of Reorganization, between Spice, Inc., and
Graff-Pay-Per-View Inc., Adam & Eve Communications, Inc., PHE, Inc. VCA
Labs, Inc., Nolan Quan, John J. Gallagher, Philip Harvey and Russell J.
Hampshire dated April 7, 1995. Incorporated by reference to Exhibit 2.03
of the April 27, 1995 Form 8-K.
10.59 Form of Promissory Note between the Company and each of J. Roger Faherty,
Mark Graff and Leland H. Nolan dated April 7, 1995 to Graff Pay-Per-View
Inc. Incorporated by reference to Exhibit 10.59 of the Company's
Registration Statement on Form S-3, Registration No. 33-93534, effective
July 5, 1995.
10.60 Joint Venture Agreement of American Gaming Network dated June 28, 1995
and between American Gaming Network, Inc. and TV Games, Inc. Incorporated
by reference to Exhibit 10.60 of the Company's Registration Statement on
Form S-3, Registration No. 33-93534, effective July 5, 1995.
10.61 Letter Agreement between MultiMedia Games, Inc., TV Games, Inc. Graff
Pay-Per-View Inc. dated June 28, 1995. Incorporated by reference to
Exhibit 10.61 of the Company's Registration Statement on Form S-3,
Registration No. 33-93534, effective July 5, 1995.
10.62 Merger Agreement and Plan of Reorganization dated August 9, 1995 by and
among Spector Entertainment Group, Inc., Edward Spector and the
Registrant and Newco SEG, Inc. Incorporated by reference to Exhibit 2.04
of the September 12, 1995 Form 8-K.
10.63 Industrial Lease Between Margate Associates and Spector Entertainment
Group, Inc. Incorporated by reference to Exhibit 10.62 of the September
12, 1995 Form 8-K.
10.64 Employment Agreement dated September 1, 1995 between the Company and
Edward M. Spector. Incorporated by reference to Exhibit 10.63 of the
September 12, 1995 Form 8-K.
10.65 Amendatory Agreement dated as of August 14, 1995 between Graff
Pay-Per-View Inc. and Midlantic National Bank, N.A. Incorporated by
reference to Exhibit 10.65 of the September 30, 1995 Form 10-Q.
10.66 Separation Agreement entered into as of December 31, 1995 between Graff
Pay-Per-View Inc. and Leland Nolan.
10.67 Separation Agreement entered into as of December 31, 1995 between Graff
Pay-Per-View Inc. and Mark Graff.
10.68 Fourth Amendment to Employment Agreement effective as of January 1, 1996
between Graff Pay-Per-View Inc. and J. Roger Faherty.
54
<PAGE>
10.69 General Partnership and Contribution Agreement of CVS Partners dated
January 27, 1996 by and between the Company and WilTech Cable Television
Services, Inc., WilTech Services, Inc. and Cable Video Store, Inc.
10.70 Third Amendatory Agreement dated as of March 28, 1996 between Graff
Pay-Per-View Inc. and Midlantic National Bank, N.A.
10.71 Share Sale Agreement made on March 22, 1996 by and between Philips Media
Services B.V., KPN Multimedia B.V. and Graff Pay-Per-View Inc.
11.01 Computation of Earnings Per Share.
21.01 Subsidiaries of the Registrant.
23.01 Consent of Coopers & Lybrand L.L.P.
23.02 Consent of Price Waterhouse LLP
27.00 Summary Financial Data Schedule.
(b) Reports on Form 8-K
A Form 8-K/A-1 was filed on October 25, 1995 which included under Item 7 of
such form the following:
(i) Financial Statements of Spector Entertainment Group, Inc.
(unaudited) for the six months ended June 30, 1995 and 1994.
(ii) Financial Statements of Spector Entertainment Group, Inc., for
the years ended December 31, 1994, 1993 and 1992.
Pro Forma Information:
(iii) Unaudited pro forma Consolidated Balance Sheet at June 30, 1995.
(iv) Unaudited pro forma Consolidated Statements of Operations for the
six months ended June 30, 1995 and 1994 and the three years ended December
31, 1994, 1993 and 1992.
55
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities
Exchange Act of 1934, Graff has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: March , 1995
GRAFF PAY-PER-VIEW INC.
By: /s/ J. ROGER FAHERTY
--------------------------
J. Roger Faherty
Chairman, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Graff and in
the capacities and on the date indicted.
PRINCIPAL EXECUTIVE OFFICER:
/s/ J. ROGER FAHERTY Chairman, Chief April 10, 1996
- ------------------------------------ Executive Officer
J. Roger Faherty and Director
/s/ LELAND H. NOLAN Vice Chairman April 10, 1996
- ------------------------------------ and Director
Leland H. Nolan
/s/ MARK GRAFF President April 10, 1996
- ------------------------------------ and Director
Mark Graff
/s/ MARVIN SMALL Director April 10, 1996
- ------------------------------------
Marvin Small
/s/ DEAN ERICSON Director April 10, 1996
- ------------------------------------
Dean Ericson
PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER:
/s/ PHILIP CALLAGHAN Executive Vice
- ------------------------------------ President and Chief
Philip Callaghan Financial Officer April 10, 1996
56
<PAGE>
<TABLE>
<CAPTION>
GRAFF PAY-PER-VIEW INC. PEER GROUP
% PEER GROUP
PEER GROUP CUMULATIVE TOTAL RETURN MARKET
(WEIGHTED AVERAGE BY MARKET VALUE) CUMULATIVE TOTAL RETURN CAPITALIZATION
------------------------------------------------------- -----------------
9/92 1992 1993 1994 1995 1992 1995
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PEER GROUP WEIGHTED AVERAGE 100 119 229 172 386 100% 100%
134 898
MACROMEDIA INC. MACR 100 97 148 606 44.0%
HYPERMEDIA COMMUNICATIONS HYPR 100 160 100 65 1.7%
LODGENET ENTMT CORP. LNET 100 87 45 57 6.1%
INTERFILM INC. IFLM 100 100 124 2 3.4%
IWERKS ENTMT INC. IWRK 100 80 14 19 5.3%
CREATIVE PROGRAM TECH VENTURE CPTV 100 84 41 15 0.7%
VIDEOTRON GROUP LTD. VDO 100 96 151 157 119
ACTV INC. IATV 100 113 353 193 200 6.7% 3.6%
NTN COMMUNICATIONS INC. NTN 100 134 271 163 122 26.2% 12.8%
INTERACTIVE NETWORK INC. INNN 100 121 18 0 4.5%
PLAYBOY ENTERPRISES INC. PL 100 113 200 162 129 67.0% 17.8%
CUMULATIVE TOTAL RETURN
SUMMARY
-------------------------------------------------------
9/92 1992 1993 1994 1995
GRAFF PAY-PER-VIEW INC. 100 242 325 450 185
PEER GROUP 100 119 229 172 386
NASDAQ STOCK MRKT - UNITED STATES 100 118 136 133 188
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
Exhibit 11.01
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER SHARE
Years Ended December 31,
-----------------------------------------------------------
Primary: 1995 1994 1993
- --------
<S> <C> <C> <C>
Net Income (loss), subject to primary
earnings per share ($15,126,490) 3,166,356 ($2,369,084)
------------ ----------- -----------
Weighted average number of common shares
outstanding1 11,747,243 10,385,727 8,953,809
Issued common shares assuming that
warrants and options outstanding during that
period were exercised 2,791,849
Common shares assumed to be repurchased
with proceeds from the exercise of
warrants and options subject to 20% limitation
under the modified treasury stock method (2) (1,268,217)
------------ ----------- -----------
Weighted average number of common shares
and equivalents outstanding 11,747,243 11,909,359 8,953,809
============ =========== ===========
Primary Earnings (loss) per share ($1.29) $0.27 ($0.26)
============ =========== ===========
Notes to Primary Earnings per Share
(1) Represents the number of common shares
outstanding during the period in
connection with the modified treasury
stock method
(2) The common shares assumed to be
repurchased under the modified treasury
method are as follows:
Average price per common share
during the period $8.54
===========
Proceeds from exercise of
options and warrants $10,830,577
===========
Common shares repurchased 1,268,217
===========
</TABLE>
58
<PAGE>
Exhibit 21.01
GRAFF PAY-PER-VIEW INC.
Subsidiaries of the Registrant
State or Jurisdiction
Subsidiary of Incorporation
- ----------------------------------- ----------------------------------
DOMESTIC:
Cable Video Store, Inc. Delaware
CPV Productions, Inc. Delaware
Cyberspice, Inc. Delaware
Graff Marketing Corp., Inc. Delaware
Guest Cinema, Inc. Delaware
Magic Hour Productions, Inc. Delaware
Media Licensing, Inc. Nevada
Pay-Per-View International, Inc. Delaware
Spector Entertainment Group, Inc. Delaware
American Gaming Network, Inc. Delaware
American Gaming Interactive, Inc. Delaware
Spice, Inc. New York
FOREIGN:
Home Video Channel Limited England and Wales
Danish Satellite T/V a/s Denmark
59
<PAGE>
GRAFF PAY-PER-VIEW INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 1995, 1994 AND 1993
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
AND SCHEDULES
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
PAGE NUMBERS
-----------------
<S> <C>
Report of Independent Accountants F-1
Consolidated Balance Sheets at F-4
December 31, 1995 and 1994
Consolidated Statements of Operations for the Years ended December 31, 1995, F-5
1994 and 1993
Consolidated Statements of Stockholders' Equity F-6 - F-7
for The Years Ended December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the years ended December 31, 1995, F-8 - F-9
1994 and 1993
Notes to the Consolidated Financial Statements F-10 - F-32
Consolidated Financial Statement Schedule F-33 - F-34
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Graff Pay-Per-View Inc.:
We have audited the consolidated financial statements and the financial
statement schedule II of GRAFF PAY-PER-VIEW INC. and Subsidiaries (the
"Company") as listed in the Index to Financial Statements and Schedules on page
F-1 of this Form 10-K. These financial statements and financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedule based
on our audits. We did not audit the financial statements or the financial
statement schedule information of Spector Entertainment Group, Inc. a
wholly-owned subsidiary, which statements reflect 15% of consolidated assets as
of December 31, 1994, and 15% and 25% of consolidated revenues as of December
31, 1994 and 1993, respectively. Those statements were audited by other
auditors, whose report, which has been furnished to us, includes an emphasis of
a matter paragraph that describes the subsidiaries extensive transactions and
relationships with related parties, and in our opinion, insofar as it relates to
the amounts included for Spector Entertainment Group, Inc. is based solely on
the report of the other auditors. We also did not audit the financial statements
of CPV and Magic Hour Production, Inc., a wholly-owned subsidiary, which
statements reflect 8% of consolidated revenues as of December 31, 1993. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for CPV and Magic
Hour Productions, Inc. is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of GRAFF PAY-PER-VIEW
INC. and Subsidiaries as of December 31, 1995 and 1994, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles. In addition, in our opinion, based upon our
audits and the reports of the other auditors, the financial statement
schedule II referred to above, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material
respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
New York, New York
March 8, 1996 except for Note 2
and paragraph (a) and (e) of Note 6 as to
which the dates are April 3, 1996,
March 29, 1996 and April 10, 1996, respectively.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Spector Entertainment Group, Inc.:
In our opinion, the balance sheet at December 31, 1994 and the related
statements of operations, of stockholders' equity and of cash flows for each of
the two years in the period ended December 31, 1994 of Spector Entertainment
Group, Inc. (not presented separately herein) present fairly, in all material
respects, its financial position at December 31, 1994, and the results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1994, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As described in Note 8 to the aforementioned financial statements, the Company
is a member of a group of affiliated companies and, as disclosed in the
financial statements, has extensive transactions and relationships with members
of the group. Because of these relationships, it is possible that the terms of
these transactions are not the same as those that would result from transactions
among wholly unrelated parties.
We have not audited the financial statements of Spector Entertainment Group,
Inc. for any period subsequent to December 31, 1994.
PRICE WATERHOUSE LLP
San Diego, California
March 30, 1995
F-2
<PAGE>
INDEPENDENT AUDITOR'S REPORT
CPV (A California S Corporation)
1762 Westwood Boulevard
Suite 220
Los Angeles, CA 90024
We have audited the accompanying combined statement of operations of CPV (A
California S Corporation) and Magic Hour Productions, Inc. as of December 31,
1993. This financial statement is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit also includes examining, on a test basis, evidence
supporting the amount and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the combined financial position of CPV (A California S
Corporation) and Magic Hour Productions, Inc., as at December 31, 1993, in
conformity with generally accepted accounting principles.
Willing and Moser
Willing and Moser, An Accountancy Corp.
May 19, 1994
F-3
<PAGE>
<TABLE>
<CAPTION>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Year Ended December 31, 1995 1994
=========================================================================================================
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 1,483,088 $ 1,598,282
Accounts receivable, less allowance for doubtful
accounts $1,193,489 in 1995 and $336,823 in 1994 7,835,696 9,082,458
Income tax refunds receivable 570,000
Film and CD-ROM costs, net 400,000 941,459
Prepaid expenses and other current assets 2,391,121 1,731,851
Deferred subscription costs 511,368 1,053,043
Due from related parties and officers 364,019
Investment in TeleSelect, asset held for sale 3,177,131
------------ -----------
Total current assets 16,732,423 14,407,093
Property and equipment 70,770,526 7,281,200
Due from related parties 621,293 542,931
Film and CD-ROM costs, net 2,316,306
Library of movies 2,990,138 2,078,984
Cost in excess of net assets acquired, net of
accumulated amortization of $1,269,633 in 1995 and
$708,647 in 1994 10,961,420 12,770,967
Other assets 402,199 1,600,258
------------ -----------
Total assets $102,477,999 $40,997,739
============ ===========
Liabilities and Stockholders' Equity Current liabilities:
Current portion of obligations under capital leases $3,978,024 $6,120
Current portion of long-term debt 2,540,444 4,432,949
Royalties payable 2,610,744 2,178,856
Accounts payable 3,721,815 2,927,173
Accrued expenses payable 2,241,171 1,470,218
Current portion of accrued restructuring costs 2,205,009
Deferred subscription revenue 2,336,952 3,191,256
------------ -----------
Total current liabilities 19,634,159 14,206,572
Obligations under capital leases 56,230,294 7,565
Long-term debt 16,896,686 3,191,028
Accrued restructuring costs 1,450,000
Deferred compensation 197,919 132,366
------------ -----------
Total liabilities 94,409,058 17,537,531
------------ -----------
Commitments and contingencies (Note 9)
Stockholders' equity
Preferred stock, $.01 par value; authorized 10,000,000
shares, none were issued or outstanding
Common stock, $.01 par value; authorized 25,000,000 shares;
11,357,928 and 11,116,588 shares issued and outstanding at
December 31, 1995 and 1994, respectively 113,579 111,166
Additional paid-in capital 22,997,350 20,887,916
Unearned compensation (1,323,074)
Accumulated (deficit) earnings (13,437,775) 2,169,315
Cumulative translation adjustments 209,609 291,811
------------ -----------
8,559,689 23,460,208
Stockholders' loan collaterilized by common stock (490,748)
------------ -----------
Total stockholders' equity 8,068,941 23,460,208
------------ -----------
Total liabilities and stockholders equity' $102,477,999 $40,997,739
============ ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1995 1994 1993
=========================================================================================================================
<S> <C> <C> <C>
Revenues $ 51,057,543 $50,656,316 $27,362,121
------------ ----------- -----------
Expenses:
Cost of goods sold 1,429,355 787,417 1,092,933
Salaries, wages and benefits 11,684,727 8,386,364 6,278,355
Producer royalties and library amortization 6,662,111 7,096,070 4,075,426
Satellite costs 12,837,849 13,264,340 8,239,326
Selling, general and administrative expenses 18,327,746 13,883,091 8,526,488
Depreciation of fixed assets and amortization of goodwill 2,807,812 1,769,958 1,103,222
Restructuring charges 3,655,010
Provision for write down of:
Investment in AGN 2,038,750
Goodwill related to Guest Cinema 871,289
Film and CD-ROM costs 3,967,252
------------ ----------- -----------
Total operating expense 64,281,901 45,187,240 29,315,750
------------ ----------- -----------
Total income (loss) from operations (13,224,358) 5,469,076 (1,953,629)
Interest expense 1,234,607 499,582 468,707
Minority interest HVC 500,255
------------ ----------- -----------
Income (loss) before provision for income taxes and equity in
undistributed earnings of foreign investee (14,458,965) 4,469,239 (2,422,336)
Provision for income taxes (benefit) 667,525 1,302,883 (49,054)
Equity in the undistributed earnings of HVC, net of the
amortization of goodwill amounting to $178,518 and
deferred income taxes of $155,554 in 1993 4,198
------------ ----------- -----------
Net income (loss) ($15,126,490) $3,166,356 ($2,369,084)
============ =========== ===========
Earnings Per Share
Primary ($1.29) $0.27 ($0.26)
============ =========== ===========
Fully Diluted $0.26
===========
Weighted average number of shares outstanding,
Primary 11,747,243 11,909,359 8,953,809
============ =========== ===========
Fully Diluted 12,214,859
===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
=======================================================================================
Additional
Common Paid-in Unearned
Stock Capital Compensation
--------------- -------------- -----------------
<S> <C> <C> <C>
Balance at January 1, 1993 $ 68,804 $ 2,646,562
Shares issued in connection with the AEC merger 8,200 31,800
Shares issued in connection with the private
placement of 375,000 units, net of costs
totaling $425,444 and other warrants 13,361 4,803,094
Issuance of shares for the purchase of a 25%
interest in The Home Video Channel
Limited ("HVC") 2,690 1,435,748
Issuance of CPV shares to officer as salary 3,380 336,620
Shares issued as compensation for services
rendered by consultants 79 37,882
Contributed services by former AEC shareholders 115,700
Shares issued to purchase a library of movies 375 199,625
Distribution by SEG to its former shareholders
Net loss for the year
Foreign currency translation adjustment
Treasury Stock at cost, 12,500 shares
-------- -----------
Balance at December 31, 1993 96,889 9,607,031
Issuance of shares in connection with the purchase of
a 100% interest in PSP Holding Inc. ("PSP")
and PSP Communications 1,375 1,045,499
Exercise of warrants in connection with the private
placement offering of 500,000 units and other
warrants 6,004 2,602,166
Exercise of employee stock options 192 63,744
Shares issued in connection with a conversion
of a convertible note 703 418,297
Capital contribution in connection with the merger of AEC 1,165,284
Issuance of shares as compensation for services rendered 50 37,450
Contributed services by AEC shareholders 277,600
Sale of Treasury Stock 125 75,540
Issuance of shares in connection with the purchase
of the remaining 49% interest in HVC 5,828 5,595,305
Net income for the year
Foreign currency translation adjustment
-------- -----------
Balance at December 31, 1994 111,166 20,887,916
<CAPTION>
============================================================================================================================
Foreign
Currency
Accumulated Translation Stock in
Deficit Adjustment Treasury Total
------------- ------------- --------- -----------
<S> <C> <C> <C> <C>
Balance at January 1, 1993 $1,590,043 $4,305,409
Shares issued in connection with the AEC merger 40,000
Shares issued in connection with the private
placement of 375,000 units, net of costs
totaling $425,444 and other warrants 4,816,455
Issuance of shares for the purchase of a 25%
interest in The Home Video Channel
Limited ("HVC") 1,438,438
Issuance of CPV shares to officer as salary 340,000
Shares issued as compensation for services
rendered by consultants 37,961
Contributed services by former AEC shareholders 115,700
Shares issued to purchase a library of movies 200,000
Distribution by SEG to its former shareholders (218,000) (218,000)
Net loss for the year (2,369,084) (2,369,084)
Foreign currency translation adjustment ($23,604) (23,604)
Treasury Stock at cost, 12,500 shares ($50,000) (50,000)
---------- -------- ----------- ----------
Balance at December 31, 1993 (997,041) (23,604) (50,000) 8,633,275
Issuance of shares in connection with the purchase of
a 100% interest in PSP Holding Inc. ("PSP")
and PSP Communications 1,046,874
Exercise of warrants in connection with the private
placement offering of 500,000 units and other
warrants 2,608,170
Exercise of employee stock options 63,936
Shares issued in connection with a conversion
of a convertible note 419,000
Capital contribution in connection with the merger of AEC 1,165,284
Issuance of shares as compensation for services rendered 37,500
Contributed services by AEC shareholders 277,600
Sale of Treasury Stock 50,000 125,665
Issuance of shares in connection with the purchase
of the remaining 49% interest in HVC 5,601,133
Net income for the year 3,166,356 3,166,356
Foreign currency translation adjustment 315,415 315,415
---------- -------- ----------- ----------
Balance at December 31, 1994 2,169,315 291,811 0 23,460,208
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Continued
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
=================================================================================================
Additional
Common Paid-in Unearned
Stock Capital Compensation
-------- ----------- ------------
<S> <C> <C> <C>
Shares issued in connection with the exercise of
employee options 82 31,643
Shares issued in connection with the
settlement of a consultancy agreement 210 223,790
Contributed services by shareholders 46,300
Capital contribution in connection with the AEC merger 25,733
Restricted stock granted to executive officers 1,770 1,524,855 (1,323,074)
Distribution by SEG to its former shareholders
Shares issued as compensation for services rendered
and bonuses to employees 201 148,513
Shares issued in connection with library purchases 150 108,600
Net loss for the period
Foreign currency translation adjustment
-------- ----------- -----------
113,579 22,997,350 (1,323,074)
Less shareholders' loans
======== =========== ===========
Balance at December 31, 1995 $113,579 $22,997,350 ($1,323,074)
======== =========== ===========
<CAPTION>
===================================================================================================================
Foreign
Currency
Accumulated Translation Stock in
Deficit Adjustment Treasury Total
----------- ------------- ----------- -----------
Shares issued in connection with the exercise of
employee options 31,725
Shares issued in connection with the
settlement of a consultancy agreement 224,000
Contributed services by shareholders 46,300
Capital contribution in connection with the AEC merger 25,733
Restricted stock granted to executive officers 203,551
Distribution by SEG to its former shareholders (480,600) (480,600)
Shares issued as compensation for services rendered
and bonuses to employees 148,714
Shares issued in connection with library purchases 108,750
Net loss for the period (15,126,490) (15,126,490)
Foreign currency translation adjustment (82,202) (82,202)
------------ -------- ----------- -----------
(13,437,775) 209,609 0 8,559,689
Less shareholders' loans (490,748)
============ ======== =========== ===========
Balance at December 31, 1995 ($13,437,775) $209,609 $0 $8,068,941
============ ======== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
F-7
<PAGE>
<TABLE>
<CAPTION>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1995 1994 1993
=============================================================================================================================
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss) ($15,126,490) $3,166,356 ($2,369,084)
------------ ---------- -----------
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Special Items
Provision for write down of goodwill related to PSP
Holding, Inc. acquisition 871,289
Provision for write down of Film and CD-ROM costs 3,967,252
Provision for restructuring costs 3,655,009
Provision for reserve against investment in American
Gaming Network 2,038,750
Depreciation and amortization of fixed assets 1,892,984 1,239,829 931,682
(Gain) loss on sale of property and equipment (12,300) (189,495) 52,000
Amortization of goodwill and other intangibles 913,972 530,129 1,268,823
Amortization of films and CD-ROM cost 1,680,441 1,299,476 553,723
Amortization of library of movies 1,539,096 43,025 (25,480)
Provision for bad debts 856,666 86,973 95,000
Decrease in income tax (benefit) provision, net (570,000) (128,354)
Amortization of debt discounts and deferred financing costs 50,000 59,582
Compensation satisfied through the issuance of common stock 576,265 55,500 352,000
Charge for contributed services 72,033 277,600 115,700
Deferred compensation expense 65,553 65,553 53,904
Subscription revenues received in advance (854,304) 463,773 394,000
Minority interest 500,255
Undistributed earnings of HVC (4,198)
Other, net (13,527)
Changes in assets and liabilities (excluding the effects of
acquisitions):
Decrease (increase) in accounts receivable 390,096 (4,396,391) (1,213,821)
(Increase) decrease in prepaid expenses and other
current assets (659,270) 165,918 689,593
Decrease (increase) in deferred subscription costs 541,675 (88,213)
(Increase) in film and CD-ROM costs (2,789,928) (3,183,280) (1,055,492)
Decrease (increase) in other assets 520,143 (771,531) (378,938)
Increase (decrease) in royalties payable 431,888 (1,565,471) 1,036,729
Increase in accounts payable and accrued expenses 1,475,595 25,513 931,678
Decrease in advance (275,000)
Increase in security deposit (75,000) (160,743)
------------ ---------- -----------
Total adjustments 16,652,905 (5,790,837) 3,553,861
------------ ---------- -----------
Net cash provided by (used in) operating activities 1,526,415 (2,624,481) 1,184,777
------------ ---------- -----------
Investing activities:
Investment in subsidiaries and J.V. (3,655,881) (1,132,453) (2,869,749)
Purchase of property and equipment (5,258,323) (3,394,207) (1,633,170)
Proceeds from sale of property and equipment 9,100 781,500 177,900
Purchase of contract rights from TVN (900,000)
Purchase of rights to libraries of movies (2,341,500) (1,592,609) (45,500)
------------ ---------- -----------
Net cash used in investing activities (11,246,604) (5,337,769) (5,270,519)
------------ ---------- -----------
Financing activities:
Proceeds from issuance of common stock and detachable
warrants 31,725 2,672,106 4,856,454
Proceeds from issuance of long-term debt 13,415,000 7,220,930 1,494,980
Proceeds from sale of treasury stock 125,665
Additional capital contribution in connection with
the merger of AEC 1,165,284
(Increase) decrease in loans receivable from related
parties (1,381,329) 360,375 (251,133)
Repayment of long-term debt (2,434,001) (3,386,704) (1,375,202)
Distribution to former shareholders of SEG (26,400) (218,000)
Payment of deferred financing and acquisition costs 10,064
Dividends paid to minority shareholders of HVC (848,304)
------------ ---------- -----------
Net cash provided by financing activities 9,604,995 7,309,352 4,517,163
------------ ---------- -----------
Net increase (decrease) in cash and cash
equivalents (115,194) (652,898) 431,421
------------ ---------- -----------
Cash and cash equivalents, beginning of the year 1,598,282 2,251,180 1,819,759
============ ========== ===========
Cash and cash equivalents, end of the year $1,483,088 $1,598,282 $2,251,180
============ ========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $1,322,557 $358,252 $337,737
============ ========== ===========
Income taxes $1,256,398 $916,636 $128,766
============ ========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
F-8
<PAGE>
<TABLE>
<CAPTION>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
Years Ended December 31, 1995 1994 1993
===================================================================================================================
Supplemental schedule of non-cash investing and
financing activities
<S> <C> <C> <C>
Capital Lease Obligations (Note 7) $60,126,787
Fair market value of 50,000 and 15,000 shares
issued to purchase foreign library rights in 1993 and
1995, respectively $108,750 $200,000
Fair market value of shares issued as
compensation for services rendered by a consultant $37,500 $25,961
Acquired investment in AGN through issuance of
notes payable $740,000
Distributions to former shareholders in the form
of property and equipment and the eliminations
of amounts owed from shareholders $454,200
Issuance of 177,000 common shares to senior
management of which, $203,550 was recognized as
compensation expense at December 31, 1995 $1,526,625
Acquired 100,000 shares of Multimedia Games'
common stock through issuance of a note payable $200,000
Acquired equipment through the issuance of a note
payable $38,553 $215,927
Acquired rights to a library of movies through
trade debt $112,500
Convertible debentures and accrued interest
converted into GPPV's common shares $419,000
Deferred acquisition costs reclassified to
investment in HVC upon the consummation of the acquisition $223,122
Fair market value of 582,820 common shares in
1994 and 200,004 in 1993 issued in connection with the
acquisition of HVC, Ltd. $5,601,133 $1,000,000
Fair market value of 12,500 common shares issued
in connection with the purchase of PSP
Communications, Inc. $93,750
Fair market value of 125,000 common shares issued
in connection with the purchase of PSP Holding, Inc. $953,125
Fair market value of 69,000 shares issued to
obtain the services of a financial advisor with respect
to purchasing future shares of HVC $438,437
Issued common stock as compensation to CPV officers $340,000
Liabilities assumed from the purchase of PSP Holdings $75,000
Liabilities assumed from the purchase of HVC Ltd. $342,278
Notes receivable forgiven in connection with the
purchase of PSP Holdings and PSP Communications $106,298
Foreign currency translation adjustment ($82,202) $315,415 ($23,604)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
F-9
<PAGE>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. ORGANIZATION
Graff Pay-Per-View Inc. and its subsidiaries (collectively "Graff" or the
"Company") is a diversified media entertainment company which owns and operates
television networks in North America and Europe, provides telecommunications and
television production services principally to the pari-mutuel wagering industry,
produces and distributes television programs and motion pictures and together
with partners, is developing emerging video delivery systems. Certain activities
have been curtailed as a result of the restructuring (Note 12).
Formed in 1987, the Company is a leading provider of pay-per-view
entertainment networks. The Company operates and distributes SPICE and THE ADAM
& EVE CHANNEL (collectively, the "SPICE Networks"), two domestic pay-per-view
programming services with access to over 18.3 million cable, direct-to-home
("DTH") and direct broadcast satellite ("DBS") subscribers. In Europe, the
Company operates and distributes two subscription networks, THE ADULT CHANNEL
("TAC") and EUROTICA which have approximately 172,000 and 7,000 subscribers,
respectively. In addition, the Company holds a majority interest in a
partnership which owns and operates CABLE VIDEO STORE ("CVS"), a domestic hit
movie pay-per-view service with access to approximately 2.5 million subscribers
and THE HOME VIDEO CHANNEL, a subscription movie service in the United Kingdom
with approximately 71,000 subscribers. Through its wholly-owned subsidiary
Spector Entertainment Group, Inc. ("SEG"), the Company is the full service
turnkey provider of telecommunications, television production and related
services to the pari-mutuel wagering, sports, entertainment, and other
industries.
In 1995, approximately 44% of total consolidated revenues was from the
United States and the United Kingdom cable operators, 28% of total revenue was
from the DTH market and 28% of the total revenue was from worldwide programming
distribution and other sources.
The Company experienced a loss of approximately $15.1 million in the year
ended December 31, 1995. The Company analyzed all its business units and
determined in December 1995 that certain actions had to be taken to conserve
cash and to return to profitability. These actions included the following:
ceasing production of and distribution of movies and television programs and
write-down of approximately $4.0 million of accumulated film and CD-ROM costs
(Note 4); suspending distribution of its hotel/motel pay-per-view technology
related to Guest Cinema and writing down associated goodwill of approximately
$0.9 million (Note 2); ceasing the Company's involvement in a venture to develop
and promote high stakes proxy play Class II tribal bingo games and writing off
its investment in the joint venture of approximately $2.0 million (Note 2). The
Company also reviewed all of its operations and restructured its operating units
to reduce overhead and labor costs, resulting in a charge for restructuring of
approximately $3.7 million (Note 13).
On March 6, 1996 the Company entered into a partnership with WilTech Cable
Television, Inc. ("WCTV"), a subsidiary of The Williams Companies, Inc. to
operate CVS, and plans to transition the network to an enhanced pay-per-view
network employing video file servers. WCTV has committed to advance
approximately $2.6 million in cash and credit to the
F-10
<PAGE>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
joint venture for working capital and product development and has an option to
purchase up to 80% of the joint venture. WCTV currently owns 25% of the joint
venture.
Management believes that theses actions and certain other reductions in
overhead and labor costs will improve cash flows and operating results.
2. ACQUISITIONS AND JOINT VENTURES
Spector Entertainment Group
On August 31, 1995, pursuant to a Merger Agreement and Plan of
Reorganization by and among SEG, Edward M. Spector, the Company and a
newly-formed wholly-owned subsidiary, the subsidiary 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 "Spector
Merger"). After the Spector Merger, Edward M. Spector was elected to the
Company's Board of Directors. The former SEG shareholders received in the
Spector Merger an aggregate of 700,000 shares (the "Shares") of the Company's
common stock, par value $.01 ("common stock"). This transaction was accounted
for as a pooling of interest whereby the financial statements for all prior
periods to the combination were restated to reflect the combined operations. On
October 1, 1995, TX Media was issued 18,940 shares of the Company's common stock
with a market value of $7.25 for a finder's fee in connection with the SEG
Merger.
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. This partnership was
formed to distribute information, news and other programming using a proprietary
point to multi point 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 no less than
100,000 shares of the Company's common stock and no more than 300,000 shares of
the Company's common stock plus the number of shares equal 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 as defined for the number
of shares of common stock as determined under the foregoing formula. As of
December 31, 1995, the Company has not exercised its option and the UTI
shareholders have not exercised their put. If the put provided for in this
letter agreement is exercised, the Company would be obligated to issue a minimum
of 100,000 shares of the Company's common stock, at a fair market value of
$463,00 as of December 31, 1995. The technology acquired would then be amortized
up to a period of 7 years.
F-11
<PAGE>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
SEG leases office space from Margate Associates, a general partnership
wholly-owned by the former SEG stockholders. The lease, which expires May 31,
2003, currently provides for monthly payments of $18,100 through May, 1996,
increasing thereafter. This transaction was entered into prior to the SEG
Merger.
SEG leases certain operating equipment from Sportsat II, Ltd. ("Sportsat"),
a limited partnership wholly-owned by a former stockholder of SEG. The lease
expires on December 31, 1999 and the monthly lease payment is $12,500. This
transaction was entered into prior to the SEG Merger.
Adam & Eve Communications, Inc.
On April 13, 1995, pursuant to a Merger Agreement and Plan of
Reorganization Adam & Eve Communications, Inc. ("AEC") merged with and into
SPICE (the "AEC Merger"). Prior to the AEC Merger, AEC owned and operated The
Adam & Eve Channel, the third largest adult pay-per-view network in the United
States with approximately three million addressable cable homes and over two
million DTH satellite users. In consideration of the AEC Merger, the AEC
shareholders received 820,000 shares of the Company's common stock. This
transaction was accounted for as a pooling of interest whereby the financial
statements for all prior periods to the combination were restated to reflect the
combined operations.
During the first quarter of 1995, former shareholders of AEC provided the
Company with management, consulting accounting and advisory services free of
charge. The Company has recorded a charge of $46,300 to operations and a
corresponding increase to additional paid-in capital for the cost of these
services for the year ended December 31, 1995.
The results of operations for 1995 were restated to reflect the operating
results of AEC and SEG, which were acquired in 1995, for the period from January
1, 1995 to the date of consummation of the acquisitions. AEC resulted in the
restatement of revenue of $1,002,819 and a net loss of $44,089. SEG resulted in
the restatement of revenue of $4,890,089 and a net income of $374,011.
The following reconciles revenue and earnings as previously reported by the
Company with the combined amounts currently presented in the Statements of
Operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
GRAFF
PAY-PER-VIEW AEC SEG RESTATED
INC.
------------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
REVENUE $40,359,404 $2,872,548 $7,424,364 $50,656,316
NET INCOME (LOSS) $3,800,118 ($846,633) 212,871 3,166,356
EARNINGS PER SHARE -
PRIMARY $0.37 $0.27
WEIGHTED AVERAGE OF
NUMBER OF SHARES
OUTSTANDING - PRIMARY 10,389,359 820,000 700,000 11,909,359
</TABLE>
F-12
<PAGE>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993
GRAFF
PAY-PER-VIEW AEC SEG RESTATED
INC.
------------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
REVENUE $20,527,725 0 $6,834,396 $27,362,121
NET INCOME (LOSS) ($2,273,484) ($320,180) $224,580 ($2,369,084)
EARNINGS PER SHARE -
PRIMARY ($0.31) ($0.26)
WEIGHTED AVERAGE OF
NUMBER OF SHARES
OUTSTANDING - PRIMARY 7,433,809 820,000 700,000 8,953,809
</TABLE>
The Home Video Channel Limited
On January 22, 1993, the Company entered into an Investment and Option
Agreement (the "Agreement") with The Home Video Channel Limited ("HVC"), a
corporation registered in England and Wales.
Pursuant to the Agreement, the Company acquired 10,001 shares of HVC, a 25%
interest, for $2,000,000 in cash and 200,004 shares of the Company's common
stock valued at $1,000,000. On December 16, 1993, the Company acquired an
additional 10,399 shares, constituting an additional 26% interest in HVC for
$1,458,000 in cash. On December 27, 1994, the Company purchased 19,600 shares
constituting the remaining 49% interest in HVC for $1,132,000 in cash and
582,820 shares of the Company's common stock valued at $5,600,000. The Company
is now the sole stockholder of HVC.
CPV Productions, Inc.
On May 27, 1994, the Company acquired all of the outstanding common stock
of CPV Productions, Inc. ("CPV") and its wholly-owned subsidiary, Magic Hour
Productions, Inc. ("MH") in exchange for 845,000 shares of the Company's common
stock in a business combination accounted for as a pooling of interest.
Historical financial statements have been restated to include CPV.
Guest Cinema, Inc.
In January 1994 the Company acquired through the merger of PSP Holding,
Inc. ("PSP") into its wholly-owned subsidiary, Guest Cinema, Inc., a hotel/motel
pay-per-view system. The
F-13
<PAGE>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
Company suspended distribution of this system because the Company projects that
the technology will not generate future cash flows sufficient to support its
investment. The Company has incurred an approximate $0.9 million expense
attributable to the write-down of goodwill created on the acquisition of PSP.
American Gaming Network, J.V.
Pursuant to a joint venture agreement dated June 28, 1995, the Company
formed American Gaming Network, J.V.("AGN") with TV Games, Inc., a wholly-owned
subsidiary of Multimedia Games, Inc. ("MMG"), a publicly held company in the
business of gaming, to develop and promote high stakes proxy play Class II
tribal bingo games and other interactive gaming products. The Company invested
$1,370,000 in AGN. It was envisioned that if the parties agreed on a business
plan, the Company would provide or arrange for additional funding.
On December 11, 1995 the parties executed a letter agreement modifying the
Joint Venture Agreement. The parties were unable to agree on a strategy or a
business plan for the next twelve months. The parties are currently in
negotiations to settle their differences. There are no assurances that the
Company will recoup its investment in AGN and, therefore, has written off its
investment in 1995.
The Company issued a $275,00 note in connection with the purchase of 100,00
shares of MMG's stock.
MMG's stock is traded on NASDAQ and there is no assurance that the shares
the Company owns will be registered or will have a buyer in the near future. The
Company has written off the investment in MMG in 1995.
TeleSelect B.V.
The Company, Philips Media B.V. ("Philips") and Royal PTT Netherlands NV
("KPN") established TeleSelect B.V. ("TeleSelect"), a Netherlands joint venture,
to create joint ventures with European cable operators to enable them to provide
conditional access services such as pay-per-view, near video on demand and
electronic retailing to their subscribers. On April 3, 1996 the Company sold
its TeleSelect interest to Philips and KPN for approximately $3.2 million,
which was equal to the interest's net book value.
F-14
<PAGE>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions
have been eliminated. Investments in which the Company has less than 20%
ownership interest have been accounted for under the cost method of accounting.
Risks and Uncertainties
The accompanying financial statements have been prepared assuming that the
Company will be able to meet its obligations in the ordinary course of business.
The Company has incurred a $13,224,358 loss from operations, of which
$10,532,301 is of a non-recurring nature. In addition, the Company's revolving
credit line amounting to $14,880,000 at December 31, 1995 matures January 2,
1997(see Note 6). Although the Company does not currently have the resources
available to meet this obligation, management is presently seeking to
restructure its principal financial obligations. Management believes that the
actions taken (see Note 1) and certain planned reductions in overhead and labor
costs will contribute towards achieving improved cash flows and operating
results.
The Telecommunication Act of 1996 (the "Act") contains certain provisions
which may adversely impact the Company. The Act would significantly limit the
hours of broadcast of sexually explicit programming and adversely affect the
SPICE Networks. The SPICE Networks account for a significant portion of the
Company's revenues and a high percentage of its income from operations and cash
flows. The Company, among others, has requested and was granted a temporary
restraining order enjoining enforcement of the Act. If the Act is enforced, the
Company's revenues, operating income and cash flows will be adversely affected.
The amount of the reduction depends on several factors and is impossible to
determine at this time.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
F-15
<PAGE>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
Concentration of Credit Risk
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and trade receivables.
The Company's trade receivables are from a broad base of cable operators
and various pari-mutuel establishments. The Company routinely assesses the
financial strength of these debtors. Accordingly, concentration of credit risk
is limited. The Company's cash is deposited in major banks, thereby limiting
credit risk.
Valuation of Long-Term Assets
The Company periodically accesses the possible impairment of its long-term
assets by comparing the sum of the undiscounted projected future cash flows
attributable to each business unit to the carrying value of the assets of that
business unit. Projected future cash flows for each business unit are estimated
for a period approximating the remaining lives of that business unit's
long-lived assets, based on earnings history, market conditions and assumptions
reflected in internal operating plans and strategies.
Cost in Excess of Net Assets Acquired (Goodwill)
This represents the cost over the fair value of net assets acquired in
business combinations accounted for as a purchase. This asset is generally being
amortized on a straight line basis over periods of up to 20 years. Goodwill is
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying value amount may have been impaired. If the sum of the future
cash flows is less than the carrying amount of the asset, a loss is recognized.
Property and Equipment
Property and equipment, including major capital improvements, are recorded
at cost. The cost of maintenance and repairs is charged against results of
operations as incurred. Depreciation is charged against results of operations
using the straight line method over the estimated useful lives of the related
assets. Equipment leased under capital leases are amortized over the lives of
the respective leases. Improvements to leased property are amortized over the
life of the lease or the life of the improvement, whichever is shorter. Sales
and retirements of depreciable property and equipment are recorded by removing
the related cost and accumulated depreciation from the accounts. Gains or losses
on sales and retirements of property and equipment are reflected in results of
operations.
F-16
<PAGE>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
Revenue Recognition
Pay-per-view revenues are recognized in the periods in which the films or
events are aired by the cable systems which have license agreements with the
Company.
Subscription revenues are deferred and amortized over the life of the
subscription. At December 31, 1995 and 1994 deferred subscription revenues were
$2,336,952 and $3,191,256, respectively.
Deferred subscription costs of $511,368 and $1,053,043 at December 31, 1995
and 1994, respectively, are deferred and amortized over the life of the
subscription.
CPV recognizes revenues in accordance with Statement if Financial
Accounting Standards ("FFAS") No. 53, Financial Reporting by Producers and
Distributors of Motion Picture Films. Revenue is recognized when films rights
are distributed. CPV recognizes revenue from the sale of video cassettes and
CD-ROMs when units are shipped.
SEG recognizes revenue when services are performed. A substantial part of
SEG's revenues are generated under long-term contracts with remaining terms from
1 to 7 years. SEG provides services for all the customers' scheduled events
under these non-cancelable contracts for the term of the contract.
Producer Royalties
The Company has entered into contractual agreements with producers or film
makers in order to obtain the rights to license films or events to the cable
systems, home backyard satellite dish market and hotels. The producer agreements
require that royalties be paid on the basis of either a percentage of the
revenues ("the producer royalty 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.
Amortization of Film and CD-ROM Costs
Film and CD-ROM costs are amortized using the income forecast method.
Net Income (Loss) per Share:
The computations of primary and fully diluted earnings (loss) per share are
based upon the weighted average number of shares outstanding during the periods
presented, after giving effect to the potential dilutive effect, if any, of
common stock equivalents and excludes those
F-17
<PAGE>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
securities whose conversion, exercise or other contingent issuance would have
the effect of increasing the earnings-per-share amount.
Foreign Currency Translation
Assets and liabilities in foreign currencies are translated into United
States dollars at the exchange rate existing at the balance sheet date. Revenues
and expenses are translated at average rates for the period. The net exchange
differences resulting from these translations are recorded as a separate
component of stockholders' equity. The excess cost over the Company's share in
the net book value in the foreign investee has been considered as a foreign
currency denominated asset in applying Statement of Financial Accounting
Standards No. 52, "Foreign Currency Translation".
Income Taxes
The Company uses the liability method of accounting for income taxes, as
set forth in Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes". Under this method, deferred income taxes, when required, are
provided on the basis of the differences between the financial-reporting and
income-tax bases of assets and liabilities at the statutory rates enacted for
future periods.
Reclassifications
Certain amounts for previous years have been reclassified to conform with
the 1995 presentation.
4. FILM AND CD-ROM COSTS
Film and CD-ROM costs consists of the following:
DECEMBER 31, 1995 1994
- -----------------------------------------------------------------------------
Films and CD-ROMs released $8,071,172 $5,007,082
Films and CD-ROMs not released 290,168 465,786
Films and CD-ROMs in process 0 98,544
---------- ----------
8,361,340 5,571,412
Less Amortization 3,994,088 2,313,647
Reduction to net realizable value 3,967,252
---------- ----------
400,000 3,257,765
Less current portion 400,000 941,459
========== ==========
Long-term portion $0 $2,316,306
========== ==========
F-18
<PAGE>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
Prior to the restructuring, the Company created, produced and distributed
movies and television programs. The Company has suspended production of movies
due to current capital requirements. The Company will continue to license and
distribute its library. The Company has valued the library based on undiscounted
projected future cash flows at $400,000.
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Useful Lives in Years
---------------------
Satellite transponders 12 $58,663,078 $0
Equipment 5-10 14,642,291 9,897,813
Furniture and fixtures 7 830,619 517,813
Leasehold improvements Life of lease or shorter 2,703,157 1,111,593
----------- -----------
76,839,145 11,527,219
Less, accumulated
depreciation and
amortization 6,068,619 4,246,019
=========== ===========
$70,770,526 $ 7,281,200
=========== ===========
</TABLE>
Certain of the aforementioned equipment having a net book value of
$60,260,366 and $255,511 is collateral for the equipment loans and capital
leases at December 31, 1995 and 1994, respectively.
All of the assets of SEG including Property and Equipment having a net book
value of $4,214,380 and $4,154,722 is collateral for the loans from Imperial
Bank at December 31, 1995 and 1994, respectively.
6. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31, 1995 1994
------------------------------------------------------------
9.9% note payable $ 637,500 $ 862,500
Revolving credit line(a) 14,880,000 2,565,000
10% note payable 130,052 175,356
11% note payable 125,000 125,000
11% note payable 54,173
8% note payable(b) 178,122 178,122
8.75% note payable 776,326
Notes payable(d) 2,711,456 2,887,500
Notes payable(e) 775,000
----------- ----------
19,437,130 7,623,977
Less current portion 2,540,444 4,432,949
----------- ----------
Long-term portion $16,896,686 $3,191,028
=========== ==========
F-19
<PAGE>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
The aggregate principal payments of the aforementioned long-term debt
maturing in each of the year's subsequent to December 31, 1995, including
estimated payments on debt with contingent terms, are as follows:
Years Ending
December 31, Payment
------------ -----------
1996 $ 2,540,444
1997 15,451,959
1998 1,357,933
1999 86,794
-----------
Total $19,437,130
===========
(a) On October 21, 1994 the Company entered into a loan agreement with
Midlantic National Bank N.A. ("Midlantic"). The loan agreement includes a
term loan with a principal sum of $900,000 and a revolving credit line of
$15,000,000, of which $120,000 was available on December 31, 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% as selected by
the Company at the time of each draw-down. Interest payments are made
quarterly and the revolving credit line will expire on December 31, 1996.
On December 31, 1995 the interest rate was 8.625%. The term loan and
revolving credit line are collateralized by the stock of the Company's
subsidiaries excluding SEG.
The Company violated certain financial covenants under the loan agreement
as of December 31, 1995. Pursuant to the Third Amendatory Agreement dated
March 29, 1996, Midlantic waived these violations on March 29, 1996,
eliminated most of the financial covenants for the balance of the loan's
term and extended the term of the loan until January 2, 1997.
Under the two covenants of the Third Amendatory Agreement, the Company must
maintain a consolidated net worth of $6,750,000 at December 31, 1995,
$5,750,000 from January 1, 1996 through June 29, 1996 and $6,000,000
thereafter and maintain certain levels of cash flow, as defined.
F-20
<PAGE>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
(b) Prior to the acquisition of CPV, a former shareholder of CPV and officer of
the Company, provided loans to CPV to fund its working capital needs. The
loan balance and accrued interest of $206,720 at December 31, 1995 is
scheduled for payment in 1996, along with any additional accrued interest
expense.
(c) 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. Approximately $776,000 were repaid by
AEC in March and September of 1995. Approximately $1,165,000 of these loans
and accrued interest were contributed to capital for the year ended
December 31, 1994 and the balance of accrued interest of $25,733 was
contributed to capital in 1995.
(d) Notes payable to Imperial Bank ("Imperial") have a remaining principal
balance of $2,711,456 as at December 31, 1995. The loans require monthly
principal payments of $75,685 and bear interest at Imperial's prime rate
plus 2%. The notes are collateralized by all of the assets of SEG and are
guaranteed by the Company. The notes have restrictive covenants that
require SEG to meet certain financial ratios, maintain certain tangible net
worth and restrict the payment of dividends.
The Company violated certain financial covenants under the note payable
agreements as of December 31, 1995. The Company has received a waiver on
April 10, 1996 of these violations as of December 31, 1995 and Imperial has
revised the existing covenants and was granted a 5 year warrant to purchase
20,000 shares of the Company's common stock at $3.125 per share.
(e) The Company issued a $500,000 note in connection with a joint venture in
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 does not expect to realize any positive cash flow from AGN and has
classified all of the note as long-term, maturing June, 1998.
The Company issued a $275,000 note in connection with the purchase of
100,000 shares of MMG stock at $2.75 per share. The $275,000 note 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").
7. OBLIGATIONS UNDER CAPITAL LEASES
Minimum annual rentals under Capital leases for the five years subsequent to
1995 and in the aggregate are as follows:
F-21
<PAGE>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
DECEMBER 31, 1995
1996 $ 8,371,462
1997 8,139,432
1998 8,009,574
1999 7,620,000
2000 7,620,000
Thereafter 53,340,000
----------
Net minimum lease
payments 93,100,648
Less amount representing
interest (32,892,150)
-----------
Present value of minimum
lease obligations 60,208,318
Current portion
of lease obligations 3,978,024
----------
Long term portion of
lease obligations $56,230,294
===========
(a) During 1995, the Company entered into a noncancelable lease agreement for
five transponders on the AT&T satellite Telestar 402R for a monthly payment
of $635,000. The term of the agreement is for a useful life of the
satellite's geo-stationary orbit, which is currently estimated to be twelve
years. Included in property and equipment is an asset of $58,663,078 equal
to the discounted lease payments using a discount rate of 8%.
(b) On August 1, 1995, the Company entered into a non-interest bearing lease
for approximately $2,100,000 of equipment. The capital lease provides for
an initial $562,727 payment and 35 monthly payments of $43,286. The Company
has discounted the lease payment using a discount rate of 5%. The Company
paid a portion of the initial payment and a monthly payment and has not
made any further payments towards this lease due to the supplier's failure
to deliver all of the leased equipment.
8. CAPITAL TRANSACTIONS
During May 1995, the Company granted to several key executives 177,000
restricted shares of common stock ("Restricted Shares") for future services
subject to shareholders approval which will be requested at the 1996 annual
shareholders' meeting. The Restricted
F-22
<PAGE>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
Shares are non-transferable with such restriction lapsing in five years. The
Company recorded unearned compensation for the portion of shares not yet vested
and will recognize such amount as an expense on a pro rata basis over five years
as the restriction lapses. The unamortized balance of unearned compensation at
December 31, 1995 of $1,323,074 has been included as a reduction in
stockholders' equity.
On July 1, 1993 Pay-Per-View International, Inc. ("PPVI"), a wholly-owned
subsidiary of the Company, entered into an agreement with Coastline Films and
CPV Productions, Inc. ("CPV") to license 200 feature length motion pictures for
ten years. In consideration for the license, the Company issued 37,500 shares of
common stock to Coastline Films. As additional consideration, PPVI agreed to
make certain cash payments to CPV and Coastline Films if PPVI's subscriber base
reached certain thresholds. On August 30, 1995, PPVI entered into a Modification
and Substitution Agreement with Coastline Films. Coastline agreed that no
further cash payments would be required in exchange for the Company's issuance
of an additional 15,000 shares of common stock to Coastline Films. The parties
also agreed to reduce the number of films from 200 to 150 and to extend the
terms of the film licenses from 10 years to perpetuity.
On December 26, 1994 the Company issued 5,000 shares of its common stock to
a consultant for services rendered.
On November 8, 1993 the Company issued 5,000 shares of its common stock to
a consultant in settlement of a consulting agreement.
On February 1, 1993, the Company issued 337,980 shares of common stock to
an employee in payment of services rendered by him to CPV in the amount of
$340,000.
In 1992, as part of a $4 million private placement equity offering, 900,000
shares were issued in 1993 valued at $3.33 per share.
F-23
<PAGE>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
Warrants:
On December 8, 1994, the Company granted 100,000 warrants exercisable at
$12.03 to Midlantic Bank, N.A. in connection with a revolving credit line. These
warrants were subsequently canceled and reissued at an exercise price of $3.00.
These warrants expire on December 8, 2004.
During May 1994, the Company granted 3,750 warrants at a purchase price of
$6.50 to three individuals in connection with an unsecured $125,000 loan (Note
5).
During January 1994, the remaining 300,900 warrants exercisable at $6.67 as
part of equity offering were exercised. Also, 85,409 of the senior secured note
warrants and 24,000 warrants were exercised.
On April 1, 1996 the Company granted Imperial Bank, 20,000 warrants with an
exercise price of $3.125 per share to purchase the Company's common stock, in
connection with the SEG term loan. These warrants will expire on April 1, 2001.
Options:
The Company has four stock option plans (the 1992, 1993, 1994 and 1995
Plans) (collectively the "Plans") for officers, employees, directors and
consultants of the Company or any of its subsidiaries and in addition a
Directors' Plan ( the "Directors' Plan"). Options granted to employees may be
either incentive stock options (ISO's) or non-ISO's; ISO's may not have an
exercise price of not less than 100% of fair market value of the Company's
common stock on the grant date and all options may not have an exercise price of
less than 110% of fair market value on the grant date in the case of options
granted to holders of 10% or more of the voting power of the Company's stock on
the date of the grant. The aggregate fair market value, as determined on the
grant date, of ISO's that may become exercisable in any one year can not exceed
$100,000. Options canceled subsequent to issuance are returned to the Plan and
are available for re-issuance as determined by the Stock Option Committee.
The options are evidenced by a written agreement containing the above terms
and such other terms and conditions consistent with the Plan as the Board/or
Committee may impose. Each option, unless sooner terminated, shall expire no
later than 10 years (five years in the case of ISOs granted to holders of 10% of
the voting power of the Company's common stock) from the date of grant, as the
Board/or Committee may determine.
The Plans in effect on December 31, 1995 and 1994 authorize the granting of
stock options to purchase an aggregate of 4,000,000 and 3,600,000 shares of the
Company's common
F-24
<PAGE>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
stock, respectively. At December 31, 1995 and 1994 there were a total of
1,213,987 and 950,901 shares remaining for future grants under the four
plans.
The Directors' Plan authorizes the automatic annual issuance to each
non-employee director of options to acquire 10,000 shares of the Company's
common stock on each December 31, at an exercise price equal to the market price
of the stock on that date. The plan was adopted in 1994 and authorizes the
granting of a total of 100,000 stock options. On December 31, 1995 and 1994
there were a total of 60,000 and 80,000 shares available for future grant under
this plan.
The Company granted options to acquire 40,000 shares outside the
aforementioned plans to consultants and other outside service providers to the
Company at an exercise price equal to the market price of the Company's common
stock on each grant date.
In April 1995 Messrs. Faherty, Nolan and Graff, executive officers, each
exercised 249,585 options to acquire common stock at $0.8333 per share. The
exercise price was paid by delivery of promissory notes. In November 1995, the
Stock Option Committee granted the executives the right to rescind the option
exercise. The rescission resulted in the cancellation of the common stock and
promissory note issued upon exercise of the options. Messrs. Faherty and Nolan
were each granted 249,585 options to replace the canceled options under the 1992
Stock Option Plan. The replaced options are currently exercisable and have an
exercise price of $3.875 per share.
On December 11, 1995 the Company's Stock Option Committee elected to
reprice a total of 1,012,300 stock options, 349,050, 559,250 and 104,000 from
the 1994, 1993 and 1992 plans, respectively, by canceling the old options and
issuing new options with substantially identical terms other than the exercise
price.
The 104,000 options repriced under the 1992 Stock Option Plan replaced
options held by employees on November 17, 1995 at exercise prices ranging from
$5.00 to $9.00 per share which include 36,000 options granted to Mr. Faherty.
The 559,250 options repriced under the 1993 Plan replaced options held by
employees on November 17, 1995 at exercise prices ranging from $8.00 to $10 per
share, which includes 100,000 options granted to Mr. Callaghan and 100,000
options issued to each of Messrs. Faherty and Nolan. The repriced options
represents all options granted and outstanding under the 1993 Plan held by
persons who were employees on November 17, 1995 with the exception of 100,000
options held by Mr. Graff with an exercise price of $9.00 per share. The 349,050
options reset under the 1994 replaced options held by employees on November 17,
1995 at exercise prices ranging from $8.63 to $9.25 per share which includes
11,000 options granted to Mr. Callaghan and 25,000 options issued to each
Messrs. Faherty and Nolan. The repriced options represents all options granted
and outstanding under the 1994 Plan held by persons who were employees on
November 17, 1995, with the exception of 25,000 options held by Mr. Graff with
an exercise price of $8.63 per share.
F-25
<PAGE>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
Changes in warrants and options outstanding are summarized as follows:
<TABLE>
<CAPTION>
WARRANTS OPTIONS
--------------------------- ------------------------------
EXERCISE OPTION
SHARES PRICE RANGE SHARES PRICE RANGE
------- -------------- --------- --------------
<S> <C> <C> <C> <C>
BALANCE JANUARY 1, 1993 601,470 1,974,949
GRANTED 450,000 $6.67-$10 461,000 $5.00-$9.00
EXERCISED 436,139 $.23-$6.67
CANCELED 1,800 $3.33
------- ---------
BALANCE DECEMBER 31, 1993 615,331 2,434,149
GRANTED 103,750 $6.50-$12.03 260,250 $7.75-$9.875
EXERCISED 600,331 $.08-$6.67 19,200 $3.33
CANCELED 2,100
------- ---------
BALANCE DECEMBER 31, 1994 118,750 2,673,099
GRANTED 100,000 $3.88 2,899,820 $3.88-$10.00
EXERCISED 8,200 $3.33-$7.75
CANCELED 100,000 $12.03 2,698,706 $0.83-$10.00
======= =========
BALANCE DECEMBER 31, 1995 118,750 2,866,013
======= =========
</TABLE>
At December 31, 1995, 1994 and 1993, there were 118,750, 118,750 and 615,331,
respectively, of exercisable warrants and 1,695,113, 1,335,232 and 1,056,657,
respectively, of exercisable options.
9. INCOME TAXES
The components of income tax expense (benefit) follow:
YEARS ENDED 1995 1994 1993
- --------------------------------------------------------------------------------
Current
Federal ($422,523) $ 351,303
State and Local 240,048 154,080 $101,600
Foreign 850,000 793,000
-------- ---------- --------
667,525 1,298,383 101,600
-------- ---------- --------
Deferred
Federal ($114,974)
State and Local (40,580)
--------
(155,554)
-------- ---------- --------
Total Income Taxes $667,525 $1,298,383 ($53,954)
======== ========== ========
F-26
<PAGE>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
The following is a reconciliation between the statutory federal income tax
for each of the past three years and the Company's effective tax rate:
YEARS ENDED 1995 1994 1993
- --------------------------------------------------------------------------------
Income tax provision (benefit) at federal
statutory rate (34%) (34%) (34%)
State and local income taxes net of
federal tax benefit (0%) 2% 3%
Foreign Income Taxes 2% 15%
Foreign Income, excluded, net of
federal tax benefit (2%) (13%)
Effect of a change in the tax rate
used to measure deferred income taxes (4%)
Amortization of Goodwill 4% 4%
Non-deductible business meals and entertainment 0% 1% 5%
(Decrease) increase due to the
change in the valuation allowance 22% (13%) 27%
Other items 3% (5%)
----- ----- -----
Effective tax rate (5%) 25% (3%)
===== ===== =====
No Federal income taxes have been provided on approximately $1,330,000 of
undistributed earnings of the Company's foreign subsidiary. These earnings are
expected to be reinvested indefinitely. Such earnings would become taxable upon
the sale or liquidation of the foreign subsidiary or upon the remittance of
dividends. The foreign income subject to foreign taxes was approximately
$2,110,000 in 1995.
As of December 31, 1995, the Company has available, for Federal income tax
purposes, unused net operating loss carryforwards of $352,000 which may provide
future tax benefits, expiring 2007. Due to a change in control of the Company
that occurred in September 1990 the net operating loss carryforward is subject
to an annual limitation of approximately $27,000.
The components of the net deferred tax assets are as follows:
YEARS ENDED 1995 1994
- --------------------------------------------------------------------------------
Deferred tax assets:
Bad debts $502,500 $ 127,656
Deferred compensation expense 184,667 60,888
Net operating loss carry-forwards 162,123 162,124
Foreign tax credit carry-forward 64,700
Accrual for restructuring charges 3,506,241
Non-deductible capital losses 937,825
Valuation allowance (4,771,327) (232,677)
---------- ---------
Total deferred tax asset 522,029 182,691
---------- ---------
Deferred tax liability
Accrual versus cash method (14,353) 28,691
Tax depreciation in excess of book (444,901) 23,000
Other 131,000
Undistributed earning of foreign investee (62,775)
--------- ---------
Total deferred tax liability ($522,029) $ 182,691
--------- ---------
Net deferred tax assets - -
--------- ---------
F-27
<PAGE>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
10. COMMITMENTS AND CONTINGENCIES
Employment Agreements
Mr. Faherty is employed by the Company as its Chairman and Chief Executive
Officer pursuant to an amended Employment Agreement effective January 1, 1996.
The agreement, as presently amended, provides for a base salary of $350,000,
with any adjustments determined annually. The agreement has a six year term,
subject to automatic renewal for additional six year terms if not terminated
each year. The agreement provides for loans from the Company of up to $215,000
plus accrued interest. The agreement also provides for certain benefits
including annual retirement benefits of not less than $100,000 (implemented by
the Deferred Compensation Agreement described below). Mr. Faherty has waived his
rights to a reimbursement for automobile costs.
Mr. Spector is employed by the Company as a President and Chief Operating
Officer pursuant to an employment agreement effective September 1, 1995 and
expiring on August 31, 1998. The agreement provides for a base salary of
$350,000, with annual increases of not less than 5%. The Company has an option
to extend the employment agreement during the third year of employment. During
the term of employment he shall be nominated as a member of the Board of
Directors of the Company if he, his family members, and affiliated trusts own an
aggregate of at least 400,000 shares of the Company's common stock. At December
31, 1995, Mr. Spector, his family members, and affiliated trusts beneficially
owned 700,000 of the Company's common stock.
Effective January 1, 1996, Messrs. Graff and Nolan have resigned as
officers of the Company. Mr. Graff will receive $250,000 per annum payable in
equal installments during the period January 1, 1996 through December 31, 1999.
Mr. Nolan will receive $350,000 per annum payable in equal installments
beginning January 1, 1996 through December 31, 1998. In the event the Company
completes financing in excess of $20 million, each individual may require
prepayment of their agreements. Both individuals have loans outstanding with the
Company which are required to be repaid during 1997 in equal monthly
installments. These costs are accrued as restructuring costs as of December 31,
1995.
During 1995, Messrs. Faherty, Graff and Nolan borrowed $215,000, $24,000
and $82,000, respectively from the Company. Pursuant to the Fourth Amendment to
Mr. Faherty's Employment Agreement, Mr. Faherty will repay his loan by December
31, 1996. Pursuant to the Separation Agreements entered into between the Company
and each of Messrs. Nolan and Graff, their loans will be paid in monthly
installments beginning January 1997 (refer to Note 8). All of
F-28
<PAGE>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
the loans bear interest at the same rate the Company pays on its loan from its
senior secured lender. At December 31, 1995, the interest rate was 8.625%.
Mr. Callaghan is employed by the Company as CFO and Executive Vice
President pursuant to an employment agreement effective September 1, 1993, for a
three-year term. Under this agreement he has a base salary of $220,000, with
annual increases of no less than 5% and reimbursement of automobile costs. Mr.
Callaghan waived his rights to both the 5% annual increase and his automobile
expenses in 1995.
Each of these agreements prohibits the executive from competing with the
Company for a specified period after termination of employment.
Deferred Compensation
During December 1992, the Board of Directors approved deferred compensation
agreements for three key executives. Under the agreements, the Company is
obligated to provide each executive or his beneficiaries, during a period of 15
years after the employee's death, disability or retirement, annual benefits
ranging from $50,000 to $100,000. The estimated present value of future benefits
is accrued over the period from the effective date of the agreements (October 1,
1992) until the expected retirement dates of the participants. As of December
31, 1995, $50,000 has been accrued as part of restructuring costs. The expense
incurred for the year ended December 31, 1995, 1994 and 1993 amounted to
$65,554, $65,554 and $53,902, respectively.
Leases and Service Contracts:
HVC has a contract with SES, the owner of the Astra Satellite providing
transmission through January 1997 for $100,000 per month. The footprint of the
satellite covers Western Europe.
Danish Satellite T/V a/s ("DSTV"), a wholly owned HVC subsidiary, has
entered into an agreement with TELECOM Denmark A/S on December 20, 1994 for
satellite and uplink services on its Eutelsat II F1 Satellite. This agreement
continues through the life of the satellite, estimated to continue through at
least April 30, 1996.
TVN is currently responsible, through a contract with Four Media Company
("4MC")for the Company's domestic uplink and playback services which expired on
April 1, 1996. The Company has contracted with 4MC to provide domestic playback
and uplink services.
F-29
<PAGE>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
The Company leases its office facilities, satellite transponders and uplink
and certain equipment. As of December 31, 1995, the aggregate minimum rental
commitments under noncancelable leases were approximately as follows (Note 2):
Satellite
Years Ending Office Facilities Transponder
December 31, Total and Equipment and Uplink
------------ ---------- ----------------- ----------
1996 $2,844,952 $1,125,666 $1,719,286
1997 1,529,019 1,018,345 510,674
1998 993,688 960,288 33,400
1999 919,975 919,975
2000 751,328 751,328
Thereafter 1,887,322 1,887,322
---------- ---------- ----------
$8,926,284 $6,662,924 $2,263,360
========== ========== ==========
Total expense under operating leases amounted to $9,780,184, $9,704,146, and
$6,119,569 for the years ended 1995, 1994 and 1993, respectively.
Contracts with Producers
The Company has entered into contracts with several major motion picture
studios for the content on CVS. The Company has contributed all contract rights
associated with CVS to the CVS partnership on March 1, 1996 (Note 1). The terms
range from one to two months to obtain the rights to exhibit the movies or
events licensed. Payment terms are based upon a percentage of the gross
revenues, usually ranging from 35% to 50%.
The CVS Network is substantially supplied by producers from major Hollywood
studios. They include Warner, Disney, Columbia, Fox, Universal, Paramount, MGM,
New Line and others.
The Spice Networks, THE ADULT CHANNEL and THE HOME VIDEO CHANNEL have
entered into contracts with producers with terms ranging from one to two years
which are on a flat fee basis. Also, the Company has contracted with several
major adult motion picture producers. These contracts allow the Company to
license world-wide pay-TV rights in perpetuity.
Contracts with Cable Systems
The Company has entered into affiliation agreements with numerous cable
systems in the United States. The contracts have terms ranging from one to ten
years with the fees to the cable systems based upon a percentage of the
subscriber gross revenues, as defined, in the respective agreements.
F-30
<PAGE>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
Contracts with pari-mutuel wagering establishments
Revenue is generated under long-term contracts with terms from 1 to 7
years. The Company provides services for these pari-mutuel wagering
establishments for the events under their non-cancelable contract for the term
of the contract.
11. SIGNIFICANT CUSTOMERS
For the year ended December 31, 1995 approximately 18% of revenues were
from two cable operators (11% and 7%) each. For the year ended December 31, 1994
approximately 20% of revenues were from two cable operators (11% and 9% each).
For the year ended December 31, 1993 approximately 31% of revenues were from two
cable company operators (17% and 14% each).
12. RETIREMENT PLAN
On January 13, 1993, the Company established a 401(k) tax deferred savings
plan (the "Plan") for all employees of the Company on March 1, 1993. Employees
are eligible to participate in the Plan after completing one year of service.
Eligible employees may elect to contribute up to 15% of their annual
compensation to the Plan, up to the maximum allowed by law. The Company declared
for 1995, 1994 and 1993, a discretionary matching contribution equal to 25% of
the amount of the salary reduction employees elect to defer, up to the first 4%
of compensation. For the year ended December 31, 1995, 1994 and 1993, the
Company incurred a 401(k) contribution expense of approximately $42,000, $19,000
and $16,000, respectively.
13. RESTRUCTURING COST
In December 1995 the Company entered into a restructuring plan for two of
its operating units and its corporate management. As part of its restructuring,
the Company has suspended all CPV film and CD-ROM productions for 1996. The
Company will continue to license CPV's film library to third parties. CPV has
terminated several employees and renegotiated employment contracts with two key
executives of CPV. The Company has recognized a charge of $655,009 in 1995 for
restructuring CPV.
During 1995, the Company has restructured one of its international
subsidiaries, Pay-Per-View International at the end of 1995. The Company has
suspended exploration of new international business opportunities. As a result
several contracted executives were terminated in 1995 at a total restructuring
cost of $300,000. The Company will still maintain and grow its adult networks
overseas.
F-31
<PAGE>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
Two executives, Mr. Mark Graff and Mr. Leland H. Nolan, have resigned as
officers of the Company effective December 31, 1995. Messrs. Graff and Nolan
have signed separation agreements (refer to Employment Agreements) which are in
force through 1998 and 1999, respectively. As a result of this restructuring,
the Company has taken a pretax charge of $3,655,010 in 1995, including the
separation costs for approximately 50 employees.
14. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1995, Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of" was issued. The statement establishes accounting standards for the
impairment of long-lived assets, such as the movie library, film and CD-ROM
costs, transportation and other equipment and will be effective for the Company
beginning with the year ending December 31, 1996. The Company does not believe
the new standard will have a material effect on the Company's financial position
or results of operations.
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" was issued. The statement requires the
computation of compensation for grants of stock, stock options and other equity
instruments issued to employees based on fair value. The compensation circulated
is to be either recorded as an expense in the financial statements or,
alternatively, disclosed. The Company anticipates it will elect the disclosure
method of complying with the new standard. Under existing accounting rules, the
Company's stock option grants have not resulted in compensation expense.
Accordingly, under the provisions of the new statement, pro forma net income to
be disclosed will be lower than net income reported in the financial statements.
15. RELATED PARTIES
Due from related parties
DECEMBER 31, 1995 1994
- -------------------------------------------------------------------
Due from officers and directors $349,068 $179,900
Due from Margate Associates 117,600
Due from Buccaneer Gaming, Inc. 399,945 106,900
Due from UTI 165,307 83,900
Due from Sportsat II, LTD. 68,747 48,000
Due from others 2,245 6,631
-------- --------
985,312 542,931
Less current portion 364,019 0
-------- --------
$621,293 $542,931
======== ========
Due from Stockholders $490,748
======== ========
F-32
<PAGE>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Page
Number(s)
---------
Schedule:
II. Valuation and Qualifying Accounts
and Reserves F-31
All other schedules are omitted since the required information is not present or
is not presented in amounts sufficient to require submission of the schedule, or
because the information required is included in the consolidated financial
statements and notes thereto.
F-33
<PAGE>
<TABLE>
SCHEDULE II
GRAFF PAY-PER-VIEW INC. and SUBSIDIARIES
VALUATION and QUALIFYING ACCOUNTS AND RESERVES
for the years ended December 31, 1995, 1994 and 1993
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- --------------------------------------------------------------------------------------------------------
Balance at Additions
Description Beginning of Charged to Costs Balance End of
Period and Expenses Deductions Period
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal year ended
December 31, 1995
Allowance for
Doubtful Accounts $336,823 $935,881 $79,215 $1,193,489
-------- -------- ------- ----------
$336,823 $935,881 $79,215 $1,193,489
======== ======== ======= ==========
Fiscal year ended
December 31, 1994
Allowance for
Doubtful Accounts $249,850 $ 98,072 $11,099 $ 336,823
-------- -------- ------- ----------
$249,850 $ 98,072 $11,099 $ 336,823
======== ======== ======= ==========
Fiscal year ended
December 31, 1993
Allowance for
Doubtful Accounts $147,350 $102,500 0 $ 249,850
-------- -------- ------- ----------
$147,350 $102,500 $0 $ 249,850
======== ======== ======= ==========
</TABLE>
F-34
Exhibit 10.66
SEPARATION AGREEMENT
SEPARATION AGREEMENT entered into as of December 31, 1995 between GRAFF
PAY-PER-VIEW, INC. (the "Company") and Leland Nolan (the "Executive").
INTRODUCTION
The parties entered into the Employment Agreement on January 1, 1992, as
amended from time to time pursuant to Amendments 1 through Amendments 3 (such
agreement as amended is referred to herein as the "Employment Agreement") and
both parties now desire to terminate the Employment Agreement and set forth
herein the terms and conditions of termination including separation payments and
benefits to the Executive.
Accordingly, in consideration of the mutual covenants and agreements set
forth herein and the mutual benefits to be derived here from, and intending to
be legally bound hereby, the Company and the Executive agree as follows:
1. Definitions. All defined terms used in this Agreement, unless otherwise
defined herein, shall have the meanings ascribed to them in the Employment
Agreement.
2. Termination of Employment Agreement and Position. Effective upon the
close of business on December 31, 1995, the Employment Agreement is terminated
in all respects except as otherwise specifically provided in paragraph 5. Except
as set forth in this Agreement, neither party shall have any claim against the
other with respect to the Employment Agreement. The Company is unaware of any
claim otherwise arising out of the employment relationship. Except (i) as
expressly provided for herein or (ii) with respect to expenses and benefits
accrued prior to December 31, 1995, neither the Company nor Executive shall have
any rights and obligations pursuant to the Employment Agreement. Executive
hereby resigns from all positions as an officer and employee of the Company and
each of its subsidiaries, as well as a director of all subsidiaries of the
Company. The Company hereby accepts such resignation. Notwithstanding the
foregoing, Executive shall remain as a director of the Company pursuant to the
provisions of paragraph 6 hereof and thereafter as a consultant pursuant to
paragraph 9.
<PAGE>
3. Separation Payment.
(a) In consideration of such termination the Company, subject to the
provisions herein, shall pay to Executive a severance payment ("Separation
Payment") in the amount of $350,000 per annum payable in equal installments
during the period January 1, 1996 through December 31, 1998. Installments of
Separation Payments shall be made at the same time executives of the Company are
paid salary which payments are currently made bi-weekly. Executive shall be
notified of any change in such salary payment policy. Any amount advanced in
1996 in excess of an installment of the Separation Payment shall be credited
against the next installments of the Separation Payments beginning November
1996.
(b) Notwithstanding the foregoing, in the event the Company or major
subsidiary completes a private or public financing in excess of $20,000,000 and
the Company is permitted to utilize the proceeds to be used for such purpose,
the Executive shall have the option to require prepayment of the Separation
Payment. The Company shall notify Executive of such completion and permission.
Such option shall be exercised in writing within twenty (20) days after notice
by the Company of the completion of the financing and receipt of all funds
thereunder. Payment shall be made within ten (10) days after the notice by the
Executive that he elects prepayment. The amount of prepayment shall be equal to
the present money value of the unpaid Separation Payment utilizing the prime
interest rate of the Company's principal bank.
(c) As used in this paragraph 3(c), the term "Compensation Payments" shall
mean the sum of (i) salary paid by the Company to Roger Faherty and (ii)
Separation Payments to Leland Nolan. In the event any principal bank or any
underwriter or placement agent requires that the aggregate Compensation Payments
to Messrs. Faherty and Nolan be reduced as a condition to making a loan,
consummating a financing, making additional advances, waiving a default of a
covenant, or agreeing not to accelerate a loan to the Company, then Executive
agrees that his Separation Payments shall be reduced as required as long as the
salary payment to Roger Faherty and Separation Payment to Leland Nolan are
reduced equally. The Company, however, shall grant Executive one five-year stock
option executed at market for each dollar that his Separation Payment is
reduced.
4. Continuation of Certain Benefits. Until December 31, 1998, the Company
shall maintain in full force and effect, for the continued benefit of the
Executive, all employee benefit plans and programs in which the Executive was
entitled to participate immediately prior to December 31, 1995 as an employee,
provided that the Executive's continued participation is possible under the
general terms and provisions of such benefit plans and programs. Other than the
Deferred Compensation Agreement and disability policy referred
<PAGE>
to hereinafter the sole benefit provided herein is the Company's health
plan. In the event that the Executive's participation in any such benefit plan
or program is barred, the Company shall arrange, at the Company's expense, to
provide the Executive with benefits substantially similar to those which the
Executive is entitled to receive under such plans and programs. The Company
shall also maintain existing disability insurance as well as the Deferred
Compensation Agreement dated October 1, 1992. At the end of the period of
coverage provided above, the Executive shall have the option to have assigned to
him at no cost and with no apportionment of prepaid premiums any assignable
insurance policy owned by the Company which relates specifically to the
Executive.
5. Survival of Certain Provisions of the Employment Agreement. The
following provisions of the Employment Agreement are incorporated herein by
reference notwithstanding the termination of such Employment Agreement.
(a) Paragraph 8(c) through 8(d) (relating to piggyback rights for the sale
of option shares acquired by Executive). The provisions of paragraphs 8(c) shall
also apply to the registration of all shares of the Company presently owned by
Executive in addition to options and shares referred to therein and the
offerings to which piggyback rights related in paragraph 8(c) shall also include
all offerings made by the Company or other senior executives or former senior
executives.
(b) Article 13 (dealing with restrictive covenants, confidentiality, etc.
set forth therein), except paragraph 13(a) shall read as follows:
Executive undertakes and agrees that until the later of June 30, 1997 or
twelve (12) months after he ceases to act as a director, he will not compete,
directly, or indirectly, or participate as a director, officer, employee,
consultant agent, consultant, representative or otherwise, or as a stockholder,
partner or joint venturer, or have any direct or indirect financial interest,
including, without limitation, the interest of a creditor, in any business
competing directly or indirectly within any geographical area in the adult
entertainment business of the Company or adult entertainment business of any of
its subsidiaries. Notwithstanding the foregoing, Executive may engage in the
business of distributing MPAA rated titles to third parties (including the
Company and its subsidiaries), for use on broadcast or pay-per-view networks and
all digital delivery platform and systems. Executive further undertakes and
agrees that during the restriction period set forth in the prior sentence, he
will not, directly or indirectly employ, cause to be employed, or solicit for
employment any of Company's or its subsidiaries' employees while employed by the
Company or Subsidiary or for a period of six (6) months thereafter.
<PAGE>
(c) Article 14. (Indemnity)
6. Director Nomination. Executive shall be nominated as a director for
election by the shareholders of the Company at the Company's 1996 annual meeting
of shareholders, and thereafter until (i) December 31, 1998, (ii) he ceases to
be the record or beneficial owner of 50% of the number of shares of the Company
he now owns, (iii) he competes directly or indirectly with the Company or its
subsidiaries, or (iv) such time as he resigns or declines to seek election as a
director.
7. Office. Executive shall be afforded the use without cost of a suitable
office at the Company's facility at 536 Broadway, New York, New York until
December 31, 1996.
8. Right of First Refusal. Until June 30, 1996, Mark Graff and Lee Nolan
together shall have the right of first refusal to purchase the Company's
playback facility on the tenth floor of the Company's facility at 536 Broadway,
New York, New York upon the same terms and conditions (including credit
worthiness) as the Company may receive from any unaffiliated third party. The
Company shall give Messrs. Graff and Nolan written notice of the terms of any
such proposal. Messrs. Graff and Nolan shall give notice of their offer and
response of such offer within ten business days after notice of such proposal.
9. No Duty, Authority, Consulting Services. Other than Executive's duties
as a director, Executive shall have no duty to provide services to the Company.
Notwithstanding the foregoing, the Company shall retain and the Executive shall
act as a consultant to the Company, without any additional monetary
consideration, for a period of five (5) years after he ceases to act as a
director. As a consultant, Executive shall perform such duties as are reasonably
assigned at mutually agreeable time and places, but Executive shall not be
required to devote more than four (4) hours per month to the Company. Other than
as specifically authorized in writing, Executive shall have no authority to act
on behalf of the Company or make any representation or commitment on its behalf.
If Executive performs any services requested in writing, he shall be paid his
authorized expenses in accordance with normal Company policy.
10. Advances. All advances (other than for business expenses) received by
Executive from the Company shall be repaid to the Company during 1997 in equal
monthly installments provided the amount of such advances shall be deducted from
any prepayment of the Separation Payment. Such outstanding advances shall bear
interest at the same rate the Company is paying to its principal lender.
<PAGE>
11. Press Releases. No release or public announcement relating to this
agreement or to Executive shall be made by the Company without the approval of
Executive which shall not be unreasonably withheld. The parties acknowledge that
the Company is a public corporation and in certain situations has the duty of
disclosure. Except as provided by law or to any proposed lender or investor,
Executive shall not disclose terms of this Separate Agreement except to the
extent such terms are publicly disclosed.
12. Return of Property. Executive shall promptly deliver to the Company all
property of the Company and its subsidiaries in its possession or control
including but not limited to all personal property, as computers and other
equipment, records, credit cards and any leased or Company owned vehicles.
13. Legal Fees. The Company will pay the legal fees and disbursements
incurred by Executive in connection with the preparation of this Separation
Agreement, provided such fees and disbursements shall not exceed $2,500.
14. Arbitration. Except for a dispute, controversy or claim relating to
Article 13 of the Employment Agreement surviving termination thereof and
incorporated herein by reference, any and all other disputes, controversies and
claims arising out of or relating to this Agreement, or with respect to the
interpretation of this Agreement, or the rights or obligations of the parties,
whether by operation of law or otherwise, shall be settled and determined by
arbitration in New York City, New York, pursuant to the then existing rules of
the American Arbitration Association ("AAA") for commercial arbitration. Any
such proceeding referred to in herein shall also determine Executive's
entitlement to legal fees. The parties covenant and agree that the decision of
the AAA shall be final and binding and hereby waive their right to appeal
therefrom. The parties further agree that judgment upon any arbitration award
may be entered in the courts of the State of New York and the United States
federal courts in said State, and the parties hereby consent to the jurisdiction
of such courts for such purposes.
15. Miscellaneous.
(a) Notices. Any Notice, demand or communication required or permitted
under this Agreement shall be in writing and shall either be hand-delivered to
the other party or mailed to the addresses set forth below by registered or
certified mail, return receipt requested or sent by overnight express mail or
courier or facsimile to such address, if a party has a facsimile machine. Notice
shall be deemed to have been given and received when so hand-delivered or after
three business days when so deposited in the U.S. Mail, or when
<PAGE>
transmitted and received by facsimile or sent by express mail properly
addressed to the other party. The addresses are:
To the Company:
Graff Pay-Per View, Inc.
536 Broadway
New York, New York 10012
To the Executive:
Leland Nolan
The foregoing addresses may be changed at any time by notice given in the manner
herein provided.
(b) Integration; Modification. This Agreement constitutes the entire
understanding and agreement between the Company, and the Executive regarding its
subject matter and supersedes all prior negotiations and agreements, whether
oral or written, between them with respect to its subject matter. This Agreement
may not be modified except by a written agreement signed by the Executive and a
duly authorized officer of the Company.
(c) Enforceability. If any provision of this Agreement shall be invalid or
unenforceable, in whole or in part, such provision shall be deemed to be
modified or restricted to the extent and in the manner necessary to render the
same valid and enforceable, or shall be deemed excised from this Agreement, as
the case may require, and this Agreement shall be construed and enforced to the
maximum extent permitted by law as if such provision had been originally
incorporated herein as so modified or restricted, or as if such provision had
not been originally incorporated herein, as the case may be.
(d) Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the parties, including their respective heirs, executors, successors
and assigns, except that this Agreement may not be assigned by the Executive.
(e) Waiver of Breach. No waiver by either party of any condition or of the
breach by the other of any term or covenant contained in this Agreement, whether
by conduct or otherwise, in any one or more instances shall be deemed or
construed as a further or continuing waiver of any such condition or breach or a
waiver of any other condition, or the breach or a waiver of any other condition,
or the breach of any other term or covenant set forth in this Agreement.
Moreover, the failure of either party to exercise any right
<PAGE>
hereunder shall not bar the later exercise thereof.
(f) Governing Law and Interpretation. This Agreement shall be governed by
the internal laws of the State of New York. Each of the parties agrees that he
or it, as the case may be, shall deal fairly and in good faith with the other
party in performing, observing and complying with the covenants, promises,
duties, obligations, terms and conditions to be performed, observed or complied
with by him or it, as the case may be hereunder; and that this Agreement shall
be interpreted, construed and enforced in accordance with the foregoing covenant
notwithstanding any law to the contrary.
(g) Headings. The headings of the various sections and paragraphs have been
included herein for convenience only and shall be considered in interpreting
this Agreement.
(h) Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
16. Continuation of Options. The Company will take such steps as reasonably
necessary so that Executive's existing options do not terminate because the
Executive is no longer an employee. Options issued under the 1992 and 1993 Stock
Option Plans shall be amended to make clear that such options shall continue as
long as Executive is a director or consultant. The Company will use its best
efforts to adopt an amendment to the 1994 and 1995 Stock Option Plans,
permitting such options to be exercised, as long as the optionee is a director
or consultant. Options held by Executive shall be amended thereby.
17. Registration Statement. The Company shall amend the existing S-3
registration statement covering Executive's shares to eliminate note 6 to the
selling stockholder table and any other provision suggesting that Executive is
only registering the shares in connection with a loan arrangement.
18. S-8. The Company has registered shares subject to its 1992, 1993 and
1994 Option Plans pursuant to Form S-8.
IN WITNESS WHEREOF, this Agreement has been executed by the Executive and
on behalf of the Company by its duly authorized officers on the date first above
written.
GRAFF PAY-PER-VIEW, INC.
<PAGE>
By: /s/ J. Roger Faherty
------------------------
Title: Chairman
/s/ Leland H. Nolan
------------------------
(Executive)
Exhibit 10.67
SEPARATION AGREEMENT
SEPARATION AGREEMENT entered into as of December 31, 1995 between GRAFF
PAY-PER-VIEW, INC. (the "Company") and Mark Graff (the "Executive").
INTRODUCTION
The parties entered into the Employment Agreement on January 1, 1992, as
amended from time to time pursuant to Amendments 1 through Amendments 3 (such
agreement as amended is referred to herein as the "Employment Agreement") and
both parties now desire to terminate the Employment Agreement and set forth
herein the terms and conditions of termination including separation payments and
benefits to the Executive.
Accordingly, in consideration of the mutual covenants and agreements set
forth herein and the mutual benefits to be derived here from, and intending to
be legally bound hereby, the Company and the Executive agree as follows:
1. Definitions. All defined terms used in this Agreement, unless otherwise
defined herein, shall have the meanings ascribed to them in the Employment
Agreement.
2. Termination of Employment Agreement and Position. Effective upon the
close of business on December 31, 1995, the Employment Agreement is terminated
in all respects except as otherwise specifically provided in paragraph 5. Except
as set forth in this Agreement, neither party shall have any claim against the
other with respect to the Employment Agreement. The Company is unaware of any
claim otherwise arising out of the employment relationship. Except (i) as
expressly provided for herein or (ii) with respect to expenses and benefits
accrued prior to December 31, 1995, neither the Company nor Executive shall have
any rights and obligations pursuant to the Employment Agreement. Executive
hereby resigns from all positions as an officer and employee of the Company and
each of its subsidiaries, as well as a director of all subsidiaries of the
Company. The Company hereby accepts such resignation. Notwithstanding the
foregoing, Executive shall remain as a director of the Company pursuant to the
provisions of paragraph 6 hereof and thereafter as a consultant pursuant to
paragraph 9.
3. Separation Payment.
(a) In consideration of such termination the Company, subject to the
provisions herein, shall pay to Executive a severance payment ("Separation
<PAGE>
Payment") in the amount of $250,000 per annum payable in equal installments
during the period January 1, 1996 through December 31, 1999. Installments of
Separation Payments shall be made at the same time executives of the Company are
paid salary which payments are currently made bi-weekly. Executive shall be
notified of any change in such salary payment policy. Any amount advanced in
1996 in excess of an installment of the Separation Payment shall be credited
against the next installments of the Separation Payments beginning November
1996.
(b) Notwithstanding the foregoing, in the event the Company or major
subsidiary completes a private or public financing in excess of $20,000,000 and
the Company is permitted to utilize the proceeds to be used for such purpose,
the Executive shall have the option to require prepayment of the Separation
Payment. The Company shall notify Executive of such completion and permission.
Such option shall be exercised in writing within twenty (20) days after notice
by the Company of the completion of the financing and receipt of all funds
thereunder. Payment shall be made within ten (10) days after the notice by the
Executive that he elects prepayment. The amount of prepayment shall be equal to
the present money value of the unpaid Separation Payment utilizing the prime
interest rate of the Company's principal bank.
(c) If during the period ending on the earlier of December 31, 1996 or the
completion of a major financing, any principal bank or any underwriter or
placement agent requires that the Severance Payment to Executive be reduced to
less than $250,000 as a condition to making a loan, consummating a financing,
making additional advances, waiving a default of a covenant, or agreeing not to
accelerate a loan to the Company, then Executive and the Company agree to
negotiate in good faith to reach an agreement with respect to the amount of
reduction and consideration and other terms therefor. In the event the Company
and Executive are unable to reach an agreement within ten (10) business days,
then they shall promptly select a mutually agreeable party to determine promptly
the amount of reduction and consideration and other terms. During the aforesaid
negotiations and determination, the Company will continue to pay Executive
Severance Payments.
4. Continuation of Certain Benefits. Until December 31, 1998, the Company
shall maintain in full force and effect, for the continued benefit of the
Executive, all employee benefit plans and programs in which the Executive was
entitled to participate immediately prior to December 31, 1995 as an employee,
provided that the Executive's continued participation is possible under the
general terms and provisions of such benefit plans and programs. Other than the
Deferred Compensation Agreement and disability policy referred to hereinafter
the sole benefit provided herein is the Company's health plan. In the event that
the Executive's participation in any such benefit plan or program is barred, the
Company shall arrange, at the Company's expense, to provide the Executive with
benefits substantially similar to those which the Executive is entitled to
receive under such plans and programs. The Company shall also maintain existing
disability insurance as well as the Deferred Compensation Agreement dated
October 1, 1992. At the end of the period of coverage provided above, the
Executive shall have the
<PAGE>
option to have assigned to him at no cost and with no apportionment of
prepaid premiums any assignable insurance policy owned by the Company which
relates specifically to the Executive.
5. Survival of Certain Provisions of the Employment Agreement. The
following provisions of the Employment Agreement are incorporated herein by
reference notwithstanding the termination of such Employment Agreement.
(a) Paragraph 8(c) through 8(d) (relating to piggyback rights for the sale
of option shares acquired by Executive). The provisions of paragraphs 8(c) shall
also apply to the registration of all shares of the Company presently owned by
Executive in addition to options and shares referred to therein and the
offerings to which piggyback rights related in paragraph 8(c) shall also include
all offerings made by the Company or other senior executives or former senior
executives.
(b) Article 13 (dealing with restrictive covenants, confidentiality, etc.
set forth therein), except paragraph 13(a) shall read as follows:
Executive undertakes and agrees that until the later of June 30, 1997 or
twelve (12) months after he ceases to act as a director, he will not compete,
directly, or indirectly, or participate as a director, officer, employee,
consultant agent, consultant, representative or otherwise, or as a stockholder,
partner or joint venturer, or have any direct or indirect financial interest,
including, without limitation, the interest of a creditor, in any business
competing directly or indirectly within any geographical area in the adult
entertainment business of the Company or adult entertainment business of any of
its subsidiaries. Notwithstanding the foregoing, Executive may engage in the
business of distributing MPAA rated titles to third parties (including the
Company and its subsidiaries), for use on broadcast or pay-per-view networks and
all digital delivery platform and systems. Executive further undertakes and
agrees that during the restriction period set forth in the prior sentence, he
will not, directly or indirectly employ, cause to be employed, or solicit for
employment any of Company's or its subsidiaries' employees while employed by the
Company or Subsidiary or for a period of six (6) months thereafter.
(c) Article 14. (Indemnity)
6. Director Nomination. Executive shall be nominated as a director for
election by the shareholders of the Company at the Company's 1996 annual meeting
of shareholders, and thereafter until (i) December 31, 1998, (ii) he ceases to
be the record or beneficial owner of 50% of the number of shares of the Company
he now owns, (iii) he competes directly or indirectly with the Company or its
subsidiaries, or (iv) such time as he resigns or declines to seek election as a
director.
7. Office. Executive shall be afforded the use without cost of a suitable
office at the Company's facility at 536 Broadway, New York, New York until
<PAGE>
December 31, 1996.
8. Right of First Refusal. Until June 30, 1996, Mark Graff and Lee Nolan
together shall have the right of first refusal to purchase the Company's
playback facility on the tenth floor of the Company's facility at 536 Broadway,
New York, New York upon the same terms and conditions (including credit
worthiness) as the Company may receive from any unaffiliated third party. The
Company shall give Messrs. Graff and Nolan written notice of the terms of any
such proposal. Messrs. Graff and Nolan shall give notice of their offer and
response of such offer within ten business days after notice of such proposal.
9. No Duty, Authority, Consulting Services. Other than Executive's duties
as a director, Executive shall have no duty to provide services to the Company.
Notwithstanding the foregoing, the Company shall retain and the Executive shall
act as a consultant to the Company, without any additional monetary
consideration, for a period of five (5) years after he ceases to act as a
director. As a consultant, Executive shall perform such duties as are reasonably
assigned at mutually agreeable time and places, but Executive shall not be
required to devote more than four (4) hours per month to the Company. Other than
as specifically authorized in writing, Executive shall have no authority to act
on behalf of the Company or make any representation or commitment on its behalf.
If Executive performs any services requested in writing, he shall be paid his
authorized expenses in accordance with normal Company policy.
10. Advances. All advances (other than for business expenses) received by
Executive from the Company shall be repaid to the Company during 1997 in equal
monthly installments provided the amount of such advances shall be deducted from
any prepayment of the Separation Payment. Such outstanding advances shall bear
interest at the same rate the Company is paying to its principal lender.
11. Press Releases. No release or public announcement relating to this
agreement or to Executive shall be made by the Company without the approval of
Executive which shall not be unreasonably withheld. The parties acknowledge that
the Company is a public corporation and in certain situations has the duty of
disclosure. Except as provided by law or to any proposed lender or investor,
Executive shall not disclose terms of this Separate Agreement except to the
extent such terms are publicly disclosed.
12. Return of Property. Executive shall promptly deliver to the Company all
property of the Company and its subsidiaries in its possession or control
including but not limited to all personal property, as computers and other
equipment, records, credit cards and any leased or Company owned vehicles.
13. Legal Fees. The Company will pay the legal fees and disbursements
incurred by Executive in connection with the preparation of this Separation
Agreement, provided such fees and disbursements shall not exceed $2,500.
<PAGE>
14. Arbitration. Except for a dispute, controversy or claim relating to
Article 13 of the Employment Agreement surviving termination thereof and
incorporated herein by reference, any and all other disputes, controversies and
claims arising out of or relating to this Agreement, or with respect to the
interpretation of this Agreement, or the rights or obligations of the parties,
whether by operation of law or otherwise, shall be settled and determined by
arbitration in New York City, New York, pursuant to the then existing rules of
the American Arbitration Association ("AAA") for commercial arbitration. Any
such proceeding referred to in herein shall also determine Executive's
entitlement to legal fees. The parties covenant and agree that the decision of
the AAA shall be final and binding and hereby waive their right to appeal
therefrom. The parties further agree that judgment upon any arbitration award
may be entered in the courts of the State of New York and the United States
federal courts in said State, and the parties hereby consent to the jurisdiction
of such courts for such purposes.
15. Miscellaneous.
(a) Notices. Any Notice, demand or communication required or permitted
under this Agreement shall be in writing and shall either be hand-delivered to
the other party or mailed to the addresses set forth below by registered or
certified mail, return receipt requested or sent by overnight express mail or
courier or facsimile to such address, if a party has a facsimile machine. Notice
shall be deemed to have been given and received when so hand-delivered or after
three business days when so deposited in the U.S. Mail, or when transmitted and
received by facsimile or sent by express mail properly addressed to the other
party. The addresses are:
To the Company:
Graff Pay-Per View, Inc.
536 Broadway
New York, New York 10012
To the Executive:
Mark Graff
The foregoing addresses may be changed at any time by notice given in the manner
herein provided.
(b) Integration; Modification. This Agreement constitutes the entire
understanding and agreement between the Company, and the Executive regarding
<PAGE>
its subject matter and supersedes all prior negotiations and agreements,
whether oral or written, between them with respect to its subject matter. This
Agreement may not be modified except by a written agreement signed by the
Executive and a duly authorized officer of the Company.
(c) Enforceability. If any provision of this Agreement shall be invalid or
unenforceable, in whole or in part, such provision shall be deemed to be
modified or restricted to the extent and in the manner necessary to render the
same valid and enforceable, or shall be deemed excised from this Agreement, as
the case may require, and this Agreement shall be construed and enforced to the
maximum extent permitted by law as if such provision had been originally
incorporated herein as so modified or restricted, or as if such provision had
not been originally incorporated herein, as the case may be.
(d) Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the parties, including their respective heirs, executors, successors
and assigns, except that this Agreement may not be assigned by the Executive.
(e) Waiver of Breach. No waiver by either party of any condition or of the
breach by the other of any term or covenant contained in this Agreement, whether
by conduct or otherwise, in any one or more instances shall be deemed or
construed as a further or continuing waiver of any such condition or breach or a
waiver of any other condition, or the breach or a waiver of any other condition,
or the breach of any other term or covenant set forth in this Agreement.
Moreover, the failure of either party to exercise any right hereunder shall not
bar the later exercise thereof.
(f) Governing Law and Interpretation. This Agreement shall be governed by
the internal laws of the State of New York. Each of the parties agrees that he
or it, as the case may be, shall deal fairly and in good faith with the other
party in performing, observing and complying with the covenants, promises,
duties, obligations, terms and conditions to be performed, observed or complied
with by him or it, as the case may be hereunder; and that this Agreement shall
be interpreted, construed and enforced in accordance with the foregoing covenant
notwithstanding any law to the contrary.
(g) Headings. The headings of the various sections and paragraphs have been
included herein for convenience only and shall be considered in interpreting
this Agreement.
(h) Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
16. Options. Executive shall receive an option to purchase 249,585 shares
of common stock at market price on the first day following the expiration of
<PAGE>
the six month period after executive's last sale of Graff stock in 1995.
17. Continuation of Options. The Company will take such steps as reasonably
necessary so that Executive's existing options do not terminate because the
Executive is no longer an employee. Options issued under the 1992 and 1993 Stock
Option Plans shall be amended to make clear that such options shall continue as
long as Executive is a director or consultant. The Company will use its best
efforts to adopt an amendment to the 1994 and 1995 Stock Option Plans,
permitting such options to be exercised, as long as the optionee is a director
or consultant. Options held by Executive shall be amended thereby.
18. Registration Statement. The Company shall amend the existing S-3
registration statement covering Executive's shares to eliminate note 6 to the
selling stockholder table and any other provision suggesting that Executive is
only registering the shares in connection with a loan arrangement.
19. S-8. The Company has registered shares subject to its 1992, 1993 and
1994 Option Plans pursuant to Form S-8.
IN WITNESS WHEREOF, this Agreement has been executed by the Executive and
on behalf of the Company by its duly authorized officers on the date first above
written.
GRAFF PAY-PER-VIEW, INC.
By: /s/ J. Roger Faherty
--------------------------------
Title: Chairman
/s/ Mark Graff
--------------------------------
(Executive)
Exhibit 10.68
FOURTH AMENDMENT
TO
EMPLOYMENT AGREEMENT
This Fourth Amendment, dated as of January 1, 1996, is to that certain
Employment Agreement made and entered into as of June 1, 1992, (as heretofore
amended, the "Employment Agreement") by and between GRAFF PAY-PER-VIEW INC., a
Delaware corporation (the "Company") and J. ROGER FAHERTY (the "Executive").
INTRODUCTION
The parties entered into the Employment Agreement on June 1, 1992, a First
Amendment thereto as of February 22, 1993, a Second Amendment thereto as of June
15, 1993 and a Third Amendment thereto as of March 23, 1995 ("Third Amendment"),
and now desire to further amend certain provisions of the Employment Agreement,
setting forth herein the revised terms and conditions of the Executive's
continued employment by the Company and its subsidiaries from and after the date
of this Agreement. Prior to Third Amendment, the Employment Agreement had
provided for the Company to make loans to the Executive from time to time. The
Company had in the past made loans to the Executive and the Executive repaid the
loans with interest. The Third Amendment deleted the loan provision. The Company
and Executive have agreed that a loan provision be reinserted to the Employment
Agreement, to adjust Executive's salary and make certain other changes to the
Employment Agreement as a result of a Separation Agreement (the "Separation
Agreement") between the Company and Leland H. Nolan ("Nolan") dated as of
December 31, 1995.
Accordingly, in consideration of the mutual covenants and agreements set
forth herein and the mutual benefits to be derived herefrom, and intending to be
legally bound hereby, the Company and the Executive agree as follows:
1. DEFINITIONS. All defined terms used in this Amendment, unless otherwise
defined herein, shall have the meanings ascribed to them in the Employment
Agreement.
2. ADJUSTMENT IN BASE SALARY. Section 3(a) of the Employment Agreement
shall be deleted in its entirety and the following substituted therefor:
"3(a) BASE SALARY. During the Term the Executive shall be entitled to
receive an annual salary (the "Base Salary") payable in installments at such
times as the Company customarily pays its other senior executive employees (but
in any event no less often than bi-monthly) and calculated as follows:
<PAGE>
(1) The Base Salary for the first Year shall be $350,000 (As used
herein "Year" shall refer to a twelve month period ending December 31st.);
and
(2) for each Year thereafter, the Company shall review the Executive's
performance and make such adjustments in the Executive's Base Salary and
other benefits that the Company deems appropriate."
3. LOANS. Subparagraph (e) of Paragraph 3 of the Employment Agreement as
heretofore amended, is hereby amended in its entirety to read as follows:
"3(e) LOANS. As at January 1, 1996 the Company had loaned Executive
$215,000. Executive and Company agree that the principal amount of the
loan shall not be increased. The loan shall be represented by note
with a maturity date of December 31, 1996 and shall bear interest at
the same rate the Company is paying its principal lender and shall be
secured by such collateral as the Company may reasonably determine.
Executive shall pay interest accrued on the outstanding balance of the
loan through December 31, 1995 at the rate specified above by March
31, 1996. If the Executive is unable to repay the loan at maturity,
the Company shall be authorized to withhold 20% of the Executive's
salary until such time as the loan is repaid."
5. AUTOMOBILE ALLOWANCE. Section 6 of the Employment Agreement shall be
deleted in its entirety and the following substituted therefor:
The Company shall also pay Executive the sum of $1,000 per month as
reimbursement for the costs of owning, operating and parking of an
automobile.
6. MISCELLANEOUS.
(a) INTEGRATION: MODIFICATION. The Employment Agreement, as amended by
this Amendment and the previous amendments, constitutes the entire
understanding and agreement between the Company and the Executive regarding
its subject matter and supersedes all prior negotiations and agreements,
whether oral or written, between them with respect to its subject matter.
This Agreement may not be modified except by a written agreement signed by
the Executive and a duly authorized officer of the Company.
<PAGE>
(b) COUNTERPARTS. This Amendment may be executed in several
counterparts, each of which shall be deemed to be an original but all of
which together will constitute one and the same instrument.
IN WITNESS WHEREOF, this Agreement has been executed by the Executive
and on behalf of the Company by its duly authorized officer on the date first
written above.
GRAFF PAY-PER-VIEW INC.
/s/ EDWARD M. SPECTOR
-------------------------------
Name: Edward M. Spector
Title: President
EXECUTIVE
/s/ J.ROGER FAHERTY
-------------------------------
J. Roger Faherty
Exhibit 10.69
GENERAL PARTNERSHIP AND
CONTRIBUTION AGREEMENT
OF CVS PARTNERS
THIS GENERAL PARTNERSHIP AND CONTRIBUTION AGREEMENT (this "Agreement")
entered into this ___day of January, 1996, by and among WILTECH CABLE TELEVISION
SERVICES, INC., ("WCTV"), a Delaware corporation and THE WILTECH GROUP, INC.
("WilTech"), a Delaware corporation with offices at One Williams Center, PO Box
2400, Tulsa Oklahoma 74172 and CABLE VIDEO STORE, INC. ("CVSI"), a Delaware
corporation and GRAFF PAY-PER-VIEW INC. ("GPPV"), a Delaware corporation with
offices at 536 Broadway, 7th Floor, New York, New York 10012.
PRELIMINARY STATEMENT
CVSI, a wholly owned subsidiary of GPPV owns and operates the Cable Video Store
network (the "Network"), a satellite delivered 24 hour a day, 7 day a week
television network featuring Hollywood hit movies and other feature programming.
CVSI also has installed a Vela Research video file server (the "Vela Server") in
the USWest Video Dial Tone ("VDT") trial in Omaha, Nebraska and is a participant
in other VDT initiatives (all of the foregoing is referred to as the "CVS
Business").
WCTV directly and through Affiliates (as defined below) operates a fiber optic
network which carries, among other things, video information.
CVSI and WCTV are forming the Company initially to take over and continue the
operations of the CVS Business and ultimately to position itself as a leader in
pay-per-view programming and as a video systems integration entity providing
video content solutions in the form of (i) system-specific, long-form store and
forward services (near-video-on-demand services); (ii) advanced
application-specific software enabling and management systems; and (iii)
advanced interactive television content applications (collectively, the
"Proposed Business").
To carry out the parties' intention, CVSI and WCTV are forming this general
partnership and entering into this operating agreement, and WCTV and CVSI are
making the contributions and executing and delivering the agreements set forth
below.
1
<PAGE>
NOW, THEREFORE, for good and valuable consideration, the parties agree
as follows:
2
<PAGE>
SECTION 1
DEFINED TERMS
1.1 The following capitalized terms shall have the meanings specified in
this Section 1. Other terms are defined in the text throughout this Agreement
and shall have the meanings respectively ascribed to them:
"ACT" means the general partnership law of the State of Oklahoma, as
amended from time to time.
"ADDRESSABLE HOUSEHOLDS" shall mean the number of households equipped
with addressable decoders and capable of receiving a linear transmission of
the Network delivered to the cable head end or IRD via satellite and where
individual movies or features of the Company may be purchased and viewed on
a pay-per-view ("PPV") basis, excluding any of such homes which receive the
Company's programming by virtue of server-based technology.
"ADJUSTED CAPITAL ACCOUNT DEFICIT" means, with respect to any Interest
Holder, the deficit balance, if any, in the Interest Holder's Capital
Account as of the end of a fiscal year, after giving effect to the
following adjustments:
(i) the deficit shall be decreased by the amounts which the Interest
Holder is deemed obligated to restore under Treas. Reg. ss.1.704-2(g)(1)
and (i)(5); and
(ii) the deficit shall be increased by the items described in Treas.
Reg. ss.1.704-1(b)(2)(ii)(d)(4), (5) and (6).
"AFFILIATE" means, with respect to any Partner, any Person: (i) which
owns 50% or more of the voting interests in the Partner; or (ii) in which
the Partner owns 50% or more of the voting interests; or (iii) in which 50%
or more of the voting interests is owned by a Person who has a relationship
with the Partner described in clause (i) or (ii) above.
"AGREEMENT" means this Partnership Agreement, as amended from time to
time in accordance with the terms hereof.
"AVAILABLE CASH" means, at the time of determination, (i) all cash and
cash equivalents on hand in the Company after repayment of all debts or
other liabilities of the Company owed to third parties
3
<PAGE>
or a Partner which are currently due , less (ii) the amount of any
reserves established by the Executive Committee (in accordance with sound
business practice) to fund the Partnership's cash requirements pursuant to
budgets theretofore adopted in accordance with Section 5.4, and exclusive
of (iii) capital contributed by the Interest Holders to the Company.
"CALL" shall mean the right granted to WCTV pursuant to Section 6.4 to
acquire a portion of CVSI's Interest in the Company.
"CAPITAL ACCOUNT" means the account to be maintained and adjusted by
the Company for each Interest Holder in accordance with the following
provisions:
(i) the Capital Account of an Interest Holder shall be credited with
its Initial Capital Contribution and any additional Capital Contributions
and its allocable share of Profits and any item of income or gain specially
allocated to it under Section 4; and
(ii) the Capital Account of an Interest Holder shall be debited with
the amount of money and the fair market value of any property distributed
to him (net of any liabilities of the Company that are assumed by the
Interest Holder or to which the distributed property is subject) and his
allocable share of Losses and any item of expense or loss specially
allocated to him under Section 4.
If an Interest is transferred under this Agreement, the transferee
shall succeed to the Capital Account of the transferor to the extent the
Capital Account is attributable to the transferred Interest. It is intended
that the Capital Accounts of all Interest Holders shall be maintained in
compliance with the provisions of Treas. Reg. ss.1.704-1(b), and all
provisions of this Agreement relating to the maintenance of Capital
Accounts shall be interpreted and applied in a manner consistent with that
Regulation.
"CAPITAL CONTRIBUTION" means the Initial Capital Contribution and, any
additional Capital Contributions and cash and the fair market value of any
other assets (net of liabilities assumed by the Company or to which the
contributed assets are subject) contributed to the Company by an Interest
Holder, but excluding the amount of any loans by a Partner in accordance
with the terms hereof.
4
<PAGE>
"CLOSING DATE" shall have the meaning set forth in Section 2.4.
"CODE" means the Internal Revenue Code of 1986, as amended from time
to time, or any corresponding provision of any succeeding law.
"COMPANY" means the general partnership operated in accordance with
this Agreement.
"FORMATION DATE" means the date this Agreement is executed.
"GAAP" means, as of the date of any determination with respect
thereto, generally accepted accounting principles as used by the Financial
Accounting Standards Board and/or the American Institute of Certified
Public Accountants.
"GEOGRAPHIC TERRITORY" shall mean the United States, its territories,
protectorates and the geographic footprint of the satellite delivering the
Network.
"INITIAL CAPITAL CONTRIBUTION" shall mean the property contributed by
WCTV and CVSI as provide for in Section 3.1 and 3.2 to the Company's
capital with a value as determined under Section 3.3 and which shall be the
parties' initial balances in their Capital Accounts.
"INTEREST" means an Interest Holder's share of the Profits and Losses
of, and the right to receive distributions from, the Company.
"INTEREST HOLDER" means any Person who holds an Interest, whether as a
Partner or an unadmitted assignee of a Partner; an Interest Holder who is
not admitted to the Company as a Partner shall have no rights to appoint a
Person to the Operating Committee or to vote on any matters to properly
come before the Operating Committee.
"INTEREST HOLDER MINIMUM GAIN" means an amount, with respect to each
Interest Holder Nonrecourse Liability, equal to the Minimum Gain that would
result (determined in accordance with the provisions of Treas. Reg.
ss.1.704-2(i)(3)) if the Interest Holder Nonrecourse Liability became a
Nonrecourse Liability.
5
<PAGE>
"INTEREST HOLDER NONRECOURSE LIABILITY" means any Company liability to
the extent the liability is nonrecourse (as determined under Treas. Reg.
ss.1.1001-2) and an Interest Holder or a Person related to an Interest
Holder (under Treas. Reg. ss.1.752-4(b)) bears the economic risk of loss
with respect to such liability.
"INVOLUNTARY WITHDRAWAL" means, with respect to any Partner, the
occurrence of any event set forth in Section 6.7.2.
"MEASUREMENT DATE" shall mean the last day of the month preceding the
day in which the event requiring calculation of the Valuation Amount
occurs.
"MINIMUM GAIN" has the meaning set forth in Treas. Reg. ss. s
1.704-2(b)(2) and 1.704-2(d). Minimum Gain shall be computed separately for
each Interest Holder in a manner consistent with the Regulations under Code
Section 704(b).
"NONRECOURSE DEDUCTIONS" has the meaning set forth in Treas. Reg.
ss.1.704-2(b)(1). The amount of Nonrecourse Deductions for a fiscal year
shall equal the net increase, if any, in the Minimum Gain for such year
reduced (but not below zero) by the aggregate distributions made during
such year of proceeds of a Nonrecourse Liability that are allocable to an
increase in Minimum Gain, determined in accordance with Treas. Reg.
ss.1.704-2(c).
"NONRECOURSE LIABILITY" means any liability of the Company with
respect to which no Interest Holder and no Person related to an Interest
Holder has personal liability or bears the risk of loss (as determined in
accordance with Code Section 752 and the Regulations promulgated thereunder
and Treas. Reg. ss.1.1001-2).
"PARTNER" means CVSI and WCTV and any Person who subsequently is
admitted as a Partner of the Company in accordance with Section 6.
"PARTNERSHIP RIGHTS" means all of the rights of a Partner in the
Company, including but not limited to a Partner's: (i) Interest; (ii) right
to inspect the Company's books and records; and (iii) right to vote on
matters coming before the Partners.
"PERCENTAGE INTERESTS" shall mean the percentage interests in the
Partnership held by CVSI and WCTV, as the case may be, as
6
<PAGE>
initially determined in accordance with Section 3.1 and 3.2 and as
adjusted from time to time as provided for in Sections 3.9, 6.4 and 6.5 or
otherwise in this Agreement.
"PERSON" means an individual, corporation, partnership, association,
limited liability company, trust, estate or other entity.
"POSITIVE CAPITAL ACCOUNT" means a Capital Account with a balance
greater than zero.
"PROFITS" and "LOSSES" means, for each fiscal year of the Company (or
other period for which Profits or Losses must be computed), the Company's
taxable income or loss determined in accordance with Code Section 703(a),
with the following adjustments:
(i) All items of income, gain, loss, deduction, or credit required to
be stated separately under Code Section 703(a)(1) shall be included in
computing taxable income or loss;
(ii) Any tax-exempt income of the Company, not otherwise taken into
account in computing Profits or Losses, shall be included in computing
taxable income or loss;
(iii) Any expenditure of the Company described in Code Section
705(a)(2)(B) (or treated as such under Treas. Reg. ss.1.704-1(b)(2)(iv)(i))
and not otherwise taken into account in computing Profits or Losses shall
be subtracted from taxable income or loss; and
(iv) Notwithstanding any other provision of this definition, any items
which are specially allocated pursuant to Section 4.3 shall not be taken
into account in computing Profits or Losses.
"RELATED AGREEMENTS" means, with respect to WCTV and WilTech, the
Vyvx Services Agreement and with respect to CVSI and GPPV, the GPPV
Services Agreement, the Trademark License Agreement, Assignment and
Assumption Agreement (Affiliate, Studio License and VDT Agreements and
Understandings), Asset Contribution Agreement, Assignment and Assumption of
Office Lease and Assignment and Assumption of Equipment Leases.
7
<PAGE>
"TAXES" means all federal, state, county, local and foreign income, ad
valorem, excise, transfer, sales and use, gross receipts, gross revenue,
excise, withholding, franchise, payroll, property, Social Security,
unemployment, customs, duties and other taxes and similar duties and other
governmental charges or assessments (including any deficiencies and
interest and penalties relating thereto).
"TRADEMARK LICENSE AGREEMENT" shall mean the license agreement entered
into simultaneously with the execution hereof between the Company and GPPV
and pertaining to the license of the CABLE VIDEO STORE name and related
identity and other related names and marks, to the Company on the terms and
conditions provided for therein.
"TRANSFER" means, when used as a noun, any voluntary sale, assignment,
attachment or other relinquishment, and, when used as a verb, means
voluntarily to sell, assign or otherwise relinquish. A pledge,
hypothecation or grant of a security interest, lien or other encumbrance or
the voluntary act of doing any of the foregoing does not constitute a
Transfer.
"TREAS. REG." means the income tax regulations, including any
temporary regulations, from time to time promulgated under the Code.
"VALUATION AMOUNT" shall mean an amount equal to (a) the sum of (i)
$3.40 times the then-current number of Addressable Households on the
Measurement Date and (ii) the net revenues (which exclude revenues retained
by the cable systems and multiple system operators) from the server-based
portion of the operations of the Company for the six months preceding the
Measurement Date and (b) reduced by the amount of any loan made by a
Partner or a third party to the Company (exclusive of trade payables
incurred in the ordinary course). Such Valuation Amount may be verified via
an audit.
8
<PAGE>
SECTION 2
FORMATION AND NAME;
OFFICE; PURPOSE; TERM; CLOSING
2.1 ORGANIZATION. The Company is being organized as a general partnership
pursuant to the Act and the provisions of this Agreement upon the filing of the
documents required by law or as the Partners shall determine are reasonably
necessary or appropriate ("Filing Documents"). The Partners have prepared and
executed and, promptly after the date hereof, will cause to be filed the Filing
Documents with the appropriate governmental entities. The Partners shall cause
all required publication and other formalities and acts required by the Act to
be carried out and to qualify the Company to do business where required as
determined by the Partners.
2.2 NAME OF THE COMPANY. The name of the Company shall be "CVS Partners."
The Company may do business under that name and under any other name or names
which the Partners shall mutually select, provided the name is lawful under the
Act. The Partners agree to execute such filings as are necessary to permit the
Company to use the CVS Partners name or any other name the Company does business
under which is different than that set forth in its Filing Document.
2.3 PURPOSE. The Company is being formed to develop, own and operate the
CVS Business and engage in the Proposed Business.
2.4 TERM. The term of the Company will be formed on the Formation Date but
will not commence business until the "Closing Date" which shall occur on the
date (i) the parties shall have satisfied or waived the closing conditions set
forth in Section 2.5 and (ii) the parties shall have made or waived the making
of the closing deliveries set forth in Section 2.6. The parties may elect to
hold a closing on the Closing Date or a date promptly following the Closing Date
at such time and place as the parties shall determine or may waive the
requirement of holding a closing. The Company shall continue in existence until
January 1, 2030 unless its existence is sooner terminated pursuant to Section
7.1 or extended pursuant to Section 5.7.
2.5 CLOSING CONDITIONS.
2.5.1 CVSI. CVSI's and GPPV's obligation to the close is subject to the
following conditions, any of which may be waived by it in its sole discretion:
2.5.1.1 COMPLIANCE BY WCTV AND WILTECH. WCTV and WilTech shall have
performed and complied in all material respects with all agreements and
conditions required by this Agreement to be performed or complied with by WCTV
and WilTech prior to or on the Closing Date.
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2.5.1.2 ACCURACY OF REPRESENTATIONS OF WCTV AND WILTECH. The
representations and warranties of WCTV and WilTech contained in this Agreement
(including the exhibits hereto and the Disclosure Schedule) or any schedule,
certificate, or other instrument delivered pursuant to the provisions hereof or
in connection with the transactions contemplated hereby shall be true and
correct in all material respects at and as of the Closing Date (except for
changes permitted by this Agreement) and shall be deemed to be made again as of
the Closing Date.
2.5.1.3 MATERIAL ADVERSE CHANGE. No material adverse change with respect to
WCTV and WilTech shall have occurred subsequent to November 30, 1995, nor shall
any event or circumstance have occurred which would result in a material adverse
change with respect to WCTV or WilTech.
2.5.1.4 LITIGATION. No litigation seeking to enjoin the transactions
contemplated by this Agreement or to obtain damages on account hereof shall be
pending or to WCTV's and WilTech's knowledge be threatened.
2.5.1.5 RELATED AGREEMENTS. The Vyvx Services Agreement in the form
attached as Exhibit A shall have been entered into.
2.5.1.6 CASH. WCTV shall have made the cash portion of its contribution
provided for in Section 3.2.
2.5.17 DOCUMENTS. All documents and instruments required hereunder to be
delivered by WCTV or WilTech to CVSI at the Closing shall be delivered in form
and substance reasonably satisfactory to GPPV and its counsel.
2.5.2 WCTV. WCTV's obligation to close is subject to the following
conditions, any of which may be waived by it in its sole discretion:
2.5.2.1 COMPLIANCE BY CVSI AND GPPV. CVSI and GPPV shall have performed and
complied in all material respects with all agreements and conditions required by
this Agreement to be performed or complied with by CVSI and GPPV prior to or on
the Closing Date.
2.5.2.2 ACCURACY OF REPRESENTATIONS OF CVSI AND GPPV. The representations
and warranties of CVSI and GPPV contained in this Agreement (including the
exhibits hereto and the Disclosure Schedule) or any schedule, certificate, or
other instrument delivered pursuant to the provisions hereof or in connection
with the transactions contemplated hereby shall be true and correct in all
material respects at and as of the Formation Date (except for changes permitted
by this Agreement) and shall be deemed to be made again as of the Closing Date.
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2.5.2.3 MATERIAL ADVERSE CHANGE. (a) No material adverse change with
respect to CVSI, the Contributed Assets, the Network or the CVS Business shall
have occurred subsequent to November 30, 1995 nor shall any event or
circumstance have occurred which would result in a material adverse change with
respect to CVSI, the Contributed Assets, the Network or the CVS Business, and
(b) no material adverse change with respect to GPPV shall have occurred
subsequent to November 30, 1995, nor shall any event or circumstance have
occurred which would result in a material adverse change with respect to GPPV,
to the extent that any of the foregoing involves or relates to the Contributed
Assets, the Network or the CVS Business.
2.5.2.4 LITIGATION. No litigation seeking to enjoin the transactions
contemplated by this Agreement or to obtain damages on account hereof shall be
pending or to CVSI's or GPPV's knowledge be threatened.
2.5.2.5 RELATED AGREEMENTS. The GPPV Service Agreement in the form attached
as Exhibit B and Trademark License Agreement in the form attached as Exhibit C,
in a form and substance reasonably satisfactory to WilTech and its counsel,
shall have been entered into.
2.5.2.6 ASSIGNMENT AGREEMENTS. The Assignment and Assumption Agreement
(Affiliation, Studio License and VDT Agreements) in the form attached as Exhibit
D, Assignment and Assumption of Office Lease in the form attached as Exhibit E
and Assignment and Assumption of Equipment Leases in three form attached as
Exhibit F, in a form and substance reasonably satisfactory to WCTV, WilTech and
its counsel, shall have been entered into.
2.5.2.7 CONTRIBUTION AGREEMENT. The Asset Contribution Agreement in the
form attached as Exhibit D pertaining to the Tangible Assets to be contributed
to the Company , in a form and substance reasonably satisfactory to WCTV,
WilTech and its counsel shall have been entered into.
2.5.2.8 APPROVAL OF BANK; CONSENTS TO ASSIGNMENT. CVSI and GPPV shall have
obtained the written approval of Midlantic Bank, N.A. ("Midlantic"), to and
waivers required for, this Agreement and the transactions described herein
including, without limitation such consents , waivers and releases (including
UCC-3, Termination Statements) necessary for the formation of the Company and
all assets being assigned, transferred, contributed or licensed to the Company
free and clear of all liens and encumbrances and Midlantic's agreement to
release any lien on a portion of CVSI's Interest upon WCTV's exercise of any
call rights applicable to CVSI's interest hereunder if the proceeds therefrom
are paid to Midlantic. CVSI and GPPV shall have obtained the written consent of
such parties to the Dallas Office Lease, any agreements associated with the Vela
Server and the VDT trials (each of such terms being hereinafter defined) and any
equipment leases to be assigned as are required by the terms thereof.
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2.5.2.9 EMPLOYMENT OF COO. Barry Goldberg shall have resigned as an officer
and employee of GPPV and agreed to be employed by the Company as its COO (as
hereinafter defined) as provided for in Section 5.2.
2.5.2.10 SATISFACTION AS TO AGREEMENTS. After interviews (telephone or in
person) by WilTech and GPPV representatives with representatives of the parties
to such Studio License Agreements, Affiliate Agreements and enhanced PPV
("EPPV")(server-based) customers or potential customers as WCTV designates, WCTV
is satisfied in its reasonable discretion that the subject Studio License
Agreements, Affiliate Agreements and proposed EPPV agreements, and CVSI's
relationship with the parties thereto will neither terminate nor be adversely
affected to a material degree as a direct or indirect result of the execution,
delivery or performance of this Agreement and the Related Agreements and the
consummation of the transactions contemplated herein or with respect to the EPPV
customers or prospective customers, that there is a reasonable likelihood that
agreements for EPPV services to be provided by the Company as contemplated in
the business plan set forth in Exhibit G will be consummated. Such interviews
shall take place within fifteen (15) business days of the Formation Date, or
within such extended time period as the parties agree. WCTV shall notify GPPV of
its decision, if any, not to close as a result of this section no later than
three (3) business days after the date of the completion of the interviews;
provided, however, that the time period within which the interviews shall take
place, shall be extended by a reasonable amount of time if any of such
interviews cannot take place within the original fifteen (15) day period as a
result of the unavailability of or lack of cooperation by GPPV or the proposed
interviewees. If WCTV is unable to complete the interviews within the applicable
time frame due to a material delay attributable to WCTV, WCTV shall have been
deemed to have waived this closing condition. If there is a delay in completing
such interviews which is not attributable to GPPV or WCTV and which delays
WCTV's decision by more than 25 days following the Formation date, CVSI shall
have the option to not close as a result of this section and may do so by
sending written notice to WCTV. In that event WCTV shall have two business days
from its receipt of such notice to waive the conditions of this Section 2.5.2.10
in which event the Closing Date shall occur without regard to this Section
2.5.2.10.
2.5.2.11 DOCUMENTS. All documents and instruments required hereunder to be
delivered by CVSI or GPPV to WCTV at the Closing shall be delivered in form and
substance reasonably satisfactory to WCTV and its counsel.
2.5.2.12 VERIFICATION OF SUBSCRIBER COUNT. After reviewing materials
reasonably requested by WCTV, WCTV is satisfied in its reasonable discretion
that CVSI's subscriber count is as previously represented to WCTV.
2.6 CLOSING DELIVERIES.
2.6.1 CVSI. On the Closing Date, in addition to documents referred
elsewhere, CVSI and/or GPPV shall deliver, or cause to be delivered, to WCTV:
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2.6.1.1 Certificates, dated as of the Closing Date, executed by an
authorized officer of CVSI and GPPV, to the effect that representations and
warranties contained in this Agreement are true and correct in all material
respects at and as of the Closing Date and that CVSI or GPPV, as the case may
be, has complied with or performed in all material respects all terms, covenants
and conditions to be complied with or performed by CVSI or GPPV, as the case may
be, on or prior to the Closing Date; and
2.6.1.2 Such other documents as WCTV or its counsel may reasonably require.
2.6.2 WCTV AND WILTECH. On the Closing Date, in addition to documents
referred elsewhere, WCTV shall deliver, or cause to be delivered to CVSI and/or
GPPV:
2.6.2.1 A certificate, dated as of the Closing Date, executed by an
authorized officer of WilTech and WCTV, to the effect that representations and
warranties contained in this Agreement are true and correct in all material
respects at and as of the Closing Date and that WilTech and WCTV has complied
with or performed in all material respects all terms, covenants and conditions
to be complied with or performed by WilTech and WCTV as the case may be, on or
prior to the Closing Date; and
2.6.1.2 such other documents as CVSI and GPPV may reasonably require.
2.7 PARTNERS. CVSI and WCTV shall be the Partners together with any other
Person admitted as a Partner as provided for in Section 6.
SECTION 3
CONTRIBUTIONS; CAPITAL ACCOUNTS
3.1 CVSI INITIAL CAPITAL CONTRIBUTIONS. CVSI will contribute or cause GPPV
to contribute to the Company as its Initial Capital Contribution, free and clear
of any liens, claims or encumbrances, except as otherwise allowed in this
Agreement, resulting in an initial Percentage Interest of 75% (i) the assets,
both tangible and intangible, comprising the CVSI business associated with the
Network and associated with the CVS Business (collectively, the "Contributed
Assets") including all such assets existing on the Formation date and acquired
between that date and the Closing Date (subject to the provisions of Section
3.12.1 (a)) and including but not limited to (a) the affiliation agreements,
arrangements and other understandings between CVSI or GPPV and cable systems and
multiple system operators pertaining to the distribution of the Network to cable
system subscribers on a PPV basis as listed on Schedule 1 (the "Affiliation
Agreements") and (b) the license agreements, arrangements or understandings
between CVSI or GPPV and studios and motion picture
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studios and pertaining to the license of hit movies and other programming for
exhibition on the Network (the "Studio License Agreements") as listed on
Schedule 2, (ii) an assignment or, if the lessor refuses to provide its consent
and a sublease requires no consent, a sublet of the lease dated March 13, 1995
between GPPV and Signature Place II Office Building for the lease of the
premises located at 14785 Preston Road, Dallas Texas (the "Dallas Office Lease")
pursuant to the Assignment and Assumption Agreement of Office Lease, (iii) the
fixture, furniture and equipment and other tangible assets currently in place
and used in the Dallas Office other than the fixture furniture and equipment
located in the two offices used by GPPV salesmen (who shall occupy such offices
pursuant to a Sublease in the form attached as Exhibit F) and which fixtures,
furniture and equipment are listed on attached Schedule 3 pursuant to the Asset
Contribution Agreement, (iv) the USWest File Server and associated equipment and
agreements as described on attached Schedule 4, (v) an assignment of CVSI's
interest in the VDT trials as listed on attached Schedule 5, (vi) the CABLE
VIDEO STORE name and related identity and other names and marks for use by the
Company in the United States and elsewhere in the world wherein such name or
related identity, names and marks are being used as of the Formation Date by
GPPV's entry into the Trademark License Agreement in the form attached as
Exhibit C (the "Trademark License Agreement") and (vii) by its entry into the
GPPV Service Agreement in the form attached as Exhibit B, the services provided
thereunder throughout its entire term (including renewals) on the terms and
conditions provided for therein, (viii) all deposits and prepaid expenses
relating to or arising from the operations of the CVS Business, and (ix) all
Authorizations (hereinafter defined). The Company shall assume, discharge and
perform only the liabilities and obligations to be performed after the Closing
Date under the contracts, leases, agreements, arrangements and other
understandings being contributed in accordance with this Section 3.1 or to be
performed pursuant to an agreement entered into by the Company. The Company
shall not assume or be deemed to assume any debts, liabilities or obligations of
CVSI, GPPV or any affiliate thereof except as hereinabove provided. Without
limiting the foregoing, it is understood and agreed that GPPV and CVSI shall
retain all obligations and liabilities, and neither the Company, WCTV nor
WilTech shall assume or have any obligation or liability, with respect to,
relating to or arising in connection with (i) GPPV's debtor/creditor
relationship with Midlantic, (ii) any individual's employment by GPPV or CVSI
prior to the Closing Date, including but not limited to obligations arising in
connection with the termination of such employment or obligations relating to
compensation or benefits payable or which may become payable to any such
individual, or (iii) any litigation, judgment, claim or other matter described
in Section 3.11.1(h), including without limitation any obligation or liability
arising from any claim by CBS relating to the use of the name CVS. All
agreements, and instruments by virtue of which the assets described above are to
be contributed, transferred or licensed to the Company shall contain language
limiting the assumption of liabilities consistent with the foregoing.
3.1.1 The value of CVSI's capital contribution is derived from the items
set forth in Section 3.1, whose value is agreed to be $7,984,771 based on
2,348,462 subscribers @ $3.40 per subscriber .
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3.2 WCTV- INITIAL CAPITAL CONTRIBUTION. WCTV will contribute to the Company
as its Initial Capital Contribution, resulting in an initial Percentage Interest
of 25% (i) $2,661,590 for working capital requirements, comprised of $2,100,000
in the form of cash, $1,000,000 of which is to be contributed at Closing, and
the remainder of which is to be contributed over no more than an 18 month period
following the Closing Date in accordance with the business plan or as otherwise
required by the Company and $561,590 in the form of a credit to be provided
under the WCTV Service Agreement and (ii) by its entry into the WilTech Service
Agreement (the "WCTV Service Agreement") in the form attached as Exhibit A, the
services described therein on the terms and conditions provided for therein. .
3.2.1 If the number of Addressable Households on January 3, 1997, taking
into account all cable systems which will cease carrying or commence carrying
the Network on or about January 3, 1997 is less than 1,556,623 Addressable
Households, then WCTV's initial Percentage Interest shall be equal to the lesser
of (i) 51% or (ii) the percentage obtained by dividing $2,661,590 by the sum of
(a) $2,661,590 and the product of (1) $3.40 and (2) the number of Addressable
Households on January 3, 1997 and CVSI's Percentage Interest shall be 100% minus
WCTV's Percentage Interest. For these purposes, former Addressable Households
which are no longer Addressable Households on January 3, 1997 as a result of (i)
the Company electing, for economic reasons, not to make available to the cable
system or cable head end servicing such Addressable Household a digital decoder
decompressor or (ii) the Company providing PPV services to such Addressable
Households via server based technology, shall be treated as an Addressable
Household on January 3, 1997.
3.2.2 If GPPV does not provide the services called for in the GPPV Services
Agreement for the full four renewal Terms described therein whether as a result
of GPPV's breach of its terms, GPPV's failure or refusal to provide such
services, the rejection of such agreement by a bankruptcy trustee, or any other
reason other than the Company's election not to renew a Term or Renewal Term or
to have GPPV provide less than all of the services called for in the GPPV
Services Agreement due to its desire to provide such services itself or have a
third party provide the services for reasons unrelated to GPPV's performance,
then the value of CVSI's initial contribution to the Company shall be reduced by
the contributed value of such services as reflected on Exhibit A to the GPPV
Services Agreement and WCTV's and CVSI's relative Percentage Interest shall be
adjusted accordingly.
3.3 INITIAL CAPITAL ACCOUNT. The parties have determined that the their
initial Capital Account balances shall be for CVSI $7,984,771 (inclusive of
CVSI's contribution as a result of GPPV's entering into the GPPV Services
Agreement and agreeing to provide services to the Company for less than the
agreed upon value as reflected in Exhibit A to the GPPV Services Agreement) and
for WCTV $2,661,590 (inclusive of WCTV's contribution as a result of Vyvx's
entering into the Vyvx Service Agreement and agreeing to provide service to the
Company for less than agreed upon values as reflected in Section 3.2).
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3.4 NO ADDITIONAL CAPITAL CONTRIBUTIONS REQUIRED. Except as otherwise
provided for in Sections 5.3, 5.7 and/or 5.10, no Partner shall be required to
contribute any additional capital to the Company, and no Partner shall have any
personal liability for any obligations or liabilities of the Company. If the
Partners determine, in accordance with Sections 5.3, 5.7 and/or 5.10, to require
an additional capital contribution, such additional capital contribution shall
be made in accordance with the Interest Holders' respective Percentage Interests
unless one Interest Holder is unwilling or unable to make the additional capital
contribution in which event the other Partner may make the additional capital
contribution on behalf of the non-contributing Interest Holder. In that event
the Percentage Interests of the Interest Holders shall be adjusted based on
their relative capital contributions, both initial and additional made to the
Partnership.
3.5 INTEREST ON CAPITAL CONTRIBUTIONS. The Interest Holders shall not be
paid interest on their Capital Contributions except as otherwise provided for
herein.
3.6 RETURN OF CAPITAL CONTRIBUTIONS. Except as otherwise provided in this
Agreement, no Interest Holder shall have the right to receive any return of any
Capital Contribution. No Interest Holder shall have the right to withdraw any
part of his Capital Contribution except in accordance with the provisions of
this Agreement.
3.7 FORM OF DISTRIBUTION. Except as otherwise provided for in Section 7.3
and in the Trademark License Agreement, no Interest Holder shall have the right
to receive anything but cash in connection with a distribution from the Company.
If, however, an Interest Holder is entitled to receive a distribution from the
Company, the Company may distribute cash, notes, property or a combination
thereof to the Interest Holder; provided, however, that an Interest Holder may
not be compelled to accept a distribution of an asset in kind to the extent that
the percentage of the asset distributed to him exceeds his Percentage Interest.
3.8 CAPITAL ACCOUNTS. A separate Capital Account shall be established and
maintained for each Interest Holder in accordance with Code Section 704 and
Treas. Reg. ss.1.704-1(b). The initial balance in the Interest holders' Capital
Accounts shall be equal to the value of their respective Initial Capital
Contributions as determined in accordance with Section 3.3.
3.9 LOANS. If the provisions of this section 3.9 apply to a loan made by a
Partner to the Company, the loan shall bear interest at (a) a rate agreed upon
by the lending Partner and the Company or in the absence of such agreement (b)
the lower of (i) 18% or (ii) the maximum rate permissible under law. Any such
loan shall not be treated as an Additional Capital Contribution or convertible
into Interests in the Company without a prior Super Majority Decision of the
Partners pursuant to Section 5.7.14 and shall be repaid prior to any
distributions to the Partners pursuant to Section 4.2.
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3.10 RECEIVABLES AND PAYABLES. All receivables and payables earned and owed
for services provided and utilized before the Closing Date shall be the property
and responsibility of GPPV. All receivables and payables earned and owed for
services provided and utilized after the Closing Date shall be the property and
responsibility of the Company. GPPV shall satisfy the payables within 30 days of
the due dates of the payables and shall recognize the importance of satisfying
such payables to the Company. WCTV acknowledges that it is industry practice
that receivables from cable systems from PPV buys may not be received for up to
90 days following the month in which such buys occur and studio royalties are
not typically paid until 30 days after receipt of the related receivable. GPPV
agrees that it shall satisfy all studio payables attributable to receivables
received by the Company from cable systems and MSO's attributable to buys which
occurred prior to the Closing Date, within 30 days of receipt of the related
receivable. Attached as Exhibit H is a list of those payables due within 30 days
of the Closing Date and a projection of receivables and payables related to the
period prior to the Closing Date. To protect the interests of the Company and
WCTV's interest in the Company, WCTV shall have the right to direct the Company,
upon five (5) days prior written notice to GPPV, to satisfy any or all of the
pre-closing payables by making payments directly to the parties entitled
thereto. In such case that the Company satisfies any or all of such payables,
each amount so paid shall be deemed to be a loan from the Company to GPPV
(collectively, the "Payables Loan"), each of which shall accrue interest at the
lower of 18% annually or the maximum interest rate permissible under law. Each
Payables Loan, including any accrued by unpaid interest, shall be repaid by GPPV
on or before the first anniversary date of the Closing Date (the "Payables Loan
Due Date"), regardless of the date of any such loans. At any time prior to the
Payables Loan Due Date, WCTV shall have the option, at its sole discretion, to
direct the Company and GPPV to satisfy the unpaid balance of any Payables Loan,
including interest, by having the Company redeem such portion of GPPV's Interest
in the Company equal to a percentage calculated by dividing the aggregate unpaid
balance of the Payables Loan, including interest, by the Valuation Amount using
the Closing Date as the Measurement Date.
3.11 REPRESENTATIONS AND WARRANTIES.
3.11.1 CVSI and GPPV represent and warrant to WCTV as follows:
(a) Corporate Status and Authority. Each of CVSI and GPPV is a corporation
duly incorporated, validly existing and in good standing under the laws of
Delaware. CVSI is qualified to do business in all jurisdictions in which the
conduct of its businesses requires such qualification, except for those
jurisdictions where failure to be so qualified would not, individually or in the
aggregate, have a material adverse effect on its assets, business, results of
operations or condition (financial or other). Each of CVSI and GPPV has the
corporate power and authority to execute and deliver this Agreement and the
Related Agreements and to perform its obligations hereunder and thereunder.
(b) Authority for Agreement. The execution, delivery and performance of
this Agreement and the Related Agreements and the consummation of the
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transactions contemplated herein have been duly authorized by all necessary
corporate action on CVSI's and GPPV's part. This Agreement has been duly
executed and delivered by CVSI and GPPV and constitutes, and the Related
Agreements when so executed and delivered each will constitute, their valid and
legally binding obligations enforceable in accordance with their terms, except
to the extent that the enforceability hereof and thereof (i) may be limited by
any applicable bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium or other similar laws, now or hereafter in effect, relating to
creditors' rights generally or (ii) may be subject to general principles of
equity (whether such enforceability is considered in a proceeding in equity or
at law).
(c) No Conflict. Except as set forth in Disclosure Schedule 3.11.1(c), no
consent, approval, order or authorization of, or registration, declaration or
filing with, any Person or governmental body (in each case, an "Approval") is
required on CVSI's part in connection with the execution and delivery of this
Agreement or the Related Agreements or the consummation of the transactions
contemplated herein. The execution, delivery and performance of this Agreement
and the Related Agreements by CVSI in accordance with their respective terms
will not conflict with or result in any violation of or default under any
provision of its Certificate of Incorporation or By-Laws or of any material
mortgage, lease, agreement, instrument, permit, franchise, license, judgment,
order, decree, law, rule or regulation applicable to it.
(d) Financial Information. To the best of CVSI's and GPPV's knowledge, CVSI
has furnished to WCTV true and correct copies of the financial statements
relating to the CVS Business identified on Disclosure Schedule 3.11.1(d) (the
"Financial Statements"). All of said Financial Statements, including any notes
thereto, fairly present in all material respects the financial position of the
CVS Business as of their respective dates and the results of its operations for
the periods covered in accordance with GAAP. The latest financial statements
identified on Schedule 3.11.1(d) are hereinafter referred to as the "Latest
Financial Statements".
(e) Contracts. (1) Schedule 1 contains a list of all of the Affiliation
Agreements, Schedule 2 contains a list of all of the Studio License Agreements;
the Trademark License Agreement in the form attached as Exhibit C includes a
license of all trademarks, service marks, tradenames and other intellectual
property rights comprising or used in connection with the CVS Business. Schedule
4 contains a description of the USWest File Server and all associated equipment
and agreements. Schedule 5 contains a list of all agreements pertaining to the
VDT Initiatives. Disclosure Schedule 3.11.1(e) contains a list as of the date of
this Agreement of all other written or oral agreements, contracts and
commitments relating to the CVS Business ("Contracts").
(2) It has advised WCTV of, and made available to WCTV, complete and
correct copies of all its Contracts set forth on such Schedules 1, 2, 4, 5
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and Disclosure 3.11.1(e), and has provided in such Schedules complete and
correct descriptions of the terms of any such oral Contracts.
(3) Except as otherwise indicated in Schedules 1,2, 4 and 5 and Disclosure
Schedule 3.11(1)(e), all Contracts set forth in such Schedules are in full force
and effect and enforceable against each party thereto. There does not exist
under any such Contract any event of default or event or condition that
constitutes or that, after notice or lapse of time or both, would constitute, a
violation, breach or event of default thereunder on its part or, to its best
knowledge, any other party thereto.
(f) Absence of Undisclosed Liabilities. To CVSI's and GPPV's knowledge,
there are no liabilities or obligations of any nature whatsoever, fixed or
contingent, matured or unmatured, relating to the CVS Business other than (i)
liabilities reflected in the Latest Financial Statements and (ii) liabilities
incurred since the date of the Latest Financial Statements in the ordinary
course of business.
(g) Compliance with Laws; Governmental Authorizations. To CVSI's and GPPV's
knowledge, CVSI is not, and has not been at any time since January 1, 1994, in
violation in any material respect of any statute, rule, regulation, judgment,
order or decree applicable to its assets or the conduct of its business.
Disclosure Schedule 3.11.1(g) sets forth all consents, approvals,
authorizations, waivers, permits, grants, franchise, concessions, licenses,
exemptions or orders of, registrations, certificates, declarations or filing
with, or report or notice to, any governmental body (each, an "Authorization")
required by law or otherwise necessary for or material to the conduct of its
Business. All such Authorizations have been duly obtained and are in full force
and effect, and it is in full compliance with each of such Authorizations.
(h) Litigation; Claims. (a) There are no judicial or administrative
actions, proceedings or claims pending to which CVSI is a party, or, to CVSI's
and GPPV's knowledge, threatened against CVSI and (b) there are no judicial or
administrative actions, proceedings or claims pending, or to GPPV's and CVSI's
knowledge, threatened, involving or relating to the Contributed Assets, the
Network or the CVS Business.
(i) Material Change. Since the date of the Latest Financial Statements, (a)
the CVS Business has been conducted only in the ordinary course consistent with
past practice and there has been no material adverse change in its assets,
business, results of operations or condition (financial or other) and (b) GPPV
has conducted its business only in the ordinary course consistent with past
practices and there has been no material adverse change in GPPV's assets,
business, results operations or condition (financial or otherwise) to the extent
that any of the foregoing involves or relates to the Contributed Assets, the
Network or the CVS Business.
(j) Brokers. All negotiations relating to this Agreement and the
transactions contemplated herein have been carried on without the intervention
of any person
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acting on its behalf in such manner as to give rise to any valid claim
against the other party for any broker or finder's commission, fee or similar
compensation.
3.11.2 WCTV and WilTech represent and warrant to CVSI as follows:
(a) Corporate Status and Authority. Each of WilTech and WCTV is a
corporation duly incorporated, validly existing and in good standing under the
laws of Delaware. WCTV is qualified to do business in all states in which the
conduct of its business requires such qualification, except for those
jurisdictions where failure to be so qualified would not, individually or in the
aggregate, have a have a material adverse effect on its assets, business,
results of operations or condition (financial or other). Each of WilTech and
WCTV have the corporate power and authority to execute and deliver this
Agreement and the Related Agreements and to perform its obligations hereunder
and thereunder.
(b) Authority for Agreement. The execution, delivery and performance of
this Agreement and the Related Agreements and the consummation of the
transactions contemplated herein have been duly authorized by all necessary
corporate action on WCTV's and WilTech's part. This Agreement has been duly
executed and delivered by WCTV and WilTech and constitutes, and the Related
Agreements when so executed and delivered each will constitute, its valid and
legally binding obligation enforceable in accordance with its terms, except to
the extent that the enforceability hereof and thereof (i) may be limited by any
applicable bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium or other similar laws, now or hereafter in effect, relating to
creditors' rights generally or (ii) may be subject to general principles of
equity (whether such enforceability is considered in a proceeding in equity or
at law).
(c) No Conflict. No Approval is required on WCTV's or WilTech's part in
connection with the execution and delivery of this Agreement or the Related
Agreements or the consummation of the transactions contemplated herein. The
execution, delivery and performance of this Agreement and the Related Agreements
by WCTV and WilTech in accordance with their respective terms will not conflict
with or result in any violation of or default under any provision of its
Certificate of Incorporation or By-Laws or of any material mortgage, lease,
agreement, instrument, permit, franchise, license, judgment, order, decree, law,
rule or regulation applicable to it.
(d) Brokers. All negotiations relating to this Agreement and the
transactions contemplated herein have been carried on without the intervention
of any person acting on its behalf in such manner as to give rise to any valid
claim against the other party for any broker or finder's commission, fee or
similar compensation.
3.12 COVENANTS AND AGREEMENTS OF CVSI AND GPPV. CVSI and GPPV covenant and
agree with WCTV and WilTech as follows:
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3.12.1 NEGATIVE COVENANTS. Pending and prior to the Closing Date, neither
CVSI nor GPPV will, without the prior written approval of WilTech, do or agree
to do any of the following:
(a) Dispositions. Sell, assign, lease or otherwise transfer or dispose of
any of the Contributed Assets; provided, however, that CVSI and GPPV may sell,
assign, lease or otherwise transfer or dispose of any of such Contributed Assets
if such Contributed Assets are expended in the ordinary course of business,
consistent with such party's past business practices and with customary
practices in the pay-per-view industry, and property or equipment of like kind
and equivalent value is substituted therefor.
(b) Customer Agreements. Enter into any customer agreement, contract,
commitment or understanding relating to or affecting the Contributed Assets, the
Network, or the business and operations thereof, except those which are in the
ordinary course of business and are consistent with CVSI's and GPPV's past
business practices.
(c) Additional Contracts. Materially modify or amend any contract or
agreement comprising the Contributed Assets or enter into any other contracts,
leases, commitments, understandings, licenses, or other agreements relating to
or affecting the Contributed Assets, the Network, or the business and operations
thereof (collectively, "Additional Contracts") or incur any obligation or
liability (contingent or absolute) relating to or affecting the Assets, the
System, or the business or operations thereof; provided, however, that CVSI and
GPPV may enter into such Additional Contracts in the ordinary course of business
consistent with such party's past business practices and with customary
practices in the pay-per-view industry.
(d) Breaches. Do or omit to do any act (or permit such action or omission)
which will cause a material breach of any contract or agreement comprising the
Contributed Assets or any other contract, understanding, commitment, obligation,
lease, license or other agreement to which CVSI or GPPV is a party or by which
such parties are bound and which relates to or affects the Contributed Assets,
the Network, or the business and operations thereof.
(e) Actions Affecting Authorizations or Contracts. Do or omit to do any act
which may jeopardize the validity or enforceability of or rights under the
Authorizations, or any material lease or other contract, or which materially
diminishes the value thereof.
(f) Accounts. Accelerate the collection of Accounts Receivable, or
decelerate the payment of accounts payable, except to conform with CVSI's or
GPPV's past business practices.
3.12.2 AFFIRMATIVE COVENANTS. Pending and prior to the Closing Date, CVSI
and GPPV will each:
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(a) Preserve Existence. Preserve its corporate existence and business
organization intact, maintain its existing franchises and licenses, use its
commercially reasonable efforts to preserve for the Company relationships with
suppliers, customers, employees and others having business relations with CVSI
and GPPV, all of the foregoing being required only to the extent that the
failure to do would have a material adverse effect upon the Contributed Assets,
the Network, or the business and operations of the Network, and keep all
physical assets comprising the Contributed Assets and the Network in their
present condition, ordinary wear and tear excepted.
(b) Normal Operations. Subject to the terms and conditions of this
Agreement (including, without limitation, Section 3.12.1(a)), (i) carry on the
businesses and activities of the Contributed Assets, the Network and the CVS
Business, including without limitation, the sale of services to customers,
entering into other agreements, leases, commitments or understandings in the
usual and ordinary course of business consistent with CVSI's and GPPV's past
business practices and with customary practices in the pay-per-view industry;
(ii) pay or otherwise satisfy all obligations of the Contributed Assets, the
Network and the CVS Business as they come due and payable; (iii) maintain all of
physical assets comprising the Contributed Assets and the Network in customary
repair, order and condition; and (iv) maintain its books of account, records,
and files in substantially the same manner as heretofore.
(c) Maintain Authorities. Maintain the validity of the Authorities, and
comply in all material respects with all applicable rules and regulations of the
Federal Communications Commission or any another applicable regulatory body.
(d) Taxes. Pay or discharge when due and payable all tax liabilities and
obligations, including without limitation those for federal, state or local
income, property, unemployment, withholding, sales, transfer, stamp,
documentary, use and other taxes, which relate to the Contributed Assets, the
Network or the CVS Business, or the business or operations thereof, unless being
contested in good faith.
(e) Corporate Action. Take all corporate action under the law of any state
having jurisdiction over such parties necessary to effectuate the transactions
contemplated by this Agreement and by the agreements and instruments called for
hereunder.
(f) Transfer Tax; Bulk Sales. Take all necessary action to provide for the
payment of all applicable state sales, transfer or use taxes, and to comply with
all applicable bulk transfer and similar laws, in connection with the
transactions contemplated by this Agreement and the agreements and instruments
called for hereunder.
(g) Other Information; Supplements to Schedules. Provide to WilTech all
such other information (including information regarding GPPV's or CVSI's
customers and suppliers) and copies of documents, as WilTech may reasonably
request,
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provided that they relate to or affect the Contributed Assets, the
Network, the CVS Business, or the business and operations thereof. From time to
time prior to the Closing Date and on the Closing Date, GPPV will promptly
supplement or amend the Schedules attached hereto with respect to any matter
hereafter arising or discovered by GPPV or CVSI, which, if existing or occurring
at the date of this Agreement, would have been required to be set forth or
described in such Schedules.
(h) Engineering Inspections. Prior to the Closing, permit WilTech and
WilTech's consulting engineers and other representatives, agents, employees and
independent contractors, at WilTech's expense, to conduct engineering and other
inspections of the Network and the facilities in a manner so as not to disrupt
the operations of GPPV or CVSI.
(i) Insurance. Maintain in full force and effect all of GPPV's and CVSI's
existing casualty, liability, and other insurance relating to or affecting the
Contributed Assets, the Network, the CVS Business, or the business and
operations thereof, through the day immediately prior to the Closing Date, in
amounts not less than those in effect on the date hereof.
(j) Violations. Upon receiving notice or otherwise becoming aware of any
violation relating to the Authorizations, or relating to Contributed Assets, the
Network, the CVS Business, or the business and operations thereof, of any
applicable rules and regulations of the Federal Communications Commission, or
any material violations under any other applicable statutes, rules, regulations,
or laws, promptly notify WilTech and, at GPPV's or CVSI's expense, cure all such
violations prior to the Closing Date.
3.13 COVENANTS AND AGREEMENTS OF WILTECH AND WCTV. WilTech and WCTV
covenant and agree with GPPV and CVSI as follows:
3.13.1 CORPORATE ACTION. Prior to the Closing, WilTech and WCTV shall take
all corporate action under the law of the State of Delaware necessary to
effectuate the transactions contemplated by this Agreement and the agreements or
instruments called for hereunder; provided, however, that GPPV shall take all
actions relating to the formation of the Company under the general partnership
laws of the State of Oklahoma, including all fictitious name filings and similar
requirements.
SECTION 4
PROFIT, LOSS AND DISTRIBUTIONS
4.1 ALLOCATION OF PROFITS AND LOSSES.
4.1.1 PROFITS. After giving effect to the special allocations set forth in
Section 4.3, Profits shall be allocated among the Interest Holders as follows:
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4.1.1.1 to the Partners in proportion to and in an amount not greater than
the excess, if any, of the aggregate amount of Losses previously allocated to
the respective Partner from the Company's inception through the end of the
preceding year over the Profits previously credited to such Partner from the
Company's inception through the end of the preceding year;
4.1.1.2 then, the balance, if any, to the Partners in accordance with their
Percentage Interests.
4.1.2 LOSSES. After giving effect to the special allocations set forth in
Section 4.3, Losses shall be allocated as follows:
4.1.2.1 to the Partners in accordance with their Percentage Interests
provided Losses shall not be allocated to a Partner in an amount in excess of
its positive balance in its Capital Account and its share of the Company's
Minimum Gain (if any), determined in accordance with Treas. Reg. ss.1.704-2(g),
determined immediately prior to such allocation;
4.1.2.2 then, the balance, if any, to the other Partner, until the
aggregate amount of Losses to be allocated to such Partner is equal to such
Partner's Capital Account Balance and its share of the Company's Minimum Gain;
4.1.2.3 then, the balance, if any, to the Partners in accordance with their
Percentage Interests.
4.2 DISTRIBUTION OF AVAILABLE CASH. Available Cash shall be distributed to
the Interest Holders no less frequently than quarterly, within 45 days of the
end of each fiscal quarter of the Company, to the Partners in accordance with
their Percentage Interest except as otherwise provided in Sections 7.2 and 7.3.1
following the dissolution of the Company.
4.3 CHARGEBACKS AND SPECIAL ALLOCATIONS.
4.3.1 MINIMUM GAIN CHARGEBACK. Except as set forth in Treas. Reg.
ss.1.704-2(f), if during any fiscal year there is a net decrease in Minimum
Gain, each Interest Holder, prior to any other allocation under this Section 4,
shall be specially allocated items of income and gain for such fiscal year (and,
if necessary, subsequent fiscal years) in an amount equal to that Interest
Holder's share of the net decrease in the Minimum Gain, computed in accordance
with Treas. Reg. ss.1.704-2(g). Allocations of income and gain under this
Section 4.3.1 shall be made first from gain recognized from the disposition of
Company assets subject to Nonrecourse Liabilities, to the extent of the Minimum
Gain attributable to those assets, and thereafter from a pro-rata portion of the
Company's other items of income and gain for the fiscal year. It is the intent
of the parties that any allocation under this Section 4.3.1 shall constitute a
"minimum gain chargeback" under Treas. Reg. ss.1.704-2(f).
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4.3.2 INTEREST HOLDER MINIMUM GAIN CHARGEBACK. Except as otherwise provided
in Treas. Reg. ss.1.704-2(i)(4), if during any fiscal year there is a net
decrease in Interest Holder Minimum Gain attributable to an Interest Holder
Nonrecourse Liability, each Interest Holder who has a share of the Interest
Holder Minimum Gain attributable to such Interest Holder Nonrecourse Liability
shall be specially allocated items of income and gain for such fiscal year (and,
if necessary, subsequent fiscal years) in an amount equal to that Interest
Holder's share of the net decrease in the Interest Holder Minimum Gain. This
allocation shall be made after the allocation under Section 4.3.1, and prior to
any other allocation under this Section 4. Allocations of income and gain under
this Section 4.3.2 shall be made first from gain recognized from the disposition
of Company assets subject to Interest Holder Nonrecourse Liabilities to the
extent of Interest Holder Minimum Gain attributable to those assets, and
thereafter from a pro-rata portion of the Company's other items of income and
gain for the taxable year. It is the intent of the parties that any allocation
under this Section 4.3.2 shall constitute a "minimum gain chargeback" under
Treas. Reg. ss.1.704-2(i).
4.3.3 QUALIFIED INCOME OFFSET. If any Interest Holder unexpectedly receives
any adjustment, allocation, or distribution described in Treas. Reg.
ss.1.704-1(b)(2)(ii)(d)(4), Section 1.704-1(b)(2)(ii)(d)(5), or Section
1.704-1(b)(2)(ii)(d)(6), items of income and gain shall be specially allocated
to each such Interest Holder in an amount and manner sufficient to eliminate, to
the extent required by the Regulations, the Adjusted Capital Account Deficit of
such Interest Holder as quickly as possible. An allocation under this Section
4.3.3 shall be made only if and to the extent that such Interest Holder would
have an Adjusted Capital Account Deficit after all other allocations provided
for under this Section 4.3 have been tentatively made as if this Section 4.3.3
were not in the Agreement.
4.3.4 NONRECOURSE DEDUCTIONS. Nonrecourse Deductions shall be specially
allocated among the Interest Holders in accordance with the rules provided for
in Treas. Reg. ss.1.704-2(e).
4.3.5 INTEREST HOLDER NONRECOURSE DEDUCTIONS. Any Interest Holder
Nonrecourse Deductions shall be specially allocated to the Interest Holders who
bear the risk of loss with respect to the Interest Holder Nonrecourse Liability
to which the Interest Holder Nonrecourse Deductions are attributable, as
determined in accordance with Treas. Reg. ss.1.704-2(b), in the proportion in
which they share such risk of loss.
4.3.6 CODE SECTION 754 ADJUSTMENT. To the extent an adjustment to the tax
basis of any Company asset under Code Section 734(b) or Code Section 743(b) is
required under Treas. Reg. ss.1.704-1(b)(2)(iv)(m) to be taken into account in
determining Capital Accounts, the amount of the adjustment to the Capital
Accounts shall be treated as an item of gain (if the adjustment increases the
basis of the asset) or loss (if the adjustment decreases basis), and the gain or
loss shall be specially allocated to the Interest Holders in a manner consistent
with the manner in which their Capital Accounts are required to be adjusted
under that Section of the Regulations.
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4.3.7 WITHHOLDING. All amounts required to be withheld under Code Section
1446 or any other provision of federal, state, or local law shall be treated as
actually distributed to the affected Interest Holder for all purposes under this
Agreement.
4.3.8 ALLOCATIONS WITH RESPECT TO CONTRIBUTED PROPERTY. The Company shall
make such allocations that are necessary to reflect contributions or
distributions of property with an adjusted tax basis different than the
property's fair market value to comply with Code Section 704(c) and Treas. Reg.
ss.1.704-3, including allocations of income, gain, loss or deduction with
respect to contributed property.
4.3.9 ALLOCATIONS RELATING TO TAXABLE ISSUANCE OF PARTNERSHIP. Any income,
gain, loss or deduction realized as a direct or indirect result of the issuance
of an interest in the Company to an Interest Holder (the "Issuance Items") shall
be allocated among the Interest Holders so that, to the extent possible, the net
amount of such Issuance Items, together with all other allocations under this
Agreement to each Interest Holder, shall be equal to the net amount that would
have been allocated to each such Interest Holder if the Issuance Items had not
been realized.
4.4 LIQUIDATION.
4.4.1 Upon the liquidation of the Company, the assets of the Company shall
be distributed to the Interest Holders in accordance with Sections 7.2 and
7.3.1.
4.4.2 No Interest Holder shall be obligated to restore a negative Capital
Account, whether following dissolution or liquidation or otherwise.
4.5 REGULATORY ALLOCATIONS.
4.5.1 All Profits and Losses shall be allocated, and all distributions
shall be made, to the Persons shown on the records of the Company to have been
Interest Holders as of the last day of the fiscal year for which the allocation
or distribution is to be made. Notwithstanding the foregoing, unless the
Company's fiscal year is otherwise separated into two or more short years, if
there is a Transfer or an Involuntary Withdrawal during the taxable year, the
Profits and Losses shall be allocated between the original Interest Holder and
the successor on the basis of the number of days each was an Interest Holder
during the taxable year.
4.5.2 The Partners are hereby authorized, upon the advice of the Company's
tax counsel, to amend this Section 4 if necessary to comply with the Code and
the Regulations promulgated under Code Sections 704(b) and (c); provided,
however, that no amendment shall materially affect the distributions to an
Interest Holder without the Interest Holder's prior written consent.
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4.5.3 Special allocations of items of income or gain pursuant to Section
4.3 may not be consistent with the manner in which the Partners intend to divide
the Profits, Losses, Nonrecourse Deductions, gain and similar items.
Accordingly, Profits, Losses, Nonrecourse Deductions, and other items shall be
allocated subsequent to any such special allocations among the Partners in a
manner consistent with Treas. Reg. ss.ss. 1.704-1(b) and 1.704-2 so as to
prevent such special allocations from distorting the manner in which overall
Company Profits, Losses and Nonrecourse Deductions are intended to be allocated
among the Partners pursuant to section 4.1. In general, the Partners and the
Company anticipate and agree that this will be accomplished by specially
allocating other Profits, Losses and items of income, gain, loss and deduction
among the Partners in the current year or subsequent years so that the net
amount of such special or other unintended allocations to each Partner is zero
after taking into account present value concepts.
SECTION 5
MANAGEMENT, RIGHTS, POWERS AND DUTIES
5.1 MANAGEMENT. Management of the Company, other than Day-to-Day Management
(as defined in Section 5.2) shall be vested in the Partners through an Operating
Committee ("Operating Committee"). Initially, the Operating Committee shall
consist of five (5) uncompensated members ("OC Members"), three to be appointed
by CVSI and two to be appointed by WCTV. From and after the first annual
re-election of OC Members, each holder of outstanding Interests shall be
entitled to appoint/elect its proportionate share (based on relative Percentage
Interests) of OC Members. If, however, CVSI and/or WCTV holds more than 20% in
Interests in the Company, such Partner shall be entitled to appoint at least two
persons to the Operating Committee and if as a result of the foregoing, the
Partner holding a majority of the Interests has not appointed a majority of the
OC Members, such Partner shall be entitled to appoint such number of OC Members
as will constitute a majority of the OC Members and the number of OC Members on
the Operating Committee will be increased appropriately to reflect the
foregoing. The Partner holding the greater Percentage Interests in the Company
shall appoint the "Chief Executive Officer and Chairman" ("CEO") of the
Operating Committee and the other Partner shall appoint the Vice Chairman of the
Operating Committee. The initial OC Members shall be, on CVSI's behalf, J. Roger
Faherty (who shall be the initial CEO), Rich Kirby and a person to be designated
by GPPV on the Closing Date and on WCTV's behalf, Del Bothof (who shall be the
initial Vice Chairman) and Bunker Sessions. The OC Members shall communicate
with each other on a regular basis with regard to Company activities.
5.1.1 MANAGEMENT THROUGH OPERATING COMMITTEE. Except as determined by the
Operating Committee pursuant to this section 5 or otherwise pursuant to this
Agreement, no Partner shall have any right or authority to take any action on
behalf of the Company with respect to third parties. It is the parties'
intention to manage through consensus wherever possible.
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5.1.2 VACANCIES. Each OC Member shall hold office until death, resignation
or removal at the pleasure of the Partner which appointed such OC Member. If an
OC Member, the CEO or Vice Chairman resigns or withdraws, the Partner that
appointed the vacating OC Member, CEO or Vice Chairman, as the case may be,
shall appoint such person's successor.
5.2 DAY-TO-DAY MANAGEMENT. Day-to-Day Management shall refer to the daily
and ongoing operational, development and strategic management of the Company
exclusive of Majority Decisions and Super Majority Decisions which are reserved
for the Operating Committee pursuant to Section 5.3. The Company's chief
operating officer ("COO") shall be responsible for Day to Day management and
shall report to, and be subject to the oversight, supervision and ultimate
control of, the Operating Committee. The position of COO shall initially be
offered to Barry Goldberg, upon such terms and conditions as shall be described
in an offer letter to be signed by GPPV and mutually agreed upon by the parties
following the Formation Date and before the Closing Date. Any other Company
officers shall report to the COO. Any officer of the Company, including the COO,
may be removed at any time, with or without cause, by the Operating Committee.
All officers shall have such power and authority as the Operating Committee or
the COO may delegate. In the event of the resignation, death or removal or the
COO, a replacement shall be appointed by the Operating Committee in accordance
with Section 5.7.8.
5.3 VOTING; DECISIONS BY OPERATING COMMITTEE. Each Partner shall designate
one OC Member to vote on Majority Decisions and Super Majority Decisions of the
Operating Committee. All voting shall be in accordance with the Partners'
respective Percentage Interests in the Company. All matters as specified in
Section 5.6 to properly come to a vote of the Operating Committee shall be
decided by a simple majority, by Percentage Interests, of the Partners (a
"Majority Vote"). All matters specified in Section 5.7 to properly come to a
vote of the Operating Committee shall be decided by an affirmative vote of at
least 81% of the Percentage Interests (a "Super Majority Vote"). Regular
meetings of the Operating Committee shall be held bi-monthly on or about the
first mutually convenient business day of every other month. Either Partner may
request a special meeting of the Operating Committee upon at least 10 days prior
written notice to the other Partner. At least five days prior to each Operating
Committee, the agenda for such meeting shall be prepared and distributed to the
Partners, in the event of a regular bi-monthly meeting, by the COO or the
Chairmen and, in the event of a special meeting, by the Partner calling the
meeting. Operating Committee meetings shall be held at the Company's offices
unless the Partners agree to the contrary. Attendance at meetings may be in
person or by telephone conference call.
5.3.1 QUORUM. At each meeting of the Operating Committee, the presence in
person or by telephone of at least two OC Members designated by each Partner
shall be necessary to constitute a quorum for the transaction of business.
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5.3.2 WRITTEN CONSENTS. Any action required or permitted to be taken at a
meeting of the Operating Committee may be taken without a meeting if at least
two OC Members designated by each Partner consent thereto in writing.
5.4 BUDGETS AND BUSINESS PLANS. At least 10 business days prior to each
scheduled meeting of the Operating Committee which falls within two months of
the beginning of a fiscal quarter, the COO in conjunction with the Company's
financial controller or the equivalent thereof, shall prepare and distribute to
the OC Members a budget and business plan for the following calendar quarter.
The COO shall prepare an initial budget and business plan, a draft of which is
attached as Exhibit G which shall be reviewed, modified and adopted at the first
Operating Committee meeting. The budget shall provide a projection of Company
revenues and Company expenses (broken down into separate categories with backup,
where appropriate) together with a projection of the monthly cash flow needs and
whether any capital contributions or external financing will be necessary to
meet Company's cash flow needs. The business plan shall include, among other
things, the Company's planned activities for the upcoming quarter, the monthly
capital needs thereof, fixed asset requirements, staffing changes and other
matters which are pertinent to planning for the next quarter. The Operating
Committee shall discuss, revise and approve the budget and business plan.
5.5 MONTHLY FINANCIAL STATEMENTS. Within fifteen business days after the
close of each month, the COO shall cause the Company to prepare and distribute
to the Partners an income statement, a balance sheet and a cash flow statement
(prepared in accordance with GAAP) and other statements and information
reasonably requested by GPPV or WCTV, for the prior month. Such instruments
shall include information in addition to, or more detailed than, that required
by GAAP to the extent reasonably requested by the Operating Committee and shall
include at a minimum, with respect to Company receipts, a breakdown from the
Network and other revenue sources and product lines and with respect to
expenses, a breakdown by category and such other information as the COO, with
the advice of the OC Members deem reasonably pertinent.
5.6 MAJORITY DECISIONS. The following decisions or matters (collectively
"Majority Decisions") shall require an affirmative Majority Vote of the
Partners.
5.6.1 The increase in Company expenses or capital expenditures for a
quarter in excess of that set forth in the budget for that quarter by more than
10%;
5.6.2 The purchase or lease of property for use by the Company where the
purchase price or aggregate lease cost exceeds $150,000;
5.6.3 The hiring or firing of any Company employee where the annual
aggregate salary to be paid to such employee exceeds $125,000;
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5.6.4 The appointment of senior operating officers of the Company other
than the COO and any change in the compensation to be paid by the Company to any
such officers;
5.6.5 The Company borrowing funds or creating a liability from any source
or guaranteeing any obligation where the aggregate borrowing or guarantee
exceeds $150,000;
5.6.6 The entry into any contract, agreement or other obligation with any
Person where the aggregate expenditure exceeds $150,000;
5.6.7 The commencement of any legal action or arbitration proceeding
(except for routine debt collection);
5.6.8 The replacement of the Company's CEO; and
5.6.9 The grant of options with a fair market value exercise price to
acquire Interests in the Company to Company officers and management, excluding
noncompensated officers and management ("Employee Options") in an amount not to
exceed 5% of the aggregate Interests (by Percentage Interests) held by CVSI and
WCTV.
5.6.10 The selection of, or after selection, any change in the Company's
auditors or legal counsel of the Company.
5.7 SUPER MAJORITY DECISIONS. The following decisions or matters
(collectively the "Super Majority Decisions") shall require a Super Majority
Vote.
5.7.1 Except as otherwise provided for in Section 6, admission of
additional Partners to the Company, the issuance of Interests in the Company to
any third party including a public offering, the granting of any rights to
acquire an Interest in the Company, excluding the grant of Employee Options
which in the aggregate, do not exceed 5% of the aggregate Interests (by
Percentage Interests) held by WCTV and CVSI or other actions which could result
in the dilution of WCTV's or CVSI's Interests;
5.7.2 Approval of a merger or consolidation of the Company with or into
another Person or the conversion of the Company into a different form of
juridical entity;
5.7.3 The termination of the Company; or the sale or disposition of all or
substantially all of the assets of the Company; or the continuation of the
Company beyond the term specified in Section 2.4;
5.7.4 The sale, setting or spinning off or separation of any Company
business into a separate corporate or partnership entity;
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5.7.5 The entry into any joint venture or partnership agreement or the
establishment of subsidiary which will not be wholly owned by the Company or the
establishment of a business entity which will be owned with a third party;
5.7.6 The amount and timing of distributions to the Partners;
5.7.7 The selection of a new President or COO;
5.7.8 The provisions of services by one Partner or an Affiliate thereof to
the Company except for the services to be provided for in the initial GPPV and
WilTech Service Agreements;
5.7.9 The approval of the initial business plan and future business plans
and quarterly and annual budgets and material adjustments to the WilTech and
GPPV Service Agreements;
5.7.10 Any non-budgeted financial expenditure in excess of $1,000,000 or
the entry into any contract not identified in the budget where the Company's
aggregate commitment will be in excess of $1,000,000;
5.7.11 The grant of Employee Options (i) where the aggregate amount of
Employee Options exceed 5% of the aggregate Interests (by Percentage Interests)
held by CVSI and WCTV and (ii) with an exercise price below fair market value on
the date of grant;
5.7.12 The registration of any Interests for an initial public offering or
otherwise;
5.7.13 The requirement that the Interest Holders make an additional capital
contribution to the Company, including in connection with a Proposed Transaction
as provided for in Section 5.10;
5.7.14 The Company borrowing funds or creating a liability from any source
or guaranteeing any obligation where the aggregate borrowing or guarantee
exceeds $250,000, treating any loan as an additional capital contribution or any
borrowing which is convertible into any Interest in the Company;
5.7.15 The increase in Company expenses or capital expenditures for a
quarter in excess of that set forth in the budget for that quarter by more than
25%; or
5.7.16 The determination to change the programming content of the Network
or the server-based channels from that currently contained on the Network or
envisioned by the initial business plan.
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5.8 CONFIDENTIALITY. Each Partner shall, and shall cause each of its
Affiliates, and each of its and their respective partners, shareholders,
directors, officers, employees and agents (collectively, "Agents") to, keep
secret and retain in strictest confidence, and not use for any purpose except as
contemplated by this Agreement, any and all confidential information relating to
the Company which is (i) not otherwise in the public domain and (ii) not
required to be disclosed by such Partner, its Affiliates or Agents pursuant to
Federal, state or local law, and shall not disclose such information, and shall
cause its Agents not to disclose such information, to anyone except (x) such
Partner's Affiliates or Agents who have a need to know such information in
connection with the matters contemplated by this Agreement, and (y) other
Persons (such as lenders to a Partner) who have a bona fide business reason for
obtaining such information in connection with their dealings with such Partner
and who agree in writing to keep in confidence all confidential information in
accordance with the terms of this Section 5.8. The obligations under this
Section 5.8 shall survive the termination of this Agreement for a period of
three years.
5.9 AFFILIATED SERVICES.
5.9.1 AFFILIATED SERVICES. The Company shall consider opportunities to
leverage and integrate the Company with the existing businesses of WCTV,
WilTech, CVSI and GPPV, and the parties would seek to take advantage of such
opportunities (subject to any regulatory restrictions, including without
limitation any transfer pricing restrictions), including without limitation any
opportunity to allow the Company to have WCTV provide transmission services
currently being provided to GPPV by third parties; however, the Company shall be
free to explore the most effective and efficient solutions and services
available from any and all potential vendors.
5.9.2 Except as otherwise requested, directed or provided for by its
customers, the Company hereby grants to GPPV and its Affiliates the right of
first refusal to supply adult programming or content which GPPV or its
Affiliates own or exclusively control to the Company pursuant to the following
conditions:
(i) CVSI owns at least 10% of the Percentage Interests in the Company;
(ii) in accordance with the GPPV adult rate schedule as provided for in the
GPPV Services Agreement;
(iii) that there is no change in control of GPPV or CVSI as defined in
Section 6.5.2 herein;
(iv) that GPPV is at the time in compliance with the provisions of the GPPV
Services Agreement.
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The Company agrees that at such time that GPPV or its Affiliates offer (i)
interactive television applications; or (ii) horse racing or other gaming
applications, the Company shall discuss in good faith any potential for the
mutual development and/or distribution thereof.
5.9.3 RIGHT OF FIRST REFUSAL ON STORE AND FORWARD SERVICES. The Company
hereby grants to WCTV and its Affiliates, for so long as WCTV owns at least 10%
of the Percentage Interests in the Company, the right of first refusal to supply
Store and Forward Services as described in the Vyvx Services Agreement.
5.10 OTHER OPPORTUNITIES. For two years following the Closing Date, CVSI or
GPPV, as applicable, shall grant the Company a right of first refusal, on a
transaction by transaction basis, with respect to proposed acquisitions or other
arrangements with Spectravision, Viewer's Choice and/or Request currently under
consideration by CVSI or GPPV ( such a transaction is referred to as a "Proposed
Transaction"). If a Proposed Transaction is achievable, the Company shall have
no more than 30 days to determine whether to pursue a Proposed Transaction and
may determine whether, pursuant to Sections 3.9, 5.3 and 5.7, to require the
Interest Holders to make additional capital contributions to fund such Proposed
Transaction. The CEO shall have primary authority to negotiate on the Company's
behalf with regard to transaction. The Vice Chairman and COO shall have the
right to participate in such discussions and negotiate a Proposed Transaction.
The Company shall reimburse GPPV or WilTech for any agreed upon reasonable
direct out of pocket expenses incurred in connection with a Proposed
Transaction.
5.10.1 If the Company elects not to pursue a Proposed Transaction as a
result of a negative vote by WCTV or CVSI, then whichever of those two Partners
voted against the proposed Transaction shall refrain from interfering with the
Proposed Transaction, either directly or through its Affiliates, for a period of
45 days from the date of the negative vote. If the Company elects not to pursue
a Proposed Transaction as a result of a negative vote of both Partners within
such 30 day time period, or the Company is unable to consummate a Proposed
Transaction after the good faith efforts of the Company and the Partners, CVSI
and/or GPPV may elect upon prior written notice to WCTV and WilTech to pursue
such Proposed Transaction itself and WCTV, WilTech and their Affiliates shall
refrain from interfering, either directly or indirectly, in CVSI's and GPPV's
efforts to consummate the Proposed Transaction itself for a period of 45 days
following receipt of such notice. If the Partner who is allowed to pursue the
Proposed Transaction, as described above, is unable to secure a letter of intent
or a more binding agreement with respect to such Proposed Transaction within
such 45 day period, either Partner or their Affiliates shall be free to pursue
such Proposed Transaction outside of the Company. Other than during any
applicable 45 day restriction period described above, and subject to such right
of first refusal set forth above, neither CVSI, GPPV, WCTV, WilTech, nor their
respective Affiliates are prohibited from pursuing an acquisition of or business
combination with Spectravision, Viewer's Choice, Request, or any other Person.
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5.11 LIABILITY AND INDEMNIFICATION.
5.11.1 A Partner shall not be liable, responsible or accountable, in
damages or otherwise, to any other Partner or to the Company for any act
performed by the Partner with respect to Company matters in good faith and with
that degree of care that an ordinarily prudent person in a like position would
use under similar circumstances. In performing duties hereunder, a Partner shall
be entitled to rely on information, opinions, reports or statements, including
financial statements and other financial data, presented by one or more agents
or employees of the Company or by counsel or other professionals retained by the
Company.
5.11.2 The provisions of Section 5.11.1 shall not eliminate or limit the
liability of any Partner if it is determined by the judgment or order of a court
of competent jurisdiction, the time for appeal from which shall have expired
without appeal having been taken, that (i) the Partner's acts or omissions were
in bad faith or involved intentional misconduct or a knowing violation of law,
or (ii) the Partner personally gained a financial profit or other advantage to
which he was not legally entitled.
5.11.3 No Partner shall be liable, responsible or accountable, in damages
or otherwise, for any liability or act or omission of the Company or another
Partner.
5.11.4 The Company shall indemnify and hold harmless each Partner from and
against all expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by a Partner in connection
with any threatened, pending or completed action, suit or proceeding whether
civil, criminal, administrative or investigative (including an action by or in
the right of the Company) (an "Indemnified Proceeding") to which a Partner is,
was or at any time becomes a party or is threatened to be made a party by reason
of the fact that the Partner is or was the Partner, unless a court of competent
jurisdiction, by judgment or order the time for appeal from which shall have
expired without appeal having been taken, shall have determined that (i) the
Partner's acts were committed in bad faith or were the result of active and
deliberate dishonesty and were material to the cause of action so adjudicated,
or (ii) the Partner personally gained in fact a financial profit or other
advantage to which he was not legally entitled.
The Company shall advance all expenses reasonably incurred by or on behalf
of the Partner in connection with any Indemnified Proceeding within 20 days
after the receipt by the Company of a statement or statements from the Partner
requesting such advance or advances from time to time. Such statement or
statements shall identify the nature and amount of the expenses to be advanced
with reasonable specificity and shall be accompanied by a written undertaking by
the Partner to repay any expenses advanced if it shall ultimately be determined
by the order or judgment of a court of competent jurisdiction the time for
appeal from which shall have expired without appeal having been taken, that the
Partner was not entitled to indemnification with respect to the Indemnified
Proceeding with respect to which such advance was made.
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The termination of any Indemnified Proceeding or of any claim, issue or
equivalent shall not of itself adversely affect the right of the Partner to
indemnification or create a presumption that the Partner did not act in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interests of the Company.
5.12 TITLE HOLDING. Title to the Company's property shall be held in the
name of the Company, or if held be another party, as nominee for the Company.
SECTION 6
TRANSFER OF INTERESTS
AND
WITHDRAWALS OF PARTNERS
6.1 DEFINITIONS A "Substituted Partner" is a person admitted to the Company
as a Partner who acquired his Interest from a former Partner. An "Additional
Partner" is a person acquiring an Interest (other than an Interest previously
owned by a Partner) directly from the Company and who is admitted to the Company
as a Partner in accordance with each of the provisions of this Agreement.
6.2 ADDITIONAL AND SUBSTITUTED PARTNERS. No Additional Partners may be
admitted to the Company without the unanimous written consent of the Partners.
No Substituted Partners may be admitted to the Company except as otherwise
provided for in Sections 6.3 and 6.4.
6.3 LIMITATIONS ON ASSIGNMENT.
6.3.1 Except as provided under Section 6.3.2 and 6.4, a Partner may not
pledge, hypothecate, sell or exchange or otherwise encumber or dispose his
Interest.
6.3.2 Except for transfers by operation of law or pursuant to Section 6.4,
a Partner may not transfer, pledge or otherwise dispose of his Interest except
(i) to a corporation controlled by the transferring Partner or in which the
Transferring Partner holds a controlling interest or (ii) a corporation which
controls, directly or indirectly the Partner. For these purposes, a controlling
interest shall mean, with respect to a corporation, ownership of more than 50%,
by vote and value, of the stock of a corporation or, with respect to a
partnership, ownership, directly or indirectly of more than a 50% interest in
the capital or profits of a partnership.
6.3.3 If a transferee otherwise satisfies the requirements of this Section
6.3, such transfer shall not occur unless the transferee executes a counterpart
of this Agreement, and any certificate determined by the remaining Partner to be
necessary or appropriate and agrees to be bound by each of such document's terms
and provisions.
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6.4 RIGHT OF FIRST REFUSAL; BRING ALONG. If a Partner (the "Offering
Partner") wishes to Transfer all or a portion of its Interest ("Offered
Interest") to a third party, it shall first offer to Transfer the Offered
Interest to the other Partner (the "Non-Offering Partner") by giving written
notice thereof (the "Offer Notice"). The Non-Offering Partner shall have 30 days
from its receipt of the Offer Notice to propose the terms on which it is
prepared to acquire the Offered Interest by delivering a written notice of its
bid, containing the terms and conditions thereof, to the Offering Partner (the
"Bid Notice"). The Offering Partner may accept the bid contained in the Bid
Notice or shall have up to 60 days to obtain bona fide bids from third parties
for the Offered Interest. If any such bids contain more favorable economic terms
than the Bid Notice, Offering Partner shall give the Non-Offering Partner notice
within such 60 day period of such competing bid(s) specifying the terms thereof
and the identity of the third party(is) (the most favorable of such bids is
referred to as the "Competing Bid" and the Person providing the Competing Bid is
referred to as the "Prospective Partner"). The Non-Offering Partner shall have
30 days from its receipt of the Competing Bid to elect to: (i) match the
Competing Bid in which event Non-Offering Partner and Offering Partner will
enter into an agreement on terms and conditions consistent with the Competing
Bid for the Transfer of the Offered Interest to the Non-Offering Partner, (ii)
exercise its Bring Along Rights, as defined and provided for in Section 6.4.1,
or (iii) not match the Competing Bid or exercise its Bring Along Rights, in
which event the Offering Partner shall be free to Transfer the Offered Interest
to the Prospective Partner in accordance with the Competing Bid and the
provisions of Section 6.3 in which event the Prospective Partner shall be
admitted to the Partnership as an Additional or Substituted Partner, as the case
may be.
6.4.1 BRING ALONG. If the Non-Offering Partner elects not to match the
Competing Bid, the Non-Offering Partner may elect within the 30 day time period
to Transfer a portion of its Interest to the Prospective Partner on the same
terms and conditions contained in the Competing Bid ("Bring Along Rights"). In
that event, the Prospective Partner shall be required to acquire the Percentage
Interest contained in the Competing Bid from each of the Offering Partner and
the Non-Offering Partner in the same proportion as such Partners' respective
Percentage Interests in the Partnership.
6.5 CALL. On or after the following anniversary dates of the Closing Date,
WCTV shall have an option to purchase and CVSI shall have an obligation to sell
that portion of its Interest as follows: (i) On or after the second anniversary
of the Closing Date, that portion of CVSI's Interest in the Company as will
result in WCTV owning, as among CVSI, WCTV and Company employees holding
Employee Options ("Employee Option Holders") and treating such Employee Option
Holders as having exercised their Employee Options, 51% of the Percentage
Interests in the Company (the "First Call"); and (ii) on or after the third
anniversary of the Closing Date, that portion of CVSI's Interest in the Company
as will result in WCTV owning, as among CVSI, WCTV and Employee Option Holders
and treating such Employee Option Holders as having exercised their Employee
Options, 80% of the Percentage Interests in the Company (the "Second Call").
Notwithstanding the provisions
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of Section 6 or any other provision of this Agreement, CVSI shall not
transfer such portion of its Interest in the Company as would result in its
being unable to satisfy the First Call.
6.5.1 The purchase price to be paid by WCTV upon exercise of the First or
Second Calls shall be the product of (i) the Valuation Amount and (ii) the
Percentage Interest in the Company being transferred by CVSI to satisfy either
the First Call or the Second Call, as the case may be. Such Percentage Interest
shall be determined by dividing (a) the Interest being transferred by (b) the
aggregate amount of outstanding Interests in the Company. For these purposes and
to take into account the dilution caused by Employee Options and other options
or rights to acquire Interests in the Company, the aggregate amount of
outstanding Interests shall be determined using the same principles employed in
determining the "weighted average number of common shares and equivalents
outstanding" in the calculation of "earnings per share" for GAAP purposes.
6.5.2 CHANGE IN CONTROL. If there is a "change in control" of GPPV or CVSI
and in WCTV's reasonable discretion, being in partnership with the Person
acquiring control could be detrimental to WCTV's business reputation or such
Person is in a business competitive with the Company and/or WilTech or any of
its direct or indirect subsidiaries, WCTV shall be entitled to put all of its
Interest to CVSI at an offered price per Percentage Interest; CVSI may accept or
refuse the put. If CVSI refuses the put, WCTV may call all of CVSI's Interest at
price equal to the greater of (i) offered price per Percentage Interest or (ii)
the amount determined using the Valuation Amount. For these purposes, a change
in control will be deemed to have occurred only if (a) a majority of GPPV's
common stock is acquired by a Person or group of Persons acting in concert
during any 60 month period, (b) at least 30% of GPPV's common stock is acquired
by a Person or group of Persons acting in concert during any 12 month period and
a majority of the members of GPPV's or CVSI's Board of Directors are replaced by
directors not endorsed by the prior Board members, or (d) substantially all of
GPPV's or CVSI's assets are acquired by a Person or group of Persons acting in
concert during any 12 month period.
6.6 REASONABLENESS OF RESTRICTIONS. Each Partner hereby acknowledges the
reasonableness of the prohibitions contained in this Section 6 in view of the
purposes of the Company and the relationship of the Partners. The Transfer of
any Partnership Interests in violation of the prohibition contained in this
Section 6 shall be deemed invalid, null and void, and of no force or effect. Any
Person to whom Partnership Rights are attempted to be transferred in violation
of this Section shall not be entitled to vote on matters coming before the
Partners, participate in the management of the Company, receive distributions
from the Company or have any other rights in or with respect to the Partnership
Rights.
6.7 WITHDRAWAL.
6.7.1 No Partner or Interest Holder may voluntarily resign or withdraw from
the Company.
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6.7.2 An Involuntary Withdrawal shall occur, with respect to any Partner,
upon the occurrence of any of the following events:
6.7.2.1 the Partner makes an assignment for the benefit of creditors;
6.7.2.2 the Partner files a voluntary petition in bankruptcy;
6.7.2.3 the Partner is adjudged bankrupt or insolvent or there is entered
against the Partners an order for relief in any bankruptcy or insolvency
proceeding;
6.7.2.4 the Partner files a petition seeking reorganization, composition,
readjustment, dissolution, or similar relief under any statute, law or
regulation;
6.7.2.5 the Partner files an answer or other pleading admitting or failing
to contest the material allegations of a petition filed against the Partner in
any proceeding described in Sections 6.7.2.1 through 6.7.2.4;
6.7.2.6 the Partner seeks, consents to, or acquiesces in the appointment of
a trustee or receiver for or liquidation of the Partner or of all or any
substantial part of the Partner's properties;
6.7.2.7 any proceeding instituted against the Partner seeking
reorganization, composition, readjustment, liquidation, dissolution, or similar
relief under any statute, law, or regulation, continues for one hundred twenty
(120) days after the commencement thereof, or the appointment of a trustee,
receiver, or liquidator for the Partner or all or any substantial part of the
Partner's properties without the Partner's agreement or acquiescence, which
appointment is not vacated or stayed for ninety (90) days or, if the appointment
is stayed for ninety (90) days, after the expiration of the stay during which
period the appointment is not vacated; or
6.7.2.8 the dissolution and winding up of a Partner.
6.7.3 Immediately upon the occurrence of an event of Involuntary
Withdrawal, the successor to the withdrawn Partner shall thereupon become an
Interest Holder but shall not become a Partner.
SECTION 7
DISSOLUTION, LIQUIDATION
AND TERMINATION OF THE COMPANY
7.1 EVENTS OF DISSOLUTION. The Company shall be dissolved upon the
happening of any of the following events:
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7.1.1 the last date on which the Company is to dissolve as set forth in
Section 2.4;
7.1.2 upon the vote or written agreement of a Super-Majority of the OC
Members as provided in Section 5.7;
7.1.3 upon the occurrence of an Involuntary Withdrawal of a Partner that is
described in Sections 6.7.2.1 through 6.7.2.7 unless all of the other Partners
elect, to continue the business of the Company pursuant to the terms of this
Agreement.
7.2 PROCEDURE FOR WINDING UP AND DISSOLUTION.
If the Company is dissolved, the Partners shall wind up its affairs. On
winding up of the Company, the assets of the Company shall be distributed as
follows:
7.2.1 first, to third party creditors of the Company (excluding Partners
who are creditors) in satisfaction of liabilities of the Company;
7.2.2 second, to creditors of the Company who are Partners or their
Affiliates in satisfaction of liabilities of the Company; and
7.2.3 third, to Interest Holders, after giving effect to the allocations of
Profits and Losses provided for in Section 4.1, in proportion to their remaining
Capital Account balances with any excess distributed to the Partners in
accordance with Percentage Interests.
7.3 RETURN OF CONTRIBUTED PROPERTY; CONTINUING LICENSE.
7.3.1 Notwithstanding any provision of this agreement to the contrary, if
the dissolution of the Company occurs prior to WCTV exercising its First Call or
otherwise acquiring a majority of the Interests in the Company, the Company
shall distribute, to the parties to the extent possible, taking into account the
parties' relative Interests in the Company and their respective Capital Account
balances, the property contributed by such party to the Company as a
distribution in kind.
7.3.2 If the Company is continuing to operate the Network using the CABLE
VIDEO STORE name and related identity when the Company is to be dissolved and if
WCTV will continue to operate such Network, then GPPV shall assign all right
title and interst in and to the CABLE VIDEO STORE name and related marks and
identity and ther names and marks to WCTV.
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7.4 FILING OF ARTICLES OF DISSOLUTION. If the Company is dissolved
accordance with the terms hereof, the Partners shall promptly file any
document(s) required by law.
SECTION 8
BOOKS, RECORDS,
ACCOUNTING AND TAX ELECTIONS
8.1 BANK ACCOUNTS. All funds of the Company shall be deposited in a bank
account or accounts opened in the Company's name. The Partners shall determine
the institution or institutions at which the accounts will be opened and
maintained, the types of accounts, and the Persons who will have authority with
respect to the accounts and the funds therein. The Company's funds shall not be
commingled with the funds of any other Person.
8.2 BOOKS AND RECORDS. The Partners shall keep or cause to be kept complete
and accurate books and records of the Company and supporting documentation of
the transactions with respect to the conduct of the Company's business. The
books and records shall be maintained in accordance with sound accounting
practices and shall be available at the Company's principal office of business
for examination by any Partner or the Partner's duly authorized representative
at any and all reasonable times during normal business hours.
8.3 ANNUAL ACCOUNTING PERIOD. The annual accounting period of the Company
shall be its fiscal year. The Company's fiscal year shall be the 12 month period
ending December 31st until a different fiscal year is selected by the OC,
subject to the requirements and limitations of the Code.
8.4 REPORTS. In addition to the items and information described in Section
5.5, within 90 days after the end of each fiscal year of the Company, the COO
shall cause to be sent to each Person who was a Partner at any time during the
fiscal year then ended a complete accounting of the affairs of the Company for
the fiscal year then ended, reviewed by the Company's independent auditors. The
Company's financial statements shall be audited by auditors as selected or
changed in accordance with Section 5 if required by the OC. In addition, within
75 days after the end of each fiscal year of the Company, the COO shall cause to
be sent to each Person who was an Interest Holder at any time during the fiscal
year then ended that tax information concerning the Company which is necessary
for preparing the Interest Holder's income tax returns for that year.
8.5 TAX ELECTIONS. The Partners shall have the authority to make all
Company elections permitted under the Code, including, without limitation,
elections of methods of depreciation and elections under Code Section 754. The
decision to make or not make an election shall be at the Partner's sole and
absolute discretion.
8.6 METHOD OF ACCOUNTING. Unless otherwise provided herein, the Company
books of account shall be maintained in accordance with GAAP; provided that for
purposes of
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making allocations and distributions hereunder, the relevant items
shall be determined in accordance with federal income tax accounting principles
utilizing the accrual method of accounting, with adjustments required by Treas.
Reg. section 1.704-1(b) to properly maintain Capital Accounts. Each Partner
acknowledges that the Capital Account balances of the Partners for the purposes
described in the preceding sentence are not computed in accordance with GAAP and
accordingly that any GAAP financial statements for the Company do not reflect
their true Capital Account balances.
8.7 TAXATION.
8.7.1. STATUS OF THE COMPANY. The Partners acknowledge that this Agreement
creates a partnership for federal income tax purposes, and hereby agree not to
elect to be excluded from the application of Subchapter K of Chapter 1 of
Subtitle A of the Code or any similar state statute.
8.7.2 TAX ELECTIONS AND REPORTING
(a) GENERALLY. The Company shall make the following elections and take the
following positions under United States income tax laws and Treasury Regulations
and any similar state laws and regulations;
(i) Adopt the year ending December 31 as the annual accounting
period (unless otherwise required by the Code and Treasury
Regulations);
(ii) Adopt the accrual method of accounting; and
(iii) Insofar as permissible, report the Company's tax attributes
and results using principles consistent with those assumed in
connection with entering into this Agreement.
(b) CODE SECTION 754 ELECTION. The Operating Committee shall, upon the
written request of any Partner, cause the Company to file an election under Code
section 754 and the Treas. Regs. thereunder to adjust the basis of the Company's
assets under Code section 734(b) or 743(b) and a corresponding election under
the applicable sections of state and local law.
(c) TAX MATTERS PARTNER. CVSI shall be the "tax matters partner," as that
term is defined in Code section 6231(a)(7) (the "Tax Matters Partner") with all
of the rights, duties and powers provided for in sections 6221 through 6232,
inclusive, of the Code, provided that the Tax Matters Partner shall not pay or
agree to pay any audit assessment, or any amount in settlement or compromise of
any litigation, in respect of income taxes of the Company, in excess $25,000 in
any one instance or series of related instances, unless approved by the
Operating Committee. The Tax Matters Partner, as an authorized
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representative of the Company, shall direct the defense of any tax claims made
by the Internal Revenue Service or any other taxing jurisdiction to the extent
that such claims relate to adjustment of Company items at the Company level and,
in connection therewith, shall retain and pay the fees and expenses of counsel
and other advisors chosen by the Tax Matters Partner. The Tax Matters Partner
shall deliver to each Partner and the Board of Control a semi-annual report on
the status of all tax audits and open tax years relating to the Company, and
shall consult with and keep all Partners and the Board of Control advised of all
significant developments in such matters coming to the attention of the Tax
Matters Partner. All reasonable expenses of the Tax Matters Partner and its
Affiliates (including reasonable internal time charges and reasonable
disbursements) and other reasonable fees and expenses in connection with such
defense shall be borne by the Company. Except as provided in Section 8.1,
neither the Tax Matters Partner nor the Company shall be liable for any
additional tax, interest or penalties payable by a Partner or any costs of
separate counsel chosen by such Partner to represent the Partner with respect to
any aspect of such challenge.
(d) COMPANY TAX RETURNS. The Tax Matters Partner will prepare, or case to
be prepared, together with the Company's management and outside auditors, any
and all tax and information returns required to be filed by the Company. Each
Partner shall provide such information, if any, as may be reasonably requested
by the Company for purposes of preparing such tax and information returns. The
Company shall use its best efforts to (i) cause copies of all tax returns to be
submitted to each Partner 30 days before the date due, including extensions, and
(ii) deliver to each Partner within 90 days after the end of each taxable year
any additional information in the possession of the Company that the Partners
may require for the preparation of their own income tax returns.
SECTION 9
INDEMNIFICATION
9.1 SURVIVAL. The representations and warranties made in Section 3 of this
Agreement shall survive for a period of two years after the Closing Date. After
the Closing Date, the sole and exclusive remedy of the parties for any
inaccuracy of any representation or warranty hereunder shall be the indemnities
provided by Sections 9.2 and 9.3.
9.2 INDEMNIFICATION BY GPPV AND CVSI. Subject to the conditions and
provisions of Section 9.4, GPPV and CVSI, jointly and severally, agree to
indemnify, defend and hold harmless WilTech and WCTV from and against any and
all demands, claims, complaints, actions or causes of action, suits,
proceedings, investigations, arbitrations, assessments, losses, damages,
liabilities, costs and expenses, including, but not limited to, interest,
penalties and reasonable attorneys' fees and disbursements, asserted against,
imposed upon or incurred by WilTech or WCTV, directly or indirectly, by reason
of or resulting from (a) any liability or obligation of or claim against WilTech
or WCTV (whether absolute, accrued, contingent or otherwise and whether a
contractual, tax or any other type of liability or obligation or claim) not
expressly assumed by WilTech or WCTV pursuant to Section 3.2
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arising out of, relating to or resulting from the businesses of GPPV or CVSI, or
relating to or resulting from the Contributed Assets, the Network, the CVS
Business or the business and operations of any of the foregoing during the
period prior to the Closing Date; (b) any material misrepresentation or breach
of the representations and warranties of GPPV or CVSI contained in or made
pursuant to this Agreement; or (c) any material noncompliance by GPPV or CVSI
with any covenants, agreements or undertakings of such parties contained in or
made pursuant to this Agreement; provided, that any claim for indemnification
hereunder must be asserted in a writing which describes in reasonable detail the
facts and circumstances with respect to such claim, before the expiration of the
applicable period of survival specified in Section 9.1.
9.3 INDEMNIFICATION BY WILTECH AND WCTV. Subject to the conditions and
provisions of Section 9.4, WilTech and WCTV, jointly and severally, hereby agree
to indemnify, defend and hold harmless GPPV and CVSI from and against all
demands, claims, complaints, actions, suits, proceedings, investigations,
arbitrations, or causes of action, assessments, losses, damages, liabilities,
costs and expenses, including, but not limited to, interest, penalties and
reasonable attorneys' fees and disbursements, asserted against, imposed upon or
incurred by GPPV or CVSI, directly or indirectly, by reason of or resulting from
(a) any liability or obligation of or claims against GPPV or CVSI (whether
absolute, accrued, contingent or otherwise and whether contractual, tax or any
other type of liability or obligation or claim) expressly assumed by WilTech or
WCTV hereunder; (b) any material misrepresentation or breach of the
representations and warranties of WilTech or WCTV contained in or made pursuant
to this Agreement; or (c) any material noncompliance by WilTech and WCTV with
any covenants, agreements or undertakings of WilTech or WCTV contained in or
made pursuant to this Agreement; provided, that any claim for indemnification
hereunder must be asserted in a writing which describes in reasonable detail the
facts and circumstances with respect to such claim, before the expiration of the
applicable period of survival specified in Section 9.1.
9.4 NOTICE AND DEFENSE OF CLAIMS
(a) NOTICE OF CLAIM. If any action, claim or proceeding (a "Claim") shall
be brought or asserted against any party seeking indemnification (the
"Indemnified Person") Indemnified Person in respect of which indemnity may be
sought under Sections 9.2 and 9.3 from an indemnifying person or any successor
thereto (the "Indemnifying Person"), the Indemnified Person shall give prompt
written notice of such Claim to the Indemnifying Person which may assume the
defense thereof, including by the employment of counsel reasonably satisfactory
to the Indemnified Person and the payment of all of such counsel's fees and
expenses; provided that any delay or failure to so notify the Indemnifying
Person shall relieve the Indemnifying Person of its obligations hereunder only
to the extent, if at all, that it is prejudiced by reason of such delay or
failure. Any such notice shall (i) describe in reasonable detail the facts and
circumstances with respect to the Claim being asserted and (ii) refer to
Sections 9.2 and 9.3, as applicable.
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(b) DEFENSE OF CLAIM. In the event that the Indemnifying Person undertakes
the defense of the Claim, the Indemnifying Person will keep the Indemnified
Person advised as to all material developments in connection with any Claim,
including, but not limited to, promptly furnishing to the Indemnified Person
copies of all material documents filed or served in connection therewith. The
Indemnified Person shall have the right to employ one separate counsel per
jurisdiction in any of the foregoing Claims and to participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense of
the Indemnified Person unless both the Indemnified Person and the Indemnifying
Person are named as parties and representation by the same counsel is
inappropriate due to actual differing interests between them; provided that
under no circumstances shall the Indemnifying Person be liable for the fees and
expenses of more than one counsel per jurisdiction in any of the foregoing
Claims for the Indemnified Person together with its Affiliates and their
respective officers, directors, employees, agents, successors and assigns, taken
collectively and not separately. The Indemnifying Person may, without the
Indemnified Person's consent, settle or compromise any Claim or consent to the
entry of any judgment if such settlement, compromise or judgment involves only
the payment of money by the Indemnifying Person and provides for the
unconditional release by the claimant or the plaintiff of the Indemnified Person
and its Affiliates from all liability in respect of such Claim. In the event
that the Indemnifying Person, within 20 business days after receiving written
notice of any such Claim, fails to assume the defense thereof, the Indemnified
Person shall have the right, subject to the provisions of this Section 9 to
undertake the defense, compromise or settlement of such Claim for the account of
the Indemnifying Person.
SECTION 10
GENERAL PROVISIONS
10.1 ASSURANCES. The Partners agree to execute all such certificates and
other documents and shall do all such filing, recording, publishing and other
acts as the Partners deem appropriate to comply with the requirements of law for
the formation and operation of the Company and to comply with any laws, rules
and regulations relating to the acquisition, operation or holding of the
property of the Company.
10.2 NOTIFICATIONS. Any notice, demand, consent, election, approval,
request or other communication (collectively, a "notice") required or permitted
under this Agreement must be in writing and either delivered personally or sent
by overnight express mail, certified or registered mail, postage prepaid, return
receipt requested. A notice must be addressed to an Interest Holder at the
Interest Holder's address on the records of the Company. A notice to the Company
must be addressed to the Company's registered office. A notice delivered
personally will be deemed given only when acknowledged in writing by the person
to whom it is delivered. A notice that is sent by mail will be deemed given
three (3) business days after it is mailed. Any party may designate, by notice
to all of the others, a substitute address for notices; and, thereafter, notices
are to be directed to that substitute address.
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10.3 COMPLETE AGREEMENT. This Agreement and related attachments constitute
the complete and exclusive statement of the agreement among the Partners. It
supersedes all prior written and oral statements, including any prior
representation, statement, condition or warranty.
10.4 AMENDMENT. Except as expressly provided otherwise herein, this
Agreement may not be amended without the unanimous consent of the Partners.
10.5 APPLICABLE LAW. All questions concerning the construction, validity
and interpretation of this Agreement and the performance of the obligations
imposed by this Agreement shall be governed by the internal law, not the law of
conflicts, of the State of Oklahoma.
10.6 SECTION TITLES. The headings herein are inserted as a matter of
convenience only, and do not define or limit the scope of this Agreement or the
intent of the provisions hereof.
10.7 BINDING PROVISIONS. This Agreement is binding upon, and inures to the
benefit of, the parties hereto their respective heirs, executors,
administrators, personal and legal representatives, successors and permitted
assigns.
10.8 TERMS. Common nouns and pronouns shall be deemed to refer to the
masculine, feminine, neuter, singular and plural, as the identity of the Person
may in the context require.
10.9 SEPARABILITY OF PROVISIONS. Each provision of this Agreement shall be
considered separable; if, for any reason, any provision or provisions herein are
determined to be invalid and contrary to any existing or future law, such
invalidity shall not impair the operation of or affect those portions of this
Agreement which are valid.
10.11 COUNTERPARTS. This Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed an original and all of which,
when taken together, constitute one and the same document. The signature of any
party to any counterpart shall be deemed a signature to, and may be appended to,
any other counterpart.
10.12 BUSINESS OPPORTUNITIES. Notwithstanding any provision of this
Agreement to the contrary, other than in Section 5.10 (to which this section
shall be subject), WilTech, WCTV, GPPV and CVSI may pursue any business
opportunities and acquire additional businesses, including without limitation,
businesses involved in aspects of the PPV industry or systems integration,
without first offering such opportunities to the Company . Neither WilTech,
WCTV, GPPV or CVSI nor any of their respective affiliates shall be restricted
from engaging in any line of business , including without limitation, a business
that competes with the Company.
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IN WITNESS WHEREOF, the parties have executed, or caused this Agreement to
be executed, under seal, as of the date set forth hereinabove.
CABLE VIDEO STORE, INC. WITNESS
By: /s/ J. Roger Faherty /s/ Daniel J. Barsky
------------------------- --------------------------------
Name: J. Roger Faherty Date: 1/27/96
------------------------- --------------------------
Title: Chairman & CEO
-------------------------
Date: 1/27/96
-------------------------
WILTECH CABLE TELEVISION WITNESS
SERVICES, INC.
By: /s/ S. Miller Williams /s/ Bunker Sessions
------------------------- --------------------------------
Name: S. Miller Williams Date: 1/27/96
------------------------- --------------------------
Title: President
-------------------------
Date: 1/27/96
-------------------------
GRAFF PAY-PER-VIEW INC. WITNESS
By: /s/ J. Roger Faherty /s/ Daniel J. Barsky
------------------------- --------------------------------
Name: J. Roger Faherty Date: 1/27/96
------------------------- --------------------------
Title: Chairman & CEO
-------------------------
Date: 1/27/96
-------------------------
THE WILTECH GROUP, INC. WITNESS
By: /s/ S. Miller Williams /s/ Bunker Sessions
------------------------- --------------------------------
Name: S. Miller Williams Date: 1/27/96
------------------------- --------------------------
Title: President
-------------------------
Date: 1/27/96
-------------------------
Exhibit 10.70
THIRD AMENDATORY AGREEMENT
THIS THIRD AMENDATORY AGREEMENT (this "Amendment") is made this 29th day of
March, 1996 by and between GRAFF-PAY-PER VIEW INC., a Delaware corporation, and
MIDLANTIC BANK, N.A., a national banking association (the "Bank").
RECITALS:
WHEREAS, the Borrower and the Bank are parties to an Amended and Restated
Loan and Security Agreement dated as of December 9, 1994, as amended by the
Amendatory Agreement dated as of August 14, 1995 and the Second Amendatory
Agreement dated as of November 13, 1995 (the "Credit Agreement"), which provides
for, inter alia, a term loan in the original principal amount of $900,000 and a
revolving credit loan in the maximum, aggregate principal amount of $15,000,000;
WHEREAS, the Borrower is in default of certain covenants of the Credit
Agreement and has requested that the Bank waive such existing and continuing
Events of Default;
WHEREAS, the Borrower has requested that the Bank amend the Credit
Agreement, including, inter alia, the elimination of certain financial
covenants; and
WHEREAS, the parties have agreed to amend the Credit Agreement for the
purpose of affecting the foregoing upon the terms and conditions hereinafter
stated.
NOW THEREFORE, in consideration of the premises and of the mutual covenants
contained in this Amendment, and intending to be legally bound hereby, the
parties agree as follows:
Section 1. Interpretation and Definitions.
(a) All terms used in this Agreement and not otherwise defined shall have
the meanings ascribed to them in the Credit Agreement, unless the context
clearly requires otherwise. The Credit Agreement and this Amendment are to be
treated as one agreement and are together referred to hereafter as the
"Agreement."
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(b) The following definitions contained in the Credit Agreement are hereby
amended and restated to read as follows:
"AGREEMENT" means the Amended and Restated Loan Agreement dated as of
December 9, 1994, as amended by that certain Amendatory Agreement dated as
of August 14, 1995, as further amended by that certain Second Amendatory
Agreement dated as of November 13, 1995, and that certain Third Amendatory
Agreement dated as of March 29, 1996, by and between the Borrower and the
Bank, as the same may be amended, modified or supplemented from time to
time, together with any appendices, exhibits, schedules or attachments to
any of the foregoing.
"TERMINATION DATE" shall mean January 2, 1997.
(c) The following definitions are added to the Credit Agreement in
alphabetical order:
"BUDGET" means the 1996 budget prepared by Borrower and delivered to
the Bank which includes pro forma income statements and sources and uses of
cash flow for the period January 1, 1996, to and including December 31,
1996, attached hereto as Exhibit "B."
"CASH FLOW REPORT" has the meaning set forth in Section 8.1(j) of this
Agreement.
"EFFECTIVE DATE" has the meaning set forth in Section 8.1(j) of this
Agreement.
Section 2. Amendment to Section 3. Section 3 is hereby amended as follows:
(a) Sections 3.1(a), (b) and (c) of the Credit Agreement, excluding any
definitions contained therein, and all references thereto in the Credit
Agreement are hereby deleted in their entirety.
(b) Section 3.5(b) of the Credit Agreement is amended and restated as
follows:
(b) Any Eurodollar Rate Loans existing as of March 29, 1996, shall be
converted to Prime Rate Loans immediately and shall bear interest on the
unpaid principal amount thereof at a rate per annum equal to the Prime Rate
plus
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the Prime Rate Margin, provided that, such conversion to a Prime Rate
Loan shall not be deemed a prepayment of the Eurodollar Rate Loan.
(c) Section 3.6(i) of the Credit Agreement and all references thereto in
the Credit Agreement are hereby deleted in their entirety.
Section 3. Amendment to Section 8.1. Section 8.1 is amended by relettering
Section 8.1(j) and all references thereto in the Credit Agreement to Section
8.1(m), and by deleting the word "and" at the end of Section 8.1(i) and adding
the following new subsections 8.1(j), 8.1(k) and 8.1(l) thereafter:
(j) on or before five (5) Business Days after (1) the end of any given
calendar month, or (2) a written request by the Bank, a monthly
consolidated cash flow summary report as of the last day of the preceding
calendar month or Bank request, as the case may be (with the date of each
of (1) or (2) being referred to herein as the "Effective Date"), including
a listing of all held checks and the total amount of said held checks, as
of the Effective Date, comparing the consolidated cash flow of the Borrower
to the Budget, with variances and variance percentages, substantially in
the form attached hereto as Exhibit C, with all blanks properly filled (the
"Cash Flow Report");
(k) on or before five (5) Business Days after each Effective Date, an
Officer's Certificate executed by an authorized officer of each of the
Obligors certifying to the Bank that all of the representations and
warranties contained in the Loan Documents are true, correct and complete
as of such Effective Date in all respects;
(l) on or before March 29, 1996, the Budget; and
Section 4. Amendments to Section 10. Section 10 of the Credit Agreement is
amended as follows:
(a) Section 10.14 is amended and restated as follows:
10.14. NET WORTH. Borrower shall not permit its consolidated net
worth, as determined in accordance with GAAP, to be less than:
(a) $6,750,000 as of December 31, 1995;
(b) $5,750,000 from January 1, 1996 to June 29, 1996, inclusive;
and
(c) $6,000,000 from June 30, 1996 to the Termination Date.
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(b) Sections 10.15, 10.16, 10.17 and 10.18 and all references thereto in
the Credit Agreement are deleted in their entirety.
(c) Section 10.19 of the Credit Agreement, entitled "Distributions to
Shareholders" is amended and restated as follows:
10.19. DISTRIBUTIONS TO SHAREHOLDERS. Borrower shall not make any
Distributions to shareholders; except that, as long as no Event of Default
has occurred and is continuing, and provided further that no Event of
Default would result therefrom, Borrower may make scheduled payments in
respect of the Indebtedness to shareholders disclosed in Schedule 10.19,
including such amounts due such shareholders for severance payments under
valid and enforceable contracts as listed on Schedule 10.19.
(d) Section 10.19 of the Credit Agreement, entitled "Spector Entertainment"
and all references to such section in the Credit Agreement are renumbered as
Section 10.20.
Section 5. Amendment of Section 11.1. Section 11.1 of the Credit Agreement
is hereby amended in the following respects:
(a) Section 11.1(g) is hereby amended by replacing the figure "$100,000"
contained in the third line of such section with the figure "$50,000."
(b) Section 11.1(h) is hereby amended by replacing the figure "$250,000"
contained in the fourth line of such section with the figure "$50,000."
(c) Section 11.1(n) of the Credit Agreement is amended by amending and
restating the last clause of such subsection as follows:
or one of the following two individuals shall no longer be employed by
the Borrower as senior executive officers: J. Roger Faherty and Edward M.
Spector;
(d) Section 11.1(o) is amended by replacing the period at the end of such
section with a semi-colon;
(e) Section 11.1 is amended by adding a new Section 11.1(p) at the end
thereof as follows:
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(p) Borrower's Cash Flow Report shows that (i) the Borrower's use of
cash has exceeded the figure set forth in the Budget for such calendar
month by more than 10% in the aggregate; or (ii) the Borrower's aggregate
cash receipts, on a rolling three month basis, are less than 90% of the
figure set forth in the Budget for such rolling three month period; or
(iii) the use of cash for the "Satellite/AT&T" line item listed on the Cash
Flow Report has exceeded the figure set forth in the Budget for such
calendar month by 10% or more.
Section 6. Existing Violations. The Borrower has informed the Bank and
hereby represents and warrants to the Bank that the following are the only
conditions which have resulted or, to the Borrower's knowledge at this time,
will result with the passage of time, in breaches of the covenants contained in
the Credit Agreement:
(a) The Borrower has violated or contemplates violating Section 10.1 of the
Credit Agreement due to the following transactions (collectively, the "10.1
Violations"):
(1) The Borrower has formed a wholly-owned Subsidiary named Direct Response
Advertising Group, Inc., a Delaware corporation ("DRAG"). DRAG and National
Media, Inc. have formed a joint venture and plan to form a limited liability
company to produce and promote DRAGnet, a cable network which distributes
infomercials twenty-four hours a day to be distributed by cable operators to
fill unused air time. The transactions related in this subsection (1) are
referred to hereafter as the "DRAG Transaction"); and
(2) The Borrower has agreed in principle (i) to release Marc Greenberg
("Greenberg") and Rich Goldberg ("Goldberg"), each shareholders and employees of
the Borrower from their no-compete agreements; (ii) to turn over rights related
to the "Love Street" and "Hot Line" shows to Magic Hour Pictures, Inc. ("MHPI"),
an entity formed by Greenberg and Goldberg; (iii) to grant the right to produce
certain unproduced shows for HBO which are currently under contract with CPV
Productions, Inc., a wholly-owned Subsidiary of the Borrower; (iv) to sell
certain scripts and treatments ("Scripts") to MHPI or MRG Entertainment, Inc.
("MRGI"), an MHPI affiliate; (v) to sell certain tangible property with a value
of approximately $30,000 (the "MHPI Tangible Property") to MHPI and/or MRGI;
(vi) to sublease certain leased real property to MHPI; (vii) to loan, as of
January 10, 1996, approximately $520,000 to MHPI to reimburse the Borrower for
money advanced to MHPI to produce the new "Hot Line" series which is being
transferred to MHPI and for sale to MHPI of the Scripts and the MHPI Tangible
Property, with such sums due the Borrower being evidenced by a note issued by
MHPI which is due December 31, 1996 and is secured by, inter alia, the joint and
several guaranty of Greenberg and Goldberg and the pledge of 100,000 shares of
Borrower's common stock owned by Greenberg and Goldberg, with the amounts due
under such note being subject to mandatory prepayment from payments received by
MHPI from HBO upon
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delivery of the new "Hot Line" series. The transactions related in this
subsection (2) are referred to hereafter as the "MHPI Transaction").
(b) The Borrower has violated or contemplates violating Section 10.2 of the
Credit Agreement due to the DRAG Transaction, the MHPI Transaction and the sale
of the Borrower's interest in TeleSelect Nederland B.V. to Philips Media
Services B.V. and KPN Multimedia B.V. for approximately $3,200,000, of which
$1,000,000 will be used by the Borrower to reduce its Obligations to the Bank,
and the remaining proceeds are to be used by the Borrower for working capital
purposes (the "TeleSelect Transaction")(collectively, the "10.2 Violations").
(c) The Borrower has violated or contemplates violating Section 10.3 of the
Credit Agreement due to the MHPI Transaction and the TeleSelect Transaction (the
"10.3 Violations").
(d) The Borrower has violated or contemplates violating Section 10.4 of the
Credit Agreement due to the MHPI Transaction, the TeleSelect Transaction and the
following transactions with Affiliates (all as of the date hereof)
(collectively, the "10.4 Violations"):
(1) Notes or accounts receivable from officers and directors of
approximately $395,000;
(2) Notes or accounts receivable from Buccaneer Gaming, Inc. of
approximately $400,000;
(3) Notes or accounts receivable from UTI of approximately $166,000;
(4) Notes or accounts receivable from Sportsat II, LTD. of
approximately $69,000; and
(5) Notes or accounts receivable from others of approximately $3,000.
(e) The Borrower has violated Section 10.7 of the Credit Agreement due to
the Borrower's agreement with Multimedia Games, Inc. and its subsidiaries
(collectively, "MGI") to acquire 275,000 shares of MGI stock, acquire certain
intellectual property from MGI, and to provide working capital for the American
Gaming Network, Inc. in exchange for $730,000 in cash and $775,000 in the form
of two notes issued by the Borrower (the "MGI Transaction") (collectively, the
"10.7 Violations").
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(f) The Borrower has violated Section 10.12 of the Credit Agreement due to
the DRAG Transaction, the 10.4 Violations, and the MGI Transaction
(collectively, the "10.12 Violations").
(g) The Borrower has violated Section 10.13 of the Credit Agreement due to
its agreement to enter into a capitalized lease with International Business
Machines in the capitalized amount of approximately $3,750,000 in 1995 in
violation of the limit on Capital Expenditures set forth in Section 10.13 of
$1,000,000 per calendar year (the "10.13 Violation").
(h) The Borrower has violated Section 10.14 of the Credit Agreement due to
its Net Worth of approximately $7,400,000 as of December 31, 1995 which was
lower than the minimum Net Worth of $28,000,000 set forth in Section 10.14(iii)
of the Credit Agreement (together with any other violation of such covenant
through the date of this Amendment, the "10.14 Violation").
(i) The Borrower has violated Section 10.15 of the Credit Agreement due to
its ratio of EBITDA to total Interest Expense as of December 31, 1995 being
approximately -17.53 to 1.00 which was lower than the minimum ratio of 5.00 to
1.00 set forth in Section 10.15 of the Credit Agreement (together with any other
violation of such covenant through the date of this Amendment, the "10.15
Violation").
(j) The Borrower has violated Section 10.16 of the Credit Agreement due to
its Senior Debt Leverage Ratio being approximately -0.77 as of December 31, 1995
which exceeded the maximum Senior Debt Leverage Ratio of 1.05 to 1.00 set forth
in Section 10.16 of the Credit Agreement (together with any other violation of
such covenant through the date of this Amendment, the "10.16 Violation").
(k) The Borrower has violated Section 10.17 of the Credit Agreement due to
its Fixed Charge Coverage Ratio as of December 31, 1996 as determined under
Section 10.17 of the Credit Agreement of approximately 0.56 to 1.00 which was
lower than the minimum Fixed Charge Coverage Ratio of 1.05 to 1.00 set forth in
Section 10.17 of the Credit Agreement (together with any other violation of such
covenant through the date of this Amendment, the "10.17 Violation").
(l) The Borrower has violated Section 10.18 of the Credit Agreement due to
its Leverage Ratio as of December 31, 1996 as determined under Section 10.18 of
the Credit Agreement of approximately 4.87 to 1.00 which was greater than the
maximum Leverage Ratio of 1.00 to 1.00 set forth in Section 10.18 of the Credit
Agreement (together with any other violation of such covenant through the date
of this Amendment, the "10.18 Violation")
(m) The Borrower no longer employs Mark Graff and Leland H. Nolan as senior
executive officers in violation of Section 11.1(n) of the Credit Agreement (the
"11.1
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Violation" and collectively, with the 10.1 Violations, the 10.2 Violations,
the 10.3 Violations, the 10.4 Violations, the 10.7 Violations, the 10.12
Violations, the 10.13 Violation, the 10.14 Violation, the 10.15 Violation, the
10.16 Violation, the 10.17 Violation and the 10.18 Violation, the "Existing
Violations").
Section 7. Waiver of Existing Violations. Subject to the conditions set
forth in this Section 7 and in Section 11, below, the Bank hereby forever waives
the Existing Violations. The waiver of the violations of the Credit Agreement
which will be caused by consummation of the MHPI Transaction shall be
conditioned upon the documentation evidencing the MHPI Transaction being
acceptable to Bank in its sole and absolute discretion, including a requirement
that the Borrower's interests in DRAG and/or any joint venture or entity
involved in the DRAG Transaction be pledged to the Bank as additional security
for the Obligations and that any security for the obligations of Greenberg,
Goldberg, MHPI or MRGI to Borrower are assigned to the Bank as additional
security for the Obligations. The waiver of the violations of the Credit
Agreement which will be caused by consummation of the TeleSelect Transaction
shall be conditioned upon receipt by the Bank of $1,000,000 of the proceeds from
such transaction to be applied to such portions of the Obligations as the Bank
deems appropriate in its sole and absolute discretion, with any remaining
proceeds from such transaction to be used by the Borrower for working
capital purposes only.
SECTION 8. RESERVATION OF RIGHTS. NOTHING CONTAINED IN THIS AMENDMENT SHALL
BE CONSTRUED TO IMPAIR THE SECURITY OF THE BANK OR ITS SUCCESSORS AND ASSIGNS
UNDER THE AGREEMENT OR ANY OF THE LOAN DOCUMENTS NOR AFFECT OR IMPAIR ANY RIGHTS
OR POWERS THAT THE BANK MAY HAVE UNDER THE AGREEMENT OR THE LOAN DOCUMENTS FOR
THE RECOVERY OF THE INDEBTEDNESS OF THE BORROWER TO THE BANK IN CASE OF
NONFULFILLMENT OF THE TERMS, PROVISIONS AND COVENANTS CONTAINED IN THIS
AMENDMENT OR THE TERMS, RIGHTS, POWERS AND COVENANTS OF THE AGREEMENT AND THE
LOAN DOCUMENTS NOT MODIFIED BY THIS AMENDMENT. ALL RIGHTS, POWERS AND REMEDIES
OF THE BANK UNDER ANY OTHER AGREEMENT NOW OR AT ANY TIME HEREAFTER IN FORCE
BETWEEN THE BANK AND THE BORROWER SHALL BE CUMULATIVE AND NOT ALTERNATIVE AND
SHALL BE IN ADDITION TO ALL RIGHTS, POWERS AND REMEDIES GIVEN TO THE BANK BY
LAW.
IF, AFTER GIVING EFFECT TO THE TERMS OF THIS AMENDMENT, ANY EVENT OF
DEFAULT OCCURS AND CONTINUES OR EXISTS UNDER THE AGREEMENT, THE BANK WILL BE
UNDER NO OBLIGATION TO FORBEAR THE EXERCISE OF ITS RIGHTS UNDER THE AGREEMENT,
THE LOAN DOCUMENTS, APPLICABLE LAW OR OTHERWISE. FURTHERMORE, ANY WAIVER BY THE
BANK CONTAINED IN THIS AMENDMENT SHALL APPLY ONLY TO THE SPECIFIC EVENT WAIVED
FOR THE TIME PERIOD SPECIFIED AND SHALL NOT BE DEEMED TO BE A CONTINUING WAIVER.
Section 9. Representations and Warranties. The Borrower represents and
warrants to the Bank that:
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(a) The Borrower has and will continue to have corporate power and
authority to execute, deliver and perform the provisions of this Amendment and
Amendment No. 1 to Second Amended and Restated Revolving Credit Note of even
date herewith (collectively, the "Amendment Documents") and all other documents,
certificates, instruments and other agreements executed and delivered by the
Borrower in connection with the Agreement and this Amendment;
(b) The execution and delivery of the Amendment Documents and the carrying
out of the Credit Agreement, as amended hereby, and the other Loan Documents
will not violate any provisions of law or any instrument, agreement, order,
decree, writ or ruling to which the Borrower is a party or by which it is bound
or to which it is subject;
(c) This Amendment and the other Amendment Documents, which have been duly
and validly executed and delivered by the Borrower, and the other Loan Documents
constitute legal, valid and binding obligations of the Borrower enforceable in
accordance with the terms hereof and thereof;
(d) The representations and warranties of the Borrower contained in the
Agreement, and the other Loan Documents are true, correct and complete on and as
of the date hereof;
(e) AT&T Corp. has agreed to allow the Borrower payment terms of net 60
days on all invoices for satellite transponder services rendered to Borrower
from and after January 1, 1996 to and including the Termination Date.
(f) No Event of Default has occurred which remains in existence after
giving effect to the waivers contained in Section 7, above.
(g) The Bank has acted solely in accordance with its rights and remedies
under the Loan Documents and applicable law; and
(h) The Bank has acted in good faith in the performance and enforcement of
the Obligations and the Loan Documents and the negotiation of the terms and
conditions of this Amendment and the other Amendment Documents.
Section 10. Release. The Borrower waives and releases, to the maximum
extent permitted by law, the Bank and its officers, directors, attorneys,
agents, and employees from liability, suit, damage, claim, loss or expense of
any kind or nature whatsoever and howsoever arising that each ever had, could
have had or now has against the Bank arising out of or relating to the Amendment
Documents and the Loan Documents or the Bank's acts or omissions, except willful
misconduct, with respect thereto.
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Section 11. Effective Date and Conditions of Closing.
(a) The effective date of this Amendment shall be March 29, 1996.
(b) Prior to a consummation or closing of the transactions contemplated in
this Amendment and the effectiveness of the waivers set forth in Section 7 of
this Amendment, the Borrower shall deliver the following to the Bank in form and
substance satisfactory to the Bank and its counsel:
(1) A properly executed original of this Amendment;
(2) A properly executed Amendment No. 1 to Second Amended and Restated
Revolving Credit Note;
(3) Copies of proper corporate resolutions of the Borrower authorizing the
execution, acknowledgment and delivery of this Amendment and the other
Amendment Documents, and any and all other documents required to consummate
the transactions contemplated thereby;
(4) A Corporate Secretary's Certificate and Certificate of Incumbency of
the officers and directors of the Borrower made by the Secretary or
Assistant Secretary of the Borrower together with a certified copy of the
articles of incorporation and by-laws of the Borrower, or a certification
that such articles of incorporation and by-laws have not changed since
August 14, 1995, the last delivery of such documents to the Bank;
(5) Updated Schedules 7.2, 7.3, 7.7, 7.8, 7.9, 7.12, 7.13, 7.15, 7.17,
7.18, 7.19, 7.20, 10.7, 10.10, 10.12 and 10.19 (including any obligations
for severance payments to shareholders of the Borrower) to the Credit
Agreement, certified to be true and correct as of the date of delivery by
the Chief Financial Officer or Chief Executive Officer of the Borrower;
(6) A replacement warrant for the purchase of 100,000 shares of the
Borrower's common stock, with full registration rights, to be exercisable
for a period from the date hereof to and including December 8, 2004 at an
exercise price of $3.00 per share (the "Warrant");
(7) Confirmation from Coopers & Lybrand that the amended financial
covenants will result in a clean audit; and
(8) The Budget.
Section 12. Call Option on Warrant. The Borrower shall have the option from
January 2, 1997 to and including January 1, 1998, to purchase the Warrant for a
purchase price of the greater of (a) $400,000 or (b) the product of 100,000
multiplied by 95% of the market price per share of the Borrower's common stock
on the date the Borrower exercises its call option (the "Purchase Price"). In
order to effectuate the exercise of its call option hereunder, the Borrower must
deliver to the Bank written notice of its intent to exercise the call option
together with the Purchase Price in immediately available funds.
10
<PAGE>
Section 13. Expenses; Fees. The Borrower agrees to pay and save the Bank
harmless against liability for the payment of all out-of-pocket expenses of the
Bank arising in connection with this Amendment and the Amendment Documents,
including fees and expenses of counsel for the Bank.
Section 14. Miscellaneous. The provisions of the Credit Agreement shall
remain in full force and effect except as modified hereby. This Amendment and
the Credit Agreement shall each be deemed to be a contract under the laws of the
State of New Jersey and for all purposes shall be construed in accordance with,
and governed by, such laws without regard to principles of conflicts of law. All
representations, warranties and covenants contained herein or made in writing by
the Borrower in connection herewith shall survive the execution and delivery of
this Amendment, and will bind and inure to the benefit of the successors and
assigns of the parties hereto, provided that, without the prior written consent
of the Bank, the Borrower may not assign any of its obligations under the Credit
Agreement as amended hereby or any of the other Loan Documents, and any such
attempted assignment shall be null and void. This Amendment may be executed in
any number of counterparts so that when all such copies are placed together they
shall constitute one and the same document.
Section 15. Security. The Borrower's obligations under the Credit
Agreement, as amended by this Amendment, and under the Notes and the Security
Documents, as each may be amended, modified or supplemented from time to time,
are and will continue to be secured by the security interests granted to the
Bank by the Borrower and the other Obligors under the Security Documents, as the
same may be amended, modified or supplemented from time to time, and such
obligations are and will continue to be a part of the Obligations which is
secured by the security interests granted in the Security Documents.
Section 16. Confirmation. Except as specifically amended or modified by
this Amendment, the Bank and the Borrower hereby confirm and ratify the Credit
Agreement in its entirety.
IN WITNESS WHEREOF, the parties, by their duly authorized officers, have
executed and delivered this Third Amendatory Agreement as of the date first
written above.
ATTEST: GRAFF PAY-PER-VIEW INC.
By: /s/ Daniel J. Barsky By: /s/ Philip J. Callaghan
--------------------------------- ----------------------------
Daniel J. Barsky Philip J. Callaghan
Senior Vice President and Chief Financial Officer/
General Counsel Executive Vice President
11
<PAGE>
MIDLANTIC BANK, N.A.
By: /s/ Thomas J. McCool
--------------------------------
Thomas J. McCool
Sr. Vice President
CONSENT, ACKNOWLEDGMENT AND AGREEMENT OF OBLIGORS
On this 29th day of March, 1996, each of the undersigned Obligors, as
defined in the Agreement, intending to be legally bound hereby (capitalized
terms have the meanings set forth in the Third Amendatory Agreement by and
between Graff Pay-Per-View Inc. and Midlantic Bank, N.A. of even date herewith):
acknowledges receipt of a copy of the Amendment and Amendment No. 1 to Third
Amended and Restated Revolving Credit Note;
consents to the terms and conditions contained in the Amendment Documents;
affirms its obligations under each of the Security Documents to which it is a
party and confirms that the Obligations of the Borrower under the Agreement are
secured by the Security Documents to which such Obligor is a party;
acknowledges that the Bank has acted solely in accordance with its rights and
remedies under the Loan Documents and applicable law;
acknowledges that the Bank has acted in good faith in the performance and
enforcement of the Obligations and the Loan Documents and the negotiation of the
terms and conditions of the Amendment and the other Amendment Documents; and
waives and releases, to the maximum extent permitted by law, the Bank and its
officers, directors, attorneys, agents, and employees from liability, suit,
damage, claim, loss or expense of any kind or nature whatsoever and howsoever
arising that each ever had, could have had or now has against the Bank arising
out of or relating to the Amendment Documents and the Loan Documents or the
Bank's acts or omissions, except willful misconduct, with respect thereto.
GRAFF PAY-PER-VIEW INC., SPICE, INC.,
12
<PAGE>
CABLE VIDEO STORE, INC., GRAFF
MARKETING CORPORATION, INC., PAY-PER-
VIEW INTERNATIONAL, INC., GUEST CINEMA,
INC., CPV PRODUCTIONS, INC., MEDIA
LICENSING, INC., CYBERSPICE, INC., MAGIC
HOUR PICTURES, INC., AMERICAN GAMING
NETWORK, INC., AMERICAN INTERACTIVE
GAMES, INC. AND THE HOME VIDEO
CHANNEL LIMITED
By:
----------------------------------
Name:
--------------------------------
An Authorized Officer of
each of the foregoing entities
EXHIBIT B
BUDGET
<PAGE>
SCHEDULE 10.19
DISTRIBUTIONS TO SHAREHOLDERS
Exhibit 10.71
SHARE SALE AGREEMENT
This Agreement is made on March 22, 1996 by and between Philips Media Services
B.V., a corporation duly organized and existing under the laws of the
Netherlands ("Philips") with its principal address at Eindhoven, the
Netherlands, KPN Multimedia B.V. a corporation duly organized and existing under
the laws of the Netherlands ("KPN") with its principal address at Hilversum, the
Netherlands, collectively hereinafter referred to as the "Purchasers"
and
Graff Pay-Per View Inc., a corporation duly organized and existing under the
laws of the State of Delaware ("Graff"), with its principal address at New York,
USA, hereinafter also referred to as the "Vendor"
hereinafter collectively or individually referred to as "Parties" or "Party".
W I T N E S S E T H
WHEREAS, TeleSelect Nederland B.V. (hereinafter called the "Company") was
incorporated in the Netherlands on April 19, 1995 under the laws of the
Netherlands as a limited liability company;
WHEREAS, the Company has issued 8,991 common shares each having a nominal value
of DGL. 100;
WHEREAS, the Company has issued 450 class A priority shares, 350 class B
priority shares and 199 class C priority shares, each having a nominal value of
DGL. 100;
WHEREAS, the Vendor owns 1,791 of these common shares, bearing the numbers 7,201
through 8991 and 199 class C priority shares, bearing the numbers 1 through 199
(collectively the "Shares");
WHEREAS, the Vendor desires to sell the Shares to the Purchasers and the
Purchasers desire to buy the Shares from the Vendor;
WHEREAS, until December 28, 1995 Graff has contributed a total value of DGL.
4,057,830 in cash and in kind, including accrued interest, to the Company;
WHEREAS, it was established at the TeleSelect Policy Board meeting of the
Parties on 24th October 1995 that Graff's contribution was to be divided in
paid-in share capital for
<PAGE>
an amount of DGL. 2,677,830 and loans for an amount of DGL. 1,380,000, all per
December 28, 1995;
WHEREAS, it was decided at the TeleSelect Policy Board meeting of the Parties of
December 19, 1995, to approve the cash call of the Company for the first
calendar quarter of 1996 per January 6th 1996;
WHEREAS, Graff's part of the cash call amounting to DGL. 1,000,000 had already
partly been paid in cash in October 1995 for an amount of DGL. 436,732 and in
kind up till the end of 1995 for an amount of DGL. 127,810, Graff's obligations
in cash remain DGL. 435,458;
NOW, THEREFORE, in consideration of these premises and of the mutual covenants
and premises herein, the Parties agree as follows:
REPRESENTATIONS AND WARRANTS
1. Graff hereby represents and warrants to the Purchasers that:
(a) the Vendor has made no agreements that would provide any third party
any rights with respect to the Shares;
(b) the Vendor has the legal capacity to enter into this Agreement and
complete the sale of Shares and has taken all requisite action in
connection therewith;
(c) the Shares have been fully subscribed and paid-up and free and clear
from all liens or charges and have not been pledged or otherwise
encumbered.
The Vendor shall be deemed to make each of these representations and
warranties immediately prior to the sale and delivery of the Shares as set
forth herein.
2. SALE OF SHARES
(a) The Vendor shall sell, and Philips shall purchase 1,007 (one thousand
and seven) of the common shares owned by Graff, bearing the numbers 7,201
through 8,207 and 112 (one hundred twelve) of the class C priority shares
owned by Graff, bearing the numbers 1 through 112, free from all claims,
liens or other encumbrances and with all rights attaching thereto.
(b) The Vendor shall sell, and KPN shall purchase 784 (seven hundred eighty
four) of the common shares owned by Graff, bearing the numbers 8,208
through 8,991 and 87 (eighty seven) of the class C priority shares owned by
Graff, bearing the numbers 113 through 199, free from all claims, liens or
other encumbrances and with all rights attaching thereto.
2
<PAGE>
3. TRANSFER OF RIGHTS AND OBLIGATIONS.
3.1 It is hereby explicitly understood and agreed that all outstanding
loans granted by Graff to the Company to a total amount of DGL. 1,380,000,
whether relevant loan agreements have been executed or not, are hereby
proportionally transferred to Philips and KPN and that Graff shall have no
claims of whatever nature with respect to these loans on the Company,
Philips and/or KPN. Philips shall thus have granted a loan to the Company
of DGL 776,250 and KPN shall thus have granted a loan to the Company of
DGL. 603,750.
3.2 The option granted to Graff pursuant to Article 5 of the Letter
Agreement of April 14, 1995 between the Parties, is herewith transferred
back to the Company. Graff's subordinated loan of DGL. 1,000 to the Company
with respect to this option is herewith deemed to be returned.
3.3 Graff's obligation towards the Company to pay DGL. 435,458 in cash
pursuant to the cash call of the Company for the first calendar quarter of
1996 is herewith assumed by Philips for an amount of DGL. 244,945 and by
KPN for an amount of DGL. 190,513.
4. PURCHASE PRICE.
(a) The purchase price payable by Philips to the Vendor for the Shares
enumerated in Article 2(a) hereto and for the transfer of rights and
obligations identified in Article 3.1 and 3.3 hereto shall be DGL.
3,027,527.00 (three million twenty seven thousand five hundred twenty seven
Dutch Guilders).
(b) The purchase price payable by KPN to the Vendor for the Shares
enumerated in Article 2(b) hereto and for the transfer of the rights and
obligations identified in Article 3.1 and 3.3 hereto shall be DGL.
2,354,744 (two million three hundred fifty four thousand seven hundred
forty four Dutch Guilders).
5. PAYMENT.
5.1 The purchase price shall be a lump sum paid in Dutch Guilders to an
account designed by the Vendor.
5.2 All payments to be made under this Agreement shall be made free and
clear of and without deduction for any taxes, duties, charges or
withholdings of any nature.
6. DECLARATION.
The Vendor declares to have no claims against the Purchasers in relation to
the sale of the Shares as described herein or in relation to the transfer
of rights and
3
<PAGE>
obligations as described herein other than the payment obligation of the
Purchasers described in Article 4 and 5 above.
7. COSTS.
Each of the Parties shall bear and pay its own legal costs, charges and
other expenses connected with this Agreement.
8. DELIVERY.
Delivery of the Shares to he Purchasers shall be executed and performed by
a notarial deed. Philips, KPN and Graff hereby instruct and authorize, with
the right of substitution, Mr. G.P.M. van Brussel of the Corporate Legal
Department of Philips International B.V. to execute and perform such
notarial deed and further to do or to cause to be done all such acts and
things as are deemed necessary or advisable in the framework of the
execution and performance of the notarial deed and to instruct the public
notary to transfer the total purchase price to the Vendor immediately after
the execution of the deed.
9. ENTIRE AGREEMENT.
This Agreement sets out the entire agreement and understanding between the
Parties in connection with the sale and purchase of the Shares and neither
party has entered into this Agreement in reliance upon any representation,
warranty or undertaking that is not set out in this Agreement. The
Agreement, may not be amended except by writing signed by the Parties.
10. LAW.
This Agreement shall be governed and constructed in accordance with the
laws of the Netherlands.
11. JOINT VENTURE.
Upon completion of the sale and delivery of the Shares, the Parties hereto
agree that Graff shall not longer be a party to the Letter Agreement of
April 14, 1995 and the Heads of Agreement of August 12, 1994 between the
Parties or their respective predecessors, and the Parties shall have no
liabilities or obligations arising therefrom except for the obligation of
confidentiality set forth in the Confidentiality Agreement of August 12,
1994.
4
<PAGE>
12. APPROVAL.
Given the fact that the Parties to this Agreement are the sole shareholders
of the Company, this Agreement also constitutes the approval of general
meeting of priority shareholders to the transfer of Shares described herein
in conformity with Article 9 of the Articles of Association of the Company.
IN WITNESS WHEREOF, this Agreement has been signed by the authorized
representatives of the Parties on the day and year first above written.
PHILIPS MEDIA SERVICES B.V.
By:
----------------------------
Name:
--------------------------
Title:
-------------------------
KPN MULTIMEDIA B.V.
By:
----------------------------
Name:
--------------------------
Title:
-------------------------
GRAFF PAY-PER-VIEW INC.
By:
----------------------------
J. Roger Faherty, Chairman
and Chief Financial Officer
TeleSelect Nederland B.V. herewith accepts and acknowledges:
o the transfer of loans pursuant to Article 3.1 of this Agreement;
o the transfer of the option pursuant to Article 3.2 of this Agreement,
which option shall be withdrawn by TeleSelect Nederland B.V. upon
execution of this Agreement;
o the obligation to have the shareholders register of the Company adjusted
to reflect the transfer of the Shares pursuant to Article 2 of this
Agreement.
TELESELECT NEDERLAND B.V.
By:
-----------------------------
Exhibit 23.01
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of
Graff Pay-Per-View Inc. on Form S-3 (File Nos. 33-80824, 33-82806, and 33-93534)
of our report, based in part on the reports of other auditors, dated March 8,
1996, except for Note 2 and paragraph (a) and (e) of Note 6 as to which dates
are April 3, 1996, March 29, 1996 and April 10, 1996, respectively, on our
audits of the consolidated financial statements and financial statement schedule
II of Graff Pay-Per-View Inc. as of December 31, 1995 and 1994, and for the
three years in the period ended December 31, 1995, which report is included in
this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
New York, New York
April 12, 1996
Exhibit 23.02
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statements on Form S-3 (File Nos.
33-80824, 33-82806 and 93534) of Graff Pay-Per-View Inc. of our report dated
March 30, 1995 relating to the consolidated financial statements of Spector
Entertainment Group, Inc., which appears in the Current Report on Form 8-K of
Graff Pay-Per-View Inc. dated October 25, 1995.
PRICE WATERHOUSE LLP
San Diego, California
April 11, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 1,483,088
<SECURITIES> 0
<RECEIVABLES> 7,835,696
<ALLOWANCES> 1,193,489
<INVENTORY> 0
<CURRENT-ASSETS> 16,732,423
<PP&E> 70,770,526
<DEPRECIATION> 6,068,619
<TOTAL-ASSETS> 102,477,999
<CURRENT-LIABILITIES> 19,634,159
<BONDS> 79,645,448
<COMMON> 0
0
113,579
<OTHER-SE> 7,955,362
<TOTAL-LIABILITY-AND-EQUITY> 102,447,999
<SALES> 0
<TOTAL-REVENUES> 51,057,543
<CGS> 1,429,355
<TOTAL-COSTS> 53,749,600
<OTHER-EXPENSES> 10,532,301
<LOSS-PROVISION> 935,881
<INTEREST-EXPENSE> 1,234,607
<INCOME-PRETAX> (14,458,965)
<INCOME-TAX> 667,525
<INCOME-CONTINUING> (15,126,490)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,126,490)
<EPS-PRIMARY> (1.29)
<EPS-DILUTED> (1.29)
</TABLE>
