-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Hcg2Rzjf1+BZA5yK5QZbxQHywBxocoGge7bPBzGoQgjyvGDPtb+6FDKCViW4l5pI /OYYdFnNHL0TIP+etOjfnQ== 0000839431-96-000010.txt : 19960612 0000839431-96-000010.hdr.sgml : 19960612 ACCESSION NUMBER: 0000839431-96-000010 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960418 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GRAFF PAY PER VIEW INC /DE/ CENTRAL INDEX KEY: 0000839431 STANDARD INDUSTRIAL CLASSIFICATION: 4841 IRS NUMBER: 112917462 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-21150 FILM NUMBER: 96548482 BUSINESS ADDRESS: STREET 1: 536 BROADWAY STREET 2: 7TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10012 BUSINESS PHONE: 2129411434 MAIL ADDRESS: STREET 1: 536 BROADWAY STREET 2: 7TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10019 FORMER COMPANY: FORMER CONFORMED NAME: JERICAP INC DATE OF NAME CHANGE: 19920703 10-K/A 1 10-K AMENDED 12/31/95 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A-1 (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. 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 non-recurring restructuring charges 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." 1 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. 2 The following table is an Edgar representation of the data points used in the printed graphic presentation. 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 3 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 on-line, 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. 4 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. 5 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 on-line 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. 6 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 7 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. 8 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 9 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 10 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, 11 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 presentation. 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 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, J.V.("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 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, President and Chief Operating Officer after the merger. 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 $3.2 million. RESTRUCTURING. The Company reported a loss for 1995 of approximately $15.1 million which includes non-recurring restructuring charges and a write-down of investments of approximately $10.5 million and an operating loss of approximately $2.7 million before the non-recurring charges and the write-down. 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 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 terminated the employment of 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. As a result management has taken 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 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 will 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 on-line service, also may be materially affected by the Act. The Act makes it a criminal offense to transmit to minors "indecent" content on-line and over the Internet. However a person providing adult content 16 on-line 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 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 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 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 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 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:
For the Years ended December 31 1995 1994 1993 1992 1991 - - --------------------------------------------------------------------------------------------------------------------------- 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 benefits 11,684,727 8,386,364 6,278,355 4,160,746 2,764,225 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 Provisions 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 Income (loss) (13,224,358) 5,469,076 (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 ----------- ----------- ----------- ----------- ----------- Income (loss) 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 provision (benefit) 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 =========== =========== =========== =========== ===========
CONTINUED 22 ITEM 6. SELECTED FINANCIAL DATA - CONTINUED
For the Years ended December 31 1995 1994 1993 1992 1991 - - --------------------------------------------------------------------------------------------------------------------------- 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 =========== =========== =========== =========== ==========
23 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 operations 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.
YEAR ENDED DECEMBER 31, 1994 PREVIOUSLY STATED AEC SEG RESTATED -------------- ------------- ------------- -------------- 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 STATED 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) LOSS 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
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 non-recurring 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 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 million and $1.2 million, 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, 25 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 Commencing December 1995, the Company utilizes five transponders pursuant to a Transponder Services Agreement with AT&T which has been 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 27 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. 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. 28 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. 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 of 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 29 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 30 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 deficit of 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. 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. Imperial waived the violations of the financial covenants through December 31, 1995.(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 non-recurring 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 31 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. On April 3, 1996, 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. 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. 32 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. 33 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. 34 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.
================================================================================================================= 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)($) ------------------ ---- ------- ------------- ------------ ---------- ------------ 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 =================================================================================================================
(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. 35 (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. 36 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 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 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 $8.63 per share. 39 The following table sets forth stock options that the Company repriced to the named executive officers in 1995.
TEN YEAR OPTION REPRICINGS ==================================================================================================================== LENGTH OF ORIGINAL NUMBER OF MARKET OPTION SECURITIES PRICE OF EXERCISE REMAINING UNDERLYING STOCK AT PRICE AT NEW AT DATE OPTIONS TIME OF TIME OF EXERCISE OF REPRICED REPRICING REPRICING PRICE REPRICING NAME DATE (#) ($) ($) ($) (YEARS) ---- -------- --------- ---------- --------- -------- ----------- 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 ====================================================================================================================
40 The following table sets forth stock options that the Company granted or repriced to the named executive officers during 1995.
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 ($/Sh) Expiration Date ($) ($) -------------------------------------------------------------------------------------------------------------- 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 ==============================================================================================================
(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 $3.875 on December 11, 1995. The options are all currently exercisable. 41 (5) Such options were granted in 1993 and are currently exercisable. Thirty-six thousand (36,000) from the 1992 plan and 100,000 to Messrs. Faherty and Nolan, all of which were repriced in December, 1995.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR END OPTION VALUE =========================================================================================================== Number of Securities Underlying Value of Unexercised Unexercised Options In-the-Money Options at FY-End (#) at FY-End ($) Shares Acquired Value -------------------- -------------------- on Exercise Realized Exercisable/ Exercisable/ Name (#) ($) Unexercisable Unexercisable(1) - - ----------------------------------------------------------------------------------------------------------- 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 ===========================================================================================================
(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 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 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 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
============================================================================================ EXECUTIVE OFFICERS, SHARES PERCENTAGE DIRECTORS AND 5% BENEFICIALLY OF SHARES SHAREHOLDERS OWNED OUTSTANDING (1) - - --------------------------------------------------------------------------------------------- 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% ============================================================================================
(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 (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 November 1995, the Stock Option Committee granted the executive officers the right to rescind the option exercised. The rescission resulted in the 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 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 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 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 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 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 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 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 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 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: April 10, 1996 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/ EDWARD M. SPECTOR President, Chief April 10, 1996 - - ------------------------------------ Operating Officer Edward M. Spector and Director /s/ LELAND H. NOLAN Director April 10, 1996 - - ------------------------------------ Leland H. Nolan /s/ MARK GRAFF Director April 10, 1996 - - ------------------------------------ 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 April 10, 1996 - - ------------------------------------ President and Chief Philip Callaghan Financial Officer 56
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 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
57
Exhibit 11.01 GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS (LOSS) PER SHARE Years Ended December 31, ----------------------------------------------------------- Primary: 1995 1994 1993 - - -------- 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 ===========
58 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 GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES PAGE NUMBERS ----------------- Reports of Independent Accountants F-1 - F-3 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
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 Schedule of this Form 10-K. These financial statements and financial statement schedule 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 of Spector Entertainment Group, Inc., a wholly-owned subsidiary, for the years ended December 31, 1994 and 1993, which statements reflect 15% of consolidated assets as of December 31, 1994, and 15% and 25% of consolidated revenues for the years ended December 31, 1994 and 1993, respectively. Those statements were audited by other auditors whose report, dated March 30, 1995, included an emphasis of a matter paragraph that describes the subsidiaries extensive transactions and relationships with related parties. Our opinion, insofar as it relates to the amounts included for Spector Entertainment Group, Inc. for 1994 and 1993, is based solely on the report of the other auditors. In addition, we did not audit the financial statements of CPV and Magic Hour Productions, Inc. wholly-owned subsidiaries, for the year ended December 31, 1993, which statements reflect 8% of consolidated revenues for the year ended 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. for 1993 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, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors 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, 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 paragraphs (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 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 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 INDEPENDENT AUDITOR'S REPORT CPV (A California S Corporation) 1762 Westwood Boulevard Suite 220 Los Angeles, CA 90024 We have audited the combined statements of operations, stockholers' equity and cash flow of CPV (A California S Corporation) and Magic Hour Productions, Inc. for the year ended December 31, 1993 (not presented separately herein). 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 audit. 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 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, 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 statements referred to above present fairly, in all material respects, the combined results of its operations and cash flow of CPV (A California S Corporation) and Magic Hour Productions, Inc. for the year ended December 31, 1993, in conformity with generally accepted accounting principles. Willing and Moser, An Accountancy Corp. May 19, 1994 F-3
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Year Ended December 31, 1995 1994 ========================================================================================================= Assets: Current assets: Cash and cash equivalents $1,483,088 $1,598,282 Accounts receivable, less allowance for doubtful accounts of $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 2,241,170 1,470,218 Current portion of accrued restructuring costs 2,205,010 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 collateralized 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.
F-4
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, 1995 1994 1993 ========================================================================================================================= 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 Provisions for write downs and non-recurring costs of: Investment in AGN 2,038,750 Goodwill related to Guest Cinema 871,289 Film and CD-ROM costs 3,967,252 Restructuring costs 3,655,010 ------------ ----------- ---------- 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.
F-5
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 --------------- -------------- ----------------- 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 ============================================================================================================================ Foreign Currency Accumulated Translation Stock in Deficit Adjustment Treasury Total ------------- ------------- --------- ----------- 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.
F-6
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 -------- ----------- ------------ 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) ======== =========== =========== =================================================================================================================== 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.
F-7
GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1995 1994 1993 ============================================================================================================================= Cash flows from operating activities: 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: Write down of goodwill related to PSP Holding, Inc. acquisition 871,289 Write down of Film and CD-ROM costs 3,967,252 Restructuring costs 3,655,009 Provision for 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, ne (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.
F-8
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 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.
F-9 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 Company's restructuring plan (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 owned and operated CABLE VIDEO STORE ("CVS")(see below), 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 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 American Gaming Network, J.V., a joint venture formed 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 GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED ================================================================================ partnership for working capital and product development in exchange for a 25% interest. WCTV has an option to purchase up to 80% of the partnership. 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 exercisable from August 1, 1996 through December 31, 1996 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. The put is exercisable from October 1, 1996 through December 31, 1996. 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 $463,000 as of December 31, 1995. The technology acquired would then be amortized up to a period of 7 years. F-11 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.
YEAR ENDED DECEMBER 31, 1994 GRAFF PAY-PER-VIEW AEC SEG RESTATED INC. ------------- ---------- ---------- ----------- 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
F-12 GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED ================================================================================
YEAR ENDED DECEMBER 31, 1993 GRAFF PAY-PER-VIEW AEC SEG RESTATED INC. ------------- ---------- ---------- ----------- 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
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. As part of the restructuring plan, the F-13 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. Accordingly, 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. During 1995, the Company issued a $275,000 note in connection with the purchase of 100,000 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 received $3.2 million of proceeds from the sale of its TeleSelect interest of which $1 million was utilized to pay down long-term debt and the remaining funds were utilized to pay trade payables. F-14 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 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 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 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 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:
DECEMBER 31, 1995 1994 - - --------------------------------------------------------------------------------------------------- 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 =========== ===========
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 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. On April 3, 1996 the Company paid the balance of the term loan in full from the proceeds received on the sale of its TeleSelect interest. 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, 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 financial 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 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"). The interest rate on December 31, 1995 was 6.73%. 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 GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED ================================================================================ DECEMBER 31, 1995 1994 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 93,100,468 Less amount representing interest (32,892,150) ----------- Present value of minimum lease obligations 60,208,318 $13,685 Current portion of lease obligations 3,978,024 6,120 ---------- ---------- Long term portion of lease obligations $56,230,294 $7,565 =========== =========== (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 the 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, net of discounting, for 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 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 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 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. During 1992 and 1995, the Company granted options to acquire 24,000 and 16,000 shares, respectively, outside the aforementioned plans 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 exercise price of the options issued on December 11, 1995 is $3.875 per share. 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 GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED ================================================================================ Changes in warrants and options outstanding are summarized as follows:
WARRANTS OPTIONS --------------------------- ------------------------------ EXERCISE EXERCISE SHARES PRICE RANGE SHARES PRICE RANGE ------- -------------- --------- -------------- 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 ======= =========
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 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 GRAFF PAY-PER-VIEW INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED ================================================================================ 10. COMMITMENTS AND CONTINGENCIES (see Note 2 with respect to the UTI letter agreement) 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 have been 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 (Note 15). All of F-28 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 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 CVS Partners on March 6, 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 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 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 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-34 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 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
- - -------------------------------------------------------------------------------------------------------- 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 - - -------------------------------------------------------------------------------------------------------- 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 ======== ======== ======= ==========
F-34 EX-10.66 2 SEPARATION AGREEMENT 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. 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 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. (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. 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 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 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. By: /s/ J. Roger Faherty ------------------------ Title: Chairman /s/ Leland H. Nolan ------------------------ (Executive) EX-10.67 3 SEPARATION AGREEMENT/GRAFF 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 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 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 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. 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 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 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) EX-10.68 4 FOURTH AMEND TO EMPLOY. AGREE 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: (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. (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 EX-10.69 5 GENERAL PARTNERSHIP AGREEMENT 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 NOW, THEREFORE, for good and valuable consideration, the parties agree as follows: 2 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 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 "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 "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 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 "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 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. 9 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. 10 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. 11 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: 12 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 13 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 . 14 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). 15 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. 16 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 17 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 18 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 19 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: 20 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: 21 (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, 22 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: 23 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). 24 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. 25 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. 26 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. 27 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. 28 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; 29 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; 30 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. 31 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. 32 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. 33 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. 34 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. 35 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(ies) (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 36 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. 37 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: 38 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 interest in and to the CABLE VIDEO STORE name and related marks and identity and their names and marks to WCTV. 39 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 40 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 41 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 42 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. 43 (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. 44 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. 45 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 ------------------------- EX-10.70 6 THIRD AMENDATORY AGREEMENT 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." 1 (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 2 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. 3 (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: 4 (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 5 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"). 6 (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 7 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: 8 (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. 9 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 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 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 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: /s/ Philip J. Callaghan ---------------------------------- Name: Philip J. Callaghan -------------------------------- An Authorized Officer of each of the foregoing entities EXHIBIT B BUDGET SCHEDULE 10.19 DISTRIBUTIONS TO SHAREHOLDERS EX-10.71 7 SHARE SALE AGREEMENT 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 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 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 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 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: /s/ R. Hamersme ---------------------------- Name: R. Hamersme -------------------------- Title: Managing Director ------------------------- KPN MULTIMEDIA B.V. By: /s/ H. P. M. Kivits ---------------------------- Name: H. P. Kivits -------------------------- Title: Director ------------------------- GRAFF PAY-PER-VIEW INC. By: /s/J. Roger Faherty ---------------------------- 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: /s/ M. J. Coppoolse ----------------------------- Name: M. J. Coppoolse Title: C.E.O. EX-23.01 8 COOPERS CONSENT 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 EX-23.02 9 PRICE WATERHOUSE CONSENT 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 EX-27 10 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1995 DEC-31-1995 1,483,088 0 7,835,696 1,193,489 0 16,732,423 70,770,526 6,068,619 102,477,999 19,634,159 79,645,448 0 113,579 0 7,955,362 102,447,999 0 51,057,543 1,429,355 52,320,245 10,532,301 935,881 1,234,607 (14,458,965) 667,525 (15,126,490) 0 0 0 (15,126,490) (1.29) (1.29)
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