SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
Commission file number 0-21150
GRAFF PAY-PER-VIEW INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 11-2917462
(STATE OF OTHER JURISDICTION OF (I.R.S. EMPLOYER
OR ORGANIZATION) IDENTIFICATION NO.)
536 BROADWAY, NEW YORK, NY 10012
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(212) 941-1434
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
Yes X No
---
Number of outstanding of Registrant's Common Stock as of May 1, 1996: 11,385,928
<PAGE>
PART I
ITEM 1: FINANCIAL STATEMENTS
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, December 31,
1996 1995
----------------------------------------------------------------------------------------------------------
(UNAUDITED)
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $1,008,237 $1,483,088
Accounts receivable, net of allowance for doubtful accounts 7,262,382 7,835,696
Income tax refunds receivable 570,000 570,000
Film and CD-ROM costs, net 213,689 400,000
Prepaid expenses and other current assets 2,128,564 2,391,121
Deferred subscription costs 392,439 511,368
Due from related parties 345,227 364,019
Investment in TeleSelect, asset held for sale 3,177,131 3,177,131
------------------- -------------------
Total current assets 15,097,669 16,732,423
Property and equipment, net of accumulated depreciation 69,062,869 70,770,526
Due from related parties 638,665 621,293
Library of movies 3,143,289 2,990,138
Cost in excess of net assets acquired, net of
accumulated amortization 10,640,869 10,961,420
Other assets 445,214 402,199
------------------- -------------------
Total assets $99,028,575 $102,477,999
=================== ===================
Liabilities and Stockholders' Equity Current liabilities:
Current portion of obligations under capital leases $4,103,940 $3,978,024
Current portion of long-term debt 17,047,958 2,540,444
Royalties payable 2,211,506 2,610,744
Accounts payable 2,517,038 3,721,815
Accrued expenses payable 2,603,332 2,241,170
Current portion of accrued restructuring costs 1,709,493 2,205,010
Deferred subscription revenue 1,834,485 2,336,952
------------------- -------------------
Total current liabilities 32,027,752 19,634,159
Obligations under capital leases 56,102,724 56,230,294
Long-term debt 2,158,495 16,896,686
Accrued restructuring costs 1,300,000 1,450,000
Deferred compensation 221,721 197,919
------------------ -------------------
Total liabilities 91,810,692 94,409,058
------------------- -------------------
Minority Interest 834,768
-------------------
Stockholders' equity
Common stock, $.01 par value; authorized 25,000,000
shares; 11,383,928 and 11,357,928 shares
and outstanding at March 31, 1996 and
December 31, 1995, respectively 113,839 113,579
Additional paid-in capital 23,023,749 22,997,350
Unearned compensation (1,246,743) (1,323,074)
Accumulated (deficit) (15,048,822) (13,437,775)
Cumulative translation adjustments 27,816 209,609
------------------- -------------------
6,869,839 8,559,689
Stockholders' loan collateralized by common stock (486,724) (490,748)
------------------- -------------------
Total stockholders' equity 6,383,115 8,068,941
------------------- -------------------
Total liabilities and stockholders' equity $99,028,575 $102,477,999
=================== ===================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1996 1995
---- ----
----------------------- ----------------------
<S> <C> <C>
Revenues: $10,071,735 $12,957,262
----------------------- ----------------------
Operating expenses:
Cost of goods sold 111,232 124,524
Salaries, wages and benefits 2,589,475 2,614,935
Producer royalties and film cost amortization 1,376,693 1,626,955
Satellite, uplinking and playback expenses 1,110,775 2,886,317
Selling, general and administrative expenses 2,867,724 4,068,287
Depreciation of fixed assets and amortization of
goodwill 2,021,275 606,310
----------------------- ----------------------
Operating expenses 10,077,174 11,927,328
----------------------- ----------------------
Total income (loss) from operations (5,439) 1,029,934
Interest expense 1,728,803 217,861
Minority Interest (165,232)
----------------------- ----------------------
Income (loss) before provision for income taxes (1,569,010) 812,073
Provision for income taxes 42,037 306,634
----------------------- ----------------------
Net income (loss) (1,611,047) $505,439
======================= ======================
Earnings (loss) per common and common
equivalent share, primary ($0.14) $0.04
======================= ======================
Earnings per common and common equivalent
share, assuming full dilution $0.04
======================
Weighted average number of shares outstanding,
primary 11,369,181 12,767,210
======================= ======================
Weighted average number of shares outstanding,
assuming full dilution 12,855,467
======================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
<PAGE>
GRAFF PAY-PER-VIEW AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN UNEARNED
COMMON STOCK CAPITAL COMPENSATION
--------------- --------------- ------------------
<S> <C> <C> <C>
Balance, January 1, 1996 $113,579 $22,997,350 ($1,323,074)
Shares issued in connection with
the exercise of employee options 260 26,399
Pro rata share of restricted stock
granted to executive officers 76,331
Net loss for the period
Foreign currency translation
adjustment
--------------- --------------- ------------------
113,839 23,023,749 (1,246,743)
Less shareholders' loans
=============== =============== ==================
Balance at March 31, 1996 $113,839 $23,023,749 ($1,246,743)
=============== =============== ==================
FOREIGN
CURRENCY
ACCUMULATED TRANSACTION
DEFICIT ADJUSTMENT TOTAL
--------------- --------------- ---------------
<S> <C> <C> <C>
Balance, January 1, 1996 ($13,437,775) $209,609 $8,559,689
Shares issued in connection with
the exercise of employee options 26,659
Pro rata share of restricted stock
granted to executive officers 76,331
Net loss for the period (1,611,047) (1,611,047)
Foreign currency translation
adjustment (181,793) (181,793)
--------------- --------------- ---------------
(15,048,822) 27,816 (6,869,839)
Less shareholders' loans (486,724)
=============== =============== ===============
Balance at March 31, 1996 $(15,048,822) $27,816 $6,383,115
=============== =============== ===============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1996 1995
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) ($1,611,047) $505,439
------------------ ----------------
Adjustments to reconcile net income to net cash used in operating activities:
Minority interest (165,231)
Other, net 31,512
Depreciation and amortization of fixed assets 1,860,116 383,171
Amortization of goodwill 161,197 223,138
Amortization of film costs and CD-ROM costs 186,311 436,981
Amortization of library of movies 313,849 245,541
Contributed capital 46,300
Provision for bad debts 32,699 8,000
Deferred compensation expense 23,802 16,388
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 540,615 (136,517)
Increase in film and cd-rom costs (1,029,230)
Decrease (increase) in prepaid expenses and other current 262,557 (1,608,315)
Assets
Decrease (increase) in deferred subscription cost 118,929 (182,540)
(Increase) decrease in other assets (43,015) 97,573
Decrease in royalties payable (399,238) (30,371)
(Decrease) increase in accounts payable and accrued expenses (788,725) 594,675
(Decrease) increase in deferred subscription revenue (502,467) 471,308
Decrease in accrued restructuring costs (645,516)
------------------- ------------------
Total adjustments 995,883 (432,386)
------------------- ------------------
Net cash (used in) provided by operating activities (655,164) 73,053
------------------- ------------------
Cash flows from investing activities:
Purchase of property and equipment (152,459) (1,253,201)
Investment in library of movies (467,000) (349,806)
------------------- -----------------
Net cash used in investing activities (619,459) (1,603,007)
------------------- -----------------
Cash flows from financing activities:
Proceeds from the issuance of common stock and detachable warrants 26,659 7,750
Proceeds from capital contributed to cvsp by a third party 1,000,000
Proceeds from the issuance of debt 120,000 1,785,493
Decrease (increase) in loans receivable from related parties 5,444 (59,753)
Repayment of long-term debt (352,311) (617,528)
-------------------- -----------------
Net cash provided by financing activities 799,772 1,115,962
-------------------- -----------------
Net decrease in cash and cash equivalents (474,851) (413,992)
Cash and cash equivalents, beginning of the period 1,483,088 1,598,282
-------------------- -----------------
Cash and cash equivalents, end of the period $1,008,237 $1,184,290
==================== =================
Supplemental schedule of non-cash items:
Equity adjustment on translation on foreign currency $181,793
====================
Vesting of 177,000 shares of restricted stock to senior management of
which $76,331 was recognized as compensation expense $76,331
====================
</TABLE>
THE ACCOMPANYING NOTES ARE AN
INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
- --------------------------------------------------------------------------------
(UNAUDITED)
1. In the opinion of Graff Pay-Per-View Inc. and its wholly-owned subsidiaries
and majority-owned affiliates (the "Company"), the accompanying consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position as of
March 31, 1996 and the results of operations and cash flows for the three months
then ended.
2. The results of operations for the three months ended March 31, 1996 are not
necessarily indicative of the results to be expected for the full year.
3. The accompanying financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All intercompany transactions and balances have
been eliminated in consolidation. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. These
consolidated financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's December 31,
1995 annual report on Form 10K/A-1.
4. The following reconciles revenue and earnings for the three months ended
March 31, 1995 as previously reported by the Company with the combined amounts
currently presented in the Statement of Operations:
<TABLE>
<CAPTION>
PREVIOUSLY
STATED AEC SEG RESTATED
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenue $10,616,464 $1,002,819 $1,337,979 $12,957,262
Net Income $625,996 ($44,089) ($76,468) $505,439
EPS-Primary $0.06 - - $0.04
Weighted Average Number
of Shares Outstanding -
Primary 11,247,210 820,000 700,000 12,767,210
</TABLE>
5. On March 6, 1996, the Company contributed the assets of the CABLE VIDEO STORE
Network and certain other assets to CVS Partners, a newly formed partnership
owned 75% by the Company and 25% by WilTech Cable Television Services, Inc.
("WCTV"), a wholly-owned subsidiary of the WilTech Group, Inc. ("WilTech").
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 the
contribution, the Company entered into a Services Agreement with CVS Partners to
<PAGE>
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
- --------------------------------------------------------------------------------
(UNAUDITED) - CONTINUED
provide certain sales, marketing, administrative and operational services to
CVS Partners and granted CVS Partners a royalty free license of the CABLE VIDEO
STORE name and related identity. WCTV is required to contribute approximately
$2.6 million to CVS Partners' capital (of which $1 million has been contributed
as of March 31, 1996), 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.
6. The Company, Philips Media B.V. ("Phillips") and Royal PTT Netherlands NV
("KPN") established TeleSelect B.V. ("TeleSelect"), a Netherlands joint venture,
to create joint ventures with European cable operators to enable them to provide
conditional access services 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 $3.2 million. $1 million of the
proceeds were utilized to pay down long-term debt and the remaining funds were
utilized for working capital.
7. The Company has a line of credit from Midlantic Bank, N.A. ("Midlantic")
which has been fully drawn, and amounts to $15.0 million. At December 31, 1995,
the Company had violated certain financial covenants. 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 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.
8. The accompanying financial statements have been prepared assuming that the
Company will be able to meet its obligations in the ordinary course of business.
Management believes that the restructuring undertaken at the end of 1995 and the
during the first quarter of 1996 and further planned reductions in overhead and
labor costs will contribute towards achieving improved cash flows and operating
results. The Company has incurred a $5,439 loss from operations for the three
months ending March 31, 1996 and currently funds its operations from cash flow.
While the Company is servicing the interest on its line of credit from
Midlantic, the Company does not currently have the resources available to repay
the principal of this obligation when it matures on January 2, 1997. The Company
is in negotiation to secure alternative financing to repay all or a portion of
the Midlantic indebtedness with such financing.
<PAGE>
ITEM 2: MANAGEMENT DISCUSSION AND ANALYSIS OF
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
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.
The Consolidated Statements of Operations include the results of Adam &
Eve Communications, Inc. ("AEC"), which was acquired by merger on April 13,
1995, into a wholly-owned subsidiary and Spector Entertainment Group, Inc.,
("SEG") a wholly-owned subsidiary, which was acquired by merger on August 31,
1995 and CVS Partners, a partnership in which the Company owns, since March 1,
1995, a 75% interest. The AEC and SEG acquisitions were accounted for as
pooling of interests, whereby the financial statements for all the periods
prior to the combination were restated to reflect the combined operations.
REVENUES
Total revenues for the three months ended March 31, 1996 decreased by
approximately $2.9 million (22.3%) to approximately $10.1 million compared to
total revenues of approximately $13.0 million for the three months ended March
31, 1995. The decrease in revenue is primarily attributable to a decline in
revenues from the Company's adult networks in the domestic C-Band direct to home
("DTH") and the United Kingdom DTH markets. Revenues from film and television
licenses of programming produced and/or distributed by CPV Productions, Inc.
("CPV") also declined as a result of the Company's suspension of production
activities as a part of the Company's restructuring plan.
In the domestic C-band DTH market, several competing adult explicit
services were launched during 1994 and 1995. The explicit adult services compete
directly with the Spice and the Adam & Eve Channel (the "SPICE Networks") in the
domestic C-band DTH market and have resulted in a decline in revenues of
approximately $1.6 million or 73.8% for the three months ended March 31, 1996 as
compared to the same period for 1995 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. The Company
is exploring various strategies in the C-Band DTH market to combat the loss of
revenues.
In the United Kingdom, two new competing adult services were launched
in the second half of 1995. The new adult services compete directly with THE
ADULT CHANNEL, the Company's United Kingdom satellite delivered adult network
and have resulted in a decline in revenues of approximately $595,000 or 24.3%
for the three months ended March 31, 1996 as compared to the same period in
1995.
<PAGE>
ITEM 2: MANAGEMENT DISCUSSION AND ANALYSIS OF
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
The Company realized $220,000 of revenues from the direct broadcast
satellite system ("DBS") market for the quarter ended March 31, 1996. The
Company did not realize any revenues from distribution of the Spice Networks
during the quarter ended March 31, 1995 from this market. The Company
anticipates that there will be rapid growth in the domestic DBS market.
Revenues from the SPICE Networks cable market decreased approximately
$266,000 or 6% for the three months ended March 31, 1996 as compared to the same
period in 1995. The Company was able to increase the number of addressable
households with access to the SPICE Networks by approximately 50% over the
number of such addressable households at the end of the quarter ended March 31,
1995 even though the Company lost approximately 8% of its addressable subscriber
base on July 1, 1995. The increase in addressable subscribers did not translate
into significantly greater revenues due to normal delays in realizing revenues
from new subscribers and a reduction in the Company's share of revenues from
cable sales of Spice. This reduction is a result of increased competition in the
Company's market segment and the growing concentration in the ownership of cable
systems.
SALARIES, WAGES AND BENEFITS
Salaries, wages and benefits decreased by approximately $25,000 or 1%
to approximately $2.6 million for the three months ended March 31, 1996 as
compared to the same period in 1995. Salaries did not decline significantly for
the period ending March 31, 1996 compared to a similar period in 1995 because
the reduction in salaries from the restructuring plan were primarily
attributable to employees hired during the second half of the year. The Company
expects to realize substantial reductions in salaries, wages and benefits from
the restructuring plan in the second half of 1996.
PRODUCER ROYALTIES
Producer royalties and film cost amortization in the three months ended
March 31, 1996 have decreased by approximately $250,000 or 15.4% as compared to
the same period in 1995. The decline is primarily attributable to the reduction
in film cost amortization resulting from the provision to write down CPV's film
and CD-ROM costs in the fourth quarter of 1995.
SATELLITE, PLAYBACK AND UPLINK EXPENSES
TRANSPONDER LEASE In December, 1995, the Company entered into a service
agreement with AT&T for the use of 5 transponders on Telstar 402R for the
satellite's useful life, estimated to be 12 years. The Company is using the
transponders for broadcast of its domestic networks and the SEG services. The
transponder agreement is being accounted for as a capital lease as required by
<PAGE>
ITEM 2: MANAGEMENT DISCUSSION AND ANALYSIS OF
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Statement of Financial and Accounting Standards No. 13, "Accounting for Leases".
As a result, the Company depreciates, on the straight-line method, the amount
equal to the present value of the expected future minimum lease payments at the
lease inception which amounted to $58.7 million and recognizes interest expense
which declines over the satellite's 12 years useful life. For the quarter ending
March 31, 1996 the Company recognized total expenses attributable to the lease
of approximately $2.6 million comprised of depreciation expense of approximately
$1.3 million and interest expense of approximately $1.3 million. Had the lease
been accounted for as an operating lease, the Company would have recognized
approximately $500,000 less in total expenses attributable to the AT&T
transponder lease during the first quarter of 1996.
Satellite, playback and uplink expenses for the three months ended
March 31, 1996 have decreased by approximately $1. 8 million or 61.5% as
compared to the same period in 1995. The decrease is primarily attributable to
the accounting treatment of the AT&T transponders lease as a capital lease as
compared to the treatment during the first quarter of 1995 when domestic
transponder expenses were accounted for as an operating lease (see "Transponder
Lease").
Had the AT&T lease been accounted for as an operating lease, the
Company's satellite expense for the three months ended March 31, 1996 would have
increased by approximately $300,000 or 10% as compared to the same period in
1995. The increase, which would have occurred, is primarily due to the increase
in the number of domestic transponders used by the Company which is offset by a
reduction in the per transponder cost of domestic transponders and an increase
in foreign transponder costs attributable to the launch of a new European adult
network, EUROTICA. (The Company's European transponders are accounted for as
operating leases.)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three months ended
March 31, 1996 have decreased by approximately $1.2 million or 29.5% to $2.9
million as compared to the same period in 1995. The decrease is primarily
attributable to the implementation of the restructuring plan which resulted in
significant reduction or the elimination of various selling, general and
administrative expenses. These include expenses associated with CPV, The Home
Video Channel, Limited, the exploration of new business opportunities including
non-network opportunities in Europe, travel and entertainment, and other
corporate overhead expenses. Offsetting these reductions was an increase in
marketing, advertising and sales promotion expenses undertaken to maintain and
increase the SPICE Networks subscriber base.
<PAGE>
ITEM 2: MANAGEMENT DISCUSSION AND ANALYSIS OF
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
DEPRECIATION OF FIXED ASSETS AND AMORTIZATION OF GOODWILL
Depreciation of fixed assets and the amortization of goodwill increased
by approximately $1.4 million or 233.4% to approximately $2.0 million for the
three months ended March 31, 1996 as compared to the same period in 1995.
Approximately $1.3 million of the increase is attributable to accounting for
the AT&T transponder lease as a capital lease.
INTEREST EXPENSE
Interest expense has increased by approximately $1.5 million or 693.5%
to approximately $1.7 million for the three months ended March 31, 1996 as
compared to the same period in 1995. Approximately $1.3 million of the increase
is attributable to accounting for the AT&T transponder lease as a capital lease
and $280,000 of the increase is attributable to additional borrowings under the
line of credit from Midlantic which was offset by a reduction in other interest
expenses.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996, the Company had a working capital deficit of
approximately $16.9 million compared to $2.9 million at December 31, 1995. The
decrease in working capital is primarily attributable to the classification of
all of the $15.6 million of the Midlantic loan as current at March 31, 1996 as
compared to only $1.1 million classified as current and $14.5 million classified
as long-term at December 31, 1995.
The Company has a line of credit from Midlantic which has been fully
drawn and amounts to $15.0 million. At December 31, 1995, the Company had
violated certain covenants. 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 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.
<PAGE>
ITEM 2: MANAGEMENT DISCUSSION AND ANALYSIS OF
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
The Company has reduced expenses in the areas of salaries and overhead
which currently allows the Company to fund day-to-day operations. The Company
plans to continue to reduce expenses in the areas which the Company projects
will have a positive impact on future liquidity. The Company is currently in
discussions with parties and is evaluating its alternatives concerning
additional financing to repay its bank debt and to fund the expansion of its
core businesses and other future projects. There are no assurances that the
Company will be able to secure alternate financing and to repay all or a portion
of the Midlantic indebtedness with such financing.
Stockholders' equity at March 31, 1996 was approximately $6.4 million
compared to approximately $8.0 million on December 31, 1995. The decline in
stockholders' equity was primarily attributable to interest expense of
approximately $1.7 million (see "Transponder Lease") which was offset by a
charge to minority interest in the amount of approximately $165,000. The
Company's loss from operations was approximately $5,000 for the three months
ended March 31, 1996.
Net cash used in operating activities was approximately $700,000 for
the three months ended March 31, 1996 as compared to net cash provided from
operating activities of approximately $73,000 for the three months ended March
31, 1995. The decrease in cash from operating was primarily attributable to a
net loss as compared to net income for the three months ending March 31, 1996
and 1995, respectively. Also contributing to the decline in cash from operating
activities was the net decrease in combined accounts payable accrued expenses,
and a decrease in accrued restructuring costs and the deferred subscription
revenue. Offsetting these declines to cash from operating activities were
decreases in prepaid expenses and other current assets, accounts receivable, and
Film and CD-ROM costs and an increase in depreciation and amortization expenses.
Net cash used in investing activities was approximately $600,000 for
the three months ended March 31, 1996 as compared to approximately $1.6 million
for the three months ended March 31, 1995. The decrease in cash used in
investing activities is primarily attributable to declines in purchases of
property and equipment.
Net cash provided by financing activities was approximately $800,000
for the three months ended March 31, 1996 as compared to approximately $1.1
million for the three months ended March 31, 1995. The decrease in cash provided
from investing activities is primarily attributable to reduced borrowings from
the Midlantic line of credit offset by $1 million contributed to CVS Partners by
WCTV for the use of working capital.
On April 3, 1996, the Company sold its TeleSelect interest to
Philips and KPN for $3.2 million. $1 million of the proceeds were utilized
to pay down long-term debt and the remaining funds were contributed to working
capital.
<PAGE>
PART II - OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits - Exhibit - 27.01 Financial Data Schedule
(b) Reports on Form 8-K - None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf of the
undersigned, thereunto duly authorized.
GRAFF PAY-PER-VIEW INC.
By: /s/ J. Roger Faherty
----------------------
J. Roger Faherty
Chairman & Chief
Executive Officer
(Principal Executive and
Financial Officer)
May 14, 1996
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 1,008,237
<SECURITIES> 0
<RECEIVABLES> 7,262,382
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 15,097,669
<PP&E> 69,062,869
<DEPRECIATION> 0
<TOTAL-ASSETS> 99,028,575
<CURRENT-LIABILITIES> 32,027,752
<BONDS> 79,413,117
0
0
<COMMON> 113,839
<OTHER-SE> 6,269,276
<TOTAL-LIABILITY-AND-EQUITY> 99,028,575
<SALES> 0
<TOTAL-REVENUES> 10,071,735
<CGS> 111,232
<TOTAL-COSTS> 10,077,174
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,728,803
<INCOME-PRETAX> (1,569,010)
<INCOME-TAX> 42,037
<INCOME-CONTINUING> (1,611,047)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,611,047)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> 0
</TABLE>
