<PAGE>
As filed with the Securities and Exchange Commission on December 8, 1999
Registration No. 333-78957
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------
Amendment No. 2
to
Note Exchange Offer
on
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
TVN ENTERTAINMENT CORPORATION
(Exact name of Registrant as specified in its charter)
--------------
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<S> <C> <C>
Delaware 4841 95-4138203
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of
incorporation or Classification Code Number) Identification Number)
organization)
</TABLE>
2901 West Alameda Avenue, Seventh Floor
Burbank, California 91505
(818) 526-5000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
--------------
Stuart Z. Levin
Chief Executive Officer
TVN Entertainment Corporation
2901 West Alameda Avenue, Seventh Floor
Burbank, California 91505
(818) 526-5000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------
Copies to:
Robert P. Latta, Esq.
Roger E. George, Esq.
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, CA 94304
(650) 493-9300
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
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If any of the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance
with General Instruction G. check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
--------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as the Securities
Exchange Commission, acting pursuant to said Section 8(a), may determine.
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<PAGE>
Explanatory note
This Registration Statement contains a prospectus relating to the offer for
all outstanding 14% Senior Notes Due 2008, Series A of TVN Entertainment
Corporation in exchange for TVN Entertainment Corporation's 14% Senior Notes
Due 2008, Series B. In addition, this Registration Statement contains a
prospectus relating to certain market-making activities with respect to the new
notes which may, from time to time, be carried out by Morgan Stanley Dean
Witter. There are certain differences between the two prospectuses. The front
cover page, the information in the prospectus summary relating to the exchange
offer, the "United States federal income tax consequences" section and the
"Plan of distribution" section will all be different. In addition, the
information under the caption "The Exchange Offer" will be deleted from the
market making prospectus and certain conforming changes will be made to delete
references to the exchange offer. The prospectus for the exchange offer follows
immediately after this explanatory note. Following the exchange offer
prospectus are the form of alternative cover page and Plan of Distribution
section for the market-making prospectus and alternative pages covering
conforming changes.
<PAGE>
Subject to completion, dated , 1999
TVN
Entertainment Corporation
offer to exchange
14% Senior Notes due 2008, Series A (Unregistered)
For 14% Senior Notes due 2008, Series B (Registered)
We currently have outstanding $166.2 million in principal amount of 14%
Senior Notes due 2008, Series A. We are offering to exchange new registered 14%
Senior Notes due 2008, Series B for any and all of the old notes.
TO EXCHANGE YOUR UNREGISTERED OLD NOTES FOR REGISTERED NEW NOTES, YOU MUST
TENDER YOUR OLD NOTES NO LATER THAN 5:00 P.M., NEW YORK CITY TIME, UNLESS
EXTENDED.
----------------
No public market currently exists for the new notes. We do not expect that
an active public market in the new notes will develop. We do not intend to list
the new notes on any securities exchange or on the Nasdaq National Market.
----------------
See the "Risk factors" section on page 11 for information that you should
consider before you decide to participate in this exchange offer.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the new notes or determined that this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is , 1999.
<PAGE>
Table of contents
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Page
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Summary.................................................................... 1
Summary consolidated financial data........................................ 9
Risk factors............................................................... 11
Special note regarding forward-looking statements.......................... 31
Use of proceeds............................................................ 32
Dividend policy............................................................ 32
Capitalization............................................................. 33
Selected historical financial data......................................... 34
Management's discussion and analysis of financial condition and results
of operations............................................................. 36
Business................................................................... 50
Management................................................................. 68
Material transactions and related party transactions....................... 76
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Page
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Principal stockholders..................................................... 80
Description of certain indebtedness........................................ 82
The exchange offer......................................................... 83
Description of the new notes............................................... 92
Form of new notes.......................................................... 92
Description of the old notes............................................... 93
Description of capital stock............................................... 133
United States federal income tax considerations............................ 138
Plan of distribution....................................................... 144
Legal matters.............................................................. 144
Experts.................................................................... 145
Where you can find more information........................................ 145
Index to financial statements.............................................. F-1
</TABLE>
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You should rely only on the information provided in this prospectus. We have
authorized no one to provide you with different information. We are not making
an offer of these securities in any state where the offer is not permitted. You
should not assume that the information in this prospectus or the prospectus
supplement is accurate as of any date other than the date on the front of the
document.
i
<PAGE>
Summary
This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus, including "Risk factors" beginning on
page 11, carefully.
TVN Entertainment Corporation
Our company provides a wide variety of new television programming and
services that we deliver in digital format to cable operators for their
subscribers using existing cable infrastructure. In response to increasing
consumer demand for additional entertainment programming and services, the
cable industry has begun a large scale conversion from analog transmission, an
older technology that can only deliver a limited number of channels, to digital
transmission, a newer technology that can deliver a greater number of channels.
This conversion has been facilitated by recent advances in the technology used
to compress multiple channels of television programming into a single video
transmission and to secure that transmission from unauthorized use. In late
1997, we launched TVN Digital Cable Television. This service combines a digital
delivery system with programming content and support services to enable cable
operators to expand the number of channels they can offer and generate new
sources of revenue without the need to rewire or significantly upgrade their
existing analog cable systems.
The TVN digital solution
Our digital solution offers two types of service: TVN Digital Cable
Television targeted at smaller and medium size cable systems, and Pay-Per-View
Feeds Service targeted at larger cable systems.
TVN Digital Cable Television
TVN Digital Cable Television can expand the number of video channels
delivered by a typical smaller cable system from 60 analog video channels to
over 100 combined digital and analog channels for digital subscribers.
Pay-Per-View Feeds Service
Our Pay-Per-View Feeds Service transmits to cable systems the same digital
pay-per-view movies and events included in our TVN Digital Cable Television
service. Pay-Per-View Feeds Service allows cable systems to receive content
from a single source of distribution and avoid the significant capital
investment otherwise required for automated playback, storage, scheduling and
delivery of pay-per-view programming. Cable operators receiving Pay-Per-View
Feeds Service also benefit from our expertise in selecting and scheduling pay-
per-view programming to maximize the number of movies and events purchased by
subscribers, based on our experience in delivering pay-per-view movies and
events to the large home satellite dish market since 1991.
In addition, we also transmit three digital channels of pay-per-view hit
movies and events that cable operators can receive in digital format at their
facilities and then convert to analog format for delivery to their subscribers
who have equipment that enables them to purchase and view encrypted
programming. This service is known as our Marquee Mix Service and provides a
replacement for the pay-per-view programming formerly offered by Request
Television, which ceased operations on June 30, 1998.
1
<PAGE>
Recent cable operator agreements
Following the completion of comprehensive operational testing and marketing
trials in late 1997, we formally launched our television programming and
services delivered in digital format in early 1998. As of November 15, 1999, we
have entered into agreements with or have received commitments from 62 cable
operators for TVN Digital Cable Television, 8 cable operators for Pay-Per-View
Feeds Service and 19 cable operators for Marquee Mix Service. As of the same
date, 23,000 cable customers were subscribers to our TVN Digital Cable
Television service. We experienced net losses of $17.7 million, $29.9 million
and $53.8 million in fiscal 1997, fiscal 1998 and fiscal 1999, respectively,
and a net loss of $41.1 million for the six months ended September 30, 1999.
----------------
We are a Delaware corporation. Our principal executive offices are located
at 2901 West Alameda Avenue, Seventh Floor, Burbank, California 91505, and our
telephone number is (818) 526-5000.
2
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Summary of the terms of the exchange offer
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Registration rights agreement.... You are entitled under the registration
rights agreement to exchange your
unregistered notes for registered notes
with substantially identical terms. We are
now offering to exchange your unregistered
old notes for registered new notes with
substantially the same terms in the
exchange offer. The exchange offer is
intended to satisfy our obligations under
the registration rights agreement. After
the exchange offer is completed, you will
no longer be entitled to any exchange or
registration rights with respect to your
old notes.
The registration rights agreement requires
us to file a registration statement for a
continuous offering in accordance with Rule
415 under the Securities Act for your
benefit if you would not receive freely
tradeable registered notes in the exchange
offer or you are ineligible to participate
in the exchange offer and indicate that you
wish to have your old notes registered
under the Securities Act. See "The exchange
offer--Procedures for tendering."
The exchange offer............... We are offering to exchange $1,000
principal amount of new notes, our Series B
14% Senior Notes due 2008 which have been
registered under the Securities Act, for
each $1,000 principal amount of old notes,
our 14% Senior Notes due 2008 which were
issued on July 29, 1998 in a private
placement. In order to be exchanged, an old
note must be properly tendered and
accepted. All old notes that are validly
tendered and not validly withdrawn will be
exchanged for new notes.
As of this date, there are $166.2 million
aggregate principal amount of old notes
outstanding.
We will issue the new notes promptly after
the expiration of the exchange offer.
Resales of the Registered Notes.. We believe that the new notes may be
offered for resale, resold and otherwise
transferred by you without compliance with
the registration and prospectus delivery
provisions of the Securities Act if you
meet the following conditions:
. The new notes to be acquired by you in
the exchange offer are acquired by you in
the ordinary course of your business;
. you are not engaging in and do not intend
to engage in a distribution of the new
notes;
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3
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<C> <S>
. you do not have an arrangement or
understanding with any person to
participate in the distribution of the
registered notes; and
. you do not control us, you are not
controlled by us, and you are not under
common control with us, either directly
or indirectly.
If you do not meet the above conditions,
you may incur liability under the
Securities Act if you transfer any new note
without delivering a prospectus meeting the
requirements of the Securities Act. We do
not assume or indemnify you against that
liability.
Each broker-dealer that receives new notes
in the exchange offer for its own account
in exchange for old notes which were
acquired by that broker-dealer as a result
of market-making activities or other
trading activities must acknowledge that it
will deliver a prospectus meeting the
requirements of the Securities Act in
connection with any resales of the
registered notes. A broker-dealer may use
this prospectus for an offer to resell or
to otherwise transfer these registered
notes.
Expiration date.................. The exchange offer will expire at 5:00
p.m., New York City time, on [ ],
1999, unless we decide to extend the
exchange offer. We do not intend to extend
the exchange offer, although we reserve the
right to do so.
Conditions to the exchange
offer........................... The only conditions to completing the
exchange offer are that the exchange offer
not violate applicable law or any
applicable interpretation of the staff of
the Securities and Exchange Commission and
no injunction, order or decree has been
issued which would prohibit, prevent or
materially impair our ability to proceed
with the exchange offer. See "The exchange
offer--Conditions."
Withdrawal....................... You may withdraw the tender of your old
notes at any time prior to 5:00 p.m., New
York City time, on the expiration date. We
will return to you any old notes not
accepted for exchange for any reason
without expense to you as promptly as we
can after the expiration or termination of
the exchange offer.
Exchange agent................... The Bank of New York is serving as the
exchange agent in connection with the
exchange offer.
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4
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Consequences of failure to
exchange........................ If you do not participate in the exchange
offer, upon completion of the exchange
offer, the liquidity of the market for your
old notes could be adversely affected. If
the liquidity of the market for your old
notes is adversely affected, you may be
unable to sell or transfer your old notes
and the value of your old notes may
decline. See "Risk factors--The value of
your old notes may decline if you fail to
exchange your old notes for new notes."
Federal income tax consequences.. The exchange of the old notes should not be
a taxable event for federal income tax
purposes. See "Certain United States
Federal Income Tax Considerations."
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5
<PAGE>
Summary of the terms of the new notes
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<C> <S>
The new notes.................... $166.2 million principal amount of 14%
Senior Notes due 2008, Series B.
Maturity......................... August 1, 2008.
Interest......................... The new notes will pay interest in cash at
the rate of 14% per annum, payable on
February 1 and August 1 of each year,
commencing February 1, 2000.
Security......................... We have purchased and pledged to The Bank
of New York, as trustee under the indenture
governing the old notes, as security for
the benefit of the holders of the notes, a
portfolio of U.S. government securities in
an amount expected to be sufficient to
provide for payment in full of the first
six scheduled interest payments on the
notes. A portion of the pledged securities
has been used to make the first two
interest payments on the old notes. We
believe that the remaining amount of the
pledged securities will be sufficient to
make the first four interest payments on
the new notes. Except for the pledged
securities, the new notes will be
unsecured. See "Description of the old
notes--Security."
Optional redemption.............. At our option, we may redeem any or all of
the new notes, at any time on or after
August 1, 2003, for a redemption price
initially equal to 108% of their principal
amount, plus any accrued and unpaid
interest. The redemption price will
decrease by equal amounts each year to 100%
of the principal amount of the notes, plus
any accrued and unpaid interest on and
after August 1, 2006.
In addition, at any time prior to August 1,
2001, we may redeem new notes representing
up to 21.8% of the aggregate principal
amount of the new notes at 114% of the
principal amount thereof on the date of
redemption with the net proceeds of one or
more underwritten primary public offerings
of our common stock; provided
. that new notes representing at least
$130.0 million aggregate principal
amount remain outstanding after each
such redemption, and
. notice of such redemption is mailed
within 60 days after the consummation of
the related public offerings.
See "Description of the old notes--optional
redemption."
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6
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<C> <S>
Change of control................ Upon a change of control, you will have the
right to require us to make an offer to
repurchase the new notes at a purchase
price equal to 101% of their principal
amount, plus any accrued and unpaid
interest. There can be no assurance that we
will have sufficient funds available at the
time of any change of control to repurchase
the new notes. We cannot otherwise redeem
the Notes. See "Description of the old
notes--Repurchase of old notes upon a
change of control."
Ranking.......................... The new notes will be our unsubordinated,
unsecured indebtedness, except to the
extent described under "--Security" above.
The new notes will rank equally in priority
of payment with all of our other existing
and future unsubordinated indebtedness and
will be senior in right of payment to all
of our future subordinated indebtedness. As
of September 30, 1999, we had
$306.0 million of indebtedness outstanding,
including the old notes and $13.8 million
of indebtedness incurred by our
subsidiaries, but excluding contingent
notes payable of $29.5 million. The new
notes will be effectively subordinated to
all of our secured indebtedness and all of
our subsidiaries' existing and future
liabilities, including trade payables and
subordinated debt. As of September 30,
1999, $111.0 million of our indebtedness
was secured indebtedness. We and our
subsidiaries may incur substantial
additional indebtedness, including secured
indebtedness, under the terms of the
indenture. See "Risk factors--We have
substantial existing debt and will incur
substantial additional debt which could
adversely affect our financial health and
prevent us from fulfilling our obligations
under the notes."
Certain covenants................ The indenture contains certain covenants
for your benefit as holders of the notes
which will, among other things, restrict
our ability and the ability of some of our
subsidiaries:
. to incur or guarantee certain kinds of
additional indebtedness;
. to create liens;
. to engage in arrangements where we sell
or transfer an asset and then lease the
asset back to use for substantially the
same purposes;
. to pay dividends or make distributions
in respect of our capital stock, redeem
capital stock, make investments or
certain other restricted payments;
. to sell assets;
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7
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. to issue or sell stock of some of our
subsidiaries;
. to enter into transactions with
stockholders or affiliates; or
. to merge, consolidate, or dispose of
substantially all of our assets.
We are not currently in default of any of
the covenants in the old notes or the new
notes. These covenant limitations are
subject to significant qualifications and
exceptions. See "Description of the old
notes-- Covenants."
Form of new notes................ The new notes will be issued in fully
registered form, without coupons. The new
notes will be deposited with The Bank of
New York, as custodian for The Depository
Trust Company, and registered in the name
of Cede & Co. in the form of one or more
global notes. Holders of the new note will
own book-entry interests in the global
note, and evidence of these interests will
be kept in the records maintained by The
Depository Trust Company. See "Form of new
notes."
Use of proceeds.................. We will not receive any proceeds from the
exchange offer.
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8
<PAGE>
Summary consolidated financial data
The following summary consolidated financial data should be read in
conjunction with our financial statements and related notes thereto and
"Management's discussion and analysis of financial condition and results of
operations". The consolidated statement of operations data for the years ended
March 31, 1997, 1998 and 1999 and the consolidated balance sheet data as of
March 31, 1999 are derived from the audited consolidated financial statements
of TVN Entertainment Corporation included elsewhere in this registration
statement. The consolidated statement of operations data for the years ended
March 31, 1995 and 1996 are derived from audited consolidated financial
statements not included herein. The consolidated statement of operations data
for the six months ended September 30, 1998 and 1999 and the consolidated
balance sheet data as of September 30, 1999 have been derived from our
unaudited consolidated financial statements included elsewhere in this
registration statement. The unaudited consolidated financial statements have
been prepared on substantially the same basis as the consolidated audited
financial statements and include all adjustments, consisting only of normal
recurring adjustments, that we consider necessary for a fair presentation of
the financial position and results of operations for the period. The historical
consolidated financial information does not reflect the significant changes in
our financial results that will occur as a result of the late 1997 launch of
our digital cable programming and services business. A substantial portion of
our revenues to date have been generated by our C-band large satellite dish
business. Our historical expenses have been generated by the large home
satellite dish business but have also included substantial operating expenses,
lease payments and capital investments to develop our digital cable programming
and services business, which was launched in late 1997.
<TABLE>
<CAPTION>
Actual
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Six months ended
Year Ended March 31, September 30,
----------------------------------------------- ------------------
1995 1996 1997 1998 1999 1998 1999
------- -------- -------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................. $35,073 $ 33,001 $ 33,380 $ 30,545 $ 39,812 $ 14,118 $ 34,185
Operating expenses:
Cost of revenue(1)
(exclusive of
depreciation shown
separately below)...... 29,300 28,767 18,812 20,426 31,775 11,914 30,856
Selling................. 9,076 8,612 5,998 7,067 14,302 5,939 7,589
General and
administrative......... 3,424 3,937 5,061 5,619 8,520 3,707 9,983
Depreciation and
amortization(1)........ 425 1,384 10,534 11,984 12,253 6,071 6,821
Amortization of
intangible assets...... (803) (803) (803) (100) 199 -- 1,233
------- -------- -------- -------- -------- -------- --------
Total operating
expenses............... 41,422 41,897 39,602 44,996 67,049 27,631 56,482
------- -------- -------- -------- -------- -------- --------
Loss from operations.... (6,349) (8,896) (6,222) (14,451) (27,237) (13,513) (22,297)
Interest expense........ 1,407 2,248 13,908 15,163 34,195 12,500 22,132
Interest income......... (6) (15) (63) (223) (6,472) (1,797) (3,484)
Other (income) and
expense................ 25 (10) 54 471 (84) (33) 138
------- -------- -------- -------- -------- -------- --------
Loss before
extraordinary gain..... (7,775) (11,119) (20,121) (29,862) (54,876) (24,183) (41,083)
Extraordinary gain...... -- -- 2,454 -- 1,113 1,113 --
------- -------- -------- -------- -------- -------- --------
Net loss................ $(7,775) $(11,119) $(17,667) $(29,862) $(53,763) $(23,070) $(41,083)
======= ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
March 31, 1999 September 30, 1999
-------------- ------------------
(in thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents..................... $ 84,343 $ 51,643
Restricted cash and investments............... 67,121 54,450
Property and equipment, net................... 84,997 82,541
Total assets.................................. 254,725 228,436
Total debt:
Senior Notes due 2008(2)..................... 186,798 187,505
Notes payable(3)............................. 15,667 26,268
Capitalized leases........................... 95,703 92,243
Series B redeemable preferred stock........... 53,047 53,245
Total stockholders' deficit(2)................ (127,176) (167,737)
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
Year Ended March 31, September 30,
--------------------------------------------- -----------------
1995 1996 1997 1998 1999 1998 1999
------- ------- ------- -------- -------- ------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Other Data:
EBITDA(4)............... $(6,752) $(8,305) $ 5,909 $ (3,038) $(13,588) $(6,296) $(14,381)
Capital
expenditures(5)........ 444 342 182 308 2,620 718 3,054
Ratio of earnings to
fixed charges(6)....... -- -- -- -- -- -- --
Net cash used for
operating activities... (3,681) (3,646) (2,937) (28,091) (35,423) (11,527) (31,358)
Net cash provided by
(used for) investing
activities............. (444) (342) (169) (308) (68,323) (78,167) 7,223
Net cash provided by
(used for) financing
activities............. 4,041 3,921 3,516 44,432 171,291 182,103 (8,565)
</TABLE>
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- --------
(1) Until February 1996, satellite transmission device costs were incurred
pursuant to operating leases and were reported as cost of revenue. Since
then, new lease agreements have met the criteria for capitalization and the
related costs have been recognized as depreciation and interest expense.
(2) Senior Notes due 2008 and total stockholders' deficit reflect the value
ascribed to the warrants issued in connection with the old notes which
results in additional debt discount that will be amortized as interest
expense using the effective interest method over the period that the notes
are outstanding.
(3) Notes Payable does not include contingent notes payable totaling
approximately $29.5 million at September 30, 1999. Interest on the
contingent notes payable accrues at a rate of prime plus 1%. The timing of
the repayment of the contingent notes payable is uncertain and subject to
events outside our control. See "Description of certain indebtedness."
(4) EBITDA consists of loss before depreciation, amortization and net interest
expense. It is a measure commonly used in the cable industry. EBITDA, and
the trends depicted by it, are used by our management and may be used by
investors to evaluate our operating results independent of the timing of
operating cash flows and cost associated with our investing and financing
activities. In evaluating EBITDA, investors should consider the financial
impact of our capital commitments and financial obligations and their
related effect on our financial condition, results of operations and cash
flows. It is not intended to represent cash flows or results of operations
in accordance with GAAP for the periods indicated, may not be comparable to
similarly titled measures presented by other companies and could be
misleading unless all companies and analysts calculate EBITDA in the same
manner.
(5) Capital expenditures exclude acquisitions financed through notes payable
and capitalized leases of $70.5 million, $45.3 million and $175,000 in
fiscal 1996, fiscal 1997 and fiscal 1998, respectively.
(6) In calculating the ratio of earnings to fixed charges, "earnings" consist
of net loss before fixed charges. Fixed charges consist of interest
expense, including such portion of rental expense that is attributed to
interest. Our earnings were insufficient to cover fixed charges for these
periods. The amount of the deficiencies were $7.8 million, $11.1 million,
$20.1 million, $29.9 million and $54.9 million for each of the five years
in the period ended March 31, 1999, and $23.1 million and $41.1 million for
the six months ended September 30, 1998 and 1999, respectively.
10
<PAGE>
Risk factors
The new notes, like the old notes, entail the following risks. You should
carefully consider these risk factors, as well as other information in this
prospectus, before tendering old notes in exchange for new notes.
We have substantial existing debt and will incur substantial additional debt
which could adversely affect our financial health and prevent us from
fulfilling our obligations under the notes.
We have borrowed a significant amount of funds. As of September 30, 1999, we
had outstanding indebtedness of approximately $306.0 million and a
stockholders' deficit of approximately $167.7 million. We cannot be certain
that our operations will generate sufficient cash flows to pay our obligations,
including our obligations on the new notes. Earnings were inadequate to cover
fixed charges by the amount of $54.9 million for the year ended March 31, 1999
and $41.1 million for the six months ended September 30, 1999. The degree to
which we have borrowed funds could have important consequences to you. For
example, it could:
. make it more difficult for us to satisfy our obligations to you with
respect to the notes and to satisfy our obligations under other
indebtedness;
. increase our vulnerability to general adverse economic and cable industry
conditions, including interest rate fluctuations;
. require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, which will reduce our funds
available for working capital, capital expenditures, acquisitions of
additional systems and other general corporate requirements;
. limit our flexibility in planning for, or reacting to, changes in our
business and the cable industry generally;
. place us at a competitive disadvantage compared to our competitors that
have proportionately less debt;
. limit our ability to borrow additional funds, if we need them, due to
applicable financial and restrictive covenants in our indebtedness; and
. increase our interest expenses above current levels due to increases in
interest rates, since much of our borrowings are and will continue to be
at variable rates of interest; and
. limit our ability to redeem the new notes in the event of a change of
control.
We may also incur additional indebtedness to finance the continued development,
commercial deployment and expansion of our networks and for funding operating
losses or to take advantage of unanticipated opportunities.
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We will require a significant amount of cash to service our indebtedness, and
our ability to generate cash depends on many factors beyond our control.
We expect that we will continue to generate substantial operating losses and
negative cash flow for at least the next several years. Our ability to make
scheduled payments on our debt, including the new notes, will depend upon,
among other things:
. our ability to achieve significant and sustained growth in cash flow;
. the rate of and successful commercial deployment of our digital cable
programming and services;
. the market acceptance, subscriber demand, rate of utilization and
pricing for our digital cable programming and services;
. our future operating performance; and
. our ability to complete additional financings.
Each of these factors is, to a large extent, subject to economic, financial,
competitive and other factors, many of which are beyond our control. We cannot
be certain that we will be successful in developing and maintaining a level of
cash flow from operations and financings sufficient to permit us to pay the
principal, premium, if any, and interest on our indebtedness, including the new
notes. If we are unable to generate sufficient cash flow from operations and
financings to service our indebtedness, including the new notes, we may have to
reduce or delay the deployment of our digital cable programming and services or
restructure or refinance our indebtedness. We cannot be certain that any of
these actions or any additional debt or equity financings could be accomplished
on satisfactory terms, if at all, in light of our high leverage, or that they
would yield sufficient proceeds to service and repay our indebtedness,
including the new notes. Any failure by us to satisfy our obligations with
respect to the new notes at maturity or prior thereto would constitute a
default under the indenture and could cause a default under agreements
governing our other indebtedness. In the event of default, the holders of our
indebtedness would have enforcement rights, including the right to accelerate
our debt and the right to commence an involuntary bankruptcy proceeding against
us. Accordingly, upon any default, insolvency, bankruptcy or similar situation,
we may have only limited assets remaining after paying the prior claims of our
secured creditors and may be unable to repay the notes.
We anticipate that our existing capital and cash from operations may be
inadequate to satisfy our capital requirements beyond the next 12 months.
Our cash on hand and amounts expected to be available through vendor
financing arrangements may not provide sufficient funds necessary for us to
expand our TVN Digital Cable Television service and Pay-Per-View Feeds Service
as currently planned and to fund our operating deficits beyond the next 12
months. We have contingent notes payable totaling approximately $29.5 million
at September 30, 1999 that have no defined maturity and payment schedule.
Although the timing of the repayment of the contingent notes payable remains
uncertain and subject to events outside of our control, if we were to repay the
contingent notes payable in full, we believe that our existing working capital
following repayment would not be sufficient to fund our operations for the next
12 months. We cannot be certain, however, that we will not require additional
capital sooner than currently anticipated. In addition, we are unable to
predict the precise amount of future capital that we will require and whether
additional financing will be available to us on acceptable terms or at all. Our
inability to obtain required financing could significantly reduce the value of
our
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business assets and impair our ability to continue the normal operation of our
business. Consequently, we could be required to significantly reduce or suspend
our operations, seek a merger partner, sell the business, seek additional
financing or sell additional securities on terms that are highly dilutive to
our stockholders. See "Use of proceeds," "Management's discussion and analysis
of financial condition and results of operations" and "Description of certain
indebtedness."
We have incurred net losses in every fiscal year since inception. We may be
unable to become profitable, or to be so consistently.
We experienced net losses of $17.7 million, $29.9 million and $53.8 million
in fiscal 1997, fiscal 1998 and fiscal 1999, respectively, and a net loss of
$41.1 million for the six months ended September 30, 1999. These net losses are
attributable to the significant costs incurred to develop and implement our
business plan and to develop, install and integrate our digital programming and
services. We expect that net losses will continue and increase for the
foreseeable future as we plan to continue to incur substantial sales and
marketing expenses to build our customer base of cable operators and
substantial capitalized lease payments for our satellite transponders. We have
not achieved profitability on a quarterly or annual basis, and we anticipate
that we will continue to incur net losses for at least the next several years.
We also expect to continue to incur significant product development and
administrative expenses. We cannot be certain that any of our business
strategies will be successful or that significant revenues or profitability
will ever be achieved or, if they are achieved, that they can be consistently
sustained or increased on a quarterly or annual basis in the future. See
"Management's discussion and analysis of financial condition and results of
operations" and our financial statements and notes thereto included elsewhere
in this prospectus.
We are a holding company for our subsidiaries and will depend on our
subsidiaries for repayment of the notes.
The notes will be our obligations exclusively. As separate and distinct
legal entities, our subsidiaries have no obligation to pay any amounts due
under the notes or to make any distributions or other payments to us to enable
us to repay the notes. We anticipate that in the future a substantial portion
of our operations will be conducted through our direct and indirect
subsidiaries. Our cash flow and, consequently, our ability to repay our
indebtedness, including the notes, will therefore depend in part upon our
subsidiaries making payments of dividends, distributions, loans or other
payments to us.
We anticipate that our subsidiaries are likely to become parties to
financing arrangements, including secured financing arrangements. Such
financing arrangements will likely restrict our subsidiaries' ability to pay
dividends or distributions, or make loans or other payments to us.
Because our subsidiaries are not expected to guarantee the notes, holders of
the notes will not have any direct claim on any assets of any of our
subsidiaries in the event of our liquidation or reorganization. The indenture
permits us to make substantial investments in our subsidiaries. However, unless
we make loans or extend credit to our subsidiaries, our only claim, and
consequently, the only claim of holders of the notes, to the assets of our
subsidiaries would be through our equity. Our equity claim and any claim of
holders of the notes would be effectively subordinated to all of our
subsidiaries' indebtedness and liabilities, including trade payables and
subordinated debt. Even if we do extend credit to our
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subsidiaries, our claims could be subordinated to other indebtedness of our
subsidiaries. The indenture permits our subsidiaries to incur substantial
additional indebtedness.
The notes are unsecured and will be effectively subordinated to secured debt.
The notes are unsecured and therefore will be effectively subordinated to
any secured indebtedness we incur with respect to the assets securing such
indebtedness. The indenture will permit us and our subsidiaries to incur
secured indebtedness to finance, among other things, the acquisition of
equipment, inventory and network assets. The holders of secured indebtedness
will have claims against the assets that constitute their collateral which will
be prior to the claims of unsecured creditors, including holders of the notes.
The prior claims of secured creditors could adversely effect the holders of the
notes in any of the following events:
. in the event of default under other indebtedness or the indenture, any
holders of our secured indebtedness would have certain rights to
repossess, foreclose upon and sell the assets securing that
indebtedness;
. in the event that we became subject to bankruptcy, liquidation,
dissolution, reorganization or similar, the holders of our secured
indebtedness will be entitled to receive proceeds from the sale and
other distributions in respect of their collateral prior to payments to
other creditors, including holders of the notes;
. to the extent that the collateral is insufficient to repay all of our
secured indebtedness, the holders of our secured indebtedness would have
a claim for any shortfall that would rank equally in priority with the
notes.
Accordingly, upon any default, insolvency, bankruptcy or similar situation,
we may have only limited assets remaining after paying the prior claims of our
secured creditors and may be unable to repay the notes.
The indenture governing the notes contains restrictions and limitations which
could significantly impact our ability to operate our business and repay the
notes.
The indenture governing the notes contains a number of significant covenants
that, among other things, restrict our ability and the ability of our
subsidiaries:
. to pay dividends or distributions to our shareholders;
. to dispose of assets or merge;
. to incur or guarantee additional indebtedness;
. to redeem or repurchase our equity or subordinated debt;
. our subsidiaries' ability to issue equity;
. to create liens;
. to enter into certain kinds of transactions; and
. to make certain investments or acquisitions, particularly with our
stockholders and affiliates.
The ability to comply with these provisions may be affected by events beyond
our control. The breach of any of these covenants will result in an event of
default under the indenture.
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Because our historical financial information only partly reflects our digital
cable programming and services, it may be of limited use in predicting our
future financial results.
Our business plan will result in significant changes in our financial
performance. The historical financial information included herein for the
fiscal years ending 1995 to 1998 primarily reflects our large home satellite
dish business. The historical financial information for the fiscal year ended
1999 does not fully reflect the many significant changes in our financial
results that will occur as a result of the ongoing roll out of our digital
cable programming and services nor the changes that will occur in our funding
and operations in connection with the roll out. The continued roll out of our
digital cable programming and services requires significant operating
expenditures, particularly selling expenses, a large portion of which are
expended before any revenue is generated. We plan to significantly increase
our operating expenses to expand our sales and marketing operations, broaden
our cable support services, develop new distribution channels, fund greater
levels of research and development and establish additional strategic
alliances. We have experienced, and expect to continue experiencing, negative
cash flows and significant losses while we continue to market our digital
cable programming and services to establish a sufficient revenue generating
customer base of cable operators, their subscribers and other customers. We
cannot be certain that we will be able to successfully roll out our digital
cable programming and services or establish a sufficient customer base. See
"Management's discussion and analysis of financial condition and results of
operations."
Our operations are influenced by many factors we cannot fully control. This
may cause our quarterly financial results to vary significantly in the future.
Factors which can cause our quarterly results to fluctuate include, but are
not limited to:
. changes in the growth rate of digital cable subscribers and their pay-
per-view buying patterns;
. cable operators' expenditures and other costs relating to the expansion
and penetration of their respective digital cable offerings;
. seasonal trends in home entertainment and home shopping;
. the mix of satellite delivered programming products and services sold
and the distribution channels for those products and services;
. with respect to our home shopping business, our ability to react quickly
to changing consumer trends and the popularity of some categories of
collectible items;
. general economic conditions; and
. specific economic conditions in the cable television and related
industries.
Additionally, as a strategic response to a changing competitive
environment, we may elect from time to time to make pricing, service,
marketing or acquisition decisions that could reduce our revenues and our
quarterly financial results.
Moreover, because our expense levels in any given quarter are based, in
part, on management's expectations regarding future revenue, if revenue is
below expectations, the
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effect on our operating results may be magnified by our inability to adjust
spending in a timely manner to compensate for a revenue shortfall. The extent
to which expenses are not subsequently followed by increased revenues would
reduce our operating results and could seriously impair our business. As a
result of these and other factors, we believe that period to period comparisons
of our operating results may not be meaningful and should not be relied upon as
an indication of future performance. Due to all of the foregoing factors, it is
likely that in one or more future quarters, our operating results may be below
the expectations of analysts and investors, which could cause the value of the
notes to fall. See "--If we fail to achieve a significant customer base for our
digital cable programming and services, we may be unable to cover our costs or
to repay the notes" and "Management's discussion and analysis of financial
condition and results of operations."
If we fail to achieve a significant customer base for our digital cable
programming and services, we may be unable to cover our costs or to repay the
notes.
The continued roll out of our digital cable programming and services
requires significant operating expenditures, in particular selling expenses, a
large portion of which will be expended before any revenue is generated. We
have experienced, and expect to continue experiencing, negative cash flows and
significant losses while we continue to market our digital cable television
programming and services and until we can establish a customer base of cable
operators and their subscribers that will generate revenue sufficient to cover
our costs. We cannot be certain that we will be able to successfully roll out
our digital cable programming and services or establish a sufficient customer
base, or that we will generate significant revenues from our home shopping or
electronic commerce products and services. If we fail to adequately address any
of these risks, it could harm our business, financial condition and results of
operations.
Our efforts have historically focused on providing national satellite pay-
per-view and related services to large home satellite dish owners. However,
beginning in late 1997, we have been devoting an increasing percentage of our
personnel and financial resources, and intend to devote substantially more
resources, to the continued development and integration of digital programming,
transactional services and delivery systems, home shopping, and electronic
commerce products and services. Our digital cable programming and services were
launched in late 1997 and have generated only modest revenues to date. In
fiscal 1999, 26.9% of total revenues were derived from our digital cable
programming and services. We believe that our future ability to service our
indebtedness and to achieve profitability is dependent upon our success in
generating substantial revenues from our digital cable programming and
services. We expect to continue experiencing negative operating margins and
EBITDA while our TVN Digital Cable Television and Pay-Per-View Feeds Service
are being marketed to cable systems and their subscribers. We expect to realize
improved operating margins and EBITDA only as:
. the number of cable systems offering TVN Digital Cable Television and
the number of cable systems offering Pay-Per-View Feeds Service
increases so as to increase the numbers of homes having access to our
digital programming and services;
. the number of subscribers to TVN Digital Cable Television increases;
. the buy rates of our pay-per-view movies and events increase; and
. revenues are generated from our home shopping and electronic commerce
products and services.
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Because our TVN Digital Cable Television and Pay-Per-View Feeds Services must
succeed in markets new to us, we may encounter difficulties achieving the level
of revenue we have forecast.
These services will need to find acceptance not only in markets we currently
serve, but in new and newly evolving markets. We have expended and will
continue to expend substantial sums for our sales and marketing efforts to
promote cable operator and subscriber awareness of our digital cable
programming and services. The digital cable television market is new and
rapidly evolving. Therefore, it is difficult to predict the rate at which this
market will grow, if at all. If the market fails to grow, or grows more slowly
than anticipated, our sales will be lower than expected and our operating
results will be harmed. Even if the market does grow, we cannot be certain that
our digital cable programming and services will realize market acceptance or
will meet the technical or other requirements of cable operators or their
subscribers. The failure of TVN Digital Cable Television or Pay-Per-View Feeds
Service to gain market acceptance would cause our sales to be lower than
expected and seriously harm our business prospects.
Our marketing efforts to date with regard to our digital programming and
services have involved identifying specific cable system market segments that
we believe will be the most receptive to our digital programming and services.
We cannot be certain that we have correctly identified our markets or that our
TVN Digital Cable Television or Pay-Per-View Feeds Services will adequately
address the needs of our markets. Broad commercialization of our digital cable
programming and services will require us to overcome significant market
development hurdles, many of which may not currently be foreseen. See
"Business--Products, markets and customers."
Our success will depend in large part on our ability to sign long-term
agreements with cable operators to deploy TVN Digital Cable Television and Pay-
Per-View Feeds Service.
To date, we have entered into agreements with only 82 cable operators. Our
ability to obtain additional long-term agreements will depend upon, among other
things, the successful commercial deployment of our TVN Digital Cable
Television and Pay-Per-View Feeds Service pursuant to our initial agreements
and our ability to demonstrate that our digital cable programming and services
are reliable and more attractive to cable operators and their subscribers than
alternative services. We cannot be certain that we will be able to enter into
definitive agreements with additional cable operators or that the ongoing
economic viability of TVN Digital Cable Television or Pay-Per-View Feeds
Service will be successfully demonstrated.
We do not set the prices charged by cable operators to their subscribers for
TVN Digital Cable Television or for pay-per-view movies and events. The level
at which prices are set may adversely affect the number of subscribers and/or
the rate at which subscribers purchase pay-per-view movies or events.
Therefore, we cannot be certain that we will be able to achieve projected rates
of return. The market for digital cable television programming and services is
new, and our digital cable service is only one possible means available to
cable operators for providing pay-per-view movies and events in the home.
Although we believe that our TVN Digital Cable Television offers a
comprehensive and economically viable digital cable solution, we cannot be
certain that we will be successful in obtaining a sufficient number of cable
operators who are willing:
. to be early adopters of new technology rather than waiting for
widespread industry implementation;
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. to risk subscriber dissatisfaction if the removal of existing analog
channels is required to accommodate new digital channels that will only
be available to digital subscribers and not to the system's entire
subscriber base;
. to bear the costs of purchasing new digital television set-top cable
boxes and installing and supporting required receiving equipment at
their facilities; or
. to sign and remain party to long-term agreements with us for our digital
cable programming and services, including an arrangement to share
revenue from pay-per-view movie and event buys.
Our failure to enter into or to sustain additional long-term agreements with
cable operators and/or their lack of acceptance of digital cable programming
and services would harm our operating results and our ability to achieve
sufficient cash flow to service our indebtedness, including the new notes. See
"Business--Products, markets and customers."
Selling and installing TVN Digital Cable Television requires lengthy sales and
implementation cycles, and delays could cause actual revenue and earnings to be
less than expected.
The decision by a cable operator to deploy TVN Digital Cable Television is
often viewed as an important and strategic decision that generally requires us
to engage in a lengthy sales cycle of typically between three and six months.
During this process, we provide a significant level of explanation to
prospective cable operators regarding the use and benefits of our digital cable
programming and services to cable operators and their respective subscribers.
Additionally, the sales cycle can be delayed by the size of the transaction and
prospective implementation costs including the purchasing, installing and
maintaining new digital television set-top cable boxes, installing and
supporting required digital equipment at the operators facility, as well as the
potential complexity of financing or other arrangements. The cable operator's
implementation of TVN Digital Cable Television involves a significant
commitment of resources over an extended period of time which may lead
prospective operators to defer indefinitely the decision to implement TVN
Digital Cable Television or to delay implementation despite having agreed to do
so. For these and other reasons, the sales and customer implementation cycles
are subject to significant delays over which we have little or no control.
Delay in the sale or implementation of even a limited number of TVN Digital
Cable Television installations would reduce our operating results and could
harm our business prospects. See "Business--Products, markets and customers"
and "--Marketing and sales."
Because we expect cable operator agreements to generate a significant portion
of our revenue, the loss or deferral of even a small number of agreements could
cause our operating results to vary significantly.
We expect that a significant portion of our future revenues will be
generated from long-term agreements with cable operators. A delay in generating
or recognizing revenue from a limited number of these agreements could cause
significant variations in our operating results and could result in further
operating losses. We recognize revenues under our cable operator agreements
only when our TVN Digital Cable Television or Pay-Per-View Feeds Service is
successfully integrated and operating and subscriber billing commences.
Accordingly, the recognition of revenues will lag the announcement of a new
cable operator agreement by at least the time necessary to install the service
and to achieve a meaningful number of subscribers and/or the rate at which
subscribers purchase pay-per-view movies or events. We expect that the number
and timing of cable operator agreements and the effect of anticipated
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lagging revenues, all of which are difficult to forecast, may cause significant
fluctuations in our operating results, particularly on a quarterly basis.
We operate in highly competitive markets and face intense competition from
existing and potential competitors, which could limit our ability to gain
market share.
Our competitors include a broad range of companies engaged in communications
and home entertainment, including small dish satellite services and programming
providers, wired and wireless cable operators, broadcast television networks,
home video companies featuring videocassette and digital video disk
technologies, as well as companies developing new in-home entertainment
technologies, such as the video-on-demand service being marketed by DIVA
Systems Corporation. We expect that competition will increase substantially as
a result of these and other new products and services, as well as from industry
consolidations and alliances. As a result, we may be unable to achieve our
sales and market share goals. In addition, we expect that an increasingly
competitive environment may result in price reductions that could reduce profit
margins and cause loss of market share. We cannot be certain that we will be
able to compete successfully with new or existing competitors or that
competitive pressures will not reduce our revenues and operating results. See
"Business--Competition."
Because we are significantly smaller than most cable companies, we may lack
the financial and other resources to obtain sufficient market share.
We expect to encounter a number of challenges in competing with large cable
companies that generally have large installed subscriber bases and significant
investments in, and access to, competitive programming sources. In addition,
these large cable companies have the financial and technological resources to
create their own digital tier of services, including per-per-view movies. We
also face the risk that the current trend of industry consolidation will
continue with the result that smaller and medium size cable operators that
might otherwise become our customers will be acquired by such large cable
companies. Currently, the only other available alternative for cable operators
that wish to offer digital services similar to those provided by small
satellite dish is a satellite transmitted digital programming delivery service
commonly known as "HITS," a name derived from the acronym for "Headend-In-The-
Sky." Certain telephone companies have announced initiatives and have made
significant investments to become digital television providers. We cannot be
certain that we will be able to compete effectively against HITS, telephone
companies or other companies that provide digital cable television programming
and services. Moreover, we cannot be certain that large cable companies
developing their own digital tiers of programming will not offer such services
to our target markets.
Because small dish satellite companies are better positioned to introduce
digital television programming and services to viewers, we may emerge from
this industry phase of introducing digital television programming with only a
limited market share.
We compete with companies offering digital programming direct-to-the-home
via various small dish satellite systems. Increased competition by small dish
satellite companies could lower our profit margins and reduce our market share.
Small satellite dishes offer consumers the appeal of significantly expanded
channel capacity, features such as an interactive on-screen program guide,
digital pictures without the signal disruption often seen in analog video, CD
quality digital music channels and many channels of movies and sports available
on a pay-per-view basis. Several well capitalized small dish satellite
companies pose a substantial threat to cable operators. DirecTV, owned by
Hughes Electronics, was the first all-digital small dish satellite service and
as of November 1999 had in excess of
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7.8 million subscribers to its satellite small dish service according to its
recent press release. Two other satellite small dish services are currently in
operation: EchoStar, which markets its digital television service under the
"Dish Network" brand name, and USSB, whose small satellite dish programming
service is owned by, and operates in tandem with, DirecTV and offers premium
subscription programming such as multiple HBO and SHOWTIME channels. A medium
sized satellite dish service, PrimeStar, has also been acquired by DirecTV.
Currently, local programming is generally unavailable through small dish
satellite services; however, recently enacted legislation facilitates the
ability of small dish satellite companies to include local broadcasts in their
digital programming services. Given small dish satellite systems' ability to
market directly to viewers, these companies may be better positioned to
introduce new digital programming and services. Because they have large
subscriber bases, small dish satellite companies may also be able to devote
significantly greater resources to the development and marketing of new
competitive products and services.
Because the market for the sale of consumer products by electronic media is
intensely competitive, we may be unable to gain meaningful market share.
We compete with other televised shopping programs, Internet merchants and
catalog and other traditional retailers for the sale of consumer products. Many
of our competitors, both in television and Internet commerce, have
substantially greater financial, distribution and marketing resources than we
do. As a result, we may be unable to achieve or sustain sufficient market share
to sell our products profitably. The televised home shopping industry is
dominated by two established competitors, the Home Shopping Network and the QVC
Network. Both of these networks have substantially more viewers than we do. We
also compete with ValueVision, another broadly distributed television commerce
company. These and other competitors may enter into business combinations,
joint ventures and strategic alliances with each other, which could further
enhance their resources.
If our relationships with our programming providers falter, we may not be able
to obtain sufficient popular programming to offer to cable systems and their
subscribers, and our revenues would fall.
We depend on all the major and many independent movie studios to provide us
with hit movies that appeal to mass audiences. Our current pay-per-view movie
programming is obtained through on-going, unwritten arrangements that have no
specific renewal provisions. We have relationships with the Playboy
Entertainment Group, supplier of the Spice pay-per-view adult movie service and
the Playboy Channel that we distribute, ESPN, for our ESPN GamePlan college
football subscription and pay-per-day-programming packages, and Guthy-Renker,
creator of direct response television "infomercials" which sell various
products direct to the viewer, including self-improvement tapes and home
exercise equipment. We cannot be certain that any of our existing relationships
will continue, that we would be able to obtain or develop substitute
programming or that such substitute programming would be comparable in quality
or profitability to our existing programming. Because our ability to succeed in
the digital cable television market will depend on our ability to continue
obtaining desirable programming and successfully market it to cable operators
and their subscribers, the termination of any of our existing programming
relationships could significantly reduce our sales and operating results. See
"Business--Programming."
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If we cannot deliver programming to our cable operator customers and their
subscribers within the time periods advertised, our revenue will fall and our
ability to offer our programming and services will be harmed.
Our failure to deliver programming within the time periods advertised,
whether or not within our control, could result in dissatisfied subscribers and
in lost orders for services which we could have otherwise sold. Dissatisfied
cable operators and subscribers may choose to no longer subscribe to our
digital cable programming and services, which could reduce our current and
future revenue. Although we maintain insurance against business interruption,
we cannot be certain that such insurance will be adequate to protect us from
significant loss in these circumstances, or that a major catastrophe such as an
earthquake or other natural disaster would not result in a prolonged
interruption of our business. In particular, our operations center is located
in the Los Angeles area, which has in the past and will in the future
experience significant, destructive seismic activity that could damage or
destroy the operations center. In addition, our ability to make deliveries to
subscribers within the time periods advertised depends on a number of factors,
some of which are outside of our control, including equipment or software
failure and our inability to provide programming to cable subscribers due to
service outages experienced by cable systems that comprise our distribution
network. See "--The loss of even a limited number of our satellite
transmitters, and our Galaxy IX transmitters in particular, could prevent us
from offering our digital cable programming and services and harm our results
of operations." and "Business--Technology and operations."
Our home shopping business may not grow if we are unable to increase our
television distribution.
If we fail to increase the television distribution of our shopping
programming, our revenue growth from this business will slow or decline.
Increasing the television distribution of our shopping programming requires
entering into new carriage agreements and acquiring additional television media
time. We cannot be certain that we will be successful in entering into
agreements or acquiring media time on terms acceptable to us. Additionally, we
cannot be certain that the funds required to enter into these agreements or to
acquire such media time will be available to us.
The loss of even a limited number of our satellite transmitters, and our Galaxy
IX satellite transmitters in particular, could prevent us from offering our
digital cable programming and services and harm our results of operations.
We transmit our programming content via 15 signal transmitters leased on two
PanAmSat satellites, Galaxy III and Galaxy IX, both of which have desirable
geostationary orbital positions with transmission coverage of the continental
United States. Our failure to maintain sufficient, well-located satellite
transmitter capacity would impair our ability to offer our digital cable
programming and services and would harm our results of operations. Our
satellite transmitter leases both expire in 2006, prior to the expiration of
each satellite's expected useful life. We cannot be certain that we will be
able to obtain replacement transmitter capacity on terms acceptable to us or at
all. If either satellite was destroyed or became inoperable prior to the
expiration of our lease, we would need to obtain replacement satellite
transmitter capacity. We cannot be certain that such replacement capacity will
be available when required or, if available, that it will be on terms
acceptable to us. The satellites now used by us are also subject to the risks
of all satellites, including damage or destruction by space debris, military
actions or acts of war, anti-satellite devices, electrostatic storms, solar
flares, loss of location or other extraterrestrial events. In addition,
satellite
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signal transmitters may malfunction or become inoperative in the ordinary
course as a result of faulty operation or latent faults in design or
construction. If, for these or any other reason, we were unable to transmit our
programming on one or more of our satellite transmitters, our revenues and
operating results would fall and our business could be seriously harmed.
Because we rely on PanAmSat satellites for transmission of all our programming,
we could lose substantial revenue if PanAmSat were unable to meet our needs.
Our relationship with PanAmSat is important to our business. We could lose
substantial revenue if PanAmSat were unable for any reason to satisfy our
satellite transmission commitments, or if any of these transmissions failed to
satisfy our quality requirements. In the event that we were unable to continue
to use our PanAmSat satellite capacity or obtain comparable replacement
satellite capacity via PanAmSat, we would have to identify, qualify and
transition deliveries to an acceptable alternative satellite transmission
vendor. This identification, qualification and transition process could take
six months or longer, and we cannot be certain that an alternative satellite
transmission vendor would be available to us or be in a position to satisfy our
delivery requirements on a timely and cost effective basis. See "Business--
Technology and operations."
We rely on General Instrument for technology and services essential to our
business, some of which are available only from General Instrument. We might be
unable to operate our business if General Instrument fails to meet our
expectations or if these technologies and services are no longer available to
us.
We are dependent on General Instrument, which recently agreed to be acquired
by Motorola, Inc., for services to turn on and off the showings of our pay-per-
view movies and events ordered by cable subscribers, and for the continued
development and standardization of equipment and the analog and digital cable
transmission technologies, known as DCII technology, that we use. Our
relationship with General Instrument includes not only the use of its DCII
technology and encoding equipment to digitally process our programming, but
also includes General Instrument's manufacture and supply of DCII cable system
equipment and television set-top cable boxes that are important to the
successful deployment of our TVN Digital Cable Television. We have no written
agreement with General Instrument for the provision of services to turn on and
off the showings of our pay-per-view movies and events, for which they are the
only provider. If we were unable to continue to receive these services from
General Instrument on acceptable terms, our only alternative would be to build
our own facility. We cannot be certain that building our own facility could be
completed in a timely manner or on a cost effective basis. If General
Instrument were unable for any reason to meet our TVN Digital Cable Television
deployment strategy, development schedule or delivery commitments with respect
to either cable system equipment or television set-top cable boxes, we would be
unable to meet our revenue goals and our operating results would be harmed. If
we are unable to continue to obtain and use the DCII technology, we would have
to identify, qualify and transition digital processing to an acceptable
alternative vendor. This identification, qualification and transition process
could take six months or longer, and we cannot be certain that an alternative
vendor would be available to us or be in a position to satisfy our delivery
requirements on a timely and cost effective basis. See "Business--Products,
markets and customers" and "--Technology and operations."
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<PAGE>
We depend on technology and services provided by third parties. If we were
unable to access these technologies and services, our ability to operate our
business would be impaired and our results of operations would be harmed.
Our technical infrastructure features in-house production, storage and
digital processing, and other outsourced services supervised by TVN personnel.
Our revenue and our ability to offer our digital cable programming and services
would be harmed if our service providers were unable for any reason to meet our
editing and transmission schedule or delivery commitments or if any uplink
transmissions failed to satisfy our quality requirements. For instance, our
replay, editing and satellite transmission facilities were custom built to our
specifications and continue to be operated by Four Media Company, a video
editing and facilities service and management company, which owns and operates
those facilities for our use under renewable service agreements. Four Media
Company recently agreed to be acquired by Liberty Media Corp. If we are unable
to continue relying on Four Media Company's operational expertise and
technology, we would have to identify, qualify and transition such operations
to an acceptable alternative vendor or perform such operations ourselves. This
identification, qualification and transition process could take six months or
longer, and we cannot be certain that we could perform these services or that
an alternative vendor would be available to us or be in a position to satisfy
our requirements on a timely and cost effective basis. See "Business--
Technology and operations."
We depend on exclusivity arrangements with some of our vendors to provide
desirable merchandise for our shopping business, without which our gross profit
would decline.
Our gross profit margin in certain product categories of our home shopping
business is partially dependent upon maintaining exclusivity agreements with
our vendors for whom we are the only seller, or one of a limited number of
sellers, of particular products. Because we are positioned in the electronic
commerce market as a seller of certain unique products, including jewelry, new
and vintage watches and precious coins and collectibles, we depend upon a
limited number of suppliers for such products. This supply cannot be assured.
Many of our vendors have not entered into exclusivity agreements with us and
may not be willing to do so. Vendors who have entered into exclusivity
agreements with us may terminate such arrangements over time. Vendors with whom
we wish to establish exclusivity arrangements may instead enter into
exclusivity agreements with our competitors. The loss of one or more of our
exclusivity arrangements with product vendors could cause our gross profit to
decline.
Because we rely on third party vendors to provide us with transactional
services, the inability of these vendors to meet our requirements could prevent
us from providing our services cost effectively, or at all.
Our ability to collect our revenue and our results of operations would be
harmed if our third party vendors were unable for any reason to meet our
transactional service commitments, service management requirements or customer
service quality requirements to our cable operator customers. We contract with
CSG Systems, Inc. to provide customer billing and subscriber management
services. Certain customer response calls are outsourced to TicketMaster
Corporation, which maintains regional call centers with extensive switching and
live operator capabilities. These systems and resources are part of the
transactional services that we offer with our TVN Digital Cable Television. If
we are unable to continue using these systems and technological resources, we
would have to identify, qualify and transition such operations to an acceptable
alternative vendor or arrange for in-house operations. This identification,
qualification and transition process could take six months or longer, and we
cannot be certain that we could perform such functions or that an alternative
vendor would be available to us or be in a position to satisfy our requirements
on a timely
23
<PAGE>
and cost effective basis. See "Business--Products, markets and customers" and
"--Technology and operations."
In addition, in our home shopping business we rely on the services of a
credit card processor, telephone service providers and shipping companies.
Should we lose or experience interruptions in the services of any of these
service providers, we may not be able to replace these providers and our
revenues and results of operations could suffer.
The market for electronic delivery of home television entertainment is
characterized by rapidly changing technology. As a result, our digital cable
services may become outdated.
Our future success and ability to remain competitive will depend in
significant part upon the technological quality of our products and processes
relative to those of our competitors, and our ability to both develop new and
enhanced products and services and to introduce products and services at
competitive prices in a timely and cost effective fashion. We cannot be certain
that our technological development will remain competitive.
We rely substantially on third party vendors for the continued development
of these technologies. We cannot be certain that our vendors will be able to
develop technologies in a manner that meets our needs and those of our
customers and subscribers. The failure to implement these technologies or to
obtain licenses on favorable economic terms from other vendors, individually or
in combination, could impair our prospects for future growth. We cannot be
certain that we will be successful in identifying, developing, contracting for
the manufacture, and marketing of product enhancements or new services or
programming that are responsive to technological change, that we will not
experience difficulties that could delay or prevent the successful development,
introduction and marketing of these products or services or that our new
products and product enhancements will adequately meet the challenges of
emerging technologies, the requirements of the marketplace and achieve market
acceptance. Delays in commercial availability of new products and services and
enhancements to existing products and services may result in customer
dissatisfaction and delay or loss of revenue, and our operating results could
decline. See "Business--Technology and operations."
If our signals are pirated, we could lose substantial revenue.
While we use digital and analog encryption systems designed by General
Instrument to minimize the risk of signal piracy, we could lose substantial
revenue if signal piracy were to become widespread. The General Instrument
encryption system that we use is based on the use of cards inserted into the
television set-top cable box, which can be changed periodically to thwart
commercial piracy efforts. In addition, electronic countermeasures can be
transmitted over the cable system at any time in an effort to counter some
types of piracy. However, we cannot be certain that this encryption technology,
electronic countermeasures and other efforts designed to prevent signal piracy
will be effective. Moreover, we cannot be certain that future technological
developments will not render our anti-piracy features less effective or
completely useless. Any significant piracy of our programming would
substantially reduce our revenues and harm our results of operations. See
"Business-- Technology and operations."
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<PAGE>
We rely on a combination of trade secret, copyright and trademark laws,
confidentiality and nondisclosure agreements and other such arrangements to
protect our proprietary rights and confidential information. The loss of our
proprietary rights or confidential information would harm our competitiveness
and reduce the value of our business assets.
We consider our software, scheduling system, telephone ordering system,
trademarks, logos, copyrights, know-how, advertising, and promotion design and
artwork to be of substantial value and importance to our business. Despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to
copy or obtain and use information that we regard as proprietary. We cannot be
certain that the steps taken by us to protect our proprietary information will
prevent misappropriation of such information and such protection may not
preclude competitors from developing confusingly similar brand names or
promotional materials, technology, or developing products and services similar
to ours. In addition, the laws of some foreign countries do not protect our
proprietary rights to the same extent as do the laws of the United States.
While we believe that our proprietary software, trademarks, copyrights,
advertising and promotion design and artwork do not infringe upon the
proprietary rights of third parties, we cannot be certain that we will not
receive future communications from third parties asserting that our software,
systems, trademarks, copyrights, advertising and promotion design and artwork
infringe, or may infringe, on the proprietary rights of third parties. Any such
claims, with or without merit, could be time consuming, require us to enter
into royalty arrangements or result in costly litigation and diversion of
management personnel. We cannot be certain that any necessary licenses can be
obtained or that, if obtainable, can be obtained on terms acceptable to us. Our
failure or inability to develop non-infringing technology or license necessary
proprietary rights on a timely basis and in a cost-effective manner would harm
our business. See "Business--Intellectual property and proprietary rights."
Rapid growth of our business could place a significant strain on our
managerial, operational and financial resources and on our internal systems and
controls.
We cannot be certain that we would have adequate resources to effectively
manage rapid growth of our business, and our inability to do so could increase
our costs and harm our business. Our financial and management controls,
reporting systems and procedures are constrained by limited resources. Although
some new controls, systems and procedures have been implemented, our growth, if
any, will depend on our ability to continue to implement and improve
operational, financial and management information and control systems on a
timely basis, together with maintaining effective cost controls. Further, we
will be required to manage multiple relationships with various customers and
other third parties. We cannot be certain that our systems, procedures or
controls will be adequate to support our operations or that our management will
be able to successfully offer our services and implement our business plan. See
"--If we fail to attract and retain qualified management, sales, operations,
marketing and technology personnel, our ability to meet our business goals will
be impaired and our financial condition and results of operations will suffer,"
"Business--Employees" and "Management."
If we fail to attract and retain qualified management, sales, operations,
marketing and technology personnel, our ability to meet our business goals will
be impaired and our financial condition and results of operations will suffer.
In particular, our success depends on the continued contributions of Stuart
Z. Levin, our Chairman and Chief Executive Officer, and other senior level
sales, operations, marketing, technology, financial and legal officers. Our
business plan was developed in large part by
25
<PAGE>
these senior level officers and requires skills and knowledge they possess in
order to implement. In addition, our products and technologies are complex and
we are substantially dependent upon the continued service of our existing
engineering personnel. We intend to hire a significant number of additional
sales, support, marketing, operations and research and development personnel in
1999 and beyond. Competition for qualified personnel is intense, and we cannot
be certain that we will be able to attract, assimilate, train or retain
additional highly qualified personnel in the future. If we are unable to hire
and retain such personnel, particularly those in key positions, our business
prospects may be harmed and our results of operations may suffer. See
"Management--Executive officers and directors."
A substantial portion of our revenues to date have been generated by pay-per-
view fees paid by subscribers of our satellite transmitted analog programming
for the large home satellite dish market. These revenues may not be
sustainable.
Revenues from our large home satellite dish business declined in fiscal
1996, in fiscal 1998, in fiscal 1999 and are expected to decline in fiscal
2000. The large home satellite dish market faces severe competition from
competing forms of content delivery, including digital content transmitted via
small satellite dishes, and has experienced no growth over the past four years.
As a result, we cannot be certain that we can continue to generate sustained
revenues from the large home satellite dish market. See "Business--Large home
satellite dish business."
We may be unable to successfully integrate any new companies, products or
technologies we acquire.
We have made and intend to continue to make investments in complementary
companies, products and/or technologies. If we fail to successfully integrate
these purchases with our existing operations, our ongoing business could be
disrupted, the attention of our management and other employees may be diverted
from other important projects, and our expenses may increase. Effective January
1999, we acquired substantially all of the assets of the Panda Shopping
Channel. In June 1999, we acquired a majority interest in New Media Network, a
company involved in the digital delivery of music via the Internet and retail
locations. In July 1999, we acquired substantially all of the assets of Guthy-
Renker Television, which purchases media time from cable operators and
programmers, service providers and television broadcasters and resells such
time in packages to direct response infomercial and product sales companies.
Such acquisitions may result in difficulty integrating personnel and
operations. In addition, key personnel of the acquired businesses may decide
not to work for us. If we make other types of acquisitions, we could have
difficulty assimilating the acquired technology or products into our
operations.
If software on which our business depends is not year 2000 compliant, it may
interpret January 1, 2000 as January 1, 1900, and the resulting errors could
significantly harm our ability to offer and collect payment for our digital
cable programming and services.
We recognize the need to ensure that our operations, products and services
will not be adversely impacted by year 2000 software failures. We have
established procedures for evaluating and managing the risks and costs
associated with this problem and believe that most of our internal computer
systems, including our sales and technical support automation systems, are
currently year 2000 compliant. However, there can be no guarantee that our
systems or the systems of other companies on which we rely will not encounter
unexpected year 2000 problems.
In addition, although we believe that our network operations are year 2000
compliant, we cannot be certain that our computer systems contain all necessary
date code changes. Furthermore, many of our cable operator customers and
vendors maintain their operations on
26
<PAGE>
systems that may be impacted by year 2000 complications. Our failure or any
failure by our cable operator customers and vendors to ensure that their
systems are year 2000 compliant could be detrimental to our ability to offer
our products and services, which in turn could harm our operating results.
The effects of year 2000 complications may include but may not be limited
to:
. our inability to create a digital broadcast if our satellite
transponder, digital uplink facility or digital encoding equipment are
not year 2000 compliant;
. our inability to authorize customer orders if our access control
software is not year 2000 compliant; or
. our inability to invoice transactions if our billing service provider is
not year 2000 compliant.
The first draft of our mission critical contingency plan has been completed.
The plan outlines the methodologies we will use to remediate year 2000
difficulties within core operations and with critical dependencies including
hot swappable replacements, alternative vendor solutions, remediated systems
and additional manpower to extend monitoring capacity of broadcasts and
operations. However, we cannot be certain that such methodologies will
remediate year 2000 difficulties effectively or in a timely manner or that
alternative vendors will provide services on terms acceptable to us.
Morgan Stanley Dean Witter has significant influence over us, and may have an
interest in pursuing actions adverse to the interests of the holders of the
notes.
Decisions concerning our operations or financial structure may present
conflicts of interest between the owners of capital stock and the holders of
the new notes. For example, the holders of capital stock may have an interest
in pursuing acquisitions, divestitures, financings or other transactions that,
in their judgment, could enhance their equity investment, even though such
transactions might involve risks to the holders of the new notes. Princes Gate
Investors II and its affiliates own 89.3% of our Series B Preferred Stock,
which ownership represents 54.8% of our outstanding voting capital stock on an
as-converted basis or 44.2% of the voting capital stock on an as-converted,
diluted basis including currently outstanding options and warrants exercisable
for voting capital stock. The general partner of Princes Gate Investors II and
Morgan Stanley are both wholly owned subsidiaries of Morgan Stanley Dean
Witter, and two of our directors are employees of Morgan Stanley. As a result
of these relationships, Princes Gate Investors II, Morgan Stanley Dean Witter
and its affiliates have, and will continue to have, significant influence over
our management policies and our corporate affairs. See "Material transactions
and related party transactions," "Principal stockholders" and "Description of
capital stock."
Our certificate of incorporation requires us, upon demand, to redeem all of the
outstanding shares of our Series B Preferred Stock in August 2002. We may be
unable to satisfy this requirement, and our creditworthiness, business
condition and value of our equity could be harmed as a result.
Our certificate of incorporation requires us, upon demand, to redeem all of
the outstanding shares of our Series B Preferred Stock in August 2002, the
mandatory redemption date, for $54.4 million, unless such shares of Series B
Preferred Stock have
27
<PAGE>
previously been converted into our common stock at the option of the holders
thereof, or automatically converted upon our initial public offering.
Notwithstanding this requirement, the terms of the notes significantly limit a
redemption by us from available cash, but will permit us to redeem the Series B
Preferred Stock with the proceeds of an equity financing. If we fail to redeem
the Series B Preferred Stock, we would continue to be in breach under our
certificate of incorporation from the redemption date until the date of a
refinancing, if any. Although a breach of this type has been excluded from the
cross default provisions of the new notes, it may trigger default provisions in
other financial instruments to which we may then be a party. We cannot be
certain that holders of Series B Preferred Stock will not take legal action
against us in an attempt to enforce their redemption right, demand that we
renegotiate the terms of the Series B Preferred Stock or sell additional equity
to finance the redemption. Although these actions may not directly effect the
new notes, they may harm our financial condition and have a dilutive effect on
the interests of our equity holders. A substantial majority of our Series B
Preferred Stock is held by Princes Gate Investors II. See "Material
transactions and related party transactions" and "Description of capital
stock--Preferred stock--Redemption."
The notes are subject to original issue discount tax treatment and may be
subject to high-yield discount obligation tax rules.
The notes will be treated as issued with original issue discount for U.S.
federal income tax purposes, so that holders of the notes generally will be
required to include amounts in gross income for U.S. federal income tax
purposes in advance of receipt of the cash payments to which the income is
attributable. Furthermore, the notes may be subject to the high yield discount
obligation rules, which will defer and may, in part, eliminate our ability to
deduct for U.S. federal income tax purposes the original issue discount
attributable to the notes. Accordingly, our after-tax cash flow might be less
than if the original issue discount on the notes was deductible when it
accrued. See "United States federal income tax considerations" for a more
detailed discussion of the U.S. federal income tax consequences for us and the
beneficial owners of the notes resulting from their purchase, ownership and
disposition of the notes.
If a bankruptcy case were commenced by or against us under the Bankruptcy
Code of 1978, as amended, after the issuance of the notes, the claim of a note
holder with respect to the principal amount thereof may be limited to an amount
equal to the sum of:
. the initial offering price and
. that portion of the original issue discount that is not deemed to
constitute "unmatured interest" for purposes of the bankruptcy code.
Any original issue discount that was not amortized as of the date of any
such bankruptcy filing would constitute "unmatured interest."
Our obligations under the notes may be diminished if the transfer of the notes
was fraudulent or made us insolvent.
Under applicable provisions of the federal bankruptcy law or comparable
provisions of state fraudulent transfer law, if, at the time we issued the old
notes or made any payment in respect of the new notes, either:
(1) we received less than reasonably equivalent value or fair
consideration for such issuance; and
. we were insolvent or were rendered insolvent by such issuance; or
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. were engaged or about to engage in a business or transaction for which
our assets constituted unreasonably small capital; or
. intended to incur, or believed that we would incur, debts beyond our
ability to pay our debts as they matured; or
(2) we issued the new notes or made any payment thereunder with intent to
hinder, defraud or delay any of our creditors,
then our obligations under some or all of the new notes could be voided or held
to be unenforceable by a court or could be subordinated to claims of other
creditors, or the new note holders could be required to return payments already
received.
In particular, if we caused a subsidiary to pay a dividend in order to
enable us to make payments in respect of the new notes, and such transfer were
deemed a fraudulent transfer, the holders of the new notes could be required to
return the payment.
The measure of insolvency for purposes of these fraudulent transfer laws
will vary depending upon the law applied in any proceeding to determine whether
a fraudulent transfer has occurred. Generally, however, we would be considered
insolvent if:
. the sum of our debts, including contingent liabilities, was greater than
all of our assets at a fair valuation; or
. we had unreasonably small capital to conduct our business; or
. the present fair salable value of our assets were less than the amount
that would be required to pay the probable liability on our existing
debts, including contingent liabilities, as they become absolute and
mature.
We believe that we will not be insolvent at the time of or as a result of
the issuance of the new notes, that we will not engage in a business or
transaction for which our remaining assets constitute unreasonably small
capital, and that we will not incur debts beyond our ability to pay such debts
as they mature. We cannot assure you, however, that a court passing on such
questions would agree with our analysis.
Under certain circumstances, our subsidiaries will be required to guarantee
our obligations under the indenture and the new notes. If any subsidiary enters
into such a guarantee, and bankruptcy or insolvency proceedings are initiated
by or against that subsidiary within 90 days or, possibly, one year, after that
subsidiary issued a guarantee or after that subsidiary incurred obligations
under its guarantee in anticipation of insolvency, then all or a portion of the
guarantee could be avoided as a preferential transfer under federal bankruptcy
or applicable state law. In addition, a court could require holders of the new
notes to return all payments made within any such 90 day or, possibly, one
year, period as preferential transfer.
Applicable bankruptcy law is likely to impair the trustee's right to foreclose
upon the pledged securities.
The right of the trustee under the indenture and the pledge agreement
relating to the new notes to foreclose upon and sell the pledged securities
upon the occurrence of an event of default on the new notes is likely to be
significantly impaired by applicable bankruptcy law if a bankruptcy or
reorganization case were to be commenced by or against us or one of our
subsidiaries. Under applicable bankruptcy law, secured creditors such as the
holders of the
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new notes are prohibited from foreclosing upon or disposing of a debtor's
property without prior bankruptcy court approval.
There is no public market for the notes. An active market may not develop, and
you may be unable to resell the notes when desired or at a price that reflects
their value.
We are offering the new notes to the holders of the old notes. Prior to this
exchange offer, there was no existing trading market for the old notes and
there were no existing new notes. We do not intend to apply for listing of the
new notes on any securities exchange or on the Nasdaq National Market. Although
the new notes will be eligible for trading in the PORTAL Market, the new notes
may trade at a discount from their initial offering price, depending upon
prevailing interest rates, the market for similar securities, our performance
and other factors. Prior to the issuance of the old notes, the initial
purchaser advised us that it intended to make a market in the old notes
following the issuance thereof; however, the initial purchaser is not obligated
to do so and any such market-making activities may be discontinued at any time
without notice. We cannot be certain, therefore, that an active market for the
new notes will develop. In addition, the market price of the old notes has
fluctuated significantly since their original issuance, and we anticipate that
the market for the new notes may similarly fluctuate. See "Description of the
old notes--Registration rights" and "Description of the old notes--Plan of
distribution."
The form and terms of the new notes are substantially identical to the form
and terms of the old notes, except that the new notes:
. will be registered under the Securities Act;
. will not provide for registration rights;
. will not provide for payment of additional interest upon failure to
register or exchange the old notes, which terminates upon completion of
the exchange offer; and
. will not bear legends containing transfer restrictions.
The new notes will be issued solely in exchange for an equal principal
amount of old notes. As of the date hereof, $166.2 million aggregate principal
amount of old notes is outstanding.
The value of your old notes may decline if you fail to exchange your old notes
for new notes.
When the exchange offer is completed, the liquidity of any trading market
for old notes which remain outstanding will decrease significantly. You may be
unable to sell or transfer your old notes and the value of your old notes may
decline.
The old notes have not been registered under the Securities Act or any state
securities laws. When the exchange offer has been completed, we will have no
further obligation to register the old notes. Thereafter, if you have not
tendered your old notes in the exchange offer, you will continue to hold
restricted securities. You may not offer to sell or otherwise transfer your old
notes unless the sale complies with the registration requirements of the
Securities Act and any other applicable securities laws, or unless there is an
exemption from the securities laws for your sale. In addition, to sell your old
notes, you must comply with certain other conditions and restrictions,
including our and the trustee's right in certain cases to require you to
deliver opinions of counsel, certifications and other information prior to any
such transfer. If you do not exchange your old notes in the exchange offer, the
old notes will continue to bear a legend reflecting such restrictions on
transfer. In addition, once the
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exchange offer has been completed, you will not be entitled to, and we do not
expect to, exchange old notes for notes registered under the Securities Act,
except for the initial purchaser in certain circumstances.
The new notes and any old notes which remain outstanding after consummation
of the exchange offer will vote together as a single class for purposes of
determining whether holders of the requisite percentage in outstanding
principal amount thereof have taken certain actions or exercised certain rights
under the indenture.
Special note regarding forward-looking statements
Some of the statements under "Prospectus summary," "Risk factors,"
"Management's discussion and analysis of financial condition and results of
operations," "Business," and elsewhere in this prospectus constitute forward-
looking statements. These statements involve known and unknown risks,
uncertainties, and other factors that may cause our or our industry's results,
levels of activity, performance, or achievements to be materially different
from any future results, levels of activity, performance, or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, those listed under "Risk factors" and elsewhere in this
prospectus.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," or "continue" or the negative of such
terms or other comparable terminology.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, events, levels
of activity, performance, or achievements. Our actual results and the timing of
certain events could differ materially from those anticipated in these forward-
looking statements. We do not intend to update any of the forward-looking
statements after the date of this prospectus to conform them to actual results.
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Use of proceeds
This exchange offer is intended to satisfy certain of our obligations under
our registration rights agreement. We will not receive any cash proceeds from
the issuance of the new notes offered in the exchange offer. In consideration
for issuing the new notes as contemplated in this prospectus, we will receive
in exchange old notes in like principal amount at maturity, the form and terms
of which are the same in all material respects as the form and terms of the new
notes except that the new notes:
(1) will have been registered under the Securities Act and therefore
will not be subject to certain restrictions on transfer applicable to the
old notes and
(2) will not be entitled to certain registration or other rights under
our registration rights agreement, including the provision in the
registration rights agreement for additional interest of up to 0.5% per
annum upon our failure to consummate the exchange offer.
The old notes surrendered in exchange for the new notes will be retired and
cancelled and cannot be reissued. Accordingly, issuance of the new notes will
not result in any increase in our indebtedness.
The net proceeds to us from the issuance of the old notes and warrants which
we issued in connection with the old notes were approximately $193.3 million,
after deducting the selling discounts and commissions and estimated expenses.
See "Description of the old notes--General." Approximately $76.7 million of the
net proceeds were used to purchase pledged securities in an amount expected to
be sufficient to provide for payment in full of the first six scheduled
interest payments on the notes. See "Description of the old notes--Security."
We are using the remaining net proceeds to fund operating expenses in
connection with the roll out and expansion of our TVN Digital Cable Television
service and Pay-Per-View Feeds Service, for acquisitions as permitted by the
indenture, for working capital and other general corporate purposes. We have
contingent notes payable totaling approximately $29.5 million at September 30,
1999. The timing of repayment of the contingent notes payable is uncertain and
subject to events outside our control. See "Description of certain
indebtedness."
In October 1999, we used approximately $12.8 million of the net proceeds to
repurchase $33.9 million of the old notes and 33,850 of the old warrants. The
repurchase generated the release of $8.9 million of the pledged securities that
were held in custody to fund the next four scheduled interest payments on the
repurchased notes.
Because of the number and variability of factors that will determine our use
of the net proceeds from the issuance of the old notes and the warrants issued
in connection therewith, management will retain a significant amount of
discretion over the application of such net proceeds. Pending the use of such
net proceeds as described above, we intend to invest such funds in short-term,
interest bearing, investment grade securities to the extent permitted by the
indenture.
Dividend policy
We have not paid any dividends since our inception and do not intend to pay
cash dividends on our capital stock in the foreseeable future. We anticipate
that we will retain all future earnings, if any, for use in our operations and
expansion of the business. In addition, the terms of the indenture will
restrict our ability to pay dividends on, or make distributions in respect of,
our capital stock. See "Description of the notes--Certain covenants."
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Capitalization
The following table sets forth our total cash and cash equivalents and
capitalization as of September 30, 1999. This table should be read in
conjunction with the financial statements and related notes thereto included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
September 30, 1999
----------------------
(dollars in thousands)
<S> <C>
Cash and cash equivalents............................... $ 51,643
Restricted cash and investments(1)...................... 54,450
=========
Short-term debt:
Current portion of capitalized leases................. 8,380
Current portion of notes payable...................... 7,262
---------
Total short-term debt............................... 15,642
---------
Long-term debt:
Capitalized leases.................................... 83,863
Notes payable......................................... 19,006
Senior notes due 2008(2).............................. 187,505
Contingent notes payable(3)........................... --
---------
Total long-term debt................................ 290,374
Series B redeemable preferred stock, $.001 par value;
12,648,107 shares authorized; 12,154,771 shares issued
and outstanding........................................ 53,245
---------
Stockholders' deficit:
Series A preferred stock, $.001 par value; 7,600,000
shares authorized; 7,499,900 shares issued and
outstanding.......................................... 8
Common stock, $.001 par value; 40,000,000 shares
authorized; 152,517 shares issued and outstanding.... --
Additional paid-in capital(2)......................... 23,269
Accumulated deficit................................... (191,014)
---------
Total stockholders' deficit......................... (167,737)
---------
Total capitalization................................ $ 191,524
=========
</TABLE>
- --------
(1) Reflects the remaining portion of the net proceeds from the issuance of the
old notes and warrants issued in connection therewith used to purchase
pledged securities to secure the first six scheduled interest payments on
the notes. See "Description of the old notes--Security."
(2) Senior notes due 2008 and total stockholders' deficit reflect the value
ascribed to the warrants issued in connection with the Senior Notes due
2008 of $14,144,812 which results in additional debt discount that will be
amortized as interest expense using the effective interest method over the
period that the notes are outstanding. See "Use of proceeds."
(3) We have contingent notes payable totaling approximately $29.5 million at
September 30, 1999. Interest on such notes accrues at a rate of prime plus
1%. The timing of the repayment of the contingent notes payable is
uncertain and subject to events outside our control. See "Description of
certain indebtedness."
33
<PAGE>
Selected historical financial data
The following selected historical financial data of TVN Entertainment
Corporation as of March 31, 1998 and 1999 and for each of the three years in
the period ended March 31, 1999 have been derived from the TVN Entertainment
Corporation financial statements and notes thereto that have been audited by
PricewaterhouseCoopers LLP, independent accountants, whose report thereon is
included elsewhere in this registration statement. The following selected
historical financial data as of March 31, 1995, 1996 and 1997 and for each of
the two years in the period ended March 31, 1996 have been derived from the
audited TVN Entertainment Corporation financial statements not included herein.
The following historical financial data for the six months ended September 30,
1998 and 1999 and the consolidated balance sheet data as of September 30, 1999
have been derived from the unaudited TVN Entertainment Corporation financial
statements included elsewhere in this registration statement. The following
data set forth below should be read in conjunction with "Management's
discussion and analysis of financial condition and results of operations," the
financial statements and the notes thereto and the other financial information
included elsewhere in this registration statement. The historical financial
information does not reflect the significant changes in our financial results
that will occur as a result of the ongoing rollout of our digital cable
programming and services business. A substantial portion of our revenues to
date have been generated by our C-band large home satellite dish business. Our
historical expenses have been generated by the large home satellite dish
business but have also included substantial operating expenses, lease payments
and capital investments to develop our digital cable programming and services
business, which was launched in late 1997.
<TABLE>
<CAPTION>
Six months ended
Year Ended March 31, September 30,
------------------------------------------------ ------------------
1995 1996 1997 1998 1999 1998 1999
-------- -------- -------- -------- -------- -------- --------
(in thousands, except share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................. $ 35,073 $ 33,001 $ 33,380 $ 30,545 $ 39,812 $ 14,118 $ 34,185
Operating expenses:
Cost of revenue(1)
(exclusive of
depreciation shown
separately below)..... 29,300 28,767 18,812 20,426 31,775 11,914 30,856
Selling................ 9,076 8,612 5,998 7,067 14,302 5,939 7,589
General and
administrative........ 3,424 3,937 5,061 5,619 8,520 3,707 9,983
Depreciation and
amortization(1)....... 425 1,384 10,534 11,984 12,253 6,071 6,821
Amortization of
intangible assets..... (803) (803) (803) (100) 199 -- 1,233
-------- -------- -------- -------- -------- -------- --------
Total operating
expenses............... 41,422 41,897 39,602 44,996 67,049 27,631 56,482
-------- -------- -------- -------- -------- -------- --------
Loss from operations.... (6,349) (8,896) (6,222) (14,451) (27,237) (13,513) (22,297)
Interest expense........ 1,407 2,248 13,908 15,163 34,195 12,500 22,132
Interest income......... (6) (15) (63) (223) (6,472) (1,797) (3,484)
Other (income) and
expense................ 25 (10) 54 471 (84) (33) 138
-------- -------- -------- -------- -------- -------- --------
Loss before
extraordinary gain..... (7,775) (11,119) (20,121) (29,862) (54,876) (24,183) (41,083)
Extraordinary gain...... -- -- 2,454 -- 1,113 1,113 --
-------- -------- -------- -------- -------- -------- --------
Net loss................ $ (7,775) $(11,119) $(17,667) $(29,862) $(53,763) $(23,070) $(41,083)
======== ======== ======== ======== ======== ======== ========
Per Share Data:
Net loss per share
applicable to common
stockholders........... $ (11) $ (17) $ (6,001) $ (272) $ (355) $ (153) $ (271)
Weighted average common
shares................. 729,180 663,443 2,944 110,237 152,517 152,517 152,517
</TABLE>
<TABLE>
<CAPTION>
March 31,
------------------------------------------------- September 30,
1995 1996 1997 1998 1999 1999
-------- -------- -------- -------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 421 $ 355 $ 765 $ 16,798 $ 84,343 $ 51,643
Restricted cash......... -- -- -- 1,833 1,903 1,591
Restricted investments.. -- -- -- -- 65,218 52,859
Property and equipment,
net.................... 894 70,359 105,271 93,769 84,997 82,541
Total assets............ 5,321 74,637 109,072 116,740 254,725 228,436
Total debt:
Senior notes due
2008(2)............... -- -- -- -- 186,798 187,505
Notes payable(3)....... 18,844 23,406 33,506 32,287 15,667 26,268
Capitalized leases..... -- 68,688 105,316 100,859 95,703 92,243
Series B redeemable
preferred stock........ -- -- -- 52,616 53,047 53,245
Total stockholders'
deficit................ (28,414) (39,533) (57,187) (87,165) (127,176) (167,737)
Other Data:
EBITDA(4)............... $ (6,752) $ (8,305) $ 5,909 $ (3,038) $ (13,588) $ (14,381)
Capital
expenditures(5)........ 444 342 182 308 2,620 3,054
Ratio of earnings to
fixed charges(6)....... -- -- -- -- -- --
Net cash used for
operating activities... (3,681) (3,646) (2,937) (28,091) (35,423) (31,358)
Net cash provided by
(used for) investing
activities............. (444) (342) (169) (308) (68,323) 7,223
Net cash provided by
(used for) financing
activities............. 4,041 3,921 3,516 44,432 171,291 (8,565)
</TABLE>
34
<PAGE>
- --------
(1) Until February 1996, satellite transmission device costs were incurred
pursuant to operating leases and were reported as cost of revenue. Since
then, new lease agreements have met the criteria for capitalization and the
related costs have been recognized as depreciation and interest expense.
(2) Senior Notes due 2008 and total stockholders' deficit reflect the value
ascribed to the warrants issued in connection with the old notes which
results in additional debt discount that will be amortized as interest
expense using the effective interest method over the period that the notes
are outstanding.
(3) Notes payable does not include contingent notes payable totaling
approximately $29.5 million at September 30, 1999. Interest on the
contingent notes payable accrues at a rate of prime plus 1%. The timing of
the repayment of the contingent notes payable is uncertain and subject to
events outside our control. See "Description of certain indebtedness."
(4) EBITDA consists of loss before depreciation, amortization and net interest
expense. It is a measure commonly used in the media industry. EBITDA, and
the trends depicted by it, are used by our management and may be used by
investors to evaluate our operating results independent of the timing of
operating cash flows and cost associated with our investing and financing
activities. In evaluating EBITDA, investors should consider the financial
impact of our capital commitments and financial obligations and their
related effect on our financial condition, results of operations and cash
flows. It is not intended to represent cash flows or results of operations
in accordance with GAAP for the periods indicated, may not be comparable to
similarly titled measures presented by other companies and could be
misleading unless all companies and analysts calculate EBITDA in the same
manner.
(5) Capital expenditures exclude acquisitions financed through notes payable
and capitalized leases of $70.5 million, $45.3 million and $175,000 in
fiscal 1996, fiscal 1997 and fiscal 1998, respectively.
(6) In calculating the ratio of earnings to fixed charges, "earnings" consist
of net loss before fixed charges. Fixed charges consist of interest
expense, including such portion of rental expense that is attributed to
interest. Our earnings were insufficient to cover fixed charges for these
periods. The amount of the deficiencies were $7.8 million, $11.1 million,
$20.1 million, $29.9 million and $54.9 million for each of the five years
in the period ended March 31, 1999, and $23.1 million and $41.1 million for
the six months ended September 30, 1998 and 1999, respectively.
35
<PAGE>
Management's discussion and analysis of
financial condition and results of operations
The following discussion of our financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and the related notes thereto included elsewhere in this prospectus.
See "Special note regarding forward-looking statements."
Overview
Our company provides a wide variety of new television programming and
services that we deliver in digital format to cable operators for their
subscribers using existing cable infrastructure. Our TVN Digital Cable
Television service enables cable operators to substantially enhance the variety
and quality of programming choices through a more efficient use of their cable
transmission capacity by utilizing recent industry technology that compresses
eight or more digital channels onto one analog channel. We believe our TVN
Digital Cable Television service is attractive particularly to smaller and
medium size cable systems, including smaller systems owned by large cable
operators, which may lack the scale, funding, technical or administrative
resources to economically implement a full offering of digital programming on
their own. For larger cable systems that do not require all of the features of
our TVN Digital Cable Television service, we can deliver our digital satellite
feeds of pay-per-view movies and events, known as our Pay-Per-View Feeds
Service. We launched our digital cable programming and services business in
late 1997.
Our efforts have historically focused on providing national satellite pay-
per-view and related services to large satellite dish owners. A substantial
majority of our revenues to date have been generated by pay-per-view fees paid
by our C-band subscribers. During the fiscal year ended March 31, 1999, over
260,000 C-band large satellite dish customers purchased pay-per-view
programming from us using their home telephone or remote control. During 1997,
General Instrument announced the introduction of its "4DTV" technology and
receivers that enable large satellite dish owners to receive both digital and
analog signals. Although we expected a significant portion of our large
satellite dish subscribers to use our digital services through new digital 4DTV
receivers, the deployment of these receivers has been slower than projected by
General Instrument. General Instrument now plans to sell a lower cost version
of its 4DTV receiver, which it expects to be more popular with large satellite
dish owners.
In January 1999, we acquired substantially all of the assets of Panda
Shopping Network, a live televised home shopping network. Upon closing, we
placed those assets into TVN Shopping, Inc., our wholly owned subsidiary. The
Panda Shopping Network currently sells new and vintage watches, new and estate
jewelry, gemstones and precious metal coins. We purchase unused broadcast time
known as "remnant time" from local and national broadcasters, cable networks
and cable operators to distribute the Panda Shopping Network service.
In June 1999, we acquired 60% of the fully diluted equity of New Media
Network, Inc., a start-up company that is developing and plans to deploy a
system utilizing state-of-the-art digital downloading technology to deliver and
sell entertainment products such as music, movies and games via the Internet
and at retail locations.
36
<PAGE>
In July 1999, we acquired substantially all of the assets of the Guthy-
Renker Television Network, Inc., a media buying business. The Guthy-Renker
Television Network purchases primarily remnant time from cable operators and
packages that time for resale to infomercial programmers and other users of
broadcast media time. The infomercial programming is either broadcast via our
satellite transponders or sent to cable operators via videotape for insertion
into their video transmission.
Our business plan contemplates that a substantial portion of future revenues
will be generated by our digital cable programming and services business which
includes our TVN Digital Cable Television service and our Pay-Per-View Feeds
Service. Our digital cable programming and services were launched in late 1997
and have generated only modest revenues to date. We believe that our future
ability to service our indebtedness and to achieve profitability is dependent
upon our success in generating substantial revenues from our digital cable
programming and services and home shopping services. We expect to continue
experiencing negative operating margins and EBITDA while our TVN Digital Cable
Television service and Pay-Per-View Feeds Service are being marketed to cable
systems and their subscribers. We expect to realize improved operating margins
and EBITDA only as:
. the number of cable systems offering our TVN Digital Cable Television
service and the number of cable systems offering Pay-Per-View Feeds
Service increases so as to increase the numbers of homes with access to
our digital programming and services;
. the number of subscribers to TVN Digital Cable Television service
increases;
. recurring purchases of our pay-per-view movies and events increase; and
. revenues are generated from our home shopping and electronic commerce
products and services.
The continued roll out of our digital cable programming and services
requires significant operating expenditures, in particular selling expenses, a
large portion of which will be expended before any revenue is generated. We
have experienced and expect to continue experiencing negative operating cash
flows and significant losses while we continue to market our digital cable
television services and until we can establish a customer base of cable
operators and their subscribers that will generate revenue sufficient to cover
our costs.
Revenue
Revenues from our digital cable programming and services are directly
related to the number of subscribers in cable systems offering either our TVN
Digital Cable Television service or our Pay-Per-View Feeds Service. Revenues
are expected to be primarily derived from monthly fees per subscriber to our
digital programming package charged to cable operators for TVN Digital Cable
Television and from the sale of pay-per-view programming to TVN Digital Cable
Television subscribers and subscribers in cable systems offering our Pay-Per-
View Feeds Service. Revenues from our digital cable programming and services
totaled approximately $40,000 and $10.9 million for the years ended March 31,
1998 and 1999, respectively, and $8.5 million for the six months ended
September 30, 1999.
TVN Digital Cable Television subscriber revenue consists of a monthly fee
charged per digital subscriber to the cable operator. A portion of this fee may
be rebated to the cable operator based on achieving certain subscriber
penetration rates or for the cable system operator agreeing to carry a greater
number of channels of our pay-per-view offerings. Pay-per-view revenues are
derived from orders by TVN Digital Cable Television subscribers for pay-per-
view programming. We remit a percentage of the pay-per-view revenue to the
cable
37
<PAGE>
operator and the content provider. Pay-per-view orders are generally paid for
by credit card with revenue being recognized once the programming is viewed.
Revenue from the Pay-Per-View Feeds Service is based on a percentage of the
cable operators' gross revenue generated by the purchase of our pay-per-view
movies and events by their subscribers. Cable operators provide us with monthly
reports detailing pay-per-view purchases by their subscribers for the prior
month and remit our share of the revenue with such report.
We expect to realize revenue from both our TVN Digital Cable Television
service and our Pay-Per-View Feeds Service pursuant to long-term agreements
with cable operators. We recognize revenues under our cable operator agreements
only when our TVN Digital Cable Television service or Pay-Per-View Feeds
Service is successfully integrated and operating and customer billing
commences. Accordingly, the recognition of revenues will lag the announcement
of a new cable operator agreement by at least the time necessary to install the
service, generally 90 days, and to achieve a meaningful number of subscribers
and/or number of pay-per-view purchases. Revenues are expected to increase as
our current and future cable operator customers successfully deploy our TVN
Digital Cable Television service and our Pay-Per-View Feeds Service and achieve
higher subscriber penetration rates.
Merchandising revenue is generated primarily by sales of merchandise to
television viewers and is related to the number of subscribers in cable systems
and viewers in television broadcast areas who receive our home shopping
service. Consumers generally pay for merchandise orders by credit card with
revenue being recognized upon shipment of the goods.
Media sales are generated by sales of media time primarily to infomercial
programmers, and is related to the number of cable subscribers that can
potentially view our customers' programming. Programmers pay either a fixed
rate in advance or a percentage of the sales generated by their programming.
In addition to the aforementioned, additional revenues may be generated by
providing satellite transmission services to other programmers via the Galaxy
III satellite transmitters that we may convert from analog to digital over an
extended transition period.
Operating expenses
Operating expenses consist of Cost of Revenue; Selling; General and
Administrative; Depreciation and Amortization; and Goodwill Amortization
expenses. Our historical expenses have been generated by the large satellite
dish business but have also included substantial operating expenses, lease
payments and capital investments to develop our digital cable programming and
services business, which was launched in the third quarter of fiscal 1998.
Cost of revenue. Cost of revenue for our TVN Digital Cable Television
service and Pay-Per-View Feeds Service primarily consists of program license
fees, payments to cable operators, satellite transmission and playback service
fees, per-subscriber authorization fees for cable television set-top cable box
authorization control, communications charges related to orders for pay-per-
view movies and events by subscribers, and salaries and related expenses of
engineering and field operations personnel. License fees for pay-per-view
programming are payable to content providers under the terms of our license
agreements and generally vary between 30% and 55% of revenue depending on the
type of content.
38
<PAGE>
Payments to cable operators represent the percentage of pay-per-view revenue
shared with operators who have entered into TVN Digital Cable Television
service agreements and vary by individual agreement. Satellite transmission
services are purchased from an outside vendor pursuant to an agreement that
provides for a flat monthly fee. With respect to television set-top cable box
authorization to enable the box to receive a pay-per-view movie or event, a fee
to maintain access control per television set-top cable box is payable to the
licensor of the operative software pursuant to its license agreement with us.
Cost of revenue related to our digital cable programming and services totaled
approximately $2.9 million and $13.1 million for the years ended March 31, 1998
and 1999, respectively, and $9.8 million for the six months ended September 30,
1999. The majority of cost of revenue for our TVN Digital Cable Television
service and Pay-Per-View Feeds Service will vary directly with revenues:
. as subscriber pay-per-view buy rates increase thereby causing us to incur
program license fees and access control charges related to orders for
pay-per-view movies and events;
. as we are required to hire additional engineering and field operations
personnel in connection with the growth of our digital cable programming
and services business; and
. according to the mix of services provided and their respective costs.
Cost of revenue for the home shopping service primarily consist of the cost
of goods sold, fulfillment costs and the cost of airtime purchased from cable
operators, cable networks and broadcast networks. The cost of goods sold are
generally between 50% and 60% of the retail price charged. Fulfillment costs
include packaging and shipping costs. The majority of cost of revenue for the
home shopping service will vary directly with revenue:
. as we increase airtime purchases to achieve greater distribution;
. as more consumers purchase our products; and
. according to the mix of product and airtime and their respective costs.
Cost of revenue for the media buying service primarily consists of the cost
of airtime purchased from cable operators. The cost of airtime varies by hour
and varies directly with revenue.
Selling. Selling expenses for TVN Digital Cable Television service and Pay-
Per-View Feeds Service consist of customer acquisition costs, billing expenses,
customer service expenses, and salaries and related expenses of our marketing
personnel. Customer acquisition costs include expenses associated with our
marketing campaign to cable systems and co-op advertising and marketing efforts
with affiliated cable systems. These expenses are required to acquire new
customers and related revenues but are discretionary and therefore can be
increased or decreased by management in accordance with the anticipated growth
in new business and revenue. We expect to incur significant customer
acquisition costs as we market our TVN Digital Cable Television service and
Pay-Per-View Feeds Service.
Implementing our TVN Digital Cable Television service requires cable
operators to acquire digital equipment for their facilities and digital
television set-top boxes for their subscribers. The new digital receiving
equipment required at an operator's facility to receive
39
<PAGE>
TVN Digital Cable Television costs the operator approximately $50,000. For
systems serving in excess of 5,000 subscribers, TVN generally agrees to make
monthly financing payments to the operator which approximate the operator's
monthly financing payments on 80% of the digital equipment cost for so long as
the affiliation agreement remains in effect.
Billing expenses consist of subscriber maintenance fees and remittance
processing fees which vary directly with revenue. Customer service expenses
consist of payroll for call center representatives and telephone charges for
customer calls. To the extent that our subscriber base increases or decreases,
the required costs to support such subscribers would correspondingly change. We
expect to continue to incur significant customer service expenses to support
our current and future subscribers.
Selling expenses for the home shopping service consist of customer service
expenses and remittance processing costs which generally vary directly with
revenue.
General and administrative. General and administrative expenses consist of
executive and administrative staff compensation, office expenses and
professional fees. General and administrative expenses cover a broad range of
the costs of our operations including corporate functions such as
administration, finance, legal, human resources and facilities. We anticipate
needing additional office facilities in order to support the expected growth in
demand for our services from cable operators and subscribers. We anticipate
that we can locate and acquire such additional space when and as it is needed
although we cannot be certain that such space can be acquired on terms
acceptable to us.
Depreciation and amortization. Depreciation and amortization expenses
consist of depreciation on our capitalized programming transmitter leases and
depreciation on equipment necessary for our digital services and are fixed with
respect to revenue. Generally, depreciation is calculated using the straight-
line method over the useful lives of the associated asset, which range from 5
to 10 years.
Amortization of intangible assets. Amortization of intangible assets
includes the amortization of acquired technology and goodwill generated by our
acquisitions.
Interest income and expense. Interest income will continue to be earned by
us from investing the proceeds from the issuance of equity and debt securities
until such proceeds are needed to fund the operating expenditures, in
particular selling expenses, of our business in connection with the continued
roll out of our digital cable programming and services business. Interest
income is expected to be highly variable over time. Interest expense will
consist primarily of interest accruing under the notes, capitalized leases and
other outstanding indebtedness.
Income taxes and net operating loss carryforwards
As a result of projected operating losses and the potential inability to
recognize a benefit for deferred income tax assets, we do not foresee recording
a provision for income tax expense in the near term.
As of March 31, 1999, we had federal and state net operating loss
carryforwards of approximately $141 million and $57 million, respectively,
which expire at various times in varying amounts beginning in the years 2004
and 2000, respectively. However, due to the provisions of Section 382, Section
1502 and certain other provisions of the Internal Revenue Code of 1986, as
amended, the utilization of a portion of the net operating loss
40
<PAGE>
carryforwards may be limited. In addition, we are also subject to certain state
income tax provisions which may also limit the utilization of net operating
loss carryforwards for state income tax purposes.
Section 382 of the Code provides annual restrictions on the use of net
operating loss carryforwards, as well as other tax attributes, following
significant changes in ownership of a corporation's stock, as defined in the
Code. Investors are cautioned that future events beyond our control could
reduce or eliminate our ability to utilize the tax benefits of our net
operating loss carryforwards. Future ownership changes under Section 382 could
further restrict the use of the net operating loss carryforwards. In addition,
the Section 382 limitation could reduce available net operating loss
carryforwards to zero if we fail to satisfy the continuity of business
enterprise requirement for the two-year period following an ownership change.
Results of operations
The table below sets forth for the periods indicated certain data regarding
expenses expressed as a percentage of total revenues:
<TABLE>
<CAPTION>
Six Months
ended
Year ended March 31, September 30,
------------------------- ---------------
1997 1998 1999 1998 1999
------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C>
Revenue.......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of revenue (exclusive of
depreciation shown separately
below)........................ 56.4 66.9 79.8 84.4 90.3
Selling........................ 18.0 23.1 35.9 42.1 22.2
General and administrative..... 15.2 18.4 21.4 26.3 29.2
Depreciation and amortization.. 31.6 39.2 30.8 43.0 19.9
Amortization of intangible
assets........................ (2.4) (0.3) .5 -- 3.6
------ ------ ------- ------ ------
Total operating expenses......... 118.6 147.3 168.4 195.8 165.2
------ ------ ------- ------ ------
Loss from operations............. (18.6) (47.3) (68.4) (95.8) (65.2)
Interest expense................. 41.7 49.6 85.9 88.5 64.7
Interest income.................. (0.2) (0.7) (16.3) (12.7) (10.2)
Other (income) and expense....... 0.2 1.5 (0.2) (0.2) 0.4
------ ------ ------- ------ ------
Loss before extraordinary gain... (60.3) (97.8) (137.8) (171.4) (120.1)
Extraordinary gain............... 7.4 -- 2.8 7.9 --
------ ------ ------- ------ ------
Net loss......................... (52.9)% (97.8)% (135.0)% (163.5)% (120.1)%
====== ====== ======= ====== ======
</TABLE>
41
<PAGE>
Six Months Ended September 30, 1999 Compared with Six Months Ended
September 30, 1998
Revenue. Total revenue increased $20.1 million, or 142.1%, to $34.2 million
in the six months ended September 30, 1999 from $14.1 million in the six months
ended September 30, 1998. Revenue generated by our Digital Cable Television
service increased approximately $599,000 or 777.6% to $676,000 in the six
months ended September 30, 1999 from $77,000 in the six months ended September
30, 1998. The increase is attributable to an increase in the number of
subscribers to the service in the six months ended September 30, 1999 from the
six months ended September 30, 1998. Revenue generated by our PPV Feeds Service
increased $5.8 million to $7.8 million in the six months ended September 30,
1999 from $2.0 million in the six months ended September 30, 1998. The increase
is attributable to the fact that revenue was generated by the Marquee Mix
Service for only three of the six months ended September 30, 1998. Transponder
service revenue decreased $2.5 million, or 59.5%, to $1.7 million in the six
months ended September 30, 1999 from $4.2 million in the six months ended
September 30, 1998. The decrease is attributable to revenue generated from
sales of transponder time to the Panda Shopping Network and the GRTV Network in
1998 that was not replaced by sales of transponder time to other third parties
upon acquiring PSN and GRTV in 1999. Home Satellite services revenue increased
$182,000, or 2.3% to $8.0 million in the six months ended September 30, 1999
from $7.8 million in the six months ended September 30, 1998. The increase is
primarily attributable to an increase of approximately $1.9 million in special
event revenue and professional wrestling events in particular. These increases
were offset by a decrease of approximately $1.4 million pay-per-view movie
revenue due primarily to a decline in the average number of active home
satellite dish subscribers per month during the six months ended September 30,
1999 as compared to the six months ended September 30, 1998. Approximately $9.8
million of the increase in revenues is attributable to merchandising revenues
generated by TVN Shopping and $6.0 of the increase in revenues is attributable
to media sales generated by GRTN. These entities had not been acquired as of
September 30, 1998.
Operating Expenses
Cost of Revenue. Cost of revenue increased $18.9 million, or 159.0%, to
$30.9 million in the six months ended September 30, 1999 from $11.9 million in
the six months ended September 30, 1998 and, as a percentage of revenue,
increased to 90.3% in the six months ended September 30, 1999 from 84.4% in the
six months ended September 30, 1998. Cost of revenue for our Digital Cable
Television service increased $5.5 million, or 133.0% to $9.6 million in the six
months ended September 30, 1999 from $4.1 million in the six months ended
September 30, 1998 and, as a percentage of revenue, decreased to 112.6% in the
six months ended September 30, 1999 from 195.3% in the six months ended
September 30, 1998. The decrease as a percentage of revenue is primarily due to
an increase in Marquee Mix revenue. Cost of revenue for our Home Satellite Dish
service increased $357,000, or 5.1% to $7.3 million in the six months ended
September 30, 1999 from $6.9 million in the six months ended September 30, 1998
and, as a percentage of revenue, increased to 91.2% in the six months ended
September 30, 1999 from 88.7% in the six months ended September 30, 1998. The
increase as a percentage of revenue is primarily due to a slight increase in
license fees paid to distributors of special events. Cost of revenue for our
transponder services decreased $597,000, or 69.2% to $266,000 in the six months
ended September 30, 1999 from $863,000 in the six months ended September 30,
1998 and, as a percentage of revenue, decreased to 15.7% in the six months
ended September 30, 1999 from 20.6% in the six months ended September 30, 1998.
The decrease as a percentage of revenue is primarily due to a reduction in the
cost incurred by the business unit for uplink service. Cost of revenue for TVN
Shopping, GRTN and NMN totaled $9.0 million, $4.7 million, and $3,000,
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respectively, in the six months ended September 30, 1999 and, as a percentage
of revenue, totaled 92.4%, 78.3% and 1.4,%, respectively, in the six months
ended September 30, 1999. We had not acquired our interests in these business
units as of September 30, 1999.
Selling. Selling expenses increased $1.7 million, or 27.8%, to $7.6 million
in the six months ended September 30, 1999 from $5.9 million in the six months
ended September 30, 1998 and, as a percentage of revenue, decreased to 22.2% in
the six months ended September 30, 1999 from 42.1% in the six months ended
September 30, 1998. Approximately $839,000 of the increase is attributable to
selling expenses incurred by TVN Shopping, GRTN and NMN. We had not acquired
our interest in NMN or the assets of TVN Shopping and GRTN as of September 30,
1998. The decrease as a percentage of revenue is primarily due to $16.0 million
in revenue generated by TVN Shopping, GRTN and NMN. For the six months ended
September 30, 1999, selling expenses for these business units averaged less
than 6% of revenue as compared to an average of 40.9% of revenue for our
Digital Cable Television Service, PPV Feeds Service and Home Satellite Dish
Service.
General and Administrative. General and administrative expenses increased
$6.3 million, or 169.3%, to $10.0 million in the six months ended September 30,
1999 from $3.7 million in the six months ended September 30, 1998 and, as a
percentage of revenue, increased to 29.2% in the six months ended September 30,
1999 from 26.3% in the six months ended September 30, 1998. Approximately 68.2%
of the increase, or $4.3 million, is attributable to general and administrative
expenses incurred by TVN Shopping, GRTN and NMN. General and administrative
expenses of these businesses averaged 27.2% of revenue in the six months ended
September 30, 1999. The balance of the increase as a percentage of revenue is
primarily attributable to (i) approximately $700,000 in severance benefits paid
to an executive upon his resignation, (ii) approximately $458,000 in
compensation expense recognized in connection with the cancellation of the
executive's options to purchase shares of the Company's common stock and the
cancellation of the executive's Put Right, (iii) approximately $458,000 in rent
to accommodate our expansion and (iv) approximately $221,000 in professional
fees incurred primarily as a result of our acquisition activity during the six
months ended September 30, 1999.
Depreciation and Amortization. Depreciation and amortization increased
$750,000, or 12.4%, to $6.8 million in the six months ended September 30, 1999
from $6.1 million in the six months ended September 30, 1998 and, as a
percentage of revenue, decreased to 20.0% in the six months ended September 30,
1999 from 43.0% in the six months ended September 30, 1998. The decrease as a
percentage of revenue is due to an increase in revenue in the six months ended
September 30, 1999 as compared to the six months ended September 30, 1998. The
overall increase is attributable to amortization/depreciation recorded on
assets acquired since September 30, 1998, including the assets of TVN Shopping,
NMN and GRTN.
Amortization of Intangible Assets. Amortization of intangible assets totaled
$1.2 million in the six months ended September 30, 1999 as compared to zero in
the six months ended September 30, 1998. The increase is attributable to the
amortization of acquired technology and goodwill generated upon the acquisition
of our interests in the Panda Shopping Network, New Media Network and GRTV.
Interest Expense/Interest Income. Interest expense increased $9.6 million,
or 77.1%, to $22.1 million in the six months ended September 30, 1999 from
$12.5 million in the six months ended September 30, 1998. Approximately $9.2
million of the increase reflects interest expense recognized on the senior
notes that were issued by the Company on July 29, 1998. The balance of the
increase is due to interest expense associated with obligations incurred upon
the acquisition of our interest in New Media Network and of the assets of
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GRTV. Interest income increased $1.7 million, or 93.9%, to $3.5 million in the
six months ended September 30, 1999 from $1.8 million in the six months ended
September 30, 1998. The increase reflects interest earned on the invested
proceeds of the senior notes.
Provision for Income Taxes. As a result of net losses and the Company's
inability to recognize a benefit for its deferred income tax assets, the
Company did not record a provision for income taxes in the six months ended
September 30, 1999 or the six months ended September 30, 1998.
Fiscal year ended March 31, 1999 compared with fiscal year ended March 31,
1998
Revenue. Total revenue increased $9.3 million, or 30.3%, to $39.8 million in
the fiscal year ended March 31, 1999 from $30.5 million in the fiscal year
ended March 31, 1998. The increase in total revenue was primarily attributable
to $10.3 million in revenues generated in fiscal 1999 by the Marquee Mix
Service, $3.1 million in revenues generated by Panda Shopping Network and $1.2
million generated by the sale of satellite transmission time to third parties.
The Marquee Mix Service had not launched and Panda Shopping Network had not
been acquired prior to the end of fiscal 1998. The increase was offset by a
$5.2 million decrease in pay-per-view programming revenue and programming
package revenues generated by our large satellite dish subscribers. The
decrease is primarily attributable to the decline in the average number of
active large satellite dish subscribers per month, from approximately 105,000
in fiscal 1998 to approximately 80,000 in fiscal 1999.
Operating expenses
Cost of revenue. Cost of revenue increased $11.3 million, or 55.6%, to $31.8
million in fiscal 1999 from $20.4 million in fiscal 1998 and, as a percentage
of revenue, increased to 79.8% in fiscal 1999 from 66.9% in fiscal 1998. The
increase as a percentage of revenue is primarily due to an $8.8 million
increase in studio license fees generated by our Marquee Mix Service and $2.6
million in costs incurred by Panda Shopping Network, both of which commenced in
fiscal 1999. The increase was also due to increases in the cost of uplink and
playback services totaling approximately $1 million and additional operations
payroll resulting from the launch of our digital cable programming and
services, totaling approximately $1.3 million. These increases were partially
offset by decreases resulting from non-recurring satellite programming
transmitter costs incurred in fiscal 1998 totaling approximately $902,000, and
other operating expenses aggregating approximately $1.5 million.
Selling. Selling expenses increased $7.2 million, or 102.4%, to $14.3
million in fiscal 1999 from $7.1 million in fiscal 1998 and, as a percentage of
revenue, increased to 35.9% in fiscal 1999 from 23.1% in fiscal 1998. The
increase as a percentage of revenue is primarily due to an increase in
advertising agency fees, trade advertising, on-air marketing costs, and sales
department payroll, all associated with the roll out of our digital cable
programming and services.
General and administrative. General and administrative expenses increased
$2.9 million, or 51.6%, to $8.5 million in fiscal 1999 from $5.6 million in
fiscal 1998 and, as a percentage of revenue, increased to 21.4% in fiscal 1999
from 18.4% in fiscal 1998. The increase as a percentage of revenue is primarily
due to additional payroll costs associated with the infrastructure required to
support our digital cable programming and services, costs incurred by Panda
Shopping Network and to a non-recurring period of free rent in fiscal 1998.
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Depreciation and amortization. Depreciation and amortization increased
$268,000 or 2.2%, to $12.3 million in fiscal 1999 from $12.0 million in fiscal
1998. The increase reflects depreciation expense recognized on assets acquired
in fiscal 1999.
Amortization of intangible assets. We recognized approximately $200,000 in
goodwill amortization associated with the acquisition of Panda Shopping Network
in fiscal 1999. Negative goodwill arising from the acquisition of our company
from our predecessor limited partnership was fully amortized in fiscal 1998.
Interest expense and interest income. Interest expense increased $19.0
million, or 125.5%, to $34.2 million in fiscal 1999 from $15.2 million in
fiscal 1998. The increase reflects interest expense recognized on the notes
that were issued during fiscal 1999. Interest income increased to $6.5 million
in fiscal 1999 from $223,000 in fiscal 1998. The increase reflects interest
earned on the invested proceeds from the notes.
Provision for income taxes. As a result of net losses and our inability to
recognize a benefit for our deferred income tax assets, we did not record a
provision for income taxes in fiscal 1999 or fiscal 1998.
Extraordinary gain. During fiscal 1999, $1.1 million of our obligation for
satellite transmission service was forgiven upon the early extinguishment of an
$8.1 million note payable previously due December 31, 1998. No extraordinary
items were recognized by us in fiscal 1998.
Fiscal year ended March 31, 1998 compared with fiscal year ended March 31,
1997
Revenue. Total revenues, which consist of programming and other operating
revenues, decreased $2.9 million, or 8.5%, to $30.5 million in fiscal 1998 from
$33.4 million in fiscal 1997. Programming revenues decreased $1.5 million to
$18.9 million in 1998 from $20.4 million in 1997, which was primarily
attributable to a decrease in the number of active large satellite dish
subscribers during fiscal 1998. Other operating revenues decreased $1.4 million
to $11.6 million in fiscal 1998 from $13.0 million in fiscal 1997 and was
primarily attributable to a decline of approximately $576,000 in one-time
subscription fees, a decline of approximately $593,000 in merchandising
revenue, a decline of approximately $464,000 in third party package revenue and
a decline in other operating revenue totaling approximately $493,000 offset by
an approximate $631,000 increase in the revenue generated by the sale of
satellite transmission service.
Operating expenses
Cost of revenue. Cost of revenue increased $1.6 million or 8.6%, to $20.4
million in fiscal 1998 from $18.8 million in fiscal 1997 and, as a percentage
of revenue, increased to 66.9% for fiscal 1998 from 56.4% in fiscal 1997. The
increase as a percentage of revenue is primarily attributable to an approximate
$1.8 million increase in the cost of uplink and playback services and an
increase of approximately $502,000 resulting from the amortization of prepaid
access control fees resulting from the launch of our digital cable programming
and services. These increases were partially offset by a decrease of
approximately $774,000 in satellite programming transmitter costs resulting
from the termination in fiscal 1998 of certain satellite programming
transmitter leases that were not renewed.
Selling. Selling expenses increased $1.1 million, or 17.8%, to $7.1 million
in fiscal 1998 from $6.0 million in fiscal 1997 and, as a percentage of
revenue, increased to 23.1% in fiscal 1998 from 18.0% in fiscal 1997. The
increase as a percentage of revenue is primarily
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due to an increase in advertising agency fees and sales department payroll
associated with the launch of our digital cable programming and services as
well as an increase in on-air production costs and a marketing promotion, both
targeted toward the large satellite dish subscriber base. These increases were
partially offset by a decrease in bad debt expense.
General and administrative. General and administrative expenses increased
$558,000, or 11.0%, to $5.6 million in fiscal 1998 from $5.1 million in fiscal
1997 and, as a percentage of revenue, increased to 18.4% in 1998 from 15.2% in
fiscal 1997. The increase as a percentage of revenue is primarily due to an
increase in payroll costs necessary to accommodate the staffing requirements of
our digital cable programming and services.
Depreciation and amortization. Depreciation and amortization increased $1.5
million, or 13.8%, to $12.0 million in fiscal 1998 from $10.5 million in fiscal
1997. The increase reflects a full year's depreciation of the Galaxy IX
satellite programming transmitters in fiscal 1998 compared to only nine months'
depreciation in 1997; the Galaxy IX satellite lease was capitalized in July
1996.
Amortization of intangible assets. Negative goodwill amortization decreased
$703,000, or 87.6% to $100,000 in fiscal 1998 from $803,000 in fiscal 1997. The
decrease is due to the amortization during fiscal 1998 of the remaining
negative goodwill balance over a two month period compared to a full year's
amortization of negative goodwill in fiscal 1997.
Interest expense. Interest expense increased $1.3 million, or 9.0%, to $15.2
million in fiscal 1998 from $13.9 million in fiscal 1997. The increase reflects
the recognition of twelve months interest on the Galaxy IX satellite
programming transmitter lease in fiscal 1998 compared to only nine months of
interest in fiscal 1997; the Galaxy IX satellite lease was capitalized in July
1996. The increase was also attributable to the accrual of twelve months of
interest in fiscal 1998 on additional indebtedness that was incurred
incrementally over the last six months of fiscal 1997. Interest income
increased $160,000 or 254%, to $223,000 in fiscal 1998 from $63,000 in fiscal
1997.
Provision for income taxes. As a result of operating losses and our
inability to recognize a benefit for our deferred income tax assets, we did not
record a provision for income taxes in fiscal 1998 and fiscal 1997.
Extraordinary gain. During fiscal 1997, a portion of our obligation for
consumer phone charges and transaction processing service was forgiven in
consideration for our agreement to terminate the original service contract. No
extraordinary gains were realized by us in fiscal 1998.
Liquidity and capital resources
Our growth has been funded through a combination of equity, debt and lease
financing. As of September 30, 1999, we had current assets of $91.1 million,
including $51.6 million of cash and cash equivalents and current liabilities of
$52.6 million, resulting in working capital of $38.6 million. We invest excess
funds in short-term, interest bearing investment grade securities until such
funds are needed to fund the capital expenditure and operating needs of our
business.
Since inception, we have incurred operating losses and as of September 30,
1999, have a total deficit of $167.7 million. Our cash on hand and amounts
expected to be available through financing arrangements may not provide
sufficient funds necessary for us to expand our TVN Digital Cable Television
service, Pay-Per-View Feeds service and Home Shopping
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service as currently planned and to fund our operating deficits beyond the next
12 months. There can be no assurance that we will not require additional
capital sooner than anticipated. In addition, we are unable to predict the
precise amount of future capital that we will require and we cannot be certain
that additional financing will be available to us on acceptable terms or at
all.
Cash provided by/used for operating activities
Our operating activities used $2.9 million, $28.1 million and $35.4 million
in fiscal 1997, fiscal 1998 and fiscal 1999, respectively and $31.4 million
during the six months ended September 30, 1999. Cash used for operations is
primarily due to net losses of $17.7 million, $29.9 million, $53.8 million and
$41.1 million in fiscal 1997, fiscal 1998 fiscal 1999 and during the six months
ended September 30, 1999, respectively, as well as increases in accounts
receivable, which are partially offset by non-cash expenses, such as
depreciation and amortization, and other changes in working capital items such
as accounts payable, accrued liabilities and accrued interest. We expect to
continue to generate negative cash flow from operating activities while we
accelerate the marketing and deployment of our TVN Digital Cable Television
service, Pay-Per-View Feeds Service and home shopping service. Consequently, we
do not anticipate that cash provided by operations will be sufficient to fund
such marketing and deployment and other costs of operations in the near term.
Cash provided by/used for investing activities
Cash used for investing activities was $169,000, $308,000 and $68.3 million
in fiscal 1997, fiscal 1998 and fiscal 1999, respectively. Cash used for
investing activities in fiscal 1999 consists primarily of investments in
marketable securities and the proceeds of such investments to secure the first
six interest payments on the notes. Cash provided by investing activities was
$7.2 million during the six months ended September 30, 1999 and included
approximately $12.4 million in proceeds from the maturity of securities
purchased as security for the senior notes. Our capital expenditures (including
assets acquired under capitalized leases and through the issuance of debt) were
$45.5 million, $482,000 and $2.6 million for fiscal 1997, fiscal 1998 and
fiscal 1999, respectively and $3.1 million for the six months ended September
30, 1999. We expect to incur approximately $4.5 million in capital expenditures
in fiscal 2000 to acquire equipment necessary to develop and deploy video on
demand service, to build out production and general office facilities and to
acquire additional office equipment to accommodate increases in personnel. We
expect that the remaining proceeds from the notes will provide the source of
funds for these expenditures.
Cash provided by/used for financing activities
Cash provided by financing activities was $3.5 million, $44.4 million and
$171.3 million in fiscal 1997, fiscal 1998 and fiscal 1999, respectively. Cash
used for financing activities was $8.6 million during the six months ended
September 30, 1999. Cash provided by financing activities includes the proceeds
of equity financings and debt arrangements that we entered into. During fiscal
1997, we received $8.0 million in proceeds from debt financings from a vendor
and certain of our stockholders. During fiscal 1998, we received $45.0 million
in proceeds from an equity financing made by Princes Gate Investors II, an
affiliate of Morgan Stanley, an investment bank, and $4.5 million in proceeds
from debt financings from a vendor and certain of our stockholders. During
fiscal 1999, we received $193.3 million in net proceeds from the sale of the
notes and warrants. We are required to make payments on notes payable and
capitalized leases of $26.8 million, $21.1 million, and $22.0 million during
fiscal 2000, fiscal 2001 and fiscal 2002, respectively, and $89.9 million
thereafter.
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In October 1999, we repurchased $33.9 million of the Senior Notes and 33,850
of the outstanding warrants to purchase 10.777 shares of our common stock for
aggregate consideration of approximately $12.8 million. The repurchase
generated the release of $8.9 million of restricted investments that were held
in custody to fund the next four scheduled interest payments on the repurchased
notes.
Quantitative and qualitative disclosures about market risk
We do not currently hold any derivative instruments and do not engage in
hedging activities. Also, we currently do not hold any variable interest rate
debt or lines of credit, and currently do not enter into any transactions
denominated in a foreign currency. Thus, our exposure to interest rate and
foreign exchange fluctuations is minimal.
Recent accounting pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position No. 98-1, "Software for Internal Use," which provides
guidance on accounting for the cost of computer software developed or obtained
for internal use. The adoption of SOP 98-1 during the first quarter of fiscal
2000 did not have a material impact on our financial position, results of
operations or cash flows.
In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the Costs of
Start-Up Activities." SOP No. 98-5 requires that all start-up costs related to
new operations must be expensed as incurred. In addition, start-up costs that
were capitalized in the past must be written off when SOP No. 98-5 is adopted.
The adoption of SOP No. 98-5 during the first quarter of fiscal 2000 did not
have a material impact on our financial position, results of operations or cash
flows.
In June 1998, The Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." The statement
requires the recognition of all derivatives as either assets or liabilities in
the balance sheet and the measurement of those instruments at fair value. The
accounting for changes in the fair value of a derivative depends on the planned
use of the derivative and the resulting designation. Because we do not
currently hold any derivative instruments or engage in hedging activities, the
impact of the adoption of SFAS No. 133 is not currently expected to have a
material impact on our business, results of operations or financial condition.
We will be required to implement SFAS No. 133 in the first quarter of fiscal
2001.
Year 2000 compliance
Many computer systems and software and electronic products are coded to
accept only two-digit entries in the date code field. These code fields will
need to accept four digit entries to distinguish 21st century dates from 20th
century dates. As a result, computer systems and software as well as other
property and equipment not directly associated with information and billing
systems, such as phones, and other office equipment used by many companies,
including us, may need to be upgraded, repaired or replaced to comply with such
"year 2000" requirements.
We have conducted an internal review of our mission critical internal
corporate headquarters computer systems, software and products, including those
used in finance and operations. We have contacted vendors of our mission
critical internal corporate headquarters computer systems and software to
determine potential exposure to year 2000 issues and have obtained letters from
most of such vendors assuring that they will be year 2000 compliant by
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the year 2000. Although we have determined that most of our principal internal
corporate headquarters computer systems and software are year 2000 compliant,
we have also determined that certain other such internal systems are not year
2000 compliant.
Our employees and consultants are in the final stage of our year 2000
review. They have implemented solutions to systems that were previously
determined not to be year 2000 compliant and have identified solutions to
ensure compliance of other such systems by the year 2000. We expect to
implement such solutions by December 17, 1999. To date, we have not incurred
significant incremental costs to remediate our year 2000 issues as the majority
our efforts have involved an allocation of internal resources, primarily
existing personnel and the upgrade of systems and equipment made in the
ordinary course of business. We presently estimate that the total additional
cost for external resources will be immaterial. We derived these estimates by
utilizing numerous assumptions, including the assumption that we have already
identified our most significant year 2000 issues and that the year 2000
compliance plans of our third-party suppliers and cable operator affiliates
which currently deploy our TVN Digital Cable Television service, Pay-Per-View
Feeds Service and home shopping services will be completed in a timely manner
without cost to us. However, these assumptions may not be accurate, and actual
results could differ materially from those anticipated.
We have been informed by key suppliers and cable operator affiliates that
currently deploy our TVN Digital Cable Television service, Pay-Per-View Feeds
Service, or home shopping service or media buying service that such suppliers
and cable operator affiliates are currently, or will be year 2000 compliant by
the year 2000. Our satellite transmission services provider, Four Media
Company, has invested in a state of the art facility that is year 2000
compliant. Our satellite provider, PanAmSat Corporation, has provided us with
its year 2000 compliance representation. Our provider of digital processing
technology has also provided us with multiple statements with respect to year
2000 compliance. We have commenced independent testing to verify the progress
and validate the representations of our key suppliers. We have been informed
that the companies that perform billing services for certain of our cable
operator affiliates may not be fully year 2000 compliant. We understand that
these companies have devoted resources to becoming year 2000 compliant.
Any failure of these third parties to timely achieve year 2000 compliance
could have a material adverse effect on our operating results, financial
condition and our ability to achieve sufficient cash flow to service our
indebtedness, including the new notes. We could be affected through disruptions
in the operation of the enterprises with which we interact or from general
widespread problems or an economic crisis resulting from noncompliant year 2000
systems. Despite our efforts to address the year 2000 effect on our internal
systems and business operations, such effect could result in a material
disruption of our business or have a material adverse effect on our business,
operating results and financial condition and our ability to achieve sufficient
cash flow to service our indebtedness, including the new notes.
We have drafted a mission critical contingency plan. This plan outlines the
methodologies we will use to remediate year 2000 difficulties within core
operations and with critical dependencies including, hot swappable
replacements, alternative vendor solutions, remediated systems and additional
manpower to extend monitoring capacity of broadcast and operations. However,
there can be no assurance that such methodologies will remediate year 2000
difficulties effectively or in a timely manner or that alternative vendors will
provide services on terms acceptable to us.
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Business
TVN Entertainment Corporation
Our company provides a wide variety of new television programming and
services that we deliver in digital format to cable operators for their
subscribers using existing cable infrastructure. In response to increasing
consumer demand for additional entertainment programming and services, the
cable industry has begun a large scale conversion from analog transmission, an
older technology that can only deliver a limited number of channels, to digital
transmission, a newer technology that can deliver a greater number of channels.
This conversion has been facilitated by recent advances in the technology used
to compress multiple channels of television programming into a single video
transmission and to secure that transmission from unauthorized use. In late
1997, we launched TVN Digital Cable Television. This service combines a digital
delivery system with programming content and support services to enable cable
operators to expand the number of channels they can offer and generate new
sources of revenue without the need to rewire or significantly upgrade their
existing analog cable systems.
Our TVN Digital Cable Television service enables cable operators to
substantially enhance the variety and quality of programming choices through a
more efficient use of their cable transmission capacity by utilizing recent
industry technology that compresses eight or more digital channels onto one
analog channel. We have long-standing relationships with key content providers,
including all the major and leading independent film studios and sports,
special event and adult content distributors, that we have developed in
connection with our pay-per-view movie and event service for owners of large
home satellite dishes, which was our primary business from 1991 until the
launch of TVN Digital Cable Television. These relationships allow us to provide
a broad range of popular programming.
We believe our TVN Digital Cable Television service is particularly
attractive to smaller and medium size cable systems, including smaller systems
owned by large cable operators, which may lack the scale, funding, technical or
administrative resources to economically implement a full offering of digital
programming on their own. These cable systems typically have fewer than 50,000
subscribers each and currently serve approximately one-third of the estimated
65 million cable television subscribers. For larger cable systems that do not
require all of the features of our TVN Digital Cable Television service, we can
deliver our digital satellite feeds of pay-per-view movies and events, known as
our Pay-Per-View Feeds Service. We transmit programming from two well-located
PanAmSat satellites via 15 electronic transmitters, known as transponders, that
receive and transmit electronic video and audio signals. We lease fourteen of
these transponders on a long-term basis from PanAmSat.
Digital signal technology adds several important advantages to analog signal
cable systems, including:
. increased channel capacity;
. high quality video and audio signals; and
. the ability to remotely authorize a subscriber's compatible television
set-top cable box to receive pay-per-view programming each time the
subscriber orders a movie or event. This remote authorization is known as
addressability.
Demand for the breadth and quality of digital programming has fueled the
dramatic growth of the direct broadcast satellite industry, where television
signals are transmitted in digital format directly to a consumer's small 18-
inch satellite dish in a transmission format
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known as Ku-band. Direct broadcast satellite has been the principal vehicle
available to consumers who want access to these digital services. We believe
that given a choice, most home television viewers will choose to receive pay-
per-view and other enhanced digital services via cable rather than direct
broadcast satellite because digital cable offers several key advantages
including:
. television programming transmitted in digital format without the need for
consumers to incur the up-front costs of purchasing and installing
satellite dish equipment;
. a high-capacity distribution path for a variety of future interactive
applications, such as high-speed Internet connectivity; and
. local broadcast television stations currently unavailable through direct
broadcast small dish satellite services.
Technology advances in the cable industry have made digital transmission
possible over cable's existing analog infrastructure without requiring time
consuming and expensive upgrades to the cable equipment. By 1997, General
Instrument, a leading cable equipment manufacturer, working with CableLabs, a
research and development entity funded by a consortium of cable operators,
including industry leader TCI, had successfully developed new technology, known
as DCII Technology, to compress multiple channels of television programming
into a single video transmission and to secure that transmission from
unauthorized use. They also developed related equipment that enables cable
operators to expand the number of channels they can offer through their
existing transmission capacity with digital programming. TCI has been at the
forefront in implementing DCII Technology and has installed digital equipment
in many of their owned and affiliated systems. Our TVN Digital Cable Television
allows smaller and medium size cable systems to implement this digital cable
service.
Our company was founded in 1987 by current Chairman and Chief Executive
Officer, Stuart Z. Levin, to provide satellite delivered pay-per-view movies
and events to owners of large home satellite dishes that are six to ten feet in
diameter and receive television broadcast signals in a transmission format
known as C-Band. More than 260,000 such owners purchased programming from us
during the fiscal year ended March 31, 1999. In fiscal 1998, we received a $45
million equity investment from Princes Gate Investors II, L.P. and certain of
its affiliates. Princes Gate Investors II, L.P. is an affiliate of Morgan
Stanley, an investment bank.
The TVN digital solution
Our digital solution offers two types of service: TVN Digital Cable
Television targeted at smaller and medium size cable systems, and Pay-Per-View
Feeds Service targeted at larger cable systems.
TVN Digital Cable Television
TVN Digital Cable Television can expand the number of video channels
delivered by a typical smaller cable system from 60 analog video channels to
over 100 combined digital and analog channels for digital subscribers.
We believe our solution provides an attractive offering for cable
subscribers. The incremental price to the subscriber for TVN Digital Cable
Television is determined by the cable operator and is generally $10.99 per
month. Pay-per-view movies typically cost $3.99
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each and pay-per-view events are priced individually. A typical TVN Digital
Cable Television programming package includes:
. 32 digital channels of pay-per-view movies and events;
. a channel showing previews of currently offered films and coming
attractions;
. adult programming;
. 40 CD quality digital music channels from DMX, a leading provider of
digital music services to cable operators for distribution to their
subscribers;
. the TV Guide interactive on-screen program guide which displays
comprehensive program listings, including each system's analog channels
and local broadcasts, and provides parental control;
. access to new digital basic and additional premium channels selected by
the cable operator; and
. continued access to the system's analog cable and local channels.
Support services provided for the cable operator include:
. automated ordering and authorization of pay-per-view movies and events;
. customer service and billing;
. engineering and marketing support;
. studio licensing and fee administration; and
. the installation of equipment at the cable operator's plant that is
capable of receiving television programming in digital format.
The typical monthly fee charged by the cable operator to subscribers for the
digital programming package generally more than covers the monthly TVN Digital
Cable Television fee paid to us by the cable operator and the amortized cost of
the digital television set-top cable box. Revenues generated from our pay-per-
view movies and events are shared by us and the cable operator based on a
percentage of the operator's pay-per-view revenue. We believe that cable
operators can achieve a meaningful increase in revenue and earn an attractive
return on investment by providing TVN Digital Cable Television.
Pay-Per-View Feeds Service
Our Pay-Per-View Feeds Service transmits to cable systems the same digital
pay-per-view movies and events included in our TVN Digital Cable Television
service. Pay-Per-View Feeds Service allows cable systems to receive content
from a single source of distribution and avoid the significant capital
investment otherwise required for automated playback, storage, scheduling and
delivery of pay-per-view programming. Cable operators receiving Pay-Per-View
Feeds Service also benefit from our expertise in selecting and scheduling pay-
per-view programming to maximize the number of movies and events purchased by
subscribers, based on our experience in delivering pay-per-view movies and
events to the large home satellite dish market since 1991. We receive from the
cable operator a percentage of the revenue generated by cable subscribers'
purchases of TVN pay-per-view movies and events. Our Pay-Per-View Feeds Service
is a highly attractive opportunity because it generates recurring revenue and
cash flow at little incremental cost.
In addition, we also transmit three digital channels of pay-per-view hit
movies and events that cable operators can receive in digital format at their
facilities and then convert to
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analog format for delivery to their subscribers who have equipment that enables
them to purchase and view encrypted programming. This service is known as our
Marquee Mix Service and provides a replacement for the pay-per-view programming
formerly offered by Request Television, which ceased operations on June 30,
1998. This service also preserves analog channels for pay-per-view that can be
used in the future by cable operators to implement TVN Digital Cable Television
or Pay-Per-View Feeds Service. For Marquee Mix Service, we receive from the
cable operator a percentage of the revenue generated by cable subscribers'
purchases of TVN pay-per-view movies and events.
Recent cable operator agreements
Following the completion of comprehensive operational testing and marketing
trials in late 1997, we formally launched our television programming and
services delivered in digital format in late 1998. As of November 15, 1999, we
have entered into agreements with or have received commitments from 62 cable
operators for TVN Digital Cable Television, 12 cable operators for Pay-Per-View
Feeds Service and 19 cable operators for Marquee Mix Service, as summarized
below. As of the same date, 23,000 cable customers were subscribers to our TVN
Digital Cable Television service. In addition, we are in active negotiations
with 36 cable operators whose systems serve over 936,000 subscribers for TVN
Digital Cable Television.
For the year ended March 31, 1999, approximately 4% of the cable homes
passed by our PPV Feeds Service had access to our programming feeds and
purchased such programming at the rate of approximately 0.25 buys per
subscriber per month. All of the cable homes passed by our Marquee Mix Service
had access to our programming feeds and purchased such programming at the rate
of approximately 0.11 buys per subscriber per month.
TVN Digital Cable Television
Currently, our TVN Digital Cable Television service is offered by:
. Eleven cable operators with systems serving over 20,000 subscribers, for
an aggregate of 558,372 subscribers with access to TVN Digital Cable
Television, including 100,000 in various Millennium Digital Cable
Systems, 93,500 in various systems belonging to Walter E. Hussman & Co,
or WEHCO, and 62,000 in various Moffat International systems;
. Ten cable operators with systems serving 10,000 to 20,000 subscribers for
an aggregate of 136,000 subscribers with access to TVN Digital Cable
Television; and
. Forty-one cable operators with systems serving fewer than 10,000
subscribers, for an aggregate of 96,000 subscribers with access to TVN
Digital Cable Television.
Pay-Per-View Feeds Service
Currently, our Pay-Per-View Feeds Service is offered by:
. Time Warner Cable in Honolulu, HI serving 274,000 subscribers;
. Jones Cable, a cable operator serving 90,000 subscribers;
. Susquehanna Cable, a cable operator serving 145,000 subscribers; and
. Five cable operators with systems serving 20,000 subscribers or less, for
an aggregate of 24,528 subscribers with access to Pay-Per-View Feeds
Service.
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Marquee Mix Service
Currently, our Marquee Mix Service is offered by:
. Three cable operators with systems serving over 20,000 subscribers, for
an aggregate of 2.3 million subscribers with access to Marquee Mix
Service, including 2.2 million Cablevision System subscribers;
. One cable operator serving 20,000 subscribers, and
. Fifteen cable operators with systems serving fewer than 10,000
subscribers, for an aggregate of 42,000 subscribers with access to
Marquee Mix Service.
We have recently created a customized digital programming package for
certain Comcast cable systems that carry Viewer's Choice pay-per-view movie
service. Our customized package includes pay-per-view movies and events
differentiated from those offered by Viewer's Choice, as well as the Spice and
Playboy Channels. Comcast will offer this customized digital programming
package in twenty of its systems that serve an aggregate of 2.4 million
subscribers.
Our digital cable strategy
Our strategy is to be the leading independent provider of digital pay-per-
view programming and services to cable operators. Our digital cable strategy
includes the following key elements:
Expand our cable operator base to maximize potential digital subscribers. To
capitalize on being first to market with an economically viable comprehensive
digital cable solution, our strategy is to enter into long-term agreements with
cable operators to maximize the number of subscribers who have access to our
digital cable programming and services. Our digital solution offers cable
operators additional revenue sources at modest incremental cost and
substantially enhanced programming and services with which to attract and
retain subscribers who might otherwise seek alternative sources of digital
programming.
Drive subscriber penetration by providing superior and convenient
service. Our strategy is to maximize subscriber penetration by delivering
conveniently accessed, superior digital services such as pay-per-view hit
movies and events, and CD quality digital music. By using our digital pay-per-
view service, cable subscribers can avoid trips to a video rental store, the
risk that popular movie rentals are unavailable, late return fees and tape
rewind charges. Our digital pay-per-view service also provides customers with
flexibility in selecting from a wide range of popular movies and start times
and other entertainment offerings versus traditional analog pay-per-view
services. Additional advantages for consumers include an on-screen programming
and navigational guide with parental control, all accessed by a universal
remote control. The high quality digital pictures and CD quality digital sound
provide a significantly enhanced viewing experience.
Maximize purchases of our pay-per-view programming. Based on our experience
in providing pay-per-view programming to the large home satellite dish market
since 1991, we select movie titles and events and schedule them to maximize
purchases of pay-per-view programming. We have learned that the convenience of
optimally scheduled start times and automated telephone number identification
ordering, known as ANI, or impulse pay-per-view ordering, known as IPPV, using
the television set-top cable box, can significantly increase subscribers'
purchases of pay-per-view programming. Our pay-per-view schedule offers 32
channels of movies with hit titles conveniently starting approximately every 30
minutes. The combination of this scheduling with automated ordering allows pay-
per-view to be an
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impulse buy which increases the number of purchases. Industry data indicates
that near-video-on-demand programming is capturing a growing share of the home
video rental market. We believe that, on average, cable operators offering our
digital programming have the potential to generate pay-per-view purchase rates
comparable to those of DirecTV's service, which approximate two purchases per
subscriber per month. Our newly developed video-on-demand service, which will
begin playing a selected movie or event immediately when the subscriber orders
it, is expected to increase the rate of pay-per-view purchases. We are
currently conducting an initial field trial of our video-on-demand service in
one of our smaller operator's systems.
Capitalize on long-standing relationships with content providers. We have
long-standing relationships with all the major and leading independent film
studios and key sports, special event and adult programming distributors. We
believe that our proven national distribution channel makes us a very
attractive customer for content providers. We believe that the breadth and
quality of our pay-per-view programming are valuable to cable operators because
together they can lead to growth in penetration and purchase rates.
Expand our Pay-Per-View Feeds Service. We are one of only two companies
offering satellite delivered digital feeds of pay-per-view hit movies and
events to cable operators. We market our Pay-Per-View Feeds Service to larger
cable systems that do not require all of our digital services but can benefit
from our single source distribution of pay-per-view content. Our Pay-Per-View
Feeds Service allows cable systems to avoid the significant capital investment
required for processing, storage, scheduling and delivery of digital pay-per-
view programming, and generates a highly attractive and recurring cash flow
stream at little incremental cost to us.
Leverage our core competencies into new internet and interactive
services. Our strategy is to remain at the forefront of implementing the newest
technologies and systems that enable us to deliver digital programming and
services to cable systems. Our digital delivery system can also be enhanced to
provide additional programming and interactive services via the Internet as
they become technologically feasible and economically attractive. These
services may include:
. high speed Internet connectivity;
. Internet telephony and Internet service provider services;
. in-home shopping, banking and other consumer oriented and informational
services; and
. high definition television.
For example, we have entered into a memorandum of understanding with
Citicorp to jointly develop an interface for the delivery of home banking,
electronic commerce and transactional services over our digital cable platform
to the television set-top cable box.
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Products, markets and customers
TVN Digital Cable Television
Our TVN Digital Cable Television service combines a digital delivery system
with programming content and support services to enable cable operators to
offer a new programming package to their subscribers. TVN Digital Cable
Television provides cable operators with:
Content. Our typical TVN Digital Cable Television programming package
features a large selection of content including multiple channels of audio and
video programming as well as an interactive on-screen program guide.
Automated ordering and authorization. We provide automated ordering and
authorization required to process large volumes of pay-per-view orders. Such
authorization, known as conditional access, is the process by which
subscribers' television set-top cable boxes are authorized by our operations
center to receive our encrypted pay-per-view movie or event programming for at
least one full showing. This authorization expires upon program completion.
Cable operators desiring to implement their own television set-top cable box
authorization system face substantial capital and operating expense. The
equipment necessary for a cable operator to provide such services typically
costs $150,000 and requires ongoing support and maintenance.
Customer service. Our customer service facilities allow cable operators to
meet the customer service demands that accompany the increased capabilities of
TVN Digital Cable Television. Subscriber orders for pay-per-view movies and
events are received electronically through either automatic telephone number
identification or the television set-top cable box. Cable subscriber inquiries
are handled by call centers that we operate. Large home satellite dish
subscriber inquiries are handled for us by TicketMaster.
Billing, reporting and subscriber management. The billing, reporting and
subscriber management system we use was developed by CSG Systems and has been
enhanced in conjunction with us specifically to support TVN Digital Cable
Television. We currently bill for most pay-per-view orders via subscribers'
authorized credit cards which reduces billing costs and substantially reduces
bad debt. For cable operators that wish to provide pay-per-view service for
subscribers who do not have or do not wish to use a credit card, we will bill
the subscriber for pay-per-view orders via a separate pay-per-view bill. We can
also deliver pay-per-view billing data to each cable operator that wishes to
include this information on the regular monthly bill sent to subscribers. The
billing software provides detailed management and marketing reports which we
believe are valuable to our cable operator customers.
Engineering support. An important aspect of our TVN Digital Cable Television
service is our commitment to facilitate its rapid implementation. We are
generally able to have our TVN Digital Cable Television service operational in
a cable system within 90 days. We arrange for the delivery, testing and
installation of preconfigured digital equipment at the cable operator's
facility. Either we or our subcontractors' personnel complete and test the
installation and remain on site until the digital equipment is fully
operational.
Marketing. We assist cable operators in creating programming packages and
related advertising and marketing campaigns in order to maximize penetration,
pay-per-view purchase rates and revenues from TVN Digital Cable Television.
Working with the Friedland, Jacobs advertising agency, we have developed a
complete "Go Digital" campaign to provide cable operator customers with a
complete package of marketing
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materials designed to increase the number of subscribers. In addition, we
contribute to cooperative advertising and marketing of TVN Digital Cable
Television.
Studio licensing and fee administration. We have long-standing relationships
with all the major and leading independent film studios and key sports, special
events and adult programming distributors. We believe that these relationships
are essential to obtaining the popular programming that drives subscriber
demand for our digital pay-per-view movies and events. In addition, we provide
a single source of digital programming for cable operators. We believe that the
breadth and quality of our pay-per-view programming are valuable to cable
operators because together they can lead to growth in penetration and pay-per-
view purchase rates.
Arrangement of financing. Implementing our TVN Digital Cable Television
requires cable operators to acquire digital equipment for their facilities and
digital television set-top cable boxes for use by their subscribers. To
facilitate the acquisition of this equipment, we have an arrangement with a
financing entity that offers lease financing to our cable operator customers.
Financial benefits of TVN Digital Cable Television to cable operators
We require the cable operator to agree to a multi-year commitment to offer
our TVN Digital Cable Television service. During the term of the agreement, the
cable operator pays us a monthly fee per digital subscriber based on achieving
certain subscriber penetration rates and/or for the cable operator agreeing to
carry a greater number of channels of our pay-per-view offerings. For cable
operators that do not require the full range of our digital services, we offer
these services on an "a la carte" basis, the fees for which are determined on
an individual basis according to the services provided.
To receive TVN Digital Cable Television, a cable subscriber must have a DCII
compatible television set-top cable box which costs the cable operator
approximately $300. The monthly charge paid by subscribers for the digital
programming package is generally more than sufficient to cover the cable
operator's amortized cost of DCII television set-top cable boxes over the five
year term of our standard cable operator agreement. The new digital equipment
required at a cable operator's facility to receive TVN Digital Cable Television
costs the cable operator approximately $50,000. For systems serving in excess
of 5,000 subscribers, we generally agree for so long as the agreement remains
in effect to make monthly payments to the operator which approximate the cable
operator's monthly financing payments on 80% of the cost of such digital
equipment. We assume no obligation, however, to third-party financing entities.
Strategic benefits of TVN Digital Cable Television to cable operators
Rapid upgrade. TVN Digital Cable Television enables cable operators to
rapidly upgrade their systems to offer pay-per-view movies and events and other
digital programming. TVN Digital Cable Television provides a broad range of
digital services that can be managed, delivered, billed and analyzed by us for
the cable operator and content providers. We believe that our digital delivery
system will also serve as a low cost platform for a wide range of new digital
and interactive services for the consumer, such as in-home shopping, banking
and bill paying.
Neutrality. We are the only independent provider of digital cable television
programming and services. We believe that many cable operators prefer to work
with an independent service provider.
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Flexibility. TVN Digital Cable Television provides a customized and scalable
solution. For instance, an operator of multiple cable systems can implement TVN
Digital Cable Television in a discrete number of its systems as well as
selecting from a range of support levels depending on the needs and sizes of
its different systems. Our TVN Digital Cable Television service offers the most
comprehensive support and services. Cable operators that desire to manage
specific functions for themselves can select from our services on an a la carte
basis. For cable operators seeking only a single source of satellite
transmitted digital pay-per-view programming, we offer our Pay-Per-View Feeds
Service.
Compatibility. Our digital delivery system works seamlessly with programmers
and television set-top cable boxes using industry standard DCII transmission
technology. Based on tests performed by CableLabs, our digital transmission
system will work in more than 95% of the existing cable systems without
significant upgrade to the operator's equipment, apart from installing the
required digital equipment at the operator's facility and deploying digital
television set-top cable boxes to subscribers.
Benefits of TVN Digital Cable Television to cable subscribers
TVN Digital Cable Television provides "near-video-on-demand" capability, the
primary attribute of which is that pay-per-view movies have multiple start
times, at brief intervals. Subscribers can order TVN pay-per-view films either
by telephone using our automated number identification system or through the
DCII television set-top cable box using the built in impulse pay-per-view
purchase system. Movie start times are a function of how many channels are
dedicated to telecasting a particular movie and the running time of that movie.
For instance, if a two-hour movie is telecast in digital format on four
channels, it can start every 30 minutes on one of those channels. Currently,
our analog signal pay-per-view movies start approximately every two hours. The
bigger the anticipated demand for a particular pay-per-view film, the more
digital channels that will be devoted to that film, especially during the
opening week. The convenience and attractiveness of near-video-on-demand movies
for digital programming subscribers is demonstrated in part by industry
experience indicating a typical 5 times improvement in the rate of pay-per-view
purchases versus traditional analog pay-per-view. One of the near-video-on-
demand features expected for a future generation DCII television set-top cable
box is a "virtual pause" function, which allows the customer to push a button
for a brief delay in the movie, which can then be restarted at a point just
prior to the scene at which the pause occurred. Another anticipated feature is
one button VCR recording by which the television set-top cable box will
automatically turn on a subscriber's VCR and record programming previously
selected by the subscriber using the on-screen navigational guide. Finally, our
TVN Digital Cable Television service protects subscribers against technological
obsolescence in that digital television set-top cable boxes remain the property
of the cable operator and can be redeployed within the cable system as new
technologies become available, rather than requiring the consumer to purchase
and then replace expensive in-home equipment such as direct broadcast, small
dish satellite systems.
Pay-Per-View Feeds Service
In systems offering either our Pay-Per-View Feeds Service or Marquee Mix
Service, the cable operator is responsible for distributing, authorizing and
billing its subscribers for the pay-per-view orders. On a monthly basis, the
cable operator provides us with a report of gross pay-per-view revenue and
remits the portion payable to us. The Pay-Per-View Feeds Service also helps us
to establish relationships with the largest cable operators who own multiple
systems and to demonstrate the earning potential of our digital pay-per-view
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content. Such relationships also provide an opportunity for us to offer our TVN
Digital Cable Television service to the smaller systems owned by these large
operators.
Home shopping services
In January 1999, we acquired substantially all of the assets of the Panda
Shopping Network as part of our strategy to use our digital infrastructure and
delivery system to offer home shopping programming. The Panda Shopping Network
is a live, on-air home televised shopping channel specializing in the offer and
sale of merchandise such as jewelry, watches and precious metal collectible
coins. The Panda Shopping Network is currently distributed through cable
operators, home satellite dish services, broadcast networks and low-power
television to approximately 25,000,000 homes during certain non-primetime
viewing hours.
In July 1999, we acquired substantially all of the assets of Guthy-Renker
Television Network to reach an expanded audience for our home shopping
programming. Guthy-Renker Television Network is in the business of acquiring
media time from cable operators and programmers, service providers and
television broadcasters, and reselling such time in packages to direct response
infomerical and product sales companies.
Video-on-demand service
Video-on-demand offers cable subscribers the ability to order, start, pause,
rewind and fast forward movies on demand. In conjunction with several
manufacturers of specialized digital computer servers, we have developed a
video-on-demand service for cable operators who install a digital server at
their facility to store and deliver our pay-per-view content. Along with our
content, we will provide management services in conjunction with the digital
servers utilized by the cable operator. We are currently conducting an initial
field trial of our video-on-demand service in one of our smaller cable
affiliate systems. We expect to commercially offer our video-on-demand service
in the first calendar quarter of 2000.
Future products and services
Electronic commerce services via our digital cable platform and the
Internet. We believe that we can leverage our home shopping and other consumer
services through their existing means of distribution and across our digital
cable platform to drive viewer traffic to a multi-featured Internet site that
we are co-developing, which will offer a wide range of consumer oriented
electronic commerce services, including home banking and finance, home
shopping, downloading of digital music and healthcare information and
consulting.
This co-development effort is an extension of our existing relationship with
e-Citi, a unit of Citigroup, whereby we previously agreed to jointly develop an
interface for the delivery of home banking, electronic commerce and
transactional services over our digital cable platform to television set-top
cable boxes equipped with cable modems. A memorandum of understanding:
. defines the funding, services and technologies to be contributed to this
effort by each party;
. provides for a one-time payment of $250,000 to us by Citicorp, with
neither party obligated to contribute additional funds to the effort;
. sets forth the various transaction fees to be paid to each party,
beginning with the launch of the interface; and
. calls for the parties to enter into a formal agreement specifying each
parties' rights, duties and obligations with respect to the co-
development of this interface.
To date, no such agreement has been executed.
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We have also formed a new venture, Chromazone LLC, in which we own a 50%
interest, to develop and license e-commerce engine software and related
interactive applications. Under the terms of Chromazone's limited liability
operating agreement, we made an initial capital contribution of $50,000, we
have contributed an additional $1,500,000 and we are required to make further
capital contributions only upon the unanimous vote of all members. We are
allocated profits and losses according to our ownership percentage and have the
right, together with the other 50% owner, to appoint a majority of the board of
directors. We anticipate that Chromazone will perform consulting and software
development services to create one or more Internet portal sites and integrate
them to effect consumer transactions via the Internet and our digital cable
platform. We are currently testing several of these sites and expect them to
become publicly available over the next 12 months. We expect the first such
site to be available on the Internet in the first calendar quarter of 2000.
We have acquired a majority interest in New Media Network, Inc., which is a
new company formed to distribute music which is downloaded from the Internet in
digital format and to offer such music and other entertainment products at
retail locations and via the Internet. We purchased shares of Series B
Preferred Stock of New Media Network representing approximately 60% of its
outstanding capital stock, for $6.0 million in cash and services, including
satellite transmission services. Along with our shares of stock, we have the
right to appoint a majority of New Media Network's board of directors and
limited rights to register our shares of its stock with the Securities and
Exchange Commission. We expect New Media Network to open its first retail
location and to commence sales via the Internet during calendar year 2000.
Premium interactive digital services. We believe that our digital delivery
system can be enhanced to provide additional digital programming and
interactive services as they become technologically feasible and economically
attractive. These services may include high speed Internet connectivity,
Internet-based telephony services, other interactive applications and high
definition television. Initial commercial releases of these services may be
introduced in the fourth calendar quarter of 2000.
Cable channel satellite transmission services. We may convert some of our
satellite transmitted programming from analog to digital transmission over an
extended transition period. We believe there may be opportunities to use the
infrastructure created for our digital cable service to provide a full range of
production, storage, operational, programming and transmission services for new
and planned digital cable channels, similar to the services we provide for
Guthy-Renker. New programming channels have experienced difficulty obtaining
carriage on cable systems in the analog environment, due to transmission
capacity constraints. Using digital compression, we now transmit eight channels
from one of our satellite programming transmitters that can carry only one
channel in analog format, based on the compression ratio we use to deliver
clear pictures. We anticipate that we will charge a monthly fee for our digital
satellite transmission services, as we do now, and may in certain circumstances
negotiate a revenue sharing relationship or obtain an ownership interest in the
channel. We may commercially introduce initial releases of one or more of these
services over the next twelve months.
High definition television. To take advantage of the opportunities for
satellite delivered digital high definition television programming, we plan to
create a digital high definition television infrastructure using high
definition television encoding and video server equipment to serve the market
as it develops.
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Programming
Pay-Per-View movies
We license our pay-per-view movies from all the major and leading
independent film studios. Since 1991, we have selected our programming on a
movie by movie basis. To maximize the viewing audience for their films, the
studios have generally not granted exclusive pay-per-view rights to movies in
the U.S. market. Major Hollywood movies are usually released simultaneously to
all participants in the pay-per-view market, typically 45 to 55 days after they
are released to the home video market, and approximately six months before they
are released to premium pay subscription movie programmers such as HBO and
SHOWTIME.
The typical movie license fee arrangement entitles the film studio to
receive 50% of pay-per-view revenues from major films, and 40% to 50% from less
popular films, without minimum guarantees. Some studios have experimented with
earlier pay-per-view release windows for certain movies in return for minimum
subscriber purchases guarantees from pay-per-view programmers. In general,
these guarantees have been well below the subscriber purchase rates that we
have typically experienced in the large dish home satellite market, enabling us
to take advantage of the early window opportunity with minimal risk. If movies
were released to the pay-per-view market concurrently with or closer to home
video market release, we believe that pay-per-view subscriber purchase rates
would increase substantially. Although movie studios receive a much higher
percentage of pay-per-view revenues than from home video rental revenues, we
anticipate that so long as the home video rental market remains a substantially
larger source of revenue to the movie studios than the pay-per-view market,
movies will continue to be released first to the home video rental market and
shortly thereafter to the pay-per-view market.
We select our movie programming based on a variety of factors, the most
important of which is box office gross revenue, followed by the availability of
other film releases in the pay-per-view window, potential appeal to our
subscriber base and the desired mix of content airing on our channels at any
given time.
Sports and special events
We obtain nonexclusive rights to telecast special pay-per-view events such
as championship boxing and wrestling matches, live concerts, martial arts
matches, rodeos and other sports and entertainment events. We enjoy strong
relationships with all the major boxing and wrestling promoters, and promoters
of other sports events, major live concerts and specialty programming.
ESPN Game Plan
In 1996 we entered into a multi-year agreement with ESPN to telecast
nationally via satellite a package of regular season college football games
under the name ESPN GamePlan. ESPN GamePlan offers more than 100 major college
football games each season, with up to 10 telecast each Saturday from all the
major college athletic conferences. On Saturday afternoons during the college
football season, we telecast college football games selected by ESPN, for a
season subscription or as ordered on a pay-per-day basis.
We retransmit ESPN GamePlan and also perform required transmission and
authorization services for a per season fee paid to us by ESPN. Beginning with
the fall 1999 football season, we will transmit and distribute a digital
version of ESPN GamePlan to the cable market and large home satellite dish
owners who have purchased digital reception
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equipment, for which we will receive satellite programming transmission service
fees from ESPN and a share of subscription and pay-per-day revenues.
Playboy and Spice channels
The Spice Channel was formerly called AdulTVision, which we distributed to
our large dish home satellite subscribers. Spice features non-rated adult movie
content created by the Playboy Entertainment Group. Spice is available in
analog signal format for $6.99 per day, or on a monthly or quarterly
subscription basis. We are the exclusive distributor of the Spice Channel in
the large dish satellite market, for which we receive a substantial share of
the subscription and pay-per-day revenues. We also transmit and distribute to
the cable market and to large home satellite dish owners who have purchased
digital reception equipment a digital format version of Spice and the Playboy
Channel, for which we receive satellite programming transmission fees and a
substantial share of the subscription and pay-per-day revenues.
Guthy-Renker
We have a long-standing relationship with Guthy-Renker Corporation, the
leading company engaged in direct response "infomercial" home shopping, to
transmit its home shopping "infomercials." We are responsible for satellite
transmission of this channel programming, which is telecast in analog and
digital format. For our services, we receive a monthly fee.
The National Football League
Since 1994, we have maintained a close working relationship with the NFL to
provide NFL Sunday Ticket programming solely to the large home satellite dish
market. We provide the NFL with the use of up to ten of our satellite
programming transmitters for our NFL Sunday Ticket subscription package, which
provides subscribers access to all of the regular season Sunday afternoon NFL
games for a per season price of approximately $159. The satellite programming
transmitters that send our programming are uniquely attractive to the NFL
because they are contiguously located on a single, well positioned satellite,
enabling subscribers to use their satellite remote control to easily click from
one NFL game to another. We preempt our regular movie programming during the
hours covered by the NFL agreement. In addition to payments for satellite use
during the NFL season and distribution fees earned from subscription sales, we
benefit from promotional commercials for our movies inserted during NFL games,
airing at the conclusion of NFL game telecasts.
Marketing and sales
Marketing to cable operators
Our marketing efforts have been focused on highlighting the financial and
operational advantages to cable operators of implementing our digital cable
solution. To date, our marketing efforts have largely consisted of
participation in industry conferences and trade shows, trade advertising and
direct contacts with cable operators. To assist in marketing our digital cable
programming and services, we have created a database of cable systems
throughout the United States that details the number of subscribers served by
each discrete system, type of billing system used, current hardware vendor,
channel capacity and addressability. This data is supplemented with available
knowledge of the cable operator's strategic goals and competitive issues to
formulate a proposal as to how our digital cable services best meet the needs
of a particular cable operator. Such a proposal draws from the
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spectrum of our services, ranging from our TVN Digital Cable Television service
for smaller cable systems to our Pay-Per-View Feeds Service for larger systems.
Marketing to cable subscribers
As part of our TVN Digital Cable Television service, we offer a complete
marketing package for cable operators to assist them in developing an effective
marketing campaign for promoting the digital programming package to their
subscribers. In our experience, a direct mail campaign alone can generate
subscriptions for TVN Digital Cable Television from 5% of a system's subscriber
base. We have developed a comprehensive marketing plan using all media for the
most effective and rapid subscriber penetration. The marketing plan includes a
demographic and competitive analysis, with specific marketing recommendations
for type of media and duration.
We also assist cable operators in tailoring programming packages and
advertising and marketing campaigns in order to increase the number of
subscribers and the number of their pay-per-view purchases and maximize profits
from TVN Digital Cable Television. We consult with many of our cable operators
on the design, marketing and introduction of digital programming packages for
their subscribers. Our goal is to obtain a 12% TVN Digital Cable Television
penetration rate and two pay-per-view purchases per subscriber per month within
twelve months of launch. Our "Go Digital" campaign, developed with the
Friedland, Jacobs Agency, promotes TVN Digital Cable Television through
creative 30 and 60 second video spots which can be shown on existing analog
cable channels, with direct marketing materials targeted at subscribers most
likely to sign up for the digital programming package and become frequent
buyers of our pay-per-view movie and event offerings. After launch of TVN
Digital Cable Television, our branded print ads, many of which highlight
specific, popular pay-per-view movies and events, are designed to increase
subscriber penetration and purchase rates. We may also contribute to
cooperative advertising and marketing.
Cable operators who sign up for TVN Digital Cable Television receive our
launch marketing kit, which includes:
. Newspaper advertisements (customizable, camera-ready ad slicks);
. 30 and 60 second cross-channel video spots that can be customized for
each particular operator;
. Direct response materials that can be customized for each particular
operator;
. Telemarketing scripts;
. Subscriber channel line-up cards;
. Radio scripts, message on-hold scripts, Weather Channel crawl scripts and
billing messages;
. Monthly programming promotions;
. Press releases; and
. Customer leave-behinds introducing TVN Digital Cable Television.
Technology and operations
Network operations
We have developed a sophisticated analog and digital technical
infrastructure comprising in-house production, storage, digital processing,
television set-top cable box authorization
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<PAGE>
and satellite transmission capabilities. Programming originates from a facility
located at our operations center, which is then transmitted to our satellites
from an immediately adjacent facility. Our analog production and transmission
facilities were custom built to our specifications by Four Media Company, which
recently agreed to be acquired by Liberty Media Corp. Similar facilities
dedicated to our digital programming are currently under construction by Four
Media Company. Four Media Company operates these facilities for us under our
direction and control. The production facilities are dedicated to us, while the
transmission facility is used for us and other Four Media Company clients such
as the Playboy Channel and syndicated television distributors. We own and
operate the digital processing equipment.
Our operations center maintains backup power and redundant equipment on
site. We have uninterrupted power supply from commercial batteries sufficient
for 20 minutes of operation in the event of a total power failure, and a diesel
powered generator sufficient for continuous operation thereafter. We have never
gone "off-air" due to a power malfunction or interruption, having maintained
continuous uninterrupted service even during the 1994 Los Angeles earthquake,
when the backup power supply system was utilized until local power was
restored.
Studio provided film masters are digitally processed, then stored in a
digital server for automated playback at multiple start times, which minimizes
the number and cost of playback units and personnel required to transmit near-
video-on-demand service. Our proprietary automated scheduling software allows
each movie to be shown as desired, and schedules all previews, promotions and
interstitial material, which plays at the end of a movie until our next start
time.
Electronic ordering by telephone through automatic telephone number
identification and through the television set-top cable box via our impulse
pay-per-view system is also fully automated. We use a service provided by
General Instrument to electronically authorize a subscriber's television set-
top cable box to receive a pay-per-view movie or event. Automated telephone
orders are placed by the customer calling one of our sequential toll-free 800
numbers specific to that showing. Orders through the television set-top cable
box are placed by the subscriber using a remote control. In either case, within
approximately four seconds of placing an order, the customer's television set-
top cable box is authorized to receive and begins playing the movie on the
customer's television screen. The customer receives the remainder of the
current showing plus the next complete showing.
Satellite transmission
We transmit our programming content via signal transmitters leased on two
PanAmSat satellites, Galaxy III and Galaxy IX, both of which have desirable
geostationary orbital positions with transmission coverage of the continental
United States. Our satellite transmission leases both expire in 2006, prior to
the expiration of each satellite's expected useful life. Currently, we transmit
our digital pay-per-view programming from five signal transmitters on the
Galaxy IX satellite, transmit our analog pay-per-view programming from six
signal transmitters on the Galaxy III satellite and provide satellite
transmission capacity to third parties on four signal transmitters on the
Galaxy III satellite. Our leased transmission capacity is protected in that we
are entitled to replacement satellite space if Galaxy III or Galaxy IX is
rendered incapable of transmitting our signals. Cable operators receive our
digital signals from Galaxy IX via commercial satellite dishes installed at
their facilities. Each of our five signal transmitters on the Galaxy IX
satellite currently delivers eight channels of programming. These signals are
then processed at the operator's facility by equipment known as DCII Integrated
Receiver Transcoders, modulators and related digital
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equipment. These signals are then transmitted via the existing cable wiring and
related equipment to each subscriber that has a DCII television set-top cable
box. As we transition our large dish home satellite service from analog to
digital signal format, we expect to convert several of the signal transmitters
on the Galaxy III satellite from analog to digital over a two-year transition
period, which will enable each signal transmitter to carry eight or more
digital channels of programming.
Strategic relationship with General Instrument
We have a long-standing cooperative business relationship with General
Instrument, which recently agreed to be acquired by Motorola, Inc. A full
complement of General Instrument programming equipment is installed at our
operations center which digitally processes our pay-per-view programming.
General Instrument also provides the Integrated Receiver Transcoders and other
equipment installed at cable operators' facilities and the DCII television set-
top cable boxes acquired by cable operators entering into agreements with us.
Large home satellite dish business
Our company operates the only satellite transmitted, direct-to-home, multi-
channel pay-per-view movie and event analog signal programming service for the
large home satellite dish market. Marketed as "TVN Satellite Theaters," the
service creates a home cineplex for large home satellite dish owners by
programming a different movie on multiple analog channels with continuous
showings 24-hours a day. We currently telecast from the Galaxy III satellite
five channels of pay-per-view movies and events, one pay-per-day channel
showing Spice, one preview channel during the day that is used for additional
showings of pay-per-view movies during the night, two home shopping channels
for which we provide transmission services and one channel subleased to a third
party.
There are an estimated 1.8 million large dish home satellite owners equipped
with the secure encryption standard used by the home satellite industry. More
than 260,000 such owners purchased programming from us during the fiscal year
ended March 31, 1999. The installed base of large dish customers has been
relatively static over the past two years. The large dish home satellite market
has not grown due to the smaller dish size and digital features offered by
direct broadcast, small satellite dish services. We believe, however, that the
existing large dish home satellite customer base will continue to represent a
viable market for our pay-per-view programming in the near term.
General Instrument has introduced its new 4DTV technology receivers,
designed to serve as a digital/analog replacement for existing analog large
dish receivers. This new digital receiver allows large dish home satellite
owners to receive:
. unencrypted analog and digital signals;
. analog signals encrypted in an industry standard technology called
VideoCipher II Plus; and
. digitally compressed signals encrypted in industry standard DCII
Technology.
Large dish home satellite owners equipped with 4DTV receivers are able to
receive more programming than that offered by direct broadcast small dish
satellite services. We expect a portion of the existing large dish home
satellite base to acquire 4DTV receivers to access the new digital channels. We
are the sole provider of pay-per-view movies licensed from all the major and
leading independent studios for both the analog large dish home satellite
market and the large dish home satellite market served by 4DTV digital
receivers.
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<PAGE>
Competition
Our competitors include a broad range of companies engaged in communications
and home entertainment, including small dish satellite operators and
programming providers, wired and wireless cable operators, broadcast television
networks, home video companies featuring videocassette and digital video disk
technologies, as well as companies developing new in-home entertainment
technologies, such as the video-on-demand service being marketed by a company
called DIVA. We expect that competition will increase
substantially as a result of these and other new products and services, as well
as from industry consolidations and alliances. We expect to compete primarily
against other providers of digital pay-per-view programming, including cable
and satellite programmers. We compete on the basis of, among other things, the
breadth and quality, price, performance and convenience of our programming and
services.
Currently, the only available alternative for cable operators that wish to
offer digital services similar to those provided by small dish satellite
operators is a satellite transmitted digital programming delivery service
commonly known as "HITS," a name derived from the acronym for "Headend-In-The-
Sky." Certain telephone companies have announced initiatives and have made
significant investments to become digital television providers.
We compete with companies offering digital programming direct-to-the-home
via various small dish satellite systems. Small satellite dishes offer
consumers the appeal of significantly expanded channel capacity, features such
as an interactive on-screen program guide, digital pictures without the signal
disruption often seen in analog video, CD quality digital music channels and
many channels of movies and sports available on a pay-per-view basis. Several
well capitalized small satellite dish companies pose a substantial threat to
cable operators. DirecTV, owned by Hughes Electronics, was the first all-
digital small dish satellite company and as of April 1999 had in excess of 4.7
million subscribers to its small dish satellite service according to DBS
Digest, an industry publication. Two other small dish satellite companies are
currently in operation: EchoStar, which markets its digital television service
under the "Dish Network" brand name and USSB, whose small satellite dish
programming service operates in tandem with DirecTV, which has agreed to
acquire USSB, offering premium subscription programming such as multiple HBO
and SHOWTIME channels. A medium satellite dish service, PrimeStar, has also
been acquired by DirecTV. Currently, local programming is generally unavailable
through small satellite dishes; however, pending legislation would facilitate
the ability of small dish satellite companies to include local broadcasts in
their digital programming services.
The television commerce industry is dominated by two established
competitors, The Home Shopping Network and the QVC Network. We also compete
with ValueVision, another broadly distributed television commerce company.
Additionally, we compete with other companies which sell consumer goods on the
Internet. We also generally compete with traditional store and catalogue
retailers. In the television home shopping market, we compete on the basis of
the breadth and quality of merchandise selection, price and customer service.
Intellectual property and proprietary rights
We consider our proprietary software, program scheduling system, automatic
telephone number identification ordering system, trademarks, logos, copyrights,
know-how, advertising, and promotion design and artwork to be of substantial
value and importance to our business. We rely on a combination of trade secret,
copyright and trademark laws, confidentiality and
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nondisclosure agreements and other such arrangements to protect our proprietary
rights and confidential information. Our success will depend in part on our
ability to maintain copyright protection for our proprietary information, to
preserve our trade secrets and confidential information and to operate without
infringing the proprietary rights of third parties. See "Risk factors--We rely
on a combination of trade secret, copyright and trademark laws, confidentiality
and nondisclosure agreements and other such arrangements to protect our
proprietary rights and confidential information. The loss of our proprietary
rights or confidential information would have an adverse effect on our
competitiveness and the value of our business assets."
Each trademark, tradename or service mark of any other company appearing in
this prospectus belongs to its holder.
Employees
As of November 15, 1999, we had 252 employees, including 46 in sales and
marketing, 124 in operations and 82 in finance, legal and administration. None
of our employees are currently represented by a labor union. We believe that
our relationships with our employees are good.
Properties
Our main facility, including our operations center, is located in Burbank,
California, where we currently lease approximately 10,000 square feet. The term
of this lease runs through July 2003. We currently sub-lease approximately
28,000 square feet at the same facility. We also currently sub-lease
approximately 13,000 square feet of office space and lease approximately 12,000
square feet of office space in Westwood, California. The terms of this sub-
lease and of this lease run through October 31, 2001 and October 31, 2004,
respectively. We also lease approximately 6,100 square feet of office space and
sub-lease approximately 6,600 square feet of office space in Torrance,
California. The terms of these leases run through September 30, 2000 and
September 30, 2002, respectively.
We anticipate that we will need additional facilities in order to support
the expected growth in demand for our services from cable operators and
subscribers. We anticipate that we can locate and acquire such additional space
when and as it is needed, although we cannot be certain that such space can be
acquired on terms acceptable to us.
Legal proceedings
We have been party to legal and administrative proceedings relating to
claims arising from our operations in the normal course of business. On the
advice of counsel, we believe we have adequate legal defenses and believe that
the ultimate outcome of these actions will not have a material adverse effect
on our consolidated financial position, results of operations or cash flows.
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Management
Executive officers and directors
Our executive officers and directors and their ages as of November 15, 1999
are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Stuart Z. Levin............. 51 Chairman of the Board of Directors and Chief
Executive Officer
Arthur Fields............... 61 Senior Executive Vice President, General
Counsel, Chief Administrative Officer,
Director and Secretary
Linda Blazy................. 45 Senior Vice President, Satellite Marketing
Leo I. Bluestein, Ph.D...... 63 Chief Technical Officer
Anthony Ciesniewski......... 54 Vice President, Network Operations &
Engineering
Richard Colletto............ 47 Vice President, Programming
John McWilliams............. 36 Senior Vice President, Finance
Gregory Pasetta............. 34 Senior Vice President
Stephen C. Rockabrand....... 50 Senior Vice President, New Business
Development
David Sears................. 43 Senior Vice President, Affiliate Sales and
Marketing
Dom Stasi................... 56 Vice President, Technology Development
Gregory A. Thomas........... 35 Chief Operating Officer, GRTV Network, Inc.
Michael Wex................. 46 Senior Vice President, Shopping Services
S. Robert Levine, M.D....... 45 Director
Stephen R. Munger........... 42 Director
Martin A. Pasetta........... 67 Director
David R. Powers............. 32 Director
Michael J. Ritter........... 58 Director
Jerome H. Turk.............. 56 Director
</TABLE>
Stuart Z. Levin founded TVN in 1987 and served as President and Chief
Executive Officer from then to September 1997. In September 1997, Mr. Levin
became Chairman of the Board of Directors and Chief Executive Officer. Prior to
joining TVN, Mr. Levin founded and operated Domesticom Corporation, a company
that delivered satellite-fed pay television and pay-per-view programming to
hotels and apartment complexes from 1980 to 1984. In 1984, Mr. Levin began work
on the initial plan for TVN.
Arthur Fields, a co-founder of TVN, joined us in January 1989 as Senior
Executive Vice President, General Counsel and Chief Administrative Officer.
Prior to joining TVN, Mr. Fields was a partner at the law firm of Ervin, Cohen
& Jessup in Beverly Hills, California. Mr. Fields received a B.S. in Pharmacy
from Columbia University and a J.D. from Loyola Law School.
Linda Blazy joined TVN in 1991 as our Vice President, Marketing, Sales &
Creative Services. From November 1995 to September 1997, Ms. Blazy served as
our Senior Vice President, Marketing, Sales & Creative Services. In September
1997, Ms. Blazy became our Senior Vice President, Consumer Marketing and in
March 1999 became our Senior Vice President, Satellite Marketing. Prior to
joining TVN in 1991, Ms. Blazy held a number of marketing and management
positions in the home video industry. Ms. Blazy received a B.S. in Marketing
from Arizona State University.
Anthony Ciesniewski joined TVN in August 1998 as Vice President, Network
Operations & Engineering. He oversees all aspects of our Digital Network
Operations Center, including day-to-day staff management and the implementation
of such technical functions as compression, encryption, access control,
automated ordering and transactional
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services. Mr. Ciesniewski joined TVN from Kelly Broadcasting Co. in Sacramento,
where he had been Director of Engineering since August 1996. From September
1997 through March 1998, he was Consulting Engineer for Ziff-Davis Publishing,
where he designed their digital cable television broadcast facility in San
Francisco. From March 1986 through August 1996 he was Vice President,
Engineering & Operations for Fox Tape, a division of 20th Century Fox.
Mr. Ciesniewski won a 1994 Emmy Award for Technical Team/Studio for "NFL on
Fox." He belongs to the Society of Broadcast Engineers, the Academy of
Television Arts & Sciences, and the Society of Motion Picture and Television
Engineers.
Leo I. Bluestein joined TVN on a full-time basis in April 1996 as our Chief
Technical Officer. From April 1989 to April 1996, Dr. Bluestein was a
consultant to us and a number of other companies in the areas of encryption and
conditional access technology. Dr. Bluestein was a Vice President with
responsibilities in the Government Systems and VideoCipher divisions of M/A-Com
Linkabit, Inc., a subsidiary of M/A Com, Inc., a diversified electronics
company, and was a director of the Advanced Technology Group at Oak Industries,
Inc., a pay television product company. Dr. Bluestein received a B.S. in
Electrical Engineering from the College of the City of New York, and an M.S. in
Electrical Engineering and a Ph.D. in Electrical Engineering from Columbia
University.
Rick Colletto joined TVN in January 1998 as our Vice President, Programming
and is responsible for overseeing the programming and scheduling of our digital
and analog channels. Prior to joining TVN, Mr. Colletto was Director, Video-On-
Demand for Time Warner, Inc.'s Full Service Network in Orlando, Florida from
May 1994 to December 1997. Mr. Colletto served as Marketing Director of Oceanic
Cable, a Hawaiian affiliate of Time Warner from December 1992 to May 1994. Mr.
Colletto received a B.A. in Communications from the University of Hawaii.
John McWilliams joined TVN in December 1994 as our Controller and was named
Vice President, Finance in November 1995. In August 1998, Mr. McWilliams was
named Senior Vice President, Finance and is responsible for our accounting,
financial reporting and financial planning systems, overseeing risk management
and administering our employee benefit plans. Mr. McWilliams was an independent
consultant from July 1993 to December 1994. From September 1992 to July 1993,
Mr. McWilliams was the Controller for Action Pay-Per-View, a national PPV
network. Mr. McWilliams received a B.S. in Accounting from the University of
Tennessee, Knoxville, and was certified as a public accountant in California in
1990.
Gregory Pasetta joined TVN as a Producer in June 1990 and was promoted to
Executive Producer in November 1991. From November 1992 to November 1995, Mr.
Pasetta served as our Vice President, Production. Mr. Pasetta was named Senior
Vice President, Operations & Production in November 1995. In September 1998,
Mr. Pasetta was named Senior Vice President. In that capacity, Mr. Pasetta is
responsible for oversight and direction of new business development. Prior to
joining TVN, Mr. Pasetta worked in live television production and direction.
Mr. Pasetta received a B.A. in Communication Arts from Loyola Marymount
University.
Stephen C. Rockabrand joined TVN in January 1996 as our Senior Vice
President, Programming and New Business Development and in January 1998 became
our Senior Vice President, New Business Development. In September 1998, Mr.
Rockabrand was named Senior Vice President for live and special event
programming. From 1990 to January 1996, Mr. Rockabrand served as Vice
President, Pay Television, Ancillary Markets and New Technologies at Paramount
Pictures Corporation, a motion picture and television studio.
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David Sears joined TVN in December 1997 as our Senior Vice President,
Affiliate Sales and Marketing and is responsible for cable affiliate
distribution, marketing, account maintenance and trade advertising of our
digital cable services. From December 1996 to December 1997, Mr. Sears served
as Senior Vice President, Sales & Affiliate Relations at Request Television, a
national pay-per-view cable programming service. From October 1994 to December
1996, Mr. Sears was Vice President, Western Division, Affiliate Sales for
Playboy Television. From February 1990 to October 1994, Mr. Sears was Vice
President, Sales and Affiliate Relations at Action Pay-Per-View, a national PPV
network and its successor Black Entertainment Television, a cable television
network, where he was responsible for marketing Action Pay-Per-View, Black
Entertainment Network and BET On Jazz. Mr. Sears received a B.A. in Journalism
from Memphis State University.
Dom Stasi joined TVN in December 1998 as Vice President, Technology
Development and is responsible for developing video and data applications for
use in video-on-demand and interactive systems. Prior to joining TVN, Mr. Stasi
spent seven years as an engineering executive with TCI and its Liberty Media
program networks. From July 1997 to October 1998, Mr. Stasi was Vice President,
Engineering and Operations for Your Choice TV. From October 1994 to July 1997,
Mr. Stasi served as Vice President, Network Video Services for the Technology
Ventures division, and from June 1993 to October 1994, Mr. Stasi was Vice
President, Technology and Operations for Request TV. Mr. Stasi holds an
engineering degree from the State University of New York, and is a member of
the NCTA Engineering Committee, the Society of Cable Telecommunications
Engineers, and the Society of Motion Picture and Television Engineers.
Gregory A. Thomas joined TVN as Chief Operating Officer of GRTV Network,
Inc. in July 1999 when we acquired substantially all the assets of Guthy-Renker
Television Network. Mr. Thomas became Chief Operating Officer of Guthy-Renker
Television Network, a satellite-delivered direct response marketing company, in
1998. In 1994, Mr. Thomas founded Coast to Coast Media, LLC, a time buying
service for infomercials to service his own productions. Mr. Thomas served as
President of Coast to Coast from 1994 until Coast to Coast was acquired by
Guthy-Renker Television Network in 1998. Mr. Thomas holds a Bachelor's Degree
in History from the University of California at Los Angeles.
Michael Wex joined TVN in February 1999 as Senior Vice President of TVN and
President & Chief Operating Officer of the wholly owned TVN Shopping, Inc.
subsidiary. Previously, Mr. Wex was President and CEO of GRTV Network from 1995
through September 1998. From January 1994 through August 1995, he was a member
of the start-up management team and consultant to S: The Shopping Network, an
interactive home shopping channel launched by Fingerhut. Mr. Wex has won
several Cable ACE awards and two Emmy Award nominations. He has a Masters
Certificate in International Interactive Communications from New York
University and a Bachelor of Arts in Communications from Goddard College.
S. Robert Levine, M.D. has been a member of TVN's Board of Directors since
October 1990. In March of 1983, Dr. Levine established the Cardiac Health and
Rehabilitation Program at New York's Mount Sinai Medical Center, and served as
its Director until October 1986. In November 1996, Dr. Levine was named
Chairman of the Progressive Policy Institute's "Health Priorities Project." Dr.
Levine is a member of the National Institute of Health's National Institute of
Diabetes, Digestive and Kidney Diseases Advisory Council, and serves as
Chairman of Government Relations and member of the Executive Committee and
International Board of the Juvenile Diabetes Foundation. Dr. Levine is also a
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member of the Board of Directors of DayOne Life Management, Inc. Dr. Levine
received a B.S. in Human Development and Nutrition from Cornell University in
1975, and an M.D., summa cum laude, from the Loyola-Stritch School of Medicine
in 1979.
Stephen R. Munger has been a member of TVN's Board of Directors since
December 1997. Mr. Munger is the Managing Director, Mergers, Acquisitions and
Restructuring Department of Morgan Stanley and is Head of its Private
Investment Department. Mr. Munger joined Morgan Stanley in 1988 and served in
various capacities prior to being named Managing Director in 1993. Mr. Munger
is also a member of the Board of Directors of Wright Medical Technology, Inc.,
EconoPhone, Inc., and ImpSat Corporation. Mr. Munger received a B.A. in
Government from Dartmouth College and an M.B.A. from The Wharton School.
Martin A. Pasetta has been a member of TVN's Board of Directors since
October 1988. Mr. Pasetta retired from a 42 year career as a director and
producer of television specials and programs, including 17 years directing the
Academy Awards from 1972 to 1989. Mr. Pasetta produced and directed Inaugural
Galas for Presidents Carter and Reagan, in addition to the first U.S. satellite
television entertainment broadcast. Mr. Pasetta received an Honorary Doctorate
in Fine Arts from the University of Santa Clara.
David R. Powers has been a member of our Board of Directors since September
1997. In December 1996, Mr. Powers became a Vice President in the Private
Investment Department of Morgan Stanley. From May 1994 to December 1996, Mr.
Powers was an Associate in the Private Investment Department. From August 1992
to May 1994 Mr. Powers was an Associate in the Mergers, Acquisitions and
Restructuring Department and has served in various capacities at Morgan Stanley
since 1989. Mr. Powers received a B.A. in Mathematics and Economics from
Amherst College.
Michael J. Ritter joined our Board of Directors in May 1998. Mr. Ritter has
been retired since 1995. From 1991 until 1995, Mr. Ritter served as President
and Chief Operating Officer of Continental Cablevision, Inc. Mr. Ritter served
as a director of Continental Cablevision, Inc. from 1991 until 1996. Mr. Ritter
received a B.S. in Business from California State University, San Jose, and a
J.D. from the University of the Pacific, McGeorge School of Law.
Jerome H. Turk joined our Board of Directors in October 1998. Mr. Turk has
been retired since January 1997. From November 1994 to December 1996, Mr. Turk
was a member of the Board of Directors of Fitzgeralds Gaming Corporation, most
recently as Chairman of the Board. From September 1985 to October 1988, Mr.
Turk worked for Oppenheimer & Co., most recently as a Managing Director. Mr.
Turk received a B.B.A. from Adelphi University and a J.D. from Brooklyn Law
School. Mr. Turk is a certified public accountant and a member of the bar in
the State of New York.
Director compensation
Members of our Board of Directors do not receive compensation for their
service as directors.
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Executive compensation
Summary of cash and certain other compensation
The following table sets forth information concerning the compensation
received for services rendered to us during fiscal 1999 by our Chief Executive
Officer and our four next most highly compensated executive officers whose
total compensation in fiscal 1999 equaled or exceeded $100,000:
Summary Compensation Table
<TABLE>
<CAPTION>
Long-term
compensation
awards
------------
Annual compensation Number of
------------------------------ securities
Other annual underlying
Name and principal positions Year Salary Bonus compensation options
- ---------------------------- ---- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Stuart Z. Levin............... 1999 $474,577 $250,000 $41,509 --
Chairman and Chief Executive
Officer
James B. Ramo(1).............. 1999 464,701 250,000 32,813 --
President and Chief Operating
Officer
Arthur Fields................. 1999 371,970 125,000 85,978 --
Senior Executive Vice
President, General Counsel,
Chief Administrative Officer
and Secretary
Gregory Pasetta............... 1999 187,115 35,000 -- --
Senior Vice President
David Sears................... 1999 175,000 45,000 -- 50,000
Senior Vice President,
Affiliate Sales & Marketing
</TABLE>
- --------
(1) In September 1999, James B. Ramo resigned as a director and as President
and Chief Operating Officer. In connection with his resignation, we agreed
to pay him approximately $700,000 in satisfaction of salary, bonus and
severance benefits arising under his employment agreement.
Other annual compensation represents car allowance and employer paid
premiums for life insurance policies. Long-term compensation awards are shares
subject to stock options granted under the 1996 Stock Option Plan. See Table
entitled "Option Grants in Last Fiscal Year" for an explanation of the vesting
provisions of such stock options.
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The following table sets forth certain information for the fiscal year ended
March 31, 1999 with respect to options granted to the named executive officers.
Option grants in last fiscal year
<TABLE>
<CAPTION>
Individual grants
------------------------------------------
Potential realizable value
% of at assumed annual rates
Total options of stock price appreciation
granted to Exercise for option term
Options employees in price per Expiration ----------------------------
Name granted fiscal year share date 5% 10%
- ---- ------- ------------- --------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Stuart Z. Levin......... -- -- -- -- -- --
James B. Ramo(1)........ -- -- -- -- -- --
Arthur Fields........... -- -- -- -- -- --
Gregory Pasetta......... -- -- -- -- -- --
David Sears............. 50,000 55.6% $3.28 5/26/2008 267,139 425,374
</TABLE>
- --------
(1) James B. Ramo resigned as a director and as President and Chief Operating
Officer in September 1999.
The amounts in the two columns entitled "Potential realizable value
at assumed annual rates of stock price appreciation for option term" represent
hypothetical gains that could be achieved for the respective options if
exercised at the end of the option term. The assumed 5% and 10% rates of stock
price appreciation are mandated by the Rules of the Securities and Exchange
Commission and do not represent our estimate or projection of future common
stock price. Actual gains, if any, on stock option exercises are dependent on
our future financial performance, overall conditions and the option holder's
continued employment through the vesting period and option term. This table
does not take into account any appreciation in the fair market value of the
common stock from the date of grant to the date of this prospectus, other than
the columns reflecting assumed rates of appreciation of 5% and 10%.
The following table sets forth certain information with respect to the
number and value of stock options held by each named executive officer as of
March 31, 1999.
Aggregate option exercises in fiscal 1999 and option values as of March 31,
1999
<TABLE>
<CAPTION>
Number of securities Value of unexercised
Number underlying unexercised in-the-money options
of shares options at March 31, 1999 at March 31, 1999
acquired Value ------------------------- -------------------------
Name on exercise realized($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Stuart Z. Levin......... -- -- 604,179 287,528 $6,451,168 $2,988,829
James B. Ramo(1)........ -- -- 179,933 419,842 1,844,313 4,303,381
Arthur Fields........... -- -- 358,333 41,667 1,934,280 447,920
Gregory Pasetta......... -- -- 100,000 0 1,075,000 0
David Sears............. -- -- 12,500 37,500 96,500 289,500
</TABLE>
- --------
(1) In connection with his resignation as director and as President and Chief
Operating Officer, we paid Mr. Ramo approximately $1.9 million in
connection with the cancellation of options to purchase 599,775 shares of
the Company's common stock previously granted to Mr. Ramo as well as the
satisfaction of other equity participation provisions arising under the
employment agreement.
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<PAGE>
"Value realized" is calculated on the basis of the fair market value of the
common stock on the date of exercise minus the exercise price, despite the fact
that none of such shares have been sold. The amounts in the two columns
entitled "Value of unexercised in-the-money options at March 31, 1999" are
calculated based upon the fair market value of $11.00 per share as of the
fiscal year end minus the exercise price.
Benefit plans
1996 Stock Option Plan. Our 1996 Stock Option Plan was adopted by the Board
of Directors and approved by the stockholders in January 1996. In August 1997,
the Board and the stockholders approved an increase in the number of shares
reserved under the 1996 Option Plan by 600,000 shares for a total of 3,000,000
shares of common stock. In April 1999, the Board approved the reservation of an
additional 993,899 shares under the 1996 Option Plan, subject to stockholder
approval. The 1996 Option Plan provides for grants of incentive stock options
to our employees (including officers and employee directors) and nonstatutory
stock options to our employees, directors and consultants. The purpose of the
1996 Option Plan is to attract and retain the best available personnel and to
encourage stock ownership by our employees, officers and consultants in order
to give them a greater personal stake in our success. The 1996 Option Plan is
administered by the Board of Directors, which determines optionees and the
terms of options granted, including the
As of March 31, 1999, 52,417 shares of Common Stock had been issued upon the
exercise of options granted under 1996 Option Plan, options to purchase
2,681,482 shares of common stock at a weighted average exercise price of $0.52
per share were outstanding and 266,101 shares remained available for future
grant.
The term of an option granted under the 1996 Option Plan is stated in the
option agreement. The terms of options granted under the 1996 Option Plan
generally may not exceed ten years, and in the case of an incentive option or
nonstatutory option granted to an optionee who, at the time of grant, owns
stock representing more than 10% of our outstanding capital stock, the term of
such option may not exceed five years. Options granted under the 1996 Option
Plan generally vest and become exercisable as set forth in the option
agreement. In general, no option may be transferred by the optionee other than
by will or the laws of descent or distribution, and each option may be
exercised, during the lifetime of the optionee, only by such optionee. An
optionee whose relationship with us or any related corporation ceases for any
reason (other than by death or permanent and total disability) may exercise
options in the 90 day period following such cessation, unless such options
terminate or expire sooner (or for nonstatutory options, later), by their
terms, but only to the extent the option had vested on such date of cessation.
In the event of death or total and permanent disability, the option may be
exercised in the twelve month period following the date of death or total and
permanent disability unless such options terminate or expire sooner (or for
nonstatutory options, later), but only to the extent the option had vested on
the date of death or disability.
In the event we merge with or into another corporation, all outstanding
options may either be assumed or an equivalent option may be substituted by the
surviving entity or, if such options are not assumed or substituted, such
options shall become exercisable as to all of the shares subject to the
options, including shares as to which they would not otherwise be exercisable.
In the event that options become exercisable in lieu of assumption or
substitution, the Board of Directors shall notify optionees that all options
shall be fully exercisable for a period of 15 days, after which such options
shall terminate.
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<PAGE>
The Board of Directors determines the exercise price of options granted
under the 1996 Option Plan at the time of grant, provided that the exercise
price of all incentive stock options must be at least equal to the fair market
value of the shares on the date of grant. With respect to any participant who
owns stock possessing more than 10% of the voting rights of our outstanding
capital stock, the exercise price of any incentive stock option or any
nonstatutory stock option granted must equal at least 110% of the fair market
value on the grant date. The consideration for exercising any incentive stock
option or any nonstatutory stock option may consist of cash, check, promissory
note, delivery of already-owned shares of our common stock subject to certain
conditions, a reduction in the amount of any company liability to an optionee
or any combination of the foregoing methods of payment or such other
consideration or method of payment to the extent permitted under applicable
law. No incentive stock options may be granted to a participant, which, when
aggregated with all other incentive stock options granted to such participant,
would have an aggregate fair market value in excess of $100,000 becoming
exercisable in any calendar year. The 1996 Option Plan will terminate in
January 2006, unless sooner terminated by the Board of Directors.
401(k) Plan. We have a 401(k) plan pursuant to which eligible employees may
elect to reduce their current salary by up to the statutorily prescribed annual
limit and have the amount of such reduction contributed to the 401(k) plan. Any
contributions by us to the 401(k) plan are discretionary. The 401(k) plan is
intended to qualify under section 401 of the Internal Revenue Code so that
contributions by participants to the 401(k) plan, and income earned on those
contributions, are not taxed to participants until withdrawn from the 401(k)
plan.
Limitation of liability and indemnification matters
As permitted by the Delaware General Corporation Law, we have included in
our certificate of incorporation a provision to eliminate the personal
liability of our directors for monetary damages for breach or alleged breach of
their fiduciary duties as directors, subject to certain exceptions. In
addition, our bylaws provide that we are required to indemnify our officers and
directors under certain circumstances, including those circumstances in which
indemnification would otherwise be discretionary, and we are required to
advance expenses to our officers and directors as incurred in connection with
proceedings against them for which they may be indemnified. We believe that our
charter provisions are necessary to attract and retain qualified persons as
directors and officers. Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers or persons
controlling us pursuant to the foregoing provisions, we have been informed
that, in the opinion of the Commission, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable. At
present, we are not aware of any pending or threatened litigation or proceeding
involving any of our directors, officers, employees or agents in which
indemnification would be required or permitted.
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Material transactions and related party transactions
Related party transactions
In May 1992, we assumed the obligations of the limited partnership that was
our predecessor in interest including specific obligations to repay funds
advanced to it by certain stockholders including Stuart Z. Levin, our Chairman
and Chief Executive Officer, and S. Robert Levine, M.D., a member of our Board
of Directors. Accordingly, we have contingent notes payable to (i) Stuart Z.
Levin, in the amount of $52,703, including principal and interest accrued
through March 31, 1999; and (ii) S. Robert Levine in the amount of $944,329
including principal and interest accrued through March 31, 1999. See
"Description of Certain Indebtedness."
During the period from fiscal 1993 to fiscal 1999, we have made a series of
advances to Stuart Z. Levin, our Chairman and Chief Executive Officer, and Mr.
Levin has from time to time made periodic repayments toward such advances. As
of March 31, 1999, the outstanding amount of such advances, net of repayments,
aggregated $143,000. Such advances are payable to us upon demand and do not
bear interest.
In February 1996, we effected a recapitalization pursuant to which each of
the 729,180 shares of then outstanding common stock was exchanged for
10.5948568 shares of Series A Preferred Stock. Prior to the recapitalization,
the only outstanding capital stock was common stock. The recapitalization and
related exchange of common stock for preferred stock was not a financing
transaction and did not generate any proceeds to us.
During the period from June 1996 through November 1996, we issued and sold
convertible promissory notes in the aggregate principal amount of $5.5 million
to Storie Partners, L.P., which owns greater than 4% of our voting securities,
and to certain other investors. The convertible notes accrued simple interest
at the annual rate of 10% and were convertible upon the consummation of a
qualified equity financing occurring on or before December 31, 1998 into shares
of capital stock issued in connection with the financing. The convertible notes
were accompanied by warrants exercisable for the purchase of an aggregate of
500,002 shares of our capital stock issued in connection with the financing.
In August 1997, we entered into an agreement with Princes Gate Investors II
and the holders of the convertible notes to issue and sell an aggregate of
5,714,442 shares of Series B-1 Preferred Stock for $2.6249 per share, 1,290,767
shares of Series B-2 Preferred Stock for $5.8105 per share and warrants
exercisable for the purchase of 500,002 shares of Series B-2 Preferred Stock at
a per share price of $5.8105, 2,285,727 shares of Series B-3 Preferred Stock
for $6.5625 per share and 1,428,584 shares of Series B-4 Preferred Stock for
$10.4999 per share.
Pursuant to the terms of the August 1997 agreement, Princes Gate Investors
II was obligated to purchase all the shares of Series B-1 Preferred Stock and
was granted an option to purchase all of the shares of Series B-3 Preferred
Stock exercisable on or before February 28, 1998 and all of the shares of
Series B-4 Preferred Stock exercisable on or before August 29, 1998. In
December 1997, we and Princes Gate Investors II amended the terms of the August
1997 agreement to provide that Princes Gate Investors II's options to purchase
such shares in February 1998 and August 1998 would become absolute obligations
in December 1997 and February 1998, respectively, in consideration for our
agreement to issue and sell a greater number of shares of Series B-3 Preferred
Stock and Series B-4 Preferred Stock at a lower price per share for each such
series. Specifically, the December 1997 amendment to the August 1997 agreement
obligated Princes Gate Investors II to purchase 2,857,169 shares
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<PAGE>
of Series B-4 Preferred Stock for $5.25 per share on or before December 31,
1997 and to purchase 2,285,727 shares of Series B-3 Preferred Stock for $6.5625
per share on or before February 15, 1998. Such purchases were subsequently
consummated by PGI II. PGI II and its affiliates own more than 5% of our voting
securities. Two of our directors, Messrs. Munger and Powers, are employees of
Morgan Stanley, an affiliate of Princes Gate Investors II.
The 1,290,767 shares of Series B-2 Preferred Stock and the warrants
receivable for shares of Series B-2 preferred stock were issued to the holders
of the convertible notes and warrants issued in connection with the convertible
notes. In consideration therefor, all of the convertible notes, including all
outstanding principal, were canceled and the warrants issued in connection with
the convertible notes were exchanged for the warrants exercisable for Series B-
2 Preferred Stock. As a result, 946,563 shares of Series B-2 Preferred Stock
and warrants exercisable for the purchase of 366,668 shares of Series B-2
Preferred Stock were acquired by Storie Partners, L.P. On December 31, 1998,
warrants exercisable for 493,336 shares of Series B-2 Preferred Stock expired
unexercised in accordance with their terms. Warrants exercisable for 6,666
shares of Series B-2 Preferred Stock were exercised prior to December 31, 1998.
Employment agreements
Stuart Z. Levin. In August 1997, Stuart Z. Levin, our Chairman of the Board
and Chief Executive Officer entered into an employment agreement with us
pursuant to which he is to receive a base salary of $450,000 for the period
September 1, 1997 through August 31, 1998, $475,000 for the period September 1,
1998 through August 31, 1999, and $500,000 for the period September 1, 1999
through August 31, 2000. The agreement provides for a bonus of $250,000 for the
fiscal year ended March 31, 1998, and for a bonus of $125,000 to $250,000 for
the fiscal years ended March 31, 1999 and March 31, 2000. The agreement is
renewable for one additional two-year period at a base salary no less than 110%
of Mr. Levin's base salary for the immediately preceding year and with a
minimum annual bonus of not less than $250,000. In connection with the
employment agreement, we also granted Mr. Levin an option to purchase 291,707
shares of common stock with an exercise price of $0.75 per share, which vests
20% at the end of the first year and monthly thereafter over the following four
years. The term of the option is ten years and the vesting of the option is
contingent upon Mr. Levin's continued employment with us.
If we desire to terminate Mr. Levin's employment involuntarily without
cause, we are obligated to pay Mr. Levin his base salary for the shorter of (i)
two years from the date of termination, or (ii) until the agreement terminates
on September 1, 2000. In the event of such termination, we are also obligated
to pay Mr. Levin a minimum annual bonus of $125,000 for the fiscal year in
which such termination occurs.
Arthur Fields. In August 1997, Arthur Fields, our Senior Executive Vice
President, General Counsel and Chief Administrative Officer entered into an
employment agreement with us pursuant to which he is to receive a base salary
of $350,000 for the period September 1, 1997 through August 31, 1998, $375,000
for the period September 1, 1998 through August 31, 1999, and $400,000 for the
period September 1, 1999 through August 31, 2000. The agreement provides for a
bonus of $125,000 for the fiscal year ended March 31, 1998, and for a bonus of
$62,500 to $125,000 for the fiscal years ended March 31, 1999 and March 31,
2000. The agreement is renewable for one additional two-year period at a base
salary no less than 110% of Mr. Fields' base salary for the immediately
preceding year and with a minimum annual bonus not less than $125,000.
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If we desire to terminate Mr. Fields' employment involuntarily without
cause, we are obligated to pay Mr. Fields his base salary for the shorter of
(i) two years from the date of termination, or (ii) until the agreement
terminates on September 15, 2000. In the event of such termination, we are also
obligated to pay Mr. Fields a minimum annual bonus of $62,500 for the fiscal
year in which such termination occurs.
John McWilliams. In January 1996, John McWilliams, our Senior Vice
President, Finance, entered into a severance agreement with us pursuant to
which he is entitled to receive severance benefits in the form of salary
continuation for six months at his then current salary in the event his
employment is terminated by us for convenience. Mr. McWilliams' current annual
salary is $150,000.
James B. Ramo. In August 1997, James B. Ramo, our former President and Chief
Operating Officer, entered into an employment agreement with us that set forth,
among other things, Mr. Ramo's salary and bonus compensation, equity
participation and severance benefits. Effective September 15, 1999, we accepted
Mr. Ramo's resignation as a director and as President and Chief Operating
Officer. In connection with his resignation, we agreed to pay him $700,000 in
satisfaction of his salary, bonus and severance benefits arising under the
employment agreement and approximately $1.9 million in satisfaction of the
equity participation provisions arising under the employment agreement.
David Sears. In November 1997, David Sears, our Senior Vice President,
Affiliate Sales and Marketing, entered into an employment agreement with us
pursuant to which he is to receive a base annual salary of $170,000. The
agreement provides for a bonus of $45,000 for the fiscal year ended March 31,
1998 and an annual bonus equal to one-half of Mr. Sears' annual salary if we
attain specified sales milestones during each fiscal year. Upon commencement of
his employment in November 1997, we paid Mr. Sears a one-time bonus of $25,000.
In May 1998, we also granted Mr. Sears an option to purchase 50,000 shares of
common stock with an exercise price of $3.28 per share which option vests 20%
at the end of Mr. Sears' first year of employment and ratably thereafter on a
monthly basis over the following four years.
Gregory A. Thomas. In July 1999, Gregory A. Thomas entered into an
employment agreement with GRTV Network, Inc., our wholly-owned subsidiary that
acquired Guthy-Renker Television Network, to be its Chief Operating Officer.
The agreement provides that Mr. Thomas is to receive a base salary at the rate
of $200,000 annually during the period July 1, 1999 through March 31, 2000,
$225,000 annually during the period April 1, 2000 through March 31, 2001, and
$250,000 annually during the period April 1, 2001 through December 31, 2001.
The agreement provides for a performance bonus of up to 125% of Mr. Thomas'
average salary in effect for each of TVN's fiscal reporting years, with a
guaranteed minimum of $100,000 per fiscal year. In addition, pursuant to the
agreement, we have granted Mr. Thomas an option to purchase 100,000 shares of
common stock with an exercise price of $11.00 per share which option vests as
described in the agreement over a five year period.
Michael Wex. In February 1999, Michael Wex, our Senior Vice President and
President and Chief Operating Officer of our wholly owned subsidiary, TVN
Shopping, Inc., entered into an employment agreement with us pursuant to which
he is to receive a base annual salary of $225,000, $236,250, $248,063, $260,466
and $273,489 for the twelve month periods ending March 31, 2000, 2001, 2002,
2003 and 2004, respectively. The agreement provides for an annual bonus,
payable in cash or TVN Shopping, Inc. stock, of no less than $100,000 per
fiscal year and up to 150% of his then current annual salary subject to
achieving certain milestones as determined by us. The agreement is renewable
for one
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additional two-year period. In April 1999, we granted Mr. Wex an option to
purchase 100,000 shares of common stock with an exercise price of $11.00 per
share which option vests 20% at the end of Mr. Wex's first year of employment
and ratably thereafter on a monthly basis over the following four years.
Gregory Pasetta. In November 1999, Gregory Pasetta, our Senior Vice
President, entered into an employment agreement with us. The agreement provides
that Mr. Pasetta is to receive a base salary at the rate of $250,000 annually
during the period November 12, 1999 through March 31, 2000, $275,000 annually
during the period April 1, 2000 through March 31, 2001 and $300,000 annually
during the period April 1, 2001 through December 31, 2001. The agreement
provides for a performance bonus of up to 100% of Mr. Pasetta's average salary
in effect for each of TVN's fiscal reporting years, with a guaranteed minimum
of $250,000 per the first fiscal year, $165,000 per the second fiscal year and
$180,000 per the third fiscal year. In addition, pursuant to the agreement, we
have agreed to grant Mr. Pasetta an option to purchase 150,000 shares of common
stock which option vests as described in the agreement over a five year period.
We believe that all of the transactions set forth above were made on terms
no less favorable than would be obtained for similar services provided to
unrelated third parties. Any future transactions between we and our executive
officers directors and their affiliates will be on terms no less favorable to
us than can be obtained from unaffiliated third parties, and any material
transactions with such persons will be approved by a majority of the
disinterested members of our Board of Directors.
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Principal stockholders
The following table sets forth certain information regarding the beneficial
ownership of our capital stock as of November 15, 1999, as adjusted to give
effect to the transactions contemplated in this prospectus:
. by each of our directors and each of the named executive officers,
. by all directors and executive officers as a group, and
. by each person who is known by us to own beneficially more than 5% of our
common stock on an as-converted basis.
Applicable percentage of ownership is based on 152,517 shares of common
stock and 19,654,671 shares of preferred stock outstanding as of November 15,
1999, together with applicable options and warrants for each stockholder.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. Except as indicated in the footnotes to
this table and pursuant to applicable community property laws, the stockholder
named in the table has sole voting and investment power with respect to the
shares set forth opposite such stockholder's name. Shares of common stock or
preferred stock subject to options or warrants that are presently exercisable
or exercisable within 60 days of November 15, 1999, are deemed to be
beneficially owned by the person holding such options for the purpose of
computing the percentage of ownership of such person but are not treated as
outstanding for the purpose of computing the percentage of any other person.
<TABLE>
<CAPTION>
Number of Number of Percent
Shares of Shares of Ownership
Common Preferred of Voting
Beneficial Owner Stock Stock Stock
---------------- --------- ---------- ---------
<S> <C> <C> <C>
Entities affiliated with Princes Gate
Investors II, L.P.(1)........................ -- 10,857,338 54.8%
1585 Broadway
New York, New York 10036
Stuart Z. Levin(2)............................ 811,230 938,398 8.5
Arthur Fields(3).............................. 395,833 397,307 3.8
Gregory Pasetta(4)............................ 100,000 -- *
David Sears(5)................................ 20,833 -- *
S. Robert Levine, M.D......................... -- 3,332,835 16.8
Stephen R. Munger(1).......................... -- 10,857,338 54.8
Martin A. Pasetta(6).......................... -- 352,883 1.8
David R. Powers(1)............................ -- 10,857,338 54.8
Melvin Rosen.................................. -- 1,165,413 5.9
Jerome H. Turk................................ -- 172,102 *
All directors and executive officers as a
group (19 persons)(7)........................ 1,658,396 16,050,863 82.9
</TABLE>
- --------
* Less than 1%.
(1) Includes an aggregate of 8,797,318 shares of Series B-1, B-3 and B-4
Preferred Stock held by Princes Gate Investors II, L.P., an aggregate of
592,812 shares of Series B-1, B-3 and B-4 Preferred Stock held by Acorn
Partnership II, L.P., an aggregate of 586,883 shares of Series B-1, B-3 and
B-4 Preferred Stock held by PGI Investments Limited, an aggregate of
293,442 shares of Series B-1, B-4 and B-4 Preferred Stock held by Gregor
von Opel and an aggregate of 586,883 shares of Series B-1, B-3 and B-4
Preferred Stock
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held by Investor Investments AB. Mr. Munger and Mr. Powers, both of whom are
directors of TVN and are also employees of Morgan Stanley, an affiliate of
Princes Gate Investors II, L.P. Each disclaims beneficial ownership of the
shares held by these funds.
(2) Includes 266,196 shares of Series A Preferred Stock held by Mr. Levin's
former wife over which Mr. Levin exercises voting power but as to which Mr.
Levin disclaims beneficial ownership. Includes 711,130 shares of common
stock which may be acquired upon exercise of stock options which are
presently exercisable or will become exercisable within 60 days of November
15, 1999.
(3) Includes 397,307 shares of Series A Preferred Stock held by the Arthur and
Soni Fields Family Trust over which Mr. Fields may be deemed to have voting
and investment power. Includes 395,833 shares of common stock which may be
acquired upon exercise of stock options which are presently exercisable or
will become exercisable within 60 days of November 15, 1999.
(4) Includes 100,000 shares of common stock which may be acquired upon exercise
of stock options which are presently exercisable or will become exercisable
within 60 days of November 15, 1999.
(5) Includes 20,833 shares of common stock which may be acquired upon exercise
of stock options which are presently exercisable or will become exercisable
within 60 days of November 15, 1999.
(6) Includes 352,883 shares of Series A Preferred Stock held by the Pasetta
Family Trust over which Mr. Pasetta may be deemed to have voting and
investment power.
(7) Includes 1,591,629 shares of common stock which may be acquired upon
exercise of stock options which are presently exercisable or will become
exercisable within 60 days of November 15, 1999.
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<PAGE>
Description of certain indebtedness
On March 16, 1991, we entered into a limited partnership, TVN Entertainment,
L.P., with two movie studios, MCA Satellite Services, Inc. and Centurion
Broadcast, Inc. The studios were the general partners and we were the sole
limited partner. Under the limited partnership agreement, the studios agreed
(1) to make a combined capital contribution of $10.0 million to the limited
partnership and (2) to loan up to an additional $20.0 million, of which
approximately $16.5 million was loaned to the limited partnership. The limited
partnership was terminated by mutual agreement on May 15, 1992, whereupon we:
. acquired the studios' interests in the limited partnership;
. received all limited partnership assets; and
. assumed certain liabilities of the limited partnership, including
contingent notes payable to the studios and certain of our stockholders.
The contingent notes payable to such stockholders, including Stuart Z.
Levin, our Chairman and Chief Executive Officer, and S. Robert Levine, M.D., a
director and owner of more than 5% of our voting securities, arose from funds
advanced to us by such stockholders. These obligations to our stockholders may
only be repaid on a pari passu basis with the obligations owing to the studios.
As of September 30, 1999, the aggregate amounts of principal and interest
under the contingent notes payable to the studios and our stockholders will be
$27.5 million and $1.9 million, respectively, including $11.0 million and
$843,000 of accrued interest on such contingent notes payable, respectively.
Interest on the contingent notes payable accrues at the prime rate plus 1% and
the contingent notes payable do not have a specified maturity date or repayment
schedule.
According to the restated limited partnership agreement dated March 7, 1991,
we are required to repay these obligations out of "Available Cash Flow" as such
term is defined in the agreement. Since then, we have experienced negative cash
flows from operations and do not believe that we have generated Available Cash
Flow that would require us to repay the contingent notes payable. In addition,
the contingent notes payable have not been recorded as a liability in
accordance with Accounting Principles Board Opinion No. 16, "Business
Combinations," because they represent contingent consideration related to the
acquisition of net assets and the outcome of the contingency is not
determinable beyond a reasonable doubt.
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The exchange offer
Purpose and effect
We issued the old notes on July 29, 1998 in a private placement. In
connection with this issuance, we entered into the indenture and the
registration rights agreement. These agreements require that we file a
registration statement under the Securities Act for the new notes, the
registered notes to be issued in the exchange offer and, upon the effectiveness
of the registration statement, offer to you the opportunity to exchange your
old notes for a like principal amount of new notes. The new notes will be
issued without a restrictive legend and, except as set forth below, may be
reoffered and resold by you without registration under the Securities Act.
After we complete the exchange offer, our obligations with respect to the
registration of the old notes will terminate, except as provided in the last
paragraph of this section. A copy of the indenture and the registration rights
agreement have been filed as exhibits to the registration statement of which
this prospectus is a part. Since we will complete the exchange offer after July
29, 1999, interest on the old notes will accrue at the rate of 0.5% per annum
(in addition to interest otherwise accruing on the old notes) and be payable in
cash, semiannually in arrears on February 1 and August 1 of each year,
commencing February 1, 2000, until the consummation of the exchange offer.
Based on an interpretation by the staff of the Commission set forth in no-
action letters issued to third parties, if you are not our "affiliate" within
the meaning of Rule 405 under the Securities Act or a broker-dealer referred to
in the next paragraph, we believe that new notes to be issued to you in the
exchange offer may be offered for resale, resold and otherwise transferred by
you, without compliance with the registration and prospectus delivery
provisions of the Securities Act. We have not received our own no-action letter
as to this interpretation. This interpretation, however, is based on your
representation to us that:
. the new notes to be issued to you in the exchange offer are acquired in
the ordinary course of your business; and
. you are not engaging in and do not intend to engage in a distribution of
the new notes to be issued to you in the exchange offer; and
. you have no arrangement or understanding with any person to participate
in the distribution of the new notes to be issued to you in the exchange
offer.
If you tender in the exchange offer for the purpose of participating in a
distribution of the new notes to be issued to you in the exchange offer, you
cannot rely on this interpretation by the staff of the Commission. Under those
circumstances, you must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction. Each broker-dealer that receives new notes in the exchange offer
for its own account, in exchange for old notes that were acquired by the
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resales of those new
notes. See "Plan of Distribution."
If you will not receive freely tradeable registered notes in the exchange
offer or are not eligible to participate in the exchange offer, you can elect,
by indicating on the letter of transmittal and providing certain additional
necessary information, to have your old notes registered in a "shelf"
registration statement on an appropriate form pursuant to Rule 415 under the
Securities Act. In the event that we are obligated to file a shelf registration
statement, we will be required to keep the shelf registration statement
effective for a period of two years or such shorter period that will terminate
when all of the old notes covered by the shelf registration statement have been
sold pursuant to the shelf registration statement.
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Other than as set forth in this paragraph, you will not have the right to
require us to register your old notes under the Securities Act. See "--
Procedures for tendering."
Consequences of failure to exchange
After we complete the exchange offer, if you have not tendered your old
notes, you will not have any further registration rights, except as set forth
above. Your old notes will continue to be subject to certain restrictions on
transfer. Therefore, the liquidity of the market for your old notes could be
adversely affected upon completion of the exchange offer if you do not
participate in the exchange offer. If the liquidity of the trading market for
the old notes is adversely affected, you may be unable to sell or transfer your
old notes and the value of your old notes may decline.
Terms of the exchange offer
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, we will accept any and all old notes validly
tendered and not withdrawn prior to 5:00 p.m., New York City time, on the
expiration date. We will issue $1,000 principal amount of new notes in exchange
for each $1,000 principal amount of old notes accepted in the exchange offer.
You may tender some or all of your old notes in the exchange offer. However,
old notes may be tendered only in integral multiples of $1,000 in principal
amount.
The form and terms of the new notes are substantially the same as the form
and terms of the old notes, except that the new notes to be issued in the
exchange offer will have been registered under the Securities Act and will not
bear legends restricting their transfer. The new notes will be issued pursuant
to, and entitled to the benefits of, the indenture. The indenture also governs
the old notes. The new notes and the old notes will be deemed one issue of
notes under the indenture.
As of the date of this prospectus, $166.2 million aggregate principal amount
of the old notes were outstanding. This prospectus, together with the letter of
transmittal, is being sent to all registered holders of old notes as of June
15, 1999 and to others believed to have beneficial interests in the old notes.
You do not have any appraisal or dissenters, rights in connection with the
exchange offer under the General Corporation Law of the State of Delaware or
the indenture. We intend to conduct the exchange offer in accordance with the
applicable requirements of the Exchange Act and the rules and regulations of
the Commission promulgated under the Exchange Act.
We will be deemed to have accepted validly tendered old notes when, as, and
if we have given oral or written notice of our acceptance to the exchange
agent. The exchange agent will act as our agent for the tendering holders for
the purpose of receiving the new notes from us. If we do not accept any
tendered notes because of an invalid tender, the occurrence of certain other
events set forth in this prospectus or otherwise, we will return certificates
for any unaccepted old notes without expense to the tendering holder as
promptly as practicable after the expiration date.
You will not be required to pay brokerage commissions or fees or, except as
set forth below under "--Transfer taxes," transfer taxes with respect to the
exchange of your old notes in the exchange offer. We will pay all charges and
expenses, other than certain applicable taxes, in connection with the exchange
offer. See "--Fees and expenses" below.
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Expiration Date; Amendments
The exchange offer will expire at 5:00 p.m., New York City time, on [ ]
1999, unless we determine, in our sole discretion, to extend the exchange
offer. If we extend the exchange offer, it will expire at the later date and
time to which it is extended. We do not intend to extend the exchange offer,
although we reserve the right to do so.. If we extend the exchange offer, we
will give oral or written notice of the extension to the exchange agent and
give each registered holder notice by means of a press release or other public
announcement of any extension prior to 9:00 a.m., New York City time, on the
next business day after the scheduled expiration date.
We also reserve the right, in our sole discretion,
. to delay accepting any old notes or, if any of the conditions set forth
below under "--Conditions" have not been satisfied or waived, to
terminate the exchange offer or
. to amend the terms of the exchange offer in any manner, by giving oral or
written notice of such delay or termination to the exchange agent, and by
complying with Rule 14e-l(d) under the Exchange Act to the extent that
rule applies.
We acknowledge and undertake to comply with the provisions of Rule 14e-l(c)
under the Exchange Act, which requires us to pay the consideration offered, or
return the old notes surrendered for exchange, promptly after the termination
or withdrawal of the exchange offer. We will notify you as promptly as we can
of any extension, termination or amendment.
Procedures for tendering
Book-entry interests
The old notes were issued as global securities in fully registered form
without interest coupons. Beneficial interests in the global securities, held
by direct or indirect participants in The Depository Trust Company, are shown
on, and transfers of these interests are effected only through, records
maintained in book-entry form by The Depository Trust Company with respect to
its participants.
If you hold your old notes in the form of book-entry interests and you wish
to tender your old notes for exchange pursuant to the exchange offer, you must
transmit to the exchange agent on or prior to the expiration date either:
(1) a written or facsimile copy of a properly completed and duly executed
letter of transmittal, including all other documents required by such
letter of transmittal, to the exchange agent at the address set forth
on the cover page of the letter of transmittal; or
(2) a computer-generated message transmitted by means of The Depository
Trust Company's Automated Tender Offer Program system and received by
the exchange agent and forming a part of a confirmation of book-entry
transfer, in which you acknowledge and agree to be bound by the terms
of the letter of transmittal.
In addition, in order to deliver old notes held in the form of book-entry
interests:
(A) a timely confirmation of book-entry transfer of your old notes into the
exchange agent's account at DTC pursuant to the procedure for book-
entry transfers described below under "--Book-entry transfer" must be
received by the exchange agent prior to the expiration date; or
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<PAGE>
(B) you must comply with the guaranteed delivery procedures described
below.
The method of delivery of old notes and the letter of transmittal and all
other required documents to the exchange agent is at your election and risk.
Instead of delivery by mail, we recommend that you use an overnight or hand
delivery service. In all cases, sufficient time should be allowed to assure
delivery to the exchange agent before the expiration date. You should not send
the letter of transmittal or old notes to us. You may request your broker,
dealer, commercial bank, trust company, or nominee to effect the above
transactions for you.
Certificated old notes
Only registered holders of certificated old notes may tender those old notes
in the exchange offer. If your old notes are certificated notes and you wish to
tender your old notes for exchange pursuant to the exchange offer, you must
transmit to the exchange agent on or prior to the expiration date, a written or
facsimile copy of a properly completed and duly executed letter of transmittal,
including all other required documents, to the address set forth below under
"--Exchange agent." In addition, in order to validly tender your certificated
old notes:
(1) the certificates representing your old notes must be received by the
exchange agent prior to the expiration date; or
(2) you must comply with the guaranteed delivery procedures described
below.
Procedures applicable to all holders
If you tender an old note and you do not withdraw the tender prior to the
expiration date, you will have made an agreement with us in accordance with the
terms and subject to the conditions set forth in this prospectus and in the
letter of transmittal.
If your old notes are registered in the name of a broker, dealer, commercial
bank, trust company or other nominee and you wish to tender your old notes, you
should contact the registered holder promptly and instruct the registered
holder to tender on your behalf. If you wish to tender on your own behalf, you
must, prior to completing and executing the letter of transmittal and
delivering your old notes, either make appropriate arrangements to register
ownership of the old notes in your name or obtain a properly completed bond
power from the registered holder. The transfer of registered ownership may take
considerable time.
Signatures on a letter of transmittal or a notice of withdrawal must be
guaranteed by an eligible institution unless:
(A) old notes tendered in the exchange offer are tendered either
(1) by a registered holder who has not completed the box entitled
"Special Registration instructions" or "Special Delivery
Instructions" on the letter of transmittal or
(2) for the account of an eligible institution; and
(B) the box entitled "Special Registration instructions" on the letter of
transmittal has not been completed.
If signatures on a letter of transmittal or a notice of withdrawal are
required to be guaranteed, the guarantee must be by a financial institution,
which includes most banks, savings and loan associations and brokerage houses,
that is a participant in the Securities
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Transfer Agents medallion Program, the New York Stock Exchange medallion
Program or the Stock Exchanges medallion Program.
If the letter of transmittal is signed by a person other than you, your old
notes must be endorsed or accompanied by a properly completed bond power and
signed by you as your name appears on those old notes.
If the letter of transmittal or any old notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations, or others acting in a fiduciary or representative capacity, those
persons should so indicate when signing. Unless we waive this requirement, in
this instance you must submit with the letter of transmittal proper evidence
satisfactory to us of their authority to act on your behalf.
We will determine, in our sole discretion, all questions regarding the
validity, form, eligibility, including time of receipt, acceptance and
withdrawal of tendered old notes. This determination will be final and binding.
We reserve the absolute right to reject any and all old notes not properly
tendered or any old notes our acceptance of which would, in the opinion of our
counsel, be unlawful. We also reserve the right to waive any defects,
irregularities or conditions of tender as to particular old notes, our
interpretation of the terms and conditions of the exchange offer, including the
instructions in the letter of transmittal, will be final and binding on all
parties.
You must cure any defects or irregularities in connection with tenders of
your old notes within the time period we will determine unless we waive that
defect or irregularity. Although we intend to notify you of defects or
irregularities with respect to your tender of old notes, neither we, the
exchange agent nor any other person will incur any liability for failure to
give this notification. Your tender will not be deemed to have been made and
your notes will be returned to you if:
(1) you improperly tender your old notes;
(2) you have not cured any defects or irregularities in your tender; and
(3) we have not waived those defects, irregularities or improper tender.
In any such case, the exchange agent will return your old notes, unless
otherwise provided in the letter of transmittal, as soon as practicable
following the expiration of the exchange offer.
In addition, we reserve the right in our sole discretion to:
(1) purchase or make offers for, or offer registered notes for, any old
notes that remain outstanding subsequent to the expiration of the
exchange offer;
(2) terminate the exchange offer; and
(3) to the extent permitted by applicable law, purchase old notes or any
other notes in the open market, in privately negotiated transactions or
otherwise.
The terms of any of these purchases or offers could differ from the terms of
the exchange offer.
By tendering, you will represent to us that, among other things:
(1) the new notes to be acquired by you in the exchange offer are being
acquired in the ordinary course of your business;
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(2) you are not engaging in and do not intend to engage in a distribution
of the new notes to be acquired by you in the exchange offer;
(3) you do not have an arrangement or understanding with any person to
participate in the distribution of the new notes to be acquired by you
in the exchange offer; and
(4) you are not our "affiliate," as defined under Rule 405 of the
Securities Act.
In all cases, issuance of new notes for old notes that are accepted for
exchange in the exchange offer will be made only after timely receipt by the
exchange agent of certificates for your old notes or a timely book-entry
confirmation of your old notes into the exchange agent's account at DTC, a
properly completed and duly executed letter of transmittal, or a computer-
generated message instead of the letter of transmittal, and all other required
documents, if any tendered old notes are not accepted for any reason set forth
in the terms and conditions of the exchange offer or if old notes are submitted
for a greater principal amount than you desire to exchange, the unaccepted or
non-exchanged old notes (or old notes in substitution therefor) will be
returned without expense to you, or, in the case of old notes tendered by book-
entry transfer into the exchange agent's account at DTC pursuant to the book-
entry transfer procedures described below, the non-exchanged old notes will be
credited to your account maintained with DTC, as promptly as practicable after
the expiration or termination of the exchange offer.
Guaranteed delivery procedures
If you desire to tender your old notes and your old notes are not
immediately available or one of the situations described in the immediately
preceding paragraph occurs, you may tender if:
(1) you tender through an eligible financial institution;
(2) on or prior to 5:00 p.m., New York City time, on the expiration date,
the exchange agent receives from an eligible institution, a written or
facsimile copy of a properly completed and duly executed letter of
transmittal and notice of guaranteed delivery, substantially in the
form provided by us; and
(3) the certificates for all certificated old notes, in proper form for
transfer, or a book-entry confirmation, and all other documents
required by the letter of transmittal, are received by the exchange
agent within three NYSE trading days after the date of execution of the
notice of guaranteed delivery.
The notice of guaranteed delivery may be sent by facsimile transmission,
mail or hand delivery. The notice of guaranteed delivery must set forth:
(1) your name and address;
(2) the principal amount of old notes you are tendering; and
(3) a statement that your tender is being made by the notice of guaranteed
delivery and that you guarantee that within three New York Stock
Exchange trading days after the execution of the notice of guaranteed
delivery, the eligible institution will deliver the following documents
to the exchange agent:
(A) the certificates for all certificated old notes being tendered, in
proper form for transfer or a book-entry confirmation of tender;
(B) a written or facsimile copy of the letter of transmittal, or a
book-entry confirmation instead of the letter of transmittal; and
(C) any other documents required by the letter of transmittal.
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Book-entry transfer
The exchange agent will establish an account with respect to the book-entry
interests at DTC for purposes of the exchange offer promptly after the date of
this prospectus. You must deliver your book-entry interest by book-entry
transfer to the account maintained by the exchange agent at DTC. Any financial
institution that is a participant in may make book-entry delivery of
book-entry interests by causing DTC to transfer the book-entry interests into
the exchange agent's account at DTC in accordance with DTC's procedures for
transfer.
If one of the following situations occur:
(1) you cannot deliver a book-entry confirmation of book-entry delivery of
your book-entry interests into the exchange agent's account at DTC; or
(2) you cannot deliver all other documents required by the letter of
transmittal to the exchange agent prior to the expiration date,
then you must tender your book-entry interests according to the guaranteed
delivery procedures discussed above.
Withdrawal rights
You may withdraw tenders of your old notes at any time prior to 5:00 p.m.,
New York City time, on the expiration date.
For your withdrawal to be effective, the exchange agent must receive a
written or facsimile transmission notice of withdrawal at its address set forth
below under "--Exchange agent" prior to 5:00 p.m., New York City time, on the
expiration date.
The notice of withdrawal must:
(1) state your name;
(2) identify the specific old notes to be withdrawn, including the
certificate number or numbers and the principal amount of withdrawn old
notes;
(3) be signed by you in the same manner as you signed the letter of
transmittal when you tendered your old notes, including any required
signature guarantees or be accompanied by documents of transfer
sufficient for the exchange agent to register the transfer of the old
notes into your name; and
(4) specify the name in which the old notes are to be registered, if
different from yours.
We will determine all questions regarding the validity, form, and
eligibility, including time of receipt, of withdrawal notices, our
determination will be final and binding on all parties. Any old notes withdrawn
will be deemed not to have been validly tendered for exchange for purposes of
the exchange offer. Any old notes which have been tendered for exchange but
which are not exchanged for any reason will be returned to you without cost as
soon as practicable after withdrawal, rejection of tender, or termination of
the exchange offer. Properly withdrawn old notes may be retendered by following
one of the procedures described under "--Procedures for tendering" above at any
time on or prior to 5:00 p.m., New York City time, on the expiration date.
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Conditions
Notwithstanding any other provision of the exchange offer and subject to our
obligations under the registration rights agreement, we will not be required to
accept for exchange, or to issue new notes in exchange for, any old notes and
may terminate or amend the exchange offer, if at any time before the acceptance
of any old notes for exchange any of the following events shall occur:
(1) any injunction, order or decree shall have been issued by any court or
any governmental agency that would prohibit, prevent or otherwise
materially impair our ability to proceed with the exchange offer; or
(2) the exchange offer shall violate any applicable law or any applicable
interpretation of the staff of the Commission.
These conditions are for our sole benefit and we may assert them regardless
of the circumstances giving rise to any condition, subject to applicable law.
We also may waive in whole or in part at any time and from time to time any
particular condition in our reasonable discretion. If we waive a condition, we
may be required in order to comply with applicable securities laws, to extend
the expiration date of the exchange offer. Our failure at any time to exercise
any of the foregoing rights will not be deemed a waiver of these rights and
these rights will be deemed ongoing rights which may be asserted at any time
and from time to time.
In addition, we will not accept for exchange any old notes tendered, and no
new notes will be issued in exchange for any of those old notes, if at the time
the old notes are tendered any stop order shall be threatened by the Commission
or be in effect with respect to the registration statement of which this
prospectus is a part or the qualification of the indenture under the Trust
Indenture Act of 1939.
The exchange offer is not conditioned on any minimum principal amount of old
notes being tendered for exchange.
Exchange agent
We have appointed The Bank of New York as exchange agent for the exchange
offer. Questions, requests for assistance and requests for additional copies of
the prospectus, the letter of transmittal and other related documents should be
directed to the exchange agent addressed as follows:
By Registered or Certified mail, by Hand or by overnight Courier:
The Bank of New York
101 Barclay Street-7E
Corporate Trust Services Window
Ground Floor
New York, New York 10286
Attn: Reorganization Section
<TABLE>
<C> <S>
By Facsimile: By Telephone:
(212) 571-3080 (212) 815-5942
</TABLE>
The exchange agent also acts as trustee under the indenture.
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Fees and expenses
We will not pay brokers, dealers, or others soliciting acceptances of the
exchange offer. The principal solicitation is being made by mail. Additional
solicitations, however, may be made in person or by telephone by our officers
and employees.
We will pay the cash expenses to be incurred in connection with the exchange
offer. These are estimated in the aggregate to be approximately $ which
includes fees and expenses of the exchange agent, accounting, legal, printing
and related fees and expenses.
Transfer taxes
You will not be obligated to pay any transfer taxes in connection with a
tender of your old notes for exchange unless you instruct us to register new
notes in the name of, or request that old notes not tendered or not accepted in
the exchange offer be returned to, a person other than the registered tendering
holder, in which event the registered tendering holder will be responsible for
the payment of any applicable transfer tax.
Accounting treatment
We will not recognize any gain or loss for accounting purposes upon the
consummation of the exchange offer, we will amortize the expense of the
exchange offer over the term of the new notes under generally accepted
accounting principles.
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Description of the new notes
The terms of the new notes will be identical in all material respects to
those of the old notes described below, except that the new notes (i) will have
been registered under the Securities Act and therefore will not be subject to
certain restrictions on transfer applicable to the old notes and (ii) will not
be entitled to certain registration rights under the registration rights
agreement, including the provision for Additional Interest of up to 0.5% on the
old notes. Holders of old notes should review the information set forth under
"Description of the old notes."
Upon consummation of the exchange offer, TVN will have no further obligation
to register the old notes. Thereafter, any holder of old notes who does not
tender its old notes in the exchange offer, including any holder which is an
"affiliate" (as that term is defined in Rule 405 of the Securities Act) of TVN
which cannot tender its old notes in the exchange offer, will continue to hold
restricted securities which may not be offered, sold or other wise transferred,
pledged or hypothecated except pursuant to Rule 144 and Rule 144A under the
Securities Act or pursuant to any other exemption from registration under the
Securities Act relating to the disposition of securities, provided that an
opinion of counsel is furnished to TVN that such an exemption is available.
The new notes are 14% Senior Notes and have a principal amount of $166.2
million. The new notes will mature on August 1, 2008. The new notes will pay
interest in cash at the rate of 14% per annum, payable on February 1 and August
1 of each year, commencing February 1, 2000.
We have purchased and pledged to The Bank of New York, as trustee under the
indenture governing the old notes, as security for the benefit of the holders
of the notes, a portfolio of U.S. government securities in an amount expected
to be sufficient to provide for payment in full of the first six scheduled
interest payments on the notes. A portion of the pledged securities has already
been used to make the first two interest payments on the old notes. We believe
that the remaining amount of the pledged securities is sufficient to make the
first four interest payments on the new notes. Except for the pledged
securities, the new notes will be unsecured.
Form of new notes
The certificates representing the new notes will be issued in fully
registered form, without coupons. Except as described in the next paragraph,
the new notes will be deposited with The Bank of New York, as custodian for The
Depository Trust Company, and registered in the name of Cede & Co., as The
Depository Trust Company's nominee in the form of one or more global notes.
Holders of the new notes will own book-entry interests in the global note
evidenced by records maintained by The Depository Trust Company.
Book-entry interests may be exchanged for certificated notes of like tenor
and equal aggregate principal amount, if:
(1) The Depository Trust Company notifies us that it is unwilling or
unable to continue as depositary or we determine that The
Depository Trust Company is unable to continue as depositary and we
fail to appoint a successor depositary within 90 days;
(2) we provide for the exchange pursuant to the terms of the indenture;
or
(3) we determine that the book-entry interests will no longer be
represented by global notes and we execute and deliver to the
Trustee instructions to that effect.
As of the date of this prospectus, no certificated notes are issued and
outstanding.
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Description of the old notes
We issued old notes under an indenture between our company, as issuer, and
The Bank of New York, as trustee (the "Trustee"). The following is a summary of
the material provisions of the indenture. For a complete statement of the
terms, we refer you to the indenture. We will provide you a copy of the
indenture upon request. Certain provisions of the indenture are made a part
thereof by the Trust Indenture Act of 1939, as amended. Definitions or
particular terms in the indenture supplement this summary. For definitions of
certain capitalized terms used in the following summary, see "--Certain
definitions" below.
General
The old notes are unsecured (except to the extent described under "--
Security" below), unsubordinated obligations of our company, initially limited
to $200 million aggregate principal amount, and will mature on August 1, 2008.
Interest on the old notes accrues at the rate of 14% per annum and is payable
semiannually in arrears (to holders of record at the close of business on
January 15 or July 15 immediately preceding the Interest Payment Date) on
February 1 and August 1 of each year commencing February 1, 1999. Interest is
computed on the basis of a 360-day year of twelve 30-day months.
If by the date that is one year after the Closing Date, our company has not
consummated the exchange offer or any other registered exchange offer for the
old notes or caused a shelf registration statement with respect to resales of
the old notes to be declared effective, interest on the old notes (in addition
to interest otherwise accruing on the old notes) will accrue at the rate of
0.5% per annum and be payable in cash semiannually in arrears on February 1 and
August 1 of each year, commencing February 1, 2000, until the consummation of a
registered exchange offer or the effectiveness of a shelf registration
statement. See "--Registration rights" below.
Principal of, premium, if any, and interest on the old notes is payable, and
the old notes may be exchanged or transferred, at the office or agency of our
company in the Borough of Manhattan, the City of New York (which initially will
be the corporate trust office of the Trustee at 101 Barclay Street, 21 West,
New York, New York 10286; Attention: Corporate Trust Trustee Administration);
provided that, at our option, payment of interest may be made by check mailed
to the holders at their addresses as they appear in the security register
maintained by the Trustee.
The old notes were issued only in fully registered form, without coupons, in
denominations of $1,000 of principal amount and any integral multiple thereof.
See "The exchange offer--Book-entry transfer." No service charge will be made
for any registration of transfer or exchange of old notes, but we may require
payment of a sum sufficient to cover any transfer tax or other similar
governmental charge payable in connection therewith.
Subject to the covenants described below under "--Covenants" and applicable
law, we may issue additional Notes under the indenture. Any old notes which
remain outstanding, the new note, offered hereby, and any additional new notes
subsequently issued would be treated as a single class for all purposes under
the indenture.
The old notes were issued in connection with the Warrants, where one old
note and one Warrant constituted a single unit. Each Warrant entitled its
holder to purchase 10.777 shares of common stock, par value $.001, of TVN. The
old note and Warrant included in each unit automatically became separately
transferable upon the date six months after the Closing Date.
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Optional redemption
We may redeem the old notes, at our option, in whole or in part, at any time
or from time to time, on or after August 1, 2003. We may also redeem the old
notes prior to maturity, upon not less than 30 nor more than 60 days' prior
notice mailed by first class mail to each holder's last address as it appears
in the Security Register, at the following Redemption Prices (expressed in
percentages of principal amount), plus accrued and unpaid interest, if any, to
the Redemption Date (subject to the right of holders of record on the relevant
Regular Record Date that is on or prior to the Redemption Date to receive
interest due on an Interest Payment Date). The chart below shows Redemption
Prices if the old notes are redeemed during the 12-month period commencing
August 1, of the years set forth below:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2003.......................................................... 108.000%
2004.......................................................... 105.333
2005.......................................................... 102.667
2006 and thereafter........................................... 100.000
</TABLE>
In addition, at any time prior to August 1, 2001, we may use proceeds of one
or more Public Equity Offerings, following which there is a Public Market, to
redeem up to 35% of the principal amount of the old notes, at any time or from
time to time in part, at a Redemption Price (expressed as a percentage of
principal amount thereof) of 114%; provided that
. Old notes representing at least $130.0 million aggregate principal
amount remain outstanding after each such redemption and
. notice of such redemption is mailed within 60 days after the
consummation of the related Public Equity Offering.
In the case of any partial redemption, the Trustee will select old notes for
redemption in compliance with the requirements of the principal national
securities exchange, if any, on which the old notes are listed. If the old
notes are not listed on a national securities exchange, the Trustee will select
old notes for redemption on a pro rata basis by lot or by such other method as
the Trustee in its sole discretion shall deem to be fair and appropriate.
However, no note of $1,000 in principal amount or less shall be redeemed in
part. If any note is to be redeemed in part only, the notice of redemption
relating to such note shall state the portion of the principal amount thereof
to be redeemed. A new note in principal amount equal to the principal amount of
the unredeemed portion thereof will be issued in the name of the holder thereof
upon cancellation of the original note.
Sinking Fund
There are no sinking fund payments for the old notes.
Security
Pursuant to the indenture, on the Closing Date, we purchased and pledged to
the Trustee, as security for the benefit of the holders of the old notes,
Pledged Securities in an amount then expected to be sufficient to provide for
payment in full of the first six scheduled interest payments on the old notes
when due. We used approximately $76.7 million of the net proceeds of issuance
of the old notes to acquire the Pledged Securities. We currently
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anticipate that the remaining amount of Pledged Securities will be sufficient
to make the first four interest payments on the new notes.
Pursuant to the Pledge Agreement, the Pledged Securities have been pledged
by us to the Trustee for your benefit as holders of the notes. The Trustee has
agreed to hold the Pledged Securities in the Pledge Account. The Pledge
Agreement provides that, immediately prior to an Interest Payment Date, we may
either deposit with the Trustee, from funds otherwise available to us, cash in
an amount sufficient to pay all or a part of the interest scheduled to be paid
on such date, or we may notify the Trustee that we do not intend to make such a
deposit. Upon receipt of such deposit or notice, the Trustee is required to
release from the Pledge Account, if and to the extent necessary, proceeds
sufficient to pay the interest then due on the old notes. A failure by us to
pay any of the first six scheduled interest payments on the notes will
constitute an immediate Event of Default under the indenture, with no cure or
grace period. The Pledged Securities and the Pledge Account will also provide
partial security for the repayment of principal, premium and interest on the
old notes.
The Pledge Agreement will provide that, upon payment by us of the first six
scheduled interest payments on the notes, all of the remaining Pledged
Securities, if any, will be released as collateral and the notes will
thereafter be unsecured.
Registration Rights
We have agreed with the Placement Agent, for your benefit as holder of the
Notes, to use our best efforts, at our cost, to file and cause to become
effective, a registration statement with respect to a registered offer (the
"exchange offer"). In the exchange offer, we will exchange the old notes for an
issue of unsubordinated notes of our company (the "new notes") with terms
identical to the old notes (except that the new notes will not bear legends
restricting the transfer thereof or provide for registration rights or
additional interest). Upon such registration statement being declared
effective, our company shall offer the new notes in return for surrender of the
old notes. When the exchange offer is completed, we will have no further
obligation to register or exchange old notes.
Ranking
The Indebtedness evidenced by the old notes ranks equally in priority of
payment with all future unsubordinated indebtedness of our company and senior
in right of payment to all existing and future subordinated indebtedness of our
company. As of June 30, 1999, we had $298.4 million of indebtedness outstanding
including the old notes but excluding contingent notes payable of $29.1
million. In addition, all existing and future liabilities, including trade
payables and indebtedness, including any subordinated indebtedness, of our
subsidiaries and all of our secured indebtedness will be effectively senior to
the old notes. We and our subsidiaries may incur substantial additional
Indebtedness, including secured Indebtedness, under the indenture.
Certain Definitions
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the indenture.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary or assumed in connection with an
Asset Acquisition by a Restricted Subsidiary and not Incurred in connection
with, or in anticipation of, such Person becoming a Restricted Subsidiary or
such Asset Acquisition; provided that
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Indebtedness of such Person which is redeemed, defeased, retired or otherwise
repaid at the time of or immediately after consummation of the transactions by
which such Person becomes a Restricted Subsidiary or such Asset Acquisition
shall not be Acquired Indebtedness.
"Adjusted Consolidated Net Income" means, for any period, the aggregate net
income (or loss) of the Company and its Restricted Subsidiaries for such period
determined in conformity with GAAP; provided that the following items shall be
excluded in computing Adjusted Consolidated Net Income (without duplication):
(1) the net income of any Person that is not a Restricted Subsidiary,
except to the extent of the amount of dividends or other distributions
actually paid to the Company or any of its Restricted Subsidiaries by
such Person during such period;
(2) solely for the purposes of calculating the amount of Restricted
Payments that may be made pursuant to clause (C) of item (4) of the
first paragraph of the "Limitation on restricted payments" covenant
described below (and in such case, except to the extent includable
pursuant to item (1) above), the net income (or loss) of any Person
accrued prior to the date it becomes a Restricted Subsidiary, or is
merged into or consolidated with the Company or any of its Restricted
Subsidiaries, or all or substantially all of the property and assets of
such Person are acquired by our company or any of its Restricted
Subsidiaries;
(3) the net income of a Restricted Subsidiary to the extent that the
declaration or payment of dividends or similar distributions by such
Restricted Subsidiary of such net income is not at the time permitted
by the operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to such Restricted Subsidiary, except to the
extent that such net income could be paid to our company or a
Restricted Subsidiary to loans, advances, intercompany transfers,
principal repayments or otherwise;
(4) any gains or losses (on an after-tax basis) attributable to Asset
Sales;
(5) except for purposes of calculating the amount of Restricted Payments
that may be made pursuant to clause (C) of item (4) of the first
paragraph of the "Limitation on restricted payments" covenant described
below, any amount paid or accrued as dividends on Preferred Stock of
our company or any Restricted Subsidiary owned by Persons other than
our company and any of its Restricted Subsidiaries; and
(6) without duplication of item (4) above, all extraordinary gains and
extraordinary losses.
"Adjusted Consolidated Net Tangible Assets" means the total amount of assets
of our company and its Restricted Subsidiaries, less applicable depreciation,
amortization and other valuation reserves, except to the extent resulting from
write-ups of capital assets, excluding write-ups in connection with accounting
for acquisitions in conformity with GAAP, after deducting therefrom:
(1) all current liabilities of our company and its Restricted
Subsidiaries, excluding intercompany items, and
(2) all goodwill, trade names, trademarks, patents, unamortized debt
discount and expense and other like intangibles,
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all as set forth on the most recent quarterly or annual consolidated balance
sheet of our company and its Restricted Subsidiaries, prepared in conformity
with GAAP and filed with the Commission or provided to the Trustee pursuant to
the "Commission reports and reports to holders" covenant below.
"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control,"
including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with," as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Asset Acquisition" means:
(1) an Investment by our company or any of its Restricted Subsidiaries
in any other Person pursuant to which such Person shall become a
Restricted Subsidiary or shall be merged into or consolidated with
our company or any of its Restricted Subsidiaries; provided that
such Person's primary business is related, ancillary or
complementary to the businesses of our company and its Restricted
Subsidiaries on the date of such Investment or
(2) an acquisition by our company or any of its Restricted Subsidiaries
of the property and assets of any Person other than our company or
any of its Restricted Subsidiaries that constitute substantially
all of such Person, or of a division or line of business of such
Person; provided that the property and assets acquired are related,
ancillary or complementary to the businesses of our company and its
Restricted Subsidiaries on the date of such acquisition.
"Asset Disposition" means the sale or other disposition by our company or
any of its Restricted Subsidiaries, other than to our company or another
Restricted Subsidiary, of:
(1) all or substantially all of the Capital Stock of any Restricted
Subsidiary or
(2) all or substantially all of the assets that constitute a division
or line of business of our company or any of its Restricted
Subsidiaries.
"Asset Sale" means any sale, transfer or other disposition (including by way
of merger or consolidation) in one transaction or a series of related
transactions by our company or any of its Restricted Subsidiaries to any Person
other than our company or any of its Restricted Subsidiaries of:
(1) all or any of the Capital Stock of any Restricted Subsidiary,
(2) all or substantially all of the property and assets of an operating
unit or business of our company or any of its Restricted
Subsidiaries, or
(3) any other property and assets (other than the Capital Stock or
other Investment in an Unrestricted Subsidiary) of our company or
any of its Restricted Subsidiaries outside the ordinary course of
business of our company or such Restricted Subsidiary and, in each
case that is not governed by the provisions of the Indenture
applicable to mergers, consolidations and sales of all or
substantially all of the assets of our company; provided that
"Asset Sale" shall not include:
(a) sales or other dispositions of inventory, receivables and other
current assets,
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(b) sales or other dispositions of assets for consideration at least
equal to the fair market value of the assets sold or disposed
of, to the extent that the consideration received would
constitute property or assets of the kinds described in clause
(i) (B) of the "Limitation on Asset Sales" covenant,
(c) sales, transfers or other dispositions of assets constituting
Restricted Payments permitted to be made under the "Limitation
on Restricted Payments" covenant,
(d) transfers consisting of granting of Liens permitted under the
"Limitation on Liens" covenant and dispositions of such assets
in accordance with such Liens, or
(e) Sale and Leaseback Transactions permitted under the "Limitation
on Sale and Leaseback Transactions" and "Limitation on
Indebtedness" covenants.
"Attributable Debt" means, with respect to an operating lease included in
any Sale and Leaseback Transaction at the time of determination, the present
value (discounted at the interest rate implicit in the lease or, if not known,
at our company's incremental borrowing rate) of the obligations of the lessee
of the property subject to such lease for rental payments during the remaining
term of the lease included in such transaction, including any period for which
such lease has been extended or may, at the option of the lessor, be extended,
or until the earliest date on which the lessee may terminate such lease without
penalty or upon payment of penalty (in which case the rental payments shall
include such penalty), after excluding from such rental payments all amounts
required to be paid on account of maintenance and repairs, insurance, taxes,
assessments, water, utilities and similar charges.
"Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing:
(1) the sum of the products of (a) the number of years from such date
of determination to the dates of each successive scheduled
principal payment of such debt security and (b) the amount of such
principal payment by
(2) the sum of all such principal payments.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in the equity of such Person, whether outstanding on the
Closing Date or issued thereafter, including, without limitation, all Common
Stock and Preferred Stock.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present
value of the rental obligations of such Person as lessee, in conformity with
GAAP, is required to be capitalized on the balance sheet of such Person.
"Capitalized Lease Obligations" means the discounted present value of the
rental obligations under a Capitalized Lease.
"Change of Control" means such time as:
(1) prior to the occurrence of a Public Market, a person- or "group"
(within the meaning of Sections 13(d) and 14(d)(2) of the Exchange
Act) becomes the ultimate "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act) of Voting Stock representing a greater
percentage of the total voting power of the Voting Stock of our
company, on a fully diluted basis, than is held by the
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Existing Stockholders on such date and (b) after the occurrence of a
Public Market, a "person" or "group" (within the meaning of Sections
13(d) and 14(d)(2) of the Exchange Act) becomes the ultimate
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act)
of more than 35% of the total voting power of the Voting Stock of our
company on a fully diluted basis, and such ownership is greater than
the percentage of the total voting power of the Voting Stock of our
company, on a fully diluted basis, than is held by the Existing
Stockholders on such date; or
(2) individuals who on the Closing Date constitute the Board of
Directors (together with any new directors whose election by the
Board of Directors or whose nomination by the Board of Directors for
election by our company's stockholders was approved by a vote of at
least two-thirds of the members of the Board of Directors then in
office who either were members of the Board of Directors on the
Closing Date or whose election or nomination for election was
previously so approved) cease for any reason to constitute a
majority of the members of the Board of Directors then in office.
"Closing Date" means the date on which the old notes are originally issued
under the indenture.
"Collateral Agent" means the securities intermediary with which the Pledged
Account is maintained, initially the Trustee.
"Consolidated EBITDA" means, for any period, Adjusted Consolidated Net
Income for such period plus, to the extent such amount was deducted in
calculating such Adjusted Consolidated Net Income:
(1) Consolidated Interest Expense;
(2) income taxes (other than income taxes (either positive or negative)
attributable to extraordinary, and non-recurring gains or losses or
sales of assets);
(3) depreciation expense;
(4) amortization expense; and
(5) all other non-cash items reducing Adjusted Consolidated Net Income
(other than items that will require cash payments and for which an
accrual or reserve is, or is required by GAAP to be, made), less all
non-cash items increasing Adjusted Consolidated Net Income, all as
determined on a consolidated basis for our company and its
Restricted Subsidiaries in conformity with GAAP, provided that, if
any Restricted Subsidiary is not a Wholly Owned Restricted
Subsidiary, Consolidated EBITDA shall be reduced (to the extent not
otherwise reduced in the calculation of Adjusted Consolidated Net
Income) by an amount equal to:
(A) the amount of the Adjusted Consolidated Net Income attributable
to such Restricted Subsidiary multiplied by
(B) the percentage ownership interest in the income of such
Restricted Subsidiary not owned on the last day of such period
by our company or any of its Restricted Subsidiaries.
"Consolidated Interest Expense" means, for any period, the aggregate amount
of interest in respect of Indebtedness (including, without limitation,
amortization of original issue discount on any Indebtedness and the interest
portion of any deferred payment obligation, calculated in accordance with the
effective interest method of accounting; all
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commissions, discounts and other fees and charges owed with respect to letters
of credit and bankers' acceptance financing; the net costs associated with
Interest Rate Agreements; and interest expenses actually paid during such
period in respect of Indebtedness that is Guaranteed or secured by our company
or any of its Restricted Subsidiaries) and all but the principal component of
rentals in respect of Capitalized Lease Obligations paid, accrued or scheduled
to be paid or to be accrued by our company and its Restricted Subsidiaries
during such period; excluding, however:
(1) any amount of such interest of any Restricted Subsidiary if the net
income of such Restricted Subsidiary is excluded in the calculation
of Adjusted Consolidated Net Income pursuant to item (3) of the
definition thereof (but only in the same proportion as the net
income of such Restricted Subsidiary is excluded from the
calculation of Adjusted Consolidated Net Income pursuant to item
(3) of the definition thereof) and
(2) any premiums, fees and expenses (and any amortization thereof)
payable in connection with the offering of the old notes, all as
determined on a consolidated basis (without taking into account
Unrestricted Subsidiaries) in conformity with GAAP.
"Consolidated Leverage Ratio" means, on any Transaction Date, the ratio of
(1) the aggregate amount of Indebtedness of our company and its
Restricted Subsidiaries on a consolidated basis outstanding on such
Transaction Date (provided that, if any Restricted Subsidiary is
not a Wholly-Owned Restricted Subsidiary, such Indebtedness of such
Restricted Subsidiary shall be reduced by an amount equal to:
(A) the amount of the Indebtedness attributable to such Restricted
Subsidiary multiplied by
(B) the percentage ownership interest in the income of such
Restricted Subsidiary not owned on such Transaction Date by our
company or any of its Restricted Subsidiaries) to
(2) the aggregate amount of Consolidated EBITDA for the then most
recent fiscal quarter for which financial statements of our company
have been filed with the Commission or provided to the Trustee
pursuant to the "Commission Reports and Reports to Holders"
covenant described below (such fiscal quarter period being the
"Quarter") multiplied by four, provided that, in making the
foregoing calculation:
(A) pro forma effect shall be given to any Indebtedness to be
Incurred or repaid on the Transaction Date;
(B) pro forma effect shall be given to Asset Dispositions and Asset
Acquisitions (including giving pro forma effect to the
application of proceeds of any Asset Disposition) that occur
from the beginning of the Quarter through the Transaction Date
(the "Reference Period"), as if they had occurred and such
proceeds had been applied on the first day of such Reference
Period; and
(C) pro forma effect shall be given to asset dispositions and asset
acquisitions (including giving pro forma effect to the
application of proceeds of any asset disposition) that have been
made by any Person that has become a Restricted Subsidiary or
has been merged with or into our company or any Restricted
Subsidiary during such Reference Period and that would have
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constituted Asset Dispositions or Asset Acquisitions had such
transactions occurred when such Person was a Restricted
Subsidiary as if such asset dispositions or asset acquisitions
were Asset Dispositions or Asset Acquisitions that occurred on
the first day of such Reference Period; provided that to the
extent that item (B) or (C) of this sentence requires that pro
forma effect be given to an Asset Acquisition or Asset
Disposition, such pro forma calculation shall be based upon the
full fiscal quarter immediately preceding the Transaction Date of
the Person, or division or line of business of the Person, that
is acquired or disposed of for which financial information is
available.
"Consolidated Net Worth" means, at any date of determination, stockholders'
equity as set forth on the most recently available quarterly or annual
consolidated balance sheet of our company and its Restricted Subsidiaries
(which shall be as of a date not more than 90 days prior to the date of such
computation, and which shall not take into account Unrestricted Subsidiaries),
less any amounts attributable to Disqualified Stock or any equity security
convertible into or exchangeable for Indebtedness, the cost of treasury stock
and the principal amount of any promissory notes receivable from the sale of
the Capital Stock of our company or any of' its Restricted Subsidiaries, each
item to be determined in conformity with GAAP (excluding the effects of
foreign currency exchange adjustments under Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 52).
"Currency Agreement" means any foreign exchange contract, currency swap
agreement, currency option or other similar agreement or arrangement.
"Debt Securities" means any Indebtedness (including any Guarantee) issued
in connection with a public offering (whether or not underwritten) or a
private placement (provided such private placement is underwritten for resale
pursuant to Rule 144A, Regulation S or other exemption from registration under
the Securities Act or sold on an agency basis by a broker-dealer or one of its
Affiliates to 10 or more beneficial holders); it being understood that "Debt
Securities" shall not include commercial bank borrowings or similar
borrowings, recourse transfers of financial assets, capital leases,
Attributable Debt arising from Sale and Leaseback Transactions, issuances of
Disqualified Stock to the extent permitted to be Incurred (treating the
Disqualified Stock as if it were Indebtedness for this purpose) under the
"Limitation on Indebtedness" covenant or other types of borrowings incurred in
a manner not customarily viewed as a "securities offering" or Guarantees in
respect of the foregoing.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means any class or series of Capital Stock of any
Person that by its terms or otherwise is:
(1) required to be redeemed prior to the Stated Maturity of the old
notes,
(2) redeemable at the option of the holder of such class or series of
Capital Stock at any time prior to the Stated Maturity of the old
notes or
(3) convertible into or exchangeable for Capital Stock referred to in
item (1) or (2) above or Indebtedness having a scheduled maturity
prior to the Stated Maturity of the old notes,
provided that any Capital Stock that would not constitute Disqualified Stock
but for provisions thereof giving holders thereof the right to require such
Person to repurchase or
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redeem such Capital Stock upon the occurrence of an "asset sale" or "change of
control" occurring prior to the Stated Maturity of the old notes shall not
constitute Disqualified Stock if the "asset sale" or "change of control"
provisions applicable to such Capital Stock are no more favorable to the
holders of such Capital Stock than the provisions contained in "Limitation on
asset sales" and "Repurchase of old notes upon a Change of Control" covenants
described below and such Capital Stock specifically provides that such Person
will not repurchase or redeem any such stock pursuant to such provision prior
to the Company's repurchase of such old notes as are required to be repurchased
pursuant to the "Limitation on asset sales" and "Repurchase of old notes upon a
change of control" covenants described below.
"Existing Stockholders" means Princes Gate Investors II, L.P. and its
Affiliates, Stuart Z. Levin and S. Robert Levine.
"fair market value" means the price that would be paid in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined in
good faith by the Board of Directors, whose determination shall be conclusive
if evidenced by a resolution of the Board of Directors; provided that for
purposes of the eighth item of the second paragraph of the "Limitation on
indebtedness" covenant:
(x) the fair market value of any security registered under the Exchange
Act shall be the average of the closing prices, regular way, of
such security for the 20 consecutive trading days immediately
preceding the sale of Capital Stock and
(y) in the event the aggregate fair market value of any other property
(other than cash or cash equivalents) received by the Company
exceeds $10 million, the fair market value of such property shall
be determined by a nationally recognized investment banking firm
and set forth in their written opinion a copy of which shall be
delivered to the Trustee.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Closing Date, including, without limitation,
those set forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and statements
and pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations contained or referred to in
the indenture shall be computed in conformity with GAAP applied on a consistent
basis, except that calculations made for purposes of determining compliance
with the terms of the covenants and with other provisions of the indenture
shall be made without giving effect to:
(1) the amortization of any expenses incurred in connection with the
offering of the old notes and
(2) except as otherwise provided, the amortization of any amounts
required or permitted by Accounting Principles Board Opinion Nos.
16 and 17.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and,
without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such Person:
(1) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness of such other Person (whether arising
by virtue of partnership
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arrangements, or by agreements to keep-well, to purchase assets,
goods, securities or services (unless such purchase arrangements are
on arm's-length terms and are entered into in the ordinary course of
business), to take-or-pay, or to maintain financial statement
conditions or otherwise) or
(2) entered into for purposes of assuring in any other manner the
obligee of such Indebtedness of me payment thereof or to protect
such obligee against loss in respect thereof (in whole or in part),
provided that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including an "Incurrence" of Acquired Indebtedness, provided that neither the
accrual of interest nor the accretion of original issue discount shall be
considered an Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication);
(1) all indebtedness of such Person for borrowed money;
(2) all obligations of such Person evidenced by bonds, debentures,
notes or other similar instruments;
(3) all obligations of such Person in respect of letters of credit or
other similar instruments (including reimbursement obligations
with respect thereto);
(4) all obligations of such Person to pay the deferred and unpaid
purchase price of property or services, which purchase price is
due more than six months after the date of placing such property
in service or taking delivery and title thereto or the completion
of such services, except Trade Payables;
(5) all Capitalized Lease Obligations of such Person;
(6) all Attributable Debt of such Person with respect to any Sale and
Leaseback Transaction to which such Person is a lessee;
(7) the maximum fixed redemption or repurchase price of Disqualified
Stock of such Person at the date of determination;
(8) all Indebtedness of other Persons secured by a Lien on any asset
of such Person, whether or not such Indebtedness is assumed by
such Person; provided that the amount of such Indebtedness shall
be the lesser of (A) the fair market value of such asset at such
date of determination and (B) the amount of such Indebtedness;
(9) all Indebtedness of other Persons Guaranteed by such Person to the
extent such Indebtedness is Guaranteed by such Person; and
(10) to the extent not otherwise included in this definition, net
obligations of such Person under Currency Agreements and Interest
Rate Agreements. For purposes of the preceding sentence, the
maximum fixed repurchase price of any Disqualified Stock that does
not have a fixed repurchase price shall be calculated in
accordance with the terms of such Disqualified Stock as if such
Disqualified Stock were repurchased on any date on which
Indebtedness shall
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be required to be determined pursuant to the indenture; provided
that if such Disqualified Stock is not then permitted to be
repurchased, the repurchase price shall be the book value of such
Disqualified Stock. The amount of Indebtedness of any Person at any
date shall be the outstanding balance at such date of all
unconditional obligations as described above and, with respect to
contingent obligations, the maximum liability upon the occurrence of
the contingency giving rise to the obligation; provided that:
(A) the amount outstanding at any time of any Indebtedness issued
with original issue discount is the face amount of such
Indebtedness less the remaining unamortized portion of the
original issue discount of such Indebtedness at the time of its
issuance as determined in conformity with GAAP,
(B) money borrowed and set aside at the time of the Incurrence of
any Indebtedness in order to prefund the payment of the
interest on such Indebtedness shall not be deemed to be
"Indebtedness" and
(C) Indebtedness shall not include any liability for federal,
state, local or other taxes.
"Interest Payment Date" means each semiannual interest payment date on
February 1 and August 1 of each year, commencing February 1, 1999.
"Interest Rate Agreement" means interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement, option or future contract or other similar
agreement or arrangement.
"Investment" in any Person means any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee
or similar arrangement; but excluding:
(x) advances to customers (including distributors) in the ordinary course
of business that are, in conformity with GAAP, recorded as accounts
receivable on the balance sheet of our company or its Restricted
Subsidiaries and
(y) advances to suppliers in the ordinary course of business that are, in
conformity with GAAP, recorded as prepaid expenses on the balance sheet
of our company or its Restricted Subsidiaries)
or capital contribution to (by means of any transfer of cash or other property
to others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, bonds, notes,
debentures or other similar instruments issued by, such Person and shall
include:
(1) the designation of a Restricted Subsidiary as an Unrestricted
Subsidiary; and
(2) the fair market value of the Capital Stock (or any other Investment),
held by our company or any of its Restricted Subsidiaries, of (or in)
any Person that has ceased to be a Restricted Subsidiary, including
without limitation, by reason of any transaction permitted by item (3)
of the "Limitation on the issuance and sale of capital stock of
restricted subsidiaries" covenant; provided that the fair market value
of the Investment remaining in any Person that has ceased to be a
Restricted Subsidiary shall not exceed the aggregate amount of
Investments previously made in
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such Person valued at the time such Investments were made less the net
reduction of such Investments. For purposes of the definition of
"Unrestricted Subsidiary," and the "Limitation on Restricted Payments"
covenant described below,
(A) "Investment" shall include the fair market value of the assets
(net of liabilities (other than liabilities to the Company or
any of its Restricted Subsidiaries)) of any Restricted
Subsidiary at the time that such Restricted Subsidiary is
designated an Unrestricted Subsidiary,
(B) the fair market value of the assets (net of liabilities (other
than liabilities to our company or any, of its Restricted
Subsidiaries)) of any Unrestricted Subsidiary at the time that
such Unrestricted Subsidiary is designated a Restricted
Subsidiary shall be considered a reduction in outstanding
Investments and
(C) any property transferred to or from an Unrestricted Subsidiary
shall be valued at its fair market value at the time of such
transfer.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including, without limitation, any conditional sale or
other title retention agreement or lease in the nature thereof or any
agreement to give any security interest).
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means:
(1) with respect to any Asset Sale, the proceeds of such Asset Sale in
the form of cash or cash equivalents, including payments in respect
of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the
form of cash or cash equivalents (except to the extent such
obligations are financed or sold with recourse to our company or any
Restricted Subsidiary) and proceeds from the conversion of other
property received when converted to cash or cash equivalents, net
of:
(A) brokerage commissions and other fees and expenses (including
fees and expenses of counsel, accountants and investment bankers
and other professionals) related to such Asset Sale,
(B) provisions for all taxes (whether or not such taxes will
actually be paid or are payable) as a result of such Asset Sale
without regard to the consolidated results of operations of our
company and its Restricted Subsidiaries, taken as a whole;
(C) payments made to repay Indebtedness or any other obligation
outstanding at the time of such Asset Sale that either (i) is
secured by a Lien on the property or assets sold or (ii) is
required to be paid as a result of such sale; and
(D) appropriate amounts to be provided by our company or any
Restricted Subsidiary as a reserve against any liabilities
associated with such Asset Sale, including, without limitation,
pension and other post-employment benefit liabilities,
liabilities related to environmental matters and liabilities
under any indemnification obligations associated with such Asset
Sale, all as determined in conformity with GAAP and
(2) with respect to any issuance or sale of Capital Stock, the proceeds
of such issuance or sale in the form of cash or cash equivalents,
including payments in
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respect of deferred payment obligations (to the extent corresponding
to the principal, but not interest, component thereof) when received
in the form of cash or cash equivalents (except to the extent such
obligations are financed or sold with recourse to our company or any
Restricted Subsidiary) and proceeds from the conversion of other
property received when converted to cash or cash equivalents, net of
attorney's fees, accountants' fees, underwriters' or placement
agents' fees, discounts or commissions and brokerage, consultant and
other fees incurred in connection with such issuance or sale and net
of taxes paid or payable as a result thereof.
"Offer to Purchase" means an offer to purchase notes by our company from the
holders commenced by mailing a notice to the Trustee and each holder stating:
(1) the covenant pursuant to which the offer is being made and that all
old notes validly tendered in accordance with the terms of the
Offer to Purchase will be accepted for payment on a pro rata basis;
(2) the purchase price and the date of purchase (which shall be a
Business Day no earlier than 30 days nor later than 60 days from
the date such notice is mailed) (the "Payment Date");
(3) that any note not tendered will continue to accrue interest
pursuant to its terms;
(4) that, unless our company defaults in the payment of the purchase
price, any note accepted for payment pursuant to the Offer to
Purchase shall cease to accrue interest on and after the Payment
Date;
(5) that holders electing to have a note purchased pursuant to the
Offer to Purchase will be required to deliver the note, together
with the form entitled "Option of the Holder to Elect Purchase" on
the reverse side of the note completed, to the Paying Agent at the
address specified in the notice no later than the close of business
on the Business Day immediately preceding the Payment Date;
(6) that holders will be entitled to withdraw their election if the
Paying Agent receives, not later than the close of business on the
third Business Day immediately preceding the Payment Date, a
telegram, facsimile transmission or letter setting forth the name
of such holder, the principal amount of old notes delivered for
purchase and a statement that such holder is withdrawing its
election to have such old notes purchased; and
(7) that holders whose old notes are being purchased only in part will
be issued new old notes equal in principal amount to the principal
amount of the unpurchased portion of the old notes surrendered;
provided that each note purchased and each new note issued shall be
in a principal amount of $1,000 or integral multiples thereof. On
or prior to the Payment Date, the Company shall:
(A) accept for payment on a pro rata basis old notes or portions
thereof tendered pursuant to an Offer to Purchase;
(B) deposit with the Paying Agent money sufficient to pay the
purchase price of all old notes or portions thereof so accepted;
and
(C) deliver, or cause to be delivered, to the Trustee all old notes
or portions thereof so accepted together with an Officers'
Certificate specifying the old notes or portions thereof
accepted for payment by our company. The Paying Agent shall
promptly mail to the holders of old notes so accepted payment
each in an amount equal to the purchase price, and the Trustee
shall
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promptly authenticate and mail to such holder a new Note equal in
principal amount to any unpurchased portion of the Note
surrendered; provided that each Note purchased and each new Note
issued shall be in a principal amount of $1,000 or integral
multiples thereof. Our company will publicly announce the results
of an Offer to Purchase as soon as practicable after the Payment
Date. The Trustee shall act as the Paying Agent for an Offer to
Purchase. Our company will comply with Rule 14e-1 under the
Exchange Act and any other securities laws and regulations
thereunder to the extent such laws and regulations are
applicable, in the event that our company is required to
repurchase old notes pursuant to an Offer to Purchase.
"Permitted Investment" means:
(1) an Investment in our company or a Restricted Subsidiary or a Person
which will, upon the making of such Investment, become a Restricted
Subsidiary or be merged or consolidated with or into or transfer or
convey all or substantially all its assets to, our company or a
Restricted Subsidiary; provided that such Person's primary business
is related, ancillary or complementary to the businesses of our
company and its Restricted Subsidiaries on the date of such
Investment;
(2) Temporary Cash Investments;
(3) payroll, travel, relocation and similar advances to cover matters
that are expected at the time of such advances ultimately to be
treated as expenses in accordance with GAAP;
(4) loans or advances to employees made in the ordinary course of
business that do not in the aggregate exceed $1.0 million at any
time outstanding;
(5) Investments in Unrestricted Subsidiaries in an aggregate amount not
to exceed $10.0 million; provided each such Unrestricted
Subsidiary's primary business is related, ancillary or complementary
to the businesses of our company and its Restricted Subsidiaries on
the dates of such Investments; and
(6) Investments received in satisfaction of judgments or as part of or
in connection with the bankruptcy, winding up or liquidation of a
Person, except if such Investment is received in consideration for
an Investment made in such Person in connection with or in
anticipation of such bankruptcy, winding up or liquidation.
"Permitted Liens" means:
(1) Liens for taxes, assessments, governmental charges or claims that
are being contested in good faith by appropriate legal proceedings
promptly instituted and diligently conducted and for which a reserve
or other appropriate provision, if any, as shall be required in
conformity with GAAP shall have been made;
(2) statutory and common law Liens of landlords and carriers,
warehousemen, mechanics, suppliers, materialmen, repairmen or other
similar Liens arising in the ordinary course of business and with
respect to amounts not yet delinquent or being contested in good
faith by appropriate legal proceedings promptly instituted and
diligently conducted and for which a reserve or other appropriate
provision, if any, as shall be required in conformity with GAAP
shall have been made;
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(3) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance
and other types of social security;
(4) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory or regulatory obligations,
bankers' acceptances, surety and appeal bonds, government
contracts, performance and return-of-money bonds and other
obligations of a similar nature incurred in the ordinary course of
business (exclusive of obligations for the payment of borrowed
money);
(5) easements, rights-of-way, municipal and zoning ordinances and
similar charges, encumbrances, title defects or other
irregularities that do not materially interfere with the ordinary
course of business of the Company or any of its Restricted
Subsidiaries;
(6) Liens (including extensions and renewals thereof) upon real or
personal property acquired after the Closing Date; provided that:
(a) such Lien is created solely for the purpose of securing
Indebtedness Incurred, in accordance with the "Limitation on
indebtedness" covenant described below, to finance the cost
(including, without limitation, the cost of design,
development, construction, acquisition, transportation,
installation, improvement or integration) of the real or
personal property subject thereto and such Lien is created
prior to, at the time of or within six months after the later
of the acquisition, the completion of construction or the
commencement of full operation of such property,
(b) the principal amount of the Indebtedness secured by such Lien
does not exceed 100% of such cost, and
(c) any such Lien shall not extend to or cover any property other
than such item of property and any improvements on such
property and any proceeds (including insurance proceeds) and
products thereof and attachments and accessions thereto;
(7) leases or subleases granted to others that do not materially
interfere with the ordinary course of business of our company and
its Restricted Subsidiaries, taken as a whole;
(8) Liens encumbering property or assets under construction arising
from progress or partial payments by a customer of our company or
its Restricted Subsidiaries relating to such property or assets;
(9) any interest or title of a lessor in the property subject to any
Capitalized Lease or operating lease;
(10) Liens arising from filing Uniform Commercial Code financing
statements regarding leases or other Uniform Commercial Code
financing statements for precautionary purposes relating to
arrangements not constituting Indebtedness;
(11) Liens on property of, or on shares of Capital Stock or
Indebtedness of, any Person existing at the time such Person
becomes, or becomes a part of, any Restricted Subsidiary; provided
that such Liens do not extend to or cover any property or assets
of our company or any Restricted Subsidiary other than the
property or assets acquired and any proceeds (including insurance
proceeds) and products thereof and attachments and accessions
thereto;
(12) Liens in favor of our company or any Restricted Subsidiary;
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(13) Liens arising from the rendering of a final judgment or order
against our company or any Restricted Subsidiary that does not
give rise to an Event of Default;
(14) Liens securing reimbursement obligations with respect to letters
of credit that encumber documents and other property relating to
such letters of credit and the products and proceeds thereof;
(15) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of customs duties in connection
with the importation of goods;
(16) Liens encumbering customary initial deposits and margin deposits,
and other Liens that are within the general parameters customary
in the industry and incurred in the ordinary course of business,
in each case, securing Indebtedness under Interest Rate Agreements
and Currency Agreements and forward contracts, options, future
contracts, futures options or similar agreements or arrangements
designed solely to protect our company or any of its Restricted
Subsidiaries from fluctuations in interest rates, currencies or
the price of commodities;
(17) Liens arising out of conditional sale, title retention,
consignment or similar arrangements for the sale of goods entered
into by our company or any of its Restricted Subsidiaries in the
ordinary course of business in accordance with the past practices
of the Company and is Restricted Subsidiaries prior to the Closing
Date;
(18) Liens on or sales of receivables;
(19) any interest or title of licensor in the property subject to a
license;
(20) Liens in favor of the Trustee arising under the indenture;
(21) Liens on the Capital Stock of Unrestricted Subsidiaries; and
(22) Liens that secure Indebtedness with an aggregate principal amount
not in excess of $10 million at any time outstanding.
"Person" means an individual, a corporation, a partnership, a limited
liability company, an association, a trust or any other entity or organization,
including a government or political subdivision or an agency or instrumentality
thereof.
"Placement Agent" means Morgan Stanley & Co. Incorporated.
"Pledge Account" means an account established and maintained with the
Trustee for the deposit of the Pledged Securities pursuant to the terms of the
Pledge Agreement.
"Pledge Agreement" means the Collateral Pledge and Security Agreement dated
as of the Closing Date, by and among our company, the Trustee and the
Collateral Agent, governing the pledge of the Pledged Securities and the
disbursement of funds from the Pledged Account as such agreement may be
amended, restated, supplemented or otherwise modified from time to time.
"Pledged Securities" means the U.S. Government Obligations to be purchased
by the Company and held in the Pledge Account in accordance with the Pledge
Agreement.
"Public Equity Offering" means an underwritten primary public offering of
Common Stock of our company pursuant to an effective registration statement
under the Securities Act.
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A "Public Market" shall be deemed to exist if:
(1) a Public Equity Offering has been consummated and
(2) at least 15% of the total issued and outstanding Common Stock of our
company has been distributed by means of an effective registration
statement under the Securities Act or sales pursuant to Rule 144
under the Securities Act.
"Redemption Date" means, when used with respect to any note to be redeemed,
the date fixed for such redemption by or pursuant to the indenture.
"Redemption Price" means, when used with respect to any note to be
redeemed, the price at which such note is to be redeemed under the indenture.
"Regular Record Date" for the interest payable on any Interest Payment Date
means the July 15 or January 15 (whether or not a business day), as the case
may be, immediately preceding such Interest Payment Date.
"Repurchase Offer" means our obligation to offer to repurchase all of the
Warrants if:
(1) we merge, consolidate or sell all or substantially all of our
assets;
(2) we receive consideration in the transaction which is less than all
cash; and
(3) as a result, the Warrants become exercisable for common stock that
is not registered.
"Restricted Subsidiary" means any Subsidiary of our company other than an
Unrestricted Subsidiary.
"Sale and Leaseback Transaction" means any direct or indirect arrangement
pursuant to which our company or any of its Restricted Subsidiaries sells or
transfers any of its assets or properties (whether owned on the Closing Date
or acquired thereafter) and then or thereafter leases such assets or
properties or any part thereof or any other assets or properties which our
company, or its Restricted Subsidiaries, intends to use for substantially the
same purpose or purposes as the assets or properties sold or transferred.
"Security Register" is a register of the Notes and of their transfer and
exchange which TVN has caused its registrar to keep.
"Significant Subsidiary" means, at any date of determination, any
Restricted Subsidiary that, together with its Subsidiaries:
(1) for the most recent fiscal year of our company, accounted for more
than 10% of the consolidated revenues of our company and its
Restricted Subsidiaries or
(2) as of the end of such fiscal year, was the owner of more than 10% of
the consolidated assets of our company and its Restricted
Subsidiaries, all as set forth on the most recently available
consolidated financial statements of our company for such fiscal
year.
"Specified Date" means any Redemption Date, any Payment Date for an Offer
to Purchase or any date on which the Old Notes first become due and payable
after an Event of Default.
"S&P" means Standard & Poor's Ratings Services, a division of The McGraw-
Hill Companies, Inc, and its successors.
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"Stated Maturity" means:
(1) with respect to any debt security, the date specified in such debt
security as the fixed date on which the final installment of
principal of such debt security is due and payable and
(2) with respect to any scheduled installment of principal of or
interest on any debt security, the date specified in such debt
security as the fixed date on which such installment is due and
payable.
"Subsidiary" means, with respect to any Person:
(1) any corporation, association or other business entity of which more
than 50% of the voting power of the outstanding Voting Stock is
owned, directly or indirectly, by such Person and one or more other
Subsidiaries of such Person,
(2) any limited partnership of which such Person is a general partner,
or
(3) any other Person over which any combination of such Person and its
other Subsidiaries, directly or indirectly, has the power, by
contract or otherwise, to direct or cause the direction of
policies, management and affairs generally.
"Temporary Cash Investment" means any of the following:
(1) direct obligations of the United States of America or any agency
thereof or obligations fully and unconditionally guaranteed by the
United States of America or any agency thereof,
(2) time deposit accounts, certificates of deposit and money market
deposits maturing within 360 days of the date of acquisition
thereof issued by a bank or trust company which is organized under
the laws of the United States of America, any state thereof or any
foreign country recognized by the United States of America, and
which bank or trust company has capital, surplus and undivided
profits aggregating in excess of $50.0 million (or the foreign
currency equivalent thereof) and has outstanding debt which is
rated "A" (or an equivalent rating) or higher by at least one
nationally recognized statistical rating organization (as defined
in Rule 436 under the Securities Act) or any money-market fund
sponsored by a registered broker dealer or mutual fund distributor,
(3) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in the first item
above entered into with a bank meeting the qualifications described
in the second item above,
(4) commercial paper, maturing not more than 270 days after the date of
acquisition, issued by a corporation (other than an Affiliate of
our company) organized and in existence under the laws of the
United States of America, any state thereof or any foreign country
recognized by the United States of America with a rating at the
time as of which any investment therein is made of "P-1" (or
higher) according to Moody's or "A-1" (or higher) according to S&P,
(5) auction-rate preferred stocks of any corporation maturing not later
than 45 days after the acquisition thereof, with a rating at the
time of acquisition of not less than "AAA" according to S&P or
"Aaa" according to Moody's,
(6) corporate debt obligations maturing within 12 months after the date
of acquisition, with a rating on the date of acquisition not less
than "AAA" or "A-1" according to S&P or "Aaa" or "P-l" according to
Moody's,
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(7) securities with maturities of one year or less from the date of
acquisition issued or fully and unconditionally guaranteed by any
state, commonwealth or territory of the United States of America,
or by any political subdivision or taxing authority thereof, and
rated at least "A" by S&P or Moody's, and
(8) mutual funds required to invest at least 90% of their funds in
investments of the types described in the first and second items
above.
"Trade Payables" means, with respect to any Person, any accounts payable or
any other indebtedness or monetary obligation to trade creditors created,
assumed or Guaranteed by such Person or any of its Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods or
services.
"Transaction Date" means, with respect to the Incurrence of any Indebtedness
by our company or any of its Restricted Subsidiaries, the date such
Indebtedness is to be Incurred and, with respect to any Restricted Payment, the
date such Restricted Payment is to be made.
"Unrestricted Subsidiary" means:
(1) any Subsidiary of our company that at the time of determination
shall be designated an Unrestricted Subsidiary by the Board of
Directors in the manner provided below; and
(2) any Subsidiary of an Unrestricted Subsidiary.
The Board of Directors may designate any Restricted Subsidiary (including
any newly acquired or newly formed Subsidiary of the Company) to be an
Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock of, or
owns or holds any Lien (other than a Permitted Lien) on any property of, our
company or any Restricted Subsidiary, provided that:
(A) any Guarantee by the Company or any Restricted Subsidiary of any
Indebtedness of the Subsidiary being so designated shall be deemed
an "Incurrence" of such Indebtedness and an "Investment" by our
company or such Restricted Subsidiary (or both, it applicable) at
the time of such designation;
(B) either (I) the Subsidiary to be so designated has total assets of
$1,000 or less or (II) if such Subsidiary has assets greater than
$1,000, such designation would be permitted under the "Limitation
on restricted payments" covenant described below; and
(C) if applicable, the Incurrence of Indebtedness and the Investment
referred to in clause (A) of this proviso would be permitted under
the "Limitation on indebtedness" and "Limitation on restricted
payments" covenants described below.
The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided that:
(1) no Default or Event of Default shall have occurred and be
continuing at the time of or after giving effect to such
designation and
(2) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately after such designation would, if Incurred
at such time, have been
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permitted to be Incurred (and shall be deemed to have been Incurred)
for all purposes of the indenture.
Any such designation by the Board of Directors shall be evidenced to the
Trustee by promptly filing with the Trustee a copy of the resolution of the
Board of Directors giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
provisions.
"U.S. Government Obligations" means securities that are:
(1) direct obligations of the United States of America for the payment
of which the full faith and credit of the United States of America
is pledged or;
(2) obligations of a Person controlled or supervised by and acting as
an agency or instrumentality of the United States of America, the
payment of which is unconditionally guaranteed as a full faith and
credit obligation by the United States of America, of America,
which, in either case, are not callable or redeemable at the option of the
issuer thereof at any time prior to the Stated Maturity of the old notes, and
shall also include a depository receipt issued by a bank or trust company as
custodian with respect to any such U.S. Government Obligation or a specific
payment of interest on or principal of any such U.S. Government Obligation held
by such custodian for the account of the holder of a depository receipt;
provided that (except as required by law) such custodian is not authorized to
make any deduction from the amount payable to the holder of such depository
receipt from any amount received by the custodian in respect of the U.S.
Government Obligation or the specific payment of interest on or principal of
the U.S. Government Obligation.
"Voting Stock" means with respect to any Person, Capital Stock of any class
or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
"Warrants" mean warrants issued in connection with, and as single units
with, the old notes, which have become separately transferable, and which
entitle the holder of each to purchase 10.777 shares of common stock, par value
$.001, of TVN.
"Wholly Owned" means, with respect to any Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such Subsidiary (other
than any director's qualifying shares or Investments by foreign nationals
mandated by applicable law) by such Person or one or more Wholly Owned
Subsidiaries of such Person.
Covenants
We have undertaken certain covenants in the indenture. We describe several
of these covenants below.
Limitation on Indebtedness
We will not, and will not permit any of our Restricted Subsidiaries to,
Incur any Indebtedness (other than the old notes and Indebtedness existing on
the Closing Date). However, we may Incur Indebtedness, and any Restricted
Subsidiary may Incur Acquired Indebtedness if, after giving effect to the
Incurrence of such Indebtedness and the receipt and application of the proceeds
therefrom, the Consolidated Leverage Ratio would be greater than zero and less
than 6:1.
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Notwithstanding the foregoing, we and any Restricted Subsidiary (except as
specified below) may Incur each and all of the following:
(1) Indebtedness (including any Indebtedness under one or more
revolving credit or working capital facilities) of the Company in
an aggregate principal amount outstanding at any time not to exceed
the greater of:
(A) the sum of (I) 80% of the consolidated book value of the
accounts receivable of our company and its Restricted
Subsidiaries and (II) 60% of the consolidated book value of the
inventory of the Company and its Restricted Subsidiaries in each
case as determined from the financial statement of our company
for the then most recent fiscal quarter which has been filed
with the Commission or provided to the Trustee pursuant to the
"Commission reports and reports to holders" covenant described
below and
(B) $25.0 million;
(2) Indebtedness owed:
(A) to our company evidenced by a promissory note or
(B) to any Restricted Subsidiary;
provided that any event which results in any such Restricted Subsidiary ceasing
to be a Restricted Subsidiary or any subsequent transfer of such Indebtedness
(other than to our company or another Restricted Subsidiary) shall be deemed,
in each case, to constitute an Incurrence of such Indebtedness not permitted by
this item;
(3) Indebtedness issued in exchange for, or the net proceeds of which
are used to refinance or refund, then outstanding Indebtedness
(other than Indebtedness Incurred under the first, second, fourth,
sixth, ninth or tenth item of this paragraph) and any refinancings
thereof in a principal amount not to exceed the principal amount so
refinanced or refunded (plus premiums, accrued interest, fees and
expenses) unless the Incurrence of such excess is otherwise
permitted by this covenant; provided that Indebtedness the proceeds
of which are used to refinance or refund the old notes or
Indebtedness that is pari passu with, or subordinated in right of
payment to, the old notes shall only be permitted under this
item (3) if:
(A) in case the old notes are refinanced in part or the Indebtedness
to be refinanced is pari passu with the old notes, such new
Indebtedness, by its terms or by the terms of any agreement or
instrument pursuant to which such new Indebtedness is
outstanding, is expressly, made pari passu with, or subordinate
in right of payment to, the remaining old notes,
(B) in case the Indebtedness to be refinanced is subordinated in
right of payment to the old notes, such new Indebtedness, by its
terms or by the terms of any agreement or instrument pursuant to
which such new Indebtedness is issued or remains outstanding, is
expressly made subordinate in right of payment to the old notes
at least to the extent that the Indebtedness to be refinanced is
subordinated to the old notes and
(C) such new Indebtedness, determined as of the date of Incurrence
of such new Indebtedness, does not mature prior to the Stated
Maturity of the Indebtedness to be refinanced or refunded, and
the Average Life of such new Indebtedness is at least equal to
the remaining Average Life of the Indebtedness to be refinanced
or refunded;
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and provided further that in no event may Indebtedness of our company, be
refinanced by means of any Indebtedness of any Restricted Subsidiary, pursuant
to this item;
(4) Indebtedness;
(A) in respect of performance; surety or appeal bonds provided in
the ordinary course of business;
(B) under Currency Agreements and Interest Rate Agreements, provided
that such agreements (a) are designed solely to protect our
company or its Restricted Subsidiaries against fluctuations in
foreign currency exchange rates or interest rates and (b) do not
increase the Indebtedness of the obligor outstanding at any time
other than as a result of fluctuations in foreign currency
exchange rates or interest rates or by reason of fees,
indemnities and compensation payable thereunder; and
(C) arising from agreements providing for indemnification,
adjustment of purchase price or similar obligations, or from
Guarantees or letters of credit, surety bonds or performance
bonds securing any obligations of our company or any of its
Restricted Subsidiaries pursuant to such agreements,
in any case Incurred in connection with the disposition of any business, assets
or Restricted Subsidiary (other than Guarantees of Indebtedness Incurred by any
Person acquiring all or any portion of such business, assets or Restricted
Subsidiary for the purpose of financing such acquisition), in a principal
amount not to exceed the gross proceeds actually received by our company or any
Restricted Subsidiary in connection with such disposition;
(5) Indebtedness of our company or any Restricted Subsidiary, to the
extent the net proceeds thereof are promptly:
(A) used to purchase old notes tendered in an Offer to Purchase made
as a result of a Change in Control or
(B) deposited to defease the old notes as described below under
"Defeasance";
(6) Guarantees of the old notes and Guarantees of Indebtedness of our
company by any Restricted Subsidiary, provided the Guarantee of
such Indebtedness is permitted by and made in accordance with the
"Limitation on issuances of guarantees by restricted subsidiaries"
covenant described below;
(7) Indebtedness Incurred to finance the cost (including the cost of
design, development, acquisition, construction, installation,
improvement, transportation or integration) to acquire equipment,
inventory or network assets (including acquisitions by way of
Capitalized Lease and acquisitions of the Capital Stock of a Person
that becomes a Restricted Subsidiary to the extent of the fair
market value of the equipment, inventory or network assets so
acquired) by the Company or a Restricted Subsidiary after the
Closing Date;
(8) Indebtedness of our company not to exceed, at any one time
outstanding, two times the sum of:
(A) the Net Cash Proceeds received by our company after the Closing
Date from the issuance and sale of its Capital Stock (other than
Disqualified Stock) to a Person that is not a Restricted
Subsidiary of our company, to the extent such Net Cash Proceeds
have not been used pursuant to clause (C)(ii) of the fourth item
of the first paragraph or the third, fourth, sixth or seventh
item of the second paragraph of the "Limitation on restricted
payments" covenant described below to make a Restricted Payment
and
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(B) 80% of the fair market value of property (other than cash and
cash equivalents) received by the Company after the Closing
Date from the sale of its Capital Stock (other than
Disqualified Stock) to a Person that is not a Restricted
Subsidiary of the Company, to the extent such sale of Capital
Stock has not been used pursuant to the third, fourth, sixth or
seventh item of the second paragraph of the "Limitation on
restricted payments" covenant described below to make a
Restricted Payment;
provided that such Indebtedness does not mature prior to the Stated Maturity of
the Old Notes and has an Average Life longer than the Old Notes;
(9) Indebtedness of our company, in an aggregate principal amount
outstanding at any time not to exceed $1.0 million, incurred in
connection with the repurchase of shares of Capital Stock of the
Company, options on any such shares or related stock appreciation
rights held by employees, former employees, directors or former
directors (or their estates or beneficiaries under their estates),
upon death, disability, retirement or termination of employment;
provided that such Indebtedness, by its terms, (A) is expressly
made subordinate in right of payment to the old notes, and (B)
provides that no payments of principal (including by way of
sinking fund, mandatory redemption or otherwise (including
defeasance)), may be made while any of the Old Notes are
outstanding; and
(10) Indebtedness of our company (in addition to Indebtedness permitted
under the preceding clauses, in an aggregate principal amount
outstanding at any time not to exceed $55.0 million, less any
amount of such Indebtedness permanently repaid as provided under
the "Limitation on asset sales" covenant described below.
Notwithstanding any other provision of this "Limitation on indebtedness"
covenant, the maximum amount of Indebtedness that our company or a Restricted
Subsidiary may Incur pursuant to this "Limitation on indebtedness" covenant
shall not be deemed to be exceeded, with respect to any outstanding
Indebtedness, due solely to the result of fluctuations in the exchange rates of
currencies.
For purposes of determining any particular amount of Indebtedness under this
"Limitation on Indebtedness" covenant:
(1) Guarantees, Liens or obligations with respect to letters of credit
supporting Indebtedness otherwise included in the determination of
such particular amount shall not be included and
(2) any Liens granted pursuant to the equal and ratable provisions
referred to in the "Limitation on liens" covenant described below
shall not be treated as Indebtedness.
For purposes of determining compliance with this "Limitation on
indebtedness" covenant, in the event that an item of Indebtedness meets the
criteria of more than one of the types of Indebtedness described in the above
clauses, our company, in its sole discretion, shall classify and may, from time
to time, reclassify, such item of Indebtedness and only be required to include
the amount and type of such Indebtedness in one of such clauses.
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Limitation on Restricted Payments
Our company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly,
(1) declare or pay any dividend or make any distribution on or with
respect to its Capital Stock (other than (A) dividends or
distributions payable solely in shares of its Capital Stock (other
than Disqualified Stock) or in options, warrants or other rights to
acquire shares of such Capital Stock and (B) pro rata dividends or
distributions on Common Stock of Restricted Subsidiaries held by
minority stockholders) held by Persons other than our company or
any of its Restricted Subsidiaries,
(2) purchase, redeem, retire or otherwise acquire for value any shares
of Capital Stock of (A) our company or an Unrestricted Subsidiary
(including options, warrants or other rights to acquire such shares
of Capital Stock) held by any Person or (B) a Restricted Subsidiary
(including options, warrants or other rights to acquire such shares
of Capital Stock) held by any Affiliate of our company (other than
a Wholly Owned Restricted Subsidiary) or any holder (or any
Affiliate of such holder) of 5% or more of the Capital Stock of our
company,
(3) make any voluntary or optional principal payment, or voluntary or
optional redemption, repurchase, defeasance, or other acquisition
or retirement for value, of Indebtedness of our company that is
subordinated in right of payment to the old notes, or
(4) make any Investment, other than a Permitted Investment, in any
Person (such payments or any other actions described in items (1)
through (4) above being collectively "Restricted Payments") if, at
the time of, and after giving effect to, the proposed Restricted
Payment:
(A) a Default or Event of Default (see "Events of Default" below
shall have occurred and be continuing,
(B) our company could not Incur at least $1.00 of Indebtedness under
the first paragraph of the "Limitation on Indebtedness" covenant
or
(C) the aggregate amount of all Restricted Payments (the amount, if
other than in cash, to be determined in good faith by the Board
of Directors, whose determination shall be conclusive and
evidenced by a resolution of the Board of Directors) made after
the Closing Date shall exceed the sum of:
(1) the aggregate amount of the Consolidated EBITDA (or, if
Consolidated EBITDA is negative, minus the amount by which
Consolidated EBITDA is less than zero) less 1.5 times
Consolidated Interest Expense, in each case accrued on a
cumulative basis during the period (taken as one accounting
period) beginning on the first day of the fiscal quarter
immediately following the Closing Date and ending on the
last day of the last fiscal quarter preceding the
Transaction Date for which reports have been filed with the
Commission or provided to the Trustee pursuant to the
"Commission reports and reports to holders" covenant plus
(2) the aggregate Net Cash Proceeds received by our company
after the Closing Date from the issuance and sale permitted
by the indenture of its Capital Stock (other than
Disqualified Stock) to a Person who is not a Restricted
Subsidiary of our company, including an issuance or sale
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permitted by the indenture of Indebtedness of our company for
cash subsequent to the Closing Date upon the conversion of
such Indebtedness into Capital Stock (other than Disqualified
Stock) of our company, or from the issuance to a Person who
is not a Restricted Subsidiary of our company of any options,
warrants or other rights to acquire Capital Stock of our
company (in each case, exclusive of any Disqualified Stock or
any options, warrants or other rights that are redeemable at
the option of the holder, or are required to be redeemed,
prior to the Stated Maturity of the old notes), in each case
except to the extent such Net Cash Proceeds are used to Incur
Indebtedness pursuant to item (8) of the second paragraph
under the "Limitation on indebtedness" covenant plus
(3) an amount equal to the net reduction in Investments (other
than reductions in Permitted Investments) in any Person
resulting from payments of interest on Indebtedness,
dividends, distributions, repayments of loans or advances,
or other transfers of assets, in each case to our company or
any Restricted Subsidiary or from the Net Cash Proceeds from
the sale of any such Investment (except, in each case, to
the extent any such payment or proceeds are included in the
calculation of Adjusted Consolidated Net Income), or from
redesignations of Unrestricted Subsidiaries as Restricted
Subsidiaries (valued in each case as provided in the
definition of "Investments"), not to exceed, in each case,
the amount of Investments previously made by our company or
any Restricted Subsidiary in such Person or Unrestricted
Subsidiary.
The foregoing provision shall not be violated by reason of:
(1) the payment of any dividend within 60 days after the date of
declaration thereof if, at said date of declaration, such payment
would comply with the foregoing paragraph;
(2) the redemption, repurchase, defeasance or other acquisition or
retirement for value of Indebtedness that is subordinated in right
of payment to the old notes, including premium, if any, and
accrued and unpaid interest, with the proceeds of, or in exchange
for, Indebtedness Incurred under item (3) of the second paragraph
of the "Limitation on indebtedness" covenant;
(3) the repurchase, redemption or other acquisition of Capital Stock
of our company or an Unrestricted Subsidiary (or options, warrants
or other rights to acquire such Capital Stock) in exchange for, or
out of the proceeds of, a substantially concurrent offering of,
shares of Capital Stock (other than Disqualified Stock) of the
Company (or options, warrants or other rights to acquire such
Capital Stock);
(4) the making of any principal payment or the repurchase, redemption,
retirement, defeasance or other acquisition for value of
Indebtedness of our company which is subordinated in right of
payment to the old notes in exchange for, or out of the proceeds
of a substantially concurrent offering of shares of the Capital
Stock (other than Disqualified Stock) of our company (or options,
warrants or other rights to acquire such Capital Stock);
(5) payments or distributions to dissenting stockholders pursuant to
applicable law, pursuant to or in connection with a consolidation,
merger or transfer of assets that complies with the provisions of
the indenture applicable to mergers,
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consolidations and transfers of all or substantially all of the
property and assets of our company;
(6) Investments in any Person the primary business of which is related,
ancillary or complementary to the business of our company and its
Restricted Subsidiaries on the date of such Investments, provided
that the aggregate amount of Investments made pursuant to this item
(6) does not exceed the sum of
(A) $30.0 million plus
(B) the amount of Net Cash Proceeds received by our company after
the Closing Date from the sale of its Capital Stock (other than
Disqualified Stock) to a Person who is not a Restricted
Subsidiary of the Company, except to the extent such Net Cash
Proceeds are used to Incur Indebtedness pursuant to the eighth
clause under the "Limitation on indebtedness" covenant or to
make Restricted Payments pursuant to item (4), clause (C)(2) of
the first paragraph, or the third or fourth clause of this
paragraph, of this "Limitation on restricted payments"
covenant, plus
(C) the net reduction in Investments made pursuant to this item (6)
resulting from distributions on or repayments of such
Investments or from the Net Cash Proceeds from the sale of any
such Investment (except in each case to the extent any such
payment or proceeds is included in the calculation of
Consolidated EBITDA) or from such Person becoming a Restricted
Subsidiary (valued in each case as provided in the definition
of "Investments"); provided that the net reduction in any
Investment shall not exceed the amount of such Investment;
(7) Investments acquired in exchange for Capital Stock (other than
Disqualified Stock) of our company;
(8) the declaration or payment of dividends on the Common Stock of the
Company following a Public Equity Offering of such Common Stock of
up to 6.0% per annum of the Net Cash Proceeds received by our
company in such Public Equity Offering;
(9) repurchases of Warrants pursuant to a Repurchase Offer;
(10) any purchase of any fractional share of Common Stock of our company
in connection with an exercise of the Warrants; or
(11) repurchases of Capital Stock of our company from employees, former
employees, directors, former directors, consultants or former
consultants of our company (or their estates or beneficiaries under
their estates) upon their death, disability, retirement, or
termination of employment;
provided that the aggregate amount of such repurchases shall not exceed $1.0
million in any calendar year or $5.0 million in the aggregate; provided that,
except in the case of items (1) and (3), no Default or Event of Default shall
have occurred and be continuing or occur as a consequence of the actions or
payments set forth therein.
Each Restricted Payment permitted pursuant to the preceding paragraph
(other than the Restricted Payment referred to in item (2) thereof, an
exchange of Capital Stock for Capital Stock or Indebtedness referred to in
item (3) or (4) thereof and an Investment referred to in item (6) thereof),
and the Net Cash Proceeds from any issuance of Capital Stock referred to in
items (3) and (4) thereof, shall be included in calculating whether the
condition of clause (C) of item (4) of the first paragraph of this "Limitation
on restricted payments" covenant
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have been met with respect to any subsequent Restricted Payments. In the event
the proceeds of an issuance of Capital Stock of the Company are used for the
redemption, repurchase or other acquisition of the old notes, or Indebtedness
that is pari passu with the old notes, then the Net Cash Proceeds of such
issuance shall be included in clause (C) of item (4) of the first paragraph of
this "Limitation on restricted payments" covenant only to the extent such
proceeds are not used for such redemption, repurchase or other acquisition of
Indebtedness.
Limitation on dividend and other payment restrictions affecting Restricted
Subsidiaries
The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary to:
(1) pay dividends or make any other distributions permitted by
applicable law on any Capital Stock of such Restricted Subsidiary
owned by our company or any other Restricted Subsidiary,
(2) pay any Indebtedness owed to our company or any other Restricted
Subsidiary,
(3) make loans or advances to our company or any other Restricted
Subsidiary or
(4) transfer any of its property or assets to our company or any other
Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions:
(1) existing on the Closing Date in the indenture or any other
agreements in effect on the Closing Date, and any extensions,
refinancings, renewals or replacements of such agreements, provided
that the encumbrances and restrictions in any such extensions,
refinancings, renewals or replacements are no less favorable in any
material respect to the holders than those encumbrances or
restrictions that are then in effect and that are being extended,
refinanced, renewed or replaced;
(2) existing under or by reason of applicable law;
(3) existing with respect to any Person or the property or assets of
such Person acquired by our company or any Restricted Subsidiary,
existing at the time of such acquisition and not incurred in
contemplation thereof, which encumbrances or restrictions are not
applicable to any Person or the property or assets of any Person
other than such Person or the property or assets of such Person so
acquired, and any extensions, refinancings, renewals or
replacements of agreements of such Person existing at the time of
such acquisition; provided, that the encumbrances and restrictions
in any such extensions, refinancings, renewals or replacements do
not extend to any Person or the property or assets of any Person
other than such Person or the property and assets of such Person so
acquired;
(4) in the case of the fourth clause of the first paragraph of this
"Limitation on dividend and other payment restrictions affecting
restricted subsidiaries" covenant:
(A) that restrict in a customary manner the subletting, assignment
or transfer of any property or asset that is subject to a lease,
license, conveyance or contract or similar property or asset,
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(B) existing by virtue of any transfer of, agreement to transfer,
option or right with respect to, or Lien on, any property or
assets of our company or any Restricted Subsidiary not otherwise
prohibited by the indenture or
(C) arising or agreed to in the ordinary course of business, not
relating to any Indebtedness, and that do not, individually or
in the aggregate, detract from the value of property or assets
of the Company or any Restricted Subsidiary in any manner
material to our company or any Restricted Subsidiary;
(5) with respect to a Restricted Subsidiary and imposed pursuant to an
agreement that has been entered into for the sale or disposition of
all or substantially all of the Capital Stock of, or property and
assets of, such Restricted Subsidiary; or
(6) contained in the terms of any Indebtedness or any agreement
pursuant to which such Indebtedness was issued if:
(A) the encumbrance or restriction is not materially more
disadvantageous to the holders of the old notes than is
customary in comparable financings (as determined by our
company) and
(B) our company determines that any such encumbrance or restriction
is not reasonably expected to materially affect our company's
ability to make principal or interest payments on the old notes.
Nothing contained in this "Limitation on dividend and other payment
restrictions affecting restricted subsidiaries" covenant shall prevent our
company or any Restricted Subsidiary from (i) creating, incurring, assuming or
suffering to exist any Liens otherwise permitted in the "Limitation on liens"
covenant or (ii) restricting the sale or other disposition of property or
assets of the Company or any of its Restricted Subsidiaries that secure
Indebtedness of our company or any of its Restricted Subsidiaries.
Limitation on the issuance and sale of capital stock of Restricted
Subsidiaries
Our company will not sell, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue or sell, any shares of Capital Stock of a
Restricted Subsidiary (including options, warrants or other rights to purchase
shares of such Capital Stock) except:
(1) to our company or a Wholly Owned Restricted Subsidiary;
(2) issuances of director's qualifying shares or sales to foreign
nationals of shares of Capital Stock of foreign Restricted
Subsidiaries, to the extent required by applicable law;
(3) if, immediately after giving effect to such issuance or sale, such
Restricted Subsidiary would no longer constitute a Restricted
Subsidiary and any Investment in such Person remaining after giving
effect to such issuance or sale would have been permitted to be
made under the "'Limitation on restricted payments" covenant if
made on the date of such issuance or sale;
(4) issuances or sales of Common Stock of a Restricted Subsidiary;
provided that the Company or such Restricted Subsidiary applies the
Net Cash Proceeds, if any, of any such sale in accordance with
clause (A) or (B) of the "Limitation on asset sales" covenant
described below; or
(5) issuances or sales of Disqualified Stock if the "Limitation on
indebtedness" covenant would permit the Disqualified Stock to be
issued or sold (treating the Disqualified Stock as Indebtedness for
such purpose).
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Limitation on issuances of Guarantees by Restricted Subsidiaries
Our company will not permit any Restricted Subsidiary to:
(x) directly or indirectly Guarantee any Indebtedness of our company
which is pari passu with or subordinate in right of payment to the
old notes ("Guaranteed Indebtedness") or
(y) issue any Debt Securities (other than Indebtedness Incurred
pursuant to the fifth clause of the "Limitation on Indebtedness"
covenant), unless:
(1) such Restricted Subsidiary simultaneously executes and delivers
a supplemental indenture to the indenture providing for a
Guarantee (a "Subsidiary Guarantee") of payment of the old notes
by such Restricted Subsidiary and
(2) such Restricted Subsidiary waives and will not in any manner
whatsoever claim or take the benefit or advantage of, any rights
of reimbursement, indemnity or subrogation or any other rights
against our company or any other Restricted Subsidiary as a
result of any payment by such Restricted Subsidiary under its
Subsidiary Guarantee;
provided that this paragraph shall not be applicable to any Guarantee of any
Restricted Subsidiary that existed at the time such Person became a Restricted
Subsidiary and was not Incurred in connection with, or in contemplation of,
such Person becoming a Restricted Subsidiary. If the Guaranteed Indebtedness
is:
(A) pari passu with the old notes, then the Guarantee of such
Guaranteed Indebtedness shall be pari passu with, or
subordinated to, the Subsidiary Guarantee or
(B) subordinated to the old notes,
then the Guarantee of such Guaranteed Indebtedness shall be subordinated to the
Subsidiary Guarantee at least to the extent that the Guaranteed Indebtedness is
subordinated to the old notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary may provide by its terms that it shall be automatically and
unconditionally released and discharged upon:
(i) any sale, exchange or transfer, to any Person not an Affiliate of
our company, of all of our company's and each Restricted
Subsidiary's Capital Stock in, or all or substantially all the
assets of, such Restricted Subsidiary (which sale, exchange or
transfer is not prohibited by the indenture) or
(ii) the release or discharge of the Guarantee which resulted in the
creation of such Subsidiary Guarantee, except a discharge or
release by or as a result of payment under such Guarantee.
Limitation on transactions with Stockholders and Affiliates
We will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, enter into, renew or extend any transaction (including, without
limitation, the purchase, sale, lease or exchange of property or assets, or the
rendering of any service) with any holder (or any Affiliate of such holder) of
5.0% or more of any class of Capital Stock of our company or with any Affiliate
of our company or any Restricted Subsidiary, except upon fair and
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reasonable terms no less favorable to our company or such Restricted Subsidiary
than could be obtained, at the time of such transaction or, if such transaction
is pursuant to a written agreement, at the time of the execution of the
agreement providing therefor, in a comparable arm's-length transaction with a
Person that is not such a holder or an Affiliate.
The foregoing limitation does not limit, and shall not apply to:
(1) transactions (A) approved by a majority of the disinterested
members of the Board of Directors or (B) for which the Company or a
Restricted Subsidiary delivers to the Trustee a written opinion of
a nationally recognized investment banking firm (including, without
limitation, the Placement Agent and its Affiliates) stating that
the transaction is fair to our company or such Restricted
Subsidiary from a financial point of view;
(2) any transaction solely between our company and any of its Wholly
Owned Restricted Subsidiaries or solely between Wholly Owned
Restricted Subsidiaries;
(3) the payment of reasonable and customary regular fees to directors
of our company who are not employees of our company;
(4) any payments or other transactions pursuant to any tax-sharing
agreement between our company and any other Person with which our
company files a consolidated tax return or with which our company
is part of a consolidated group for tax purposes;
(5) transactions between our company or any of its Restricted
Subsidiaries and a non-Wholly Owned Restricted Subsidiary or an
Unrestricted Subsidiary on a cost, rather than fair market value,
basis, or on other terms of the kind customarily employed to
allocate charges among members of a consolidated group of entities,
in any such case that are fair and reasonable to our company or
such Restricted Subsidiary; provided that the aggregate fair market
value of the consideration subject to such transactions does not
exceed $1.0 million in any calendar year;
(6) payment of fees to the Placement Agent or its Affiliates for
financial, advisory, consulting or investment banking services that
the Board of Directors deems to be advisable or appropriate
(including, without limitation, the payment of any underwriting
discounts or commissions or placement agency fees in connection
with the issuance and sale of securities); or
(7) any Restricted Payments not prohibited by the "Limitation on
restricted payments" covenant. Notwithstanding the foregoing, any
transaction or series of related transactions covered by the first
paragraph of this "Limitation on transactions with stockholders and
affiliates" covenant and not covered by the second and third items
of this paragraph, (a) the aggregate amount of which exceeds $5.0
million in value, must be approved or determined to be fair in the
manner provided for in subclause (A) or (B) of the first item above
and (b) the aggregate amount of which exceeds $10.0 million in
value, must be determined to be fair in the manner provided for in
item (1)(B) above.
Limitation on Liens
We will not, and will not permit any Restricted Subsidiary to, create,
incur, assume or suffer to exist any Lien on any of its assets or properties of
any character, or any shares of Capital Stock or Indebtedness of any Restricted
Subsidiary, without making effective
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provision for all of the old notes and all other amounts due under the
indenture to be directly secured equally and ratably with (or, if the
obligation or liability to be secured by such Lien is subordinated in right of
payment to the old notes, prior to) the obligation or liability secured by such
Lien.
The foregoing limitation does not apply to:
(1) Liens existing on the Closing Date;
(2) Liens granted after the Closing Date on any assets or Capital Stock
of our company or its Restricted Subsidiaries created in favor of
the holders;
(3) Liens with respect to the assets of a Restricted Subsidiary granted
by such Restricted Subsidiary to our company or a Wholly Owned
Restricted Subsidiary to secure Indebtedness owing to our company
or such other Restricted Subsidiary;
(4) Liens securing Indebtedness which is Incurred to refinance secured
Indebtedness which is permitted to be Incurred under the third
clause of the second paragraph of the "Limitation on indebtedness"
covenant; provided that such Liens do not extend to or cover any
property or assets of our company or any Restricted Subsidiary
other than the property or assets securing the Indebtedness being
refinanced;
(5) Liens on the Capital Stock of, or any property or assets of, a
Restricted Subsidiary securing Indebtedness of such Restricted
Subsidiary permitted under the "Limitation on indebtedness"
covenant;
(6) Liens securing (A) obligations under revolving credit, working
capital or similar facilities Incurred under clause (i), or (B)
Indebtedness Incurred under the seventh clause of the second
paragraph of the "Limitation on indebtedness" covenant; or
(7) Permitted Liens.
Limitation on Sale and Leaseback Transactions
We will not, and will not permit any Restricted Subsidiary to, enter into
any Sale and Leaseback Transaction.
The foregoing restriction does not apply to any Sale and Leaseback
Transaction if:
(1) the lease is for a period, including renewal rights, of not in
excess of three years;
(2) the lease secures or relates to industrial revenue or pollution
control bonds;
(3) the transaction is solely between our company and any Wholly Owned
Restricted Subsidiary or solely between Wholly Owned Restricted
Subsidiaries; or
(4) our company or such Restricted Subsidiary, within 12 months after
the sale or transfer of any assets or properties is completed,
applies an amount not less than the net proceeds received from such
sale in accordance with clause (A) or (B) of the first paragraph of
the "Limitation on asset sales" covenant described below.
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Limitation on Asset Sales
The Company will not, and will not permit any Restricted Subsidiary to,
consummate any Asset Sale, unless:
(1) the consideration received by our company or such Restricted
Subsidiary is at least equal to the fair market value of the assets
sold or disposed of and
(2) at least 75% of the consideration received consists of any
combination of cash or Temporary Cash Investments or the assumption
of unsubordinated Indebtedness of our company or Indebtedness of
any Restricted Subsidiary, provided that our company or such
Restricted Subsidiary is irrevocably and unconditionally released
from all liability under such Indebtedness.
In the event and to the extent that the Net Cash Proceeds received by our
company or any of its Restricted Subsidiaries from one or more Asset Sales
occurring on or after the Closing Date in any period of 12 consecutive months
exceed 10% of Adjusted Consolidated Net Tangible Assets (determined as of the
date closest to the commencement of such 12-month period for which a
consolidated balance sheet of the Company and its Subsidiaries has been filed
with the Commission or provided to the Trustee pursuant to the "Commission
reports and reports to holders" covenant), then our company shall or shall
cause the relevant Restricted Subsidiary to:
(1) within 12 months after the date Net Cash Proceeds so received
exceed 10% of Adjusted Consolidated Net Tangible Assets:
(A) apply an amount equal to such excess Net Cash Proceeds to
permanently repay unsubordinated Indebtedness of the Company, or
any Restricted Subsidiary providing a Subsidiary Guarantee
pursuant to the "Limitation on issuances of guarantees by
restricted subsidiaries" covenant described above or
Indebtedness of any other Restricted Subsidiary, in each case
owing to a Person other than our company or any of its
Restricted Subsidiaries or
(B) invest an equal amount, or the amount not so applied pursuant to
clause (A) (or enter into a definitive agreement committing to
so invest within 12 months after the date of such agreement), in
property or assets (other than current assets) of a nature or
type or that are used in a business (or in a Person having
property and assets of a nature or type, or engaged in a
business) similar or related to the nature or type of the
property and assets of, or the business of, and its Restricted
Subsidiaries existing on the date of such investment and
(2) apply (no later than the end of the 12-month period referred to in
clause (1)) such excess Net Cash Proceeds (to the extent not
applied (or committed to be applied) pursuant to clause (i)) as
provided in the following paragraph of this "Limitation on asset
sales" covenant.
The amount of such excess Net Cash Proceeds required to be applied (or to be
committed to be applied) during such 12-month period as set forth in clause (1)
of the preceding sentence and not applied as so required by the end of such
period shall constitute "Excess Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to
this "Limitation on asset sales" covenant totals at least $5.0 million, our
company must commence, not later than the fifteenth Business Day of such month,
and consummate an Offer to Purchase from the
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holders on a pro rata basis an aggregate principal amount of old notes equal to
the Excess Proceeds on such date, at a purchase price equal to 100% of the
principal amount of the old notes on the relevant payment date, plus, in each
case, accrued interest, if any, to the payment date.
Repurchase of old notes upon a Change of Control
Our company must commence, within 30 days of the occurrence of a Change of
Control, and thereafter consummate an Offer to Purchase for all old notes then
outstanding, at a purchase price equal to 101% of the principal amount thereof
on the relevant Payment Date, plus accrued interest, if any, to the Payment
Date.
There can be no assurance that our company will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of old notes) required by the foregoing covenant (as
well as may be contained in other securities of our company which might be
outstanding at the time). The above covenant requiring our company to
repurchase the old notes will, unless consents are obtained, require our
company to repay all indebtedness then outstanding which by its terms would
prohibit such Note repurchase, either prior to or concurrently with such Note
repurchase.
Commission reports and reports to Holders
At all times from and after the earlier of:
(1) the date of the commencement of an exchange offer or the
effectiveness of the Shelf Registration Statement (the
"Registration") and
(2) the date that is one year after the Closing Date, in either case,
whether or not the Company is then required to file reports with
the Commission, our company shall file with the Commission all such
reports and other information as it would be required to file with
the Commission by Sections 13(a) or 15(d) under the Exchange Act if
it were subject thereto. Our company shall supply the Trustee and
each holder or shall supply to the Trustee for forwarding to each
such holder, without cost to such holder, copies of such reports
and other information. At all times prior to the earlier of the
date of the Registration and the date that is one year after the
Closing Date, our company shall supply the Trustee and each holder
or shall supply to the Trustee for forwarding to each such holder,
without cost to such holder, quarterly and annual reports
substantially equivalent to those which would be required by the
Exchange Act. In addition, at all times prior to the sale of the
old notes pursuant to an effective registration statement, upon the
request of any holder or any prospective purchaser of the old notes
designated by a holder, the Company shall supply to such holder or
such prospective purchaser the information required under Rule 144A
under the Securities Act.
Events of Default
The following events are defined as "Events of Default" in the indenture:
(a) default in the payment of principal of (or premium, if any, on) any
Note when the same becomes due and payable at maturity, upon
acceleration, redemption or otherwise;
(b) default in the payment of interest on any Note when the same becomes
due and payable, and such default continues for a period of 30 days or
a failure by our
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company to make any of the first six scheduled interest payments on the
old notes on the applicable Interest Payment Date;
(c) default in the performance or breach of the provisions of the indenture
applicable to mergers, consolidations and transfers of all or
substantially all of the assets of our company or the failure to make
or consummate an Offer to Purchase in accordance with the "Limitation
on Asset Sales" or "Repurchase of Notes upon a Change of Control"
covenant;
(d) our company defaults in the performance of or breaches any other
covenant or agreement of our company in the indenture or under the old
notes (other than a default specified in clause (a), (b) or (c) above)
and such default or breach continues for a period of 30 consecutive
days after written notice by the Trustee or the holders of 25% or more
in aggregate principal amount of the old notes;
(e) there occurs with respect to any issue or issues of Indebtedness of our
company or any Significant Subsidiary having an outstanding principal
amount of $10.0 million or more in the aggregate for all such issues of
all such Persons, whether such Indebtedness now exists or shall
hereafter be created,
(1) an event of default that has caused the holder thereof to declare
such Indebtedness to be due and payable prior to its Stated Maturity
and such Indebtedness has not been discharged in full or such
acceleration has not been rescinded or annulled within 30 days of
such acceleration and/or
(2) the failure to make a principal payment at the final (but not any
interim) fixed maturity and such defaulted payment shall not have
been made, waived or extended within 30 days of such payment
default;
(f) any final judgment or order (not covered by insurance) for the payment
of money in excess of $10.0 million in the aggregate for all such final
judgments or orders against all such Persons (treating any deductibles,
self-insurance or retention as not so covered) shall be rendered
against our company or any Significant Subsidiary and shall not be paid
or discharged, and there shall be any period of 30 consecutive days
following entry of the final judgment or order that causes the
aggregate amount for all such final judgments or orders outstanding and
not paid or discharged against all such Persons to exceed $10.0 million
during which a stay of enforcement of such final judgment or order by
reason of a pending appeal or otherwise, shall not be in effect;
(g) a court having jurisdiction in the premises enters a decree or order
for:
(A) relief in respect of our company or any Significant Subsidiary in an
involuntary case under any applicable bankruptcy, insolvency or
other similar law now or hereafter in effect,
(B) appointment of a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of our company or any Significant
Subsidiary or for all or substantially all of the property, and
assets of our company or any Significant Subsidiary or
(C) the winding up or liquidation of the affairs of our company or any
Significant Subsidiary and, in each case, such decree or order shall
remain unstayed and in effect for a period of 60 consecutive days;
(h) our company or any Significant Subsidiary:
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(A) commences a voluntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, or
consents to the entry of an order for relief in an involuntary case
under any such law,
(B) consents to the appointment of or taking possession by a receiver,
liquidator, assignee, custodian, trustee, sequestrator or similar
official of our company or any Significant Subsidiary or for all or
substantially all of the property and assets of our company or any
Significant Subsidiary or
(C) effects any general assignment for the benefit of creditors or
(i) the Pledge Agreement shall cease to be in full force and effect or to
be enforceable in accordance with its terms, except as provided
therein.
If an Event of Default (other than an Event of Default specified in clause
(g) or (h) above that occurs with respect to our company) occurs and is
continuing under the indenture, the Trustee or the holders of at least 25% in
aggregate principal amount of the old notes then outstanding, by written notice
to our company (and to the Trustee if such notice is given by the holders),
may, and the Trustee at the request of such holders shall, declare the
aggregate principal amount of, premium, if any, and accrued interest on the old
notes to be immediately due and payable. Upon a declaration of acceleration,
such principal amount, premium, if any, and accrued interest shall be
immediately due and payable. In the event of a declaration of acceleration
because an Event of Default set forth in clause (e) above has occurred and is
continuing, such declaration of acceleration shall be automatically rescinded
and annulled if the event of default triggering such Event of Default pursuant
to clause (e) shall be remedied or cured by our company or the relevant
Significant Subsidiary or waived by the holders of the relevant Indebtedness
within 60 days after the declaration of acceleration with respect thereto. If
an Event of Default specified in clause (g) or (h) above occurs with respect to
our company, the principal amount of, premium, if any, and accrued interest on
the old notes then outstanding shall ipso facto become and be immediately due
and payable without any declaration or other act on the part of the Trustee or
any holder. The holders of at least a majority in aggregate principal amount of
the outstanding old notes, by written notice to our company and to the Trustee,
may waive all past defaults and rescind and annul a declaration of acceleration
and its consequences if (i) all existing Events of Default, other than the
nonpayment of the principal amount of, premium, if any, and interest on the old
notes that have become due solely by such declaration of acceleration, have
been cured or waived and (ii) the rescission would not conflict with any
judgment or decree of a court of competent jurisdiction. For information as to
the waiver of defaults, see "--Modification and waiver" below.
The holders of at least a majority in aggregate principal amount of the
outstanding old notes may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. However, the Trustee may refuse to follow any
direction that conflicts with law or the indenture, that may involve the
Trustee in personal liability, or that the Trustee determines in good faith may
be unduly prejudicial to the rights of holders of old notes not joining in the
giving of such direction and may take any other action it deems proper that is
not inconsistent with any such direction received from holders of old notes. A
holder may not pursue any remedy with respect to the indenture or the old notes
unless:
(1) the holder gives the Trustee written notice of a continuing Event of
Default;
(2) the holders of at least 25% in aggregate principal amount of
outstanding old notes make a written request to the Trustee to pursue
the remedy;
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(3) such holder or holders offer the Trustee indemnity satisfactory to the
Trustee against any costs, liability or expense;
(4) the Trustee does not comply with the request within 60 days after
receipt of the request and the offer of indemnity; and
(5) during such 60-day period, the holders of a majority in aggregate
principal amount of the outstanding old notes do not give the Trustee a
direction that is inconsistent with the request.
However, such limitations do not apply to the right of any holder of a Note
to receive payment of the principal amount of, premium, if any, or interest on,
such Note or to bring suit for the enforcement of any such payment, on or after
the due date expressed in the old notes, which right shall not be impaired or
affected without the consent of such holder.
The indenture requires certain officers of our company to certify, on or
before a date not more than 90 days after the end of each fiscal year, that a
review has been conducted of the activities of our company and its Restricted
Subsidiaries and our company's and its Restricted Subsidiaries' performance
under the indenture and that our company has fulfilled all obligations
thereunder, or, if there has been a default in the fulfillment of any such
obligation, specifying each such default and the nature and status thereof. Our
company will also be obligated to notify the Trustee of any default or defaults
in the performance of any covenants or agreements under the indenture.
Consolidation, Merger and Sale of Assets
Our company will not consolidate with, merge with or into, or sell, convey,
transfer, lease or otherwise dispose of all or substantially all of its
property and assets (as an entirety or substantially an entirety in one
transaction or a series of related transactions) to, any Person or permit any
Person to merge with or into our company unless:
(1) our company shall be the continuing Person, or the Person (if other
than our company) formed by such consolidation or into which our
company is merged or that acquired or leased such property, and
assets of our company shall be a corporation organized and validly
existing under the laws of the United States of America or any
jurisdiction thereof and shall expressly assume, by a supplemental
indenture, executed and delivered to the Trustee, all of the
obligations of our company on all of the old notes and under the
indenture;
(2) immediately after giving effect to such transaction, no Default or
Event of Default shall have occurred and be continuing;
(3) immediately after giving effect to such transaction on a pro forma
basis, our company or any Person becoming the successor obligor of
the old notes (including any Person which would, after giving
effect to the merger or consolidation, properly classify our
company as a subsidiary in accordance with GAAP, and which
expressly guarantees the obligations of our company under the old
notes through a supplemental indenture) shall have a Consolidated
Net Worth equal to or greater than 90% of the Consolidated Net
Worth of our company immediately prior to such transaction;
(4) immediately after giving effect to such transaction on a pro forma
basis, our company, or any Person becoming the successor obligor of
the old notes (including any Person which would, after giving
effect to the merger or consolidation, properly classify our
company as a subsidiary in accordance with
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GAAP, and which expressly guarantees the obligations of our company
under the old notes through a supplemental indenture) as the case may
be, shall have a Consolidated Leverage Ratio not greater than 110% of
the Consolidated Leverage Ratio of our company immediately prior to
the transaction, provided, however, that the fourth item shall not
apply to a consolidation or merger with or into a Wholly Owned
Restricted Subsidiary with a positive net worth; and
(5) our company delivers to the Trustee an officers' certificate
(attaching the arithmetic computations to demonstrate compliance
with the third and fourth items above) and an opinion of counsel, in
each case stating that such consolidation, merger or transfer and
such supplemental indenture comply with this provision and that all
conditions precedent provided for herein relating to such
transaction have been complied with; provided, however, that the
third and fourth items above do not apply if, in the good faith
determination of the Board of Directors of our company, whose
determination shall be evidenced by a resolution of the Board of
Directors, the principal purpose of such transaction is to change
the state of incorporation of the Company; provided further that, in
connection with any such merger or consolidation, no consideration
(other than Capital Stock (other than Disqualified Stock) in the
surviving Person or our company) shall be issued or distributed to
the stockholders of our company; and provided further that any such
transaction shall not have as one of its purposes the evasion of the
foregoing limitations.
Defeasance
Defeasance and Discharge. The indenture provides that our company will be
deemed to have paid and will be discharged from any and all obligations in
respect of the old notes on the 123rd day after the deposit referred to below,
and the provisions of the indenture will no longer be in effect with respect
to the old notes (except for, among other matters, certain obligations to
register the transfer or exchange of the old notes, to replace stolen, lost or
mutilated old notes, to maintain paying agencies and to hold monies for
payment in trust) if, among other things,
(A) our company has deposited with the Trustee, in trust, money and/or U.S.
Government Obligations that through the payment of interest and
principal in respect thereof in accordance with their terms will
provide money in an amount sufficient to pay the principal of, premium,
if any, and accrued interest on the old notes on the Stated Maturity of
such payments in accordance with the terms of the indenture and the old
notes,
(B) our company has delivered to the Trustee:
(1) either (x) an opinion of counsel to the effect that holders will not
recognize income, gain or loss for federal income tax purposes as a
result of our company's exercise of its option under this
"Defeasance" provision and will be subject to federal income tax on
the same amount and in the same manner and at the same times as
would have been the case if such deposit, defeasance and discharge
had not occurred, which opinion of counsel must be based upon (and
accompanied by a copy of) a ruling of the Internal Revenue Service
to the same effect unless there has been a change in applicable
federal income tax law after the Closing Date such that a ruling is
no longer required or (y) a ruling directed to the Trustee received
from the Internal Revenue Service to the same effect as the
aforementioned opinion of counsel; and
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(2) an opinion of counsel to the effect that the creation of the
defeasance trust does not violate the Investment Company Act of
1940 and after the passage of 123 days following the deposit
(assuming that none of the holders of the old notes are insiders of
our company within the meaning of Section 101(31) of the United
States Bankruptcy Code) the trust fund will not be subject to the
effect of Section 547 of the United States Bankruptcy Code or
Section 15 of the New York Debtor and Creditor Law,
(C) immediately after giving effect to such deposit on a pro forma basis,
no Event of Default, or event that after the giving of notice or lapse
of time or both would become an Event of Default, shall have occurred
and be continuing on the date of such deposit or during the period
ending on the 123rd day after the date of such deposit, and such
deposit shall not result in a breach or violation of, or constitute a
default under, any other agreement or instrument to which our company
or any of its Subsidiaries is a party or by which our company or any of
its Subsidiaries is bound and
(D) if at such time the old notes are listed on a national securities
exchange, our company has delivered to the Trustee an Opinion of
Counsel to the effect that the old notes will not be delisted as a
result of such deposit, defeasance and discharge.
Defeasance of Certain Covenants and Certain Events of Default. The indenture
further provides that the provisions of the indenture will no longer be in
effect with respect to the third and fourth clauses under "Consolidation,
Merger and Sale of Assets" and all the covenants described herein under
"Covenants," clause (c) under "Events of Default" with respect to such the
third and fourth items under "Consolidation, Merger and Sale of Assets," clause
(d) under "Events of Default" with respect to such other covenants and clauses
(e) and (f) under "Events of Default" shall be deemed not to be Events of
Default upon, among other things, the deposit with the Trustee, in trust, of
money and/or U.S. Government Obligations that through the payment of interest
and principal in respect thereof in accordance with their terms will provide
money in an amount sufficient to pay the principal of, premium, if any, and
accrued interest on the old notes on the Stated Maturity of such payments in
accordance with the terms of the indenture and the old notes, the satisfaction
of the provisions described in clauses (B)(2), (C) and (D) of the preceding
paragraph and the delivery by our company to the Trustee of an Opinion of
Counsel to the effect that, among other things, the holders will not recognize
income, gain or loss for federal income tax purposes as a result of such
deposit and defeasance of certain covenants and Events of Default and will be
subject to federal income tax on the same amount and in the same manner and at
the same times as would have been the case if such deposit and defeasance had
not occurred.
Defeasance and Certain Other Events of Default. In the event our company
exercises its option to omit compliance with certain covenants and provisions
of the indenture with respect to the old notes as described in the immediately
preceding paragraph and the old notes are declared due and payable because of
the occurrence of an Event of Default that remains applicable, the amount of
money and/or U.S. Government Obligations on deposit with the Trustee will be
sufficient to pay amounts due on the old notes at the time of their Stated
Maturity but may not be sufficient to pay amounts due on the old notes at the
time of the acceleration resulting from such Event of Default. However, our
company will remain liable for such payments.
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Modification and waiver
Modifications and amendments of the indenture may be made by our company and
the Trustee with the consent of the holders of not less than a majority in
aggregate principal amount of the outstanding old notes; provided, however,
that no such modification or amendment may, without the consent of each holder
affected thereby:
(1) change the Stated Maturity of the principal of, or any installment of
interest on, any Note,
(2) reduce the principal amount of, or premium, if any, or interest on, any
Note,
(3) change the place or currency of payment of principal of, or premium, if
any, or interest on, any Note,
(4) impair the right to institute suit for the enforcement of any payment
on or after the Stated Maturity (or, in the case of a redemption, on or
after the Redemption Date) of any Note,
(5) reduce the above-stated percentage of outstanding old notes the consent
of whose holders is necessary to modify or amend the indenture,
(6) waive a default in the payment of principal of, premium, if any, or
interest on the old notes, or
(7) reduce the percentage or aggregate principal amount of outstanding old
notes the consent of whose holders is necessary for waiver of
compliance with certain provisions of the indenture or for waiver of
certain defaults.
No personal liability of incorporators, stockholders, officers, directors, or
employees
The indenture provides that:
(1) no recourse for the payment of the principal of, premium, if any, or
interest on any of the old notes or for any claim based thereon or
otherwise in respect thereof, and
(2) no recourse under or upon any obligation, covenant or agreement of our
company in the indenture, or in any of the old notes or because of the
creation of any Indebtedness represented thereby,
shall be had against any incorporator, stockholder, officer, director, employee
or controlling person of our company or of any successor Person thereof. Each
holder, by accepting the old notes, waives and releases all such liability.
Concerning the Trustee
The indenture provides that, except during the continuance of a Default, the
Trustee will not be liable for the performance of such duties as are
specifically set forth in such indenture. If an Event of Default has occurred
and is continuing, the Trustee will use the same degree of care and skill in
its exercise of the rights and powers vested in it under the indenture as a
prudent person would exercise under the circumstances in the conduct of such
person's own affairs.
The indenture and provisions of the Trust indenture Act of 1939, as amended,
incorporated by reference therein, contain limitations on the rights of the
Trustee, should it become a creditor of our company, to obtain payment of
claims in certain cases or to realize on certain property received by it in
respect of any such claims, as security or otherwise. The Trustee is permitted
to engage in other transactions, but if the Trustee acquires any conflicting
interest, it must eliminate such conflict or resign.
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Description of capital stock
The following is a summary of the terms of our capital stock and is
qualified in its entirety by reference to the actual terms of the capital stock
contained in our amended and restated certificate of incorporation.
Our certificate of incorporation, as amended to date authorizes the issuance
of 40,000,000 shares of common stock, $.001 par value per share, and 20,248,107
shares of preferred stock, $.001 par value per share. The following series of
preferred stock have been designated in the Certificate of Incorporation:
Series A Preferred Stock, Series B-1 Preferred Stock, Series B-2 Preferred,
Series B-3 Preferred Stock and Series B-4 Preferred. The Series B-1 Preferred,
Series B-2 Preferred, Series B-3 Preferred and the Series B-4 Preferred are
collectively referred to herein as the "Series B Preferred."All shares of
preferred stock are currently convertible into common stock on a one-for-one
basis. As of November 15, 1999, there were four holders of record of common
stock and twenty-six holders of record of preferred stock. The following table
sets forth, with respect to each series of preferred stock and the common stock
as of November 15, 1999, the number of shares designated, the number of shares
outstanding, the number of shares subject to outstanding options and warrants
and our total fully diluted capitalization:
<TABLE>
<CAPTION>
Common stock
outstanding
Shares on a
issuable diluted, as
Authorized Outstanding under options converted
Class/Series shares shares and warrants basis
------------ ---------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Preferred Stock
Series A Preferred...... 7,600,000 7,499,900 -- 7,499,900
Series B-1 Preferred.... 5,714,442 5,714,442 -- 5,714,442
Series B-2 Preferred.... 1,790,769 1,297,433 -- 1,297,433
Series B-3 Preferred.... 2,285,727 2,285,727 -- 2,285,727
Series B-4 Preferred.... 2,857,169 2,857,169 -- 2,857,169
---------- ---------- --------- ----------
Total Preferred Stock... 20,248,107 19,654,671 -- 19,654,671
Common Stock............ 40,000,000 152,517 5,118,106(1) 5,270,623
---------- ---------- --------- ----------
Total Common and Pre-
ferred Stock........... 60,248,107 19,807,188 5,118,106 24,925,294
========== ========== ========= ==========
</TABLE>
- --------
(1) Includes warrants to purchase 2,355,400 shares of common stock at an
exercise price of $0.01, 2,762,706 shares issuable in connection with
options granted under the 1996 Stock Option Plan with a weighted average
exercise price of $3.48 per share but excludes 1,178,776 shares issuable in
connection with options available for future grant under the 1996 Stock
Option Plan.
Common stock
The holders of our common stock are entitled to receive dividends when and
if declared by the Board of Directors, provided that no dividend or
distribution may be declared or paid on any shares of common stock unless all
dividend preferences of the preferred stock have been declared and set aside or
paid. Upon a liquidation, dissolution, merger or sale of substantially all of
our assets, all assets remaining after the payment of liabilities and the
liquidation preferences of any outstanding shares of preferred stock will be
distributed ratably among the holders of common stock based upon the number of
shares of common stock then held by each holder. The holders of our common
stock are entitled to one vote for each share held of record on all matters
submitted to a vote of stockholders. Our common
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stock has no preemptive or other subscription rights, and there are no
redemption or sinking fund provisions applicable to the common stock.
As of November 15, 1999, there were 152,517 shares of common stock
outstanding held by four stockholders of record. As of November 15, 1999,
options to purchase an aggregate of 2,762,706 shares of common stock were also
outstanding. See "Management--1996 Stock Option Plan."
Preferred stock
Dividends. The holders of Series B Preferred are entitled to receive
dividends when, as and if dividends are declared by the Board of Directors out
of funds legally available for the payment of dividends on each outstanding
share of common stock or Series A Preferred Stock in an amount equal to the
dividends paid on each share of the common stock or Series A Preferred Stock
multiplied by a fraction equal to the liquidation preference of each share of
Series B Preferred Stock, divided by the liquidation preference of the Series A
Preferred or common stock (assumed to be $.001), as the case may be. Dividends
on the Series B Preferred Stock are not cumulative. The holders of the Series A
Preferred Stock are entitled to dividends at the rate of $0.25 per annum per
share, payable prior and in preference to any payment of any dividend on the
common stock, when and as declared by the Board of Directors. Dividends on the
Series A Preferred are not cumulative. Dividends must be paid in order of
preference to the Series B Preferred (on a pari passu basis), to the Series A
Preferred and common stock.
Liquidation. A liquidation event is defined as any voluntary or involuntary
liquidation, dissolution or winding up of the corporation. The sale, lease,
conveyance, exchange or transfer of all or substantially all of our property or
assets or a merger or consolidation of the corporation are not liquidation
events with respect to the Series B Preferred. Payments made pursuant to a
liquidation must be made in full to each series of Preferred Stock in the
following order of preference: Series B-1 Preferred, Series B-2 Preferred,
Series B-3 Preferred and Series B-4 Preferred (on a pari passu basis) and then
the Series A Preferred. Thereafter, any remaining assets shall be distributed
ratably among the holders of common stock.
Redemption. The Series B Preferred Stock is subject to mandatory redemption
on August 29, 2002 or, at the option of the holder, upon a change in control of
our company. A change in control with respect to redemption means such time as
a person or group becomes the beneficial owner (as defined in Rule 13d-3 under
the Securities Exchange Act of 1934, as amended) of our capital stock having
voting power that is more than the voting power of the Series B Preferred Stock
on that date. There are no sinking fund provisions applicable to the preferred
stock. The Series A Preferred Stock is not redeemable.
Conversion. The preferred stock is convertible by the holder at any time
into common stock at the rate of our initial conversion price divided by the
conversion price then in effect. The initial conversion prices of the Series A
Preferred, Series B-1 Preferred, Series B-2 Preferred, Series B-3 Preferred and
Series B-4 Preferred are $2.50, $2.7343, $5.8105, $6.8359 and $5.4687 per
share, respectively. The conversion price of the preferred stock is subject to
adjustment for stock splour, stock dividends, consolidations, combinations,
reclassifications and other like events. The conversion prices of the Series B-
1 Preferred, Series B-2 Preferred, Series B-3 Preferred and Series B-4
Preferred Stock may also be subject to adjustment for certain dilutive issues
of stock at a price per share below the applicable conversion price of such
respective series of preferred stock, based on the
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weighted average dilution to such series. The Series A Preferred and Series B
Preferred are automatically convertible into common stock in the event of the
closing of a registered public offering of common stock with aggregate gross
proceeds of at least $7.5 million in the case of the Series A Preferred and $25
million in the case of the Series B Preferred.
Voting. The holders of preferred stock are entitled to notice of any
stockholders' meeting in accordance with our bylaws and are entitled to vote
together with the holders of common stock as a class. The holders of preferred
stock are entitled to the number of votes equal to the number of shares of
common stock into which such shares are convertible.
Other Restrictive Covenants. Our certificate of incorporation provides that
so long as shares of the Series B Preferred are outstanding, we may not (i)
declare or pay any dividend on any other class or series of shares of our
capital stock or (ii) purchase or redeem shares of our capital stock, except
the repurchase of common stock from employees in an amount less than $250,000.
Further, our certificate of incorporation provides that, without the approval
of the directors elected by the holders of the Series B-1 Preferred Stock,
Series B-3 Preferred Stock and Series B-4 Preferred Stock Series B-1 Preferred
Stock, Series B-3 Preferred Stock and Series B-4 Preferred Stock, we may not
create, authorize or issue any securities or reclassify any shares of capital
stock into any securities that rank senior to or on a parity with the Series B
Preferred Stock with respect to dividends or upon our liquidation or
dissolution. Without the approval of holders of at least a majority of the
shares of Series B-1 Preferred Stock, Series B-3 Preferred Stock and Series B-4
Preferred Stock then outstanding, we may not amend, modify or appeal the terms
of the Series B Preferred Stock in our certificate of incorporation.
Board representation rights. In any election of directors, our certificate
of incorporation provides that the holders of the Series B-1 Preferred, Series
B-3 Preferred and B-4 Preferred are entitled to elect one director as long as
any such shares are outstanding. If the Series B-1 Preferred, Series B-3
Preferred and Series B-3 Preferred outstanding have an aggregate liquidation
preference of at least $7.5 million, $15.0 million or $30.0 million, the
holders of such shares leave the right to elect two directors, three directors
and four directors, respectively. All other directors will be elected by the
holders of the preferred stock and common stock voting together as one class on
an as-converted basis.
In the event of a Special Trigger Event (as defined below) when any Series
B-1 Preferred Stock, Series B-3 Preferred Stock and Series B-4 Preferred Stock
is outstanding, the number of directors constituting the Board of Directors
shall be immediately adjusted to permit the holders of a majority of the shares
of Series B-1 Preferred Stock, Series B-3 Preferred Stock and Series B-4
Preferred Stock then outstanding to immediately appoint a majority of the
directors. Such rights shall continue until such time as all Special Trigger
Events shall be cured and no longer of any force or effect. A "Special Trigger
Event" shall be deemed to occur if:
. we have not, prior to August 29, 2000, completed an initial public
offering generating gross proceeds to us in excess of $25 million;
. we are in default with a creditor or trade partner with respect to a
liability or obligation of at least $50,000 for thirty days;
. we breach any covenant or agreement contained in our certificate of
incorporation or the operative agreements pursuant to which the Series B
Preferred Stock were issued; or
. we becomes the subject of a voluntary or involuntary bankruptcy,
insolvency or similar proceeding.
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Registration rights. Pursuant to the Securityholders' Agreement dated as of
August 29, 1997, between us and the holders of Series B Preferred Stock, such
holders are entitled to certain rights with respect to the registration of the
common stock issuable upon conversion of their shares under the Securities Act.
If we propose to register any of our securities under the Securities Act, the
Series B holders are entitled to notice of such proposed registration and the
opportunity to include shares of registrable securities therein; provided,
however, that we and the underwriter of any such offering have the right to
limit or completely exclude shares proposed to be registered. At any time, if
Series B holders holding at least 20% of the registrable securities which
constitutes at least 1% of our then outstanding Common Stock request that we
file a registration statement for the sale of shares having an anticipated sale
price of at least $10.0 million, we are required to use our best efforts to
cause such shares to be registered, subject to certain conditions and
limitations. Series B holders are limited to one such demand registration in
any six month period. In the event of any limitation by the underwriter, the
number of securities that may be included in such registration will be
allocated on a pro rata basis. Further, the Series B holders may require us to
register all or a portion of their registrable securities pursuant to Rule 415
promulgated under the Securities Act, provided that the request is made by the
holders of at least 20% of the registrable securities and subject to other
conditions and limitations specified in the agreement.
Other rights. Any holder of at least 150,000 shares of the Series B
Preferred Stock is entitled to certain annual and quarterly financial
information from us and also has certain rights of access and inspection. The
information rights terminate upon the earlier of (i) a registered public
offering of our common stock, or (ii) an acquisition of our company where the
surviving corporation is subject to the reporting requirements of the Exchange
Act.
Transfer agent and registrar
The transfer agent and registrar for our common stock and preferred stock is
Wilson Sonsini Goodrich & Rosati, P.C.
Delaware law and certain charter provisions
Our certificate of incorporation provides for cumulative voting for the
election of directors. Cumulative voting provides that each share of stock
normally having one vote is entitled to a number of votes equal to the number
of directors to be elected. A stockholder may then cast all such votes for a
single candidate or may allocate them among as many candidates as the
stockholder may choose. In the absence of cumulative voting, the holders of a
majority of the shares present or represented at a meeting in which directors
are to be elected would have the power to elect all the directors to be elected
at such meeting, and no person could be elected without the support of holders
of a majority of the shares present or represent at such meeting. Section 141
of the Delaware General Corporation Law provides that a director elected by
cumulative voting generally may not be removed without cause if the number of
votes cast against removal would be sufficient to elect such director under
cumulative voting.
Under Delaware law, a special meeting of stockholders may be called by the
Board of Directors or by any other person authorized to do so in the
certificate of incorporation or the bylaws. Our bylaws authorize the Board of
Directors, the Chairman of the Board or the President (or any Vice President in
the Chairman's or President's absence) or stockholders holding in the aggregate
a majority of our outstanding shares to call a special meeting of stockholders.
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Under Delaware law and our bylaws, stockholders may execute an action by
written consent in lieu of a stockholder meeting. Delaware law permits a
corporation to eliminate such actions by written consent. Elimination of
written consents of stockholders may lengthen the amount of time required to
take stockholder actions since certain actions by written consent are not
subject to the minimum notice requirement of a stockholders' meeting. The
elimination of stockholders' written consents, however, deters hostile takeover
attempts. Without the availability of stockholder's actions by written consent,
a holder or group of holders controlling a majority in interest of our capital
stock would not be able to amend our bylaws or remove directors pursuant to a
stockholder's written consent. Any such holder or group of holders would have
to call a stockholders' meeting and wait until the notice periods determined by
the Board of Directors pursuant to our bylaws prior to taking any such action.
Provisions of Delaware law
We are subject to Section 203 of the Delaware General Corporation Law, a
provision that, in general, prohibits a publicly held Delaware corporation from
engaging in various "business combination" transactions with any "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an "interested stockholder," unless:
. prior to such date, the Board of Directors of the corporation approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder,
. upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned by:
. persons who are directors and also officers and
. employee stock plans in which employee participants do not have the
right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer, or
. on or subsequent to such date the business combination is approved by
the board of directors and authorized at an annual or special meeting
of stockholders by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the interested
stockholder.
Section 203 defines business combination to include:
. any merger or consolidation involving the corporation and the
interested stockholder;
. any sale, transfer, pledge or other disposition involving the
interested stockholder of 10% or more of the assets of the
corporation;
. subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the
corporation to the interested stockholder;
. any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested
stockholder; or
. the receipt of the interested stockholder of the benefit of any
loans, advances guarantees, pledges or other financial Benefits
provided by or through the
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corporation. In general, Section 203 defines an interested stockholder
as an entity or person who, together with affiliates and associates,
beneficially owns (or within three years did beneficially own) 15% or
more of a corporation's voting stock. The statute could prohibit or
delay mergers or other takeover or change in control attempts with
respect to us and, accordingly, may discourage attempts to acquire us.
United States federal income tax considerations
The following discussion is a general summary of the material U.S. federal
income tax considerations resulting from the exchange offer and to the
ownership of the new notes. The discussion of the federal income tax
consequences set forth below is based upon the Internal Revenue Code of 1986,
as amended (the "Code"), and judicial decisions and administrative
interpretations thereunder, as of the date hereof, and such authorities may be
repealed, revoked or modified so as to result in federal income tax
consequences different from those discussed below. There can be no assurance
that the Internal Revenue Service (the "IRS") will not successfully challenge
one or more of the tax consequences described herein, and we have not obtained,
nor does it intend to obtain, a ruling from the IRS or an opinion of counsel
with respect to the U.S. federal income tax consequences of acquiring or
holding new notes. The discussion below pertains only to U.S. Holders, except
as described below under the caption "Tax treatment of the ownership and
disposition of new notes by non-U.S. holders." As used herein, a U.S. holder
means
. citizens or residents (within the meaning of Section 7701 (b) of the
Code) of the U.S.
. corporations, partnerships or other entities created in or under the laws
of the U.S. or any political subdivision thereof,
. estates the income of which is subject to U.S. federal income taxation
regardless of its source,
. trusts subject to the primary supervision of a court within the U.S. and
the control of a U.S. person as described in Section 7701 (a)(30) of the
Code, and
. any other person whose income or gain from the new notes is effectively
connected with the conduct of a U.S. trade or business. In addition, the
discussion relies upon the description provided to us by the DTC,
Euroclear and Cedel of their depository procedures and the procedures of
their participants and Indirect Participants in maintaining a book entry
system reflecting the beneficial ownership of the new notes.
This discussion does not purport to deal with all aspects of U.S. federal
income taxation that may be relevant to a particular Holder in light of the
Holder's circumstances (for example, persons subject to the alternative minimum
tax provisions of the Code). Also, it is not intended to be wholly applicable
to all categories of investors, some of which (such as dealers in securities,
banks, insurance companies, tax-exempt organizations, and persons holding new
notes as part of a hedging or conversion transaction or straddle or persons
deemed to sell new notes under the constructive sale provisions of the Code)
may be subject to special rules. The discussion below is premised upon the
assumption that the new notes and old notes are held (or would be held if
acquired) as capital assets within the meaning of Section 1221 of the Code and
constitute indebtedness for tax purposes. This summary does not discuss the tax
considerations applicable to subsequent purchasers. The discussion also does
not discuss any aspect of state, local or foreign law.
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Each holder tendering old notes or prospective purchasers of new notes are
strongly urged to consult its own tax advisor with respect to its particular
tax situation including the tax effects of any state, local, foreign, or other
tax laws and possible changes in the tax laws.
Exchange of notes
The exchange of old notes for new notes pursuant to the exchange offer
should not be a taxable exchange for U.S. federal income tax purposes.
Accordingly, a holder should have the same adjusted issue price, adjusted basis
and holding period in the new notes as it had in the old notes immediately
before the exchange.
The new notes
Original issue discount
The new notes will be treated as issued with original issue discount, which
each holder will be required to include in its gross income as described below.
Except as provided below in the section entitled "Applicable High-Yield
Discount Obligations," a holder must include original issue discount (to the
extent there is not offsetting acquisition or bond premium) in income as
ordinary interest income as it accrues on the basis of a constant yield to
maturity. Generally, original issue discount must be included in income in
advance of the receipt of cash representing such income.
The amount of original issue discount with respect to a new note will be
equal to the excess of the stated redemption price at maturity over the issue
price of the old note exchanged for such new note. The stated redemption price
at maturity of a new note will equal the sum of all payments other than any
"qualified stated interest" payments. Qualified stated interest is stated
interest that is unconditionally payable in cash or in property (other than
debt instruments of the issuer) at least annually at a single fixed rate.
Because interest on the new notes will not be payable prior to August 1, 2003,
none of the payments on the new notes will constitute qualified stated
interest. Accordingly, all payments on the new notes will be treated as part of
their stated redemption price at maturity.
Because the old notes were issued as part of an investment unit, the issue
price of each investment unit was allocated between the old note and the
warrant constituting an investment unit based on their relative fair market
values on the issue date. Although our allocation is not binding on the IRS, a
holder of a unit must use our allocation unless the holder discloses on its
federal income tax return for the year in which the unit was acquired that it
plans to use an allocation that is inconsistent with our allocation.
A holder must include in gross income, for all days during its taxable year
in which it holds such new note, the sum of the "daily portions" of original
issue discount. The "daily portions" are determined by allocating to each day
in an "accrual period" (generally the period between interest payments or
compounding dates) a pro rata portion of the original issue discount that
accrued during such accrual period. The amount of original issue discount that
will accrue during an accrual period is the product of the "adjusted issue
price" of the new note at the beginning of the accrual period and its yield to
maturity (determined on the basis of compounding at the end of each accrual
period and properly adjusted for the length of the particular accrual period).
The adjusted issue price of a new note is the sum of the issue price of an old
note, plus prior accruals of original issue discount, reduced by the total
payments made with respect to such new note in all prior periods and on the
first day of the current accrual period. Each payment on a new note will be
treated as a payment of original
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issue discount to the extent that original issue discount has accrued as of the
date such payment is due and has not been allocated to prior payments, and any
excess will be treated as a payment of principal.
There are several circumstances under which we could make a payment on a new
note that would affect the yield to maturity of a new note, including the
redemption or repurchase of a new note (as described under "Description of the
old notes"). According to Treasury Regulations, the possibility of a change in
the yield will not be treated as affecting the amount of interest income
(including original issue discount) recognized by a holder (or the timing of
such recognition) if the likelihood of the change, as of the date the debt
obligations are issued, is remote. We intend to report on the basis that the
likelihood of any change in the yield on the new notes is remote.
We are required to furnish certain information to the IRS, and will furnish
annually to record holders of a new note, information with respect to original
issue discount accruing during the calendar year. That information will be
based upon the adjusted issue price of the new note as if the holder were the
original holder of the new note.
Election to treat all interest as original issue discount
A holder may elect to treat all "interest" on any new note as original issue
discount and calculate the amount includable in gross income under the method
described above. For this purpose, "interest" includes stated and unstated
interest, original issue discount, acquisition discount, market discount and de
minimis market discount, as adjusted by any acquisition premium. The election
is to be made for the taxable year in which the holder acquired the note and
may not be revoked without the consent of the IRS.
Acquisition premium
To the extent a holder had acquisition premium with respect to an old note,
the holder generally will have acquisition premium with respect to a new note.
A holder will reduce the original issue discount otherwise includable for each
accrual period by an amount equal to the product of (i) the amount of such
original issue discount otherwise includable for such period, and (ii) a
fraction, the numerator of which is the acquisition premium and the denominator
of which is the excess of the amounts payable on the new note after the
purchase date over the adjusted issue price.
Sale, exchange or retirement of the new notes
Upon the sale, exchange or retirement of a new note, the holder generally
will recognize gain or loss equal to the difference between the amount realized
on the sale, exchange or retirement (which does not include any amount
attributable to accrued but unpaid interest including market discount) and the
holder's adjusted tax basis in the new note. A holder's adjusted tax basis in
the new note will equal the holder's cost for the old note exchanged therefor
or the holder's cost for the new note itself increased by any original issue
discount included in income by such holder with respect to such new note and
decreased by any payments received thereon other than qualified stated
interest.
Gain or loss realized on the sale, exchange or retirement of a new note will
be capital, and will be long-term if at the time of sale, exchange or
retirement the new note has been held for more than one year (including the
holding period of the old note exchanged therefor by the holder). The maximum
rate of tax on long-term capital gains on most capital assets
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held by an individual for more than one year is 20%. The deductibility of
capital losses is subject to limitations.
Market discount
As described above, any gain or loss on a disposition of a new note would
generally be capital gain or loss. However, a subsequent purchaser of a new
note who did not acquire the new note (or an old note exchanged for a new note)
at its original issue, and who acquires such new note (or such old note, as the
case may be) at a price that is less than the adjusted issue price (as
determined under the original issue discount rules described above), may be
required to treat the new note as a "market discount bond". Any recognized gain
on a disposition of the new note would then be treated as ordinary income to
the extent that it does not exceed the "accrued market discount" on the new
note which has not previously been included in income.
In general, any market discount will be considered to accrue ratably during
the period from the date of acquisition to the maturity date of the new note.
In addition, there are rules deferring the deduction of all or part of the
interest expense on indebtedness incurred or continued to purchase or carry
such bond, and permitting a holder to elect to include accrued market discount
in income on a current basis.
Applicable high-yield discount obligations
The new notes will be subject to the "applicable high yield discount
obligation" provisions of the tax code. Because the yield of the new notes is
at least five percentage points above the applicable federal rate and the new
notes are issued with "significant original issue discount," otherwise
deductible interest and original issue discount will not be deductible with
respect thereto until such interest is actually paid. In addition, because the
yield of the new notes is more than six percentage points above the applicable
federal rate, (i) a portion of such interest corresponding to the yield in
excess of six percentage points above the applicable federal rate will not be
deductible by TVN at any time, and (ii) a corporate holder may be entitled to
treat the portion of the interest that is not deductible by TVN as a dividend
for purposes of qualifying for the dividends received deduction provided for by
the tax code, subject to applicable limitations. In such event, corporate
holders should consult with their own tax advisors as to the applicability of
the dividends received deduction and the relevant exceptions.
Tax treatment of the ownership and disposition of new notes by non-U.S. holders
The following discussion is a general summary of certain U.S. federal income
and estate tax considerations of the ownership and disposition of new notes by
non-U.S. holders. As used herein, a Non-U.S. holder means any holder other than
a U.S. holder.
Withholding tax on payments of principal and interest on new notes
The payment of principal and interest on a new note to a non-U.S. holder
will not be subject to U.S. federal withholding tax pursuant to the "portfolio
interest exception," provided that (i) the non-U.S. holder does not actually or
constructively own 10% or more of the total voting power of all voting stock of
TVN and is not a controlled foreign corporation that is related to TVN within
the meaning of the tax code and (ii) the beneficial owner of the new notes
certifies to TVN or its agent, under penalties of perjury, that it is not a
U.S. holder and provides its name and address on U.S. Treasury Form W-8 (or a
suitable substitute form) or a securities clearing organization, bank or other
financial institution that holds
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customers' securities in the ordinary course of its trade or business (a
"financial institution") and holds the new notes certifies under penalties of
perjury that such a Form W-8 (or suitable substitute form) has been received
from the beneficial owner by it or by a financial institution between it and
the beneficial owner and furnishes the payor with a copy thereof. Treasury
Regulations that will be effective January 1, 2001 (the "Withholding
Regulations") provide alternative methods for satisfying the certification
requirement described in (ii) above. The Withholding Regulations will generally
require, in the case of new notes held by a foreign partnership, that the
certificate described in (ii) above be provided by the partners rather that by
the foreign partnership, and that the partnership provide certain information
including a U.S. tax identification number. Holders of notes should consult
their top advisors concerning the possible application of the Withholding
Regulations to any payments made on or with respect to the notes.
Gain on disposition of the notes
Non-U.S. holders generally will not be subject to U.S. federal income tax on
gain realized on the sale, exchange or redemption of new notes, unless in the
case of an individual non-U.S. holder (i) such holder is present in the U.S.
for 183 days or more in the year of such sale, exchange or redemption and
certain other conditions are met, or (ii) such holder is a former citizen or
resident of the United States subject to certain rules relating to that status.
Federal estate tax
New notes held by an individual who is not a citizen or resident of the
United States for federal estate tax purposes at the time of his or her death
will not be subject to U.S. federal estate tax if the interest on the new notes
qualifies for the portfolio interest exemption under the rules described above.
Information reporting and backup withholding
In general, information reporting requirements will apply to payments of
principal and interest on a new note and payments on the proceeds of the sale
of a new note to certain noncorporate U.S. holders, and a 31% backup
withholding tax may apply to such payments if the holder (i) fails to furnish
or certify its correct taxpayer identification number to the payor in the
manner required, (ii) is notified by the IRS that it has failed to report
payments of interest and dividends properly, or (iii) under certain
circumstances, fails to certify that it has not been notified by the IRS that
it is subject to backup withholding for failure to report interest and dividend
payments. Certain holders (including, among others, all corporations) are not
subject to the backup withholding and reporting requirements.
We must report annually to the IRS and to each non-U.S. holder any interest
that is subject to withholding, or that is exempt from U.S. withholding tax
pursuant to a tax treaty, or interest that is exempt from U.S. tax under the
portfolio interest exception. Copies of these information returns may also be
made available under the provisions of a specific treaty or agreement to the
tax authorities of the country in which the non-U.S. holder resides.
The backup withholding and additional information reporting requirements
also apply to non-corporate non-U.S. holders. Treasury Regulations, however,
provide that backup withholding and additional information reporting will not
apply to payments of principal on the new notes by TVN to a non-U.S. holder if
the holder certifies as to its non-U.S. status under penalties of perjury or
otherwise establishes an exemption (provided that neither TVN
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nor its Paying Agent has actual knowledge that the holder is a U.S. person or
that the conditions of any other exception are not, in fact, satisfied).
The payment of portfolio interest and of the proceeds from the disposition
of new notes to or through the U.S. office of any broker, U.S. or foreign, will
be subject to information reporting and possible backup withholding unless the
owner certifies as to its non-U.S. holder status under penalty of perjury or
otherwise establishes an exemption, provided that the broker does not have
actual knowledge that the holder is a U.S. person or that the conditions of any
other exemption are not, in fact, satisfied. The payment of portfolio interest
and of the proceeds from the disposition of a new note to or through a non-U.S.
office of a broker that is either a U.S. person or a "U.S. related person" will
be subject to information reporting (but currently not backup withholding)
unless the broker has documentary evidence in the files that the owner is a
non-U.S. holder and the broker has no knowledge to the contrary. Backup
withholding and information reporting will not apply to payments made through
foreign offices of a broker that is not a U.S. person or a U.S. related person
(absent actual knowledge that the payee is U.S. person). For purposes of this
paragraph, a "U.S. related person" is (i) a "controlled foreign corporation"
for U.S. federal income tax purposes, or (ii) a foreign person 50% or more of
whose gross income from all sources for the three-year period ending with the
close of its taxable year preceding the payment (or for such part of the period
that the broker has been in existence) is effectively connected with the
conduct of a U.S. trade or business. Effective for payments after December 31,
2000 the Withholding Regulations expand the number of foreign intermediaries
that are potentially subject to information reporting, modify certain of the
documentation requirements and provide certain presumptions under which a non-
U.S. holder will be subject to backup withholding and information reporting
unless the non-U.S. holder provides a certification as to its non-U.S. holder
status. Holders of the new notes should consult their tax advisors concerning
the application of the Withholding Regulations to their particular situations.
Any amounts withheld under the backup withholding rules from a payment to a
U.S. or non-U.S. holder will be allowed as a refund or a credit against such
holder's U.S. federal income tax liability, provided that the requisite
procedures are followed.
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Plan of distribution
Each broker-dealer that receives new notes in the exchange offer for its own
account must acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resales of such
notes. We reserve the right in our sole discretion to purchase or make offers
for, or to offer new notes for, any old notes or any other notes that remain
outstanding subsequent to the expiration of the exchange offer pursuant to this
prospectus or otherwise and, to the extent permitted by applicable law,
purchase old notes or any other notes in the open market, in privately
negotiated transaction or otherwise. This prospsectus or otherwise and, to the
extent permitted by applicable law, purchase old notes or any other notes in
the open market, in privately negotiated transactions or otherwise. This
prospectus, as it may be amended or supplemented from time to time, may be used
by all persons subject to the Prospectus delivery requirements of the
Securities Act, including broker-dealers in connection with resales of new
notes received in the exchange offer, where such notes were acquired as a
result of market-making activities or other trading activities and may be used
by us to purchase any notes outstanding after expiration of the exchange offer.
We have agreed that, for a period of 180 days after the expiration of the
exchange offer, it will make this prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale.
We will not receive any proceeds from any sale of new notes by broker-
dealers. New notes received by broker-dealers in the exchange offer for their
own account may be sold from time to time in one or more transactions in the
over-the-counter market, in negotiated transactions, through the writing of
options on the new notes or a combination of such methods of resale, at market
prices prevailing at the time of resale, at prices related to such prevailing
market prices or negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissons or concessions from any such broker-dealer and/or the
purchasers of any such new notes. Any broker-dealer that resells new notes
received by it in the exchange offer for its own account and any broker or
dealer that participates in a distribution of any such new notes may be deemed
to be an "underwriter" within the meaning of the Securities Act and any profit
on any such resale of such new notes and any commissions or concessions
received by any such Persons may be deemed to be underwriting compensation
under the Securities Act. The letter of transmittal states that, by
acknowledging that it will deliver and by delivering a prospectus meeting the
requirements of the Securities Act, a broker-dealer will not be deemed to admit
that it is an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after the expiration of the exchange offer, we will
promptly send additional copies of this Prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests such documents
in the letter of transmittal. We have agreed to pay all expenses incident to
the exchange offer, other than commissions or concessions of any brokers or
dealers.
Legal matters
The validity of the new notes offered hereby will be passed upon for us by
special bond counsel Irell & Manella, LLP, Los Angeles, California.
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Experts
The consolidated financial statements of TVN Entertainment Corporation and
subsidiaries as of March 31, 1998 and 1999 and for each of the three years in
the period ended March 31, 1999 included in this prospectus have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
Where you can find more information
A registration statement on Form S-4, including amendments thereto, relating
to the new notes offered by this prospectus has been filed by us with the
Securities and Exchange Commission. This prospectus, which constitutes a part
of the Registration Statement, does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto. For
further information with respect to us and the new notes offered by this
prospectus, reference is made to the registration statement, exhibits and
schedules. A copy of the registration statement may be inspected by anyone
without charge at the Public Reference Room maintained by the Securities and
Exchange Commission at 450 Fifth Street, NW, Judiciary Plaza, Washington, D.C.
20549, and copies of all or any part thereof maybe obtained from the Securities
and Exchange Commission upon payment of certain fees prescribed by the
Securities and Exchange Commission. You may obtain information on the operation
of the Public Reference Room by calling the Securities and Exchange Commission
at 1-800-SEC-0330. The Securities and Exchange Commission maintains a World
Wide Web site that contains reports, proxy and information statements and other
information filed electronically with the Securities and Exchange Commission.
The address of the site is http://www.sec.gov.
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TVN ENTERTAINMENT CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants.......................................... F-2
Financial Statements:
Consolidated Balance Sheets as of March 31, 1998 and 1999................ F-3
Consolidated Statements of Operations for the Three Years Ended March 31,
1999.................................................................... F-4
Consolidated Statements of Stockholders' Deficit for the Three Years
Ended March 31, 1999.................................................... F-5
Consolidated Statements of Cash Flows for the Three Years Ended March 31,
1999.................................................................... F-6
Notes to the Consolidated Financial Statements........................... F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
TVN Entertainment Corporation:
In our opinion, the accompanying balance sheets and the related statements of
operations, of stockholders' deficit and of cash flows present fairly, in all
material respects, the financial position of TVN Entertainment Corporation and
subsidiaries (the "Company") at March 31, 1998 and 1999 and the results of
their operations and their cash flows for each of the three years in the period
ended March 31, 1999 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.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Los Angeles, California
May 12, 1999
F-2
<PAGE>
TVN ENTERTAINMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31, September
------------------ 30,
1998 1999 1999
-------- -------- -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 16,798 $ 84,343 $ 51,643
Restricted short-term investments................ -- 25,909 25,885
Trade and other accounts receivable, less
allowance for doubtful accounts of $159 and $426
at March 31, 1998 and March 31, 1999,
respectively, and $330 at September 30, 1999
(unaudited)..................................... 2,699 5,615 9,790
Inventory........................................ -- 807 2,041
Prepaid expenses and other current assets........ 1,502 656 1,787
-------- -------- --------
Total current assets........................... 20,999 117,330 91,146
Restricted cash.................................... 1,833 1,903 1,591
Restricted investments............................. -- 39,309 26,974
Property and equipment, net........................ 93,769 84,997 82,541
Intangible assets, net............................. -- 4,585 16,934
Other assets, net.................................. 139 6,601 9,250
-------- -------- --------
Total assets................................... $116,740 $254,725 $228,436
======== ======== ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable................................. $ 2,039 $ 4,496 $ 7,560
Accrued liabilities.............................. 3,790 9,445 10,461
License fees payable............................. 6,900 8,321 9,953
Deferred revenue and advances.................... 1,521 1,140 2,345
Accrued interest................................. 3,893 7,284 6,593
Current portion of capitalized leases............ 5,583 7,444 8,380
Current portion of notes payable................. 23,187 8,228 7,262
-------- -------- --------
Total current liabilities...................... 46,913 46,358 52,554
Capitalized leases................................. 95,276 88,259 83,863
Notes payable...................................... 9,100 7,439 19,006
Senior notes due 2008.............................. -- 186,798 187,505
-------- -------- --------
Total liabilities.............................. 151,289 328,854 342,928
Commitments and contingencies...................... -- -- --
Series B redeemable convertible preferred stock;
liquidation value: $54,413,732.................... 52,616 53,047 53,245
Stockholders' deficit:
Series A convertible preferred stock, liquidation
value: $18,750; 7,600,000 shares authorized;
7,499,900 shares issued and outstanding at March
31, 1998, March 31, 1999 and September 30, 1999
(unaudited)..................................... 8 8 8
Common stock, $.001 par value, 40,000,000 shares
authorized; 152,517 shares issued and
outstanding at March 31, 1998, March 31, 1999
and September 30, 1999 (unaudited).............. -- -- --
Additional paid-in-capital....................... 8,995 22,747 23,269
Accumulated deficit.............................. (96,168) (149,931) (191,014)
-------- -------- --------
Total stockholders' deficit.................... (87,165) (127,176) (167,737)
-------- -------- --------
Total liabilities & stockholders' deficit...... $116,740 $254,725 $228,436
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
TVN ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
<TABLE>
<CAPTION>
Six months ended
Year ended March 31, September 30,
---------------------------- ------------------
1997 1998 1999 1998 1999
-------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue..................... $ 33,380 $ 30,545 $ 39,812 $ 14,118 $ 34,185
Operating expenses:
Cost of revenue (exclusive
of depreciation shown
separately below)........ 18,811 20,426 31,775 11,914 30,856
Selling................... 5,998 7,067 14,302 5,939 7,589
General and
administrative........... 5,061 5,619 8,520 3,707 9,983
Depreciation and
amortization............. 10,534 11,984 12,253 6,071 6,821
Amortization of intangible
assets................... (802) (100) 199 -- 1,233
-------- -------- -------- -------- --------
Total operating expenses.... 39,602 44,996 67,049 27,631 56,482
-------- -------- -------- -------- --------
Loss from operations........ (6,222) (14,451) (27,237) (13,513) (22,297)
Interest expense............ 13,908 15,163 34,195 12,500 22,132
Interest income............. (63) (223) (6,472) (1,797) (3,484)
Other (income) and expense.. 54 471 (84) (33) 138
-------- -------- -------- -------- --------
Loss before extraordinary
gain....................... (20,121) (29,862) (54,876) (24,183) (41,083)
Extraordinary gain.......... 2,454 -- 1,113 1,113 --
-------- -------- -------- -------- --------
Net loss.................... (17,667) (29,862) (53,763) (23,070) (41,083)
Accretion of Series B
redeemable convertible
preferred stock............ -- (116) (393) (197) (198)
-------- -------- -------- -------- --------
Net loss applicable to
common stockholders........ $(17,667) $(29,978) $(54,156) $(23,267) $(41,281)
======== ======== ======== ======== ========
Basic and diluted net loss
per share applicable to
common stockholders:
Net loss applicable to
common stockholders before
extraordinary gain......... $ (6,835) $ (272) $ (362) $ (160) $ (271)
Extraordinary gain.......... 834 -- 7 7 --
-------- -------- -------- -------- --------
Net loss applicable to
common stockholders........ $ (6,001) $ (272) $ (355) $ (153) $ (271)
======== ======== ======== ======== ========
Weighted average shares..... 2,944 110,237 152,517 152,517 152,517
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
TVN ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(In thousands)
<TABLE>
<CAPTION>
Series A
Convertible
Preferred Stock Common Stock Additional
------------------ ------------------ Paid-in Accumulated
Outstanding Amount Outstanding Amount Capital Deficit Total
----------- ------ ----------- ------ ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of March 31,
1996................... 7,600 $ 8 -- $ -- $ 9,098 $ (48,639) $ (39,533)
Exercise of stock
options................ -- -- 50 -- 13 -- 13
Net loss................ -- -- -- -- -- (17,667) (17,667)
----- ---- --- ----- ------- --------- ---------
Balance as of March 31,
1997................... 7,600 8 50 -- 9,111 (66,306) (57,187)
Conversion of preferred
stock.................. (100) -- 100 -- -- -- --
Exercise of stock
options................ -- -- 2 -- -- -- --
Accretion of Series B
redeemable convertible
preferred stock........ -- -- -- -- (116) -- (116)
Net loss................ -- -- -- -- -- (29,862) (29,862)
----- ---- --- ----- ------- --------- ---------
Balance as of March 31,
1998................... 7,500 8 152 -- 8,995 (96,168) (87,165)
Accretion of Series B
redeemable convertible
preferred stock........ -- -- -- -- (393) -- (393)
Issuance of warrants in
connection with senior
notes.................. -- -- -- -- 14,145 -- 14,145
Net loss................ -- -- -- -- -- (53,763) (53,763)
----- ---- --- ----- ------- --------- ---------
Balance as of March 31,
1999................... 7,500 $ 8 152 $ -- $22,747 $(149,931) $(127,176)
===== ==== === ===== ======= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
TVN ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six months ended
March 31, September 30,
---------------------------- ------------------
1997 1998 1999 1998 1999
-------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss..................... $(17,667) $(29,862) $(53,763) $(23,070) $(41,083)
Adjustments to reconcile net
loss to net cash used for
operating activities:
Depreciation and
amortization.............. 10,534 11,984 12,253 6,070 6,821
Amortization of intangible
assets.................... (802) (100) 199 -- 1,234
Provision for doubtful
accounts.................. 851 120 753 158 182
Debt forgiveness........... (2,454) -- (1,113) (1,113) --
Gain on sale of asset...... (22) -- -- -- --
Accretion of discount on
debt...................... -- -- 943 236 828
Amortization of debt
issuance costs............ -- -- 446 110 366
Other non-cash charges..... -- -- -- -- 138
Change in assets and
liabilities, net of
acquisition:
Restricted cash........... -- (1,833) (70) (40) 312
Accounts receivable....... (8) (425) (4,456) (354) (4,118)
Inventory................. -- -- (422) (43) (1,233)
Prepaid expenses and other
current assets........... (326) (1,034) 1,066 623 (583)
Other assets.............. 29 35 (197) 24 (23)
Accounts payable.......... 2,812 (515) (606) 1,231 2,670
Accrued liabilities....... 1,717 491 5,112 830 336
License fees payable...... (1,366) (4,279) 1,421 (1,882) 1,632
Deferred revenue and
advances................. 2,317 (3,763) (380) 826 1,854
Accrued interest.......... 1,448 1,090 3,391 4,867 (691)
-------- -------- -------- -------- --------
Net cash used for operating
activities.................. (2,937) (28,091) (35,423) (11,527) (31,358)
Cash flows from investing
activities:
Purchases of property and
equipment................. (182) (308) (2,621) (718) (3,054)
Disposals of property and
equipment................. 13 -- -- -- --
Purchases of restricted
investments............... -- -- (76,745) (76,745) --
Proceeds from maturities of
restricted investments.... -- -- 11,528 (704) 12,358
Acquisition of Panda
Shopping Network, net of
cash acquired............. -- -- (485) -- --
Acquisition of New Media
Network, net of cash
acquired.................. -- -- -- -- (165)
Acquisition of GRTV
Network, net of cash
acquired.................. -- -- -- -- (216)
Investment in joint
ventures.................. -- -- -- -- (1,700)
-------- -------- -------- -------- --------
Net cash provided by (used
for) investing activities... (169) (308) (68,323) (78,167) 7,223
Cash flows from financing
activities:
Net proceeds from issuance
of preferred stock........ -- 45,000 39 -- --
Additions to notes
payable................... 8,000 4,500 -- -- --
Repayments of capitalized
leases.................... (3,473) (4,456) (5,608) (2,637) (3,460)
Repayments of notes
payable................... (1,024) (612) (16,428) (8,660) (5,105)
Exercise of stock options.. 13 -- -- -- --
Net proceeds from issuance
of senior notes........... -- -- 193,288 193,400 --
-------- -------- -------- -------- --------
Net cash provided by (used
for) financing activities... 3,516 44,432 171,291 182,103 (8,565)
-------- -------- -------- -------- --------
Net increase (decrease) in
cash and cash equivalents... 410 16,033 67,545 92,409 (32,700)
Cash and cash equivalents at
the beginning of year....... 355 765 16,798 16,798 84,343
-------- -------- -------- -------- --------
Cash and cash equivalents at
the end of year............. $ 765 $ 16,798 $ 84,343 $109,207 $ 51,643
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
TVN ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share data)
Supplemental disclosures of cash flow information:
<TABLE>
<CAPTION>
Six months
ended
Year ended March 31, September 30,
----------------------- --------------
1997 1998 1999 1998 1999
------- ------- ------- ------ -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash paid for:
Interest............................... $12,331 $14,173 $30,012 $7,628 $21,586
</TABLE>
Supplemental schedule of noncash investing and financing activities:
During 1997, the Company incurred a capital lease obligation of $40,101 for
property and equipment (see note 10).
During 1997 and 1998, the Company incurred notes payable of $5,213 and $175,
respectively for property and equipment (see note 7).
Additions to notes payable in 1998 include $1,884 previously classified as
trade accounts payable and $333 previously classified as accrued interest (see
note 7).
During 1998, the Company converted notes payable of $7,500 to Series B
Redeemable Convertible Preferred Stock (see note 11).
During 1999, the Company completed a private placement of 200,000 Units,
each of which consists of one 14% Senior Note (the "Notes") due 2008 and one
warrant to purchase initially 10.777 shares of the Company's common stock. The
warrants were recorded at a value of $14,145 and were deducted from the face
value of the Notes (see note 8).
Additions to other assets in 1999 include $6,711 of capitalized closing
costs deducted from the proceeds related to the private placement of the Notes
(see note 8).
During 1999, the Company assumed $3.4 million in net liabilities and forgave
$948 in trade receivables in connection with an acquisition (see note 5).
During 2000, the Company incurred a $1.7 million discounted note obligation
and assumed $1.4 million in net liabilities in connection with an acquisition
(see note 5).
During 2000, the Company incurred $10.4 million in discounted note
obligations and assumed $100 in net assets in connection with an acquisition
(see note 5).
F-7
<PAGE>
TVN ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
1. Organization and Business
TVN Entertainment Corporation (the "Company") owns and operates a national,
satellite transmitted, multi-channel, pay-per-view television programming
network, providing analog and digital entertainment programming to C-band
satellite dish owners and to cable system operators and their subscribers. The
Company's analog service currently consists of nine channels of programming,
featuring five encrypted pay-per-view channels, one unencrypted promotional
channel and three channels utilized for third party programming. The Company's
digital service currently consists of thirty-two encrypted pay-per-view
channels, one unencrypted promotional channel, forty digital music channels, an
interactive on-screen programming guide and complementary transactional
services including billing, collection, customer service, remittance processing
and studio license fee administration. Analog and digital subscribers order
movies and events for a pay-per-view fee, using either an automatic number
identification (ANI) phone ordering system or an electronic impulse store and
forward ordering system.
The Company also owns and operates a national, satellite transmitted, home
shopping television network, providing an analog and digital home shopping
service to subscribers of cable operators and cable networks and viewers of
broadcast networks (see note 5). The Company's home shopping service primarily
sells collectibles.
The Company also owns a majority interest in a start-up company that is
developing and plans to deploy a system utilizing state-of-the-art digital
downloading technology to deliver and sell entertainment products such as
music, movies and games via the Internet and at retail locations.
The Company also owns and operates a national, satellite transmitted
television broadcast network that primarily purchases remnant time from cable
operators and packages that time for resale to infomercial programmers and
other users of broadcast media time.
The Company was a development stage enterprise from its incorporation in
1987 until March 5, 1991. On March 6, 1991 the Company entered into a limited
partnership, TVN Entertainment L. P. (the "Partnership"), comprised of itself
as a limited partner and two general partners. The Partnership was an operating
entity and was accounted for on the equity basis during the period from March
6, 1991 to May 15, 1992.
On May 15, 1992, the Company acquired the general partners' interests in the
Partnership, which was dissolved pursuant to a partnership dissolution
agreement which provided that the Company receive all partnership assets and
assume certain liabilities as of the dissolution date for an effective purchase
price of $1. These liabilities include notes payable to the former general
partners and certain Company stockholders totaling $16,503 and $1,080,
respectively. Interest accrues on these obligations at prime plus 1% and
totaled $10,313 and $795, respectively at March 31, 1999. Repayment of these
loans and related accrued interest (collectively the "Contingent Debt") will be
made on a pari passu basis out of "available cash flow," as defined in the
Restated Limited Partnership Agreement dated March 7, 1991. The dissolution
agreement provides that the Company will not make any distributions or pay any
dividends in respect of its capital stock or other equity interests prior to
the payment in full to TVN's former general partners and will not subordinate
these obligations to other debt.
F-8
<PAGE>
TVN ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share data)
Because payment of these liabilities is dependent upon "available cash
flow," this debt represents contingent consideration related to the acquisition
of net assets. The Company has had negative operating cash flows and payment of
these liabilities does not appear to be probable at this time. Accordingly,
these amounts have not been recorded as a liability in accordance with
Accounting Principles Board Opinion No. 16, "Business Combinations", because
the outcome of the contingency is not determinable beyond a reasonable doubt.
The Company will record these liabilities when the contingency is resolved.
The acquisition of the former general partners' interests is accounted for
under the purchase method of accounting. The purchase method required the
recognition of negative goodwill of $4,013 which was amortized on a straight
line basis over a five year period.
2. Summary of Significant Accounting Policies
Basis of Presentation
Since inception, the Company has incurred operating losses. In addition,
although the Company has working capital of approximately $70,972, it has a
total stockholders' deficit of approximately $127,176 at March 31, 1999.
Management intends to fund future losses, if any, through the offering of
additional debt and/or equity securities and ultimately, through the attainment
of positive operating cash flows.
The Company plans to attain positive operating cash flows with the rollout
of TVN Digital Cable Television, a comprehensive package of turn-key digital
services, TVN Shopping, a home shopping television network, GRTV, a national,
satellite transmitted infomercial network and New Media Network, a distributor
of entertainment products via the Internet and at retail locations.
The ability of the Company to ultimately achieve positive operating cash
flows is uncertain. The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern and do not include
any adjustments that might result from the outcome of this uncertainty.
Unaudited Interim Financial Information
The interim consolidated financial information of the Company for the six
months ended September 30, 1998 and 1999 is unaudited. The unaudited interim
financial information has been prepared on the same basis as the annual
consolidated financial statements and, in the opinion of management, reflect
all adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial position, results of operations and cash flows as
of September 30, 1999 and for the six months ended September 30, 1998 and 1999.
Consolidation
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. All intercompany balances and transactions
have been eliminated in consolidation.
F-9
<PAGE>
TVN ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share data)
Use of Estimates
The preparation of the 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, Cash Equivalents and Restricted Cash
The Company considers all highly liquid temporary investments (money market,
certificates of deposit, commercial paper and government issued securities)
with original maturities of three months or less to be cash equivalents.
Restricted cash consists of amounts held in escrow to fund certain of the
Company's obligations under an employment agreement (see note 10) and amounts
held on deposit pursuant to a credit card processing agreement.
Restricted short-term and long-term investments
Restricted short-term and long-term investments consist of marketable
securities (see note 4) held in custody to fund the next five scheduled
interest payments on the Notes due 2008 (see note 8). The marketable securities
consist principally of federal agency notes with original maturity dates
greater than three months. All marketable securities are classified as held to
maturity securities under the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" and are stated at amortized cost plus accrued interest.
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 cash is deposited in major financial institutions, thereby
limiting credit risk. However, the Company's deposits with a single financial
institution as of the respective balance sheet dates exceed the maximum amount
of $100 insured by the FDIC.
The Company's trade accounts receivable are routinely assessed for
collectability from its pay-per-view subscribers. As a consequence,
concentration of credit risk is limited.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, short and long-term
investments, accounts receivable, accounts payable, and accrued expenses,
approximate fair values because of the short maturities of these instruments.
The fair value of the Company's long-term debt approximates its carrying value
based on the current borrowing rates for similar instruments.
F-10
<PAGE>
TVN ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share data)
Inventory
Inventory is stated at the lower of cost (using first-in, first-out method)
or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization is
recorded using the straight-line method over the useful lives, estimated at
between five and seven years for office furniture and equipment, seven years
for digital equipment, and ten years for assets under capitalized leases. Upon
retirement or other disposal, the asset cost and related accumulated
depreciation and amortization are removed from the accounts and the net amount,
less any proceeds, is charged or credited to operations. Repairs and
maintenance are charged to operations when incurred. The carrying value of
property and equipment is periodically reviewed by management, and impairment
losses, if any, are recognized when the expected nondiscounted future operating
cash flows derived from such assets are less than their carrying value.
Intangible Assets
Intangible assets, which represent acquired technology and goodwill,
represent the excess of the purchase price over the fair value of assets
acquired in connection with the acquisitions of Panda Shopping Network ("PSN"),
New Media Networks ("NMN") and Guthy-Renker Television ("GRTV"). The Company
amortizes intangible assets on a straight-line basis over the estimated period
of benefit, currently between three and five years. On an annual basis the
Company reviews the recoverability of intangible assets based primarily upon
cash flow forecasts. The Company has not recognized any impairment losses as of
March 31, 1999.
Revenue Recognition
Programming revenues consist of revenue generated directly from subscribers
and cable operators and are recognized when movies and events are viewed. Fees
paid by cable operators for digital cable television service are recognized as
such services are provided and reduced for estimated rebates earned by cable
operators which achieve certain customer acquisition milestones. Sign-up
revenues in excess of direct costs are recognized over the related customer
usage period for the related service. Merchandising revenues are recognized
when products are shipped, at which point reserves are established for
estimated returns. Revenue received from subscription sales, advances against
merchandising revenue and amounts received from other programmers for
uplink/playback and transponder services is deferred and recognized as earned.
License fees payable to producers are accrued on the basis of the
contractual license terms and are charged to expense as the related revenues
are recorded.
Research and Development
Research and development costs are expensed as incurred and totaled $1,172
during the year ended March 31, 1999. Expenses were not significant for each of
the years ended March 31, 1997 and 1998.
F-11
<PAGE>
TVN ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share data)
Advertising
The Company reports the cost of all advertising as expenses in the period in
which those costs are incurred. The Company shares portions of certain
distributors' advertising expenses through co-op advertising arrangements.
Advertising expense was $496, $849 and $1,380 for the years ended March 31,
1997, 1998 and 1999, respectively.
Stock-based Compensation
The Company grants incentive stock options for a fixed number of common
shares to employees, with an exercise price equal to or greater than the fair
value of the shares at the date of grant. The Company has elected to measure
compensation expense related to employee stock options in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", and has provided the additional required disclosures as if the fair
value based method of accounting, as defined by SFAS No. 123, "Accounting for
Stock-Based Compensation", had been applied.
Net Loss Applicable to Common Stockholders
Basic and diluted net loss applicable to common stockholders is computed
using the weighted average number of shares of common stock outstanding. Common
equivalent shares related to stock options, warrants and preferred stock are
excluded from the computation when their effect is antidilutive.
Income Taxes
Income tax expense, if any, represents the taxes payable for the year and
the changes during the year in deferred tax assets and liabilities. Deferred
income taxes are determined based on the difference between the financial
reporting and tax bases of assets and liabilities using enacted rates in effect
during the year in which the differences are expected to reverse. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized.
Reclassifications
Certain reclassifications have been made to the prior year financial
statements to conform to the 1999 presentation.
Comprehensive Income
Effective April 1, 1998, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. To date, the Company has not had any
transactions that are required to be reported in comprehensive income.
F-12
<PAGE>
TVN ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share data)
Segments
Effective April 1, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise," replacing the "industry segment" approach with the "management"
approach. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of the Company's reportable segments. SFAS No. 131 also requires
disclosures about products and services, geographic areas and major customers.
The adoption of SFAS No. 131 did not affect results of operations or financial
position but did affect the disclosure of segment information (see note 15).
3. Concentrations of Business Risk
The Company leases its transponders from one supplier under the terms of two
ten year capital leases (see note 10). Although there are a limited number of
transponders available for the Company's use in the event of default by this
supplier, management believes that other suppliers could provide similar
transponder service. A change in suppliers, however, could result in less
favorable terms for the service and/or could cause a delay in distribution,
either of which would have an adverse affect on the Company's financial
condition, results of operations and cash flows.
The Company receives uplink and playback service from one supplier under the
terms of a five year service agreement. While several other suppliers could
provide similar service, an abrupt termination of this service could result in
less favorable terms for the service and/or could cause a delay in
distribution, either of which would have an adverse affect on the Company's
financial condition, results of operations and cash flows.
The Company receives transaction processing service from one supplier under
the terms of a long term service agreement (see note 10). While several other
suppliers could provide similar service, an abrupt termination of this service
could result in a billing delay which would have an adverse affect on the
Company's financial condition, results of operations and cash flows.
For the year ended March 31, 1999 and the six months ended September 30,
1999, one customer accounted for 24.6% and 26.6% of revenue, respectively.
4. Investments
Investments are comprised primarily of U.S. Treasury securities with
maturities of up to 3 years and are stated at amortized cost plus accrued
interest. Securities classified on the balance sheet as restricted short-term
and long-term investments have been placed in escrow to fund the next five
scheduled interest payments on the Notes (see note 8) and are invested in
compliance with the Company's bond indenture which restricts the type, quality
and maturity of these investments.
5. Acquisitions
On January 18, 1999, the Company acquired certain assets of PSN, a 24 hour
home shopping video network, for aggregate consideration of $500 in cash, the
forgiveness of
F-13
<PAGE>
TVN ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share data)
$948 in trade accounts receivable and the assumption of $3.4 million in net
liabilities. The acquisition has been accounted for as a purchase. The excess
of purchase consideration over net tangible assets acquired of approximately
$4.8 million has been allocated to goodwill which is being amortized on a
straight-line basis over 5 years.
The following summarized unaudited pro forma financial information assumes
the PSN acquisition occurred at the beginning of each period:
<TABLE>
<CAPTION>
March 31,
------------------
1998 1999
-------- --------
<S> <C> <C>
Revenue................................................... $ 44,690 $ 50,981
Net loss applicable to common stockholders................ $(32,798) $(57,557)
Basic and diluted net loss per share applicable to common
stockholders:
Net loss applicable to common stockholders................ $ (298) $ (377)
Weighted average shares .................................. 110,237 152,517
</TABLE>
Acquisitions (unaudited)
On June 30, 1999, the Company acquired 60% of the fully diluted equity of
NMN, a start-up company that is developing and plans to deploy a system
utilizing state-of-the-art digital downloading technology to deliver and sell
entertainment products such as music, movies and games via the Internet and at
retail locations. The aggregate consideration included a cash commitment
totaling $2 million, a commitment to render $4 million of Company services to
NMN over a three-year period and an obligation to purchase a portion of the
outstanding stock of NMN for $2.68 million subject to certain conditions. The
acquisition has been accounted for as a purchase. The excess of purchase
consideration over net tangible assets acquired of approximately $3.3 million
has been allocated to acquired technology and is being amortized over a three
year period.
In July 1999, the Company acquired from Guthy-Renker Corporation ("GRC")
substantially all of the assets of Guthy-Renker Television Network, Inc.
("GRTV"), a media buying business and a wholly owned subsidiary of GRC, for
consideration consisting of: (i) $302 in cash; (ii) $4 million payable in cash
per the terms of a promissory note, payable at 6% interest in two equal annual
installments commencing one year from the closing date; (iii) $9 million
payable in cash or TVN stock per the terms of the promissory note, payable at
9% interest on the earlier to occur of the fifth anniversary of the closing
date or the consummation of an initial public offering by the Company; and (iv)
a warrant to purchase 200,000 shares of the Company's common stock (see Note
12). The acquisition was accounted for as a purchase. The excess of purchase
consideration, after adjustment to the discount rate on the notes, over net
tangible assets acquired of approximately $10.2 million has been allocated to
goodwill and is being amortized over a period of five years.
F-14
<PAGE>
TVN ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share data)
The following summarized unaudited pro forma financial information assumes
the NMN and GRTV acquisitions occurred at the beginning of each period and that
the PSN acquisition occurred on April 1, 1998:
<TABLE>
<CAPTION>
September 30,
------------------
1998 1999
-------- --------
<S> <C> <C>
Revenue................................................... $ 29,657 $ 40,494
Net loss applicable to common stockholders................ $(28,006) $(42,138)
Basic and diluted net loss per share applicable to common
stockholders:
Net loss applicable to common stockholders................ $ (184) $ (276)
Weighted average shares .................................. 152,517 152,517
</TABLE>
6. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
September 30,
1998 1999 1999
-------- -------- -------------
(unaudited)
<S> <C> <C> <C>
Equipment.................................... $ 8,573 $ 11,405 $ 15,224
Assets under capitalized leases.............. 110,608 111,052 111,052
Office furniture and fixtures................ 167 372 702
-------- -------- --------
Total........................................ 119,348 122,829 126,978
Less, accumulated depreciation including
capital lease amortization of $22,000,
$33,061 and $38,694 (unaudited) at March 31,
1998 and 1999, and September 30, 1999,
respectively................................ (25,579) (37,832) (44,437)
-------- -------- --------
$ 93,769 $ 84,997 $ 82,541
======== ======== ========
</TABLE>
F-15
<PAGE>
TVN ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share data)
7. Notes Payable
Notes payable at March 31, consist of the following:
<TABLE>
<CAPTION>
1998 1999
-------- -------
<S> <C> <C>
Notes payable collateralized by equipment with a net
book value of $3,371 at March 31, 1999. Principal
and interest at 10% payable in eighty four equal
installments beginning June 1, 1997................. $ 6,261 $ 5,457
Notes payable, collateralized by a right to use the
Company's customer list on a limited basis.
Principal and accrued interest at 10% was due but
unpaid on March 31, 1999............................ 5,000 5,000
Refinanced trade payable. Principal and interest at
10% payable monthly in sixty equal installments
beginning March 31, 1998............................ 4,658 4,290
Notes payable. Principal and accrued interest
averaging 7.84% payable in the first quarter of
fiscal 2000......................................... -- 920
Refinanced trade payable. Principal and interest at
5% payable in $50 monthly installments through
November 1, 1998 with the unpaid balance payable
December 31, 1998................................... 8,251 --
Debt agreement with former general partners,
unsecured. Principal and interest at 8% payable in
$50 monthly installments through December 15, 1998
with the unpaid balance payable December 31, 1998... 6,417 --
Note payable, unsecured. Interest payable at a
variable rate not to exceed 10%. Accrued and unpaid
interest payments due December 31, 1996 and 1997,
with the unpaid principal and interest payable
December 31, 1998................................... 1,700 --
-------- -------
Total notes payable.................................. $ 32,287 $15,667
Current portion of notes payable..................... (23,187) (8,228)
-------- -------
Total long term notes payable........................ $ 9,100 $ 7,439
======== =======
</TABLE>
The note payable for $5,457 represents a refinancing of the purchase of one
video scrambling system and the original financing to purchase five digital
encoding systems and related equipment.
The notes payable for $5,000 represent a cash financing for the Company and
will become immediately due and payable in the event that the Company raises
any equity capital or receives any cash infusion outside the ordinary course of
business.
The refinanced trade payables for $4,290 represent the Company's obligations
for uplink, playback and other services rendered through August 19, 1997. To
the extent that any portion of this obligation is unpaid at the time of an
initial public offering (IPO) by the Company, it shall either be paid in full
upon the closing of an IPO of the Company's stock in excess of $50 million or
converted to equity at a price equal to the IPO price, concurrently with and as
part of such IPO.
The notes payable totalling $920 represent bank financing for the Company to
fund operations that were assumed upon acquisition of the assets of PSN (see
note 5).
F-16
<PAGE>
TVN ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share data)
The refinanced trade payable for $8,251 represented the unpaid portion of
the Company's obligation for the use of eleven satellite transponders through
February 1996. In August 1998, the Company realized an extraordinary gain of
$1.1 million upon the early extinguishment of this note previously due December
31, 1998 (see note 9).
The note payable for $1,700 represented the unpaid portion of the Company's
obligation for consumer phone charges and transaction processing services
rendered through August 31, 1996. A portion of the obligation was forgiven upon
execution of the note. The principal and accrued interest were paid in full
during the fiscal year ended March 31, 1999.
The weighted average interest rate on notes payable was 8.37%, 8.32% and
9.87% for the years ended March 31, 1997, 1998 and 1999, respectively.
Maturities of the Company's notes payable at March 31, are as follows:
<TABLE>
<S> <C>
2001............................................................... $ 1,835
2002............................................................... 2,027
2003............................................................... 2,141
2004............................................................... 1,220
Thereafter......................................................... 216
-------
$ 7,439
=======
</TABLE>
8. Senior Notes due 2008
In July 1998, the Company completed a private placement of 200,000 Units at
a price of $1,000 per unit, each of which consists of one 14% Senior Note (the
"Notes") due 2008 and one warrant to purchase initially 10.777 shares of the
Company's common stock, $0.001 par value, at an exercise price of $0.01 per
share, subject to adjustment. Interest on the Notes accrues at the rate of 14%
per annum and is payable semiannually in arrears on February 1 and August 1
each year, commencing February 1, 1999.
The Notes are not collateralized except to the extent of the first six
scheduled interest payments (see note 2) and rank equally in right of payment
with all existing and future unsubordinated indebtedness and senior in right of
payment to all existing and future subordinated indebtedness of the Company.
The indenture contains certain convenants including limitations on future
indebtedness, payments of dividends and other distributions, liens,
transactions with affiliates, mergers and acquisitions, sales of assets and
conditions of borrowing.
The Notes are redeemable at the option of the Company, in whole or in part,
at any time on or after August 1, 2003, at redemption prices defined by the
indenture, plus accrued and unpaid interest. In addition, at any time prior to
August 1, 2001, the Company may redeem up to 35% of the aggregate principal
amount of the Notes, with the net proceeds of one or more public equity
offerings at 114% of the principal amount thereof plus accrued interest.
The Company estimated the fair value of the warrants at $14,145 which was
recorded as a discount to the face amount of the Notes and is being amortized
as additional interest
F-17
<PAGE>
TVN ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share data)
expense using the effective interest method over the term of the Notes. The
warrants may be exercised at any time commencing July 1999 and prior to the
maturity date of the Notes.
In October 1999, the Company repurchased $33,850 of the notes and 33,850
warrants (see note 16).
9. Extraordinary Gain
During 1997, a portion of the Company's obligation for consumer phone
charges and transaction processing service was forgiven in consideration of the
Company's agreement to terminate the original service contract.
During 1999, a portion of the Company's obligation for the use of
transponder service through February 1996 was forgiven upon the early
extinguishment of the remaining debt.
10. Commitments and Contingencies
Capitalized Leases
In October 1994, the Company entered into a noncancelable capital lease
agreement for eight primary C-Band transponders and one reserve C-Band
transponder commencing February 1996, at escalating rates throughout its term.
The future minimum lease payments are discounted using an interest rate of 12%
over the ten year lease term.
In November 1995, the Company entered into a noncancelable capital lease
agreement for five primary C-Band transponders commencing July 1996, at
escalating rates throughout its term. The future minimum lease payments are
discounted using an interest rate of 12% over the ten year lease term.
In January 1999, the Company assumed certain noncancelable lease obligations
for operating equipment and software upon acquiring the assets of PSN (see note
5).
The future minimum lease payments at March 31, are as follows:
<TABLE>
<S> <C>
2000............................................................. $ 18,542
2001............................................................. 19,222
2002............................................................. 19,930
2003............................................................. 20,761
2004............................................................. 21,593
Thereafter....................................................... 43,937
--------
Total minimum obligations........................................ 143,985
Less interest.................................................... (48,282)
--------
Present value of minimum obligations............................. 95,703
Less current portion............................................. (7,444)
--------
Long-term obligations at March 31, 1999.......................... $ 88,259
========
</TABLE>
F-18
<PAGE>
TVN ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share data)
Operating Leases
Rent expense was $6,001, $6,987 and $6,858 for the years ended March 31,
1997, 1998 and 1999, respectively.
Office
The Company leases its Burbank headquarters under an operating lease that
expired August 1, 1998. The Company has the option to extend the lease for an
additional five years on the same terms and conditions, except that the base
rent for the option period shall be fair rental or as mutually agreed upon by
the lessor and the Company, provided the Company is not in default on the
existing lease. The Company has exercised its option to extend the lease and is
in negotiations with its landlord regarding the amount of the base rent.
Commitments
In June 1997, the Company entered into an agreement to obtain certain
services and a license for digital set-top authorizations of cable affiliate
subscribers. Fees for such services are calculated on a monthly basis at
varying rates throughout the seven year term. The minimum license fee during
the remaining term of the agreement is $1,200 per year, payable in advance on
or before the first day of each such license term year.
In June 1997, the Company entered into an agreement to obtain transaction
processing and print and mail services. The minimum fee for these services
aggregates approximately $1,600, payable monthly over the remaining 39 months
of the agreement.
The Company's minimum commitments and contingencies under its employment
agreements aggregated approximately $4,200 and $3,800, respectively at March
31, 1999. The Company has set aside restricted cash totaling approximately
$1,900 as of March 31, 1999 to meet a portion of these commitments, and is
required to do so through September 2002 unless the contingency is eliminated
prior to that date.
The Company's cable operator affiliates usually must purchase digital
equipment to receive the Company's digital services. The Company generally
agrees for so long as the affiliation agreement remains in effect to make
monthly payments to its affiliates which approximate the affiliates' monthly
financing payments on 80% of the cost of such digital equipment. As of March
31, 1999, the Company's contingent commitment under such agreements totaled
approximately $1.1 million.
Under the terms of an agreement between the Company and one of its
employees, 336,459 option shares are subject to the employee's right to require
the Company to cancel all or a portion of such shares in return for a cash
payment to the employee of up to $2.3 million (the "Put Right"). The Put Right
may be exercised by the employee only if he has not terminated his employment
or been terminated involuntarily for cause prior to September 15, 2000. The Put
Right may not be exercised if prior to September 15, 2000, the Company has
either been acquired, consummated an initial public offering or arranged a
private resale transaction, any of which would provide the employee with an
opportunity to sell his shares at a per share price of $7.59. The contingent
liability of $2.3 million related to
F-19
<PAGE>
TVN ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share data)
the Put Right is being recognized as compensation expense over the three year
term of the related employment agreement.
Commitments (unaudited)
On May 28, 1999, the Company entered into an agreement with Four Media
Company ("4MC") to purchase certain uplink, downlink, programming origination
and other services to be rendered to the Company by 4MC and for 4MC to finance
the acquisition of equipment and software to be used by 4MC to provide such
services, commencing on the execution date of the agreement and continuing
through November 30, 2004. The Company has the right to renew the agreement for
two additional two-year terms. Commencing on approximately November 1, 1999,
the Company has agreed to pay 4MC $479 per month as consideration for such
services during the term of the agreement. The Company also entered into an
agreement with 4MC to sublease an additional 14,883 square feet of office space
in the building where the Company has its principal offices, commencing April
1, 1999 and expiring on March 31, 2005. The minimum commitment over the term of
the sublease totals approximately $3.1 million.
In June 1999, the Company entered into a sub-lease agreement for
approximately 13,000 square feet of office space. The term of the agreement
runs through October 31, 2001, and the future minimum lease payments under the
agreement total $848.
In July 1999, the Company entered into a media access, consulting and
services agreement to purchase $15 million of such services to be rendered by
Guthy-Renker Corporation ("GRC") over a five year period and paid for by the
Company to GRC in equal monthly installments of $250. Such services include (i)
the right to broadcast infomercial programming provided by GRC on a priority
basis, (ii) consulting services regarding product selection, infomercial
production, worldwide operations, merchandising procurement and order
fulfilment, (iii) access to GRC's library of infomercials and (iv) the
availability of products distributed by or through GRC, for distribution by the
Company's home shopping network.
In September 1999, in connection with the resignation of an executive of the
Company, the Company paid the executive approximately $700 in satisfaction of
the salary, bonus and severance benefits arising under the executive's
employment agreement. In addition, the Company paid the executive approximately
$1.9 million in connection with the cancellation of options to purchase 599,775
shares of the Company's common stock previously issued to the executive as well
as the termination of the executive's Put Right.
In September 1999, the Company entered into a sub-lease agreement for
approximately 15,000 square feet of office space. The term of the agreement
runs through February 28, 2003, and the future minimum lease payments total
$1.5 million.
The Company's minimum commitments and contingencies under employment
agreements entered into after March 31, 1999 aggregated approximately $3,011
and $848, respectively.
F-20
<PAGE>
TVN ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share data)
Contingencies
See note 1 for a discussion of the Contingent Debt.
The Company has been party to legal and administrative proceedings relating
to claims arising from its operations in the normal course of business. On the
advice of counsel, the Company believes it has adequate legal defenses and
believes that the ultimate outcome of these actions will not have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flows.
11. Redeemable Convertible Preferred Stock
At March 31, 1999, the Company had authorized 12,648,107 shares of Series B
Redeemable Convertible Preferred Stock with a par value of $.001 per share,
12,154,771 of which are issued and outstanding. The Series B Preferred was
issued in four subseries, with original liquidation preferences equal to:
$2.7343 per share for the 5,714,442 shares of Series B1 Preferred; $5.8105 per
share for the 1,297,433 shares of Series B2 Preferred; $6.8359 per share for
the 2,285,727 shares of Series B3 Preferred; and $5.4687 per share for
2,857,169 shares of Series B4 Preferred.
The Series B Preferred is a senior security and shall rank, with respect to
dividends and distribution upon the liquidation, dissolution or winding-up of
the Company, senior to all classes or series of Common Stock and any other
Capital Stock of the Company, including, without limitation, any series of
Preferred Stock hereafter authorized by the Board of Directors and the Series A
Convertible Preferred Stock.
The Series B Preferred is entitled to dividends, if earned and declared, in
an amount equal to the dividends paid on each share of Common or Series A
Preferred, respectively, multiplied by a fraction equal to the liquidation
preference of each share of Series B Preferred divided by the liquidation
preference of the Series A Preferred or the Common Stock, respectively. The
liquidation preference with respect to the Common Stock shall be deemed to
equal $.001 per share. All such dividends are payable on any date that
dividends are paid on the Common or Series A Preferred.
The Series B Preferred is convertible, at the option of the holder, into
Common Stock subject to a conversion ratio that may be adjusted from time to
time, as defined by the Certificate of Designations of the Series B Preferred.
The Series B Preferred is not permitted to vote on matters required or
permitted to be voted upon by the stockholders of the Company subject to
certain exceptions.
The Company is required to redeem the Series B Preferred on August 27, 2002
or, at the option of the holders of the Series B Preferred upon a change of
control of the Company at a price equal to the liquidation preference of the
shares, all as defined in the Certificate of Designations of the Series B
Preferred.
F-21
<PAGE>
TVN ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share data)
12. Stockholders' Equity
Common Stock
In August 1997, the Company's Board of Directors (the "Board") , through an
amendment and restatement of the Company's Certificate of Incorporation,
increased the number of authorized shares of common stock from 10,000,000 to
40,000,000 and increased the number of shares reserved for issuance under its
stock option plan from 2,400,000 to 3,000,000.
Preferred Stock
The total number of shares of Preferred Stock that the Company has the
authority to issue is 20,248,107 shares, $.001 par value. The Board of
Directors of the Company is authorized to determine the rights, preferences,
privileges and restrictions granted to or imposed upon any undesignated shares
of Preferred, and to increase or decrease (but not below the number of shares
of any such series then outstanding) the number of shares of any such series
subsequent to the issue of shares of that series. The Board of Directors is
authorized to determine the designation and par value of any series and to fix
the number of shares of any series.
Series A Convertible Preferred Stock
At March 31, 1999, the Company had authorized 7,600,000 shares of Series A
Preferred Stock, 7,499,900 of which are issued and outstanding. The Series A
Preferred is entitled to noncumulative annual dividends, if earned and
declared, commencing February 28, 1996 at the rate of $.25 per share payable
prior and in preference to any payment or any dividend on the Common Stock.
After dividends in the total amount of $.25 per share on the Series A Preferred
have been declared and paid or set apart in any year, if the Board of Directors
elects to declare additional dividends in that year, such additional dividends
shall be declared equally on the Common and Series A Preferred, with the
holders of the Series A Preferred to receive amounts equal to the dividends
declared on the Common into and to which the Series A is convertible. The
Series A Preferred is convertible, at the option of the holder, into Common
Stock at the rate of one share of Common Stock for each share of Series A
Preferred, has voting rights equal to those of the Common Stockholders, and
votes with the Common Stock. Seven million six hundred thousand shares of
Common Stock are reserved for conversion of the Series A Preferred Stock.
Warrants
In August 1997, the Company amended and substituted warrants originally
issued in June 1996, for warrants to purchase 500,002 shares of Series B2
Convertible Preferred Stock, 6,666 of which were exercised at $5.8105 per
share. The remaining warrants to purchase 493,336 shares expired on December
31, 1998.
Warrants (unaudited)
In July 1999, the Company amended and substituted a warrant originally
issued in December 1996, for a warrant to purchase 200,000 shares of Common
Stock. The warrant is exercisable at $0.01 per share and expires on July 1,
2009. The fair value of the warrant has been accounted for as additional
purchase consideration for the Company's acquisition of Guthy-Renker Television
Network, Inc. (see note 5).
F-22
<PAGE>
TVN ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share data)
Employee Stock Option Plan
The Company adopted a stock option plan (the "Plan") in 1996 that provides
for awards to be made in respect to a maximum of 3,941,482 shares of the
Company's Common Stock. Awards may be made as grants of incentive stock options
and nonstatutory stock options. Participants in the Plan who own stock
representing more than 10% of the voting power of all classes of stock at the
date of grant, may be issued an incentive or a nonstatutory stock option having
an exercise price that shall be no less than 110% of the fair market per share
at the date of grant. Participants in the Plan who own stock representing 10%
or less of the voting power of all classes of stock at the date of grant, may
be issued an incentive or a nonstatutory stock option having an exercise price
that shall be no less than 100% of the fair market per share at the date of
grant. Options granted under the Plan vest ratably over five years and have a
maximum term of ten years unless terminated sooner in accordance with the Plan.
The following table summarizes activity under the Plan for the years ended
March 31, 1997, 1998 and 1999 and the six months ended September 30, 1999:
<TABLE>
<CAPTION>
Wgtd. Avg.
Shares Exer. Price
--------- -----------
<S> <C> <C>
Outstanding at March 31, 1996........................ 1,875,000 $ 0.25
Granted--price greater than fair value............... 75,000 0.25
Exercised............................................ (50,417) 0.25
Canceled............................................. (149,583) 0.25
--------- ------
Outstanding at March 31, 1997........................ 1,750,000 $ 0.25
Granted--price greater than fair value............... 891,482 0.75
Exercised............................................ (2,000) 0.25
Canceled............................................. (28,000) 0.25
--------- ------
Outstanding at March 31, 1998........................ 2,611,482 $ 0.42
Granted--price greater than fair value............... 90,000 3.28
Exercised............................................ -- --
Canceled............................................. (20,000) 0.25
--------- ------
Outstanding at March 31, 1999........................ 2,681,482 $ 0.52
Granted-price greater than fair value (unaudited).... 340,000 11.00
Exercised (unaudited)................................ -- --
Canceled (unaudited)................................. (599,775) 0.75
--------- ------
Outstanding at September 30, 1999 (unaudited)........ 2,421,701 $ 1.93
========= ======
</TABLE>
<TABLE>
<CAPTION>
1997 1998 1999
------- --------- ---------
<S> <C> <C> <C>
Options exercisable at year end.................. 847,500 1,207,500 1,755,528
Options available for future grants.............. 599,583 336,101 266,101
</TABLE>
The compensation expense associated with the Plan did not result in a
material difference from the reported net loss for the years ended December 31,
1997, 1998, and 1999. The fair value for these awards was estimated at the date
of grant using a minimum value option pricing model with the following
assumptions for 1997, 1998 and 1999: risk free interest rate of between 5.8%
and 6.5%, no dividend yield, no volatility factor, and an
F-23
<PAGE>
TVN ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share data)
expected average life of 5 years. The effects of applying SFAS No. 123 are not
indicative of future amounts and additional awards in future years are
anticipated.
The following table summarizes information about stock options outstanding
at March 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------- -------------------------
Wgtd. Avg. Wgtd. Wgtd.
Range of Remaining Avg. Avg.
Exercise Number Contractual Exer. Number Exer.
Price Outstanding Life Price Outstanding Price
-------- ----------- ----------- ----- ----------- -----
<C> <C> <C> <C> <S> <C>
$0.25--$0.75 2,591,482 7.38 0.42 1,734,028 0.33
$3.28 90,000 9.16 $3.28 21,500 $3.28
</TABLE>
13. Earnings Per Share
The following table sets forth the computation of basic and diluted net loss
per share applicable to common stockholders for the periods indicated:
<TABLE>
<CAPTION>
Six months ended
Year ended March 31, September 30,
---------------------------- ------------------
1997 1998 1999 1998 1999
-------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss.................. $(17,667) $(29,862) $(53,763) $(23,070) $(41,083)
Accretion of redeemable
Series B preferred
stock.................... -- (116) (393) (197) (198)
-------- -------- -------- -------- --------
Net loss applicable to
common stockholders...... $(17,667) $(29,978) $(54,156) $(23,267) $(41,281)
======== ======== ======== ======== ========
Denominator:
Weighted average shares... 2,944 110,237 152,517 152,517 152,517
======== ======== ======== ======== ========
Basic and diluted net loss
applicable to common
stockholders............... $ (6,001) $ (272) $ (355) $ (153) $ (271)
======== ======== ======== ======== ========
</TABLE>
The computation for diluted number of shares excludes preferred stock,
unexercised stock options and warrants which are antidilutive. The number of
such shares were 9,916,568, 22,959,489 and 24,691,553 for the years ended March
31, 1997, 1998 and 1999, respectively, and 25,184,889 (unaudited) and
24,431,778 (unaudited) for the six months ended September 30, 1998 and 1999,
respectively.
F-24
<PAGE>
TVN ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share data)
14. Income Taxes
As a result of net operating losses, the Company has not recorded a
provision for income taxes. The primary components of temporary differences
which give rise to deferred taxes at March 31, are as follows:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward...................... $ 28,487 $ 51,347
Allowance for doubtful amounts....................... 64 171
Deferred revenue..................................... 208 176
Refinanced trade payables............................ 5,755 1,716
Accrued license fees................................. 2,413 1,664
Accrued liabilities.................................. 142 153
Depreciation and amortization........................ -- 421
-------- --------
Deferred tax asset..................................... 37,069 55,648
Less: valuation allowance............................ (36,530) (55,648)
-------- --------
Net deferred tax asset............................... 539 --
Deferred tax liabilities:
Depreciation and amortization........................ (539) --
-------- --------
Deferred tax liabilities............................... (539) --
-------- --------
Net deferred tax....................................... $ -- $ --
======== ========
</TABLE>
Due to the uncertainty surrounding the realization of net operating loss
carryforwards and other net deferred tax assets resulting from continued
operating losses, the Company provided a full valuation allowance against its
deferred tax assets.
At March 31, 1999, the Company had available federal and state net operating
loss carryforwards of approximately $141 million and $57 million, which begin
to expire in the years 2004 and 2000, respectively. Because the Company
experienced a change in ownership during 1998 within the meaning of Section 382
of the Internal Revenue Code, the Company's ability to utilize its net
operating loss carryforwards may be limited.
15. Operating Segments
The Company's operating segments are strategic operating units that are
managed separately due to their different products and/or services. The Digital
Cable operating segment markets and sells the Company's DCTV service, a turnkey
digital delivery system with programming content, including 32 channels of pay-
per-view movies and events, and support services which enables cable operators
to expand their existing channel capacity and the PPV Feeds service, a pay-per-
view programming service without support services. The Home Satellite Dish
operating segment markets and sells the Company's home satellite dish service,
an analog pay-per-view delivery service transmitted directly to C-band home
satellite dish consumers. The Transponder operating segment markets and sells
transponder capacity and uplinking services to third parties. The Home Shopping
Services operating segment broadcasts the Panda Shopping Network, a live on-air
home televised shopping channel which markets and sells merchandise such as
jewelry, watches and precious metal
F-25
<PAGE>
TVN ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share data)
collectibles. The Media Time Sales operating segment, GRTV Network, Inc., sells
media time on its 24-hour broadcast network. The Music Marketing Services
operating segment is a start-up company, New Media Network, Inc., that markets
and sells entertainment products such as music, movies and games via the
internet and at retail locations.
The Company's measure of profit or loss for its operating segments reviewed
by the chief operating decision maker and executive management is operating
loss, excluding depreciation and amortization (and also excludes interest and
other income and expense). Revenue and operating losses for the Company's
operating segments are as follows (in thousands):
<TABLE>
<CAPTION>
Six months ended
Year ended March 31, September 30,
--------------------------- ------------------
1997 1998 1999 1998 1999
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue:
Home satellite dish
service................ $26,137 $ 22,631 $ 17,154 $ 7,823 $ 8,005
Digital cable service... -- 40 10,947 2,104 8,508
Transponder service..... 7,243 7,874 8,580 4,191 1,699
Home shopping service... -- -- 3,131 -- 9,757
Media time sales........ -- -- -- -- 6,001
Music marketing
services............... -- -- -- -- 215
------- -------- -------- -------- --------
Total revenue......... $33,380 $ 30,545 $ 39,812 $ 14,118 $ 34,185
Operating income (loss):
Home satellite dish
service................ $(2,724) $ (1,446) $ (4,973) $ (2,248) $ (3,508)
Digital cable service... -- (7,863) (16,916) (8,522) (9,238)
Transponder service..... 6,234 6,742 7,108 3,328 1,433
Home shopping service... -- -- (4) -- (2,141)
Media time sales........ -- -- -- -- (74)
Music marketing
services............... -- -- -- -- (715)
------- -------- -------- -------- --------
Operating
profit/(loss)
excluding
depreciation and
amortization......... $ 3,510 $ (2,567) $(14,785) $ (7,442) $(14,243)
Depreciation and
amortization............. 9,732 11,884 12,452 6,071 8,054
------- -------- -------- -------- --------
Operating loss............ $(6,222) $(14,451) $(27,237) $(13,513) $(22,297)
======= ======== ======== ======== ========
</TABLE>
Asset information is not prepared for or allocated to individual segments.
16. Subsequent Events (unaudited)
In October 1999, the Company repurchased $33,850 of its 14% Senior Notes due
2008 and 33,850 warrants to purchase 10.777 shares of the Company's common
stock for aggregate consideration of approximately $12.8 million in cash. The
repurchase resulted in the release of approximately $8.9 million of restricted
investments that were held in custody to fund the next four scheduled interest
payments on the repurchased notes.
F-26
<PAGE>
TVN ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share data)
In November 1999, the Company entered into a lease agreement for
approximately 12,000 square feet of office space. The term of the agreement
runs through October 31, 2004, and the future minimum lease payments total $2.0
million.
In November 1999, the Company amended its agreement for transaction
processing and print and mail services and is no longer committed to pay a
minimum fee for such services.
F-27
<PAGE>
[ALTERNATE COVER PAGE]
Subject to completion, dated , 1999
TVN
Entertainment Corporation
14% Senior Notes due 2008, Series B (Registered)
We have exchanged old unregistered 14% Senior Notes due 2008, Series A
(referred to in this prospectus as the old notes) for new registered 14% Senior
Notes due 2008, Series B (referred to in this prospectus as the new notes).
This prospectus is to be used by Morgan Stanley Dean Witter in connection
with offers and sales of the new notes in market-making transactions at
negotiated prices related to prevailing market prices at the time of sale.
Morgan Stanley Dean Witter may act as principal or as agent in such
transactions. We will receive no portion of the proceeds of the sales of such
new notes and will bear the expenses incident to the registration thereof. If
Morgan Stanley Dean Witter conducts any market-making activities, it may be
required to deliver this "market-making prospectus" when effecting offers and
sales in the notes because of the equity ownership of our company by certain
private investment partnerships, which are affiliates of Morgan Stanley Dean
Witter. As of [ ], 1999, these investment partnerships owned in the
aggregate approximately 89.3% of our Series B Preferred Stock, which ownership
represents 54.8% of our outstanding voting capital stock on an as-converted
basis or 43.7% of the voting capital stock on an as-converted, diluted basis
including currently outstanding options and warrants exercisable for voting
capital stock. For as long as a market-making prospectus is required to be
delivered, the ability of Morgan Stanley Dean Witter to make a market in the
new notes may, in part, be dependent on our ability to maintain a current
market-making prospectus.
----------------
No public market currently exists for the new notes. We do not expect that
an active public market in the new notes will develop. We do not intend to list
the new notes on any securities exchange or on the Nasdaq National Market.
----------------
See the "Risk factors" section on page 11 for information that you should
consider before you decide to participate in this exchange offer.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the new notes or determined that this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is , 1999.
<PAGE>
Table of contents
[Alternate table of contents]
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................. 1
Summary consolidated financial data...................................... 9
Risk factors............................................................. 11
Special note regarding forward-looking statements........................ 31
Use of proceeds.......................................................... 32
Dividend policy.......................................................... 32
Capitalization........................................................... 33
Selected historical financial data....................................... 34
Management's discussion and analysis of financial condition and results
of operations........................................................... 36
Business................................................................. 50
Management............................................................... 68
Material transactions and related party transactions..................... 76
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Principal stockholders..................................................... 80
Description of certain indebtedness........................................ 82
Description of the new notes............................................... 92
Form of new notes.......................................................... 92
Description of the old notes............................................... 93
Description of capital stock............................................... 133
United States federal income tax considerations............................ 138
Plan of distribution....................................................... 144
Legal matters.............................................................. 144
Experts.................................................................... 145
Where you can find more information........................................ 145
Index to financial statements.............................................. F-1
</TABLE>
----------------
You should rely only on the information provided in this prospectus. We have
authorized no one to provide you with different information. We are not making
an offer of these securities in any state where the offer is not permitted. You
should not assume that the information in this prospectus or the prospectus
supplement is accurate as of any date other than the date on the front of the
document.
i
<PAGE>
[Alternate Page]
The exchange offer
We issued the old notes on July 29, 1998. In connection with the issuance of
the old notes, we entered into an indenture and a registration rights
agreement. These agreements required us to offer to holders of the old notes
the opportunity to exchange their old notes for a like principal amount of new
notes and to file a registration statement under the Securities Act for
registration of the new notes in connection therewith. The exchange offer was
commenced on [ ], 1999.
The form and terms of the notes are substantially identical to the form and
terms of the old notes, except that the new notes:
. will be registered under the Securities Act;
. will not provide for registration rights;
. will not provide for payment of additional interest upon failure to
register or exchange the old notes, which terminates upon completion of
the exchange offer; and will not bear legends containing transfer
restrictions.
See "Description of the new notes."
3
<PAGE>
[Alternate Page]
Summary of the terms of the new notes
<TABLE>
<C> <S>
The new notes.................... $166.2 million principal amount of 14%
Senior Notes due 2008, Series B.
Maturity......................... August 1, 2008.
Interest......................... The new notes pay interest in cash at the
rate of 14% per annum, payable on February
1 and August 1 of each year, commencing
February 1, 2000.
Security......................... We have purchased and pledged to The Bank
of New York, as trustee under the indenture
governing the old notes, as security for
the benefit of the holders of the notes, a
portfolio of U.S. government securities in
an amount expected to be sufficient to
provide for payment in full of the first
six scheduled interest payments on the
notes. A portion of the pledged securities
has been used to make the first two
interest payments on the old notes. We
believe that the remaining amount of the
pledged securities will be sufficient to
make the first four interest payments on
the new notes. Except for the pledged
securities, the new notes will be
unsecured. See "Description of the old
notes--Security."
Optional redemption.............. At our option, we may redeem any or all of
the new notes, at any time on or after
August 1, 2003, for a redemption price
initially equal to 108% of their principal
amount, plus any accrued and unpaid
interest. The redemption price will
decrease by equal amounts each year to 100%
of the principal amount of the notes, plus
any accrued and unpaid interest on and
after August 1, 2006.
In addition, at any time prior to August 1,
2001, we may redeem new notes representing
up to 21.8% of the aggregate principal
amount of the new notes at 114% of the
principal amount thereof on the date of
redemption with the net proceeds of one or
more underwritten primary public offerings
of our common stock; provided
. that new notes representing at least
$130.0 million aggregate principal
amount remain outstanding after each
such redemption, and
. notice of such redemption is mailed
within 60 days after the consummation of
the related public offerings.
See "Description of the old notes--optional
redemption."
</TABLE>
6
<PAGE>
[Alternate Page]
<TABLE>
<C> <S>
Change of control................ Upon a change of control, you will have the
right to require us to make an offer to
repurchase the new notes at a purchase
price equal to 101% of their principal
amount, plus any accrued and unpaid
interest. There can be no assurance that we
will have sufficient funds available at the
time of any change of control to repurchase
the new notes. We cannot otherwise redeem
the new notes. See "Description of the old
notes--Repurchase of old notes upon a
change of control."
Ranking.......................... The new notes are our unsubordinated,
unsecured indebtedness, except to the
extent described under "--Security" above.
The new notes rank equally in priority of
payment with all of our other existing and
future unsubordinated indebtedness and are
senior in right of payment to all of our
future subordinated indebtedness. As of
September 30, 1999, we had $306.0 million
of indebtedness outstanding, including the
old notes and $13.8 million of indebtedness
incurred by our subsidiaries, but excluding
contingent notes payable of $29.5 million.
The new notes are effectively subordinated
to all of our secured indebtedness and all
of our subsidiaries' existing and future
liabilities, including trade payables and
subordinated debt. As of September 30,
1999, $111.0 million of our indebtedness
was secured indebtedness. We and our
subsidiaries may incur substantial
additional indebtedness, including secured
indebtedness, under the terms of the
indenture. See "Risk factors--We have
substantial existing debt and will incur
substantial additional debt which could
adversely affect our financial health and
prevent us from fulfilling our obligations
under the notes."
Certain covenants................ The indenture contains certain covenants
for your benefit as holders of the notes
which, among other things, restrict our
ability and the ability of some of our
subsidiaries:
. to incur or guarantee certain kinds of
additional indebtedness;
. to create liens;
. to engage in arrangements where we sell
or transfer an asset and then lease the
asset back to use for substantially the
same purposes;
. to pay dividends or make distributions
in respect of our capital stock, redeem
capital stock, make investments or
certain other restricted payments;
. to sell assets;
</TABLE>
7
<PAGE>
[Alternate Page]
<TABLE>
<C> <S>
. to issue or sell stock of some of our
subsidiaries;
. to enter into transactions with
stockholders or affiliates; or
. to merge, consolidate, or dispose of
substantially all of our assets.
We are not currently in default of any of
the covenants in the old notes or the new
notes. These covenant limitations are
subject to significant qualifications and
exceptions. See "Description of the old
notes-- Covenants."
Form of new notes................ The new notes were issued in fully
registered form, without coupons. The new
notes are deposited with The Bank of New
York, as custodian for The Depository Trust
Company, and registered in the name of
Cede & Co. in the form of one or more
global notes. Holders of the new note own
book-entry interests in the global note,
and evidence of these interests are kept in
the records maintained by The Depository
Trust Company. See "Form of new notes."
Use of proceeds.................. We will not receive any proceeds from the
exchange offer.
</TABLE>
8
<PAGE>
[Alternate Page]
There is no public market for the notes. An active market may not develop, and
you may be unable to resell the notes when desired or at a price that reflects
their value.
We are offering the new notes to the holders of the old notes. Prior to the
exchange offer, there was no existing trading market for the old notes and
there were no existing new notes. We do not intend to apply for listing of the
new notes on any securities exchange or on the Nasdaq National Market.
Although the new notes will be eligible for trading in the PORTAL Market, the
new notes may trade at a discount from their initial offering price, depending
upon prevailing interest rates, the market for similar securities, our
performance and other factors. Prior to the issuance of the old notes, the
initial purchaser advised us that it intended to make a market in the old
notes following the issuance thereof; however, the initial purchaser is not
obligated to do so and any such market-making activities may be discontinued
at any time without notice. We cannot be certain, therefore, that an active
market for the new notes will develop. In addition, the market price of the
old notes has fluctuated significantly since their original issuance, and we
anticipate that the market for the new notes may similarly fluctuate. See
"Description of the old notes--Registration rights" and "Description of the
old notes--Plan of distribution."
The form and terms of the new notes are substantially identical to the form
and terms of the old notes, except that the new notes:
. are registered under the Securities Act;
. do not provide for registration rights;
. do not provide for payment of additional interest upon failure to
register or exchange the old notes, which terminates upon completion of
the exchange offer; and
. do not bear legends containing transfer restrictions.
The new notes were issued solely in exchange for an equal principal amount
of old notes.
Special note regarding forward-looking statements
Some of the statements under "Prospectus summary," "Risk factors,"
"Management's discussion and analysis of financial condition and results of
operations," "Business," and elsewhere in this prospectus constitute forward-
looking statements. These statements involve known and unknown risks,
uncertainties, and other factors that may cause our or our industry's results,
levels of activity, performance, or achievements to be materially different
from any future results, levels of activity, performance, or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, those listed under "Risk factors" and elsewhere in this
prospectus.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," or "continue" or the
negative of such terms or other comparable terminology.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, events, levels
of activity, performance, or achievements. Our actual results and the timing
of certain events could differ materially from those anticipated in these
forward-looking statements. We do not intend to update any of the forward-
looking statements after the date of this prospectus to conform them to actual
results.
30
<PAGE>
[Alternate Page]
Use of proceeds
The net proceeds to us from the issuance of the old notes and warrants which
we issued in connection with the old notes were approximately $193.3 million,
after deducting the selling discounts and commissions and estimated expenses.
See "Description of the old notes--General." Approximately $76.7 million of the
net proceeds were used to purchase pledged securities in an amount expected to
be sufficient to provide for payment in full of the first six scheduled
interest payments on the notes. See "Description of the old notes--Security."
We are using the remaining net proceeds to fund operating expenses in
connection with the roll out and expansion of our TVN Digital Cable Television
service and Pay-Per-View Feeds Service, for acquisitions as permitted by the
indenture, for working capital and other general corporate purposes. We have
contingent notes payable totaling approximately $29.5 million at September 30,
1999. The timing of repayment of the contingent notes payable is uncertain and
subject to events outside our control. See "Description of certain
indebtedness."
In October 1999, we used approximately $12.8 million of the net proceeds to
repurchase $33.9 million of the old notes and 33,850 of the old warrants. The
repurchase generated the release of $8.9 million of the pledged securities that
were held in custody to fund the next four scheduled interest payments on the
repurchased notes.
Because of the number and variability of factors that will determine our use
of the net proceeds from the issuance of the old notes and the warrants issued
in connection therewith, management will retain a significant amount of
discretion over the application of such net proceeds. Pending the use of such
net proceeds as described above, we intend to invest such funds in short-term,
interest bearing, investment grade securities to the extent permitted by the
indenture.
Dividend policy
We have not paid any dividends since our inception and do not intend to pay
cash dividends on our capital stock in the foreseeable future. We anticipate
that we will retain all future earnings, if any, for use in our operations and
expansion of the business. In addition, the terms of the indenture will
restrict our ability to pay dividends on, or make distributions in respect of,
our capital stock. See "Description of the notes--Certain covenants."
31
<PAGE>
[Alternate Page]
Plan of distribution
This Prospectus is to be used by Morgan Stanley Dean Witter in connection
with offers and sales of the new notes in market-making transactions at
negotiated prices relating to prevailing market prices at the time of sale.
Morgan Stanley may act as principal or agent in such transactions. Morgan
Stanley Dean Witter has no obligation to make a market in the new notes, and
may discontinue its market-making activities at any time without notice, at its
sole discretion.
There is currently no established public market for the new notes. We do not
currently intend to apply for listing of the new notes on any securities
exchange. Therefore, any trading that does develop will occur on the over-the-
counter market. We have been advised by Morgan Stanley Dean Witter that it
intends to make a market in the new notes but it has no obligation to do so and
any market-making may be discontinued at any time. No assurance can be given
that an active public market for the new notes will develop.
[Morgan Stanley Dean Witter acted as placement agent in connection with the
original private placement of the old notes and received a placement fee of
$6.0 million in connection therewith.] Morgan Stanley Dean Witter is affiliated
with entities that beneficially own approximately 89.3% of our Series B
Preferred Stock, which ownership represents 54.8% of our outstanding voting
capital stock on an as-converted basis or 43.7% of the voting capital stock on
an as-converted, diluted basis including currently outstanding options and
warrants exercisable for voting capital stock as of [ ], 1999.
Although there are no agreements to do so, Morgan Stanley Dean Witter, as
well as others, may act as broker or dealer in connection with the sale of the
new notes contemplated by this prospectus and may receive fees or commissions
in connection therewith.
We have agreed to indemnify Morgan Stanley Dean Witter against certain
liabilities under the Securities Act or to contribute to payments that Morgan
Stanley Dean Witter may be required to make in respect of such liabilities.
32
<PAGE>
[Alternate Page]
Description of the new notes
The terms of the new notes are identical in all material respects to those
of the old notes described below, except that the new notes (i) have been
registered under the Securities Act and therefore are not be subject to certain
restrictions on transfer applicable to the old notes and (ii) are not entitled
to certain registration rights under the registration rights agreement,
including the provision for Additional Interest of up to 0.5% on the old notes.
Holders of old notes should review the information set forth under "Description
of the old notes."
The new notes are 14% Senior Notes and have a principal amount of $166.2
million. The new notes will mature on August 1, 2008. The new notes will pay
interest in cash at the rate of 14% per annum, payable on February 1 and August
1 of each year, commencing February 1, 2000.
We have purchased and pledged to The Bank of New York, as trustee under the
indenture governing the old notes, as security for the benefit of the holders
of the notes, a portfolio of U.S. government securities in an amount expected
to be sufficient to provide for payment in full of the first six scheduled
interest payments on the notes. A portion of the pledged securities has already
been used to make the first two interest payments on the old notes. We believe
that the remaining amount of the pledged securities is sufficient to make the
first four interest payments on the new notes. Except for the pledged
securities, the new notes are unsecured.
Form of new notes
The certificates representing the new notes were issued in fully registered
form, without coupons. Except as described in the next paragraph, the new notes
are deposited with The Bank of New York, as custodian for The Depository Trust
Company, and registered in the name of Cede & Co., as The Depository Trust
Company's nominee in the form of one or more global notes. Holders of the new
notes own book-entry interests in the global note evidenced by records
maintained by The Depository Trust Company.
Book-entry interests may be exchanged for certificated notes of like tenor
and equal aggregate principal amount, if:
(1) The Depository Trust Company notifies us that it is unwilling or
unable to continue as depositary or we determine that The
Depository Trust Company is unable to continue as depositary and we
fail to appoint a successor depositary within 90 days;
(2) we provide for the exchange pursuant to the terms of the indenture;
or
(3) we determine that the book-entry interests will no longer be
represented by global notes and we execute and deliver to the
Trustee instructions to that effect.
As of the date of this prospectus, no certificated notes are issued and
outstanding.
92
<PAGE>
[Alternate Page]
United States federal income tax considerations
The following discussion is a general summary of the material U.S. federal
income tax considerations resulting from the purchase, ownership and
disposition of the new notes. The discussion of the federal income tax
consequences set forth below is based upon the Internal Revenue Code of 1986,
as amended (the "Code"), and judicial decisions and administrative
interpretations thereunder, as of the date hereof, and such authorities may be
repealed, revoked or modified so as to result in federal income tax
consequences different from those discussed below. There can be no assurance
that the Internal Revenue Service (the "IRS") will not successfully challenge
one or more of the tax consequences described herein, and we have not obtained,
nor does it intend to obtain, a ruling from the IRS or an opinion of counsel
with respect to the U.S. federal income tax consequences of acquiring or
holding new notes. The discussion below pertains only to U.S. Holders, except
as described below under the caption "Tax treatment of the ownership and
disposition of new notes by non-U.S. holders." As used herein, a U.S. holder
means
. citizens or residents (within the meaning of Section 7701 (b) of the
Code) of the U.S.
. corporations, partnerships or other entities created in or under the laws
of the U.S. or any political subdivision thereof,
. estates the income of which is subject to U.S. federal income taxation
regardless of its source,
. trusts subject to the primary supervision of a court within the U.S. and
the control of a U.S. person as described in Section 7701 (a)(30) of the
Code, and
. any other person whose income or gain from the new notes is effectively
connected with the conduct of a U.S. trade or business. In addition, the
discussion relies upon the description provided to us by the DTC,
Euroclear and Cedel of their depository procedures and the procedures of
their participants and Indirect Participants in maintaining a book entry
system reflecting the beneficial ownership of the new notes.
This discussion does not purport to deal with all aspects of U.S. federal
income taxation that may be relevant to a particular Holder in light of the
Holder's circumstances (for example, persons subject to the alternative minimum
tax provisions of the Code). Also, it is not intended to be wholly applicable
to all categories of investors, some of which (such as dealers in securities,
banks, insurance companies, tax-exempt organizations, and persons holding new
notes as part of a hedging or conversion transaction or straddle or persons
deemed to sell new notes under the constructive sale provisions of the Code)
may be subject to special rules. The discussion below is premised upon the
assumption that the new notes and old notes are held (or would be held if
acquired) as capital assets within the meaning of Section 1221 of the Code and
constitute indebtedness for tax purposes. This summary does not discuss the tax
considerations applicable to subsequent purchasers. The discussion also does
not discuss any aspect of state, local or foreign law.
Prospective purchasers of new notes are strongly urged to consult its own
tax advisor with respect to its particular tax situation including the tax
effects of any state, local, foreign, or other tax laws and possible changes in
the tax laws.
138
<PAGE>
[Alternate Page]
The new notes
Original issue discount
The new notes are treated as issued with original issue discount, which each
holder will be required to include in its gross income as described below.
Except as provided below in the section entitled "Applicable High-Yield
Discount Obligations," a holder must include original issue discount (to the
extent there is not offsetting acquisition or bond premium) in income as
ordinary interest income as it accrues on the basis of a constant yield to
maturity. Generally, original issue discount must be included in income in
advance of the receipt of cash representing such income.
The amount of original issue discount with respect to a new note equals the
excess of the stated redemption price at maturity over the issue price of the
old note exchanged for such new note. The stated redemption price at maturity
of a new note equals the sum of all payments other than any "qualified stated
interest" payments. Qualified stated interest is stated interest that is
unconditionally payable in cash or in property (other than debt instruments of
the issuer) at least annually at a single fixed rate. Because interest on the
new notes will not be payable prior to August 1, 2003, none of the payments on
the new notes will constitute qualified stated interest. Accordingly, all
payments on the new notes will be treated as part of their stated redemption
price at maturity.
Because the old notes were issued as part of an investment unit, the issue
price of each investment unit was allocated between the old note and the
warrant constituting an investment unit based on their relative fair market
values on the issue date. Although our allocation is not binding on the IRS, a
holder of a unit must use our allocation unless the holder discloses on its
federal income tax return for the year in which the unit was acquired that it
plans to use an allocation that is inconsistent with our allocation.
A holder must include in gross income, for all days during its taxable year
in which it holds such new note, the sum of the "daily portions" of original
issue discount. The "daily portions" are determined by allocating to each day
in an "accrual period" (generally the period between interest payments or
compounding dates) a pro rata portion of the original issue discount that
accrued during such accrual period. The amount of original issue discount that
will accrue during an accrual period is the product of the "adjusted issue
price" of the new note at the beginning of the accrual period and its yield to
maturity (determined on the basis of compounding at the end of each accrual
period and properly adjusted for the length of the particular accrual period).
The adjusted issue price of a new note is the sum of the issue price of an old
note, plus prior accruals of original issue discount, reduced by the total
payments made with respect to such new note in all prior periods and on the
first day of the current accrual period. Each payment on a new note will be
treated as a payment of original issue discount to the extent that original
issue discount has accrued as of the date such payment is due and has not been
allocated to prior payments, and any excess will be treated as a payment of
principal.
There are several circumstances under which we could make a payment on a new
note that would affect the yield to maturity of a new note, including the
redemption or repurchase of a new note (as described under "Description of the
old notes"). According to Treasury Regulations, the possibility of a change in
the yield will not be treated as affecting the amount of interest income
(including original issue discount) recognized by a holder (or the timing of
such recognition) if the likelihood of the change, as of the date the debt
obligations
139
<PAGE>
[Alternate Page]
are issued, is remote. We intend to report on the basis that the likelihood of
any change in the yield on the new notes is remote.
We are required to furnish certain information to the IRS, and will furnish
annually to record holders of a new note, information with respect to original
issue discount accruing during the calendar year. That information will be
based upon the adjusted issue price of the new note as if the holder were the
original holder of the new note.
Election to treat all interest as original issue discount
A holder may elect to treat all "interest" on any new note as original issue
discount and calculate the amount includable in gross income under the method
described above. For this purpose, "interest" includes stated and unstated
interest, original issue discount, acquisition discount, market discount and de
minimis market discount, as adjusted by any acquisition premium. The election
is to be made for the taxable year in which the holder acquired the note and
may not be revoked without the consent of the IRS.
Acquisition premium
To the extent a holder had acquisition premium with respect to an old note,
the holder generally will have acquisition premium with respect to a new note.
A holder will reduce the original issue discount otherwise includable for each
accrual period by an amount equal to the product of (i) the amount of such
original issue discount otherwise includable for such period, and (ii) a
fraction, the numerator of which is the acquisition premium and the denominator
of which is the excess of the amounts payable on the new note after the
purchase date over the adjusted issue price.
Sale, exchange or retirement of the new notes
Upon the sale, exchange or retirement of a new note, the holder generally
will recognize gain or loss equal to the difference between the amount realized
on the sale, exchange or retirement (which does not include any amount
attributable to accrued but unpaid interest including market discount) and the
holder's adjusted tax basis in the new note. A holder's adjusted tax basis in
the new note will equal the holder's cost for the old note exchanged therefor
or the holder's cost for the new note itself increased by any original issue
discount included in income by such holder with respect to such new note and
decreased by any payments received thereon other than qualified stated
interest.
Gain or loss realized on the sale, exchange or retirement of a new note will
be capital, and will be long-term if at the time of sale, exchange or
retirement the new note has been held for more than one year (including the
holding period of the old note exchanged therefor by the holder). The maximum
rate of tax on long-term capital gains on most capital assets held by an
individual for more than one year is 20%. The deductibility of capital losses
is subject to limitations.
Market discount
As described above, any gain or loss on a disposition of a new note would
generally be capital gain or loss. However, a subsequent purchaser of a new
note who did not acquire the new note (or an old note exchanged for a new note)
at its original issue, and who acquires such new note (or such old note, as the
case may be) at a price that is less than the adjusted
140
<PAGE>
[Alternate Page]
issue price (as determined under the original issue discount rules described
above), may be required to treat the new note as a "market discount bond". Any
recognized gain on a disposition of the new note would then be treated as
ordinary income to the extent that it does not exceed the "accrued market
discount" on the new note which has not previously been included in income.
In general, any market discount will be considered to accrue ratably during
the period from the date of acquisition to the maturity date of the new note.
In addition, there are rules deferring the deduction of all or part of the
interest expense on indebtedness incurred or continued to purchase or carry
such bond, and permitting a holder to elect to include accrued market discount
in income on a current basis.
Applicable high-yield discount obligations
The new notes are subject to the "applicable high yield discount obligation"
provisions of the tax code. Because the yield of the new notes is at least five
percentage points above the applicable federal rate and the new notes are
issued with "significant original issue discount," otherwise deductible
interest and original issue discount will not be deductible with respect
thereto until such interest is actually paid. In addition, because the yield of
the new notes is more than six percentage points above the applicable federal
rate, (i) a portion of such interest corresponding to the yield in excess of
six percentage points above the applicable federal rate will not be deductible
by TVN at any time, and (ii) a corporate holder may be entitled to treat the
portion of the interest that is not deductible by TVN as a dividend for
purposes of qualifying for the dividends received deduction provided for by the
tax code, subject to applicable limitations. In such event, corporate holders
should consult with their own tax advisors as to the applicability of the
dividends received deduction and the relevant exceptions.
Tax treatment of the ownership and disposition of new notes by non-U.S. holders
The following discussion is a general summary of certain U.S. federal income
and estate tax considerations of the ownership and disposition of new notes by
non-U.S. holders. As used herein, a Non-U.S. holder means any holder other than
a U.S. holder.
Withholding tax on payments of principal and interest on new notes
The payment of principal and interest on a new note to a non-U.S. holder
will not be subject to U.S. federal withholding tax pursuant to the "portfolio
interest exception," provided that (i) the non-U.S. holder does not actually or
constructively own 10% or more of the total voting power of all voting stock of
TVN and is not a controlled foreign corporation that is related to TVN within
the meaning of the tax code and (ii) the beneficial owner of the new notes
certifies to TVN or its agent, under penalties of perjury, that it is not a
U.S. holder and provides its name and address on U.S. Treasury Form W-8 (or a
suitable substitute form) or a securities clearing organization, bank or other
financial institution that holds customers' securities in the ordinary course
of its trade or business (a "financial institution") and holds the new notes
certifies under penalties of perjury that such a Form W-8 (or suitable
substitute form) has been received from the beneficial owner by it or by a
financial institution between it and the beneficial owner and furnishes the
payor with a copy thereof. Treasury Regulations that will be effective January
1, 2001 (the "Withholding Regulations") provide alternative methods for
satisfying the certification requirement described in (ii) above. The
Withholding Regulations will generally require, in the case of
141
<PAGE>
[Alternate Page]
new notes held by a foreign partnership, that the certificate described in (ii)
above be provided by the partners rather that by the foreign partnership, and
that the partnership provide certain information including a U.S. tax
identification number. Holders of notes should consult their top advisors
concerning the possible application of the Withholding Regulations to any
payments made on or with respect to the notes.
Gain on disposition of the notes
Non-U.S. holders generally will not be subject to U.S. federal income tax on
gain realized on the sale, exchange or redemption of new notes, unless in the
case of an individual non-U.S. holder (i) such holder is present in the U.S.
for 183 days or more in the year of such sale, exchange or redemption and
certain other conditions are met, or (ii) such holder is a former citizen or
resident of the United States subject to certain rules relating to that status.
Federal estate tax
New notes held by an individual who is not a citizen or resident of the
United States for federal estate tax purposes at the time of his or her death
will not be subject to U.S. federal estate tax if the interest on the new notes
qualifies for the portfolio interest exemption under the rules described above.
Information reporting and backup withholding
In general, information reporting requirements will apply to payments of
principal and interest on a new note and payments on the proceeds of the sale
of a new note to certain noncorporate U.S. holders, and a 31% backup
withholding tax may apply to such payments if the holder (i) fails to furnish
or certify its correct taxpayer identification number to the payor in the
manner required, (ii) is notified by the IRS that it has failed to report
payments of interest and dividends properly, or (iii) under certain
circumstances, fails to certify that it has not been notified by the IRS that
it is subject to backup withholding for failure to report interest and dividend
payments. Certain holders (including, among others, all corporations) are not
subject to the backup withholding and reporting requirements.
We must report annually to the IRS and to each non-U.S. holder any interest
that is subject to withholding, or that is exempt from U.S. withholding tax
pursuant to a tax treaty, or interest that is exempt from U.S. tax under the
portfolio interest exception. Copies of these information returns may also be
made available under the provisions of a specific treaty or agreement to the
tax authorities of the country in which the non-U.S. holder resides.
The backup withholding and additional information reporting requirements
also apply to non-corporate non-U.S. holders. Treasury Regulations, however,
provide that backup withholding and additional information reporting will not
apply to payments of principal on the new notes by TVN to a non-U.S. holder if
the holder certifies as to its non-U.S. status under penalties of perjury or
otherwise establishes an exemption (provided that neither TVN nor its Paying
Agent has actual knowledge that the holder is a U.S. person or that the
conditions of any other exception are not, in fact, satisfied).
The payment of portfolio interest and of the proceeds from the disposition
of new notes to or through the U.S. office of any broker, U.S. or foreign, will
be subject to information reporting and possible backup withholding unless the
owner certifies as to its non-U.S.
142
<PAGE>
[Alternate Page]
holder status under penalty of perjury or otherwise establishes an exemption,
provided that the broker does not have actual knowledge that the holder is a
U.S. person or that the conditions of any other exemption are not, in fact,
satisfied. The payment of portfolio interest and of the proceeds from the
disposition of a new note to or through a non-U.S. office of a broker that is
either a U.S. person or a "U.S. related person" will be subject to information
reporting (but currently not backup withholding) unless the broker has
documentary evidence in the files that the owner is a non-U.S. holder and the
broker has no knowledge to the contrary. Backup withholding and information
reporting will not apply to payments made through foreign offices of a broker
that is not a U.S. person or a U.S. related person (absent actual knowledge
that the payee is U.S. person). For purposes of this paragraph, a "U.S. related
person" is (i) a "controlled foreign corporation" for U.S. federal income tax
purposes, or (ii) a foreign person 50% or more of whose gross income from all
sources for the three-year period ending with the close of its taxable year
preceding the payment (or for such part of the period that the broker has been
in existence) is effectively connected with the conduct of a U.S. trade or
business. Effective for payments after December 31, 2000 the Withholding
Regulations expand the number of foreign intermediaries that are potentially
subject to information reporting, modify certain of the documentation
requirements and provide certain presumptions under which a non-U.S. holder
will be subject to backup withholding and information reporting unless the non-
U.S. holder provides a certification as to its non-U.S. holder status. Holders
of the new notes should consult their tax advisors concerning the application
of the Withholding Regulations to their particular situations.
Any amounts withheld under the backup withholding rules from a payment to a
U.S. or non-U.S. holder will be allowed as a refund or a credit against such
holder's U.S. federal income tax liability, provided that the requisite
procedures are followed.
143
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Article XI of our Amended and Restated Certificate of Incorporation provides
for the indemnification of our directors to the fullest extent permissible
under Delaware law.
Article VI of our Bylaws provides for the indemnification of our officers,
directors, employees and agents if such person acted in good faith and in a
manner reasonably believed to be in and not opposed to the best interest of the
corporation, and, with respect to any criminal action or proceeding the
indemnified party had no reason to believe his conduct was unlawful.
Section 145 of the Delaware General Corporation Law permits us to include in
its charter documents, and in agreements between the corporation and its
directors and officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law.
We maintain liability insurance coverage for our directors and officers.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1* Placement Agreement dated July 24, 1998 by and between TVN and
Morgan Stanley & Co. Incorporated.
3.1* Amended and Restated Certificate of Incorporation, as amended, of
TVN, as currently in effect.
3.2* Bylaws, as currently in effect.
4.1* Securityholder Agreement dated as of August 29, 1997 among TVN,
Princes Gate Investors II, L.P., Storie Partners, L.P., Wenonah
Development Corp., Jerome H. Turk and Carole Turk. Family Trust and
PG Investors II, Inc. as Agent.
4.2* Amendment to Securityholders Agreement dated as of December 19, 1997
among TVN, Princes Gate Investors II, L.P., Storie Partners, L.P.,
Wenonah Development Corp., Jerome H. Turk and Carole Turk Family
Trust and PG Investors II, Inc. as Agent.
4.3* Indenture dated as of July 29, 1998, by and between TVN and The Bank
of New York, including form of 14% Senior Discount Note Due 2008.
4.4* Warrant Agreement dated as of July 29, 1998 between TVN and The Bank
of New York.
4.5* Warrant registration rights agreement dated as of July 29, 1998
among TVN and Morgan Stanley & Co. Incorporated.
4.6* Specimen 14% Senior Discount Note Due 2008.
4.7* Notes registration rights agreement dated as of July 29, 1998
between TVN and Morgan Stanley & Co. Incorporated.
5.1* Opinion of Irell & Manella LLP.
10.1+ Transponder Lease Agreement for Galaxy IIIR dated as of October 21,
1994 between Hughes Communications Galaxy, Inc. and TVN.
10.2* Galaxy IIIR Transponder Service Agreement dated October 21, 1994
between Hughes Communications Satellite Services, Inc. and TVN.
10.3+ Transponder Lease Agreement for Galaxy IX dated as of November 29,
1995 between Hughes Communications Galaxy, Inc. and TVN and First
Amendment to Galaxy IX Transponder Lease Agreement dated May 10,
1996.
</TABLE>
II-1
<PAGE>
<TABLE>
<C> <S>
10.4* Galaxy IX Transponder Service Agreement dated November 29, 1995
between Hughes Communications Satellite Services, Inc. and TVN.
10.5* 1996 Stock Option Plan and related option agreement, as currently in
effect.
10.6*+ Service and License Agreement dated June 9, 1997 between National
Digital Television, Inc., doing business as Headend in the Sky(R)
("HITS") and TVN.
10.7* CSG Master Subscriber Management System Agreement dated June 30, 1997
between CSG Systems, Inc. and TVN.
10.8* Employment Agreement entered into between TVN and Stuart Z. Levin.
10.9* Employment Agreement entered into between TVN and James Ramo.
10.10* Employment Agreement entered into between TVN and Arthur Fields.
10.11* Employment Agreement entered into between TVN and Michael Wex.
10.12* Employment Agreement entered into between TVN and John McWilliams.
10.13* Employment Agreement entered into between TVN and David Sears.
10.14* Employment Agreement entered into between Guthy-Renker Television
Network, Inc. and Gregory A. Thomas.
10.15* Assumption of and First Amendment to Employment Agreement between
GRTV Network, Inc. and Gregory A. Thomas.
10.16 Series B Preferred Stock Purchase Agreement dated June 30, 1999, by
and between New Media Network, Inc. and TVN together with all
exhibits thereto.
10.17 Agreement for Purchase and Sale of Assets effective January 18, 1999
by and among TVN, W&K Pharmacy, Inc., d/b/a PandaAmerica Corp. and
Martin D. Weiss, together with all exhibits thereto.
10.18 Asset Acquisition Agreement by and among TVN, GRTV Network, Inc., a
wholly-owned subsidiary of TVN, Guthy-Renker Corporation, and Guthy-
Renker Television Network, Inc., dated July 30, 1999, together with
all exhibits thereto.
10.19 Organization, Uplink and Post-Production Services Agreement dated May
28, 1999 by and between 4MC-Burbank, Inc. and TVN Entertainment
Corporation.
10.20 Employment Agreement entered into between TVN and Gregory Pasetta.
21.1* Subsidiaries of TVN.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2* Consent of Irell & Manella LLP (Included in Exhibit 5.1).
24.1* Power of Attorney.
25.1* Statement of Eligibility of Trustee.
27.1* Financial Data Schedules.
99.1* Form of Letter of Transmittal with respect to exchange offer.
99.2* Form of Notice of Guaranteed Delivery.
99.3* Form of Exchange Agent Agreement.
</TABLE>
- --------
* Previously filed.
+ Confidential treatment has been requested for portions of these agreements.
Omitted portions have been filed separately with the Commission.
(b) Financial Statement Schedules
Schedules not listed above have been omitted because the information to be
set forth therein is not applicable or is shown in the financial statements or
Notes thereto.
Item 22. Undertaking
1. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling persons
pursuant to the foregoing
II-2
<PAGE>
provisions, or otherwise, we have been advised that in the opinion of the SEC
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than our payment of expenses
incurred or paid by one of our directors, officers or controlling persons in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, we will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
2. We hereby undertake to respond to requests for information that is
incorporated by reference into the Prospectus pursuant to Items 4, 10(b), 11 or
13 of this Form, within one business day of receipt of such request, and to
send the incorporated documents by first class mail or other equally prompt
means. This includes information contained in documents filed subsequent to the
effective date of the Registration Statement through the date of responding to
the request.
3. We hereby undertake to supply by means of a post-effective amendment all
information concerning a transaction, and the company being acquired involved
therein, that was not the subject of and included in this Registration
Statement when it became effective.
4. We hereby undertake:
(a) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(b) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(c) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-3
<PAGE>
(d) If we are a foreign private issuer, to file a post-effective
amendment to the registration statement to include any financial statements
required by (S)210.3-19 of this chapter at the start of any delayed
offering or throughout a continuous offering. Financial statements and
information otherwise required by Section 10(a)(3) of the Act need not be
furnished, provided that we include in the prospectus, by means of a post-
effective amendment, financial statements required pursuant to this
paragraph (d) and other information necessary to ensure that all other
information in the prospectus is at least as current as the date of those
financial statement. Notwithstanding the foregoing, with respect to
registration statements on Form F-3, a post-effective amendment need not be
filed to include financial statements and information required by Section
10(a)(3) of the Act or (S)210.3-19 of this chapter if such financial
statements and information are contained in periodic reports filed with or
furnished to the Commission by us pursuant to section 13 or section 15(d)
of the Securities Exchange Act of 1934 that are incorporated by reference
in the Form F-3.
II-4
<PAGE>
Signatures
In accordance with the requirements of the Securities Act of 1933, we have
duly caused this Amendment No. 2 to Registration Statement to be signed on our
behalf by the undersigned, thereunto duly authorized, in the City of Burbank,
State of California on December 8, 1999.
TVN Entertainment corporation
By:
/s/ Stuart Z. Levin
-----------------------------------
Stuart Z. Levin
Chairman of the Board, Chief
Executive Officer (Principal
Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 2 to Registration Statement has been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
/s/ Stuart Z. Levin Chairman of the Board December 8, 1999
____________________________________ of Directors and Chief
Stuart Z. Levin Executive Officer
(Principal Executive
Officer)
Arthur Fields* Senior Executive Vice December 8, 1999
____________________________________ President, General
Arthur Fields Counsel, Chief
Administrative
Officer, Director and
Secretary
/s/ John McWilliams Senior Vice President, December 8, 1999
____________________________________ Finance (Principal
John McWilliams Financial and
Accounting Officer)
S. Robert Levine* Director December 8, 1999
____________________________________
S. Robert Levine, M.D.
Stephen R. Munger* Director December 8, 1999
____________________________________
Stephen R. Munger
Martin A. Pasetta* Director December 8, 1999
____________________________________
Martin A. Pasetta
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
David R. Powers* Director December 8, 1999
____________________________________
David R. Powers
Michael J. Ritter* Director December 8, 1999
____________________________________
Michael J. Ritter
Jerome H. Turk* Director December 8, 1999
____________________________________
Jerome H. Turk
</TABLE>
/s/ Stuart Z. Levin
*By:___________________________
(Stuart Z. Levin)
ATTORNEY-IN-FACT
II-6
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1* Placement Agreement dated July 24, 1998 by and between TVN and
Morgan Stanley & Co. Incorporated.
3.1* Amended and Restated Certificate of Incorporation, as amended, of
TVN, as currently in effect.
3.2* Bylaws, as currently in effect.
4.1* Securityholder Agreement dated as of August 29, 1997 among TVN,
Princes Gate Investors II, L.P., Storie Partners, L.P., Wenonah
Development Corp., Jerome H. Turk and Carole Turk. Family Trust and
PG Investors II, Inc. as Agent.
4.2* Amendment to Securityholders Agreement dated as of December 19, 1997
among TVN, Princes Gate Investors II, L.P., Storie Partners, L.P.,
Wenonah Development Corp., Jerome H. Turk and Carole Turk Family
Trust and PG Investors II, Inc. as Agent.
4.3* Indenture dated as of July 29, 1998, by and between TVN and The Bank
of New York, including form of 14% Senior Discount Note Due 2008.
4.4* Warrant Agreement dated as of July 29, 1998 between TVN and The Bank
of New York.
4.5* Warrant registration rights agreement dated as of July 29, 1998
among TVN and Morgan Stanley & Co. Incorporated.
4.6* Specimen 14% Senior Discount Note Due 2008.
4.7* Notes registration rights agreement dated as of July 29, 1998
between TVN and Morgan Stanley & Co. Incorporated.
5.1* Opinion of Irell & Manella LLP.
10.1+ Transponder Lease Agreement for Galaxy IIIR dated as of October 21,
1994 between Hughes Communications Galaxy, Inc. and TVN.
10.2* Galaxy IIIR Transponder Service Agreement dated October 21, 1994
between Hughes Communications Satellite Services, Inc. and TVN.
10.3+ Transponder Lease Agreement for Galaxy IX dated as of November 29,
1995 between Hughes Communications Galaxy, Inc. and TVN and First
Amendment to Galaxy IX Transponder Lease Agreement dated May 10,
1996.
10.4* Galaxy IX Transponder Service Agreement dated November 29, 1995
between Hughes Communications Satellite Services, Inc. and TVN.
10.5* 1996 Stock Option Plan and related option agreement, as currently in
effect.
10.6*+ Service and License Agreement dated June 9, 1997 between National
Digital Television, Inc., doing business as Headend in the Sky(R)
("HITS") and TVN.
10.7* CSG Master Subscriber Management System Agreement dated June 30,
1997 between CSG Systems, Inc. and TVN.
10.8* Employment Agreement entered into between TVN and Stuart Z. Levin.
10.9* Employment Agreement entered into between TVN and James Ramo.
10.10* Employment Agreement entered into between TVN and Arthur Fields.
10.11* Employment Agreement entered into between TVN and Michael Wex.
10.12* Employment Agreement entered into between TVN and John McWilliams.
10.13* Employment Agreement entered into between TVN and David Sears.
10.14* Employment Agreement entered into between Guthy-Renker Television
Network, Inc. and Gregory A. Thomas.
10.15* Assumption of and First Amendment to Employment Agreement between
GRTV Network, Inc. and Gregory A. Thomas.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.16 Series B Preferred Stock Purchase Agreement dated June 30, 1999, by
and between New Media Network, Inc. and TVN together with all
exhibits thereto.
10.17 Agreement for Purchase and Sale of Assets effective January 18, 1999
by and among TVN, W&K Pharmacy, Inc., d/b/a PandaAmerica Corp. and
Martin D. Weiss, together with all exhibits thereto.
10.18 Asset Acquisition Agreement by and among TVN, GRTV Network, Inc., a
wholly-owned subsidiary of TVN, Guthy-Renker Corporation, and Guthy-
Renker Television Network, Inc., dated July 30, 1999, together with
all exhibits thereto.
10.19 Organization, Uplink and Post-Production Services Agreement dated
May 28, 1999 by and between 4MC-Burbank, Inc. and TVN Entertainment
Corporation.
10.20 Employment Agreement entered into between TVN and Gregory Pasetta.
21.1* Subsidiaries of TVN.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2* Consent of Irell & Manella LLP (Included in Exhibit 5.1).
24.1* Power of Attorney.
25.1* Statement of Eligibility of Trustee.
27.1* Financial Data Schedules.
99.1* Form of Letter of Transmittal with respect to exchange offer.
99.2* Form of Notice of Guaranteed Delivery.
99.3* Form of Exchange Agent Agreement.
</TABLE>
- --------
* Previously filed.
+ Confidential treatment has been requested for portions of these agreements.
Omitted portions have been filed separately with the Commission.
<PAGE>
EXHIBIT 10.16
Series B Preferred Stock Purchase Agreement
New Media Network, Inc.
June 30, 1999
This Series B Preferred Stock Purchase Agreement (the "Agreement") is made
as of June 30, 1999 by and between New Media Network, Inc., a Delaware
corporation (the "Company"), and TVN Entertainment Corporation, a Delaware
corporation (the "Purchaser"), whose principal address is 2901 West Alameda
Avenue, 7/th/ Floor, Burbank, CA 91505.
ARTICLE 1
Authorization and Sale of Series B Preferred Stock
--------------------------------------------------
1.1 Authorization. The Company will authorize the sale and issuance of
-------------
21,199,302 shares of its Series B Preferred Stock, having the rights, privileges
and preferences as set forth in the Restated Certificate of Incorporation (the
"Restated Certificate") in the form attached to this Agreement as Exhibit A.
---------
1.2 Sale of Series B Preferred Stock. Subject to the terms and
--------------------------------
conditions of this Agreement, Purchaser agrees to purchase at the Closing (as
defined below), and the Company agrees to sell and issue to Purchaser,
21,199,302 shares of the Company's Series B Preferred Stock (the "Shares") for a
total purchase price of SIX MILLION DOLLARS ($6,000,000) (the "Purchase Price"),
payable as follows.
(a) FIVE HUNDRED THOUSAND DOLLARS ($500,000) in cash will be paid by
the Purchaser to the Company at the Closing. Promptly following the Closing, the
Company will tender the FIVE HUNDRED THOUSAND DOLLARS ($500,000) to Alan Morelli
("Morelli"), Chairman of the Company, as a partial payment of the Company's loan
obligation owed to Morelli and Paren Knadjian pursuant to the Revolving Credit
Agreement (the "Credit Agreement"). In consideration of this partial payment,
Morelli shall extend payment of the approximately EIGHT HUNDRED THOUSAND
($800,000) balance (approximately ONE HUNDRED FIFTY THOUSAND DOLLARS ($150,000)
of which is escrowed as security for the Company's Santa Monica office lease,
which will be paid to Morelli from such escrow in accordance with its terms)
owing on such loan obligation (including accrued interest at 8.6% per annum) to
the last day of the 24/th/ month from the date of Closing, such payment
extension to be documented in form acceptable to the Purchaser and to Morelli,
including provision for removal of existing restrictive covenants, but with the
UCC security interest remaining in place until such time as the loan is paid
off, or mutually acceptable substitute security is provided by the Company or
the Purchaser.
(b) ONE MILLION FIVE HUNDRED THOUSAND DOLLARS ($1,500,000) in cash,
less any advances previously made by Purchaser prior to and at the Closing, will
be paid by the Purchaser in installments and drawn down upon written request by
the Company to the Purchaser in accordance with the cash funding requirements
set forth in the Business Plan (defined below), with a mutually agreed upon
portion of such funding to be provided immediately upon Closing as
1
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needed for operations. Any advances previously made by the Purchaser to the
Company shall be immediately credited as a previous draw down. Further, those
certain promissory notes by and between the Purchaser and Company, dated as of
May 6, 1999, June 1, 1999 and June 28, 1999 (the "Notes"), copies of which are
attached hereto as Exhibit G, shall be immediately due as of the Closing, and
---------
any and all principal and accrued interest thereon shall be immediately credited
as a draw down, and the Notes shall, thereafter, be deemed fully paid and
satisfied.
(c) FOUR MILLION DOLLARS ($4,000,000) in services (the "TVN
Services') to be rendered by the Purchaser to the Company over a three (3) year
period, with not less than ONE MILLION DOLLARS ($1,000,000) to be utilized by
the Company in the first year, and with not less than ONE MILLION FIVE HUNDRED
THOUSAND DOLLARS ($1,500,000) (or 50% of the remaining amounts) to be utilized
by the Company in the second and third years. The details of the TVN Services
shall be as is more fully set forth in that certain Service Access and
Transponder Use Agreement ("SATU Agreement") in substantially the form attached
hereto as Annex A, to be entered into by the parties as a condition to Closing,
-------
which will specify in detail the TVN Services available for utilization by the
Company, and the draw-down rate applicable for such Services.
ARTICLE 2
Closing, Delivery
-----------------
2.1 Closing. The purchase and sale of the Shares shall take place in
-------
a Closing at the offices of TVN Entertainment Corporation, 2901 West Alameda
Boulevard, 7/th/ Floor, Burbank, CA 91505, with such Closing to be held at 1:00
p.m., on June 30, 1999 or at such other time and place as the Company and the
Purchaser shall mutually agree (the "Closing").
2.2 Delivery. At the Closing, the Company will deliver to the Purchaser
--------
a certificate or certificates representing the number of Shares to be purchased
by Purchaser, against delivery to the Company by the Purchaser of payment by
check or wire transfer to:
New Media Network, Inc.
1427 Third Street Promenade
Santa Monica, CA 90401
Wells Fargo Bank - West Los Angeles Branch
Account: 0747362192
ABA #121000248
ARTICLE 3
Representations and Warranties of the Company
---------------------------------------------
Except as set forth on Exhibit B attached to this Agreement, the Company
---------
hereby represents and warrants to the Purchaser as follows:
3.1 Corporate Organization and Authority. The Company is a corporation
------------------------------------
duly organized, validly existing, authorized to exercise all its corporate
powers, rights and privileges, and in good standing in the State of Delaware, is
qualified to do business in California and Illinois, has the corporate power and
corporate authority to own and operate its properties and to carry on its
2
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business as now conducted and as proposed to be conducted and is not qualified
to do business as a foreign corporation in any jurisdiction other than
California and Illinois and such qualification is not presently required in any
jurisdiction where a failure to so qualify would have a material adverse effect
on the Company.
3.2 Capitalization. Immediately prior to the Closing, the authorized
--------------
capital stock of the Company shall consist of:
(a) Preferred Stock. 29,020,106 shares of Preferred Stock, of which
---------------
7,820,804 shares are designated Series A Preferred Stock, 7,820,804 of which
shares are issued and outstanding, and 21,199,302 of which are designated Series
B Preferred Stock, none of which are issued and outstanding. The rights,
preferences, privileges and beneficial restrictions on the Preferred Stock of
the Company are set forth in the Restated Certificate of Incorporation as in
effect as of the Closing. The Company has reserved an aggregate of 21,199,302
shares of its Series B Preferred Stock for issuance hereunder.
(b) Common Stock. After giving effect to the transactions
------------
contemplated herein, 48,000,000 shares of Common Stock will be authorized, of
which 4,135,196 shares are duly and validly issued, fully-paid, nonassessable,
outstanding are held by the persons and in the amounts set forth on Exhibit C.
---------
The Company has reserved 7,820,804 shares of Common Stock for issuance upon
conversion of the outstanding shares of Series A Preferred Stock, 21,199,302
shares of Common Stock for issuance upon conversion of the outstanding shares of
Series B Preferred Stock, 1,422,301 shares of Common Stock for issuance upon the
exercise of options, and 191,667 shares of Common Stock for issuance upon the
exercise of the warrants. The Company has reserved 1,800,000 shares of Common
Stock for issuance to employees and directors of, and consultants to, the
Company. There are no other outstanding warrants, options, conversion
privileges, preemptive rights, or other rights or agreements to purchase or
otherwise acquire or issue any equity securities of the Company. Other than
those certain Stockholders Agreements attached hereto as Exhibit E (the
---------
"Stockholders Agreement"), the Company is not a party or subject to any
agreement or understanding, and, to the Company's knowledge, there is no
agreement or understanding between any persons and/or entities, which affects or
relates to the voting or giving of written consents with respect to any security
or by a director of the Company.
3.3 Authorization. The Company has full corporate power and authority to
-------------
execute and deliver the Restated Certificate of Incorporation, the Restated
Bylaws, this Agreement, the Registration Rights Agreement (the "Registration
Rights Agreement"), the Stock Exchange Agreement (the "Stock Exchange
Agreement"), the Series A Preferred Voting Agreement (the "Voting Agreement
(Series A)", the Series B Preferred Voting Agreement (the "Voting Agreement
(SATU"), and all other documents, certificates and agreements contemplated
hereby and thereby (collectively, "The Transaction Agreements") and to perform
the obligations under each Transaction Agreement including, without limitation,
to issue the shares of Common Stock upon conversion of the shares. All corporate
action on the part of the Company, its officers, directors and stockholders
necessary for the authorization, execution, delivery and performance of all
obligations under the Purchase Agreement, the Registration Rights Agreement and
for the sale, issuance and delivery of the Shares, and of the Common Stock
issuable upon conversion of the Shares, has been taken,
3
<PAGE>
attached hereto as Exhibit F, constitute legally binding valid obligations of
---------
the Company enforceable in accordance with their terms.
3.4 Validity of Shares. The Shares, when issued, sold and delivered in
------------------
accordance with the terms and for the consideration expressed in this Agreement
shall be duly and validly issued (including, without limitation, issued in
compliance with applicable federal and state securities laws), fully-paid and
non-assessable and free and clear of all liens and encumbrances (other than
those, if any, created or imposed by the Purchaser) and shall have the rights
and preferences set forth in the Restated Certificate. The Common Stock issuable
upon conversion of the Shares (the "Conversion Shares") has been reserved, and
assuming such Common Stock is issued to the Purchaser, upon issuance in
accordance with the Restated Certificate of Incorporation, shall be duly and
validly issued (including, without limitation, issued in compliance with all
applicable federal and state securities laws), fully-paid and non-assessable.
3.5 No Conflict with Other Instruments. The execution, delivery and
----------------------------------
performance of this Agreement, the Registration Rights Agreement, and the
Stockholders Agreement will not result in any violation of, be in conflict with,
or constitute a default under, with or without the passage of time or the giving
of notice: (i) any provision of the Company's Restated Certificate of
Incorporation or Bylaws; (ii) any provision of any judgment, decree or order to
which the Company is a party or by which it is bound; (iii) any material
contract, obligation or commitment to which the Company is a party or by which
it is bound; or (iv) any statute, rule or governmental regulation applicable to
the Company except for an immaterial violation, conflict or default under (iii)
and/or (iv) which does not have a material effect.
3.6 No Defaults, Violations or Conflicts. The Company is not in
------------------------------------
violation of any term or provision of its Restated Certificate of Incorporation
or Restated Bylaws, or any material term or provision of any indebtedness,
mortgage, indenture, contract, agreement, judgment, statute, rule or regulation,
or to the Company's knowledge, any decree or order.
3.7 Title to Properties; Liens and Encumbrances. The Company has good
-------------------------------------------
and marketable title to all of its properties and assets, both real and
personal, and has good title to all its leasehold interests, in each case
subject to no mortgage, pledge, lien, security interest, conditional sale
agreement, encumbrance or charge.
3.8 Patents and Other Proprietary Rights.
------------------------------------
(a) The Company owns or possesses, has access to or can become
licensed on reasonable terms under, all patents, patent applications,
trademarks, trade names, licenses, inventions, computer software, technical
information and copyrights necessary for the operation of its business as now
conducted and as proposed to be conducted by the Company as set forth in that
certain Business Plan, as amended (the "Business Plan") provided to the
Purchaser in connection with the transactions contemplated hereby, with no known
infringement of or conflict with the rights of others (nor, to the best of the
Company's knowledge, any basis therefor).
(b) Other than routine licenses entered into in the ordinary course
of business, there are no outstanding options, licenses or agreements of any
kind relating to the matters listed in
4
<PAGE>
Article 3.8(a), nor is the Company bound by or a party to any options, licenses
or agreements of any kind with respect to the patents, trademarks, service
marks, trade names, copyrights, trade secrets, licenses, information,
proprietary rights and processes of any other person or entity.
(c) The Company has not received any communications alleging that
the Company has violated or, by conducting its business as proposed in the
Business Plan, would violate any of the patents, trademarks, service marks,
trade names, copyrights or trade secrets or any proprietary rights of any other
person or entity.
(d) The Company is not aware that any of its employees is obligated
under any contract (including licenses, covenants or commitments of any nature)
or other agreement, or subject to any judgment, decree or order of any court or
administrative agency, that would interfere with the use of such employee's best
efforts to promote the interests of the Company or that would conflict with the
Company's business as presently conducted.
(e) Neither the execution nor delivery of this Agreement, the
Registration Rights Agreement or the Stockholders Agreement, nor the carrying on
of the Company's business by the employees of the Company, nor the conduct of
the Company's business as presently conducted, will, to the Company's knowledge,
conflict with or result in a breach of the terms, conditions or provisions of,
or constitute a default under, any contract, covenant or instrument under which
any of such employees is now obligated.
(f) The Company does not believe it is or will be necessary to
utilize any inventions of any of its employees (or people it currently intends
to hire) made prior to their employment by the Company and the rights to which
have not been fully assigned to the Company.
3.9 Financial Statements. The unaudited financial statements of the
--------------------
Company as of and for the year ended December 31, 1998 (the "Financial
Statements") are, to the best of our knowledge, complete and correct in all
material respects, present fairly the financial position and result of
operations of the Company at the dates and for the periods to which they relate.
The Financial Statements were internally prepared, have not been prepared in
accordance with generally accepted accounting principles and are still subject
to normal year-end audit adjustments and do not contain footnotes normally
associated with year-end financial statements. The interim financial statements
for the period ended April 30, 1999 have been prepared by the Company and have
not been audited and are subject to normal year-end audit adjustments and do not
contain footnotes. The financial statements show all material liabilities,
absolute or contingent, of the Company required to be recorded.
3.10 Absence of Certain Changes. Since December 31, 1998 and at all
--------------------------
times up to the Closing, there has not been, nor, so far as reasonably can be
foreseen at this time, is there reasonably likely to be, any event or condition
of any character which has materially adversely affected, or is likely to
affect, the Company's business operations, assets, condition (financial or
otherwise), liabilities or earnings including but not limited to:
(a) any declaration, setting aside or payment or other distribution
in respect of any of the Company's capital stock, or any direct or indirect
redemption, purchase or other
5
<PAGE>
acquisition of any of such stock by the Company, other than the repurchase of
unvested shares of Common Stock of the Company issued to employees, officers or
directors of or consultants to the Company;
(b) any waiver by the Company of a valuable right or of a material
debt owed to it;
(c) any material change or amendment to a contract or arrangement by
which the Company or any of its assets or properties is bound or subject;
(d) any damage, destruction or loss to any asset valued in excess of
$5,000 of the Company (whether or not covered by insurance);
(e) any commitment, transaction or other action by the Company other
than in the ordinary course of business and consistent with past practice;
(f) any amendment or other change to the Restated Articles or Bylaws
of the Company (except as contemplated by this Agreement);
(g) any sale or other disposition of any right, title or interest in
or to any assets or properties of the Company or any revenues derived therefrom
other than in the ordinary course of business and consistent with past practice;
(h)(x) any approval or action to put into effect any general
increase in any compensation or benefits payable to any class or group of
employees of the Company, any increase in the compensation or benefits payable
or to become payable by the Company to any of their directors, officers or any
of their employees whose total compensation after such increase, in aggregate,
would exceed $50,000 per annum (collectively, "Key Employees") or any bonus,
service award, percentage compensation or other benefit paid, granted or accrued
to or for the benefit of any Key Employee or (y) the adoption or amendment in
any material respect of any employee benefit plan or compensation commitment or
any severance agreement or employment contract to which any Key Employee is a
party;
(i) any creation, incurrence or assumption of any indebtedness for
money borrowed by the Company exceeding $50,000;
(j) any capital expenditures by the Company in excess of $5,000
individually, or in the aggregate;
(k) any material change in any accounting principle or method or
election for federal income tax purposes used by the Company;
(l) any labor trouble, or any event or condition of any character,
materially adversely affecting the business or plans of the Company; or
(m) any authorization, approval, agreement or commitment to do any
of the foregoing.
6
<PAGE>
3.11 Tax Returns, Payments and Elections. The Company has sought
-----------------------------------
extensions for all tax returns and reports as required by law. These returns and
reports are true and correct in all material respects. The Company has paid all
taxes and other assessments due, except those contested by it in good faith that
are listed in the Schedule of Exceptions. The provision for taxes of the Company
as shown in the Financial Statements is adequate for taxes due or accrued as of
the date thereof. The Company has not made any elections pursuant to the
Internal Revenue Code of 1986, as amended (the "Code") (other than elections
that relate solely to methods of accounting, depreciation or amortization) that
would have a material effect on the Company, its financial condition, its
business as presently conducted or proposed to be conducted or any of its
properties or material assets, apart from the previous Subchapter S status which
will terminate upon Closing.
3.12 Liabilities. The Company has no material liabilities and, to the
-----------
of its knowledge, knows of no material contingent liabilities, except current
liabilities incurred in the ordinary course of business which have not been,
either in any individual case or in the aggregate, materially adverse.
3.13 Private Offering. The Company agrees that neither the Company nor
----------------
anyone acting on its behalf will offer any of the Shares or any similar
securities for issuance or sale to, or solicit any offering to acquire any of
the same from, anyone so as to make the sale and issuance of the Shares subject
to the registration requirements of Section 5 of the Securities Act of 1933, as
amended (the "Securities Act").
3.14 Use of Proceeds. The Company shall use the proceeds from the sale of
---------------
the Shares as follows: (a) $500,000 will be paid by the company to Alan Morelli
as a partial payment of the Credit Agreement in exchange for Morelli and
Knadjian executing a formal agreement, agreeable to Purchaser, which agreement
extends the payment of the current loan obligation owed by the Company to
Morelli and Knadjian to the last day of the 24/th/ month following the date
hereof and which agreement removes all existing restrictive covenants other than
the UCC security interest pursuant to the Security Agreement related thereto and
(b) the remainder of such proceeds shall be used for the conduct of the business
of the Company in compliance with the Business Plan.
3.15 Prior Registration Rights. Except as provided in the Registration
-------------------------
Rights Agreement, the Company is under no contractual obligation to register
under the Securities Act any of its presently outstanding securities or any of
its securities that may subsequently be issued.
3.16 Litigation. There is no action, suit, proceeding or investigation
----------
pending or to the Company's knowledge currently threatened against the Company
that questions the validity of this Agreement, and the Stockholders Agreement or
the Registration Rights Agreement or the right of the Company to enter into any
of such agreements, or to consummate the transactions contemplated hereby or
thereby, or which might result, either individually or in the aggregate, in any
material adverse change in the assets, condition, affairs or prospects of the
Company, financially or otherwise, or any change in the current equity ownership
of the Company, nor is the Company aware that there is any basis for the
foregoing. The foregoing includes, without limitation, actions pending or
threatened (or any basis therefor known to the Company) involving the prior
employment of any of the Company's employees, their use in connection with the
Company's business of any information or techniques allegedly proprietary to any
of their former employers, or their obligations under any agreements with prior
employers. The Company is not a party or subject to the provisions
7
<PAGE>
of any order, writ, injunction, judgment or decree of any court or government
agency or instrumentality. There is no action, suit, proceeding or investigation
by the Company currently pending or which the Company intends to initiate.
3.17 Full Disclosure. The Company has fully provided the Purchaser with
---------------
all the information which the Purchaser has requested for deciding whether to
purchase the Shares and all information which the Company believes is reasonably
necessary to enable the Purchaser to make such decision. The representations and
warranties of the Company contained in this Agreement and the Registration
Rights Agreement, certificates and exhibits delivered in connection herewith,
together with the financial projections of the Company contained in the Business
Plan, do not contain any untrue statement of a material fact or omit any
material fact necessary to make the statements contained therein or herein in
view of the circumstances under which they were made not misleading.
3.18 Agreements; Action.
------------------
(a) There are no agreements, understandings, instruments, contracts,
proposed transactions, judgments, orders, writs or decrees to which the Company
is a party or to its knowledge by which it is bound which may involve (i)
obligations (contingent or otherwise) of, or payments to, the Company in excess
of $10,000 (other than obligations of, or payments to, the Company arising from
purchase or sale agreements entered into in the ordinary course of business), or
(ii) the license of any patent, copyright, trade secret or other proprietary
right to or from the Company (other than licenses arising from the purchase of
"off the shelf" or other standard products), or (iii) provisions restricting or
affecting the development, manufacture or distribution of the Company's products
or services, or (iv) indemnification by the Company with respect to
infringements of proprietary rights (other than indemnification obligations
arising from purchase or sale or license agreements entered into in the ordinary
course of business).
(b) The Company has not (i) declared or paid any dividends, or
authorized or made any distribution upon or with respect to any class or series
of its capital stock, (ii) incurred any indebtedness for money borrowed or any
other liabilities (other than with respect to dividend obligations,
distributions, indebtedness and other obligations incurred in the ordinary
course of business) individually in excess of $10,000 or, in the case of
indebtedness and/or liabilities individually less than $10,000, in excess of
$25,000 in the aggregate, (iii) made any loans or advances to any person, other
than ordinary advances for travel expenses, or (iv) sold, exchanged or otherwise
disposed of any of its assets or rights, other than the sale of its inventory in
the ordinary course of business.
(c) For the purposes of subsections (a) and (b) above, all
indebtedness, liabilities, agreements, understandings, instruments, contracts
and proposed transactions involving the same person or entity (including persons
or entities the Company has reason to believe are affiliated therewith) shall be
aggregated for the purpose of meeting the individual minimum dollar amounts of
such subsections.
(d) The Company has not engaged in the past three (3) months in any
discussion (i) with any representative of any corporation or corporations
regarding the consolidation or merger of the Company with or into any such
corporation or corporations, (ii) with any corporation,
8
<PAGE>
partnership, association or other business entity or any individual regarding
the sale, conveyance or disposition of all or substantially all of the assets of
the Company, or a transaction or series of related transactions in which more
than fifty percent (50%) of the voting power of the Company is disposed of, or
(iii) regarding any other form of acquisition, liquidation, dissolution or
winding up of the Company.
3.19 Related-Party Transactions. Except for certain promissory notes
--------------------------
payable to the Company by certain stockholders in connection with the purchase
of Common Stock pursuant to certain Restricted Stock Purchase Agreements, no
employee, officer or director of the Company or member of his or her immediate
family is indebted to the Company, nor is the Company indebted (or committed to
make loans or extend or guarantee credit) to any of them. To the best of the
Company's knowledge, none of such persons has any direct or indirect ownership
interest in any firm or corporation with which the Company is affiliated or with
which the Company has a business relationship, or any firm or corporation that
competes with the Company, except that employees, officers, or directors of the
Company and members of their immediate families may own stock in publicly traded
companies that may compete with the Company. No member of the immediate family
or any officer or director of the Company is directly or indirectly interested
in any material contract with the Company.
3.20 Distributions. There has been no declaration or payment by the
-------------
Company of any dividend, nor any distribution by the Company of any assets of
any kind, to any class or series of its capital stock. The Company is not a
party to or bound by any contract, indenture, agreement, instrument, order of
any court, or governmental agency (except the Delaware General Corporation Law),
rule or regulation, or any note, debenture, bond or other security, which
contains provisions expressly limiting or restricting payments by the Company on
or in respect of shares of its capital stock of any class, or pursuant to which
the Company's right to declare and pay dividends on the Shares is restricted.
3.21 Employee Compensation Plans. The Company is not party to or
---------------------------
bound by any currently effective employment contracts, deferred compensation
agreements, bonus plans, incentive plans, profit sharing plans, retirement
agreements, employee benefit plan subject to the Employee Retirement Income
Security Act of 1974 or other employee compensation agreements. Subject to
applicable law, the employment of each officer and employee of the Company is
terminable at the will of the Company.
3.22 Employees. The Company has no collective bargaining agreements with
---------
any of its employees. There is no labor union organizing activity pending or, to
the Company's knowledge, threatened with respect to the Company. No Company
employee has any agreement or contract, written or verbal, regarding his
employment. No employee of the Company has been granted the right to continued
employment by the Company or to any material compensation following termination
of employment with the Company. The Company is not aware that any officer or key
employee, or that any group of key employees, intends to terminate their
employment with the Company, nor does the Company have a present intention to
terminate the employment of any officer, key employee or group of key employees.
The Company is in compliance in all material respects with all currently
applicable laws and regulations respecting employment, discrimination
9
<PAGE>
in employment, terms and conditions of employment and wages and hours and
occupational safety and health and employment practices, and is not engaged in
any unfair labor practices. The Company is not aware of any such claims or any
basis for any such claims grounded on such laws.
3.23 Proprietary Information and Inventions Agreements. Each former and
-------------------------------------------------
current employee, officer and consultant of the Company has executed the
Company's standard form of Confidential Information and Inventions Agreement.
3.24 Transactions with Affiliates. Except for (i) the purchase of shares
----------------------------
of the Company's Common Stock, (ii) regular salary payments, fringe benefits
under an individual's compensation package with the Company and expense
reimbursements, and (iii) the issuance and sale of the Shares pursuant to the
terms and conditions of this Agreement, none of the officers, employees,
directors or other affiliates of the Company are a party to any transactions
with the Company. There have been no assumptions or guarantees by the Company of
any obligations of such affiliates.
3.25 Minute Books. The minute books of the Company contain a complete
------------
summary of all meetings of directors and stockholders since the time of
incorporation and reflect all transactions referred to in such minutes
accurately in all material respects.
3.26 Insurance. The Company maintains fire and casualty insurance
---------
policies, with extended coverage, sufficient in amount (subject to reasonable
deductibles) to allow it to replace any of its properties that might be damaged
or destroyed.
3.27 Compliance with Laws; Permits. To its knowledge, the Company is not
-----------------------------
in violation of any applicable statute, rule, regulation, order or restriction
of any domestic or foreign government or any instrumentality or agency thereof
in respect of the conduct of its business or the ownership of its properties
which violation would materially and adversely affect the business, assets,
liabilities, financial condition, operations or prospects of the Company. No
governmental orders, permissions, consents, approvals or authorizations are
required to be obtained and no registrations or declarations are required to be
filed in connection with the execution and delivery of this Agreement and the
issuance of the Shares or the Conversion Shares, except such as has been duly
and validly obtained or filed, or with respect to any filings that must be made
after the Closing, as will be filed in a timely manner. The Company has all
franchises, permits, business licenses and any similar authority necessary for
the conduct of its business as now being conducted by it, the lack of which
could materially and adversely affect the business, properties, prospects or
financial condition of the Company and believes it can obtain, without undue
burden or expense, any similar authority for the conduct of its business as
planned to be conducted.
3.28 Environmental and Safety Laws. To its knowledge, the Company is not
-----------------------------
in violation of any applicable statute, law or regulation relating to the
environment or occupational health and safety, and to its knowledge, no material
expenditures are or will be required in order to comply with any such existing
statute, law or regulation. To its knowledge, the Company has not transported,
stored, used, manufactured, released or exposed its employees or any other
person to any substance that is regulated by any governmental entity or that has
been designated by an governmental entity to be radioactive, toxic, hazardous,
or otherwise a danger to health or the environment.
10
<PAGE>
3.29 Corporate Documents. The Company's Restated Certificate of
-------------------
Incorporation and Bylaws are in the form previously provided to the Purchaser.
3.30 No Subsidiaries. At the date hereof, the Company does not own or
---------------
control, directly or indirectly, any interest in any other corporation,
partnership, limited liability company, association or other business entity.
3.31 Brokers. No agent, broker, investment banker or other firm or
-------
person is or will be entitled to any broker's or finder's fee or any other
commission or similar fee by any action of any member of the Company, or the
Company itself, in connection with any of the transactions contemplated by this
Agreement.
3.32 Questionable Payments. None of the Company, any director, officer,
---------------------
or other employee of the Company has: (i) made any payments or provided services
or other favors in the United States of America or in any foreign country in
order to obtain preferential treatment or consideration by any governmental
entity with respect to any aspect of the business the Company; or (ii) made any
political contributions which would not be lawful under the laws of the United
States (including the Foreign Corrupt Practices Act) or the foreign country in
which such payments were made with respect to any aspect of the business of the
Company. None of the Company, any director, officer, or other employee of the
Company, nor, to the Company's best knowledge after reasonable inquiry, any
supplier of the Company, as been the subject of any inquiry or investigation by
any governmental entity in connection with payments or benefits or other favors
to or for the benefit of any governmental or armed services official, agent,
representative, or employee with respect to any aspect of the business of the
Company, or with respect to any political contribution made by the Company.
3.33 Year 2000 Compliance. Except as set forth on the Disclosure
--------------------
Schedule, the Company warrants that all of its products are Year 2000 compliant.
Year 2000 compliant means that the products store data in four digit fields so
as to accurately process, provide and/or receive date data within and between
the years 1999 and 2001 so long as the following conditions are met: (i) all
materials (including hardware, software, firmware, and databases) used with such
software products properly exchange date data with the Company products, (ii)
the products are used in accordance with their associated documentation and
(iii) the products have not been modified by anyone other than the Company. None
of the Company nor any director, officer, or other employees of the Company has
made any statements regarding products or services developed, marketed,
supported, sold or otherwise exploited by the Company as of or prior to the
Closing that materially misstate the Year 2000 compliance status of such
products and have not made any statements that commit the Company to repair,
replace, or otherwise remedy any Year 2000 compliance deficiency in such
products.
ARTICLE 4
Representations and Warranties of the Purchaser
-----------------------------------------------
Purchaser hereby represents and warrants to the Company with respect to the
purchase of the Shares as follows:
11
<PAGE>
4.1 Experience. Purchaser has substantial experience in evaluating and
----------
investing in private placement transactions so that Purchaser is capable of
evaluating the merits and risks of Purchaser's investment in the Company.
Purchaser, by reason of its business or financial experience or the business or
financial experience of its professional advisors who are unaffiliated with and
who are not compensated by the Company or any affiliate or selling agent of the
Company, directly or indirectly, has the capacity to protect its own interests
in connection with the purchase of the Shares under this Agreement.
4.2 Investment. Purchaser is acquiring the Shares and the underlying
----------
Common Stock for investment for Purchaser's own account, not as a nominee or
agent, and not with the view to, or for resale in connection with, any
distribution thereof. Purchaser understands that the Shares and the underlying
Common Stock have not been, and will not be, registered under the Securities Act
by reason of a specific exemption therefrom, and that any such exemption would
depend, among other things, upon the bona fide nature of the investment intent
and the accuracy of such Purchaser's representations as expressed in this
Agreement. Purchaser has not been formed for the specific purpose of acquiring
the Shares or the underlying Common Stock. By executing this Agreement, the
Purchaser further represents that the Purchaser does not have any contract,
undertaking, agreement or arrangement with any person to sell, transfer or grant
participations to such person or to any third person, with respect to any of the
Shares.
4.3 Accredited Purchaser. The Purchaser is an "Accredited Purchaser"
--------------------
within the meaning of Securities and Exchange Commission ("SEC") rule 501 of
Regulation D, as presently in effect.
4.4 Rule 144. Purchaser acknowledges that the Shares and the underlying
--------
Common Stock must be held indefinitely unless subsequently registered under the
Securities Act or an exemption from such registration is available. Purchaser is
aware of the provisions of Rule 144 promulgated under the Securities Act which
permit limited resale of shares purchased in a private placement subject to the
satisfaction of certain conditions, including, among other things, the existence
of a public market for the shares, the availability of certain current public
information about the Company, the resale occurring not less than one year after
a party has purchased and paid for the security to be sold, the sale being
effected through a "broker's transaction" or in transactions directly with a
"market maker" (as provided by Rule 144(f)) and the number of shares being sold
during any three-month period not exceeding specified limitations.
4.5 No Public Market. Purchaser understands that no public market now
----------------
exists for any of the securities issued by the Company, that the Company has
made no assurances that a public market will ever exist for the Shares or the
underlying Common Stock and that, even if such a public market exists at some
future time, the Company may not then be satisfying the current public
information requirements of Rule 144.
4.6 Legends.
-------
(a) It is understood that the certificates evidencing the
Shares may bear one or all of the following legends:
12
<PAGE>
"These securities have not been registered under the Securities Act of
1933, as amended. They may not be sold, offered for sale, pledged or
hypothecated in the absence of a registration statement in effect with
respect to the securities under such Act or an opinion of counsel
satisfactory to the Company that such registration is not required or
unless sold pursuant to Rule 144 of such Act."
(b) Any legend required by the laws of thE State of California,
including any legend required by the California Department of Corporations and
Sections 417 and 418 of the California Corporations Code.
4.7 Access to Data. Purchaser and its representatives have met with
--------------
representatives of the Company and thereby have had the opportunity to ask
questions of, and receive answers from, said representatives concerning the
Company and the terms and conditions of this transaction as well as to obtain
any information requested by Purchaser. Any questions raised by Purchaser or its
representatives concerning the transaction have been answered to the
satisfaction of Purchaser and its representatives. Purchaser's decision to
purchase the Shares is based in part on the answers to such questions as
Purchaser and its representatives have raised concerning the transaction and on
its own evaluation of the risks and merits of the purchase and the Company's
proposed business activities.
4.8 Authorization. The Purchaser has full corporate power and authority
-------------
to execute and deliver the Transaction Agreements and to perform the obligations
under the Transaction Agreements. All corporate action on the part of the
Purchaser, its officers, directors and stockholders necessary for the
authorization, execution, delivery and performance of its obligations under the
Transaction Agreements has been taken and the Transaction Agreements represent
legally binding valid obligations of the Purchaser enforceable in accordance
with the terms.
4.9 Disclosure of Information. The Purchaser believes it has received
-------------------------
all the information it considers necessary or appropriate for deciding whether
to purchase the Series B Preferred Stock. The Purchaser further represents that
it has had an opportunity to ask questions and receive answers from the Company
regarding the terms and conditions of the offering of the Series B Preferred
Stock and the business, properties, prospects and financial condition of the
Company. The foregoing, however, does not limit or modify the representations
and warranties of the Company in Article 3 of this Agreement or the right of the
Purchaser to rely thereon.
ARTICLE 5
Conditions to Closing of Purchaser
----------------------------------
Purchaser's obligation to purchase the Shares at the Closing is, at the
option of the Purchaser, subject to the fulfillment or waiver as of the Closing
of the following conditions:
5.1 Representations and Warranties Correct. The representations and
--------------------------------------
warranties made by the Company in Article 3 of this Agreement shall be true and
correct in all material respects when made, and shall be true and correct in all
material respects as of the Closing with the same force and effect as if they
had been made on and as of said date.
13
<PAGE>
5.2 Covenants. All covenants, agreements and conditions contained in
---------
this Agreement to be performed by the Company as of or prior to the Closing
shall have been performed or complied with in all material respects.
5.3 Compliance Certificate. The Company shall have delivered to
----------------------
Purchaser a certificate of the Company, executed by an authorized officer of the
Company, dated as of the date of the Closing, and certifying to the fulfillment
of the conditions specified in Articles 5.1 and 5.2 of this Agreement.
5.4 Secretary's Certificate. A Secretary's Certificate certifying on
-----------------------
behalf of the Company to the Company's current Bylaws, Certificate of
Incorporation, resolutions authorizing the transaction described herein and
approving the form of each of the other agreements.
5.5 Blue Sky. The Company shall have obtained all necessary Blue Sky law
--------
permits and qualifications, or secured exemptions therefrom, required by any
state for the offer and sale of the Shares and the Common Stock issuable upon
conversion of the Shares.
5.6 Certificates. A certificate or certificates, registered in such
------------
Purchaser's name as set forth in the Agreement, representing the number of
Shares designated in Article 1.1 to be purchased by such Purchaser.
5.7 Certificate of Incorporation. The Restated Certificate shall have
----------------------------
been filed with the Secretary of State of the State of Delaware.
5.8 Bylaws. The Restated Bylaws shall have been passed by the Board of
------
Directors and by the stockholders.
5.9 Registration Rights Agreement. The Company shall have entered into
-----------------------------
the Registration Rights Agreement.
5.10 Stockholders Agreement. Morelli shall have executed and delivered
----------------------
the Stockholders Agreement.
5.11 Opinion of Company's Counsel. At the Closing, the Purchaser shall
----------------------------
have received from Brobeck, Phleger & Harrison LLP, counsel to the Company, a
favorable opinion addressed to them, dated as of the date of the Closing, in
substantially the form attached to this Agreement as Exhibit F.
---------
5.12 Stock Exchange Agreement. The Company and Morelli shall have entered
------------------------
into that certain Stock Exchange Agreement of even date herewith.
5.13 Voting Agreement (Series A). The Company and Morelli shall have
---------------------------
entered into that certain Voting Agreement (Series A) of even date herewith.
5.14 Voting Agreement (SATU). The Company shall have entered into that
-----------------------
certain Voting Agreement (SATU), dated of even date herewith, among Morelli,
Ian W. Duffell and the Purchaser.
14
<PAGE>
5.15 Proceedings and Documents. All corporate action and other proceedings
-------------------------
in connection with the transactions contemplated at the Closing and all
documents incident thereto shall be reasonably satisfactory in form and
substance to Purchaser, and they shall have received all such counterpart
original and certified or other copies of such documents as they may reasonably
request.
5.16 Cancellation of Alan Morelli Options. The Company shall have
------------------------------------
undertaken all actions necessary to terminate all Company stock options (and
rights to receive options) which are (a) currently issued to Alan Morelli, or
(b) committed, by contract or otherwise, to be issued to Alan Morelli.
ARTICLE 6
Conditions to Closing of Company
--------------------------------
The Company's obligation to sell and issue the Shares at the Closing is, at
the option of the Company, subject to the fulfillment or waiver of the following
conditions:
6.1 Representations and Warranties Correct.. The representations and
--------------------------------------
warranties made by Purchaser in Article 4 of this Agreement shall be true and
correct in all material respects when made, and shall be true and correct in all
material respects as of the Closing.
6.2 Covenants. All covenants, agreements and conditions contained in this
---------
Agreement to be performed by the Purchaser as of or prior to the Closing shall
have been performed or complied with in all material respects.
6.3 General Continuing Guaranty. The Purchaser shall have entered into
---------------------------
that certain General Continuing Guaranty, of even date herewith, in favor of
Morelli.
6.4 Registration Rights. The Purchaser shall have entered into that
-------------------
certain Registration Rights Agreement, of even date herewith, with Morelli.
ARTICLE 7
Affirmative Covenants of the Company
------------------------------------
The Company hereby covenants and agrees as follows:
7.1 Financial information. As soon as practicable after the end of each
---------------------
Company fiscal year, and in any event no later than ninety (90) days thereafter,
the Company will deliver the following documents to Purchaser for so long as
Purchaser is a holder of any Shares purchased pursuant to this Agreement (or
Common Stock issued upon conversion of the Shares) consolidated balance sheets
of the Company and its subsidiaries, if any, as of the end of such fiscal year,
and consolidated statements of income and consolidated statements of cash flow
of the Company and its subsidiaries, if any, for such year, prepared in
accordance with generally accepted accounting principles and setting forth in
each case in comparative form the figures for the previous fiscal year, all in
reasonable detail and audited by a nationally recognized public accounting firm
approved by the Board of Directors of the Company.
15
<PAGE>
7.2 Additional Information. As long as Purchaser (together with any
----------------------
affiliate of such Purchaser) holds not less than 200,000 Shares (or an
equivalent number of shares consisting of the Shares or Common Stock issued upon
conversion of the Shares), as adjusted for recapitalizations, stock splits,
stock dividends and the like, the Company will deliver the following documents
to such Purchaser:
(a) As soon as practicable after the end of each fiscal month, and in
any event within thirty (30) days thereafter, an unaudited consolidated balance
sheet of the Company, as at the end of such month, and unaudited consolidated
statements of income and unaudited consolidated statements of cash flow for such
month and for the current fiscal year to date. Such financial statements shall
be prepared in accordance with generally accepted accounting principles
consistently applied (other than accompanying notes and subject to year-end
adjustments), all in reasonable detail.
(b) As soon as practicable, but in any event prior to the end of each
fiscal year, a budget for the next fiscal year, including balance sheets and
sources and applications of funds statements and, as soon as prepared, any other
budgets or revised budgets prepared for the Company.
(c) Promptly upon their becoming available, one copy of (i) each
financial statement, report, notice or proxy statement sent by the Company or
any subsidiary to common stock holders generally, and (ii) each regular or
periodic report, each registration statement (without exhibits except as
expressly requested by such holder), and each prospectus and all amendments
thereto filed by the Company or any subsidiary of the Company with the
Securities and Exchange Commission and (iii) all press releases and other
statements made available generally by the Company or any subsidiary to the
public concerning developments that are material.
(d) With reasonable promptness, such other data and information
relating to the business, operations, affairs, financial condition, assets or
properties of the Company, or any of its subsidiaries or relating to the ability
of the Company to perform its obligations hereunder, as from time to time may be
reasonably requested by Purchaser.
7.3 Transfer of Information Rights. The information rights set forth in
------------------------------
Articles 7.1 and 7.2 may be transferred in any nonpublic transfer of Shares (or
Shares of Common Stock issued upon conversion of the Shares), provided that the
Company is given written notice of such transfer, and provided further that the
right to receive the information set forth in Article 7.2 may only be
transferred to a holder of, or affiliated holders who in the aggregate hold, at
least 1,000,000 Shares (or an equivalent number of Shares consisting of the
Shares or Common Stock issued upon conversion of the Shares, as appropriately
adjusted for stock splits and the like). In the event that the Company
reasonably determines that provision of information to a transferee pursuant to
this Article 7.3 would materially adversely affect its proprietary position,
such information may be edited in the manner necessary to avoid such effect.
7.4 Termination of Covenants. The covenants set forth in Articles 7.1 and
------------------------
7.3 shall terminate on and be of no further force or effect upon the earlier of
(i) the consummation of the Company's sale of its Common Stock in an
underwritten public offering pursuant to an effective registration statement
filed under the Securities Act, immediately subsequent to which the Company
16
<PAGE>
shall be obligated to file annual and quarterly reports with the Commission
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the
"Exchange Act") or (ii) the registration by the Company of a class of its equity
securities under Section 12(b) or 12(g) of the Exchange Act.
7.5 Confidential Information and Invention Assignment Agreement. The
-----------------------------------------------------------
Company shall require all of its current and future officers and each employee
or consultant with access to confidential information regarding the Company's
operations, to execute and deliver the Company's standard form of Confidential
Information and Invention Assignment Agreement.
7.6 Vesting of Employee Stock. Any stock granted to employees in the
-------------------------
future, i.e. following the Closing, of or consultants to the Company as part of
the shares of Common Stock reserved for such purpose shall be subject to the
Company's standard vesting provisions, which provide for a four year term with
25% of the total shares or options to be granted vesting on the first
anniversary of the grant or purchase date and the remaining shares vesting at a
rate of 1/48th of the total amount per month.
7.7 Payment. The Company will not directly or indirectly pay or cause to
-------
be paid any remuneration, whether by way of supplemental or additional interest,
fee or otherwise, or grant any security, to any holder of preferred stock as
consideration for or as an inducement to the entering into by any holder of
preferred stock of any waiver or amendment of any of the terms and provisions
hereof or of any other agreement affecting the rights of the holders of
preferred stock unless such remuneration is concurrently paid, or security is
concurrently granted, on the same terms, ratably to each holder of preferred
stock then outstanding even if such holder did not consent to such waiver or
amendment.
7.8 Directors and Officers and Errors and Omissions Insurance. At all
---------------------------------------------------------
times during which Purchaser has its designee serve as a director of the Company
and for a minimum of six years thereafter, the Company will maintain directors
and officers and errors and omissions insurance coverage in reasonably
sufficient amounts, and will provide indemnification to such board designee.
7.9 Covenant with Respect to Board Representation. After such time as the
---------------------------------------------
Company has commenced the federal registration process for its initial public
offering and prior to the effective time of such offering, the Company will
propose to, and use its best efforts to obtain the approval of its stockholders
for the adoption of a classified Board of Directors having at least three
temporal classes, with one of the seats having the longest term filled by the
director serving on behalf of the Purchaser.
7.10 Covenants of the Company Other Than Reporting Requirements. Without
----------------------------------------------------------
limiting any other covenants and provisions hereof, the Company covenants and
agrees that until the Closing of the first public offering of the Common Stock
of the Company to the general public which is effected pursuant to a
registration statement filed with, and declared effective by, the Securities and
Exchange Commission under the Securities Act pursuant to which the Preferred
Stock would be converted into Common Stock under the terms of the Restated
Articles, it will perform and observe the following covenants and provisions,
and will cause each of its subsidiaries, if and when such subsidiaries exist, to
perform and observe such of the following covenants and provisions as are
applicable to such subsidiary:
17
<PAGE>
(a) Board Composition; Conduct of Business.
--------------------------------------
(i) The Company covenants to reimburse its outside directors
for all expenses reasonably incurred in connection with attendance at meetings
of the Board of Directors or any committee thereof.
(ii) Company management will be responsible for day-to-day
business operations, including hiring and firing of other company personnel, all
under the direction and control of Company's Board of Directors and pursuant to
the Board approved Business Plan.
(iii) The Company shall not borrow and permit to remain
outstanding funds in excess of $10,000 except with the written consent of the
Board of Directors.
(iv) Substantive matters which may materially deviate from the
approved Company Business Plan, and the addition of new Company Directors, shall
require mutual consent of the Company and the Purchaser appointed Directors.
Company's governance provisions (whether Certificate of Incorporation or Bylaws)
shall be modified so as to contain covenants which prohibit the Directors or
Company management from taking certain actions (including but not limited to,
issuance of additional units/shares, sale of units/shares, holding unscheduled
Board of Directors meetings, sale of Company, its business or any substantial
part or all of its assets, incurring new debt, changing the name, nature or
management of Company's business) without the consent of Company's Board of
Directors.
(v) Attendance by no less than four (4) Directors, either in
person or by participation via scheduled conference call, including at least one
(1) Director appointed by the Purchaser, one (1) by the Series A Preferred Stock
so long as it shall be outstanding, and one (1) by Company management, shall
constitute a quorum for a Director's meeting, which shall take place no less
often than quarterly. Upon any such Director's resignation or inability to
serve, the entity or group which appointed such Director, may appoint a
replacement Director.
(vi) Ian Duffell ("Duffell") and Alan Morelli ("Morelli") will
receive employment or consulting agreements from Company on terms approved by
the Company Board in accordance with the Company Business Plan.
(b) General Provisions.
------------------
(i) All business plans and financial models, proprietary
information, technology and data, and other confidential information disclosed
by Company to the Purchaser, and by the Purchaser to Company shall be governed
by the terms of that certain mutual Non-Disclosure/Confidentiality Agreement
executed by the parties on April 9, 1999. Nothing contained herein shall be
deemed to constitute a grant, license, transfer, conveyance, offer or sale by
one party to the other of any right, title, or interest in the assets or
property of either party (including without limitation, with respect to any
software or intellectual property rights, or any rights, modifications,
enhancements, or derivatives of either). The parties agree that any joint or
separate press releases regarding the Purchaser's involvement in the Company
shall be jointly planned and coordinated, and neither party shall issue any such
press release or make any press announcement regarding the
18
<PAGE>
Company and/or the Services, except as may be required by law, without the prior
written approval of the other party.
(ii) The Company's management shall use its best efforts to
obtain binding commitments to license music content and other entertainment
products to be utilized for the testing set forth in Article 7.11(b), above, and
on mutually acceptable terms. The parties hereto agree that this Agreement (i)
shall replace and supercede any and all prior and contemporaneous
understandings, agreements and/or original or amended Memoranda of
Understanding, all of which are deemed merged herein, (ii) shall be a binding
Agreement, enforceable pursuant to the terms and conditions set forth herein,
(iii) may not be modified, other than in writing signed by each party and (iv)
shall be interpreted and governed by the internal laws of the State of
California. Neither party shall be, nor hold itself out as, the partner, joint
venturer, agent or authorized representative of the other, or take any action or
make any representation for or on behalf of the other party, without that
party's prior written consent
(iii) The Company and TVN anticipate that such additional
funding will be provided by third party loans, if obtainable; provided, however,
TVN may provide such debt funding, but shall not be obligated to provide such
debt funding, on terms substantially comparable to any firm commitment third
party loans, for which TVN will receive debt instruments convertible to equity
of the Company.
7.11 Modification of Liquidation Preference. Within a reasonable time
--------------------------------------
following each additional investment, if any, made by Purchaser, whereby
Purchaser receives additional Series B Preferred Stock, but in no event more
frequently than quarterly, the Company agrees to amend the liquidation
preference provisions of the Company's Certificate of Incorporation to reflect
such new investment.
ARTICLE 8
Miscellaneous
-------------
8.1 Governing Law. This Agreement shall be governed in all respects by
-------------
the laws of the State of Delaware in the United States of America without giving
effect to the conflicts of laws principles thereof.
8.2 Successors and Assigns. Except as otherwise provided in this
----------------------
Agreement, the provisions of this Agreement shall inure to the benefit of, and
be binding upon, the successors, assigns, heirs, executors and administrators of
the parties to this Agreement; provided, however, that the right of the
Purchaser to purchase the Shares shall not be assignable without the prior
written consent of the Company.
8.3 Entire Agreement; Amendment. This Agreement and the other documents
---------------------------
delivered pursuant to this Agreement at the Closing constitute the full and
entire understanding and agreement between the parties with regard to the
subjects hereof and thereof, and supersede all prior agreements and merge all
prior discussions, negotiations, proposals and offers (written or oral) between
them, and no party shall be liable or bound to any other party in any manner by
any warranties, representations or covenants except as specifically set forth
herein or therein. Except as expressly provided
19
<PAGE>
in this Agreement, neither this Agreement nor any term hereof may be amended,
waived, discharged or terminated other than by a written instrument signed by
the party against whom enforcement of any such amendment, waiver, discharge or
termination is sought; provided, however, that holders of at least a majority of
the Shares (or shares of Common Stock issued upon conversion of the Shares) may,
with the written consent of the Company, waive, modify or amend on behalf of all
holders, any provisions hereof benefiting such holders, so long as the effect
thereof will be that all such holders will be treated equally.
8.4 Notices, etc. All notices and other communications required or
-------------
permitted under this Agreement shall be mailed by registered or certified mail,
postage prepaid, or otherwise delivered by hand or by messenger, addressed (a)
if to Purchaser, at Purchaser's address set forth above, or, at such other
address as Purchaser shall have furnished to the Company in writing, or (b) if
to any other holder of any Shares, at such address as such holder shall have
furnished the Company in writing, or, until any such holder so furnishes an
address to the Company, then to and at the address of the last holder of such
Shares who has so furnished an address to the Company, or (c) if to the Company,
one copy should be sent to its offices and addressed to the attention of the
President, or at such other address as the Company shall have furnished to the
Purchaser.
Each such notice or other communication shall for all purposes of this
Agreement be treated as effective or having been given when delivered if
delivered personally, or, if sent by mail, at the earlier of its receipt or 72
hours after the same has been deposited in a regularly maintained receptacle for
the deposit of the United States mail, addressed and postage prepaid as
aforesaid.
8.5 Delays or Omissions. Except as expressly provided in this Agreement,
-------------------
no delay or omission to exercise any right, power or remedy accruing to any
holder of any Shares, upon any breach or default of the Company under this
Agreement, shall impair any such right, power or remedy of such holder nor shall
it be construed to be a waiver of any such breach or default, or an acquiescence
therein, or of or in any similar breach or default thereafter occurring; nor
shall any waiver of any single breach or default be deemed a waiver of any other
breach or default theretofore or thereafter occurring. Any waiver, permit,
consent or approval of any kind or character on the part of any holder of any
breach or default under this Agreement, or any waiver on the part of any holder
of any provisions or conditions of this Agreement, must be in writing and shall
be effective only to the extent specifically set forth in such writing. All
remedies, either under this Agreement or by law or otherwise afforded to any
holder, shall be cumulative and not alternative.
8.6 Expenses. The Company and the Purchaser shall each bear their own
--------
expenses incurred on their behalf with respect to this Agreement and the
transactions contemplated hereby.
8.7 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
8.8 Severability. In the event that any provision of this Agreement
------------
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision; provided that no such severability shall be effective if
it materially changes the economic benefit of this Agreement to any party.
20
<PAGE>
8.9 Titles and Subtitles. The titles and subtitles used in this Agreement
--------------------
are used for convenience only and are not considered in construing or
interpreting this Agreement.
8.10 Dispute Resolution.
------------------
(a) Any claim, controversy or dispute, whether sounding in contract,
statute, tort, fraud, misrepresentation or other legal theory, whenever brought
and whether between the parties to this Agreement or between one of the parties
to this Agreement and the employees, agents or affiliated businesses of the
other party, shall be resolved by arbitration as prescribed in this paragraph.
(b) A single arbitrator engaged in the practice of law shall conduct
the arbitration under the then current commercial arbitration rules of the
American Arbitration Association ("AAA"), unless otherwise provided herein. The
arbitrator shall be selected in accordance with AAA procedures from a list of
qualified (i.e., knowledgeable in the Company's industry) people maintained by
AAA. The arbitration shall be conducted in the regional AAA office in Los
Angeles, California, and all expedited procedures prescribed by the AAA rules
shall apply.
(c) The arbitrator shall only have authority to award compensatory
damages and shall not have authority to award exemplary or punitive damages, or
other non-compensatory damages or any other form of relief; provided, however,
either party may apply to any court having jurisdiction thereof solely for the
entry of injunctive relief to maintain the status quo until such time as the
----------
arbitration award is rendered or the controversy is otherwise resolved. Each
party shall bear its own costs and attorney's fees and the parties shall share
equally the fees and expenses of the arbitration. The arbitrator's decision and
award shall be final and binding, and judgment upon the award rendered by the
arbitrator may be entered in any court having jurisdiction thereof.
(d) If any party files a judicial or administrative action asserting
claims subject to arbitration, as prescribed herein, and another party
successfully stays such action and/or compels arbitration of said claims, the
party filing said action shall pay the other party's costs and expenses incurred
in seeking such stay and/or compelling arbitration, including reasonable
attorneys' fees.
21
<PAGE>
The foregoing Agreement is hereby executed as of the date first above written.
"COMPANY" NEW MEDIA NETWORK, INC.,
a Delaware corporation
By:___________________________________
Name: Ian W. Duffell
Title: President and C.E.O.
By:___________________________________
Name: Alan E. Morelli
Title: Chairman
"PURCHASER" TVN ENTERTAINMENT CORPORATION,
a Delaware corporation
By:___________________________________
Name:_________________________________
Title:________________________________
22
<PAGE>
Exhibit A
Restated Certificate of Incorporation of New Media Network, Inc.
<PAGE>
_____________________________________
RESTATED
CERTIFICATE OF INCORPORATION
OF
NEW MEDIA NETWORK, INC.
_____________________________________
Alan E. Morelli, Secretary, of New Media Network, Inc., a Corporation
organized and existing under the General Corporation Law of the State of
Delaware, in accordance with the provisions of Section 242 and 245 thereof, DOES
HEREBY CERTIFY:
FIRST: The name of this Corporation is New Media Network, Inc. (the
"Corporation"). The Corporation was originally incorporated under the name New
Media Network, Inc. and the original Certificate of Incorporation of the
Corporation was filed with the Secretary of State of the State of Delaware on
January 10, 1996.
SECOND: That the Corporation's Amended and Restated Certificate of
Incorporation (the "Restated Certificate") set forth in the following resolution
has been approved by the Corporation's Board of Directors and stockholders and
was duly adopted in accordance with the provisions of Section 242 and 245 of the
General Corporation Law of the State of Delaware.
NOW, THEREFORE, BE IT RESOLVED, that the Certificate of Incorporation of
this Corporation be, and it hereby is, restated and further amended to read in
its entirety as follows:
"ARTICLE I
The name of this Corporation is New Media Network, Inc.
ARTICLE II
The address of the Corporation's registered office in the State of Delaware
is 1013 Centre Road, Wilmington, Delaware 19805, county of New Castle. The name
of its registered agent at such address is Corporation Service Company.
ARTICLE III
The nature of the business and of the purposes to be conducted and promoted
by the Corporation are to conduct any lawful business, to promote any lawful
purpose, and to engage in any lawful act or activity for which corporations may
be organized under the General Corporation Law of Delaware.
ARTICLE IV
A. This Corporation is authorized to issue two classes of shares of stock
to be designated, respectively, "Common Stock" and "Preferred Stock." The total
number of authorized
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shares of Common Stock is 48,000,000 with a par value of $0.01 per share. The
total number of authorized shares of Preferred Stock is 29,020,106 with a par
value of $0.01 per share. The Preferred Stock may be issued in one or more
series. Of the Preferred Stock, 7,820,804 shares shall be denominated Series A
Preferred Stock ("Series A Preferred") and 21,199,302 shall be denominated
Series B Preferred Stock ("Series B Preferred").
B. The following is a statement of the designations, preferences,
qualifications, limitations, privileges, restrictions and the special or
relative rights granted to or imposed upon the shares of capital stock of the
Corporation:
1. Dividends.
---------
(a) The holders of the Series A Preferred shall be entitled to
receive cumulative cash dividends, prior and in preference to any dividend on
Common Stock or any other class or series of Preferred Stock, at the rate of
$0.0275 per share of Series A Preferred and per annum (as adjusted for any stock
dividends, combinations or splits with respect to such shares that occur after
the date of filing of this Restated Certificate), whenever funds are legally
available and when and as declared by the Board of Directors payable quarterly
on the first days of January, April, July and October, respectively, in each
year with respect to the quarterly dividend period (or portion thereof) ending
on the preceding such respective dividend payment date, to stockholders of
record on the respective date, not exceeding five (5) days preceding such
dividend payment date, fixed for the purpose by the Board of Directors in
advance of payment of each particular dividend. Dividends on the shares of
Series A Preferred shall be cumulative as follows: (A) if issued prior to the
record date for the first dividend on shares of such series, from the date of
issue thereof (B) if issued during the period commencing immediately after a
record date for a dividend on shares of such series and ending on the payment
date for such dividend, from such dividend payment date; and (C) otherwise from
the first day of January, April, July and October preceding the date of issuance
of such shares.
(b) The holders of the Series B Preferred shall be entitled to
receive dividends, prior and in preference to, any dividend on the Common Stock,
at the rate of $0.03 per share of Series B Preferred, per annum (as adjusted for
any stock dividends, combinations or splits with respect to such shares that
occur after the date of filing of this Restated Certificate), whenever funds are
legally available and when and as declared by the Board of Directors. Such
dividends shall be non-cumulative.
2. Liquidation Preference.
----------------------
(a) In the event of any liquidation, dissolution or winding up
of the Corporation, either voluntary or involuntary, the holders of the Series A
Preferred and the Series B Preferred shall be entitled to receive, prior and in
preference to any distribution of any of the assets or surplus funds of the
Corporation to the holders of Common Stock by reason of their ownership thereof,
the amount of $0.343 per share and $0.29 per share, respectively, for each share
of Series A Preferred and Series B Preferred then held by them (each as adjusted
for any stock dividends, combinations or splits with respect to such shares
effective after the date of filing of this Restated Certificate) plus all
accrued or declared but unpaid dividends on each such share. If, upon the
occurrence of such event, the assets and funds thus distributed among the
holders of the Series A
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Preferred and Series B Preferred shall be insufficient to permit the payment to
such holders of the full preferential amount, then the entire assets and funds
of the Corporation legally available for distribution shall be distributed first
to the holders of the Series A Preferred and, after the full preferential amount
owing to the holders of the Series A Preferred shall have been paid, then among
the Series B Preferred, each in proportion to the amount each such holder is
otherwise entitled to receive. Notwithstanding the foregoing, the Corporation
shall have no further obligation to make any payment to the holders of the
Series A Preferred under this Subsection IV.B.2.(a) if the Corporation has
redeemed the Series A Preferred and paid the Initial Redemption Price (as
defined below) to the holders of the Series A Preferred as provided in
Subsection IV.B.5.(a).
(b) After payment has been made to the holders of the Series A
Preferred and Series B Preferred of the full amounts to which they shall be
entitled as provided in Subsection IV.B.2.(a), the entire remaining assets and
funds of the Corporation legally available for distribution, if any, shall be
distributed among the holders of Common Stock in proportion to the shares of
Common Stock then held by each.
(c) (i) For purposes of this Section IV.B.2., a liquidation or
dissolution or winding up of this Corporation shall be deemed to be occasioned
by, or to include, without limitation, (A) the acquisition of the Corporation by
another entity by means of any transaction or series of related transactions
(including, without limitation, any reorganization, merger or consolidation but,
excluding any merger effected exclusively for the purpose of changing the
domicile of the Corporation); or (B) a sale of all or substantially all of the
assets of the Corporation, in any transaction or series of related transactions,
unless the Corporation's stockholders of record as constituted immediately prior
to such acquisition or sale will, immediately after acquisition or sale (by
virtue of securities issued as consideration for the Corporation's acquisition
or sale or otherwise) hold at least a majority of the voting power of the
surviving or acquiring entity; or (C) one or more transfers of the capital stock
of the Corporation which results, singly or in the aggregate, in a transfer of
more than fifty percent (50%) of the voting power of the Corporation as of June
30, 1999, other than transfers by any stockholder of voting power to any of such
stockholder's affiliates (as such term is defined in Rule 12(b)(2) promulgated
under the Securities Exchange Act of 1934, as amended, or such successor
regulation) (any of (A), (B) or (C) shall be referred to herein as a "Sale
Event").
For purposes of this Section IV.B.2., the term "affiliates" shall
include any individual, partnership, corporation, limited liability company,
business trust, joint stock company, trust, unincorporated association or joint
venture which directly or indirectly, is in control of, is controlled by, or is
under common control with, holder. For purposes of the preceding sentence, the
term "control" shall mean the power, directly or indirectly, to (i) vote 51% or
more of the voting securities of an entity, or (ii) direct or cause the
direction of the management or policies of an entity as the trustee, general
partner or managing member of such entity.
(ii) In any of such events, if the consideration received by
the Corporation is other than cash, its value shall be deemed its fair market
value. Any securities shall be valued as follows:
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(A) Securities not subject to investment letter or
other similar restrictions on free marketability:
(1) If traded on a securities exchange or through
NASDAQ-NMS, the value shall be deemed to be the average of the closing prices of
the securities on such exchange over the thirty-day period ending three (3) days
prior to the closing;
(2) If actively traded over-the-counter, the
value shall be deemed to be the average of the closing bid or sale prices
(whichever is applicable) over the thirty-day period ending three (3) days prior
to the closing; and
(3) If there is no active public market, the
value shall be the fair market value thereof, as determined by an independent
appraiser or valuation firm mutually acceptable to the majority of the
stockholders of the Series A Preferred and the holders of the Series B
Preferred.
(B) The method of valuation of securities subject to
investment letter or other restrictions on free marketability (other than
restrictions arising solely by virtue of a stockholder's status as an affiliate
or former affiliate) shall be to make an appropriate discount from the market
value thereof, as determined by an independent appraiser or valuation firm
mutually acceptable to the majority of the stockholders of the Series A
Preferred and the holders of the Series B Preferred.
(iii) In the event the requirements of this Subsection
IV.B.2.(c) are not complied with, this Corporation shall forthwith either:
(A) cause such liquidation, dissolution or winding up
to be postponed until such time as the requirements of this Section IV.B.2. have
been complied with; or
(B) cancel such transaction, in which event the
rights, preferences and privileges of the holders of the Preferred Stock shall
revert to and be the same as such rights, preferences and privileges existing
immediately prior to the date of the first notice referred to in Subsection
IV.B.2.(e) hereof.
(d) In the event of a liquidation, dissolution or winding up of
the Corporation, each holder of shares of Preferred Stock shall have the right
to preference upon the distribution of assets as provided in this Section
IV.B.2., or alternatively at such holder's election, shall have the right to
convert to shares of Common Stock as provided in Section IV.B.4. and receive a
distribution of assets as holders of Common Stock.
(e) In the event of any liquidation, dissolution or winding up of
the Corporation, the Corporation shall, within ten (10) days after the date the
Board of Directors approves such action, or twenty (20) days prior to any
stockholders' meeting called to approve such action, or twenty (20) days after
the commencement of an involuntary proceeding, whichever is earlier, give each
holder of shares of Preferred Stock initial written notice of the proposed
action. Such initial written notice shall describe the material terms and
conditions of such proposed action, including a description of the stock, cash
and property to be received by the holders of shares of
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Preferred Stock upon consummation of the proposed action and the date of
delivery thereof. If any material change in the facts set forth in the initial
notice shall occur, the Corporation shall promptly give written notice to each
holder of shares of Preferred Stock of such material change.
(f) The Corporation shall not consummate any liquidation,
dissolution or winding up of the Corporation before the expiration of twenty
(20) days after the mailing of the initial notice or ten (10) days after the
mailing of any subsequent written notice, whichever is later; provided that any
such 20-day or 10-day period may be shortened upon the written consent of the
holders of at least a majority of the outstanding shares of each class of
Preferred Stock, voting separately.
3. Voting Rights.
-------------
(a) Except with respect to the election of directors of the
Corporation, the holder of shares of Preferred Stock shall be entitled to the
number of votes equal to the number of shares of Common Stock into which such
share of Preferred Stock could be converted (at the time of the vote) and shall
have voting rights and powers equal to the voting rights and powers of such
Common Stock (except as otherwise expressly provided herein or as required by
law), the Preferred Stock and Common Stock voting together as a single class,
and shall be entitled to notice of any stockholders' meeting in accordance with
the Bylaws of the Corporation. Fractional votes shall not, however, be
permitted and any fractional voting rights resulting from the above formula with
respect to any one holder (after aggregating all shares into which shares of
Preferred Stock held by each holder could be converted) shall be rounded to a
nearest whole number (with one-half being rounded upward).
(b) Notwithstanding Subsection IV.B.3.(a) above, for so long as
any shares of Preferred Stock shall be outstanding, election of directors of the
Corporation shall be as provided in the remainder of this paragraph. The holders
of Common Stock shall have the right, voting together as a separate class, to
elect one (1) director to the Board of Directors. The Holders of Series A
Preferred shall have the right, voting together as a single class, to elect one
(1) director to the Board of Directors. The holders of the Series B Preferred
shall have the right, voting together as a single class, to elect three (3)
directors to the Board of Directors. In the case of any vacancy in the office of
a director elected by the holders of a class or series as aforesaid; such
vacancy shall be filled by the remaining director or directors elected by that
class or series, if any, or if no such director remains, by the affirmative vote
of the holders of shares of the applicable class or series. Any director elected
by the holders of a class or series of stock may be removed, either with or
without cause, by and only by the affirmative vote of the holders of the shares
of the class or series of stock which elected such director or directors, and
any vacancy thereby created may be filled by a vote of that class or series of
stock.
4. Conversion Rights. The holders of the Preferred Stock shall have
-----------------
the conversion rights as follows:
(a) Right to Convert. Each share of the Series B Preferred
----------------
shall be convertible, at the option of the holder thereof, at any time after the
date of issuance of such share (the "Original Issue Date"), and each share of
the Series A Preferred shall be convertible, at the
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option of the holder thereof, at any time after June 30, 2002, at the office of
this Corporation or any transfer agent for such shares, into such number of
fully paid and nonassessable shares of Common Stock determined: (i) in the case
of the Series A Preferred, by dividing $0.343 plus any accrued or declared but
unpaid dividends by the Conversion Price applicable to such share, determined as
hereinafter provided, in effect on the date the certificate is surrendered for
conversion (the "Series A Conversion Rate"), subject to adjustment as
hereinafter provided and (ii) in the case of the Series B Preferred, by dividing
$0.29 by the Conversion Price applicable to such share, determined as
hereinafter provided, in effect on the date the certificate is surrendered for
conversion (the "Series B Conversion Rate"), subject to adjustment as
hereinafter provided, subject to adjustment as hereinafter provided. (The Series
A Conversion Rate or Series B Conversion Rate shall be referred to as the
"Conversion Rate.") The price at which shares of Common Stock shall be
deliverable upon conversion of shares of Preferred Stock (the "Conversion
Price") shall initially be, in the case of the Series A Preferred, $0.343 per
share of Common Stock (the "Series A Conversion Price") and in the case of the
Series B Preferred, $0.29 plus any accrued or declared but unpaid dividends per
share of Common Stock (the "Series B Conversion Price"). Each such initial
Conversion Price, if applicable, shall be adjusted as hereinafter provided. (The
Series A Conversion Price or Series B Conversion Price may be referred to as the
"Conversion Price.")
(b) Automatic Conversion. Each share, Series A and B of
--------------------
Preferred Stock shall automatically be converted into shares of Common Stock at
the then-effective Conversion Price immediately upon the closing of the sale of
the Corporation's Common Stock in a firm commitment, underwritten public
offering registered under the Securities Act of 1933, as amended (other than a
registration relating solely to a transaction under Rule 145 under such Act (or
any successor thereto) or to an employee benefit plan of the Corporation), (i)
at a public offering price (prior to underwriter commissions and expenses) equal
to or exceeding $5.00 per share of Common Stock (as adjusted for any stock
dividends, combinations or splits with respect to such shares occurring after
the date of filing of this Restated Certificate), and with aggregate proceeds to
the Corporation (before deduction for underwriter commissions and expenses
relating to the issuance, including, without limitation, fees of the
Corporation's counsel) of $15,000,000 or more, or (ii) if at a lower per share
price or for lower aggregate proceeds upon the written consent of the holders of
at least a majority of the then-outstanding shares of each series of Preferred
Stock.
(c) Mechanics of Conversion. Before any holder of Preferred
-----------------------
Stock shall be entitled to convert the same into shares of Common Stock, he
shall surrender the certificate or certificates therefor, duly endorsed, or
assigned to the Corporation, or in blank, stock, and shall give written notice
to the Corporation at such office that he elects to convert the same and shall
state therein the name or names in which he wishes the certificate or
certificates for shares of Common Stock to be issued. The Corporation shall, as
soon as practicable thereafter, issue and deliver at such office to such holder
of Preferred Stock, a certificate or certificates for the number of shares of
Common Stock to which he shall be entitled as aforesaid. Such conversion shall
be deemed to have been made immediately prior to the close of business on the
date of surrender of the shares of Preferred Stock to be converted, and the
person or persons entitled to receive the shares of Common Stock issuable upon
such conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock on such date.
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(d) Adjustments for Subdivisions or Combinations of or Stock
--------------------------------------------------------
Dividends on Common Stock. In the event the outstanding shares of Common Stock
- -------------------------
shall be subdivided (by stock split or otherwise), into a greater number of
shares of Common Stock, or the Corporation at any time or from time to time
after the Original Issue Date shall declare or pay any dividend on the Common
Stock payable in Common Stock, each Conversion Rate then in effect shall,
concurrently with the effectiveness of such subdivision or stock dividend, be
proportionately increased based on the ratio of (A) the number of shares of
Common Stock outstanding immediately after such subdivision or stock dividend to
(B) the number of shares of Common Stock outstanding immediately prior to such
subdivision or stock dividend. In the event the outstanding shares of Common
Stock shall be combined or consolidated, by reclassification or otherwise, into
a lesser number of shares of Common Stock, the Conversion Rate then in effect
shall, concurrently with the effectiveness of such combination or consolidation,
be proportionately decreased on the same basis.
(e) Adjustments for Recapitalization, Reclassification, Exchange
------------------------------------------------------------
and Substitution. If at any time or from time to time the Common Stock issuable
- ----------------
upon conversion of the Preferred Stock shall be changed into the same or a
different number of shares of any other class or classes of stock, whether by
recapitalization, capital reorganization, reclassification or otherwise (other
than a subdivision, combination of shares or merger or sale of assets
transaction provided for in Subsection IV.B.4.(d) or Subsection IV.B.2.(c)),
then concurrently with the effectiveness of such recapitalization,
reorganization or reclassification, the Preferred Stock shall thereafter be
convertible into, in lieu of the number of shares of Common Stock which the
holders thereof would have been entitled to receive prior to such
recapitalization, reorganization or reclassification, a number of shares of such
other class or classes of stock equivalent to the number of shares of such other
class or classes of stock that a holder of the number of shares of Common Stock
into which the Preferred Stock would have been converted immediately before such
recapitalization, reorganization or reclassification would have received in
connection with such recapitalization, reorganization or reclassification. In
addition, to the extent applicable in any reorganization or recapitalization,
provision shall be made so that the holders of the Preferred Stock shall
thereafter be entitled to receive upon conversion of the Preferred Stock the
number of shares of stock or other securities or property of the Corporation or
otherwise, to which a holder of the number of shares of Common Stock deliverable
upon conversion of the Preferred Stock immediately prior to such
recapitalization or reorganization would have been entitled on such
reorganization or recapitalization.
(f) Adjustment of Conversion Price for Dividends, Distributions
-----------------------------------------------------------
and Common Stock Equivalents. In the event the Corporation at any time or from
- ----------------------------
time to time after the Original Issue Date shall make or issue, or fix a record
date for the determination of holders of Common Stock entitled to receive a
dividend or other distribution payable in additional shares of Common Stock or
other securities or rights (hereinafter referred to as "Common Stock
Equivalents") convertible into or entitling the holder thereof to receive
additional shares of Common Stock without payment of any consideration by such
holder for such Common Stock Equivalents or the additional shares of Common
Stock, then and in each such event the maximum number of shares (as set forth in
the instrument relating thereto without regard to any provisions contained
therein for a subsequent adjustment of such number) of Common Stock issuable in
payment of such dividend or distribution or upon conversion or exercise of such
Common Stock Equivalents shall be deemed to be issued and outstanding as of the
time of such issuance or, in the event such a record date shall have been fixed,
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as of the close of business on such record date. In each such event, the
Conversion Price for the Preferred Stock shall be decreased as of the time of
such issuance or, in the event such a record date shall have been fixed, as of
the close of business on such record date, by dividing the Conversion Price for
such series by a fraction,
(i) the numerator of which shall be the total number of
shares of Common Stock issued and outstanding or deemed to be issued and
outstanding immediately prior to the time of such issuance on the close of
business on such record date plus the number of shares of Common Stock issuable
in payment of such dividend or distribution or upon conversion or exercise of
such Common Stock Equivalents; and
(ii) the denominator of which shall be the total number of
shares of Common Stock issued and outstanding or deemed to be issued and
outstanding immediately prior to the time of such issuance on the close of
business on such record date provided, however, (A) if such record date shall
have been fixed and such dividend is not fully paid or if such distribution is
fully made on the date fixed therefor, the Conversion Price for such series
shall be recomputed accordingly as of the close of business on such record date
and thereafter the Conversion Price for such series shall be adjusted pursuant
to this Subsection IV.B.4.(f) as of the time of actual payment of such dividends
or distribution; (B) if such Common Stock Equivalents provide, with the passage
of time or otherwise, for any decrease in the number of shares of Common Stock
issuable upon conversion or exercise thereof, the Conversion Price for such
series shall, upon any such decrease becoming effective, be recomputed to
reflect such decrease insofar as it affects the rights of conversion or exercise
of the Common Stock Equivalents then outstanding; and (C) upon the expiration of
any rights or conversion or exercise under any unexercised Common Stock
Equivalents, the Conversion Price for such series computed upon the original
issue thereof shall, upon such expiration, be recomputed as if the only
additional shares of Common Stock issued were the shares of such stock, if any,
actually issued upon the conversion or exercise of such Common Stock
Equivalents.
(g) Adjustment of Conversion Price for Subsequent Sales Below
---------------------------------------------------------
Conversion Price. If the Corporation shall issue, after the date upon which any
- ----------------
shares of Preferred Stock were first issued (the "Purchase Date" with respect to
such series), any Additional Stock (as defined below) without consideration or
for a consideration per share less than the Conversion Price in effect
immediately prior to the issuance of such Additional Stock, then such Conversion
Price shall be adjusted by multiplying such Conversion Price by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such issuance plus the number of shares of Common Stock
that the aggregate consideration received by the Corporation for such issuance
would purchase at the Conversion Price in effect immediately prior to the
issuance of such Additional Stock and the denominator of which shall be the
number of shares of Common Stock outstanding immediately prior to such issuance
plus the number of shares of such Additional Stock so issued. For purposes of
this Subsection IV.B.4.(g) and Subsection IV.B.4.(f), the shares of issued or
issuable Common Stock that are excluded from the definition of Additional Stock
will be deemed outstanding.
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(i) No adjustment of the Conversion Price for the
Preferred Stock shall be made in an amount less than one cent per share, and any
adjustments which are not required to be made by reason of this sentence shall
not be carried forward nor taken into account in any subsequent adjustment.
Except to the limited extent provided for in Subsections IV.B.4.(g)(iv)(3) and
IV.B.4.(g)(iv)(4), no adjustment of such Conversion Price pursuant to this
Subsection IV.B.4.(g)(i) shall have the effect of increasing the Conversion
Price above the Conversion Price in effect immediately prior to such adjustment.
(ii) In the case of the issuance of Common Stock for cash,
the consideration shall be deemed to be the amount of cash paid therefor before
deducting any reasonable discounts, commissions or other expenses allowed, paid
or incurred by this Corporation for any underwriting or otherwise in connection
with the issuance and sale thereof.
(iii) In the case of the issuance of the Common Stock for a
consideration in whole or in part other than cash, the consideration other than
cash shall be deemed to be the fair value thereof as determined by the Board of
Directors irrespective of any accounting treatment.
(iv) In the case of the issuance, whether before, on or
after the Purchase Date of such series of Preferred Stock, of options to
purchase or rights to subscribe for Common Stock, securities by their terms
convertible into or exchangeable for Common Stock or options to purchase or
rights to subscribe for such convertible or exchangeable securities (which are
not excluded from the definition of Additional Stock), the following provisions
shall apply:
(1) The aggregate maximum number of shares of Common
Stock deliverable upon exercise of such options to purchase or rights to
subscribe for Common Stock shall be deemed to have been issued at the time such
options or rights were issued and for a consideration equal to the consideration
(determined in the manner provided in Subsections IV.B.4.(g)(ii) and
IV.B.4.(g)(iii), if any, received by the Corporation upon the issuance of such
options or rights plus the minimum purchase price provided in such options or
rights for the Common Stock covered thereby.
(2) The aggregate maximum number of shares of Common
Stock deliverable upon conversion of or in exchange for any such convertible or
exchangeable securities or upon the exercise of options to purchase or rights to
subscribe for such convertible or exchangeable securities and subsequent
conversion or exchange thereof shall be deemed to have been issued at the time
such securities were issued or such options or rights were issued and for a
consideration equal to the consideration, if any, received by the Corporation
for any such securities and related options or rights (excluding any cash
received on account of accrued interest or accrued dividends), plus the
additional consideration, if any, to be received by the Corporation upon the
conversion or exchange of such securities or the exercise of any related options
or rights (the consideration in each case to be determined in the manner
provided in Subsections IV.B.4.(g)(ii) and IV.B.4.(g)(iii)).
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(3) In the event of any change in the number of shares
of Common Stock deliverable or any increase in the consideration payable to this
Corporation upon exercise of such options or rights or upon conversion of or in
exchange for such convertible or exchangeable securities, including, but not
limited to, a change resulting from the antidilution provisions thereof, the
Conversion Price of the Preferred Stock obtained with respect to the adjustment
at the time it was made upon the issuance of such options, rights or securities,
and any subsequent adjustments based thereon, shall be recomputed to reflect
such change, but no further adjustment shall be made for the actual issuance of
Common Stock or any payment of such consideration upon the exercise of any such
options or rights or the conversion or exchange of such securities.
(4) Upon the expiration of any such options or rights,
the termination of any such rights to convert or exchange or the expiration of
any options or rights related to such convertible or exchangeable securities,
the Conversion Price of the Preferred Stock obtained with respect to the
adjustment which was made upon the issuance of such options, rights or
securities or options or rights related to such securities, and any subsequent
adjustments based thereon, shall be recomputed to reflect the issuance of only
the number of shares of Common Stock actually issued upon the exercise of such
options or rights, upon the conversion or exchange of such securities or upon
the exercise of the options or rights related to such securities. Upon the
expiration of any such options or rights, the termination of any such rights to
convert or exchange or the expiration of any options or rights related to such
convertible or exchangeable securities, only the number of shares of Common
Stock actually issued upon the exercise of such options or rights, upon the
conversion or exchange of such securities or upon the exercise of the options or
rights related to such securities shall continue to be deemed to be issued.
(5) All Common Stock deemed issued pursuant to this
Subsection IV.B.4.(g)(iv) shall be considered issued only at the time of its
deemed issuance and any actual issuance of such stock shall not be an actual
issuance or a deemed issuance of the Corporation's Common Stock under the
provisions of this Subsection IV.B.4.(g).
(h) Additional Stock. "Additional Stock" shall mean any shares
----------------
of Preferred Stock or Common Stock issued by this Corporation on or after the
Purchase Date other than:
(i) shares issued or issuable pursuant to a transaction
described in Subsections IV.B.4.(d) through IV.B.4.(e) hereof for which an
adjustment has already been made pursuant to such Section IV.B.4.;
(ii) shares of Common Stock, as adjusted for stock splits,
reclassifications and the like, reserved for issuance to officers, directors,
employees and consultants of this Corporation directly or pursuant to a stock
option plan or restricted stock plan approved by the stockholders and directors
of this Corporation;
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(iii) capital stock, or options or warrants to purchase
capital stock issued in connection with bona fide equipment lease financings or
similar transactions, provided that any such transaction has been unanimously
approved by the Corporation's Board of Directors;
(iv) capital stock or warrants or options to purchase
capital stock issued to vendors or issued in connection with bona fide
acquisitions, strategic licensing transactions, mergers or similar transactions,
the terms of which are unanimously approved by the Board of Directors of the
Corporation;
(v) capital stock or options or warrants to purchase
capital stock the issuance of which is determined to be excluded from the
definition of "Additional Stock" upon the written consent of the holders of at
least a majority of each series of the then outstanding Preferred Stock (without
any requirement of an amendment to this Restated Certificate of Incorporation);
and
(vi) shares issued or issuable upon conversion of any
series of Preferred Stock.
(i) No Impairment. The Corporation will not, by amendment of
-------------
its Certificate of Incorporation or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by the Corporation, but
will at all times in good faith assist in the carrying out of all the provisions
of this Section IV.B.4. and in the taking of all such action as may be necessary
or appropriate in order to protect the Conversion Rights of the holders of the
Preferred Stock against impairment.
(j) Certificates as to Adjustments. Upon the occurrence of each
------------------------------
adjustment or readjustment of any Conversion Price pursuant to this Section
IV.B.4., the Corporation at its expense shall promptly compute such adjustment
or readjustment in accordance with the terms hereof and prepare and furnish to
each holder of Preferred Stock, as the case may be, a certificate setting forth
such adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation shall, upon the written
request at any time of any holder of Preferred Stock, furnish or cause to be
furnished to such holder a like certificate setting forth (i) such adjustments
and readjustments, (ii) the applicable Conversion Price at the time in effect,
and (iii) the number of shares of Common Stock and the amount, if any, of other
property which at the time would be received upon the conversion of such
Preferred Stock.
(k) Notices of Record Date. In the event of any taking by the
----------------------
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any security or
right convertible into or entitling the holder thereof to receive additional
shares of Common Stock, or any right to subscribe for, purchase or otherwise
acquire any shares of stock of any class or any other securities or property, or
to receive any other right, the Corporation shall mail to each holder of
Preferred Stock at least twenty (20) days prior to the date specified therein, a
notice specifying the date on which any such record is to be taken for the
purpose of such dividend,
11
<PAGE>
distribution, security or right, and the amount and character of such dividend,
distribution, security or right.
(l) Reservation of Stock Issuable Upon Conversion. The
---------------------------------------------
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Preferred Stock, such number of its shares of
Common Stock as shall from time to time be sufficient to effect the conversion
of all outstanding shares of the Preferred Stock; and if at any time the number
of authorized but unissued shares of Common Stock shall not be sufficient to
effect the conversion of all then outstanding shares of the Preferred Stock, the
Corporation will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purpose,
including, without limitation, engaging in best efforts to obtain the requisite
stockholder approval of any necessary amendment to this Certificate.
(m) Fractional Shares. No fractional shares shall be issued
-----------------
upon the conversion of any share or shares of Preferred Stock. All shares of
Common Stock (including fractions thereof) issuable upon conversion of more than
one share of Preferred Stock by a holder thereof shall be aggregated for
purposes of determining whether the conversion would result in the issuance of
any fractional share. If, after the aforementioned aggregation, the conversion
would result in the issuance of a fraction of a share of Common Stock, the
Corporation shall, in lieu of issuing any fractional share, pay the holder
otherwise entitled to such fraction a sum in cash equal to the fair market value
of such fraction on the date of conversion (as determined in good faith by the
Board of Directors of the Corporation).
5. Redemption.
----------
(a) Redemption. The Corporation shall have the right, but not
----------
the obligation, at any time prior to June 30, 2002, to redeem, from any source
of funds legally available therefor, all or part of the Series A Preferred, at a
price of FOUR MILLION THREE HUNDRED THOUSAND DOLLARS ($4,300,000) plus all
accrued or declared and unpaid dividends thereon, multiplied by a fraction, the
numerator of which shall be the number of shares of Series A Preferred to be
redeemed and the denominator of which shall be 7,820,804 (the "Initial
Redemption Price"). The Corporation shall have the obligation to redeem all of
the then-outstanding Series A Preferred at the Initial Redemption Price,
immediately upon the occurrence of a Sale Event on or prior to June 30, 2002.
(b) Notice. In the event that the Corporation wishes to redeem
------
the Series A Preferred, the Corporation shall mail written notice thereof to the
holders of the Series A Preferred, postage prepaid, stating, at a minimum, the
number of preferred shares which the Corporation elects to redeem and the
consideration therefor.
(c) Consideration. The Corporation shall effect such redemption
-------------
by paying cash therefor, due and payable within fifteen (15) days following the
Corporation's written notice to the holders of the Series A Preferred of the
intention to so redeem.
12
<PAGE>
(d) Surrender. Upon receipt of the Corporation's notice to
---------
redeem the Series A Preferred, the holders of the Series A Preferred shall
surrender the certificate or certificates representing the Series A Preferred to
the Corporation (at the principal executive office of the Corporation), and
thereupon the consideration for such shares shall be paid. From and after the
time of delivery, and unless there shall have been a default in payment
therefor, all rights to further dividends on the Series A Preferred shall cease
to exist, all rights of the stockholders of the Series A Preferred as a holders
of the Series A Preferred (except the right to receive the applicable
consideration, without interest, upon surrender of the certificates) shall cease
and terminate with respect to such shares, and such shares shall not thereafter
be transferred on the books of the Corporation or be deemed to be outstanding
for any purpose whatsoever.
(e) (i) If (A) the Corporation has not repurchased all of the
Series A Preferred within three (3) years following June 30, 1999, (B) the
Corporation has not redeemed all of the Series A Preferred within such three (3)
year period, and (C) the Corporation has not issued shares of its capital stock
in a public offering registered under the Securities Act of 1933, as amended
(other than a registration relating solely to a transaction under Rule 145 under
such Act (or any successor regulation thereto) or to an employee benefit plan of
the Corporation) ("IPO") by the end of such three (3) year period; or (ii)
immediately upon an event of bankruptcy, dissolution or insolvency involving the
Corporation; the holders of the Series A Preferred shall have the right, but not
the obligation, to have the Corporation mandatorily redeem all or a portion of
the Series A Preferred for a price of TWO MILLION SIX HUNDRED EIGHTY THOUSAND
DOLLARS ($2,680,000), plus all accrued but unpaid dividends thereon, multiplied
by a fraction, the numerator of which shall be the number of shares of Series A
Preferred to be redeemed and the denominator of which shall be 7,820,804. Such
redemption purchase price shall be paid by the Corporation to the holders of the
Series A Preferred, at the Corporation's sole option, in cash paid immediately,
or in equal payments quarterly over a five (5) year period with interest
continuing to accrue on the unpaid balance at EIGHT PERCENT (8%) per annum
pursuant to a promissory note reflecting such terms and containing other
customary terms and conditions ("Promissory Note"). The Promissory Note shall,
by its terms, accelerate and be due immediately upon the first to occur of (i)
an IPO of the Corporation, (ii) a Sale Event or (iii) an event of bankruptcy,
dissolution or insolvency involving the Corporation.
(f) In the event that the holders of Series A Preferred wish to
exercise the redemption rights set forth in Subsection IV.B.5.(e) above, such
holders shall notify the Corporation not less than fifteen (15) nor more than
thirty (30) days prior to the date of such exercise (the "Sale Notice"). The
Sale Notice shall state the date on which such sale shall be consummated (the
"Exercise Date"), the number of shares such holders elect to have the
Corporation redeem, and the redemption sales price set forth with interest to
the Exercise Date. Upon the Corporation's receipt of a Sale Notice, the
Corporation shall notify said holders within five (5) days whether it elects to
pay the redemption sales price in full on the Exercise Date, or in installments
with interest, as specified in Subsection IV.B.5.(e) above. On the Exercise
Date, as well as on dates where funds are tendered pursuant to any installment
payments by the Corporation, the selling Series A Preferred holders shall
deliver one or more certificates representing the applicable shares being sold,
duly endorsed for transfer upon receipt of payment therefor. If the shares sold
in any such transaction represent less than the total number of shares of any
such certificate, the Corporation shall cancel same and issue
13
<PAGE>
to each of the holders a new certificate representing their respective remaining
shares.
6. Amendment or Waiver. Any term relating to the Preferred Stock
-------------------
may be amended and the observance of any term relating to the Preferred Stock
may be waived (either generally or in a particular instance and either
retroactively or prospectively) only with the vote or written consent of holders
of at least a majority of the shares of each series of the Preferred Stock then
outstanding and the Corporation. Any amendment or waiver so effected shall be
binding upon the Corporation and any holder of shares of the Preferred Stock.
7. Restrictions and Limitations.
----------------------------
(a) So long as any shares of Preferred Stock remain outstanding,
the Corporation shall not, without the vote or written consent by the holders of
at least a majority of the then outstanding shares of Preferred Stock voting as
a single class, except as otherwise required by law:
(i) alter or change any of the rights, preferences or
privileges of the Series A Preferred or Series B Preferred;
(ii) increase or decrease (other than by redemption or
conversion) the total number of authorized shares of Preferred Stock of the
Corporation or the total numbers of such shares of Preferred Stock designated
Series A Preferred or Series B Preferred Stock;
(iii) authorize or issue, or obligate itself to issue, any
other equity security senior to or on a parity with the Series A Preferred or
Series B Preferred Stock as to dividend or redemption rights, liquidation
preferences, conversion rights, voting rights or otherwise, or create any
obligation or security convertible into or exchangeable for, or having any
option rights to purchase Preferred Stock or any such equity security which is
senior to or on a parity with the Series A Preferred or Series B Preferred;
(iv) purchase, redeem or otherwise acquire (or pay into or
set aside for a sinking fund for such purpose), any of the Common Stock (or
other capital stock or rights to acquire capital stock) of the Corporation,
provided, however, that this restriction shall not apply to the repurchase of
shares of Common Stock from directors, officers, consultants or employees of the
Corporation or any subsidiary pursuant to agreements approved by the
Corporation's Board of Directors under which the Corporation has the option to
repurchase such shares upon the occurrence of certain events, including
termination of employment or services;
(v) issue dividends or other distributions on any shares
of capital stock of the Corporation or redeem or otherwise repurchase any such
shares or securities exchangeable, exercisable or convertible into such shares;
(vi) effect a reclassification or recapitalization of the
outstanding capital stock of the Corporation;
(vii) effect a merger or consolidation of the Corporation or
its subsidiary (other than to change its domicile or to effect a short-form
merger of the Corporation with
14
<PAGE>
a subsidiary that is at least 90% owned by the Corporation) with any other
entity where the stockholders of the Corporation before such merger or
consolidation would hold less than a majority of the surviving entity;
(viii) sell, convey, or otherwise dispose of, all or
substantially all of the property or business of the Corporation in any
transaction or series of related transactions;
(ix) issue any capital stock (or rights to acquire capital
stock) of the Corporation for a price that is less than the fair market value
thereof as determined in good faith by the Board of Directors;
(x) change the number of members of the Board of
Directors; or
(xi) amend or waive any provision of this Article IV.
(b) So long as any shares of Series A Preferred remain
outstanding, the Corporation shall not, without the vote or written consent by
the holders of at least a majority of the Series A Preferred:
(i) materially and adversely alter or change any of the
rights, preferences or privileges of the Series A Preferred, other than such
alterations or changes which affect all of the outstanding shares of Preferred
Stock evenly on a pro rata basis; or
(ii) amend or waive any provision of Section IV.B.5.
8. Notices. Any notice required by the provisions of this Section
-------
IV.B. to be given to the holders of shares of Preferred Stock shall be deemed
given if deposited in the United States mail, postage prepaid, and addressed to
each holder of record at his address appearing on the books of the Corporation
at such time.
C. Registered Owners. The Corporation shall be entitled to treat the
-----------------
person in whose name any share, right or option is registered as the owner
thereof, for all purposes, and shall not be bound to recognize any equitable or
other claim to or interest in such share, right or option on the part of any
other person, whether or not the Corporation shall have notice thereof, save as
may be expressly provided by the laws of the State of Delaware.
ARTICLE V
For the management of the business and for the conduct of the affairs of
the Corporation, and in further definition, limitation and regulation of the
powers of the Corporation, of its directors and of its stockholders or any class
thereof, as the case may be, it is further provided that:
(a) The management of the business and the conduct of the affairs of
the Corporation shall be vested in its Board of Directors. The Board of
Directors of the Corporation shall consist of five (5) members unless changed in
accordance with the provisions of this Certificate of Incorporation. Except as
may otherwise be required by law and subject to the terms of any agreement to
the contrary between the Corporation and its stockholders, vacancies in the
Board of
15
<PAGE>
Directors of the Corporation and newly created directorships resulting from any
increase in the authorized number of directors may be filled by a majority of
the directors then in office, though less than a quorum, or by a sole remaining
director.
(b) The directors of the Corporation need not be elected by written
ballot unless the Bylaws so provide.
ARTICLE VI
The Board of Directors may from time to time make, amend, supplement
or repeal the Bylaws except as provided therein; provided, however, that the
stockholders may change or repeal any Bylaw adopted by the Board of Directors by
the affirmative vote of the holders of a majority of the voting power of all of
the then outstanding shares of the capital stock of the Corporation; and,
provided further, that no amendment or supplement to the Bylaws adopted by the
Board of Directors shall vary or conflict with any amendment or supplement thus
adopted by the stockholders.
ARTICLE VII
A. No director shall have any personal liability to the Corporation or
its stockholders for any monetary damages for breach of fiduciary duty as a
director, except that this Article shall not eliminate or limit the liability of
each director (i) for any breach of such director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware General Corporation Law, or (iv) for any transaction
from which such director derived an improper personal benefit.
B. It being the intention of the foregoing provision to eliminate the
liability of the Corporation's directors to the fullest extent permitted by
Section 102(b)(7) of the General Corporation Law of the State of Delaware, as
amended from time to time, any repeal or modification of the foregoing Section
VII.A. of this Article VII by the stockholders of the Corporation shall not
adversely affect any right or protection of a director of the Corporation
existing at the time of such repeal or modification.
C. If the General Corporation Law of the State of Delaware is amended
after approval by the stockholders of this Article VII to authorize corporate
action further eliminating or limiting the personal liability of directors, then
a director of the Corporation, in addition to the circumstances in which he is
not now personally liable, shall be free of liability to the fullest extent
permitted by the General Corporation Law of the State of Delaware as so amended.
D. Each director, officer, employee and agent, past or present, of the
Corporation, and each person who serves or may have served at the request of the
Corporation as a director, trustee, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, and their
respective heirs, administrators and executors, shall be indemnified by the
Corporation in accordance with, and to the fullest extent permitted by, the
provisions of the General Corporation Law of the State of Delaware as it may
from time to time be amended. The provisions of this
16
<PAGE>
Section D shall apply to any member of any committee appointed by the Board of
Directors as fully as though such person shall have been an officer or director
of the Corporation.
E. The provisions of this Article VII shall be in addition to and not in
limitation of any other rights, indemnities, or limitations of liability to
which any director or officer may be entitled, as a matter of law or under the
Bylaws of the Corporation.
F. The Corporation shall pay expenses incurred by an officer or director
in defending a civil or criminal action, suit or proceeding in advance of the
final disposition of such action, suit or proceeding upon receipt of any
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the Corporation as authorized in this Certificate of Incorporation.
G. Neither any amendment nor repeal of this Article VII, nor the adoption
of any provision of this Certificate of Incorporation inconsistent with this
Article VII, shall eliminate or reduce the effect of this Article VII, in
respect of any matter occurring, or any cause of action, suit or claim accruing
or arising or that, but for this Article VII, would accrue or arise, prior to
such amendment, repeal or adoption of an inconsistent provision."
[Signature page follows]
17
<PAGE>
IN WITNESS WHEREOF, this Restated Certificate of Incorporation has been
executed on behalf of the Corporation by Alan E. Morelli, its Secretary, this
30th day of June, 1999.
NEW MEDIA NETWORK, INC.
By:____________________________________
Alan E. Morelli, Secretary
18
<PAGE>
Exhibit B
Disclosure Statement of New Media Network, Inc.
<PAGE>
Exhibit C
Stockholder List of New Media Network, Inc.
COMMON STOCK HOLDERS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Stockholder Number of Shares
- --------------------------------------------------------------------------------
<S> <C>
Ian Duffell 3,600,000
- --------------------------------------------------------------------------------
Michael North 106,000
- --------------------------------------------------------------------------------
Harrick Ahn 30,432
- --------------------------------------------------------------------------------
David Augustine 328,332
- --------------------------------------------------------------------------------
Scott McKee 30,432
- --------------------------------------------------------------------------------
John Wanzung 16,000
- --------------------------------------------------------------------------------
Konrad Schaumloffel 12,000
- --------------------------------------------------------------------------------
Albert E. Heekin IV 4,000
- --------------------------------------------------------------------------------
Christopher J. Heekin 2,000
- --------------------------------------------------------------------------------
Thomas DiSanto 2,000
- --------------------------------------------------------------------------------
Stephen Charlton 800
- --------------------------------------------------------------------------------
Eric K. M. Schaumloffel 800
- --------------------------------------------------------------------------------
James Haft 800
- --------------------------------------------------------------------------------
John T. Fenner 800
- --------------------------------------------------------------------------------
Ellen Wanzung 400
- --------------------------------------------------------------------------------
Joanna Clinton 400
- --------------------------------------------------------------------------------
TOTAL SHARES 4,135,196
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit C
Stockholder List of New Media Network, Inc.
OPTION HOLDERS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Option Holder Number of Shares
- --------------------------------------------------------------------------------
<S> <C>
Stephen Hamilton 300,000
- --------------------------------------------------------------------------------
Paren Knadjian 300,000
- --------------------------------------------------------------------------------
Brad Beckerman 60,000
- --------------------------------------------------------------------------------
Ian Duffell 215,000
- --------------------------------------------------------------------------------
Paren Knadjian 150,000
- --------------------------------------------------------------------------------
Stephen Friess 135,000
- --------------------------------------------------------------------------------
Ian Duffel 62,046
- --------------------------------------------------------------------------------
Bruce Watkins 60,000
- --------------------------------------------------------------------------------
Matthew McGrath 25,000
- --------------------------------------------------------------------------------
Kristen Frederick 25,000
- --------------------------------------------------------------------------------
Stephen Hamilton 23,077
- --------------------------------------------------------------------------------
Karl Thompsen 21,678
- --------------------------------------------------------------------------------
John Wanzung 20,000
- --------------------------------------------------------------------------------
Kip Schaumloffel 20,000
- --------------------------------------------------------------------------------
James Green 5,500
- --------------------------------------------------------------------------------
TOTAL SHARES 1,422,301
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit C
Stockholder List of New Media Network, Inc.
WARRANT HOLDERS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Warrant Holder Number of Shares
- --------------------------------------------------------------------------------
<S> <C>
Arnie Maslow 66,667
- --------------------------------------------------------------------------------
Fritz Perlberg 125,000
- --------------------------------------------------------------------------------
TOTAL SHARES 191,667
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit C
Stockholder List of New Media Network, Inc.
SERIES A PREFERRED STOCKHOLDERS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Series A Preferred Stockholder Number of Shares
- --------------------------------------------------------------------------------
<S> <C>
Alan E. Morelli 7,820,804
- --------------------------------------------------------------------------------
TOTAL SHARES 7,820,804
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit D
Registration Rights Agreement
<PAGE>
Registration Rights Agreement
New Media Network, Inc.
June 30, 1999
This REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made as of June
30, 1999 by and among New Media Network, Inc., a Delaware corporation (the
"Company"), Alan E. Morelli ("Morelli"), Ian Duffell (the "Founder"), and the
investor in the Company's Series B Preferred Stock Purchase Agreement dated June
30, 1999 (the "Series B Purchaser"). Morelli, Founder, and the Series B
Purchaser are collectively referred to herein as the "Purchasers".
NOW, THEREFORE, in consideration of the mutual promises and covenants
hereinafter set forth, the parties agree as follows:
Article 1
Restrictions on Transferability; Registration Rights
----------------------------------------------------
1.1 Certain Definitions. As used in this Agreement, the following terms
-------------------
shall have the following respective meanings:
"Commission" shall mean the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.
"Common Shares" shall mean the 3,600,000 shares of Common Stock issued
to the Founder of the Company and any additional shares of Common Stock of the
Company hereafter acquired by the Founder.
"Common Stock" shall mean shares of the Company's Common Stock.
"Conversion Shares" means the Common Stock issued or issuable upon
conversion of the Preferred Shares as defined herein.
"Holder" shall mean any Purchaser holding Registrable Securities, as
defined for purposes of that particular Article, and any person holding
Registrable Securities to whom the rights under this Agreement have been
transferred in accordance with Article 1.14 hereof.
"Initiating Holders" shall mean a single holder in the aggregate of
not less than ten (10%) of the Registrable Securities as defined for purposes of
that particular Article.
"Major Purchaser" shall mean any Purchaser holding more than 250,000
shares of Registrable Securities.
The terms "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
1
<PAGE>
"Preferred Shares" shall mean the shares of Series A Preferred Stock
or Series B Preferred Stock issued to Morelli and to TVN.
"Registration Expenses" shall mean all expenses incurred by the
Company in complying with Articles 1.5, 1.6 and 1.7 of this Agreement,
including, without limitation, all registration, qualification and filing fees,
printing expenses, escrow fees, fees and disbursements of counsel for the
Company, blue sky fees and expenses, and the expense of any special audits
incident to or required by any such registration (but excluding the compensation
of regular employees of the Company which shall be paid in any event by the
Company).
"Registrable Securities" means (i) the Common Shares or any Common
Stock of the Company issued or issuable in respect of the Common Shares or other
securities issued or issuable with respect to the Common Shares upon any stock
split, stock dividend, recapitalization, or similar event, or any Common Stock
otherwise issued or issuable with respect to the Common Shares, except that the
Common Shares or any such Common Stock shall not be included in the definition
of Registrable Securities for the purposes of Articles 1.5 and 1.7; (ii) the
Conversion Shares; and (iii) any Common Stock of the Company issued or issuable
in respect of the Preferred Shares or Conversion Shares or other securities
issued or issuable with respect to the Preferred Shares or Conversion Shares
upon any stock split, stock dividend, recapitalization, or similar event, or any
Common Stock otherwise issued or issuable with respect to the Conversion Shares
or Preferred Shares; provided, however, that shares of Common Stock or other
securities shall only be treated as Registrable Securities if and so long as
they have not been (A) sold to or through a broker or dealer or underwriter in a
public distribution or a public securities transaction, or (B) sold in a
transaction exempt from the registration and prospectus delivery requirements of
the Securities Act under Article 4(l) thereof so that all transfer restrictions
and restrictive legends with respect thereto are removed upon the consummation
of such sale.
"Restricted Securities" shall mean the securities of the Company
required to bear the legend set forth in Article 1.3 of this Agreement.
"Securities Act" shall mean the Securities Act of 1933, as amended, or
any similar federal statute and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Selling Expenses" shall mean all underwriting discounts, selling
commissions and stock transfer taxes applicable to the securities registered by
the Holders and all fees and disbursements of counsel for the Holders (except as
provided by Article 1.9).
1.2 Restrictions. The Preferred Shares, the Conversion Shares and the
------------
Common Shares shall not be sold, assigned, transferred or pledged except upon
the conditions specified in this Agreement, which conditions are intended to
ensure compliance with the provisions of the Securities Act. The Purchasers will
cause any proposed purchaser, assignee, transferee or pledgee of the Preferred
Shares, the Conversion Shares or the Common Shares to agree to take and hold
such securities subject to the provisions and upon the conditions specified in
this Agreement.
2
<PAGE>
1.3 Restrictive Legend. Each certificate representing (i) the Preferred
------------------
Shares, (ii) the Conversion Shares, (iii) the Common Shares and (iv) any other
securities issued in respect of the securities referenced in clauses (i), (ii)
and (iii) upon any stock split, stock dividend, recapitalization, merger,
consolidation or similar event, shall (unless otherwise permitted by the
provisions of Article 1.4 below) be stamped or otherwise imprinted with legends
in the following form (in addition to any legend required under applicable state
securities laws):
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN
ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933. SUCH SHARES MAY NOT BE SOLD,
TRANSFERRED OR PLEDGED IN THE ABSENCE OF SUCH REGISTRATION
OR UNLESS THE COMPANY RECEIVES AN OPINION OF COUNSEL (WHICH
MAY BE COUNSEL FOR THE COMPANY) REASONABLY ACCEPTABLE TO IT
STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE
REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID
ACT."
"THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE
TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF THAT
CERTAIN REGISTRATION RIGHTS AGREEMENT BETWEEN THE COMPANY
AND THE STOCKHOLDER DATED JUNE 30, 1999, A COPY OF WHICH IS
ON FILE WITH THE SECRETARY OF THE COMPANY."
Each Purchaser and Holder consents to the Company making a notation on its
records and giving instructions to any transfer agent of the Restricted
Securities in order to implement the restrictions on transfer established in
this Article 1. The Company agrees that, upon receipt of a written request of a
holder of Restricted Securities, accompanied by an opinion of counsel (which may
be any independent nationally recognized outside securities counsel) reasonably
acceptable to the Company, addressed to the Company and its transfer agent, to
the effect that some or all of the securities held by such holder may lawfully
be publicly offered and sold in the United States without registration under the
Securities Act, the Company will, or will cause its transfer agent to, remove
such legend from certificates representing such securities, and will make
inapplicable to such securities any stop transfer instructions.
1.4 Notice of Proposed Transfers. The holder of each certificate
----------------------------
representing Restricted Securities, by acceptance thereof, agrees to comply in
all respects with the provisions of this Article 1. Prior to any proposed sale,
assignment, transfer or pledge of any Restricted Securities, unless there is in
effect a registration statement under the Securities Act covering the proposed
transfer, the holder thereof shall give written notice to the Company of such
holder's intention to effect such transfer, sale, assignment or pledge. Each
such notice shall describe the manner and circumstances of the proposed
transfer, sale, assignment or pledge in sufficient detail, and shall be
accompanied at such holder's expense by either (i) an unqualified written
opinion of legal counsel who shall, and whose legal opinion shall be, reasonably
satisfactory to the Company, addressed to
3
<PAGE>
the Company, to the effect that the proposed transfer of the Restricted
Securities may be effected without registration under the Securities Act, or
(ii) a "no action" letter from the Commission to the effect that the transfer of
such securities without registration will not result in a recommendation by the
staff of the Commission that action be taken with respect thereto, whereupon the
holder of such Restricted Securities shall be entitled to transfer such
Restricted Securities in accordance with the terms of the notice delivered by
the holder to the Company. The Company will not require such a legal opinion or
"no action" letter (a) in any transaction in compliance with Rule 144, (b) in
any transaction in which a Purchaser which is a corporation distributes
Restricted Securities after six (6) months after the purchase thereof solely to
its majority-owned subsidiaries or affiliates for no consideration, (c) in any
transaction in which a Purchaser which is a partnership distributes Restricted
Securities after six (6) months after the purchase thereof solely to partners
thereof for no consideration, or (d) in any transaction in which a Purchaser who
is an individual distributes Registrable Securities after six (6) months of the
purchase thereof to members of his or her immediate family or to any trust
established for the benefit of such persons, provided that each transferee
agrees in writing to be subject to the terms of this Article 1.4. Each
certificate evidencing the Restricted Securities transferred as above provided
shall bear, except if such transfer is made pursuant to Rule 144, the
appropriate restrictive legend set forth in Article 1.3 above, except that such
certificate shall not bear such restrictive legend if, in the opinion of counsel
for such holder and the Company, such legend is not required in order to
establish compliance with any provisions of the Securities Act.
1.5 Requested Registration.
----------------------
(a) Request for Registration. In case the Company shall receive from
------------------------
Initiating Holders a written request that the Company effect any qualification,
compliance or registration, the Company shall:
(i) promptly give written notice of the proposed registration,
qualification or compliance to all other Holders; and
(ii) use its best efforts to effect such registration,
qualification or compliance (including, without limitation, the execution of an
undertaking to file post-effective amendments, appropriate qualification under
applicable blue sky or other state securities laws and appropriate compliance
with applicable regulations issued under the Securities Act and any other
governmental requirements or regulations) as may be so requested and as would
permit or facilitate the sale and distribution of all or such portion of such
Registrable Securities as are specified in such request, together with all or
such portion of the Registrable Securities of any Holder or Holders joining in
such request as are specified in a written request received by the Company
within twenty (20) days after receipt of such written notice from the Company;
provided, however, that the Company shall not be obligated to take any action to
- --------
effect any such registration, qualification or compliance pursuant to this
Article 1.5:
(1) In any particular jurisdiction in which the Company
would be required to execute a general consent to service of process in
effecting such registration, qualification or compliance unless the Company is
already subject to service in such jurisdiction and except as may be required by
the Securities Act;
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(2) Prior to the earlier of (i) six (6) months following
the Company's initial public offering or (ii) June 30, 2004;
(3) During the period ending on the date three (3) months
immediately following the effective date of, any registration statement
pertaining to securities of the Company (other than a registration of securities
in a Rule 145 transaction or with respect to an employee benefit plan);
(4) After the Company has effected two (2) such
registrations pursuant to this subparagraph 1.5(a), such registrations have been
declared or ordered effective and the securities offered pursuant to such
registrations have been sold; or
(5) If the Company shall furnish to such Holders a
certificate, signed by the President of the Company, stating that in the good
faith judgment of the Board of Directors it would be seriously detrimental to
the Company or its shareholders for a registration statement to be filed in the
near future, then the Company's obligation to use its best efforts to register,
qualify or comply under this Article 1.5 shall be deferred for a single period
not to exceed one hundred-twenty (120) days from the date of receipt of written
request from the Initiating Holders; provided that this provision may not be
invoked more than once in any twelve month period.
Subject to the foregoing clauses (1) through (5), the Company shall file a
registration statement covering the Registrable Securities so requested to be
registered as soon as practicable after receipt of the request or requests of
the Initiating Holders, and in any case, not later than sixty (60) days
thereafter.
(b) Underwriting. In the event that a registration pursuant to
------------
Article 1.5 is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as part of the notice given pursuant to
Article 1.5(a)(i). The right of any Holder to registration pursuant to Article
1.5 shall be conditioned upon such Holder's participation in the underwriting
arrangements required by this Article 1.5 and the inclusion of such Holder's
Registrable Securities in the underwriting, to the extent requested, to the
extent provided in this Agreement.
The Company shall (together with all Holders proposing to distribute their
securities through such underwriting) enter into an underwriting agreement in
customary form with the managing underwriter selected for such underwriting by a
majority in interest of the Initiating Holders (which managing underwriter shall
be reasonably acceptable to the Company). Notwithstanding any other provision of
this Article 1.5, if the managing underwriter advises the Initiating Holders in
writing that marketing factors require a limitation of the number of shares to
be underwritten, then the Company shall so advise all Holders of Registrable
Securities and the number of shares of Registrable Securities that may be
included in the registration and underwriting shall be allocated among all
Initiating Holders thereof in proportion, as nearly as practicable, to the
respective amounts of Registrable Securities requested to be registered by such
Initiating Holders at the time of filing the registration statement; provided,
however, that the number of shares of Registrable Securities to be included in
such underwriting shall not be reduced unless all other securities (including
but not limited to those held by non-Initiating Holders) are first entirely
excluded from the underwriting.
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<PAGE>
No Registrable Securities excluded from the underwriting by reason of the
underwriter's marketing limitation shall be included in such registration. To
facilitate the allocation of shares in accordance with the above provisions, the
Company or the underwriters may round the number of shares allocated to any
Holder to the nearest 100 shares. Notwithstanding the foregoing, in the event
that the holders of the Conversion Shares are unable to sell at least 90% of the
Conversion Shares requested to be sold pursuant to Article 1.5(a), then such
registration shall not count as one of the two registrations that the Company is
obligated to effect pursuant to Article 1.5(a)(ii)(4).
If any Holder of Registrable Securities disapproves of the terms of the
underwriting, such person may elect to withdraw therefrom by written notice to
the Company, the managing underwriter and the Initiating Holders. The
Registrable Securities and/or other securities so withdrawn shall also be
withdrawn from registration, and such Registrable Securities shall not be
transferred in a public distribution prior to one hundred eighty (180) days
after the effective date of such registration.
1.6 Company Registration.
--------------------
(a) Notice of Registration. If at any time or from time to time, the
----------------------
Company shall determine to register any of its securities, either for its own
account or the account of a security holder or holders other than (i) a
registration relating solely to employee benefit plans, or (ii) a registration
relating solely to a Commission Rule 145 transaction, the Company will:
(i) promptly give to each Holder written notice thereof, and
(ii) include in such registration (and any related qualification
under blue sky laws or other compliance), and in any underwriting involved in
such registration, all the Registrable Securities specified in a written request
or requests received within twenty (20) days after receipt of such written
notice from the Company by any Holder, but only to the extent that such
inclusion will not diminish the number of securities included by the Company or
by holders of the Company's securities who have demanded such registration.
(b) Underwriting. If the registration of which the Company gives
------------
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Article 1.6(a)(i). In such event, the right of any Holder to
registration pursuant to Article 1.6 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of Registrable Securities
in the underwriting to the extent provided herein. All Holders proposing to
distribute their securities through such underwriting shall (together with the
Company and the other holders distributing their securities through such
underwriting) enter into an underwriting agreement in customary form with the
managing underwriter selected for such underwriting by the Company (or by the
holders who have demanded such registration). Notwithstanding any other
provision of this Article 1.6, if the managing underwriter determines that
marketing factors require a limitation of the number of shares to be
underwritten, the managing underwriter may limit the Registrable Securities to
be included in such registration to a minimum of 30% of the total shares to be
included in such underwriting or exclude them entirely in the case of the
Company's initial public offering. The Company shall so advise all Holders and
the other holders distributing their securities through such underwriting
pursuant to piggyback registration rights similar to this Article 1.6, and the
number of shares of Registrable Securities and other securities that
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<PAGE>
may be included in the registration and underwriting shall be first allocated
among all holders of Preferred Shares or Conversion Shares in proportion, as
nearly as practicable, to the respective amounts of Registrable Securities
requested to be registered by such Preferred Purchasers at the time of filing
the registration statement, and after satisfaction of the requirements of the
Preferred Purchasers, the remaining shares that may be included in the
registration and underwriting shall be allocated among the Founder in
proportion, as nearly as practicable, to the respective amounts of Registrable
Securities held by such Founder at the time of filing of the registration
statement. To facilitate the allocation of shares in accordance with the above
provisions, the Company or the underwriters may round the number of shares
allocated to any Holder or other holder to the nearest 100 shares. If any Holder
or other holder disapproves of the terms of any such underwriting, he or she may
elect to withdraw therefrom by written notice to the Company and the managing
underwriter. Any securities excluded or withdrawn from such underwriting shall
be withdrawn from such registration, and shall not be transferred in a public
distribution prior to one hundred eighty (180) days after the effective date of
the registration statement relating thereto (the "Lock-Up Period"); provided,
however, that if such registration is not the Company's initial public offering
such Lock-Up Period shall be one hundred twenty (120) days unless the managing
underwriter determines that marketing factors require a longer period in which
case the Lock-Up period shall be specified by the managing underwriter but shall
not exceed one hundred eighty (180) days.
(c) Right to Terminate Registration. The Company shall have the right
-------------------------------
to terminate or withdraw any registration initiated by it under this Article 1.6
prior to the effectiveness of such registration, whether or not any Holder has
elected to include securities in such registration.
1.7 Registration on Form S-3.
------------------------
(a) If Holders of Registrable Securities request in writing that the
Company file a registration statement on Form S-3 (or any successor form to Form
S-3) for a public offering of shares of the Registrable Securities, the
reasonably anticipated aggregate price to the public of which, net of
underwriting discounts and commissions, would exceed $1,000,000, and the Company
is a registrant entitled to use Form S-3 to register the Registrable Securities
for such an offering, the Company shall use its best efforts to cause such
Registrable Securities to be registered for the offering on such form; provided,
--------
however, that the Company shall not be required to effect more than one
- -------
registration pursuant to this Article 1.7 in any twelve (12) month period. The
Company will (i) promptly give written notice of the proposed registration to
all other Holders, and (ii) as soon as practicable, use its best efforts to
effect such registration (including, without limitation, the execution of an
undertaking to file post-effective amendments, appropriate qualification under
applicable blue sky or other state securities laws and appropriate compliance
with applicable regulations issued under the Securities Act and any other
governmental requirements or regulations) as may be so requested and as would
permit or facilitate the sale and distribution of all or such portion of such
Registrable Securities as are specified in such request, together with all or
such portion of the Registrable Securities of any Holder or Holders joining in
such request as are specified in a written request received by the Company
within twenty (20) days after receipt of such written notice from the Company.
The substantive provisions of Article 1.5(b) shall be applicable to each
registration initiated under this Article 1.7.
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<PAGE>
(b) Notwithstanding the foregoing, the Company shall not be obligated
to take any action pursuant to this Article 1.7: (i) in any particular
jurisdiction in which the Company would be required to execute a general consent
to service of process in effecting such registration, qualification or
compliance unless the Company is already subject to service in such jurisdiction
and except as may be required by the Securities Act, (ii) during the period
ending on a date three (3) months following the effective date of, a
registration statement (other than with respect to a registration statement
relating to a Rule 145 transaction, an offering solely to employees or any other
registration which is not appropriate for the registration of Registrable
Securities), or (iii) if the Company shall furnish to such Holder a certificate
signed by the President of the Company stating that, in the good faith judgment
of the Board of Directors, it would be seriously detrimental to the Company or
its shareholders for registration statements to be filed in the near future,
then the Company's obligation to use its best efforts to file a registration
statement shall be deferred for a single period not to exceed one hundred twenty
(120) days from the receipt of the request to file such registration by such
Holder or Holders.
1.8 Limitations on Subsequent Registration Rights.
---------------------------------------------
(a) From and after the date of this Agreement, the Company shall not
enter into any agreement granting any holder or prospective holder of any
securities of the Company registration rights with respect to such securities
without (i) the prior written consent of at least majority of each class of
Preferred Shares then outstanding and Conversion Shares then outstanding (on a
Common Stock equivalent basis), and, (ii) where the rights of the Founder are
directly and adversely affected, the prior written consent of the Founder,
unless (1) such new registration rights, including standoff obligations, are on
a pari passu basis with those rights of the Holders hereunder, or (2) such new
---- -----
registration rights, including standoff obligations, are subordinate to the
registration rights granted the Holders hereunder; provided, that the inclusion
of such holder's securities shall not reduce the amount of Registrable
Securities which are included in any registration for which the Holders hold
registration rights pursuant to this Agreement.
(b) Where the Company determines to grant any holder or prospective
holder of any securities of the Company registration rights that are on a pari
----
passu basis with those rights of the Holders hereunder and determines that the
- -----
grant of such rights shall be made pursuant to this Agreement, then such grant
shall be evidenced by the execution of an additional signature page to this
Agreement by the Company and such holder, without any requirement on the part of
the Company to seek the consent or approval of the Holders.
1.9 Expenses of Registration. All Registration Expenses incurred in
------------------------
connection with any registration pursuant to Articles 1.5, 1.6, or 1.7 and the
reasonable cost of one special legal counsel to represent all of the Holders
together in any such registration shall be borne by the Company, provided that
the Company shall not be required to pay the Registration Expenses of any
registration proceeding begun pursuant to Article 1.5, the request of which has
been subsequently withdrawn by the Initiating Holders. Prior to effectiveness
of the applicable registration statement. [In such case, the Holders of
Registrable Securities to have been registered shall bear all such Registration
Expenses pro rata on the basis of the number of shares to have been registered
unless the Holders of 75% of the Registrable Securities agree to forfeit their
right to one demand registration pursuant
8
<PAGE>
to Article 1.5.] Notwithstanding the foregoing, however, if at the time of the
withdrawal, the Holders have learned of a material adverse change in the
condition, business or prospects of the Company from that known to the Holders
at the time of their request, of which the Company had knowledge at the time of
the request, then the Holders shall not be required to pay any of said
Registration Expenses or to forfeit the right to one demand registration.
1.10 Registration Procedures. Whenever any Holder has requested that any
-----------------------
Registrable Securities be registered pursuant to this Agreement, the Company
will use its commercially reasonable efforts to effect the registration and the
sale of such Registrable Securities in accordance with the intended method of
disposition thereof, and pursuant thereto, the Company will as expeditiously as
possible:
(a) prepare and file with the Commission a registration statement
under the Securities Act (a "Registration Statement") on any appropriate form
under the Securities Act with respect to such Registrable Securities and use its
commercially reasonable efforts to cause such Registration Statement to become
effective, provided that the Company will included in any Registration Statement
(i) all financial statements required by the Commission to be filed therewith
and (ii) any information reasonably requested to be included by a Holder that
specifically relates to such Holder or to the proposed method of distribution of
the Registrable Securities to be registered pursuant to such Registration
Statement;
(b) prepare and file with the Commission such amendments, post-
effective amendments and supplements to such Registration Statement and the
prospectus used in connection therewith as may be necessary to keep such
Registration Statement effective for a period of not less than thirty (30) days
(or such longer period as is necessary for the underwriters in an Underwritten
Offering to sell unsold allotments not to exceed one hundred eighty (180) days)
and comply with the provisions of the Securities Act with respect to the
disposition of all securities covered by such Registration Statement during such
period in accordance with the intended methods of disposition by the sellers
thereof set forth in such Registration Statement;
(c) furnish to each seller of Registrable Securities and the
underwriters of the securities being registered such number of copies of such
Registration Statement, each amendment and supplement thereto, the prospectus
included in such Registration Statement (including each preliminary prospectus),
any documents incorporated by reference therein and such other documents as such
seller or underwriters may reasonably request in order to facilitate the
disposition of the Registrable Securities owned by such seller or the sale of
such securities by such underwriters (it being understood that, subject to the
requirements of the Securities Act and applicable state securities laws, the
Company consents to the use of the prospectus and any amendment or supplement
thereto by each seller and the underwriters in connection with the offering and
sale of the Registrable Securities covered by the Registration Statement of
which such prospectus, amendment or supplement is a part);
(d) use its commercially reasonable efforts to register or qualify
such Registrable Securities under such other securities or blue sky laws of such
jurisdictions as the managing underwriter reasonably requests (or, in the event
the Registration Statement relates to an offering under an S-3 Registration, as
the holders of a majority of such Registrable Securities may reasonably
9
<PAGE>
request); use its commercially reasonable efforts to keep each such registration
or qualification (or exemption therefrom) effective during the period in which
such Registration Statement is required to be kept effective; and do any and all
other acts and things which may be reasonably necessary or advisable to enable
each seller to consummate the disposition of the Registrable Securities owned by
such seller in such jurisdictions (provided, however, that the Company will not
be required to (A) qualify generally to do business in any jurisdiction which it
would not otherwise be required to qualify but for this subparagraph, or (B)
consent to general service of process in any such jurisdiction);
(e) promptly notify each seller and each underwriter and (if
requested by any such Person) confirm such notice in writing (A) when a
prospectus or any prospectus supplement or post-effective amendment has been
filed and, with respect to a Registration Statement or any post-effective
amendment, when the same has become effective, (B) of the issuance by any state
securities or other regulatory authority of any order suspending the
qualification or exemption from qualification of any of the Registrable
Securities under state securities or "blue sky" laws or the initiation of any
proceedings for that purpose, and (C) or the happening of any event which makes
any statement made in a Registration Statement or related prospectus untrue or
which requires the making of any changes in such Registration Statement,
prospectus or documents so that they will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, and, as promptly as
practicable thereafter, prepare and file with the Commission and furnish a
supplement or amendment to such prospectus so that, as thereafter deliverable to
the purchasers of such Registrable Securities, such prospectus will not contain
any untrue statement of a material fact or omit a material fact necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading;
(f) make generally available to the Company's security holders an
earnings statement satisfying the provisions of Section 11(a) of the Securities
Act no later than thirty (30) days after the end of the twelve (12) month period
beginning with the first day of the Company's first fiscal quarter commencing
after the effective date of a Registration Statement, which earnings statement
shall cover said twelve (12) month period, and which requirement will be deemed
to be satisfied if the Company timely files complete and accurate information on
Forms 10-Q, 10-K and 8-K under the Exchange Act and otherwise complies with Rule
158 under the Securities Act;
(g) if requested by the managing underwriter or any seller, promptly
incorporate in a prospectus supplement or post-effective amendment such
information as the managing underwriter or any seller reasonably requests to be
included therein, including, without limitation, with respect to the Registrable
Securities being sold by such seller, the purchase price being paid therefor by
the underwriters and with respect to any other terms of the Underwritten
Offering of the Registrable Securities to be sold in such offering, and promptly
make all required filings of such prospectus supplement or post-effective
amendment;
(h) cooperate with the sellers and the managing underwriter to
facilitate the timely preparation and delivery of certificates (which shall not
bear any restrictive legends unless required under applicable law) representing
securities sold under any Registration Statement, and
10
<PAGE>
enable such securities to be in such denominations and registered to such names
as the managing underwriter or such seller may request and keep available and
make available to the Company's transfer agent prior to the effectiveness of
such Registration Statement a supply of such certificates;
(i) promptly make available for inspection by any seller, any
underwriter participating in any disposition pursuant to any Registration
Statement, and any attorney, accountant or other agent or representative
retained by any such seller or underwriter (collectively, the "Inspectors"), all
financial and other records, corporate documents and properties of the Company
(collectively, the "Records"), as shall be reasonably necessary to enable them
to exercise their due diligence responsibility, and cause the Company's
officers, directors and employees to supply all information requested by any
such Inspector in connection with such Registration Statement; provided, that,
unless the disclosure of such Record is necessary to avoid or correct a
misstatement or omission in the Registration Statement or the release of such
Records is ordered pursuant to a subpoena or other order from a court of
competent jurisdiction, the Company shall not be required to provide any
information under this subparagraph (i) if (A) the Company reasonably believes
in good faith, after consultation with counsel for the Company, that to do so
would cause the Company to forfeit an attorney-client privilege that was
applicable to such information, (B) either (1) the Company has requested and
been granted from the Commission confidential treatment of such information
contained in any filing with the Commission or documents provided supplementally
or otherwise or (2) the Company reasonably determines in good faith that such
Records are confidential and so notifies the Inspectors in writing unless prior
to furnishing any such information with respect to (1) or (2) such Holder of
Registrable Securities requesting such information agrees to enter into a
confidentiality agreement in customary form and subject to customary exceptions;
and provided, further, that each Holder of Registrable Securities agrees that it
will, upon learning the disclosure of such Records is sought in a court of
competent jurisdiction, give notice to the Company and allow the Company, at its
expense, to undertake appropriate action and to prevent disclosure of the
Records deemed confidential, or (C) the disclosure of such information would
violate a confidentiality agreement to which the Company is subject;
(j) furnish to each seller and underwriter a signed counterpart of
(A) an opinion or opinions of counsel to the Company, and (B) a comfort letter
or comfort letters from the Company's independent public accountants, each in
customary form and covering such matters of the type customarily covered by
opinions or comfort letters, as the case may be, as the sellers or managing
underwriter reasonably requests;
(k) cause the Registration Securities included in any Registration
Statement to be (A) listed on each securities exchange, if any, on which similar
securities issued by the Company are then listed, or (B) authorized to be quoted
and/or listed (to the extent applicable) on the Nasdaq System or the Nasdaq
National Market if the Registrable Securities so qualify;
(l) provide a CUSIP number for the Registrable Securities included in
any Registration Statement not later than the effective date of such
Registration Statement;
(m) cooperate with each seller and each underwriter participating in
the disposition of such Registrable Securities and their respective counsel in
connection with any filings required to be made with the National Association of
Securities Dealers, Inc.;
11
<PAGE>
(n) during the period when the prospectus is required to be delivered
under the Securities Act, promptly file all documents required to be filed with
the Commission pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange
Act;
(o) notify each seller of Registrable Securities promptly of any
request by the Commission for the amending or supplementing of such Registration
Statement or prospectus or for additional information;
(p) prepare and file with the Commission promptly any amendments or
supplements to such Registration Statement or prospectus which, in the opinion
of counsel for the Company, is required in connection with the distribution of
the Registrable Securities;
(q) enter into such agreements (including underwriting agreements in
the managing underwriter's customary form) as are customary in connection with
an underwritten registration; and
(r) advise each seller of such Registrable Securities, promptly after
it shall receive notice or obtain knowledge thereof, of the issuance of any stop
order by the Commission suspending the effectiveness of such Registration
Statement or the initiation or threatening of any proceeding for such purpose
and promptly use its commercially reasonable efforts to prevent the issuance of
any stop order or to obtain its withdrawal at the earliest possible moment if
such stop order should be issued.
1.11 Indemnification.
---------------
(a) The Company will indemnify each Holder, each of its officers and
directors and partners, and each person controlling such Holder within the
meaning of Section 15 of the Securities Act, with respect to which registration,
qualification or compliance has been effected pursuant to this Article 1, and
each underwriter, if any, and each person who controls any underwriter within
the meaning of Section 15 of the Securities Act, against all expenses, claims,
losses, damages or liabilities (or actions in respect thereof), including any of
the foregoing incurred in settlement of any litigation, commenced or threatened,
arising out of or based on any untrue statement (or alleged untrue statement) of
a material fact contained in any registration statement, prospectus, offering
circular or other document, or any amendment or supplement thereto, incident to
any such registration, qualification or compliance, or based on any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances in
which they were made, not misleading, or any violation by the Company of any
rule or regulation promulgated under the Securities Act applicable to the
Company in connection with any such registration, qualification or compliance,
and the Company will reimburse each such Holder, each of its officers and
directors, and each person controlling such Holder, each such underwriter and
each person who controls any such underwriter, for any legal and any other
expenses reasonably incurred in connection with investigating, preparing or
defending any such claim, loss, damage, liability or action, provided that the
Company will not be liable in any such case to the extent that any such claim,
loss, damage, liability or expense arises out of or is based on any untrue
statement or omission or alleged untrue statement or omission, made in reliance
upon and in conformity with written information furnished to the Company by an
instrument duly
12
<PAGE>
executed by such Holder, controlling person or underwriter and stated to be
specifically for use therein; and provided, further, that the Company will not
be liable to any such person or entity with respect to any such untrue statement
or omission or alleged untrue statement or omission made in any preliminary
prospectus that is corrected in the final prospectus filed with the Commission
pursuant to Rule 424(b) promulgated under the Securities Act (or any amendment
or supplement to such prospectus) if the person asserting any such loss, claim,
damage or liability purchased securities but was not sent or given a copy of the
prospectus (as amended or supplemented) at or prior to the written confirmation
of the sale of such securities to such person in any case where such delivery of
the prospectus (as amended or supplemented) is required by the Securities Act,
unless such failure to deliver the prospectus (as amended or supplemented) was a
result of the Company's failure to provide such prospectus (as amended or
supplemented).
(b) Each Holder will, if Registrable Securities held by such Holder
are included in the securities as to which such registration, qualification or
compliance is being effected, indemnify the Company, each of its directors and
officers, each underwriter, if any, of the Company's securities covered by such
a registration statement, each person who controls the Company or such
underwriter within the meaning of Section 15 of the Securities Act, and each
other such Holder, each of its officers and directors and each person
controlling such Holder within the meaning of Section 15 of the Securities Act,
against all claims, losses, damages and liabilities (or actions in respect
thereof) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any such registration statement,
prospectus, offering circular or other document, or any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse the
Company, such Holders, such directors, officers, persons, underwriters or
control persons for any legal or any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability or action, in each case to the extent, but only to the extent, that
such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
furnished to the Company by an instrument duly executed by such Holder and
stated to be specifically for use therein; provided, however, that the liability
of a Holder for indemnification under this Article 1.11(b) shall not exceed the
gross proceeds from the offering received by such Holder.
(c) Each party entitled to indemnification under this Article 1.11
(the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not unreasonably be
withheld), and the Indemnified Party may participate in such defense at such
party's expense, and provided further that the failure of any Indemnified Party
to give notice as provided herein shall not relieve the Indemnifying Party of
its obligations under this Article 1 unless the failure to give such notice is
materially prejudicial to an Indemnifying Party's ability to defend such action.
No Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry
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<PAGE>
of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation.
(d) If the indemnification provided for in this Article 1.11 is for
any reason not available to an Indemnified Party with respect to any loss,
liability, claim, damage, or expense referred to therein, then the Indemnifying
Party, in lieu of indemnifying such Indemnified Party hereunder, shall
contribute to the amount paid or payable by such Indemnified Party as a result
of such loss, liability, claim, damage, or expense in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party on the one
hand and of the Indemnified Party on the other in connection with the statements
or omissions that resulted in such loss, liability, claim, damage, or expense as
will as any other relevant equitable considerations. The relative fault of the
Indemnifying Party and of the Indemnified Party shall be determined by reference
to, among other things, whether the untrue or the alleged untrue statement of a
material fact or the omission to state a material fact relates to information
supplied by the Indemnifying Party or by the Indemnified Party and the parties'
relative intent, knowledge, access to information, and opportunity to correct or
prevent such statement or omission.
1.12 Information by Holder. The Holder or Holders of Registrable Securities
---------------------
included in any registration shall furnish to the Company such information
regarding such Holder or Holders, the Registrable Securities held by them and
the distribution proposed by such Holder or Holders as the Company may request
in writing and as shall be required in connection with any registration,
qualification or compliance referred to in this Article 1.
1.13 Rule 144 Reporting. With a view to making available the benefits of
------------------
certain rules and regulations of the Commission which may at any time permit the
sale of the Restricted Securities to the public without registration, after such
time as a public market exists for the Common Stock of the Company, the Company
agrees to use its best efforts to:
(a) Make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act, at all times after
the effective date that the Company becomes subject to the reporting
requirements of the Securities Act or the Securities Exchange Act of 1934, as
amended (the "Exchange Act");
(b) File with the Commission in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act
(at any time after it has become subject to such reporting requirements); and
14
<PAGE>
(c) So long as a Purchaser owns any Restricted Securities, to furnish
to the Purchaser forthwith upon request a written statement by the Company as to
its compliance with the reporting requirements of said Rule 144 (at any time
after ninety (90) days after the effective date of the first registration
statement filed by the Company for an offering of its securities to the general
public), and of the Securities Act and the Exchange Act (at any time after it
has become subject to such reporting requirements), a copy of the most recent
annual or quarterly report of the Company, and such other reports and documents
of the Company and other information in the possession of or reasonably
obtainable by the Company as a Purchaser may reasonably request in availing
itself of any rule or regulation of the Commission allowing a Purchaser to sell
any such securities without registration.
1.14 Transfer of Registration Rights. The rights to cause the Company to
-------------------------------
register securities granted Purchasers under Articles 1.5, 1.6 and 1.7 may be
assigned to a transferee or assignee in connection with any transfer or
assignment of Registrable Securities by a Purchaser (together with any
affiliate); provided that (a) such transfer may otherwise be effected in
accordance with applicable securities laws, (b) notice of such assignment is
given to the Company, and (c) such transferee or assignee (i) is a wholly-owned
subsidiary or constituent partner (including limited partners) of such
Purchaser, or (ii) is an immediate family member of a Purchaser or a trust
established for the benefit of such person, or (iii) acquires from such
Purchaser the lesser of (a) 400,000 or more shares of Registrable Securities (as
appropriately adjusted for stock splits and the like) or (b) all of the
Registrable Securities then owned by such Purchaser.
1.15 Standoff Agreement. Each Holder agrees in connection with the initial
------------------
registration of the Company's securities that, upon request of the Company or
the underwriters managing any underwritten initial public offering of the
Company's securities, not to sell, make any short sale of, loan, grant any
option for the purchase of, or otherwise dispose of any Registrable Securities
(other than those included in the registration) without the prior written
consent of the Company or such underwriters, as the case may be, for such period
of time (not to exceed one hundred eighty (180) days from the effective date of
such registration) as may be requested by the Company or such managing
underwriters; provided, however, that the officers and directors of the Company
who own stock of the Company also agree to such restrictions.
1.16 Termination of Rights. No Holder shall be entitled to exercise any
---------------------
right provided for in this Article 1:
(a) after five (5) years following the consummation of the sale of
securities pursuant to a registration statement filed by the Company under the
Securities Act in connection with the initial firm commitment underwritten
offering of its securities to the general public, or
(b) on or after the closing of a public offering of the Common Stock
of the Company, initiated by the Company, when all shares of the Holder's
Registrable Securities may be sold under Rule 144 during any 90-day period;
provided, however, that the provisions of this subsection (b) shall not apply
where the Holder owns more than one percent (1%) of the Company's outstanding
stock until such time as such Holder owns less than one percent (1%) of the
outstanding stock.
15
<PAGE>
Article 2
Miscellaneous
-------------
2.1 Assignment. Except as otherwise provided in this Agreement, the terms
----------
and conditions of this Agreement shall inure to the benefit of and be binding
upon the respective successors and assigns of the parties to this Agreement.
2.2 Third Parties. Nothing in this Agreement, express or implied, is
-------------
intended to confer upon any party, other than the parties to this Agreement, and
their respective successors and assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
2.3 Governing Law. This Agreement shall be governed by and construed
-------------
under the laws of the State of Delaware in the United States of America without
giving effect to the conflicts of laws principles thereof.
2.4 Counterparts. This Agreement may be executed in counterparts, each
------------
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
2.5 Notices. All notices and other communications required or permitted
-------
under this Agreement shall be mailed by registered or certified mail, postage
prepaid, or otherwise delivered by hand or by messenger, addressed (a) if to a
Purchaser, at such Purchaser's address set forth on Exhibit A, or, at such other
---------
address as such Purchaser shall have furnished to the Company in writing, or (b)
if to any other holder of any Shares, at such address as such holder shall have
furnished the Company in writing, or, until any such holder so furnishes an
address to the Company, then to and at the address of the last holder of such
Shares who has so furnished an address to the Company, or (c) if to the Company,
one copy should be sent to its offices and addressed to the attention of the
President, or at such other address as the Company shall have furnished to the
Purchaser.
Each such notice or other communication shall for all purposes of this
Agreement be treated as effective or having been given when delivered if
delivered personally, or, if sent by mail, at the earlier of its receipt or 72
hours after the same has been deposited in a regularly maintained receptacle for
the deposit of the United States mail, addressed and postage prepaid as
aforesaid.
2.6 Severability. If one or more provisions of this Agreement are held
------------
to be unenforceable under applicable law, portions of such provisions, or such
provisions in their entirety, to the extent necessary, shall be severed from
this Agreement, and the balance of this Agreement shall be enforceable in
accordance with its terms.
2.7 Amendment and Waiver. Any provision of this Agreement may be amended
--------------------
or waived with the written consent of the Company and the Holders of at least
75% of the outstanding Preferred Shares and Conversion Shares, so long as the
effect is to treat all Holders equally and, provided further, that any amendment
or waiver of this Agreement shall require the written consent of any Holder who
is adversely affected by such amendment or waiver. Any amendment or waiver
16
<PAGE>
effected in accordance with this paragraph shall be binding upon each Holder of
Registrable Securities and the Company. In addition, the Company may waive
performance of any obligation owing to it, as to some or all of the Holders of
Registrable Securities, or agree to accept alternatives to such performance,
without obtaining the consent of any Holder of Registrable Securities. In the
event that an underwriting agreement is entered into between the Company and any
Holder, and such underwriting agreement contains terms differing from this
Agreement, as to any such Holder the terms of such underwriting agreement shall
govern.
2.8 Effect of Amendment or Waiver. The Purchasers and their successors
-----------------------------
and assigns acknowledge that by the operation of Article 2.7 of this Agreement
the holders of at least 75% of the outstanding Preferred Shares and Conversion
Shares, acting in conjunction with the Company, may have the right and power to
diminish or eliminate any or all rights or increase any or all obligations
pursuant to this Agreement.
2.9 Rights of Holders. Each holder of Registrable Securities shall have
-----------------
the absolute right to exercise or refrain from exercising any right or rights
that such holder may have by reason of this Agreement, including, without
limitation, the right to consent to the waiver or modification of any obligation
under this Agreement, and such holder shall not incur any liability to any other
holder of any securities of the Company as a result of exercising or refraining
from exercising any such right or rights.
2.10 Delays or Omissions. No delay or omission to exercise any right,
-------------------
power or remedy accruing to any party to this Agreement, upon any breach or
default of the other party, shall impair any such right, power or remedy of such
non-breaching party nor shall it be construed to be a waiver of any such breach
or default, or an acquiescence therein, or of or in any similar breach or
default thereafter occurring; nor shall any waiver of any single breach or
default be deemed a waiver of any other breach or default theretofore or
thereafter occurring. Any waiver, permit, consent or approval of any kind or
character on the part of any party of any breach or default under this
Agreement, or any waiver on the part of any party of any provisions or
conditions of this Agreement, must be made in writing and shall be effective
only to the extent specifically set forth in such writing. All remedies, either
under this Agreement, or by law or otherwise afforded to any holder, shall be
cumulative and not alternative.
2.11 Dispute Resolution.
------------------
(a) Any claim, controversy or dispute, whether sounding in contract,
statute, tort, fraud, misrepresentation or other legal theory, whenever brought
and whether between the parties to this Agreement or between one of the parties
to this Agreement and the employees, agents or affiliated businesses of the
other party, shall be resolved by arbitration as prescribed in this paragraph.
(b) A single arbitrator engaged in the practice of law shall conduct
the arbitration under the then current commercial arbitration rules of the
American Arbitration Association ("AAA"), unless otherwise provided herein. The
arbitrator shall be selected in accordance with AAA procedures from a list of
qualified (i.e., knowledgeable in the Company's industry) people
17
<PAGE>
maintained by AAA. The arbitration shall be conducted in the regional AAA office
in Los Angeles, California, and all expedited procedures prescribed by the AAA
rules shall apply.
(c) The arbitrator shall only have authority to award compensatory
damages and shall not have authority to award exemplary or punitive damages, or
other non-compensatory damages or any other form of relief; provided, however,
either party may apply to any court having jurisdiction thereof solely for the
entry of injunctive relief to maintain the status quo until such time as the
----------
arbitration award is rendered or the controversy is otherwise resolved. Each
party shall bear its own costs and attorney's fees and the parties shall share
equally the fees and expenses of the arbitration. The arbitrator's decision and
award shall be final and binding, and judgment upon the award rendered by the
arbitrator may be entered in any court having jurisdiction thereof.
(d) If any party files a judicial or administrative action asserting
claims subject to arbitration, as prescribed herein, and another party
successfully stays such action and/or compels arbitration of said claims, the
party filing said action shall pay the other party's costs and expenses incurred
in seeking such stay and/or compelling arbitration, including reasonable
attorneys' fees.
[SIGNATURE PAGE FOLLOWS]
18
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
NEW MEDIA NETWORK, INC. TVN ENTERTAINMENT CORPORATION
______________________________ _________________________________
By:___________________________ By:______________________________
Its:__________________________ Its:_____________________________
Date:_________________________ Date:____________________________
IAN DUFFEL ALAN MORELLI
______________________________ _________________________________
Date:_________________________ Date:____________________________
<PAGE>
Exhibit A
Addresses for Notices
COMPANY:
New Media Network, Inc.
1427 Third Street Promenade, Suite 200
Santa Monica, California 90401
Facsimile: (310) 394-6396
SERIES B PURCHASER:
TVN Entertainment Corporation
2901 West Alameda Boulevard, 7th Floor
Burbank, California 91505
Attn: Arthur Fields
Facsimile: (818) 526-5002
MORELLI:
Alan E. Morelli
200 Mantua Road
Pacific Palisades, California 90272
Facsimile: (310) 230-2526
FOUNDER:
Ian W. Duffell
2240 Bella Vista Drive
Montecito, California 93108
Facsimile: (805) 969 7945
<PAGE>
Exhibit E
Shareholder Agreement
<PAGE>
STOCKHOLDER'S AGREEMENT
NEW MEDIA NETWORK, INC.
THIS STOCKHOLDER'S AGREEMENT (this "Agreement") is dated as of this 30th
day of June 1999 by and between TVN Entertainment Corporation, a Delaware
corporation ("TVN") and Alan E. Morelli ("Holder").
WHEREAS, Holder is currently the majority stockholder in New Media Network,
Inc., a Delaware corporation ("NMN"), and, in connection with certain
transactions described below, has agreed to exchange 7,820,804 shares of Common
Stock of NMN for an equal number of shares of Series A Preferred Stock of NMN
("Series A Preferred");
WHEREAS, TVN has agreed to purchase 21,199,302 shares of NMN's Series B
Preferred Stock ("Series B Preferred") pursuant to a Series B Preferred Stock
Purchase Agreement of even date herewith; and
WHEREAS, as an inducement to Holder to consent to these transactions, the
parties are concurrently herewith entering into a General Continuing Guaranty,
the form of which is attached hereto as Annex A.
NOW, THEREFORE, in consideration of the premises, mutual covenants and
terms hereof, the receipt and sufficiency of which is hereby acknowledged, the
parties agree as follows:
ARTICLE I
TVN CALL RIGHT
--------------
I.1 Grant of Call Right. Commencing on the date hereof and ending on
-------------------
the earlier of (a) the date that is three (3) years following the date hereof,
or (b) the date on which all Series A Preferred shall have been redeemed
pursuant to NMN's Amended and Restated Certificate of Incorporation (the
"Restated Charter"), TVN shall have the right, but not the obligation, to
purchase, from time to time, all or any part of Holder's outstanding Series A
Preferred (the "Call Right"). The aggregate purchase price for all such shares
shall be FOUR MILLION THREE HUNDRED THOUSAND DOLLARS ($4,300,000) plus all
accrued and unpaid dividends thereon, multiplied by a fraction, the numerator of
which shall be the number of shares of Series A Preferred being purchased and
the denominator of which shall be the total number of shares of Series A
Preferred originally issued to Holder prior to entering into this Agreement (the
"Call Purchase Price").
I.2 Exercise of Call Right. In order to exercise the Call Right, TVN shall
----------------------
notify Holder not less than fifteen (15) nor more than thirty (30) days prior to
the date on which TVN intends to exercise such Call Right (the "Call Notice").
The Call Notice shall state the number of Series A Preferred shares to be
purchased (the "Call Shares"), the date on which such purchase shall be
consummated (the "Call Exercise Date") and the method of payment in accordance
with Section I.3 below. Within five (5) business days following its receipt of
the Call Notice, Holder shall provide TVN with notice setting forth the Call
Purchase Price for such Call Shares for TVN's review and approval. On the Call
Exercise Date, Holder shall deliver one or more stock certificates representing
the applicable Call Shares, duly endorsed by Holder for transfer upon receipt of
payment of the Call Purchase Price. If the Call Shares in such transaction
represent less
<PAGE>
than the total number of shares of outstanding Series A Preferred, then Holder
shall deliver said certificate(s) to NMN, and NMN shall cancel same and issue to
each of Holder and TVN a new certificate representing their respective shares.
If the Call Shares in such transaction represent the total number of shares of
outstanding Series A Preferred, then Holder shall deliver said certificate(s)
directly to TVN, duly endorsed for transfer to TVN.
I.3 Form of Consideration. TVN shall pay the Call Purchase Price by any
---------------------
one of the following methods of payment: (a) wire transfer of immediately
available funds to an account designated by Holder; (b) delivery of a certified
or bank cashier's check made payable to Holder; or (c) the issuance of shares of
Common Stock of TVN ("TVN Stock"), but only if the conditions in this section
are satisfied. TVN may elect to pay the Call Purchase Price with TVN Stock only
if TVN Stock is traded on a national securities exchange or the Nasdaq National
Market System and provided further that: (x) the TVN Stock is freely tradable,
without any restrictions or any requirement under any applicable securities laws
that a registration statement be filed with the Securities and Exchange
Commission ("TVN Free Trading Stock") or (y) in the event that TVN issues Holder
unregistered shares of TVN Stock, TVN further covenants to use commercially
reasonable efforts to cause such shares of TVN Stock to be registered pursuant
to a shelf registration statement within six (6) months following the Call
Exercise Date; provided, however, that if the Call Exercise Date occurs in the
months of November or December, TVN shall use commercially reasonable efforts to
cause such shares to be so registered within four (4) months of the Call
Exercise Date. TVN covenants to keep such registration statement continuously
effective, in compliance with all applicable laws, for a reasonable period of
time, not to exceed 90 days, subject to customary blackout periods. The 90-day
period shall be extended by the duration of any blackout period in the event
Holder has not sold all registered shares prior to the end of said 90-day
period. At its option, TVN may within the time periods set forth above, satisfy
its obligations to register shares of TVN Stock under this section by permitting
Holder to "Piggy Back" on a TVN registration statement. Holder and TVN shall, as
a condition of such registration, enter into a customary registration agreement
including, without limitation, mutual indemnification provisions.
I.4 Valuation of TVN Stock. In the event TVN elects to issue TVN Stock as
----------------------
payment of the Call Purchase Price, the Call Notice shall specify the estimated
number of shares of TVN stock to be issued to Holder at the Call Exercise Date.
The value of each such share of TVN Stock shall be the average closing price for
TVN Stock on the principal exchange on which it is traded over the thirty (30)
day period ending three (3) days before the Call Exercise Date. In the event the
TVN Stock issued as payment of the Call Purchase Price is restricted stock, and
TVN fails to obtain the effectiveness of a registration statement for such stock
within the specified four (4) or six (6) months following the Call Exercise
Date, then Holder shall have the right, but not the obligation, to require that
TVN purchase from Holder the TVN Stock for an amount of cash equal to the Call
Purchase Price, plus interest at a rate of 8% per annum accruing from the Call
Exercise Date to the date of Holder's receipt of such cash payment.
I.5 Further Actions. The parties hereto agree to use all reasonable
---------------
efforts to take, or cause to be taken and to do, or cause to be done, all things
necessary, proper or advisable to effect the transactions contemplated in this
Article I as promptly as practicable.
2
<PAGE>
ARTICLE II
REDEMPTION/PUT RIGHT
--------------------
II.1 Notice of Redemption Obligation. Reference is made to Section IV.B.5
-------------------------------
of the Restated Charter whereby Holder may require NMN to redeem the Series A
Preferred ("NMN's Redemption Obligation"). Holder will provide TVN with a copy
of any notice seeking to trigger NMN's Redemption Obligation (the "Redemption
Notice"). Within ten (10) business days of receipt by TVN of a Redemption
Notice, TVN may notify Holder that it elects to satisfy NMN's Redemption
Obligation on the terms set forth below.
II.2 Grant of Put Right. TVN hereby grants to Holder the right to cause
------------------
TVN to purchase all of Holder's Series A Preferred (the "Put Right") in the
event that: (a) three (3) years following the date hereof Holder remains the
beneficial owner of any Series A Preferred and Holder wishes to exercise
Holder's right to require NMN to satisfy NMN's Redemption Obligation and has
reasonable grounds to believe that NMN may be unable (under applicable law, for
financial reasons or otherwise) to perform NMN's Redemption Obligation and
Holder confirms such belief in writing to TVN; (b) there occurs a "Sale Event"
(as such term is defined in the Restated Charter on the date hereof) and NMN
shall not, for any reason, have performed any of its obligations when due to
redeem Holder's Series A Preferred under the second sentence of Subsection
IV.B.5.(a) of the Restated Charter; or (c) NMN shall be adjudicated bankrupt or
insolvent or admit in writing its inability to pay debts as they mature or make
an assignment to or for the benefit of creditors, or consent to the appointment
of a receiver, trustee, or similar officer for a substantial part of NMN's
property or institute (by petition, application, answer, consent or otherwise)
any bankruptcy, insolvency, reorganization or readjustment of debt, dissolution,
liquidation, or similar proceeding under the U.S. Bankruptcy Code or laws of any
jurisdiction or in the event such proceeding shall be instituted and remains
undismissed for a period of sixty (60) days, for, in each case, the sum of TWO
MILLION SIX HUNDRED EIGHTY THOUSAND DOLLARS ($2,680,000), plus all accrued but
unpaid dividends, if any, (the "Put Purchase Price").
II.3 Discharge of NMN's Redemption Obligation. In the event TVN elects to
----------------------------------------
directly perform NMN's Redemption Obligation pursuant to Section II.1 above, and
TVN performs such obligations completely, Holder acknowledges and agrees that
NMN's Redemption Obligation shall be deemed discharged.
II.4 Exercise of Put Right. In the event that the Holder wishes to
---------------------
exercise the Put Right, Holder shall notify TVN in writing not less than fifteen
(15) nor more than thirty (30) days prior to the date of such exercise (the "Put
Notice"). The Put Notice shall state the date on which such sale shall be
consummated (the "Put Exercise Date"), the number of shares TVN shall purchase
(the "Put Shares"), the Put Purchase Price, and the basis upon which such put is
being exercised. Upon TVN's receipt of the Put Notice, TVN shall notify Holder
within ten (10) business days whether (i) the purchase price stated in the Put
Notice is correct and (ii) it elects to pay the Put Purchase Price in cash,
either in full or pursuant to installment payments upon terms described in
Section II.5 below, or in full in TVN Stock pursuant to Section II.5 below. On
the Put Exercise Date, as well as on dates where funds are tendered pursuant to
any installment payments, Holder shall deliver one or more certificates
representing the applicable shares being sold, duly endorsed by Holder. The Put
Shares represent the total number of shares of outstanding Series A Preferred,
and when paid for in full, in cash or TVN Stock, Holder shall deliver said
certificate(s) directly to TVN, duly endorsed for transfer to TVN.
3
<PAGE>
II.5 Form of Consideration. The Put Purchase Price shall be paid by TVN to
---------------------
Holder, at TVN's option, by any one of the following methods of payment: (a)
wire transfer of immediately available funds to a bank account designated by
Holder, (b) delivery of a certified or bank cashier's check made payable to
Holder, (c) in equal quarterly payments over a five (5) year period with
dividends continuing to accrue on the Put Shares not yet paid for at a rate of
eight percent (8%) per annum, pursuant to a promissory note reflecting such
terms and such other customary terms and conditions and providing further that
payments are to be made on the first day of each calendar quarter beginning on
the first such day following the Put Exercise Date and that payments shall be
accelerated upon a sale or merger of TVN involving a change of control of TVN,
or the sale of all or substantially all of TVN's assets; or (d) in TVN Stock,
valued as set forth in the second sentence of Section I.4 above, but only if the
conditions in this section are satisfied. TVN may elect to pay the Put Purchase
Price using TVN Stock only if TVN Stock is traded on a national securities
exchange or the Nasdaq National Market System and provided further that: (x) the
TVN Stock is TVN Free Trading Stock or (y) in the event that TVN issues Holder
unregistered shares of TVN Stock, TVN further covenants to use commercially
reasonable efforts to cause such shares of TVN Stock to be registered pursuant
to a shelf registration statement within six (6) months following the Put
Exercise Date; provided, however, that if the Put Exercise Date occurs in the
months of November or December, TVN shall use commercially reasonable efforts to
cause such shares to be so registered within four months (4) of the Put Exercise
Date. TVN covenants to keep such registration statement continuously effective,
in compliance with all applicable laws, for a reasonable period of time, not to
exceed 90 days, subject to customary blackout periods. The 90-day period shall
be extended by the duration of any blackout period in the event Holder has not
sold all registered shares prior to the end of said 90-day period. At its
option, TVN may, within the time periods set forth above, satisfy its
obligations to register shares of TVN Stock under this section by permitting
Holder to "Piggy Back" on a TVN registration statement. Holder and TVN shall,
as a condition of such registration, enter into a customary registration
agreement including, without limitation, mutual indemnification provisions. In
the event that the TVN Stock issued as payment of the Put Purchase Price is
unregistered stock and TVN fails to obtain the effectiveness of a registration
statement for such stock as described above, then Holder shall have the right,
but not the obligation, to require that TVN purchase from Holder the TVN Stock
for an amount of cash equal to the Put Purchase Price plus interest at a rate of
8% per annum accruing from the Put Exercise Date to the date of Holder's receipt
of such cash payment.
II.6 Further Actions. The parties hereto agree to use all reasonable
---------------
efforts to take, or cause to be taken and to do, or cause to be done, all things
necessary, proper or advisable to effect the transactions contemplated in this
Article II as promptly as practicable.
ARTICLE III
TERMINATION OF STOCKHOLDER RIGHTS
---------------------------------
The Purchase Rights created under Articles I and II of this Agreement shall
expire upon the closing of the first public offering of NMN's Common Stock to
the general public which is effected pursuant to a registration statement filed
with, and declared effective by, the Securities and Exchange Commission under
the Securities Act, prior to which all Preferred Stock will be converted into
Common Stock under the terms of the Restated Charter (the "IPO Closing Date").
4
<PAGE>
ARTICLE IV
SPECIFIC PERFORMANCE
--------------------
The rights of the parties under this Agreement are unique and, accordingly,
the parties shall, in addition to the other remedies available to them at law or
in equity, have the right to enforce their rights hereunder by actions for
specific performance to the extent permitted by law.
ARTICLE V
LEGENDS
-------
The certificates representing the shares of the Series A Preferred shall
have stamped on their face the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE
TERMS AND CONDITIONS OF A STOCKHOLDER'S AGREEMENT DATED AS OF JUNE 30,
1999 BY AND BETWEEN TVN ENTERTAINMENT CORPORATION AND ALAN E. MORELLI."
Nothing in this Agreement should be construed as a modification or
amendment of any restrictions on transfer under applicable federal or state
securities laws.
ARTICLE VI
GENERAL PROVISIONS
------------------
VI.1 Governing Law. This Agreement shall be governed by the laws of the
-------------
State of Delaware without regard to choice of law provisions.
VI.2 Entire Agreement. This Agreement constitutes the entire agreement
----------------
among the parties with respect to the subject matter hereof and supersedes all
prior agreements and understandings between them or any of them as to such
subject matter.
VI.3 Amendment. Except as otherwise expressly provided herein, this
---------
Agreement may be amended only upon the written consent of TVN and Holder.
VI.4 Successors. This Agreement shall be binding upon and shall inure to
----------
the benefit of the parties hereto and their respective heirs, executors, legal
representatives, successors and permitted transferees, except as may be
expressly provided otherwise herein.
VI.5 Invalidity of Provisions. In the case any one or more of the
------------------------
provisions contained in this Agreement shall for any reason be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this Agreement and such
invalid, illegal and unenforceable provision shall be reformed and construed so
that it will be valid, legal, and enforceable to the maximum extent permitted by
law.
VI.6 Notice. Any notice, demand or request required or permitted to be
------
given by either TVN or Holder pursuant to the terms of this Agreement shall be
in writing and shall be deemed given when delivered personally or deposited in
the U.S. mail, First Class with postage prepaid, and addressed to the parties at
the addresses of the parties set forth at the end of this Agreement or such
other address as a party may request by notifying the other in writing.
5
<PAGE>
VI.7 No Waiver. Either party's failure to enforce any provision or
---------
provisions of this Agreement shall not in any way be construed as a waiver of
any such provision or provisions, nor prevent that party thereafter from
enforcing each and every other provision hereunder. The rights granted both
parties herein are cumulative and shall not constitute a waiver of either
party's right to assert all other legal remedies available to it under the
circumstances.
VI.8 Cooperation. Holder and TVN agree to execute any further
-----------
documentation or instruments necessary or desirable to carry out the purposes or
intent of this Agreement.
VI.9 No Assignment. The rights and obligations of either party hereunder
-------------
may not be assigned without the prior written consent of the other party hereto.
VI.10 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
[Signature page follows]
6
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Stockholder's Agreement
as of the day and year first set forth above.
TVN ENTERTAINMENT CORPORATION
_______________________________
Alan E. Morelli
By: _______________________________
Name: _____________________________
Title: ____________________________
7
<PAGE>
ANNEX A
FORM OF GENERAL CONTINUING GUARANTY
8
<PAGE>
ANNEX 1
GENERAL CONTINUING GUARANTY
----------------------------
THIS GENERAL CONTINUING GUARANTY ("Guaranty") dated as of June 30,
1999, is executed and delivered by TVN Entertainment Corporation, a Delaware
corporation ("Guarantor"), in favor of Alan E. Morelli ("Guarantied Party"), in
light of the following:
WHEREAS, Guarantor is, contemporaneously herewith, acquiring a
majority interest in the outstanding shares of capital stock of New Media
Network, Inc., a Delaware corporation ("NMN") pursuant to that certain Series B
Preferred Stock Purchase Agreement of even date herewith, and Guarantor and
Guarantied Party are also entering into that certain Stockholders Agreement
("the Stockholders Agreement") of even date herewith in connection with such
investment by Guarantor; and
WHEREAS, in order to induce the Guarantied Party to enter into the
Stockholders Agreement and the other terms and conditions of the investment by
Guarantor in NMN, Guarantor has agreed to guarantee various payment obligations
to Guarantied Party stemming therefrom.
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, Guarantor hereby agrees, in favor of Guarantied Party,
as follows:
1. Definitions and Construction.
----------------------------
(a) Definitions. The following terms, as used in this Guaranty, shall
-----------
have the following meanings:
"Guarantied Obligations" shall mean: (a) the due and punctual payment
----------------------
of the Redemption Purchase Price to the Guarantied Party and (b) the full and
prompt payment of all costs of collection thereof, including but not limited to
reasonable attorney's fees and expenses, whether or not there is litigation,
court costs, and all costs in connection with any proceeding that may arise
under the United States Bankruptcy Code.
"Indebtedness" shall mean the Redemption Purchase Price and any and all
------------
obligations, indebtedness, or liabilities of any kind or character owed or
scheduled to be owed by NMN or Guarantor to Guarantied Party and arising
directly or indirectly out of or in connection with the Restated Charter,
whether heretofore, now, or hereafter made, incurred, or created, whether
voluntarily or involuntarily made, incurred or created, whether absolute or
contingent, liquidated or unliquidated, determined or indeterminate, and whether
recovery is or hereafter becomes barred by any statue of limitations or
otherwise becomes unenforceable for any reason whatsoever, including any act or
failure to act by Guarantied Party.
"Redemption Purchase Price" shall mean the price, including all
-------------------------
accrued but unpaid dividends, which NMN is required to pay to Guarantied Party
pursuant to the Restated Charter including, without limitation, Subsection
IV.B.5(a) and (e) and all related provisions. If NMN shall have elected to pay
the Redemption Purchase Price to Guarantied Party in
1
<PAGE>
installments with accruing interest as therein stated and as may be
reflected in an installment sale agreement and/or promissory note, the term
"Redemption Purchase Price" shall include such ongoing installment
payments, when required to be paid, in their entirety.
"Restated Charter" shall mean the Restated Certificate of
----------------
Incorporation of NMN filed with the Secretary of State of Delaware on June
30, 1999, as such may be amended and/or restated from time to time (section
references herein shall refer to the present sections, not to any amended
section references).
(b) Construction. Unless the context of this Guaranty clearly requires
------------
otherwise, references to the plural include the singular, references to the
singular include the plural, the part includes the whole, in terms "include" and
"including" are not limiting, and the term "or" has the inclusive meaning
represented by the phrase "and/or." The words "hereof," "herein," "hereby,"
"herewith," "hereunder," and other similar terms refer to this Guaranty as a
whole and not to any particular provision of this Guaranty. Any reference in
this Guaranty to this Guaranty or the Restated Charter includes any and all
alterations, amendments, restatements, extensions, modifications, renewals, or
supplements thereto or thereof, as applicable. Neither this Guaranty nor any
uncertainty or ambiguity herein shall be construed or resolved against
Guarantied Party or Guarantor, whether under any rule of construction or
otherwise. On the contrary, this Guaranty has been reviewed by Guarantor,
Guarantied Party, and their respective counsel, and shall be construed and
interpreted according to the ordinary meaning of the words used so as to fairly
accomplish the purposes and intentions of Guarantied Party and Guarantor.
2. Guarantied Obligations. Guarantor hereby irrevocably and
----------------------
unconditionally guarantees to Guarantied Party, as and for its own debt, until
final and indefeasible payment thereof has been made, the payment of the
Guarantied Obligations, in each case, when and as the same shall become due and
payable as provided in the Restated Charter; it being the intent of Guarantor
that the guarantee set forth herein shall be a guarantee of payment and not a
guarantee of collection. If NMN shall fail, or for any reason whatsoever be
unable, to (when and as required pursuant to the terms and conditions set forth
in the Restated Charter): (i) redeem the outstanding NMN Series A Preferred
Stock, or (ii) pay all, or any portion, of the Redemption Purchase Price, then
Guarantor shall in all such events directly assume, and be required to
discharge, such payment obligations, when due, in favor of the Guarantied Party.
3. Continuing Guaranty. This Guaranty includes Guarantied Obligations
-------------------
arising under future transactions, approved by TVN in writing, continuing,
compromising, extending, increasing, modifying, releasing, or renewing any of
the Guarantied Obligations, changing the interest rate, payment terms, or other
terms and conditions thereof, or creating new or additional Guarantied
Obligations after prior Guarantied Obligations have been satisfied in whole or
in part. To the maximum extent permitted by law, Guarantor hereby waives any
right to revoke this Guaranty as to future Indebtedness. If such a revocation is
effective notwithstanding the foregoing waiver, Guarantor acknowledges and
agrees that (a) no such revocation shall be effective until written notice
thereof has been received by Guarantied Party, (b) no such revocation shall
apply to any Guarantied Obligations in existence on such date (including any
subsequent continuation, extension, or renewal thereof, or change in the
interest rate, payment terms, or other terms and conditions thereof), (c) no
such revocation shall apply to any Guarantied Obligations made or created after
such date to the extent made or created pursuant to
2
<PAGE>
a legally binding commitment of Guarantied Party in existence on the date of
such revocation, (d) no payment by Guarantor, NMN, or from any other source,
prior to the date of such revocation shall reduce the maximum obligation of
Guarantor hereunder, and (e) any payment by NMN or from any source other than
Guarantor subsequent to the date of such revocation shall first be applied to
that portion of the Guarantied Obligations as to which the revocation is
effective and which are not, therefore, guaranteed hereunder, and to the extent
so applied shall not reduce the maximum obligation of Guarantor hereunder.
4. Performance Under this Guaranty. In the event NMN fails to make any
-------------------------------
payment of any Guarantied Obligations, on or before the due date thereof in the
manner provided in the Restated Charter or written document stemming therefrom,
Guarantor upon receipt of notice that NMN has failed to pay Guarantor, shall
immediately make such payment to Guarantied Party.
5. Primary Obligations. This Guaranty shall be construed to be a primary
-------------------
and original obligation of Guarantor, and not merely the creation of a surety
relationship, and is an absolute, unconditional, and continuing guarantee of
payment and performance which shall remain in full force and effect without
respect to future changes in conditions. Guarantor agrees that it is directly
liable to Guarantied Party, that the obligations of Guarantor hereunder are
independent of the obligations of NMN, and that a separate action may be brought
against the Guarantor, whether such action is brought against NMN or whether NMN
is joined in such action. Guarantor agrees that its liability hereunder shall be
immediate and shall not be contingent upon the exercise or enforcement by
Guarantied Party of whatever remedies it may have against NMN, or the
enforcement of any lien or realization upon any security Guarantied Party may at
any time possess. Guarantor agrees that any release which may be given by
Guarantied Party to NMN shall not release Guarantor. Guarantor consents and
agrees that Guarantied Party shall be under no obligation to marshal any
property or assets of NMN in favor of Guarantor, or against or in payment of any
or all of the Guarantied Obligations.
6. Waivers.
-------
(a) To the fullest extent permitted by applicable law, Guarantor
hereby waives: (i) notice of any financial accommodation made or extended by
Guarantied Party to NMN under the Restated Charter; (ii) notice of the amount of
the Guarantied Obligations, subject, however, to Guarantor's right to make
inquiry of Guarantied Party to ascertain the amount of the Guarantied
Obligations at any reasonable time; (iii) notice of any adverse change in the
financial condition of NMN or of any other fact that might increase Guarantor's
risk hereunder; (iv) notice of presentment of payment, demand, and protest; (v)
any amendments of the Restated Charter; and (vi) all other notices (except if
such notice is specifically required to be given to Guarantor under this
Guaranty) and demands to which Guarantor might otherwise be entitled.
(b) In the event that NMN fails to pay Indebtedness as and when it
shall be due, Guarantor waives, to the fullest extent permitted by applicable
law, the right by statute or otherwise to require Guarantied Party to institute
suit against NMN or to exhaust any rights and remedies which Guarantied Party
has or may have against NMN. In this regard, Guarantor agrees that it is bound
to the payment of each and all Guarantied Obligations, whether now existing or
hereafter arising, as fully as if such Guarantied Obligations were directly
owing to Guarantied Party by Guarantor. Guarantor further waives any defense
arising by reason of any
3
<PAGE>
disability, dissolution or other defense (other than the defense that the
Guarantied Obligations shall have been fully and finally performed and
indefeasibly paid) of NMN or by reason of the cessation from any cause
whatsoever of the liability of NMN in respect thereof.
(c) To the fullest extent permitted by applicable law, Guarantor
hereby waives: (i) any right to assert against Guarantied Party any defense,
whether legal or equitable, set-off, counterclaim, or claim which Guarantor may
now or at any time hereafter have against NMN or any other party liable to
Guarantied Party; (ii) any defense, set-off, counterclaim, or claim of any kind
or nature, arising directly or indirectly from the present or future lack of
perfection, sufficiently, validity, or enforceability of the Guarantied
Obligations or any security therefor; (iii) any defense arising by reason of any
or defense based upon any law of California or any other jurisdiction; and (iv)
the benefit of any statute of limitations affecting the Guarantor's liability
hereunder or the enforcement thereof, and any act which shall defer or delay the
operation of any statute of limitations applicable to the Guarantied Obligations
shall similarly operate to defer or delay the operation of such statute of
limitations applicable to Guarantor's liability hereunder.
(d) Until such time as all of the Guarantied Obligations have been
fully, finally, and indefeasibly paid in full in cash (or these obligations are
otherwise discharged): (i) Guarantor hereby waives and postpones any right of
subrogation Guarantor has or may have as against NMN with respect to the
Guarantied Obligations; (ii) in addition, Guarantor hereby waives and postpones
any right to proceed against NMN or any other party, now or hereafter, for
contribution, indemnity, reimbursement, or any other suretyship rights and
claims (irrespective of whether direct or indirect, liquidated or contingent),
with respect to the Guarantied Obligations; and (iii) in addition, Guarantor
also hereby waives and postpones any right to proceed or to seek recourse
against or with respect to any property or asset NMN.
7. Consent. Guarantor consents and agrees that, without notice to or by
-------
Guarantor and without affecting or impairing the obligations of Guarantor
hereunder, Guarantied Party may, by action or inaction, compromise or settle,
extend the period of duration or the time for the payment, or discharge the
performance of, or may refuse to, or otherwise not enforce, or may, by action or
inaction, release NMN from all or any of its payment obligations under the
Restated Charter or other agreement or may grant other indulgences to NMN in
respect thereof.
8. No Election. Guarantied Party shall have the right to seek recourse
-----------
against Guarantor to the fullest extent provided for herein and no election by
Guarantied Party to proceed in one form of action or proceeding, or against any
party, or on any obligation, shall constitute a waiver of Guarantied Party's
right to proceed in any other form of action or proceeding or against other
parties unless Guarantied Party has expressly waived such right in writing.
Specifically, but without limiting the generality of the foregoing, no action or
proceeding by Guarantied Party under any document or instrument evidencing the
Guarantied Obligations shall serve to diminish the liability of Guarantor under
this Guaranty except to the extent that Guarantied Party finally and
unconditionally shall have realized indefeasible payment by such action or
proceeding.
9. Indefeasible Payment. The Guarantied Obligations shall not be
--------------------
considered indefeasible paid for purposes of this Guaranty unless and until all
payments to Guarantied Party are no longer subject to any right on the part of
any party whomsoever, including NMN, any of
4
<PAGE>
NMN's stockholders, any of NMN's creditors, NMN as a debtor in possession, or
any trustee (whether appointed under the Bankruptcy Code or otherwise) of NMN's
assets to invalidate or set aside such payments or to seek to recoup the amount
of such payments or any portion thereof, or to declare same to the fraudulent,
preferential or in violation of the Delaware General Corporation Law. In the
event that, for any reason, all or any portion of such payments to Guarantied
Party is set aside or restored, whether voluntarily or involuntarily, after the
making thereof, the obligation or part thereof intended to be satisfied thereby
shall be revived and continued in full force and effect as if said payment or
payments had not been made and Guarantor shall be liable for the full amount
Guarantied Party is required to repay plus any and all costs and expenses
(including attorneys' fees) paid by Guarantied Party in connection therewith.
10. NMN Financial Condition. Guarantor represents and warrants to
-----------------------
Guarantied Party that it is currently informed of the financial condition of NMN
and of all other circumstances which a diligent inquiry would reveal and which
bear upon the risk of nonpayment of the Guarantied Obligations. Guarantor
further represents and warrants to Guarantied Party that it has read and
understands the terms and conditions of the Restated Charter. Guarantor hereby
covenants that it will continue to keep itself informed of NMN's financial
condition and of all other circumstances which bear upon the risk of nonpayment
or nonperformance of the Guarantied Obligations.
11. Subordination. Guarantor hereby agrees that any and all present and
-------------
future indebtedness of NMN owing to Guarantor is postponed in favor of and
subordinated to payment, in full, in cash, of the Guarantied Obligations. In
this regard, no payment of any kind whatsoever shall be made with respect to
such indebtedness until the Guarantied Obligations have been indefeasibly paid
in full.
12. Payments: Application. All payments to be made hereunder by Guarantor
---------------------
shall be made in immediately available funds and shall be made without deduction
(whether for taxes or otherwise) or offset and shall be applied as follows:
first, to all reasonable costs and expenses (including attorneys' fees)
incurred by Guarantied Party in enforcing this Guaranty or in collecting the
Guarantied Obligations; second, to all accrued and unpaid interest owing to
Guarantied Party constituting Guarantied Obligations; and third, to the balance
of the Guarantied Obligations.
13. Attorneys' Fees and Costs. Guarantor agrees to pay, on demand, all
-------------------------
reasonable attorneys' fees and all other reasonable costs and expenses which may
be incurred by Guarantied Party in the enforcement of this Guaranty or in any
way arising out of, or consequential to the protection, assertion, or
enforcement of the Guarantied Obligations (or any security therefor),
irrespective or whether suit is brought.
14. Notices. Unless otherwise specifically provided in this Guaranty, any
-------
notice or other communication relating to this Guaranty or any other agreement
entered into in connection herewith shall be in writing and shall be personally
delivered or sent by registered or certified mail, postage prepaid, return
receipt requested, or by facsimile with electronic confirmation of receipt, or
by telegram with messenger delivery specified to Guarantor or to Guarantied
Party, as the case may be, at its addresses set forth below:
5
<PAGE>
If to Guarantor: TVN Entertainment Corporation
2901 West Alameda Avenue
Burbank, California 91505
Attn: Arthur Fields
Facsimile: (818) 526-5003
If to Guarantied Party: Alan E. Morelli
200 Mantua Rd.
Pacific Palisades, California 90272
Facsimile: (310) 230-2526
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other. All notices or demands sent in accordance with this Section 14 shall be
deemed received on the earlier of the date of actual receipt or three (3)
calendar days after the deposit thereof in the mail.
15. Cumulative Remedies. No remedy under this Guaranty or under the
-------------------
Restated Charter is intended to be exclusive of any other remedy, but each and
every remedy shall be cumulative and in addition to any and every other remedy
given under this Guaranty, the Restated Charter and those provided by law. No
delay or omission by Guarantied Party to exercise any right under this Guaranty
shall impair any such right nor be construed to be a waiver thereof. No failure
on the part of Guarantied Party to exercise, and no delay in exercising, any
right under this Guaranty shall operate as a waiver thereof; nor shall any
single or partial exercise of any right under this Guaranty preclude any other
or further exercise thereof or the exercise of any other right.
16. Severability of Provisions. Any provision of this Guaranty which is
--------------------------
prohibited or unenforceable under applicable law shall be ineffective to the
extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof.
17. Entire Agreement: Amendments. This Guaranty constitutes the entire
----------------------------
agreement between Guarantor and Guarantied party pertaining to the subject
matter contained herein. This Guaranty may not be altered, amended, or
modified, nor may any provision hereof be waived or noncompliance therewith
consented to, except by means of a writing executed by both Guarantor and
Guarantied Party. Any such alteration, amendment, modification, waiver, or
consent shall be effective only to the extent specified therein and for the
specific purpose for which given. No course of dealing and no delay or waiver
of any aright or default under this Guaranty shall be deemed a waiver of any
other, similar or dissimilar, right or default or otherwise prejudice the rights
and remedies hereunder.
18. Successors and Assigns. This Guaranty shall be binding upon Guarantor
----------------------
and its successors and assigns and shall inure to the benefit of the heirs and
assigns of Guarantied Party; provided, however, Guarantor shall not assign this
-------- -------
Guaranty or delegate any of its duties hereunder without Guarantied Party's
prior written consent and any unconsented to assignment shall be absolutely
void. In the event of any assignment or other transfer of rights by Guarantied
Party, the rights and benefits herein conferred upon Guarantied Party shall
automatically extend to and be vested in such assignee or other transferee.
6
<PAGE>
19. No Third Party Beneficiary. This Guaranty is solely for the benefit
--------------------------
of Guarantied Party and his heirs and assigns and may not be relied on by any
other Party.
20. Choice Of Law And Venue: Jury Trial Waiver
------------------------------------------
The validity of this Guaranty, its construction, interpretation,
and enforcement, and the rights of the parties hereto with respect to all
matters arising hereunder or related hereto shall be determined under, governed
by, and construed in accordance with the laws of the State of California.
The parties hereto agree that all actions or proceedings arising
in connection with this Guaranty shall be tried and litigated only in the State
and federal courts located in the County of Los Angeles, State of California.
Guarantor and Guarantied Party hereby waive their respective
rights to a jury trial of any claim or cause of action based upon or arising out
of this Guaranty or any of the transactions contemplated herein, including
contract claims, tort claims, breach of duty claims, and all other common law or
statutory claims. Guarantor and Guarantied Party represent that each has
reviewed this waiver and each knowingly and voluntarily waives its or his jury
trial rights following consultation with legal counsel. In the event of
litigation, a copy of this Guaranty may be filed as a written consent to a trial
by the court.
IN WITNESS WHEREOF, the undersigned has executed and delivered
this Guaranty as of the date first written above.
Guarantor:
TVN ENTERTAINMENT CORPORATION,
By: /s/ Arthur Fields
--------------------------------
Name: Arthur Fields
------------------------------
Title: Sr. Exec. V.P.
-----------------------------
Guarantied Party:
/s/ Alan E. Morelli
-----------------------------------
Alan e. Morelli
Acknowledged and consented to:
NEW MEDIA NETWORK, INC.
7
<PAGE>
By: /s/ Ian W. Duffell
--------------------------
Name: IAN W. DUFFELL
------------------------
Title: President & CEO
-----------------------
8
<PAGE>
ANNEX B
REGISTRATION RIGHTS AGREEMENT
(TVN ENTERTAINMENT CORPORATION)
9
<PAGE>
Exhibit F
Opinion of Counsel to New Media Network, Inc.
<PAGE>
[LETTERHEAD OF BROBECK PHLEGER & HARRISON LLP]
June 30, 1999
TVN Entertainment Corporation
2901 West Alameda Boulevard, 7th Floor
Burbank, California 91505
Gentlemen:
We have acted as counsel for New Media Network, Inc., a Delaware
corporation (the "Company"), in connection with (i) the issuance and sale of
shares of its Series B Preferred Stock pursuant to the Series B Preferred Stock
Purchase Agreement, dated June 30, 1999 (the "Stock Purchase Agreement"),
between the Company and you, (ii) the Registration Rights Agreement, dated June
30, 1999 (the "Registration Rights Agreement"), by and among the Company, Alan
E. Morelli, Ian Duffel, and you, (iii) the Voting Agreement (the "Series A
Voting Agreement"), dated June 30, 1999, by and between the Company and Alan E.
Morelli ("Mr. Morelli"), and (iv) the Voting Agreement (the "Voting Agreement-
SATU"), dated June 30, 1999, by and among the Company, Mr. Morelli, Ian W.
Duffel and you (the Series A Voting Agreement and the Voting Agreement-SATU, are
sometimes referred to herein as, the "Voting Agreements"). This opinion letter
is being rendered to you pursuant to Section 5.11 of the Stock Purchase
Agreement. Capitalized terms not otherwise defined in this opinion letter have
the meanings given them in the Stock Purchase Agreement.
In connection with the opinions expressed herein, we have made such
examination of matter of law and of fact as we considered appropriate or
advisable for purposes hereof. As to matters of fact material to the opinions
expressed herein, we have relied upon the representations and warranties as to
factual matters contained in and made by the Company pursuant to the Stock
Purchase Agreement and upon certificates and statements of government officials
and of officers of the Company. We have also examined originals or copies of
such corporate documents or records of the Company as we have considered
appropriate for the opinions expressed herein. We have assumed for the purposes
of this opinion letter the genuineness of all signatures, the legal capacity of
natural persons, the authenticity of the documents submitted to us as originals,
the conformity to the original documents of all documents submitted to us as
certified, facsimile or photostatic copies, and the authenticity of the
originals of such copies.
In rendering this opinion letter we have also assumed: (A) that the
Stock Purchase Agreement and the Registration Rights Agreement (collectively,
the "Transaction Agreements") have been duly and validly executed and delivered
by you or on your behalf, that you have the
<PAGE>
TVN Entertainment Corporation
June 30, 1999 Page 2
power to enter into and perform all your obligations thereunder, and that the
Transaction Agreements constitute valid, legal, binding and enforceable
obligations upon you; (B) that the representations and warranties made in the
Stock Purchase Agreement by you are true and correct; (C) that any wire
transfers, drafts or checks tendered by you will be honored; and (D) that you
have filed any required state franchise, income or similar tax returns have been
paid any required state franchise, income or similar tax returns.
As used in this opinion letter, the expression "we are not aware" or
the phrase "to our knowledge", or any similar expression or phrase with respect
to our knowledge of matters of fact, means as to matters of fact that, based on
the actual knowledge of individual attorneys within the firm principally
responsible for handling current matters for the Company (and not including any
constructive or imputed notice of any information), and after an examination of
documents referred to herein and after inquiries of certain officers of the
Company, no facts have been disclosed to that have caused us to conclude that
the opinions expressed are factually incorrect; but beyond that we have made no
factual investigations for the purposes of rendering this opinion letter.
Specifically, but without limitation, we have not searched the dockets of any
courts and we have made no inquiries of securities holders or employees of the
Company, other than such officers.
This opinion letter relates solely to the laws of the State of
California, the General Corporation Law of the State of Delaware and the federal
law of the United States and we express no opinion with respect to the effect or
application of any other laws. Special rulings of authorities administering such
laws or opinions of other counsels have been sought or obtained.
Based upon our examination of and reliance upon the foregoing and
subject to the limitations, exceptions, qualifications and assumptions set forth
below and except as set forth in the Stock Purchase Agreement of the Disclosure
Statement thereto, we are of the opinion that as of the date hereof:
1. The Company is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of Delaware, and the Company
has the requisite corporate power and authority to own its properties and to
conduct its business as, to our knowledge, it is presently conducted.
2. The Company is qualified to do business as a foreign corporation
in the State of California.
3. The Company has the requisite corporate power and authority to
execute, deliver and perform the Transaction Agreements and the Voting
Agreements. Each of the Transaction Agreements and the Voting Agreements have
been duly and validly authorized by the Company, duly executed and delivered by
an authorized officer of the Company and each of the Transaction Agreements
constitutes a legal, valid and binding obligation of the Company, enforceable by
you against the Company in accordance with its terms.
<PAGE>
TVN Entertainment Corporation Page 3
June 30, 1999
4. The Company has the requisite corporate power and authority to execute,
deliver and perform that certain Stock Exchange Agreement (the "Stock Exchange
Agreement"), dated June 30, 1999, by and between the Company and Mr. Morelli.
The Stock Exchange Agreement has been duly and validly authorized by the
Company, duly executed and delivered by an authorized officer of the Company and
constitutes a legal, valid and binding obligation of the Company enforceable by
the Company against Mr. Morelli in accordance with its terms.
5. The capitalization of the Company is as follows:
(a) Preferred Stock. Twenty Nine Million Twenty Thousand One Hundred
Six (29,020,106) authorized shares of Preferred Stock, par value $0.01 per share
(the "Preferred Stock"), of which (i) Seven Million Eight Hundred Twenty
Thousand Eight Hundred Four (7,820,804) shares have been designated Series A
Preferred Stock, and to our knowledge all of which are currently issued and
outstanding, and (ii) Twenty One Million One Hundred Ninety Nine Thousand Three
Hundred Two (21,199,302) shares have been designated Series B Preferred Stock,
and to our knowledge and before giving effect to the transactions contemplated
by the Stock Purchase Agreement, none of which are currently issued and
outstanding. The shares of Series B Preferred Stock to be purchased at the
Closing have been duly authorized and, upon purchase at the Closing pursuant to
the terms of the Stock Purchase Agreement, will be validly issued. The
respective rights, privileges, restrictions and preferences of the Series B
Preferred Stock are as stated in the Company's Restated Certificate of
Incorporation attached as Exhibit A to the Stock Purchase Agreement.
---------
(b) Common Stock. Forty Eight Million (48,000,000) authorized shares
of Common Stock, par value $0.01 per share (the "Common Stock"), and to our
knowledge Four Million One Hundred Thirty Five Thousand One Hundred Ninety Six
(4,135,196) of which are currently issued and outstanding. Such shares of
outstanding Common Stock have been duly authorized and validly issued, are
nonassessable, and, to our knowledge, are fully paid.
(c) Except for (i) the conversion privileges of the Series A Preferred
Stock, (ii) the conversion privileges of the Series B Preferred Stock (upon
issuance as contemplated in the Stock Purchase Agreement), (iii) outstanding
warrants to purchase One Hundred Ninety One Thousand Six Hundred Sixty Seven
(191,667) shares of Common Stock, and (iv) outstanding options to purchase One
Million Four Hundred Twenty Two Thousand Three Hundred One (1,422,301) shares of
Common Stock pursuant to the Company's 1998 Stock Option/Stock Issuance Plan,
and relying as to outstanding warrants and options solely on a certificate of
the Company to us, to our knowledge there are no preemptive rights or options
warrants, conversion privileges or other rights (or agreements for any such
rights) outstanding to purchase or otherwise obtain from the Company any of the
Company's equity securities.
6. The form of certificate for the Shares conforms in all material respects
to the requirements of the Delaware General Corporation Law.
<PAGE>
TVN Entertainment Corporation Page 4
June 30, 1999
7. The Company's execution and delivery of, and its performance and
compliance as of the date hereof with the terms of, the Transaction Agreements
do not violate any provision of the Company's Restated Certificate of
Incorporation or Bylaws, or, to our knowledge, violate any provision of any
federal, Delaware corporate or California law, rule or regulation applicable to
the Company.
8. Other than in connection with any securities laws (with respect to which
we direct you to paragraph 9 below) all consents, approvals, permits, orders or
authorizations of, and all qualifications by and registrations with, any federal
or Delaware corporate or California state governmental authority on the part of
the Company required in connection with the execution and delivery of the Stock
Purchase Agreement and consummation at the Closing of the transactions
contemplated by the Stock Purchase Agreement have been obtained, and are
effective, and we are not aware of any proceedings, or written threat of any
proceedings, that question the validity thereof.
9. Based in part upon the representations of you in the Stock Purchase
Agreement, the offer and sale of the Series B Preferred Stock to you pursuant to
the terms of the Stock Purchase Agreement are exempt from the registration
requirements of Section 5 of the Securities Act of 1933, as amended, by virtue
of Section 4(2) thereof and from the qualification requirements of the
California Corporate Securities Law of 1968, as amended, by virtue of Section
25102(f) thereof, and, under such securities laws as they presently exist, the
issuance of Common Stock to you upon conversion of the Series B Preferred Stock
would also be exempt from such registration and qualification requirements.
10. Based in part upon the representations of Mr. Morelli in the Stock
Exchange Agreement, the exchange of Mr. Morelli's Common Stock for Series A
Preferred Stock pursuant to the transactions contemplated by the Stock Exchange
Agreement is exempt from the registration requirements of Section 5 of the
Securities Act of 1933, as amended.
11. We are not aware that there is any action, proceeding or governmental
investigation pending, or threatened in writing, against the Company which
questions the validity of the Transaction Agreements or the right of the Company
to enter into the Transaction Agreements nor are we aware of any litigation
pending, or threatened in writing, against the Company by reason of the proposed
activities of the Company, the past employment relationships of its officers,
directors or employees, or negotiations by the Company with possible investors
in the Company or its business.
Our opinions expressed above are specifically subject to the following
limitations, exceptions, qualifications and assumptions:
(A) The legality, validity, binding nature and enforceability of the
Company's obligations under the Transaction Agreements may be subject to or
limited by (1) bankruptcy, insolvency, reorganization, arrangement, moratorium,
fraudulent transfer and other similar laws affecting the rights of creditors
generally; (2) general principles of equity (whether relief is
<PAGE>
TVN Entertainment Corporation Page 5
June 30, 1999
sought in a proceeding at law or in equity), including, without limitation,
concepts of materiality, reasonableness, good faith and fair dealing, and the
discretion of any court of competent jurisdiction in awarding specific
performance or injunctive relief and other equitable remedies; and (3), without
limiting the generality of the foregoing, the effect of California court
decisions and statutes which indicate that provisions of the Transaction
Agreements which permit you to take action or make determinations may be subject
to a requirement that such action be taken or such determinations be made on a
reasonable basis in good faith or that it be shown that such action is
reasonably necessary for your protection.
(B) For purposes of the matters addressed in paragraph (1) above
relating to the due incorporation, valid existence and good standing of the
Company under the laws of the State of Delaware, we have relied solely upon The
Certificate of Good Standing of the Company certified by the Secretary of
State of the State of Delaware on May 6, 1999, a Good Standing Telegram, dated
June 16, 1999, from CSC The United States Corporation Company, and an oral
Bring-Down from the Secretary of State of the State of Delaware on June 28,
1999.
(C) For purposes of the matters addressed in paragraph (2) above
relating to the Company's qualification to do business as a foreign corporation
in the State of California, we have relied solely upon the Certificate of
Qualification of the Company certified by the Secretary of State of the State of
California on May 13, 1999, a Good Standing Confirmation Letter of the Company,
dated June 16, 1999, from CSC The United States Corporation Company, a
Certificate of Good Standing of the Company certified by the Franchise Tax Board
of the State of California ("Tax Board") on June 16, 1999, and an oral
Bring-Down from the Tax Board and the Secretary of State of the State of
California on June 28, 1999.
(D) We express no opinion as to the Company's compliance or
noncompliance with applicable federal or state antifraud or antitrust statutes,
laws, rules and regulations.
(E) We express no opinion concerning the past, present or future fair
market value of any securities.
(F) We express no opinion as to the enforceability under certain
circumstances of any provisions indemnifying a party against, or requiring
contributions toward, that party's liability for its own wrongful or negligent
acts, or where indemnification or contribution is contrary to public policy or
prohibited by law. In this regard, we advise you that in the opinion of the
Securities and Exchange Commission, indemnification of directors, officers and
controlling persons of an issuer against liabilities arising under the
Securities Act of 1933, as amended, is against public policy and is therefore
unenforceable.
(G) We express no opinion as to the enforceability under certain
circumstances of any provisions prohibiting waivers of any terms of the
Transaction Agreements other than in writing, or prohibiting oral modifications
thereof or modification by course of dealing. In addition, our opinions are
subject to the effect of judicial decisions which may permit the introduction of
extrinsic evidence to interpret the terms of written contracts.
<PAGE>
TVN Entertainment Corporation
June 30, 1999 Page 6
(H) We express no opinion as to the effect of Section 1670.5 of the
California Civil Code or any other California law, federal law or equitable
principle which provides that a court may refuse to enforce, or may limit the
application of, a contract or any clause thereof which the court finds to have
unconscionable at the time it was made or contrary to public policy.
(I) We express no opinion as to your compliance with any Federal or
state law relating to your legal or regulatory status or the nature of your
business.
(J) We express no opinion as to the compliance of the Company or you
or the sale of Series B Preferred Stock to you with the provisions of the Small
Business Investment Act of 1958, as amended, or any of the regulations
promulgated thereunder.
(K) We express no opinion as to the effect of subsequent issuances of
securities of the Company, to the extent that notwithstanding its reservation of
shares the Company may issue so many shares of Common Stock that there are not
enough remaining authorized but unissued shares of Common Stock for the
conversion of the Series B Preferred Stock (or may issue securities which by
antidultion adjustment so reduce the Conversion Price of the Series B Preferred
Stock and/or other derivative securities that the outstanding shares of the
Series B Preferred Stock become convertible for more shares of Common Stock than
remained authorized but unissued).
(L) We express no opinion as to:
(1) The effect of Chapter Five, Chapter Thirteen and Chapter
Eighteen of Division One of the California Corporations Code or any other
California law, federal law or equitable principles restricting in certain
circumstances distributions by a corporation to its shareholders, relating to
dissenters' rights or relating to involuntary dissolution;
(2) The enforceability under certain circumstances of provisions
expressly or by implication waiving broadly or vaguely stated rights, unknown
future rights, or defenses to obligations or rights granted by law, when such
waivers are against public policy or prohibited by law;
(3) The enforceability under certain circumstances of provisions
to the effect that rights or remedies are not exclusive, that every right or
remedy is cumulative and may be exercised in addition to or with any other
right or remedy, that election of a particular remedy or remedies does not
preclude recourse to one or more remedies, that rights or remedies may be
exercised without notice, or that failure to exercise or delay in exercising
rights or remedies will not operate as a waiver of any such right or remedy;
(4) Any provision providing for the exclusive jurisdiction of a
particular court or purporting to waive rights to trial by jury, service of
process or objections to the laying
<PAGE>
TVN Entertainment Corporation
June 30, 1999 Page 7
of venue or to forum on the basis of forum non conveniens, in connection with
--------------
any litigation arising out of or pertaining to the Transaction Agreements;
(5) Section 8.10 of the Stock Purchase Agreement and 3.11 of the
Registration Rights Agreement relating to dispute resolution;
(6) Section 8.1 of the Stock Purchase Agreement and Section 3.3. of
the Registration Rights Agreement to the extent that it purports to exclude
conflict of law principles under law;
(7) The effect of any California law, federal law or equitable
principles which limit the amount of attorneys' fees that can be recovered
under certain circumstances;
(8) The effect of Section 1717 of the California Civil Code, which
provides that, among other things, where a contract permits one party to the
contract to recover attorneys' fees, the prevailing party in any action to
enforce any provision of the contract shall be entitled to recover its
reasonable attorneys' fees; and
(9) The creation, attachment, perfection or priority of any security
interests in any collateral, or any title to any property or collateral.
This opinion letter is rendered as of the date first written above
solely for your benefit in connection with the Stock Purchase Agreement and may
not be delivered to, quoted or relied upon by any person other than you, or for
any other purpose, without our prior written consent. Our opinion is expressly
limited to the matters set forth above and we render no opinion, whether by
implication or otherwise, as to any other matters relating to the Company. We
assume no obligation to advise you of facts, circumstances, events or
developments which hereafter may be brought to our attention and which may
alter, affect or modify the opinions expressed herein.
Very truly yours,
/s/ Brobeck, Phlegar & Harrison LLP
BROBECK, PHLEGER & HARRISON LLP
<PAGE>
Exhibit G
Promissory Notes of New Media Network, Inc.
<PAGE>
Exhibit A
PROMISSORY NOTE
$840,267.33 Dated June 30, 1999
Los Angeles, California
NEW MEDIA NETWORK, INC. (hereinafter called "Borrower")
to
Alan E. Morelli (hereinafter called "Prime Lender")
and
Paren Knadjian (hereinafter called "Co-Lender")
(Prime Lender and Co-Lender together, hereinafter called "Lenders")
1. Obligation. FOR VALUE RECEIVED, the undersigned promises to pay: (a)
----------
to the order of Alan E. Morelli at 200 Mantua Road, Pacific Palisades,
California 90272 or at whatever other US address Prime Lender may direct, in
lawful currency of the United States of America, the principal sum of Seven
Hundred and Sixty Three Thousand, Seven Hundred and Eighty Eight dollars and 37
cents ($763,788.37) or so much thereof as shall remain outstanding under the
Revolving Credit Agreement and amendments thereto between Lenders and Borrower,
including the Second Amendment (the "Second Amendment") dated as of even date
herewith (altogether, the "Credit Agreement"), together with interest accrued on
unpaid principal as provided in Section 2 hereof, and (b) to the order of Paren
Knadjian at 100 California Avenue, Santa Monica, California 90405 or at whatever
other US address Co-Lender may direct, in lawful currency of the United States
of America, the principal sum of Seventy Six Thousand Four Hundred and Seventy
Eight dollars and 96 cents ($76,478.96) or so much thereof as shall remain
outstanding under the Credit Agreement, together with interest accrued on unpaid
principal as provided in Section 2 hereof.
2. Interest. Interest shall accrue on the unpaid principal amount of this
--------
Promissory Note (this "Note") at a rate per annum (computed on the basis of a
360-day year) equal to the lower of (i) eight and six-tenths' percent (8.6%) per
annum (the "Stated Rate") or (ii) the highest rate permitted by California law.
Interest on payments of principal or interest due but unpaid shall accrue at a
default rate equal to four percent (4%) above the Stated Rate, unless such rate
is in excess of the maximum rate permitted by California law, in which event
interest shall accrue at a rate equal to such maximum legal rate.
3. Payment. The entire outstanding principal balance of this Note,
-------
together with all unpaid interest accrued thereon and other amounts payable by
Borrower under the terms of this Note, shall be immediately due and payable in
each of the following events: (i) Borrower raises funding with aggregate
proceeds to Borrower of $15,000,000 or more; (ii) the closing of a sale of all
or substantially all of the assets or capital stock of Borrower, excluding the
TVN Acquisition as defined in the Second Amendment, or the merger of Borrower
with or into another entity; or (iii) upon reaching the two (2) year anniversary
of this Note (the "Maturity Date") or earlier acceleration upon an Event of
Default (as defined in the Credit Agreement). All payments received by Lender
under the terms of this Note will first be credited to charges or other expenses
to which Lender shall be entitled to be reimbursed hereunder, second to accrued
but unpaid interest, and third to unpaid principal. Payment of the indebtedness
hereunder is secured by, and entitled to the benefits of, the Security Agreement
and Amendment to Security Agreement of even date herewith, by and between
Borrower and Lender (altogether, the "Security Agreement"). Upon payment in full
of all principal and accrued but unpaid interest due hereunder, Lenders shall
deliver the original of this Note to Borrower marked "Cancelled and Paid in
Full", along with (i) a form of UCC Termination Statement, terminating any and
all security interests recorded by Lenders pursuant to this Note and
-1-
<PAGE>
related Credit Agreement (in form acceptable to Borrowers' attorneys) and (ii) a
form of termination of the Security Agreement and Amendments thereto signed by
Borrower in favor of Lender.
4. Prepayment. Borrower may at any time prior to the Maturity Date
----------
prepay, in whole or in part, any amounts owed to Lenders under this Note without
penalty. Pursuant to the Credit Agreement, Borrower has agreed that each amount
payable from Borrower to Lenders shall consist of two payments, one payment to
each of Prime Lender and Co-Lender, allocated proportionately between them
pursuant to each lender's then-existing indebtedness. The amount and date of all
such prepayments shall be recorded by Lenders onto Schedule A attached hereto
and made a part hereof; provided, however, that a failure to make any such
notations shall not limit or otherwise affect Borrower's obligations or Lenders'
rights hereunder.
5. Planned Prepayment. Notwithstanding Section 4 above, the approximately
------------------
$150,000 in funds held by Borrower's landlord, pursuant to the terms of an
escrow account, as security for Borrower's Santa Monica office lease shall,
immediately upon release from escrow, shall be paid directly from such account
to Prime Lender. When and if received, such payment shall be credited to
Borrower as partial repayment of its indebtedness to Prime Lender and recorded
by Lenders onto Schedule A.
6. Governing Law. For any action related to judicial enforcement or
-------------
interpretation of this Note, Borrower and Lender expressly submits to
nonexclusive jurisdiction in the state or Federal courts located in the County
of Los Angeles in the State of California at Lenders' election. Borrower and
Lender further hereby consents-to service of process out of any of the
aforementioned courts in any such action or proceeding by mailing of copies
thereof by registered or certified mail, postage prepaid, at addresses for
notice furnished by Borrower and Lenders, such service to become effective five
(5) days after such mailing. Nothing herein shall affect the right to serve
process in any other manner permitted by law or the right of the parties to
bring legal action or proceedings in any other jurisdiction. This Note shall be
governed by and construed in accordance with the internal substantive laws of
the State of California, without regard to principles of choice of law or
conflict of laws.
8. Waiver by Borrower. Borrower hereby waives any right of offset
------------------
Borrower may now or hereafter have against Lenders and Borrower also waives
diligence, presentment, protest and demand, notice of protest, dishonor and
nonpayment of this Note and expressly agrees that, without in any way affecting
the liability of Borrower hereunder, Lenders may extend any maturity date or the
time for payment of any installment due hereunder and release any security now
or hereafter securing this Note. Borrower further waives, to the full extent
permitted by law, the right to plead any and all statutes of limitations as a
defense to any demand on this Note, or on any deed of trust, security agreement,
lease assignment, guaranty or other agreement now or hereafter securing this
Note. BORROWER AND LENDERS HEREBY AGREE TO WAIVE THEIR RIGHTS TO A JURY TRIAL OF
CLAIMS OR CAUSES OF ACTION BASED UPON OR ARISING OUT OF THIS NOTE OR ANY MATTER
RELATING TO THE SUBJECT MATTER OF THIS NOTE, THE SECURITY AGREEMENT AND THE
LENDER/BORROWER RELATIONSHIP BEING ESTABLISHED. The scope of this waiver is
intended to be all-encompassing of any and all disputes that may be filed
relating to the subject matter of this transaction including without limitation
contract, tort or breach of duty claims, and all other common law and statutory
claims. Borrower and Lenders acknowledge-that this waiver was a material
inducement to each other to enter into the Credit Agreement and advance money
and the parties have already relied on this waiver in entering into this
transaction, and that the parties will continue to rely on this waiver in their
related future dealings with each other. THIS WAIVER IS IRREVOCABLE AND SHALL
APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO
THIS NOTE, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS
-2-
<PAGE>
RELATING THERETO. IN EVENT OF LITIGATION, THIS NOTE MAY BE FILED AS A WRITTEN
CONSENT TO A TRIAL BY THE COURT.
9. Cure: Event of Default. If Borrower fails to pay Lenders when due as
----------------------
above provided, Lenders shall give written notice of such failure to Borrower,
and Borrower shall have five (5) business days to cure such failure, failing
which Borrower shall be in default hereunder (an "Event of Default").
10. Incorporation of Agreements. This Note incorporates by reference each
---------------------------
of the provisions of the Credit Agreement and the Security Agreement.
IN WITNESS WHEREOF, this Promissory Note has been duly executed by the
undersigned, New Media Network, Inc., on the day and year first written above.
Borrower:
NEW MEDIA NETWORK, INC.
/s/ Ian Duffell
------------------------
By: Ian Duffell
Its: President
Witness:
/s/ [ILLEGIBLE]^^
- ------------------
-3-
<PAGE>
SCHEDULE A TO PROMISSORY NOTE
-----------------------------
Borrower: NEW MEDIA NETWORK, INC.
Prime Lender: Alan E. Morelli
<TABLE>
<CAPTION>
==============================================================================================================
Date of Starting Amount of Amount of Unpaid Name of
Transaction Balance Owed Interest Paid Principal Paid Balance of Credit Person
Making
Notation
<S> <C> <C> <C> <C> <C>
==============================================================================================================
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
==============================================================================================================
</TABLE>
Co- Lender: Paren Knadjian
<TABLE>
<CAPTION>
==============================================================================================================
Date of Starting Amount of Amount of Unpaid Name of
Transaction Balance Owed Interest Paid Principal Paid Balance of Credit Person
Making
Notation
<S> <C> <C> <C> <C> <C>
==============================================================================================================
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
==============================================================================================================
</TABLE>
-4-
<PAGE>
Annex A
Service Access and Transponder Use Agreement
<PAGE>
Service Access and Transponder Use Agreement
This Service Access and Transponder Use Agreement (the "Agreement") is made
as of June 30, 1999 by and among New Media Network, Inc., a Delaware corporation
("NMN"), and TVN Entertainment Corporation, a Delaware corporation ("TVN"),
whose principal address is 2901 West Alameda Avenue, 7/th/ Floor, Burbank, CA
91505.
WHEREAS, TVN and NMN have entered into that certain Series B Preferred
Stock Purchase Agreement (the "Underlying Agreement") whereby TVN has agreed to
purchase a majority interest in NMN; and
WHEREAS, as part of the consideration of the Underlying Agreement TVN is to
provide certain goods and services (set forth below as TVN Services) to NMN.
NOW, THEREFORE, in consideration of the premises, the covenants contained
herein, and for other good and valuable consideration the receipt and
sufficiency are hereby acknowledged, the parties hereto agree as follows:
1. TVN Services. The following TVN services (the "TVN Services") are offered
------------
by TVN and will be utilized by NMN hereunder, all subject to the availability of
the facilities and personnel needed for TVN to provide such services:
. Database Management Services -- TVN will provide certain database
management services through its Adonnis systems.
. Encoding -- TVN will input NMN provided content and data into TVN's
digital encoders to create digitally compressed and encrypted
audio/video streams.
. Library Storage and Management - Library management and storage of the
TVN encoded content and data.
. Office Space - TVN will offer to provide a mutually agreed amount of
office space at TVN leased office facilities.
. Transponder Capacity Use -- Use of mutually approved digitally
compressed streams transmitted via a TVN designated satellite
transponder (the "Transponder").
. Uplinking - Each NMN digital stream will be uplinked (transmitted) to
the Transponder for reception and decoding at each NMN retail store
location.
. Website Design and Implementation Services -- Services of TVN's web
development personnel.
. Promotion - Promotion and advertising services for NMN's retail stores
and for NMN's web site.
. Receiving Equipment - TVN will provide NMN with digital receivers
capable of receiving, decoding and de-compressing NMN's digital
streams.
Page 1 of 6
<PAGE>
. Accounting - Services of TVN's accounting personnel.
. Administrative - Services of TVN's administrative personnel.
. Information Systems - Services of TVN's information systems personnel.
. Legal - Services of TVN's legal personnel.
. Office Supplies and Postage - TVN will provide NMN with office
supplies and postage.
. Sales and Marketing - Services of TVN's sales and marketing personnel.
. Telephones - TVN telephone network and reception services.
. Technical Support - Technical support services from TVN personnel for
the TVN Services.
. Other Services -- Other services as may be reasonably requested by NMN
and which TVN is willing, in its sole discretion, to supply.
2. Fees for TVN Services.
---------------------
(a) TVN shall provide the above described TVN Services to NMN on an
as-requested, as-needed, basis with NMN requesting and TVN approving the type,
timing and amount of each TVN Service which TVN provides. In the event that NMN
requests an estimate with regard to any of the TVN Services, TVN shall provide a
good-faith estimate as to the timing and costs associated therewith and NMN
shall have the opportunity to accept, decline, or modify its request. The
parties understand that estimates shall not be considered as binding and shall
not be deemed as a maximum. The prices for the TVN Services provided will be on
a "most favored nations" basis with those charged to other comparable service
providers who utilize such TVN Services ("Most Favored Customers").
(b) TVN Services will be invoiced monthly to NMN based on the then current
TVN fee schedule (the "Fee Schedule") reflecting those rates which TVN offers to
its Most Favored Customers. All fees payable hereunder by NMN shall be
drawn-down in accordance with Section 1.2(c) of the Underlying Agreement.
(c) The total value of TVN Services (as determined by the Fee Schedule)
which TVN shall be obligated to provide hereunder, and which NMN will be
entitled to draw-down, shall equal but not exceed the sum of Four Million
Dollars ($4,000,000).
(d) NMN shall utilize the TVN Services subject to the following:
(i) The value of TVN Services available for NMN to utilize in the
first year of this Agreement shall not exceed the sum of Four
Million Dollars ($4,000,000).
(ii) The value of TVN Services available for NMN to utilize in the
second year of this Agreement shall be the sum of Four Million
Dollars ($4,000,000) reduced by the greater of (1) the actual
fees incurred by
Page 2 of 6
<PAGE>
NMN hereunder in the first year of this Agreement or (2) One
Million Dollars ($1,000,000).
(iii) The value of TVN Services available for NMN to utilize in the
third year of this Agreement shall be the sum of Four Million
Dollars ($4,000,000) reduced by (1) the greater of (x) the
actual fees incurred by NMN hereunder in the first year of this
Agreement or (y) One Million Dollars ($1,000,000) and reduced
by (2) the greater of (x) the actual fees incurred by NMN
hereunder in the second year of this Agreement or (y) One
Million Five Hundred Thousand Dollars ($1,500,000).
(e) NMN shall direct its Chief Accounting Officer to certify in writing
each December and May during the Term the approximate value of all TVN
Services provided by TVN to NMN under this Agreement during the
previous six (6) months (each a "Services Certificate"). Each party to
this Agreement shall receive a copy of each Services Certificate
promptly after it is prepared. The Accounting Officer shall be
reasonably available during TVN business hours to answer questions
regarding the information contained therein.
3. Term. This Agreement shall commence on the date hereof, and shall continue
----
until the earlier of (i) the three (3) year anniversary of the date hereof or
(ii) such time as NMN has drawn down/utilized Four Million Dollars ($4,000,000)
of TVN Services hereunder.
4. Indemnification.
---------------
(a) NMN shall indemnify, defend and hold harmless TVN, its subsidiary and
affiliated companies and their respective officers, agents, directors
and employees (collectively, the "TVN Indemnitees") from any and all
losses, claims, liabilities, damages, costs and expenses (including
reasonable attorneys' fees) incurred by any TVN Indemnitee for third
party claims arising out of, or based upon, NMN supplied content
and/or data, and NMN's use of the TVN Services.
(b) TVN shall indemnify, defend and hold harmless NMN, its subsidiary and
affiliated companies and their respective officers, agents, directors
and employees (collectively, the "NMN Indemnitees") from any and all
losses, claims, liabilities, damages, costs and expenses (including
reasonable attorneys' fees) incurred by any NMN Indemnitee for third
party claims arising out of, or based upon, any willful failure by TVN
to provide the TVN Services to NMN as set forth above.
5. Confidentiality. The terms and pricing set forth herein is the confidential
---------------
information of TVN and shall be held by NMN in strictest confidence and not
disclosed to any third party without TVN's prior written consent.
6. Representations and Covenants. Each party hereto represents and warrants
-----------------------------
that: it has the right to enter into this Agreement, and covenants that it will
comply with all of the terms herein, and that the execution and performance of
this Agreement will not result in any violation of, be in conflict with, or
constitute a default under, with or without the passage of time or the giving of
notice of, any other agreement to which it is bound.
Page 3 of 6
<PAGE>
7. No Restriction on TVN's Business. Nothing contained in this Agreement is
--------------------------------
intended by the parties to impose any restriction on TVN's ability to utilize
any or all of the TVN Services on a priority basis for itself or its affiliates,
or to provide the identical or substantially similar services to third parties.
8. Breach. No breach committed hereunder shall be grounds for termination of
------
this Agreement unless written notice thereof has been provided to the breaching
party with a reasonable opportunity to cure.
9. General Provisions.
------------------
(a) This agreement shall inure to the benefit of each party's successors
in interest, its affiliates and permitted assigns, and each and every other
corporation or firm which is under its common control. No term or provision of
this Agreement may be amended, waived, released, discharged or modified in any
respect except in writing, signed by the parties hereto.
(b) NMN may not delegate any of its obligations under this Agreement nor
assign any of its rights hereunder or resell any of the TVN Services utilized by
NMN without TVN's prior written consent, which consent may be withheld in TVN's
sole discretion.
(c) No failure or delay on the part of any party to this Agreement in
exercising any right, power or remedy hereunder shall operate as a waiver
thereof; nor shall any single or partial exercise of any such right, power or
remedy preclude any other or further exercise thereof or the exercise of any
other right, power or remedy hereunder. No breach of any provision hereof can be
waived unless in writing.
(d) This agreement is made and entered into, and shall be construed in
accordance with, the internal laws of the State of California. Copies may be
transmitted via telefax for signature and each mutually executed fax copy may be
used for all purposes an original by either party.
(e) This Agreement sets forth the entire understanding between the parties
hereto with respect to the subject matter hereof, and there are no terms,
conditions, representations, warranties or covenants other than those expressly
contained herein. This Agreement supersedes any previous agreements or
understandings between the parties with respect to the subject matter hereof,
whether written or oral, all of which are merged herein.
(f) Neither party shall be liable for any delay or failure which is
directly attributable to fire, flood, earthquake, or public disaster; strike,
labor dispute or unrest; embargo, riot, war, insurrection or civil unrest; any
act of God, any act of legally constituted authority; or any other cause beyond
the that party's control. If by reason of the foregoing, a party's performance
hereunder is delayed or prevented for a period of thirty (30) days, this
Agreement shall be terminable by the other party upon notice to the non-
performing party.
(g) In no event will either party be liable for any indirect, incidental,
consequential, special or punitive damages (including, without limitation,
damages for loss of business, profits or revenues, loss of goodwill, business
interruption, or failure to realize expected savings) arising out this
Agreement, even if said party has been advised of the possibility of such
damages.
Page 4 of 6
<PAGE>
(h) Dispute Resolution.
------------------
(i) Any claim, controversy or dispute, whether sounding in
contract, statute, tort, fraud, misrepresentation or other legal theory,
whenever brought and whether between the parties to this Agreement or between
one of the parties to this Agreement and the employees, agents or affiliated
businesses of the other party, shall be resolved by arbitration as prescribed in
this paragraph.
(ii) A single arbitrator engaged in the practice of law shall
conduct the arbitration under the then current commercial arbitration rules of
the American Arbitration Association ("AAA"). The arbitrator shall be selected
in accordance with AAA procedures from a list of qualified people (i.e.,
knowledgeable in TVN's industry) maintained by AAA. The arbitration shall be
conducted in Los Angeles, California, and all expedited procedures prescribed by
the AAA rules shall apply.
(iii) The arbitrator shall have authority to award compensatory
damages only and shall not have authority to award incidental, consequential,
exemplary or punitive damages, or non-compensatory damages (including, without
limitation, damages for loss of business, profits or revenues, loss of goodwill,
business interruption, or failure to realize expected savings) or any other form
of relief; provided, however, either party may apply to any court having
jurisdiction thereof solely for the entry of injunctive relief to maintain the
status quo until such time as the arbitration award is rendered or the
- ----------
controversy is otherwise resolved. Each party shall bear its own costs and
attorney's fees and the parties shall share equally the fees and expenses of the
arbitration. The arbitrator's decision and award shall be final and binding, and
judgment upon the award rendered by the arbitrator may be entered in any court
having jurisdiction thereof.
(iv) If any party files a judicial or administrative action
asserting claims subject to arbitration, as prescribed herein, and another party
successfully stays such action and/or compels arbitration of said claims, the
party filing said action shall pay the other party's costs and expenses incurred
in seeking such stay and/or compelling arbitration, including reasonable
attorneys' fees.
(i) Headings. The headings herein are for convenience only, and do not
--------
modify or limit the terms of this Agreement, nor shall they be given any effect
in the construction or interpretation thereof.
(j) Construction. Each party acknowledges that the language contained in
------------
this Agreement is the product of an arms length negotiation conducted by that
party's duly appointed legal counsel. As a result, neither party (i) shall be
deemed to have drafted this Agreement or (ii) shall be entitled to construe this
Agreement, either in whole or in part, against the other party on the theory
that contract provisions are construed against the party that drafted it.
Page 5 of 6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the day and year first
written above.
TVN ENTERTAINMENT CORPORATION NEW MEDIA NETWORK, INC.
By: /s/ Arthur Fields By: /s/ Ian W. Duffell
--------------------------- -------------------------
Name: Arthur Fields Name: Ian W. Duffell
-------------------------
Title: Sr. Exec. V.P. Title: President and C.E.O.
------------------------
Date: 6/30/99 Date: 6.30.99
------------------------- -----------------------
By: /s/ Alan E. Morelli
-------------------------
Name: Alan E. Morelli
Title: Chairman
Date: 6-30-99
-----------------------
Page 6 of 6
<PAGE>
EXHIBIT 10.17
AGREEMENT FOR PURCHASE AND
SALE OF ASSETS
Among
TVN Entertainment Corporation,
W&K Pharmacy, Inc., d/b/a
PandaAmerica Corp. and Martin D. Weiss
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I PURCHASE AND SALE OF ASSETS...................................... 1
1.1 Purchased Assets................................................. 1
1.2 Leases........................................................... 3
1.3 Excluded Assets.................................................. 3
1.4 Option to Acquire Additional Assets.............................. 3
ARTICLE II NON-ASSUMPTION OF LIABILITIES................................... 4
2.1 Non-Assumption of Liabilities.................................... 4
2.2 Assumed Liabilities.............................................. 4
2.3 Excluded Liabilities............................................. 4
ARTICLE III PURCHASE PRICE................................................. 5
3.1 Purchase Price................................................... 5
3.2 Allocation of the Purchase Price................................. 6
3.3 Transfer Taxes................................................... 6
3.4 Guarantee of Accounts Receivable................................. 6
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND
SHAREHOLDER........................................................... 6
4.1 Organization and Qualification of the Company.................... 6
4.2 Subsidiaries..................................................... 7
4.3 Authority Relative to this Agreement............................. 7
4.4 Compliance of Transaction With Laws and Other
Instruments...................................................... 7
4.5 Financial Statements............................................. 8
4.6 Title to Purchased Assets; Liens; Condition of
Purchased Assets................................................. 8
4.7 Absence of Undisclosed Liabilities............................... 9
4.8 Collectibility of Gross Accounts Receivable...................... 9
4.9 Inventories...................................................... 9
4.10 Absence of Certain Changes....................................... 10
4.11 Intellectual Property Rights..................................... 11
4.12 Contracts and Commitments........................................ 12
4.13 ERISA; Employees................................................. 12
4.14 Permits; Governmental Agreements................................. 14
4.15 Borrowings and Guarantees........................................ 14
4.16 Insurance........................................................ 14
4.17 Environmental Matters............................................ 14
4.18 Outstanding Claims............................................... 15
4.19 Compliance with Applicable Law; Adverse Restriction.............. 15
4.20 Litigation....................................................... 16
</TABLE>
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<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
4.21 Finder's Fee................................................... 16
4.22 Transactions with Interested Persons........................... 16
4.23 Consents....................................................... 16
4.24 Information.................................................... 16
4.25 Questionable Payments.......................................... 16
4.26 Taxes.......................................................... 17
4.27 Operation of Business.......................................... 17
ARTICLE V REPRESENTATIONS AND WARRANTIES OF BUYER........................ 17
5.1 Organization................................................... 17
5.2 Binding Obligation............................................. 18
5.3 Consents....................................................... 18
ARTICLE VI CERTAIN UNDERSTANDINGS AND AGREEMENTS......................... 18
6.1 Access and Audit............................................... 18
6.2 Operation of Business.......................................... 18
6.3 Expenses....................................................... 20
6.4 News Releases.................................................. 20
6.5 Notice of Adverse Developments................................. 20
6.6 Exclusivity.................................................... 21
6.7 Confidentiality................................................ 21
6.8 Preserve Accuracy of Representations and Warranties............ 21
6.9 Certain Events................................................. 22
6.10 Best Efforts and Mutual Cooperation............................ 22
6.11 Further Assurances............................................. 22
6.12 Third Party Consents........................................... 22
6.13 Offers of Employment........................................... 22
6.14 Performance and Payment by Buyer............................... 22
6.15 Application for Tax Certificates............................... 22
6.16 1.44 Tax Returns............................................... 23
6.17 Post-Closing Date Access to Information........................ 23
6.18 Final Schedules of Purchased Assets and Assumed
Liabilities.................................................... 23
ARTICLE VII CONDITIONS TO OBLIGATIONS TO CLOSE........................... 23
7.1 Conditions Precedent to Obligations of the Company
and Shareholder................................................ 23
7.2 Conditions Precedent to Obligations of Buyer................... 24
</TABLE>
-ii-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE VIII CLOSING DELIVERIES........................................... 26
8.1 At the Closing, Buyer shall deliver to the Company:............ 26
8.2 At the Closing, the Company and Shareholder shall deliver to
Buyer:......................................................... 26
8.3 After the Closing:............................................. 27
ARTICLE IX INDEMNIFICATION................................................ 27
9.1 Survival of Representations, Etc............................... 27
9.2 Indemnification of Buyer....................................... 28
9.3 Indemnification of the Company and Shareholder................. 28
9.4 Minimum Indemnification........................................ 28
9.5 Procedures for Indemnification................................. 29
9.6 Payment of Indemnification Claims.............................. 30
9.7 Tax Indemnification............................................ 31
9.8 Limitations on Liabilities..................................... 32
9.9 Sole Remedy.................................................... 32
ARTICLE X TERMINATION..................................................... 33
10.1 Termination.................................................... 33
10.2 Liability of the Parties....................................... 33
ARTICLE XI MISCELLANEOUS PROVISIONS....................................... 33
11.1 Entire Agreement: Amendment.................................... 33
11.2 Assignment and Binding Effect.................................. 33
11.3 Waivers........................................................ 34
11.4 Notices........................................................ 34
11.5 Governing Law.................................................. 35
11.6 Counterparts; Execution........................................ 35
11.7 Interpretation................................................. 35
11.8 Severability................................................... 35
11.9 Arbitration.................................................... 35
11.10 Knowledge...................................................... 35
</TABLE>
-iii-
<PAGE>
Exhibits:
A Form of Equipment Lease Assignment Agreement
B-1 Secured Promissory Note
B-2 Security Agreement
C Employees
D Form of Consulting Agreement
E Form of Bill of Sale
F Dispute Resolution
-iv-
<PAGE>
SCHEDULES
<TABLE>
<CAPTION>
Schedule No. Title
- ------------ -------------------------------------------------------------
<S> <C>
1.1.1 Inventory
1.1.2 Fixed Assets
1.1.3 Gross Accounts Receivable
1.2.1 Third Party Real Property Leases
1.2.2 Equipment Leases
1.3 Excluded Assets
2.3 Enumerated Excluded Liabilities
4.4 Compliance of Transaction with Laws and Other Instruments
4.5 Company Financial Statements
4.6 Title to Purchased Assets; Location of all facilities
4.8 Collectibility of Gross Accounts Receivable
4.9 Unsalable Inventory
4.10 Certain Changes
4.11 Licenses with Respect to Company Intellectual Property Rights
4.12 Contracts and Commitments
4.15 Borrowings and Guarantees
</TABLE>
-v-
<PAGE>
AGREEMENT FOR PURCHASE AND
SALE OF ASSETS
THIS AGREEMENT is made as of January 18, 1999 by and among TVN
Entertainment Corporation, a Delaware corporation ("Buyer"), W&K Pharmacy, Inc.,
d/b/a PandaAmerica Corp., a California corporation (the "Company"), and Martin
D. Weiss ("Weiss") (Weiss may sometimes be referred to herein as "Shareholder").
R E C I T A L S
---------------
WHEREAS, the Company owns, has been and is currently in the business of
operating a televised home shopping network known as "Panda Shopping Network"
(the "Business") along with a precious metals and coin business (the "Excluded
Business");
WHEREAS, Shareholder is the majority shareholder, President and Chief
Executive Officer of the Company; and
WHEREAS, pursuant to the terms and conditions of this Agreement, Buyer
desires to purchase, and the Company desires to sell, substantially all of the
assets, properties and rights related to, associated with and used in the
Business, and Buyer desires to assume, and Shareholder desires to transfer,
specified liabilities which have been incurred in connection with the operation
of the Business.
NOW, THEREFORE, for and in consideration of the mutual promises herein
made, and for other good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged,
THE PARTIES AGREE AS FOLLOWS:
ARTICLE I
---------
PURCHASE AND SALE OF ASSETS
---------------------------
1.1 Purchased Assets. Subject to and upon the terms and conditions
----------------
hereof, and in reliance upon the representations, warranties and covenants made
herein by a party to the others, on the Closing Date (as defined in Article
VIII), the Company agrees to sell, transfer, assign, convey and deliver to
Buyer, and Buyer agrees to purchase and acquire from the Company, all right,
title, claim, and interest in and to all of the assets of the Company, wherever
situated, which are directly or indirectly used for or associated with the
Business but not the Excluded Business, including, but not limited to, the
following, except to the extent that any such assets are Excluded Assets (as
defined in Section 1.3 below) (collectively, the "Purchased Assets"):
<PAGE>
(a) Inventory. All inventories of all merchandise held for resale in
---------
connection with the operation of the Business including, without limitation,
those inventory items set forth in Schedule 1.1.1 (collectively, the "Gross
--------------
Inventory").
(b) Equipment and Other Fixed Assets. All equipment and other fixed
--------------------------------
assets owned by the Company and related to or used in the Business, wherever
located including, without limitation, the equipment and assets set forth or
described in Schedule 1.1.2 (collectively, the "Fixed Assets").
--------------
(c) Cash. All cash owned by or in the possession of the Company which
----
was derived in the ordinary course of the Business, including customer deposits,
and existing on the Closing Date.
(d) Accounts Receivable and Other Current Assets. Trade accounts
--------------------------------------------
receivable from the sale of Gross Inventory or other activities of the Company
and the Business prior to the Closing Date ("Gross Accounts Receivable"),
including, without limitation, those Gross Accounts Receivable and other current
assets set forth on Schedule 1.1.3.
--------------
(e) Assigned Contracts. All contracts or orders obligating the Company
------------------
to purchase, television time and/or the right to place commercial insertions,
Gross Inventory, Fixed Assets, supplies, components, parts, goods, packaging or
promotional material, services or other items used in connection with the
operation of the Business, relating to the Purchased Assets or which may affect
the conduct of the Business after Closing as defined in Article VIII
(collectively, the "Purchase Orders"); all warranty rights and, unless otherwise
excluded by the terms of this Agreement, claims against third parties relating
to or arising under any of the Purchased Assets; such other contracts and other
agreements relating to the marketing or sale of Gross Inventory, relating to the
Purchased Assets or which may affect the conduct of the Business after Closing
(all of the foregoing in this Section 1.1(5) are collectively referred to herein
as the "Assigned Contracts").
(f) Business Records. All existing books and records (excluding the
----------------
minute books, corporate seal and stock records of the Company) reasonably
necessary to enable Buyer to continue the uninterrupted marketing and sale of
Gross Inventory, ownership or use of the Purchased Assets and conduct of the
Business including, without limitation, all customer, vendor and other lists,
information, records, files, literature, brochures, catalogs, correspondence,
displays and other similar data relating to financial, operating, customer,
supplier, vendor, manufacturer and promotional matters or relating to the
marketing and sale of Gross Inventory, ownership or use of the Purchased Assets
or conduct of the Business (collectively, the "Business Records").
(g) Intellectual Property Rights. All patents, registered and
----------------------------
unregistered trademarks and service marks, registered and unregistered
copyrights, trade names and any applications therefor, technology, know-how, MIS
systems, computer software programs and applications (in both source code and
object code form), and tangible or intangible proprietary information or
material which relate to or are a part of the products of the Business or are
used in the Business ("Company Intellectual Property Rights").
-2-
<PAGE>
(h) Permits; Governmental Agreements. The right to operate under all
--------------------------------
governmental licenses, permits, franchises and approvals and all related vendor
numbers which are required or appropriate to conduct the Business, where and as
such Business is conducted ("Licenses").
(i) Other Purchased Assets. Except as otherwise provided in this
----------------------
Agreement, all causes of action, judgments, claims and demands of every nature
whatsoever in favor of, or arising in connection with the operation of the
Business and relating to the Purchased Assets; and all labels, signs, packaging,
promotional materials, sales literature, advertising, catalogs, brochures,
documents and other such items relating to the marketing or sale of Gross
Inventory or otherwise used in connection with the Business, together with all
goodwill associated with the Business and the Purchased Assets.
1.2 Leases.
------
(a) Third Party Real Property Leases. The Company currently leases
---------------------------------
certain office space and premises used for the Business from third parties
pursuant to real property leases listed on Schedule 1.2.1 (the "Third Party Real
--------------
Property Leases"), including the building structures, fixtures and improvements.
The Company will permit Buyer to occupy such portion of the premises currently
used to operate the Business and covered by such Third Party Real Property
Leases and Buyer hereby agrees to reimburse the Company on a monthly basis for
the monthly rent, utilities and expenses directly related to such premises.
Buyer will not become a party as a subtenant or otherwise to any Third Party
Real Property Leases.
(b) Assignment of Equipment Leases. The Company currently leases
------------------------------
certain equipment used in the Business from third parties pursuant to equipment
leases listed on Schedule 1.2.2 (the "Equipment Leases"). The Company will
--------------
assign such Equipment Leases to Buyer, subject to Company obtaining the consent
of the lessors under such leases, if required, pursuant to the terms of one or
more equipment lease assignment agreements in the form attached hereto as
Exhibit A (the "Equipment Lease Assignment Agreements") as may be requested by
- ---------
Buyer.
1.3 Excluded Assets. Anything contained in this Agreement to the contrary
---------------
notwithstanding, the Company's wholesale and retail precious metals and coins
business (the "Excluded Business"), including the rights, properties and assets
directly related thereto (the "Excluded Assets") as listed on Schedule 1.3, and
------------
the Company's right, title and interest under the Camino Real Agreement (as set
forth in Section 1.4) are not included in the Purchased Assets.
1.4 Option to Acquire Additional Assets. Until the July 22, 1999, Buyer
-----------------------------------
shall have the right but not the obligation to acquire, for no additional
consideration, all of the Company's right, title and interest under that certain
joint television broadcasting company agreement with JB Broadcasting Inc., dated
March 23, 1998, (the "Camino Real Agreement"), providing for the joint ownership
and operation of the Low Power Television ("LPTV") licenses and stations
described therein. Buyer may exercise this right by written notice to the
Company. Upon the exercise of such right by Buyer, the Camino Real Agreement
shall be deemed a Purchased Asset under the terms of this Agreement.
-3-
<PAGE>
ARTICLE II
----------
NON-ASSUMPTION OF LIABILITIES
-----------------------------
2.1 Non-Assumption of Liabilities. Other than with respect to the Assumed
-----------------------------
Liabilities (as defined in Section 2.2 below), on the Closing Date Buyer will
not assume, agree to perform, discharge or indemnify the Company or Shareholder
against, or otherwise have any liability or obligation with respect to, any
liability, debt, contract or obligation of the Company or Shareholder, or any
liability, debt, contract or obligation which is or was directly or indirectly
associated with or related to the Business, the Purchased Assets or otherwise.
The Company and/or Shareholder shall remain solely responsible for satisfying,
discharging or performing all of its liabilities, debts, contracts and
obligations on a timely basis in accordance with their respective terms.
2.2 Assumed Liabilities. On the Closing Date, Buyer will assume only the
-------------------
following liabilities, responsibilities and obligations, which exclude the
Excluded Liabilities as defined in Section 2.3 below (collectively, the "Assumed
Liabilities"):
(a) Contract Obligations. All liabilities, responsibilities and
--------------------
obligations of the Company under the Assigned Contracts, including any
obligation for performance thereon.
(b) Specific Financial Obligations. The liabilities of the Business
------------------------------
specified on Schedule the Company's balance sheet as of January 18, 1999.
(c) Conduct of Business After Closing. All other liabilities,
---------------------------------
responsibilities and obligations directly arising out of, resulting from, or
relating to the use, ownership and operation of the Purchased Assets by Buyer
after the Closing, or the normal, good faith conduct of the Business by Buyer
after the Closing.
2.3 Excluded Liabilities. For purposes hereof, the term "Excluded
--------------------
Liabilities" means any and all liabilities, responsibilities and obligations not
listed in Section 2.2, including but not limited to the following liabilities
and obligations:
(a) The Company's Other Businesses. All liabilities, responsibilities
------------------------------
and obligations incurred by the Company in connection with the conduct of the
Excluded Businesses, and such liabilities and obligations not expressly assumed
by Buyer under Section 2.2(c) above.
(b) Litigation. All liabilities, responsibilities and obligations,
----------
whether now existing or hereafter arising, in respect to litigation brought or
claims made under any legal theory whatsoever against the Company and/or Buyer
by or on behalf of third parties, including without limitation any government
agencies, which result from occurrences on or prior to the Closing with respect
to the conduct of the Business or ownership of the Purchased Assets by the
Company.
-4-
<PAGE>
(c) Employment Matters. Any liability to employees of the Company
------------------
whether direct or indirect, accrued or absolute, contingent or otherwise,
relating to any event, occurrence or set of facts which took place as of or
prior to the Closing except to the extent such liability relates to agreements
between Buyer and such employees.
(d) Environmental Liabilities. Any and all environmental liabilities
-------------------------
arising from the Company's operations on or prior to the Closing or from the
Company's operation of the Business on or prior to the Closing.
(e) Taxes. Except as assumed pursuant to Section 2.2(c) or as provided
-----
in Section 3.3, all liabilities and obligations for Taxes (as that term is
defined in Section 4.26) relating or attributable to (i) the use and ownership
of the Purchased Assets by the Company on or prior to Closing, (ii) the conduct
of the Business by the Company and (iii) Taxes for which the Company is
responsible.
(f) Conduct of Company After Closing. All debts, obligations,
--------------------------------
responsibilities, contracts and liabilities arising out of, resulting from or
relating to the conduct of the Company after the Closing.
(g) Obligations in Connection with this Agreement. All liabilities,
---------------------------------------------
debts, obligations and responsibilities incurred by the Company in violation of,
or as a result of the Company's or Shareholder's violation of, this Agreement.
(h) Other Excluded Liabilities. All debts, obligations,
--------------------------
responsibilities, contracts and liabilities of the Company relating to the
Excluded Business or the Excluded Assets.
(i) Enumerated Excluded Liabilities. Those debts, obligations,
-------------------------------
responsibilities, contracts and liabilities enumerated on Schedule 2.3, which
------------
would otherwise fall within the scope of Section 2.2.
ARTICLE III
-----------
PURCHASE PRICE
--------------
3.1 Purchase Price. In reliance on the warranties and representations of
--------------
the Company and Shareholders contained herein, and in consideration of the
aforesaid sale, assignment, transfer and delivery of the Purchased Assets, Buyer
shall pay to the Company in full payment for the Purchased Assets, and in full
payment for the agreements of the Company and Shareholders, consideration in the
form of the assumption of the Assumed Liabilities for an aggregate purchase
price (the "Purchase Price") that is equal to (i) the amount of the Assumed
Liabilities less (ii) the amount of $245,000 (the "Cash Rebate"), which Cash
Rebate shall be paid by Company to Buyer pursuant the terms of the Secured
Promissory Note attached hereto as Exhibit B-1, the obligations of which shall
-----------
be secured by the Excluded Assets pursuant to the terms of the Security
Agreement attached hereto as Exhibit B-2.
-----------
-5-
<PAGE>
3.2 Allocation of the Purchase Price. At the Closing Date, Buyer and the
--------------------------------
Company shall prepare an allocation of the Purchase Price among the Purchased
Assets together with those Assumed Liabilities that are required to be
capitalized for federal income tax purposes (the "Allocation"). The parties
agree that all tax returns and reports (including IRS Form 8594) and all
financial statements shall be prepared in a manner consistent with (and the
parties shall not otherwise take a position inconsistent with) the Allocation.
The Allocation is intended to comply with Section 1060 of the Internal Revenue
Code of 1986, as amended (the "Code") and the Regulations promulgated
thereunder.
3.3 Transfer Taxes. The Company shall pay and promptly discharge when due
--------------
the entire amount of any and all excise, sales, use, transfer, stamp,
registration or other similar taxes ("Transfer Taxes") imposed or levied by
reason of or in connection with or attributable to the transactions contemplated
by this Agreement. The parties shall cooperate with each other to the extent
reasonably requested and legally permitted to minimize any such Transfer Taxes.
Sales taxes on the book value of assets prior to any revaluation of such assets
resulting from property appraisals required under the terms of this Agreement
shall be divided equally between the Buyer and the Company. Any sales taxes in
excess of the book value shall be the responsibility of the Buyer. Buyer
acknowledges that the Inventory being purchased hereunder is for "resale
purposes" and will provide the Company with a California Resellers Certificate.
3.4 Guarantee of Accounts Receivable. The amount of trade accounts
--------------------------------
receivable from the sale of Gross Inventory (the "Receivables"), net of reserves
for uncollectible accounts receivable, is referred to as the "Net Receivables."
Company shall use its best efforts to collect all the Receivables prior to and
during the ninety (90) day period after the Closing Date, referred to herein as
"Actual Collections." If more than one invoice is outstanding for any customer,
the "first-in, first-out" principle shall be applied in determining the invoice
to which a payment relates, unless a customer specifies which invoice a payment
should be credited to.
ARTICLE IV
----------
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND SHAREHOLDER
-------------------------------------------------------------
In order to induce Buyer to enter into this Agreement, subject to
exceptions as disclosed in schedules referring specifically to the
representations and warranties in this Agreement, which shall be attached to
this Agreement and which shall identify by the section and/or subsection to
which such disclosure relates (however all information disclosed therein shall
be deemed disclosed under and incorporated into any other section of the
Agreement where such disclosure would be appropriate) and which are supplied by
the Company and Shareholder to Buyer and dated as of the date hereof, the
Company and Shareholder make the following representations and warranties to
Buyer:
4.1 Organization and Qualification of the Company. The Company is a
---------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of California has all requisite power and authority to own, lease
and operate the Purchased Assets and to conduct the Business as now
-6-
<PAGE>
being conducted. The nature and conduct of the Business or the ownership or
leasing of the Purchased Assets do not require that the Company be qualified to
do business in any other jurisdiction, except where the failure to be so
qualified would not have a material adverse effect on the Business or the
Purchased Assets. The Company has delivered to Buyer complete and correct copies
of the Articles of Incorporation and Bylaws of the Company, in each case as
amended to the date hereof.
4.2 Subsidiaries. Except as to any securities listed on Schedule 1.3 as
------------ ------------
Excluded Assets, the Company does not own any securities issued by, or have any
other ownership interest in, any other corporation, business organization or
entity. The Company is not a partner or participant in any joint venture or
partnership of any kind. The Company is not subject to any obligation or
requirement to provide funds to or to make any investment (in the form of a
loan, capital contribution or otherwise) in any entity or to any individual.
4.3 Authority Relative to this Agreement. The Company has all requisite
------------------------------------
corporate power and authority to enter into this Agreement and any agreement or
document contemplated hereby and, upon the requisite approval of its
shareholders, the Company will have all requisite corporate power and authority
to consummate the transactions contemplated hereby; and the Company has the
requisite power and authority to sell, transfer, convey, assign and deliver to
Buyer all right, title and interest to all of the Purchased Assets under this
Agreement, free and clear of all liens, claims, encumbrances, charges,
liabilities or obligations of every kind and nature whatsoever including,
without limitation, tax liens, except those assumed by Buyer hereunder
(collectively "Liens"). The execution and delivery of this Agreement, and any
agreement or document contemplated hereby, and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of the Company. This Agreement, and all agreements
or documents contemplated hereby, have been duly executed and delivered by the
Company and the obligations imposed on the Company by this Agreement, or by any
agreement or document contemplated hereby, constitute the valid and binding
obligations and agreements of the Company enforceable against the Company in
accordance with its terms except: (i) that such enforcement may be subject to
bankruptcy, insolvency, reorganization, moratorium or other similar laws now or
hereafter in effect relating to creditor's rights; and (ii) that the remedy of
specific performance and injunctive and other forms of equitable relief, may be
subject to equitable defenses and to the discretion of the court before which
any proceeding therefor may be brought.
4.4 Compliance of Transaction With Laws and Other Instruments. The
---------------------------------------------------------
Company is not in violation of its Articles of Incorporation or Bylaws in any
respect. The execution, delivery and performance by the Company of this
Agreement, and the other agreements and documents contemplated hereby and the
performance and consummation of the transactions contemplated hereby by the
Company: (i) do not require on behalf of the Company any material approval,
consent, order or authorization of, registration, declaration or filing with,
any governmental agency, court, or other authority which has not been obtained
and which is not in full force and effect as of the date hereof; (ii) will not
conflict with, or result in a breach or violation of any provision of the
Articles of Incorporation or Bylaws of the Company; (iii) will not result in a
violation of any law, regulation,
-7-
<PAGE>
statute, ordinance, rule, judgment, writ, injunction, license, permit, order or
decree of any court or governmental or regulatory authority (federal, state,
local or otherwise) to which the Company or its properties or assets (including
the Purchased Assets) are subject, the effect of which would be materially
adverse to the Business or the Purchased Assets; and (iv) except as set forth on
Schedule 4.4, will not require the approval, consent or waiver of, or filing
- ------------
with any party to, violate or conflict with or result in a breach of, or
constitute a default or acceleration of or give rise to a right of termination
(or an event which with notice or lapse of time or both would become a default)
under, any provision of any contract (including the Assigned Contracts),
indenture, mortgage, lease, agreement or other instrument to which the Company
is a party or to which any of its assets or properties (including the Purchased
Assets) are subject, the effect of which would be material and adverse to the
Business or the Purchased Assets.
4.5 Financial Statements. Attached as Schedule 4.5 hereto are the
-------------------- ------------
unaudited, financial statements of the Company for the year in the period ended
June 30, 1998 (the "Yearly Financials"), which statements fairly present the
financial position of the Company, including operations of the Business, as of
the dates thereof and the results of its operations for the periods covered
thereby. All such financial statements are sometimes referred to herein as the
"Financial Statements." The balance sheet dated January 18, 1999 (the "Balance
Sheet") has been prepared in accordance with generally accepted accounting
principles ("GAAP"), and to the extent GAAP would require such items to be
disclosed therein, properly reflects all transactions, both ordinary and
extraordinary, engaged in by the Company. The Yearly Financials have been
prepared by the Company on a basis consistent with the Company's accounting
policy in prior periods and properly reflect all transactions, both ordinary and
extraordinary, engaged by the Company.
4.6 Title to Purchased Assets; Liens; Condition of Purchased Assets.
---------------------------------------------------------------
(a) Title to Purchased Assets; Liens. Except as disclosed on Schedule
-------------------------------- --------
4.6, (i) none of the Purchased Assets are subject to any Liens except for Liens
- ---
for taxes not yet due and payable and Liens arising by operation of law or the
Assigned Contracts or the Assumed Liabilities, and the Company agrees to sell
and transfer the Purchased Assets to Buyer free and clear of all Liens and
subject to no restrictions with respect to the transferability thereof and,
without requiring the consent of any third party; (ii) the Purchased Assets
comprise all of the tangible assets owned, used in or necessary for the conduct
of the Business; (iii) the Company owns all leasehold estates and other rights
purported to be granted by the leases to which it is a party and all such leases
are valid, enforceable and subsisting and no default by the Company exists under
any thereof; (iv) there are no other agreements, written or oral concerning the
Company's right, title or interest in and to any Purchased Asset or leased
property; and (v) the Company has no notice of any claim, suit, or proposal by a
taxing authority which could have a material adverse impact on the value, use or
condition of any leased property. Schedule 4.6 also sets forth the addresses
------------
or locations of all facilities (whether leased or owned) of the Company and the
addresses or locations of all places where the Company operates the Business or
stores personal property.
-8-
<PAGE>
(b) Condition of Purchased Assets. (i) The Purchased Assets and all
-----------------------------
assets which are the subject of the Equipment Leases are in good working
condition, ordinary wear and tear excepted, have been properly maintained, are
suitable for the purposes for which they are used, and substantially conform to
the requirements of all laws, ordinances and regulations applicable to their use
and ownership or lease by the Company; and (ii) the buildings and structures
leased and occupied by the Company are suitable and properly zoned for the
purpose for which they are used, have been properly maintained to the extent the
Company is required to do so, and there are no material outstanding work orders
with respect to any painting, maintenance, repair or alterations to be performed
thereon.
4.7 Absence of Undisclosed Liabilities.
----------------------------------
(a) The Company does not have any liability or obligation (absolute,
accrued, contingent or otherwise) of a nature required by GAAP to be reflected
on the Financial Statements or disclosed in the notes thereto, and there is no
basis for any such liability or obligation except: (i) liabilities stated or
adequately reserved against in the Financial Statements; and (ii) liabilities
incurred in the ordinary course of business and which are not individually or in
the aggregate material to the financial condition or earnings of the Company or
the value of the assets of the Company; and
(b) To the Company's knowledge, there is no fact, which is not
disclosed in this Agreement or in any Schedule furnished herewith, that would
have a material adverse effect on, or that may in the future materially and
adversely affect the Business or the Purchased Assets. The Company has not been
notified or is otherwise aware that any supplier, client or customer of the
Business has made, or intends to make, a reduction in its present level of
business with the Company as a result of this Agreement and the transactions
contemplated hereby or for any other reason, except for such suppliers that have
reduced or cancelled shipments due to nonpayment or slow payment.
4.8 Collectibility of Gross Accounts Receivable. The Gross Accounts
-------------------------------------------
Receivable represent valid claims against account debtors for goods delivered or
services rendered by the Company. To the Company's knowledge, there is no reason
why all such Gross Accounts Receivable will not be collected in the ordinary
course of business, and such Gross Accounts Receivable are not subject to set-
off or counterclaim. The Company does not have any accounts or loans receivable
from any person, firm or corporation which is employed by or affiliated with it
or any of its or shareholders, directors, officers or managerial employees, or
from any shareholder, director, officer or managerial employee of the Company,
or from any parent, spouse or child of them, which relate to or in any way
affect or diminish the value of the Business or Purchased Assets.
4.9 Inventories. The Gross Inventory was acquired in the ordinary course
-----------
of business and in a manner consistent with past practices, and is of a quality
and quantity usable or salable in the ordinary course of the Business, except
for obsolete and slow moving items and items below standard quality which have
been written down on the Closing Balance Sheet to net realizable value or have
been provided for by adequate reserves. All items of Gross Inventory which are
damaged, previously returned, obsolete (which shall include all Gross Inventory
which has been held for more than six months), discontinued or otherwise for any
reason not salable in the ordinary course of business
-9-
<PAGE>
including, without limitation, any Gross Inventory items representing more than
a supply of such item based on the Company's average historical monthly usage
records over the last twelve months (or for such shorter period of the existence
of a particular product). The Gross Inventory is stated consistent with past
practices.
4.10 Absence of Certain Changes. Except as indicated on Schedule 4.10,
-------------------------- -------------
since January 18, 1999 there has not been:
(a) any material adverse change in the Purchased Assets or Assumed
Liabilities;
(b) any material contingent liability incurred by the Company whether
(i) by reason of an event, accident or occurrence or (ii) as guarantor, surety
or otherwise with respect to the obligations of others;
(c) any material obligation or liability incurred by the Company,
including the obligation to perform services, other than obligations and
liabilities incurred in the ordinary course of business;
(d) any purchase, sale or other disposition, or any agreement or other
arrangement for the purchase, sale or other disposition, of any of the services,
properties or assets of the Company, except in the ordinary course of business;
(e) any material damage, destruction or loss, whether or not covered
by insurance, affecting the Purchased Assets or the Business;
(f) any declaration, setting aside or payment of any dividend, or the
making of any other distribution in respect of, any class of the capital stock
of the Company, or any direct or indirect redemption, purchase or other
acquisition by the Company of its own capital stock;
(g) any pending or threatened labor disputes or strikes, labor union
organizational activity, any material claim or threatened claim of unfair labor
practices, or any material adverse change in relations with employees involving
the Business generally;
(h) any change in the compensation payable or to become payable to any
employee of the Business outside of the ordinary course of business of the
Company as heretofore conducted, or payments of bonuses to any employees that
exceed $10,000 in the aggregate;
(i) any material change in the Company's invoicing or collection
procedures or any discounts, rebates or returns granted to any customer of the
Business other than in the normal and customary manner consistent with the
Company's prior practice;
(j) any material settlement, compromise or agreement to settle or
compromise any claim, litigation, action or proceeding relating to the Purchased
Assets or the Business;
-10-
<PAGE>
(k) any material increase in the amount of Gross Accounts Receivable
which are more than thirty-one (31) days past the date such amounts are due
pursuant to their terms, or any notes or Gross Accounts Receivable or portions
thereof written off by the Company as uncollectible or specifically reserved for
on the books of the Company;
(l) any amendment or termination of any material Assigned Contract;
(m) any change in the Company's accounting methods, principles or
practices;
(n) any net decrease in the net worth of the Company;
(o) any change by the Company in the amount of insurance coverage
relating to the Business or the Purchased Assets or change in insurance
carriers;
(p) expenditures made by the Company which are not reflected as an
asset in the Company's accounts or which are not deductible for federal income
tax purposes which in the aggregate are material;
(q) any action taken by the Company outside of the ordinary course of
business, including, but not limited to, those actions described in Sections
6.2(b)(i) through (xiv);
(r) any material adverse change in the information contained in the
October Balance Sheet; or
(s) any agreement or understanding by the Company to do any of the
foregoing.
4.11 Intellectual Property Rights. To the best of the Company's knowledge,
----------------------------
the Company owns or is licensed or otherwise possesses legally enforceable
rights to use all Company Intellectual Property Rights that are necessary to
conduct the Business. No claims with respect to the Company Intellectual
Property Rights, including software, programs and MIS systems and materials, or
any trade secret material to the Business have been asserted or are threatened
by any person, nor does the Company know of any valid grounds for any bona fide
claims (i) to the effect that the sale or use of any product as now used or sold
or proposed for use or sale by the Company infringes on any copyright, patent,
trademark, service mark or trade secret; (ii) against the use by the Company of
any trademarks, trade names, trade secrets, copyrights, patents, technology,
know-how or computer software programs and applications used in the Company's
business as currently conducted or as proposed to be conducted by the Company;
or (iii) challenging the ownership, validity or effectiveness of any of the
Company Intellectual Property Rights or other trade secret material to the
Company. All registered trademarks, service marks and copyrights held by the
Company are valid and subsisting. To the Company's knowledge, there is no
material unauthorized use, disclosure, infringement or misappropriation of any
of the Company Intellectual Property Rights or any trade secret material to the
Company, by any third party, including any employee or former employee of the
Company.
-11-
<PAGE>
4.12 Contracts and Commitments. Except as set forth in Schedule 4.12 (and
------------------------- -------------
specifically referenced to the paragraph below to which it relates) hereto:
(a) Other than the Assigned Contracts and the Assumed Liabilities, the
Company has no contract or commitment which may materially restrict the use or
materially adversely affect a Purchased Asset or the Business, and has no
Assigned Contract which will result in a loss to the Buyer in conducting the
Business or which will have an adverse effect on the Business, the Purchased
Assets or the Buyer after Closing.
(b) The Company has no Purchase Orders which were incurred or placed
by the Company outside of the normal, ordinary, usual and current course of the
Business.
(c) The Company has not given a power of attorney, which is currently
in effect, to any person, firm, entity or company regarding the Purchased Assets
or the Business, except pursuant to this Agreement or documents required hereby.
(d) All Assigned Contracts are valid and enforceable contracts in
accordance with their respective terms and the Company is not materially in
breach of or default under any Assigned Contract or any other contract or
commitment by which any of the Purchased Assets may be bound or affected nor has
any event occurred, which, through the passage of time or the giving of notice,
or both, would constitute a default thereunder or cause the acceleration of any
of the obligations thereunder or result in the creation of any Lien upon any
Purchased Asset. No third party has canceled or terminated any Assigned
Contract nor is in material default under any Assigned Contract or any other
contract or commitment by which any of the Purchased Assets may be bound or
affected nor has any event occurred which, through the passage of time or the
giving of notice, or both, would constitute a default thereunder or cause the
acceleration of any obligation owed thereunder. True and correct copies of all
Assigned Contracts (and all amendments and modifications thereto) have been
delivered to Buyer.
(e) The Company is not restricted by agreement or otherwise (except as
the Company may be restricted by applicable laws and statutes) from carrying on
the Business anywhere in California, except pursuant to this Agreement or
documents required hereby.
4.13 ERISA; Employees.
----------------
(a) The Company has made available to Buyer copies of all employee
benefit plans (as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")) and all bonus, stock option, stock
purchase, incentive, deferred compensation, supplemental retirement, severance
and other similar employee benefit plans, programs or arrangements, and any
current employment or executive compensation or severance agreements or
arrangements, written or otherwise, for the benefit of, or relating to, any
current or former employee of the Company or any trade or business (whether or
not incorporated) which is a member or which is under common control with the
Company (an "ERISA Affiliate") within the meaning of Section 414 of the Code, or
any subsidiary of the Company (together, the "Company Employee Plans").
-12-
<PAGE>
(b) (i) None of the Company Employee Plans promises or provides retiree
medical or other retiree welfare benefits to any person except as required by
applicable law, including but not limited to COBRA; (ii) all Company Employee
Plans are in compliance in all material respects with the requirements
prescribed by any and all applicable statutes (including ERISA and the Code),
orders, or governmental rules and regulations currently in effect with respect
thereto (including all applicable requirements for notification to participants
or beneficiaries or the Department of Labor, Internal Revenue Service (the
"IRS") or Secretary of the Treasury), and the Company has performed all
obligations required to be performed by it under, is not in default under or in
violation of, and has no knowledge of any default or violation by any other
party to any of the Company Employee Plans; (iii) with respect to each Company
Employee Plan intended to qualify under Section 401(a) of the Code and each
trust intended to qualify under Section 501(a) of the Code, either a favorable
determination letter with respect to each such Company Employee Plan and trust
has been received from the IRS or there is still remaining a period of time
under applicable Treasury Regulations or IRS pronouncements in which to apply
for such a determination letter and to make any amendments necessary to obtain a
favorable determination; (iv) no Company Employee Plan is or within the prior
six (6) years has been subject to, and the Company has not incurred and does not
expect to incur any liability under, Title IV of ERISA or Section 412 of the
Code and (v) nothing in any Company Employee Plan precludes or interferes with
Buyer's ability to cause the Company to terminate (or consolidate, at Buyers
option) any Company Employee Plan after the Closing; provided that (i) the
Company Employee Plans may be terminated prospectively only, subject to rights
accrued by the Company's employees at the time of such termination and (ii) not
more than sixty (60) days notice may be required to terminate certain Company
Employee Plans.
(c) Each Company Employee Plan has been maintained in substantial
compliance with its terms, and all material contributions, premiums or other
payments due from the Company or any of its subsidiaries to (or under) any such
Company Employee Plan have been fully paid or adequately provided for on the
Financial Statements for the most recently-ended fiscal year. All accruals
thereon (including, where appropriate proportional accruals for partial periods)
have been made in accordance with GAAP consistently applied on a reasonable
basis. There has been no amendment, written interpretation or announcement
(whether or not written) by the Company with respect to, or change in employee
participation or coverage under, any Company Employee Plan that would increase
materially the expense of maintaining such plans, programs or arrangements,
individually or in the aggregate, above the level of expense incurred with
respect thereto for the most recently-ended fiscal year.
(d) The Company has provided to Buyer complete, accurate and current copies
of all Company Employee Plans and all amendments, documents, correspondence and
filings relating thereto, including but not limited to any statements, filings,
reports or returns filed with any governmental agency with respect to the
Company Employee Plans at any time within the three-year period ending on the
date hereof.
(e) There are no currently effective consulting or employment agreements or
other agreements (excluding any oral employment agreement terminable at will
without liability to the
-13-
<PAGE>
Company), except as set forth on Schedule 4.13, whether written or oral, with
-------------
individual consultants or employees to which the Company is a party. There have
not been any petitions for representation elections filed with the National
Labor Relations Board on behalf of any employees of the Company during the
Company's existence and no employees of the Company are represented by any
union. The Company has no legal obligation to pay any employee or any other
person any bonus in fiscal 1998 or thereafter.
4.14 Permits; Governmental Agreements. All Licenses are, and will be
--------------------------------
immediately before the Closing, valid and in full force and effect and
enforceable. No such License requires the consent of, or a filing or
qualification with, the permitting or licensing authority with respect to the
transactions contemplated by this Agreement. The Company is not subject to or
bound by any governmental agreement, judgment, decree or order, specifically
directed to the Company, which may materially and adversely affect the Business
or the Purchased Assets.
4.15 Borrowings and Guarantees. Except as shown on Schedule 4.15, there are
------------------------- -------------
no agreements or undertakings pursuant to which the Company is: (i) borrowing or
is entitled to borrow any money; (ii) lending or has committed itself to lend
any money; or (iii) a guarantor or surety with respect to the obligations of any
person or entity. The Company is not in default of such agreements or
undertakings listed on Schedule 4.15 so as to allow the other party thereto to
-------------
accelerate the Company's obligations thereunder or terminate or cancel such
agreements or undertakings, and the consummation of the transactions
contemplated by this Agreement will not cause the Company to be in default
thereunder or cause or give rise to a right to any acceleration, or termination
thereof. The Company has not received any grants, cancellation or other payments
from any federal, state or local governmental body which the Company could have
to repay under any circumstances.
4.16 Insurance. The Purchased Assets are insured with insurance companies
---------
against such risks and in such amounts as are customarily maintained by similar
businesses similarly situated. A true and correct copy of all policies of
liability, fire, workers' compensation, health and other forms of insurance of
any nature whatsoever presently in effect with respect to the Company or its
properties and assets, has been delivered to Buyer. All such policies are valid
and enforceable and in full force and effect, are sufficient for all applicable
requirements of law, and to the best of the Company's knowledge, no event has
occurred and no condition exists which would allow coverage under such policies
of insurance to be denied. If the Company receives, prior to the Closing, any
notices of cancellation or other termination of any such policies presently in
effect with respect to the Purchased Assets or the Business, the Company will
promptly inform Buyer and will replace or cause to be replaced such policies no
later than a date prior to the effective date of such cancellation or other
termination with policies providing substantially the same coverage.
4.17 Environmental Matters.
---------------------
(a) Hazardous Material. No underground storage tanks and no material
------------------
amount of any substance that has been designated by any governmental agency or
authority or by applicable state law to be radioactive, toxic, hazardous or
otherwise a danger to health or the environment, including,
-14-
<PAGE>
without limitation, PCBs, asbestos, petroleum, urea-formaldehyde and all
substances listed as hazardous substances pursuant to the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended, or
defined as a hazardous waste pursuant to the United States Resource Conservation
and Recovery Act of 1976, as amended, and the regulations promulgated pursuant
to said laws (a "Hazardous Material"), is present, as a result of the actions of
the Company, or to the Company's knowledge, as a result of any actions of any
third party or otherwise, in, on or under any property, including the land and
the improvements, ground water and surface water thereof, that the Company has
at any time owned, operated, occupied or leased.
(b) Hazardous Materials Activities. At no time prior to the Closing
------------------------------
Date has the Company transported, stored, used, manufactured, disposed of,
released or exposed its employees or others to Hazardous Materials in violation
of any law in effect on or before the Closing Date, nor has the Company disposed
of, transported, sold, or manufactured any product containing a Hazardous
Material (collectively "Hazardous Materials Activities") in violation of any
rule, regulation, treaty or statute promulgated by any governmental agency or
authority to prohibit, regulate or control hazardous materials or any Hazardous
Material Activity.
(c) Permits. The Company does not hold any environmental approvals,
-------
permits, licenses, clearances and consents (the "Environmental Permits") as none
are necessary as the Company does not conduct any Company's Hazardous Material
Activities.
(d) Environmental Liabilities. No action, proceeding, revocation
-------------------------
proceeding, amendment procedure, writ, injunction or claim is pending or
threatened concerning or relating to the Company, any Environmental Permit or
any Hazardous Materials Activity of the Company. The Company is not aware of
any fact or circumstance which is likely to involve the Company in any
environmental litigation or impose upon the Company any environmental liability
which would have a material adverse effect on the Business or the Purchased
Assets.
4.18 Outstanding Claims. There are no existing, pending or threatened
------------------
claims involving or relating to the Company or the Company's performance of
services which have been, or may be, asserted against the Company and which, if
successful, would be material and adverse to the Business or the Purchased
Assets, nor, to the Company's knowledge, are there any facts which would be a
proper basis for such claims.
4.19 Compliance with Applicable Law; Adverse Restriction. To the Company's
---------------------------------------------------
knowledge, the Company is presently conducting the Business in substantial
compliance with: (i) all applicable laws, rules, regulations and ordinances of
all governmental and regulatory authorities (federal, state, local or otherwise)
(collectively "Statutes") and (ii) all applicable orders, writs, injunctions,
judgments, decrees and awards of all governmental and regulatory authorities
(federal, state, local or otherwise) (collectively "Decrees"). The Company has
not received notification of any asserted present or past failure of the Company
so to comply with any Statute or Decree and no such violation of any Statute or
Decree exists or will exist upon the Closing Date. The Company is not subject to
any Statute or Decree
-15-
<PAGE>
or any other restriction of any kind or character, which could materially
adversely affect the Business or the Purchased Assets after the Closing.
4.20 Litigation. Except as set forth on Schedule 4.20, there are no
---------- -------------
claims, actions, suits, proceedings or investigations pending or threatened
against the Company at law, in equity or otherwise, in, before, or by, any court
or governmental agency or authority, nor is there any basis therefor, which,
individually or in the aggregate, would have a material adverse effect on the
Business or the Purchased Assets. There are no unsatisfied judgments or
outstanding orders, injunctions, decrees, stipulations or awards (whether
rendered by a court or administrative agency or by arbitration) against the
Company or against any of its respective properties (including the Purchased
Assets) or businesses (including the Business) which, individually or in the
aggregate, would have a material adverse effect on the Business or the Purchased
Assets, and none which will cause this Agreement or any action taken or to be
taken in connection herewith to be invalid.
4.21 Finder's Fee. The Company has not incurred or become liable for any
------------
broker's commission or finder's fee relating to or in connection with the
transactions contemplated by this Agreement, or otherwise dealt with any brokers
or finders in connection herewith.
4.22 Transactions with Interested Persons. Except as set forth on
------------------------------------
Schedule 4.22, no officer, managerial employee or director of the Company or
- -------------
their spouses, parents or children: (i) owns directly or indirectly, on an
individual or joint basis, any material interest in, or serves as an officer or
director of, any customer, competitor or supplier of the Company or any
organization which has a contract or arrangement with the Company; (ii) has any
loans outstanding to the Company; (iii) is indebted to the Company; (iv) owns
any property, real or personal, tangible or intangible, or has rights required
for or used in the business of the Company, with the exception of some
employees' and officers' personal office decorations; or (v) is owed any money
or property by the Company, other than compensation earned in the ordinary
course of business.
4.23 Consents. To the Company's knowledge, the Company is not subject to
--------
any law, ordinance, regulation, rule, order, judgment, injunction or decree,
contract, commitment, lease, agreement, instrument or other restriction of any
kind, which by its provisions would prevent the consummation of the transactions
contemplated hereby, without the consent, filing with or notification of any
third party or which is likely to result in any penalty, forfeiture or
termination as a result of such consummation.
4.24 Information. None of the information supplied by the Company in
-----------
connection with the transactions contemplated by this Agreement and no
representation or warranty made in this Agreement or any Schedule hereto
contains any untrue statement of a material fact or omits to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
4.25 Questionable Payments. To the Company's knowledge, neither the
---------------------
Company nor any director, officer, agent, employee or other person acting on
behalf of the Company has used any funds
-16-
<PAGE>
of the Company for unlawful contributions, gifts, entertainment or other
unlawful expenses relating to political activity, made any direct or indirect
unlawful payments to foreign or domestic government officials or employees from
corporate funds, established or maintained any unlawful or unrecorded fund or
corporate monies or other assets, made any false or fictitious entries on the
books of record of the Company, made or received any bribe, rebate, payoff,
influence payment, kickback or other unlawful payment, or made any other
payment, favor or gift to a third party not fully deductible for federal income
tax purposes.
4.26 Taxes. The Company has timely filed within the time period for filing
-----
or any extension granted, or appropriately amended, with respect thereto all
federal, state, local and other returns, estimates and reports ("Returns")
relating to any and all taxes or other governmental charges, obligations or fees
including any secondary or transferee liability for taxes and any related
interest or penalties ("Tax" or "Taxes") it is required to file and such Returns
were true and correct when filed and were completed in accordance with
applicable law. Except for Taxes contested in good faith and which are disclosed
in Schedule 4.26, the Company has paid all Taxes it is required to pay and has
-------------
withheld with respect to the Company's employees, all federal and state income
Taxes, FICA, FUTA and other Taxes required to be withheld. No Tax Return of the
Company has been examined or audited by the IRS or any other taxing authority
for tax years beginning after December 31, 1989. There are no pending or, to the
Company's knowledge, threatened audits, examinations, assessments, asserted
deficiencies or claims for additional Taxes with respect to the Company. There
are (and as of the Closing there will be) no Liens or similar encumbrances
relating to or attributable to Taxes on the Purchased Assets. The Company has no
knowledge of any basis for the assertion of any claims attributable to Taxes,
which if adversely determined, would result in a Lien or similar encumbrance on
the Purchased Assets or otherwise adversely affect Buyer. For purposes of this
Section 4.26, references to the Company include any predecessor or transferor
with respect to the Company.
4.27 Operation of Business. The Company has not taken any actions during
---------------------
the period from January 18, 1999 to the date of this Agreement which would be
considered a prohibited action pursuant to Section 6.2(b) herein if such action
was taken after the date of this Agreement.
ARTICLE V
---------
REPRESENTATIONS AND WARRANTIES OF BUYER
---------------------------------------
In order to induce the Company and Shareholder to enter into this
Agreement, Buyer makes the following representations and warranties to the
Company and Shareholder:
5.1 Organization. Buyer is a corporation duly organized, validly existing
------------
and in good standing under the laws of the State of Delaware, and is qualified
to do business and is in good standing in the State of California. Buyer has all
requisite corporate power and authority to enter into this Agreement, and any
agreement or document contemplated hereby, and, subject to obtaining the
approval of the shareholders of Buyer, to consummate the transactions
contemplated hereby. The execution and
-17-
<PAGE>
delivery of this Agreement, and any agreement or document contemplated hereby,
and, subject to obtaining the approval of the shareholders of the Buyer, the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of Buyer.
5.2 Binding Obligation. This Agreement, and all agreements or documents
------------------
contemplated hereby, have been duly executed and delivered by Buyer and the
obligations imposed on Buyer by this Agreement, or by any agreement or document
contemplated hereby, constitute the valid and binding obligations and agreements
of Buyer, enforceable against Buyer in accordance with its terms except: (i)
that such enforcement may be subject to bankruptcy, insolvency, reorganization,
moratorium or other similar laws now or hereafter in effect relating to
creditors rights; and (ii) that the remedy of specific performance, and
injunctive and other forms of equitable relief, may be subject to equitable
defenses and to the discretion of the court before which any proceeding
therefore may be brought.
5.3 Consents. Buyer is not subject to any law, ordinance, regulation,
--------
rule, order, judgment, injunction or decree, contract, commitment, lease,
agreement, instrument or other restriction of any kind, which by its provisions
would prevent the consummation of this Agreement or any of the transactions
contemplated hereby, without the consent, filing with or notification of any
third party or which would result in any penalty, forfeiture or termination as a
result of such consummation.
ARTICLE VI
----------
CERTAIN UNDERSTANDINGS AND AGREEMENTS
-------------------------------------
6.1 Access and Audit. Between the date of this Agreement and the Closing,
----------------
the Company will provide Buyer and its accountants, counsel and other
representatives full access to the offices, books and records of the Company and
will furnish to Buyer and its representatives such financial and operating data
and other information with respect to the business and properties of the Company
as Buyer and its representatives may request for purposes of evaluating the
purchase hereunder, including but not limited to all contracts, agreements and
arrangements with clients, customers, vendors, consultants, agents and suppliers
of the Company, and any other persons having a relationship with the Company.
(a) In connection with an audit which may be performed by Buyer's
accountants (the "Accountants") and in connection with such Accountant's review
of the financial statements of the Company, the parties agree that the fees and
expenses of the Accountants, as well as the fees and expenses of the Company's
accountants in assisting the Accountant's review of the Company's financial
statements, shall be paid by the Buyer.
6.2 Operation of Business.
---------------------
(a) Between the date of this Agreement and the Closing, the Company
and Shareholder shall:
-18-
<PAGE>
(i) preserve intact and continue to manage and day-to-day
operate the Business substantially in conformity with the manner in which it has
heretofore been operated by Company;
(ii) preserve the Company's existing relationships with
customers, affiliates, suppliers, consultants, employees and any other persons
having business relations with it;
(iii) preserve and protect all of the Purchased Assets in good
repair and condition, normal wear and tear excepted, and maintain the insurance
policies covering the Business and the Purchased Assets in full force and
effect;
(iv) maintain the Company's books of account and records in the
usual and ordinary manner, and in conformity with its past practices; and
(v) pay its Taxes when due and to pay its debts or perform its
other obligations consistent with recent past practices.
(b) Between the date of this Agreement and the Closing, the Company
shall conduct its business, in a reasonable and prudent manner, in the ordinary
course of business consistent with past practices and, by way of amplification
and not limitation, the Company shall not, without the prior written consent of
Buyer:
(i) amend its Articles of Incorporation or Bylaws;
(ii) grant any increase in the compensation payable, or to
become payable, by the Company to employees of the Business, make any bonus
payment to any of the employees of the Business or enter into any insurance,
pension or other benefit plan, payment or arrangement for or with any of the
employees of the Business;
(iii) borrow or agree to borrow any funds, incur any
indebtedness, or directly or indirectly guarantee or agree to guarantee the
obligations of others;
(iv) not make any capital expenditure or enter into any
agreement, contract, lease or commitment relating to the Business or the
Purchased Assets (other than materials and supplies acquired in the ordinary
course of business);
(v) place or allow to be placed on any of the Purchased Assets
any Lien other than Liens arising by operation of law in the ordinary course of
business consistent with past practices or other minor Liens which do not in the
aggregate detract from the value of such assets or properties in any material
amount;
(vi) cancel, discount or otherwise compromise any indebtedness
owing to it or any claims which it may possess or waive any rights of value, in
each case which are included in the Purchased Assets except in the ordinary
course of business consistent with its past practices;
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<PAGE>
(vii) sell, assign, license or transfer any Company Intellectual
Property Rights;
(viii) sell or otherwise dispose of any interest in real property
or personal property comprising the Purchased Assets, except in the ordinary
course of business consistent with its past practices;
(ix) commit any act or omit to do any act which will cause a
breach of any Assigned Contract;
(x) violate any law, statute, rule, governmental regulation or
order of any court or governmental or regulatory authority (whether federal,
state or local) in any material way;
(xi) engage in any activity or transaction or incur any
obligation (by conduct or otherwise) which will have a material adverse effect
on the Business, the Purchased Assets or the Assumed Liabilities;
(xii) make any loan, advance, or distribution or payment of any
type to its shareholders, or any of its officers or directors, except for
payment of salaries;
(xiii) increase any reserves for doubtful or uncollectible
accounts receivable without the consent of Buyer; or
(xiv) take, or agree in writing or otherwise to take, any of the
actions described in Section 6.2(b)(i) through (xiv) above, or take any action
(or fail to take any action) that would cause any representation or warranty
made by the Company or Shareholder herein to be untrue in any material respect,
or that would prevent the Company or Shareholder from performing any
requirements or covenants of the Company or Shareholder contained herein.
6.3 Expenses. Subject to Section 10.2 hereof and except as otherwise
--------
provided herein, Buyer and the Company shall each pay their respective costs
incurred in connection with the preparation, negotiation, execution and delivery
of this Agreement and the consummation of the transactions contemplated hereby
including, without limitation, the fees of their respective attorneys, brokers
and finders.
6.4 News Releases. Prior to the Closing, and except as required by law,
-------------
any news releases pertaining to the transactions contemplated hereby shall be
prepared by Buyer, or its representatives, and reviewed and approved by
Shareholder, and shall be acceptable to it them prior to any dissemination.
After the Closing, if a public notice or announcement has not already been made,
the Buyer may prepare a public statement or announcement with regard to the sale
and purchase hereunder. The Company shall not make any other public notice or
announcement without the consent and approval of Buyer.
6.5 Notice of Adverse Developments. Prior to the Closing, the Company
------------------------------
will give immediate written notice to Buyer by facsimile transmission of any
development which adversely
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affects, or which is likely to adversely affect Business, the Purchased Assets
or Buyer after the Closing. No disclosure pursuant to this Section 6.5, however,
shall be deemed to amend or supplement the schedules to this Agreement or to
prevent or cause any misrepresentation or breach of representations, warranties
or covenants made by the Company or Shareholder herein; except that if Buyer
determines any adverse or potentially adverse effect to be material, Buyer and
the Company agree to negotiate a reduction in the Purchase Price mutually
acceptable to Buyer and the Company. If, however, an agreement for a reduction
in the Purchase Price cannot be reached between the parties within thirty (30)
days of beginning such negotiations, any party may terminate this Agreement by
written notice to the other without further obligation to the other.
6.6 Exclusivity. Neither the Company nor any of its directors, officers,
-----------
employees, financial advisors or agents will (i) solicit, encourage, initiate or
participate in any negotiations or discussions with any third party with respect
to any offer or proposal to merge with or acquire the Company or all or
substantially all of the Business or Purchased Assets whether by merger,
purchase of assets or otherwise, (ii) disclose to any third party any
information concerning the Business and properties of the Company or afford any
third party access to the properties, books or records of the Company, except in
the ordinary course of business or as customarily disclosed or accessed or as
compelled by law, or (iii) cooperate with any third party to make any proposal
to merge with or acquire all or any part of the capital stock or assets of the
Company other than inventory in the ordinary course of business or non-essential
or excess assets. If the Company receives a formal or informal offer or proposal
for such a merger or acquisition (or an offer or proposal to enter negotiations
therefor), the Company shall immediately inform Buyer thereof (including the
identity of the offeror and a written summary of the terms of such offer) and
shall provide Buyer with copies of any documents relating thereto.
6.7 Confidentiality. All information furnished by either party to the
---------------
other party or its representatives will be held in strict confidence by the
party receiving such information and will not be disclosed to any third party
except representatives who need access to the information in order to complete
the transactions contemplated hereby. All information furnished by any party
hereto to another party will be deemed to be proprietary in nature and shall be
kept confidential unless (a) the party providing the information consents in
writing to disclosure to third persons, (b) the information is already in the
public domain, (c) disclosure of the information is compelled by process of law,
or (d) the party receiving the information already had such information in its
possession from another source. If this Agreement shall be terminated prior to
Closing, each party and its representatives will return to the other all
tangible, electronic or other forms of such information to the other party, will
retain no such information in its files, and will not use to its commercial
advantage any information obtained (whether or not contained in hard copy,
database or other physical form) concerning products, customers or other
information of or about the other which reasonably could be presumed to be of a
proprietary and confidential nature.
6.8 Preserve Accuracy of Representations and Warranties. The parties
---------------------------------------------------
shall not voluntarily undertake any action which would render inaccurate any
representation or warranty contained herein.
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6.9 Certain Events. Each of the Buyer, the Company and shareholder shall
--------------
immediately communicate to the others any determination that any of the
conditions to its respective obligations to close the transactions contemplated
hereby cannot be met or its knowledge of any circumstances which would require a
modification of any material term of this Agreement.
6.10 Best Efforts and Mutual Cooperation. Each of the parties to this
-----------------------------------
Agreement shall use its best efforts to effectuate the transactions contemplated
hereby and to fulfill and cause to be fulfilled the conditions to closing under
this Agreement. The parties hereto will cooperate with each other to obtain as
promptly as possible all consents, authorizations, orders or approvals of any
third party, whether private or governmental, required in connection with the
transactions contemplated by this Agreement. The parties hereto agree to
coordinate and cooperate with one another in exchanging such information and in
executing and delivering such instruments as the others may request in
connection with all of the foregoing.
6.11 Further Assurances. At and after the Closing, and without any further
------------------
consideration, each of the parties hereto will, at the request of the other
parties hereto, execute and deliver to the requesting party all such further
assignments, assurances and other documents as such party may reasonably request
in order to effect the transfer of the Business, the Purchased Assets and the
Assumed Liabilities to Buyer.
6.12 Third Party Consents. Prior to the Closing, the Company shall use its
--------------------
best efforts to obtain all necessary consents, waivers and acknowledgments
required to avoid a default under, or to avoid giving another party the ability
to terminate or accelerate, any contract, agreement, or other instrument to
which the Company is a party including the Assigned Contracts, or by which any
of the Purchased Assets are bound, or which are otherwise material to the
Business.
6.13 Offers of Employment. The Company will use its best efforts to assist
--------------------
Buyer in obtaining the employment after Closing of those employees of the
Company listed on Exhibit C attached hereto that Buyer indicates it desires
---------
to employ.
6.14 Performance and Payment by Buyer. Buyer shall perform, pay and
--------------------------------
discharge when due: (a) the Assumed Liabilities and (b) all executory
obligations of the Company under the Assigned Contracts, and the Equipment
Leases, on the terms and conditions provided in such agreements.
6.15 Application for Tax Certificates. Within fifteen (15) days of the
--------------------------------
date of this Agreement, the Company shall file with the appropriate governmental
agencies properly completed applications or other appropriate forms of request
to obtain the following:
(a) a tax good standing certificate issued by the Franchise Tax Board
(FTB Form 4263A) which states that the Company is in good standing, has no known
unpaid tax liability and is entitled to transact business in California ("Tax
Good Standing Certificate");
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<PAGE>
(b) a certificate of release as authorized in and pursuant to
California Unemployment Insurance Code Sections 1731 through and including 1734
("Certificate of Release"); and
(c) a certificate or receipt of payment of all sales and use taxes as
authorized in and pursuant to California Revenue and Taxation Code Sections 6811
through and including 6814 of the Sales and Use Tax Law of California
("Certificate of Sales Tax Payment").
The Tax Good Standing Certificate, the Certificate of Release and the
Certificate of Sales Tax Payment required hereunder are collectively referred to
herein as the "Tax Certificates" and such Tax Certificates shall be dated not
earlier than thirty (30) days before the Closing Date.
6.16 1.44 Tax Returns. To the extent that failure to do so would adversely
----------------
affect Buyer or the Purchased Assets, the Company shall (i) continue to timely
file within the time period for filing, or any extension granted with respect
thereto, all federal, state, local and other Returns relating to any and all
Taxes it is required to file and such Returns shall be true and correct and
complete in accordance with applicable law and (ii) be responsible for and pay
when due any and all Taxes (A) relating or pertaining to the period (or that
portion of any period) ending on or prior to the Closing Date, and (B)
attributable to, levied or imposed upon, or incurred in connection with the
Purchased Assets on or prior to the Closing Date or the operations of the
Company.
6.17 Post-Closing Date Access to Information. If after the Closing, in
---------------------------------------
order properly to prepare documents or reports required to be filed with
governmental authorities or its financial statements, it is necessary that Buyer
be furnished with additional information relating to the Purchased Assets or the
Business and such information is in possession of the Company, the Company will
furnish, or cause to be furnished, such information to Buyer. The Company agrees
to maintain and retain for three years any and all information regarding its
business and operations on or prior to the Closing.
6.18 Final Schedules of Purchased Assets and Assumed Liabilities. To the
-----------------------------------------------------------
extent that updated Schedules to this Agreement are delivered by the Company to
the Buyer at the Closing and do not reflect all activity of the Company through
and including the Closing Date, within three (3) business days after the
Closing, the Company shall deliver to Buyer updated Schedules to this Agreement
reflecting all activity through and including the Closing Date. Such Schedules
shall become the basis for determining the Purchased Assets, the Excluded
Assets, the Assumed Liabilities and the Excluded Liabilities for purposes of
this Agreement.
ARTICLE VII
-----------
CONDITIONS TO OBLIGATIONS TO CLOSE
----------------------------------
7.1 Conditions Precedent to Obligations of the Company and Shareholder.
------------------------------------------------------------------
The obligations of the Company and Shareholder to consummate the transactions
contemplated by this Agreement are
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<PAGE>
subject to the fulfillment, prior to or at the Closing, of each of the following
conditions, except to the extent the Company and Shareholder shall have waived
in writing such satisfaction:
(a) Representations and Warranties True. The representations and
-----------------------------------
warranties made by Buyer in this Agreement shall be true and correct as of the
date of this Agreement and on and as of the Closing Date as though such
representations and warranties were made on and as of such date.
(b) Performance. Buyer shall have performed and complied with and be
-----------
in compliance with all covenants, agreements, representations, warranties and
undertakings required by this Agreement to be performed or complied with by
Buyer prior to the Closing.
(c) Closing Documents. Buyer shall have delivered to the Company at
-----------------
Closing all of the documents required by Section 8.1.
(d) Consulting Agreement. W&K Pharmacy, Inc. shall have entered into a
--------------------
Consulting Agreement with Buyer to provide the non-exclusive services of Martin
Weiss in the form attached hereto as Exhibit D.
----------
(e) Insurance. Buyer shall have provided the Company copies of
---------
insurance binders for business insurance coverage of the Business and Purchased
Assets to become effective upon the Closing in amounts equal to or greater than
the current coverage maintained by the Company.
(f) Corporate Approval. This Agreement shall have been approved and
------------------
adopted by the requisite vote or consent of the board of directors of Buyer.
(g) Closing Certificate. Buyer shall deliver at Closing a certificate
-------------------
in such detail as the Company shall reasonably request, certifying to the
fulfillment or satisfaction of the conditions set forth in this Section 7.1. The
delivery of such certificate shall constitute a representation and warranty of
Buyer as to the statements set forth therein.
7.2 Conditions Precedent to Obligations of Buyer. The obligations of Buyer
--------------------------------------------
to consummate the transactions contemplated by this Agreement are subject to the
fulfillment, prior to or at the Closing, of each of the following conditions,
except to the extent the Buyer shall have waived in writing such satisfaction.
(a) Representations and Warranties True. The representations and
-----------------------------------
warranties made by the Company and Shareholder in this Agreement shall be true
and correct as of the date of this Agreement and on and as of the Closing Date
as though such representations and warranties were made on and as of such date.
(b) Performance. The Company and Shareholder shall have performed and
-----------
complied with and be in compliance with all covenants, agreements,
representations and warranties and
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<PAGE>
undertakings required by this Agreement to be performed or complied with by the
Company or Shareholder prior to the Closing.
(c) No Proceeding or Litigation. No action, suit or proceeding before any
---------------------------
court or any governmental or regulatory authority shall have been commenced, no
investigation by any governmental or regulatory authority shall have been
commenced, and no action, suit or proceeding by any governmental or regulatory
authority shall have been threatened, against Buyer or the Company or any
affiliate, associate, officer or director of any of them, seeking to restrain,
enjoin, rescind, prevent or change the transactions contemplated hereby or
questioning the validity or legality of any such transactions or seeking Losses
in connection with any of such transactions.
(d) No Adverse Change. There shall have been no material adverse change
-----------------
since the date of this Agreement in the general affairs, management, business,
condition (financial or otherwise) of the Purchased Assets, Assumed Liabilities
or the Business or in the Balance Sheet since January 18, 1999.
(e) Employees. The employees of the Company listed on Exhibit C attached
--------- ---------
hereto shall have indicated their willingness to work for Buyer after the
Closing to the reasonable satisfaction of Buyer and pursuant to similar terms of
employment between such employees and the Company.
(f) Receipt of Required Consents. All consents that may be necessary to
----------------------------
consummate the transactions contemplated hereby in accordance with Section 6.12
shall have been received by the Company with copies provided to Buyer.
(g) Consulting Agreement. W&K Pharmacy, Inc. shall have entered into a
--------------------
Consulting Agreement with Buyer to provide the non-exclusive services of Martin
Weiss in the form attached hereto as Exhibit D.
----------
(h) Corporate Approval. This Agreement shall have been approved and
------------------
adopted by the requisite vote or consent of the board of directors and
shareholders of the Company.
(i) Delivery of Tax Certificates. The Company shall have delivered to
----------------------------
Buyer on or before the Closing the Tax Certificates.
(j) Closing Certificate. The Company and Shareholder shall have delivered
-------------------
at Closing certificates in such detail as Buyer shall reasonably request,
certifying to the fulfillment or satisfaction of the conditions set forth in
this Section 7.2. The delivery of such certificate shall constitute a
representation and warranty of the Company and Shareholders as to the statements
set forth therein.
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<PAGE>
ARTICLE VIII
------------
CLOSING DELIVERIES
------------------
Unless this Agreement shall have been terminated as provided in Article X,
the closing of the transactions contemplated hereby (the "Closing") will be held
at the offices of the Buyer in Burbank, California at 9:00 a.m. on or before
June 30, 1999, or such other time, date and/or place as mutually agreed upon by
Buyer and the Company. The date of the Closing is herein referred to as the
"Closing Date." All actions taken at the Closing will be considered as having
been taken simultaneously and no such actions will be considered to be completed
until all such actions have been completed.
8.1 At the Closing, Buyer shall deliver to the Company:
--------------------------------------------------
(a) The Closing Certificate executed by an officer of Buyer in
accordance with Section 7.1(g).
(b) A certificate of the Secretary of State of the State of
California, dated within seven (7) days of the Closing Date, confirming the
legal existence and good standing of the Buyer.
(c) An executed Consulting Agreement executed by W&K substantially in
the form of Exhibit D attached hereto.
---------
(d) Executed Equipment Lease Assignment Agreements substantially in
the form of Exhibits A attached hereto.
----------
8.2 At the Closing, the Company and Shareholder shall deliver to Buyer:
------------------------------------------------------------------
(a) Resolutions of the Board of Directors and shareholders of the
Company authorizing the execution and delivery of this Agreement by the Company
certified by the Secretary of the Company;
(b) Closing Certificate executed by the President of the Company and
Shareholder in accordance with Section 7.2(j).
(c) A Certificate of the Secretary of State of the State of
California, dated within seven (7) days of the Closing Date, confirming the
legal existence and good standing of the Company.
(d) Copies of all Third Party Real Property Leases, Equipment Leases,
Business Records, Licenses and all Assigned Contracts.
(e) Any Real Property Lease Assignment Agreements and Equipment Lease
Assignment Agreements, substantially in the forms of Exhibits A attached hereto.
----------
(f) The Tax Certificates as described in Section 7.2(i).
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<PAGE>
(g) An executed Consulting Agreement executed by W&K substantially in
the form of Exhibit D attached hereto.
---------
(h) The Bill of Sale duly executed by the Company substantially in
the form of Exhibit E attached hereto.
---------
(i) The consents required in accordance with Section 7.2(f).
(j) Releases executed by creditors with respect to such creditors'
lien on the assets of the Company.
8.3 After the Closing:
-----------------
(a) Within thirty (30) days after Closing, the Buyer shall cause to
be satisfied or shall assume of all Company's and Shareholder's respective
obligations under those certain credit facilities with the American Pacific Bank
and China Trust Bank set forth on Schedule 4.15.
(b) For so long as Company is in the business of acquiring
merchandise for wholesale or retail, including without limitation, jewelry,
watches and precious metal coins, Company shall provide, and Shareholder shall
cause Company to provide, Buyer with such merchandise for sale on Buyer's
shopping channel by buying appropriate inventory, as approved by Buyer, and
selling it to Buyer (or its assigns) at Company's cost to acquire such
merchandise (taking into account any applicable volume discounts) and Company's
actual general and administrative costs (not to exceed 8.0% of Company's costs)
to acquire such merchandise for Buyer. Upon Buyer's request, Company shall
provide written purchase orders, confirmations, invoices and other such
documentation needed to establish Company's acquisition and general and
administrative costs.
ARTICLE IX
----------
INDEMNIFICATION
---------------
9.1 Survival of Representations, Etc. It is the express intention and
--------------------------------
agreement of the parties to this Agreement that all covenants, agreements,
statements, representations, warranties and indemnities made by Buyer, the
Company and Shareholder in this Agreement or in any document or instrument
delivered by Buyer or the Company and Shareholder pursuant to the provisions of
this Agreement at or in connection with the Closing shall survive the Closing as
follows:
(a) all representations, warranties, covenants and agreements of the
Company and Shareholder in Section 4.26 or otherwise relating to the federal,
state, local or foreign Tax obligations of the Company with respect to the Tax
Returns filed or required to be filed prior to or on the Closing Date ("Tax
Matters") shall survive the Closing for the period of the applicable statute of
limitations plus any extensions or waivers granted or imposed with respect
thereto;
-27-
<PAGE>
(b) all representations, warranties, covenants and agreements of the
Company and Shareholder relating to regulatory aspects of the Company's business
prior to or on the Closing Date, including but not limited to environmental
matters and employee safety regulations (collectively referred to herein as
"Regulatory Matters") shall survive the Closing for a period of five (5) years
from the Closing Date;
(c) all other representations, warranties, covenants and agreements
contained in this Agreement shall survive the Closing for a period of two (2)
years from the Closing Date; and
(d) the right of either party to recover Losses (as defined in
Section 9.2) on any claim shall not be affected by the termination of any
representations, warranties, covenants and agreements as set forth above in
subparagraphs (a), (b) and (c) and in Section 9.5 below, provided that notice of
the existence of any Losses (but not necessarily the fixed amount of any such
Losses) as a result of such claim has been given by the indemnified to the
indemnifying party prior to such termination.
9.2 Indemnification of Buyer. From and after the Closing, the Company and
------------------------
the Shareholder shall jointly and severally indemnify and hold Buyer harmless
from and against any liability, loss, cost, expense, claim, lien or other damage
including, without limitation, reasonable attorney's fees and expenses (all of
the foregoing items for purposes of this Agreement are referred to as "Losses"),
resulting from, arising out of or incurred with respect to, or alleged to result
from, arise out of or have been incurred with respect to:
(a) the falsity or breach of any representation, warranty, covenant
or agreement by the Company herein or in the Schedules hereto, subject to a
claim being made before the expiration of the applicable period specified in
Section 9.1 above with respect to the falsity or breach of any representation,
warranty, covenant or agreement by the Company or Shareholder herein.
(b) the assertion against the Company or Shareholder or against the
Buyer of any Losses created by or attributable to any unknown, undisclosed or
contingent liability of the Company and Shareholder arising out of the Company's
or Shareholder's conduct prior to the Closing.
9.3 Indemnification of the Company and Shareholder. From and after the
----------------------------------------------
Closing, Buyer shall indemnify and hold the Company and Shareholder harmless
from and against any Losses, resulting from, arising out of, or incurred with
respect to, or alleged to result from arise out of or have been incurred with
respect to the falsity of breach of any representation, warranty, covenant or
agreement by Buyer herein or in the Schedules hereto, subject to a claim being
made before the expiration of the applicable period specified in Section 9.1
above with respect to the falsity or breach of any representation, warranty,
covenant or agreement by Buyer herein or the operation of the Business or the
use of the Purchased Assets from and after the Closing Date.
9.4 Minimum Indemnification. Except with respect to Tax Matters, and
-----------------------
fraud and willful concealment, for which there shall be no minimum claim,
neither Buyer nor the Company and Shareholder shall have any liability under the
indemnification provisions of this Article IX unless and
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<PAGE>
until the gross aggregate amount of claims for liabilities exceeds $50,000. At
such time as the gross aggregate amount of claims for liabilities exceeds
$50,000, Buyer or the Company and Shareholder, as the case may be, shall be
entitled to be indemnified against the full amount of such liabilities (and not
merely the portion of such liabilities exceeding $50,000).
9.5 Procedures for Indemnification.
------------------------------
(a) Upon obtaining knowledge of the assertion of any personal injury,
property damage, nuisance, tort, contract or other claims, actions or demands,
including any and all investigations, suits, demands, actions, fines, penalties,
enforcement actions, Losses, deficiencies, injunctions, reasonable attorneys'
fees, costs and expenses actually paid, imposed or incurred ("Claims") by any
person or entity who is not an Indemnified Person (as defined below) (i.e., a
third-party claim) and which could give rise to a claim for indemnity pursuant
to Sections 9.2 and 9.3 above, the party seeking indemnification (the
"Indemnified Person") from the other party (the "Indemnifying Person") shall
promptly provide the Indemnifying Person with written notice of any such Claim
and use such Indemnified Person's reasonable efforts to cooperate fully with the
Indemnifying Person, at the Indemnifying Person's expense, in any defense or
settlement thereof, but the failure of the Indemnified Person to so promptly
notify and cooperate fully with the Indemnifying Person shall not affect the
Indemnifying Person's obligation pursuant to this Article IX unless such failure
materially prejudices the Indemnifying Person's right to participate in the
contest of such Claim as hereinafter provided. The Indemnifying Person shall
have the right at its expense to employ counsel of its choice to assume control
of the defense of such Claim and the Indemnified Person shall have the right,
but not the obligation, to participate in the investigation and defense of any
such Claim with separate counsel chosen by such Indemnified Person; provided,
however, that in the event that the Indemnifying Person has employed counsel to
defend a Claim and the Indemnified Person elects to engage its own counsel to
assist in the defense, the Indemnified Person shall pay all fees and expenses of
its own counsel, unless (i) the Indemnifying Person has previously agreed to pay
the fees and expenses of counsel retained by an Indemnified Person, (ii) the
Indemnifying Person has failed to assume the defense of such Claim or (iii) in
the reasonable judgment of such Indemnified Person, based upon advice of its
counsel, there is a conflict of interest between the Indemnifying Person and
such Indemnified Person with respect to such Claim, then the reasonable fees and
expenses of such Indemnified Person's counsel shall be at the expense of the
Indemnifying Person, provided that the Indemnifying Person approves such
counsel, which approval shall not be unreasonably withheld. So long as the
Indemnifying Person is defending such Claim in good faith, the Indemnified
Person will not settle such Claim without the Indemnifying Person's written
consent, which consent shall not be unreasonably withheld, and the Indemnifying
Person will not settle any Claim on behalf of the Indemnified Person without the
Indemnified Person's written consent, which consent shall not be unreasonably
withheld. The Indemnified Person shall make available to the Indemnifying
Person all records and other materials at the Indemnifying Person's expense, as
shall reasonably be required by the Indemnifying Person to contest such Claim.
In the event there is a Claim for indemnification hereunder, the Indemnifying
Person shall have a reasonable period of time, not to exceed thirty (30) days,
to resolve the matter with the person or entity making the Claim and to have the
Claim dismissed as to any applicable Indemnified Person.
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<PAGE>
(b) If the Indemnifying Person assumes the defense of a third-party
Claim, the obligations of the Indemnifying Person hereunder as to such Claim
shall include taking all steps necessary to defend or settle such Claim and
holding the Indemnified Person harmless against any and all expenses, costs,
losses and Losses caused by or arising out of any settlement approved by the
Indemnifying Person or any judgment in connection with such Claim. Except with
the prior written consent of the Indemnified Person, the Indemnifying Person
shall not, in the defense of such Claim, consent to the entry of any judgment
(other than a judgment of dismissal on the merits without costs), or enter into
any settlement which does not include as an unconditional term thereof the
giving by the claimant or the plaintiff to the Indemnified Person a release from
all liability in respect of such Claim.
(c) In the event any Claim is made pursuant to Section 9.2 or 9.3 of
this Agreement, the party asserting the Claim (the Indemnified Person with
respect to such Claim) shall notify the other parties hereto in writing as to
the existence and amount of the Claim. If the Indemnifying Person with respect
to such Claim disputes the existence or the amount of such Claim, the
Indemnifying Person shall so notify the Indemnified Person in writing within
fifteen (15) days following the Indemnifying Person's receipt of written notice
as to the existence and amount of the Claim. Upon such an exchange of written
notification, the parties will negotiate in good faith for up to thirty (30)
days or such other period of time as the parties mutually agree and if after
such period of time the parties are unable to resolve their differences with
respect to such Claim, the matter shall be resolved in accordance with the
arbitration procedures set forth in Article XI hereof. Any decision of the
arbitrator with respect to both the existence and amount of such Claim shall be
final and binding on the parties hereto.
9.6 Payment of Indemnification Claims.
---------------------------------
(a) In the event any Claim not arising from the Claim of a third
party is made pursuant to Section 9.2 of this Agreement, if the Company and
Shareholders fail to object in writing within thirty (30) days of their receipt
of Buyer's written notice as to the existence and amount of the Claim, then the
existence and amount of such Claim as set forth in the Buyer's notice shall be
deemed to be the true and accurate amount of the Claim. Upon the determination
of the amount of the Claim that is payable by the Company and Shareholders as a
result of (i) the failure of the Company and Shareholders as a party to object
in writing to the written notice as to the amount of the Claim within thirty
(30) days of receipt of Buyer's written notice of such Claim, (ii) the
conclusion of negotiations between the parties or (iii) a determination pursuant
to the terms of the arbitration procedures set forth in Exhibit F attached
---------
hereto, such amount shall be immediately due and payable to the Buyer.
(b) In the event a Claim for indemnification arises under Section
9.2(b) hereof, the amount of such Claim shall be paid as follows: (i) if the
Indemnified Person is required to defend the Claim due to the failure of the
Indemnifying Person to defend the Claim or due to the conflict of interest
provisions set forth in Section 9.5(a), the Indemnifying Person shall pay on a
monthly basis the Indemnified Person's reasonable legal fees and related
expenses incurred in investigating and defending the Claim, and (ii) if the
Indemnifying Person assumes the defense of the Claim in accordance with Section
9.5(a) and 9.5(b), no indemnification payment shall be due and payable to an
Indemnified
-30-
<PAGE>
Person until a final determination or settlement has been made or entered into.
Immediately upon the determination of any judgment or the rendering of any
settlement with respect to any third party Claim, the Indemnified Person shall
be entitled to receive immediately the amount of such judgment or settlement and
all expenses, losses and Losses incurred by the Indemnified Person in connection
therewith and payable in accordance with this Article IX.
(c) Any payment due to an Indemnified Person (or payable on behalf of
an Indemnified Person) pursuant to any Claim under Section 9.2 and any legal
fees and expenses payable pursuant to Section 9.6(b)(i) in connection therewith
shall be paid by Shareholders by check or wire transfer. Without limiting any
other rights it may have, Buyer may, at its sole option by notice to the Company
and Shareholder, satisfy an amount due to the Buyer pursuant to any Claim under
Section 9.2 and any legal fees and expenses payable pursuant to Section
9.6(b)(i) in connection therewith, by withholding such amount from any amounts
due or to become due to the Buyer pursuant to (i) the Promissory Note of Buyer
described in Section 3.1(b) hereof or (ii) the Contingent Payments described in
Section 3.2 hereof. Nothing contained in this Section 9.6 shall be deemed to
limit the joint and several obligation of the Company and Shareholders to limit
the Company's and Shareholders' rights to defend Claims in accordance with
Section 9.5 above.
(d) In the event a Claim is made for indemnity pursuant to Section
9.3 upon the resolution of the amount determined to be payable by Buyer with
respect to such Claim as a result of (i) the failure of the Indemnifying Person
to object in writing to the amount of the Claim within thirty (30) days of
receipt of written notice of such Claim, (ii) the conclusion of negotiations
between the parties or (iii) a determination pursuant to Article IX hereof, then
such amount shall be immediately due and payable to the Company and
Shareholders.
(e) In the event the Indemnifying Person fails to pay in full any
amount due pursuant to this Section 9.6 within three (3) business days of the
date such amount first becomes due and payable, then the amount of any such
Claim which is due and payable shall bear interest following such (3) three day
period at the reference rate then in effect for Bank of America, NT & SA.
9.7 Tax Indemnification.
-------------------
(a) The Company and Shareholders represent and warrant that all
material Tax Returns for taxable periods ending on or prior to the Closing Date
by, or with respect to the assets or activities of, the Company have been or
will be timely filed in accordance with all applicable laws, and all Taxes shown
to be due on such Returns have been or will be timely paid by the Company and
Shareholder, and the Company and Shareholders shall indemnify Buyer and hold
Buyer harmless against all such Taxes.
(b) Other than Returns to be prepared by the Company and Shareholders
pursuant to Section 9.7(a) above, Buyer will be responsible for and will cause
to be prepared and duly filed any and all Returns of the Company for any and all
taxable periods (including any taxable period which includes and ends after the
Closing Date (an "Overlap Period")). The Company and Shareholders will
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<PAGE>
be responsible for and will indemnify and hold harmless the Company and Buyer
with respect to all Taxes for the Overlap Period in an amount equal to the
liability for Taxes that would have resulted had the Overlap Period ended at the
Closing Date (utilizing, if applicable, the actual tax rate imposed on a
particular category of income by the applicable taxing jurisdiction).
(c) After the Closing Date, Buyer, on the one hand, and the Company
and Shareholders, on the other hand, will make available to the other, as
reasonably requested, all information, records or documents relating to the
liability for Taxes of the Company for all periods prior to or including the
Closing and will preserve such information, records or documents until the
expiration of any applicable statute of limitations or extensions thereof.
(d) Notwithstanding any other provision of this Agreement, including
Section 9.6, upon the receipt by Buyer or the Company and Shareholders of any
evidence of an actual, asserted or threatened liability for Taxes attributable
to any period (or that portion of any period) ending on or prior to the Closing
for which Buyer or the Company and Shareholders are claimed to be, or are held,
liable and which would be subject to a claim for indemnification by Buyer or the
Company and Shareholders under this Section 9.7, then the Buyer or the Company
(or any successor thereof) and Shareholders are hereby authorized to apply all
payments due to the Company and Shareholders under the terms of the Promissory
Note of Buyer described in Section 3.1(b) hereof, to the payment of any such Tax
liability by paying any such amounts directly to the appropriate governmental
body. In the event that the Company and Shareholders object to or dispute the
payment or satisfaction of any such Tax liability, the Company's and
Shareholders' sole recourse shall be to file a claim for refund or such other
appropriate claim with the governmental body to which the payment was made;
provided, that (i) the cost of any such claim shall be borne solely by Company
- --------
and Shareholders and (ii) Buyer shall cooperate with Company and Shareholders to
the extent reasonably requested with respect to any such claim. Buyer shall
provide Company and Shareholders with notice of the payment of any such Tax
liability made under this Section 9.7.
9.8 Limitations on Liabilities. In case any event shall occur which would
--------------------------
otherwise entitle a party to assert a claim for indemnification hereunder, the
amount of Losses determined to have been sustained by such party shall be
reduced by (a) any net tax savings actually realized by such party with respect
thereto after taking into account the effect for tax purposes of both the event
giving rise to such Losses and the receipt of the indemnification payment, or
(b) any proceeds received by such party from any insurance policies with respect
thereto.
9.9 Sole Remedy. The sole and exclusive remedy for any and all Losses, as
-----------
defined in Section 9.2, shall be the indemnification rights set forth in this
Article IX. Notwithstanding the foregoing, each party to an Exhibit hereto
shall have all the rights and remedies arising from or related to a breach or
default under such Exhibit as are available to such party under law or in
equity, in addition to the rights and remedies provided for in this Article IX.
-32-
<PAGE>
ARTICLE X
---------
TERMINATION
-----------
10.1 Termination. This Agreement may be terminated at any time prior to
-----------
the Closing as follows, and in no other manner:
(a) by mutual consent of Buyer and the Company;
(b) by Buyer, if the Closing shall not have occurred on or before May
31, 1999, or such later date as may have been agreed upon in writing by the
parties hereto;
(c) by Buyer, if any representation or warranty made herein for the
benefit of Buyer , or in any certificate, schedule, exhibit or document
furnished to Buyer, pursuant to this Agreement is untrue in any material
respect, or the Company and Shareholder, respectively, shall have defaulted in
any material respect in the performance of any obligation under this Agreement
and Buyer and the Company are unable in good faith to negotiate a reduction in
the Purchase Price acceptable to Buyer and the Company with respect thereto.
10.2 Liability of the Parties. Upon any termination pursuant to
------------------------
subsection (e) of Section 10.1 hereof due to an intentional misrepresentation or
intentional breach of warranty or an intentional default by Company and
Shareholder, whichever shall be the party at fault, shall (among other things)
reimburse the terminating party or parties for all legal, accounting and other
out-of-pocket expenses reasonably incurred by the terminating party or parties
in connection with this Agreement and the transactions contemplated hereby. Upon
any other termination, no party shall have any liability or obligation under
this Agreement except to observe the confidentiality provisions hereof, and each
party shall bear the expenses incurred by it.
ARTICLE XI
----------
MISCELLANEOUS PROVISIONS
------------------------
11.1 Entire Agreement: Amendment. This Agreement (including the Exhibits
---------------------------
and Schedules hereto), contains the entire agreement among the parties hereto
and supersedes all prior oral or written agreements, promises, representations,
commitments or understandings with respect to the matters provided for therein.
This Agreement may be modified or amended only by a writing duly executed by
Buyer, the Company and Shareholders, which modification or amendment shall be
binding upon all of the parties hereto.
11.2 Assignment and Binding Effect. This Agreement and the rights and
-----------------------------
obligations of any party hereunder may not be assigned by any party without the
prior written consent of the other parties hereto except that Buyer may assign
its rights and delegate its obligations hereunder to any wholly-
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<PAGE>
owned subsidiary. All covenants, agreements, statements, representations,
warranties and indemnities in this Agreement by and on behalf of any of the
parties hereto shall bind and inure to the benefit of their respective heirs,
successors and permitted assigns of the parties hereto.
11.3 Waivers. No waiver of any of the provisions of this Agreement shall
-------
be deemed or shall constitute a continuing waiver, and no waiver shall be
binding unless executed in writing by the party making the waiver.
11.4 Notices. All notices, demands or other communications which may be
-------
or are required to be given by any party to any other party pursuant to this
Agreement, shall be in writing and shall be mailed by certified mail, return
receipt requested, postage prepaid, or transmitted by hand delivery, national
overnight express, telegram or facsimile transmission, addressed as follows:
(a) If to Buyer:
TVN Entertainment Corporation
2901 W. Alameda, 7th Floor
Burbank, CA 91505
Attn: Arthur Fields, Sr. Exec. V.P.
Phone No: (818) 846-4886
Fax No: (818) 846-4626
with a copy (which shall not constitute notice) to:
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304
Attn: Robert P. Latta, Esq.
Phone No: (650) 493-9300
Fax No: (650) 845-5000
(b) If to the Company:
PandaAmerica Corp.
3460 Torrance Blvd., Suite 100
Torrance, CA 90503
Attn: Martin D. Weiss
Phone No: (310) 373-9647
Fax No: (310) 378-6024
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<PAGE>
with a copy (which shall not constitute notice) to:
Buchalter, Nemer, Fields & Younger
601 South Figueroa Street, Suite 2400
Los Angeles, CA 90017-5704
Attn: Stuart D. Buchalter, Esq.
Phone No: (213) 891-0700
Fax No: (213) 896-0400
until such time as either party notifies the other of a change of address. Each
notice or other communication which shall be mailed, delivered or transmitted in
the manner described above shall be deemed sufficiently given and received for
all purposes at such time as it is delivered to the addressee (with the return
receipt, the delivery receipt, or the affidavit of messenger or telefax
transmission log being deemed conclusive evidence of such delivery) or at such
time as delivery is refused by the addressee upon presentation.
11.5 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the internal laws (non-conflict of law laws) of the State of
California.
11.6 Counterparts; Execution. To facilitate execution, this Agreement
-----------------------
may be executed in as many counterparts as may be required, and each such
counterpart hereof shall be deemed to be an original instrument, but all such
counterparts together shall constitute but a single agreement. This Agreement
shall be deemed to have been executed at the time when and location at which the
last signature of any of the parties is affixed hereto or to any counterpart
hereof.
11.7 Interpretation. The headings contained in this Agreement are for
--------------
reference purposes only and shall not affect in any way the meaning of
interpretation of this Agreement.
11.8 Severability. The parties agree that if any provisions of this
------------
shall under any circumstances be deemed invalid or inoperative, the Agreement
shall be construed with the invalid or inoperative provision deleted and the
rights and obligations of the parties shall be construed and enforced
accordingly.
11.9 Arbitration. After the Closing, the parties agree to arbitrate any
-----------
dispute, claim or controversy of whatever nature arising out of or relating to a
claim for indemnification under Article IX of this Agreement through arbitration
in accordance with the terms of the Dispute Resolution attached hereto as
Exhibit F.
- ---------
11.10 Knowledge. Any reference to the Company's or Shareholder's
---------
knowledge or awareness of any fact, notice or event shall refer to the present
actual knowledge or awareness of the Company and Shareholder, as well as matters
of which the Company and Shareholder should have reasonably been aware.
-35-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement,
or caused this Agreement to be executed on its behalf, as of the date first
above written.
BUYER:
TVN ENTERTAINMENT CORPORATION
By:___________________________________
Stuart Z. Levin, Chief Executive
Officer
THE COMPANY:
W&K PHARMACY, Inc.,
d/b/a PandaAmerica Corp.
By:____________________________________
Martin D. Weiss, President
SHAREHOLDER:
---------------------------------------
Martin D. Weiss, an individual
-36-
<PAGE>
ASSIGNMENT OF EQUIPMENT LEASE AGREEMENT
THIS ASSIGNMENT OF EQUIPMENT LEASE AGREEMENT is made on ____________, 1999,
among ________________________ ("Lessor"), whose address is
_________________________________________, W&K Pharmacy, Inc., d/b/a
PandaAmerica Corp., a California corporation (the "Company"), a California
corporation ("Assignor"), whose address is __________________, Torrance,
California ________, and TVN Entertainment Corporation [or TVN Shopping, Inc.],
a Delaware corporation ("Assignee"), whose address is 2901 W. Alameda Avenue,
7/th/ Floor, Burbank, California 91505, who agree as follows:
1. Recitals. This Assignment of Equipment Lease Agreement ("Assignment")
--------
is made with reference to the following facts and objectives:
a. Lessor and Assignor, as Lessee, entered into a written equipment
lease dated _______________, 19__ (the "Lease") in which Lessor leased to
Assignor and Assignor leased from Lessor certain personal property and equipment
as more particularly described in the Lease ("Equipment").
b. Assignor desires to assign all of its right, title, and interest in
the Lease to Assignee.
c. Lessor shall consent to the proposed assignment on the conditions
set forth in this Assignment.
2. Effective Date of Assignment. The assignment in this agreement shall
----------------------------
take effect on the closing of the transactions contemplated by the Agreement for
Purchase and Sale of the Assets dated January 18, 1999, among Assignee, Assignor
and Martin D. Weiss ("Weiss") (the "Effective Date"), and Assignor shall give
possession of the Equipment to Assignee on that date.
3. Assignment and Assumption. Assignor assigns and transfers to Assignee
-------------------------
all of its right, title and interest in the Lease, and Assignee accepts the
assignment and assumes and agrees to perform, from the Effective Date, as a
direct obligation to Lessor, all the provisions of the Lease.
4. Lessor's Consent. Lessor consents to the assignment without waiver of
----------------
any restriction concerning further assignment and waives any application or
prior notice period which may be contained in the Lease.
5. Termination of Assignor's Liability. Assignor's liability for the
-----------------------------------
performance of the provisions of the Lease shall terminate as of the Effective
Date.
6. Security Deposit. The parties acknowledge that Lessor now holds the
----------------
sum of _______________________________ Dollars ($__________), to be applied
subject to the
<PAGE>
provisions of the Lease. Assignor releases all claims to that sum, and the sum
shall be held by Lessor for the benefit of Assignee, subject to the provisions
of the Lease.
7. Miscellaneous.
-------------
a. Attorneys' Fees. If any party commences an action against any of
---------------
the parties arising out of or in connection with this Assignment, the prevailing
party or parties shall be entitled to recover from the losing party or parties
reasonable attorneys' fees and costs of suit.
b. Notice. Any notice, demand, request, consent, approval, or
------
communication that any party desires or is required to give to any other party
or any other person shall be in writing and either served personally or sent by
prepaid, first-class mail. Any notice, demand, request, consent, approval or
communication that any party desires or is required to give to any other party
shall be addressed to the other party at the address set forth in the
introductory paragraph of this Assignment; provided that, after the Effective
Date, any notice given to the Assignee shall be addressed to the Assignee at the
address set forth in the introductory paragraph of this Assignment as well as at
the location of the Equipment. Any party may change its address by notifying the
other parties of the change of address. Notice shall be deemed communicated
within forty-eight (48) hours from the time of mailing if mailed as provided in
this paragraph.
c. Successors. This Assignment shall be binding on and inure to the
----------
benefit of the parties and their successors.
LESSOR:
,
By:_______________________
Its:______________________
Dated:____________________
<PAGE>
ASSIGNOR:
W&K Pharmacy, Inc., d/b/a PandaAmerica Corp.,
a California corporation
By:_____________________________
Its:____________________________
Dated:__________________________
ASSIGNEE:
TVN Entertainment Corporation,
a Delaware
By:_____________________________
Arthur Fields, Grand Pooh Bah
Dated:__________________________
-3-
<PAGE>
SECURED PROMISSORY NOTE
$245,000.00 Burbank, California
June 30, 1999
At the times hereinafter stated, for value received, the undersigned W&K
Pharmacy, Inc., d/b/a PandaAmerica Corp., a California corporation (the
"Company") promises to pay to the order of TVN Entertainment Corporation
("Holder") at its principal office the principal sum of Two Hundred Forty-five
Thousand Dollars ($245,000.00) with simple interest accruing from the date
hereof at the rate of 5.4% per annum. The principal amount of this Note as set
forth above and any interest accrued hereon shall be due and payable on June 30,
2003; provided, however, that such amounts shall be offset by (i) any payments
made by the Company to a leasing entity in connection with the Company's former
telephone system (since transferred to Holder), and (ii) any amounts owed by
Holder to the Company under the terms of that certain Consulting Agreement by
and between Holder and the Company entered into in connection with the purchase
by Holder of certain assets of the Company effective January 18, 1999. For the
purpose of calculating interest hereunder, the principal amount of this Note
shall be deemed offset by any amounts under item (i) above when paid or under
item (ii) above accrued.
Principal and interest are payable in lawful money of the United States of
America. THE PRIVILEGE IS RESERVED TO PREPAY ANY PORTION OF THE NOTE AT ANY TIME
WITHOUT PENALTY, BUT PARTIAL PAYMENTS SHALL BE APPLIED FIRST TO OUTSTANDING
INTEREST AND THEN TO THE PRINCIPAL.
Should default be made in the payment of this Note when due, then the whole
sum of principal and accrued interest shall become immediately due and payable
at the option of the holder of this Note. Should suit be commenced to collect
this Note or any portion thereof, such sum as the court may deem reasonable
shall be added hereto as attorneys' fees. The Company waives presentment for
payment, protest, notice of protest, and notice of non-payment of this Note.
This Note shall be governed by, and construed and enforced in accordance
with the laws of the State of California.
Any provision of this Note may be amended, waived or modified upon the
written consent of the Company and the Holder.
This Note is secured by a pledge of certain assets pursuant to the
provisions of the Security Agreement entered into between the Company and the
undersigned contemporaneously with this Note.
Upon payment in full of principal and all accrued interest, the Note will
be marked "Cancelled" by Holder and returned to the Company.
<PAGE>
This Note is executed as of the date first above written.
W&K Pharmacy, Inc., d/b/a PandaAmerica Corp.
a California corporation.
By:_________________________________________
Title:______________________________________
Acknowledged and Agreed:
HOLDER:
By:_________________________
Title:______________________
[SECURED PROMISSORY NOTE]
-2-
<PAGE>
SECURITY AGREEMENT
In consideration of the acceptance by TVN Entertainment Corporation (the
"Holder") of a Secured Promissory Note (the "Note") in the principal amount of
$245,000 issued by W&K Pharmacy, Inc., d/b/a PandaAmerica Corp., a California
corporation (the "Company") of even date herewith made by Company to the order
of the Holder, the Company hereby agrees, for the benefit of the Holder, as
follows:
ARTICLE I
DEFINITIONS
1.1 Defined Terms. As used in this Agreement, the following terms shall
-------------
have the following meanings:
"Agreement" shall mean this Security Agreement as the same may from
time to time be amended or modified.
"Collateral" shall mean the Excluded Assets as defined in that certain
Agreement for Purchase and Sale of Assets, dated January 18, 1999, by and among
Holder, the Company and Martin D. Weiss, an individual, and all proceeds
thereof, including without limitation, the following items related to the
Excluded Assets:
(a) Inventory: All inventories of finished goods, raw materials,
---------
work-in-process and all other items held for sale;
(b) Equipment: All assets, items or other goods owned by the Company
---------
other than inventory, including without limitation all scientific
instrumentation, computing equipment, furniture and fixtures and any interest
therein;
(c) Accounts: Any right to payment for goods sold or leased or for
--------
services rendered which is not evidenced by an instrument or chattel paper,
whether or not it has been earned by performance;
(d) General Intangibles: All personal property (including chooses in
-------------------
action) of an intangible nature of the Company, including without limitation all
patent applications, patents, copyrights, trademarks, trade names, copyrights,
trade secrets, know how or other proprietary rights owned by the Company or any
interest therein; and
(e) Omnibus: All other assets, property rights, documents
-------
instruments, chattel paper or other rights owned by the Company and any interest
therein and all additions, accessions, replacements, substitutions, improvements
and proceeds of any asset set forth in clauses (a)-(e).
<PAGE>
"Obligations" shall mean any and all liabilities and obligations of the
Company to the Holder of every kind arising under this Agreement or the Note
(including without limitation any and all costs and expenses (including
attorneys' fees, incurred by the Holder in the collection, whether by suit or by
any other means, of any of the Obligations), together with any future advances
thereunder and amendments thereof.
1.2 Other Defined Terms. Terms not defined herein shall have their
-------------------
respective meanings as set forth in the California Uniform Commercial Code.
ARTICLE II
SECURITY INTEREST
2.1 Grant of Security Interest. As security for the payment and
--------------------------
performance of the obligations, the Company hereby grants to the Holder a
continuing security interest in, and a continuing lien upon, the Collateral.
2.2 Priority of Lien. The Company agrees that the security interest in the
----------------
Collateral granted hereunder to the Holder shall be a lien prior to all other
interests in the Collateral, except for any liens in effect on the date of this
Agreement.
ARTICLE III
COVENANTS OF COMPANY
3.1 Payment or Performance. The Company shall pay, perform or otherwise
----------------------
satisfy the Obligations, when the same shall become due, at term or otherwise.
3.2 Maintenance of Collateral Security. The Company shall continually take
----------------------------------
such steps as are necessary and prudent to protect the security interest of the
Holder in the Collateral, including without limitation the following:
(a) Keep and maintain books and records relating to the collateral,
in a form and substance satisfactory to the Holder, at the Company's principal
place of business, not remove the same without the written consent of the
Holder, and allow the Holder or its representatives access to such books and
records and to the Collateral at all reasonable times for the purpose of
examination, verification, copying, extracting and other reasonable purposes as
it may require;
(b) At any time after an Event of Default (as hereinafter defined)
shall have occurred, deliver to the Holder promptly at its request, all
schedules, lists, invoices, original bills of lading, documents of title,
original purchase orders, receipts, chattel paper, instruments and other items
relating to the collateral;
-2-
<PAGE>
(c) Make, stamp or record such entries or legends on any of the
Company's books and records relating to the Collateral as the Holder shall
reasonably request from time to time;
(d) Execute and deliver to the Holder such other and further
documents, instruments or writings as it may deem necessary or advisable in
order to evidence, effectuate, perfect or maintain their security interest in
the Collateral;
(e) Defend the Collateral against all claims, liens, security
interests, demands and other encumbrances of third parties, except buyers in the
ordinary course of the Company's business, at any time claiming an interest in
the Collateral which is adverse or prior to the security interest granted to the
Holder;
(f) Except for liens actively and diligently contested in good faith,
keep the Collateral free of all liens and encumbrances, other than the security
interests of the Holder created hereby and repairmen's and materialmen's liens,
and not sell, transfer or otherwise dispose of the Collateral or any interest
therein, in bulk or otherwise, except in the ordinary course of business, and
except that the Company may sell, exchange, or dispose of all or any portion of
the Collateral if the proceeds of such disposition are used to purchase assets
constituting Collateral of equal or greater value or are entirely used to repay
the Note until all Obligations are paid in full;
(g) Notify the Holder in the event of any material loss or damage to
the Collateral, any material adverse change in Company's business or in the
Collateral, or any other occurrences which could materially and adversely affect
the security interest of the Holder therein;
(h) Pay all taxes which are or may become a lien on the Collateral
promptly when due, and in any event reimburse the Holder for any expenses which
it might incur in satisfying such liens, expenses or taxes which it may incur,
in their sole discretion, as it deems necessary in order to protect the
Collateral ;
(i) Maintain insurance on the Collateral of such types, coverage,
form and amount as is usually carried on similar goods by similar enterprises
and such additional insurance as the Holder shall reasonably determine, and
supply the Holder with certificates as to the continuance of such insurance, at
its request; and
(j) Maintain the Company's equipment in good operating, condition and
repair.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Holder, and shall be deemed to
continually do so, as long as this Agreement shall remain in force:
-3-
<PAGE>
4.1 That it is the owner of the Collateral with good and marketable title
thereto free and clear of all encumbrances and adverse claims, other than the
liens created by this Agreement, that the liens in effect on the date of this
Agreement.
4.2 That it is authorized to enter into this Agreement and to implement
and carry out the provisions hereof, and has taken all necessary actions,
corporate or otherwise, in respect thereto.
4.3 That this Agreement is a valid, binding and enforceable obligation of
the Company, subject to laws of general application relating to bankruptcy,
insolvency and the relief of debtors and to rules of law governing specific
performance, injunctive relief or other equitable remedies, and the Agreement
does not and will not violate the terms of any other agreement to which the
Company is a party.
4.4 No Misrepresentations. No representation or warranty by the Company in
---------------------
this Agreement contains any untrue statement of a material fact or omits to
state a material fact necessary to make the statements made therein not
misleading.
ARTICLE V
EVENTS OF DEFAULT
The occurrence of any of the following events shall constitute an "Event of
Default" under this Agreement:
5.1 Default on Obligations. Company fails to pay its Obligations as and
----------------------
when they come due, including, without limitation, any payment of any principal
and interest on the Note.
5.2 Breach of Agreement. Company breaches any material warranty in this
-------------------
Agreement or the Note, or fails to perform any other material obligation under
this Agreement or the Note.
5.3 Inaccuracy of Representations. Any representation or warranty made in
-----------------------------
connection with the execution and delivery of this Agreement or the Note shall
prove to be materially incorrect.
5.4 Bankruptcy. (i) Company shall be or become insolvent, or admit in
----------
writing its inability to pay its debts as they mature; (ii) Company shall apply
for, consent to, or acquiesce in the appointment of the property of Company or,
in the absence of such application, consent or acquiescence, a trustee or
receiver shall be appointed for Company or for a substantial part of the
Collateral of Company or for a substantial part of the Collateral of Company;
(iii) any bankruptcy, reorganization, debt arrangement or other proceedings
under any bankruptcy or insolvency law or a dissolution or liquidation
proceedings shall be instituted with respect to Company; or (iv) any judgment,
writ of attachment or execution or any similar process shall be issued or levied
against a substantial part of the Collateral.
-4-
<PAGE>
ARTICLE VI
RIGHTS OF THE HOLDER
6.1 General Rights. The rights of the Holder shall at all times be those
--------------
of a secured party under the California Uniform Commercial Code. Without
limiting the generality of the foregoing, the Holder shall have the additional
rights set forth in this Article VI.
6.2 Rights Upon Default. Upon the occurrence or continuance of any Event
-------------------
of Default hereunder, the Holder may declare any or all of the Obligations to be
immediately due and payable, without presentment, protest, or prior notice of
any kind all of which are expressly waived, notwithstanding anything to the
contrary contained in any Note or any other instrument evidencing any of the
obligations. Also upon the occurrence of an Event of Default, the Company
further authorizes the Holder and does hereby irrevocably make, constitute and
appoint the Holder and any officer or agent thereof, with full power of
substitution, as the Company's true and lawful attorneys-in-fact with full
power, in its own name or in the name of the Company: (a) to endorse any notes,
checks, drafts, money orders or other instruments of payment (including payments
payable under or with respect to any policy of insurance) relating to the
Collateral or in connection therewith, and to sign and endorse any invoices,
drafts against debtors, assignments, verifications and notices in connection
with accounts and other documents relating to the Collateral; (b) to notify the
account debtor or debtors obligated to the Company under any account of the
assignment of such account to Holder and of their security interests therein and
to direct such account debtor or debtors to make payment of all amounts due or
to become due to the Company thereunder directly to the Holder and, upon such
notification, to enforce collection of any such account in the same manner and
to the same extent as the Company is entitled to do; (c) to pay or discharge
taxes, liens, security interests or other encumbrances levied or placed on or
threatened against the Collateral; (d) to receive payment of, receipt for,
settle or compromise and give discharges and releases for or in respect of any
and all monies, claims or other amounts due and to become due at any time under
or arising out of the Collateral; (e) to defend any suit, action or proceeding
brought against the Company with respect to any Collateral; (f) to settle or
compromise any suit, action or proceeding described above and in connection
therewith to give such discharges or releases as the Holder may deem
appropriate; and (g) generally, to sell, transfer, pledge, make any agreement
with respect to or otherwise deal with any of the Collateral as fully and
completely as though they were the absolute owner thereof for all purposes.
6.3 Realization Upon the Collateral. In the event the Holder determines
-------------------------------
that the Collateral should be sold to satisfy all or any part of the
obligations, it may dispose of the Collateral in whole or in part at public or
private sale, in accordance with applicable provisions of the California Uniform
Commercial Code, and any notice required to be given shall be given in
accordance with Section 7.4 at least ten (10) days before the proposed sale,
which the parties hereto agree shall be a reasonable notice period. The Company
shall remain liable for any deficiency.
6.4 Pro Rata Application of Collateral Proceeds. All proceeds received
-------------------------------------------
pursuant to the exercise of the rights granted to the Holder by this Agreement
first shall be applied to reimburse any
-5-
<PAGE>
and all costs and expenses, including attorneys' fees, incurred by the Holder in
the collection of the Obligations. Any such proceeds remaining following payment
of any such costs and expenses and payment in full of all amounts due under the
Note shall be returned to the Company.
6.5 Expense of Collection and Sale. The Company agrees to pay all costs
------------------------------
and expenses incurred by the Holder in enforcing, collecting or realizing upon
the obligations or the Collateral, including without limitation reasonable
attorneys' fees.
6.6 Financing Statements. Where permitted by applicable law, the Holder
--------------------
are authorized to file financing statements relating to the Collateral without
the Company's signature thereon and at the expense of the Company, and to act as
attorney-in-fact to sign the Company's name to and file such additional or
continuation financing statements as shall be necessary to maintain the priority
of the security interest granted hereby. The Company will, however, at the
request of the Holder, sign any amendments, releases, or assignments of any
financing statements relating to the Collateral. Upon the Company's failure to
do so, the Holder are authorized as the Company's agent to execute any such
modifications to any financing statement.
ARTICLE VII
MISCELLANEOUS
7.1 Waivers. The Company expressly waives notice of nonpayment,
--------
presentment and protest in relation to the Obligations or the Collateral. No
delay or omission of the Holder in exercising or enforcing any of their rights,
powers, privileges, options or remedies under this Agreement, the Note, or any
other agreement or promissory note between the Holder and the Company shall
constitute a waiver thereof, and no waiver by the Holder of any default by the
Company shall operate as a waiver of any other default. This Agreement, together
with the Note, constitutes the entire understanding between the Company and the
Holder with respect to the subject matter hereof and supersedes all prior
written or oral communications or understandings. No term or provision of this
Agreement shall be waived, altered or modified except in writing signed by the
Company and the Holder. All rights and remedies of the Holder under this
Agreement shall be cumulative and not alternative or exclusive, may be exercised
by the Holder at such time or times and in such order as the Holder, in its sole
discretion, may determine, and are for the sole benefit of the Holder. The
exercise or failure to exercise such rights or remedies shall not result in
liability to the Company or others.
7.2 Successors and Survival. This Agreement shall be binding upon and
-----------------------
shall inure to the benefit of the respective parties hereto, their successors
and assigns, and shall remain in force and effect until terminated by written
agreement of the parties. All representations, warranties and covenants
contained herein shall survive the execution hereof.
7.3 Governing Law. The Company agrees that this Agreement shall be
-------------
governed by, and construed and enforced in accordance with, the laws of the
State of California.
-6-
<PAGE>
7.4 Notices. All notices and other communications required or permitted
-------
hereunder shall be in writing and shall be mailed by first-class mail, postage
prepaid, or delivered either by hand or by messenger.
7.5 Headings. The headings of Articles and Sections in this Agreement are
--------
for convenience only; they form no part of this Agreement and shall not affect
its interpretation.
7.6 Severability. If any provision of this Agreement shall be or become
------------
illegal or unenforceable in whole or in part for any reason whatsoever, the
remaining provisions shall nevertheless be deemed valid, binding and subsisting.
IN WITNESS WHEREOF, this Agreement has been executed this 30th day of June,
1999.
COMPANY:
W&K Pharmacy, Inc., d/b/a PandaAmerica Corp.
a California corporation
By:______________________________________
Title:___________________________________
HOLDER:
TVN Entertainment Corporation
By:______________________________________
Title:___________________________________
-7-
<PAGE>
CONSULTING AGREEMENT
--------------------
This CONSULTING AGREEMENT is made and entered into this 5/th/ day of March 1999
by and between W&K Pharmacy, Inc. dba PandAmerica Corporation ("Consultant"),
with its principal office at 3460 Torrance Blvd. #100, Torrance, CA 90503 and
TVN ENTERTAINMENT CORPORATION ("TVN"), with its principal offices at 2901 West
Alameda Avenue, 7/th/ Floor, Burbank, California 91505.
RECITALS:
- --------
A. Consultant owns and operates a) a precious metals coin business which
direct markets such coins to its customers, and b) a televised home
shopping network, "Panda Shopping Network" ("PSN"), which produces live
television shows for the sale of coins, watches, jewelry and other
merchandise, and distributes them via available commercial time on network
television ("Network"), cable television ("Cable"), direct broadcast
satellite ("DBS") and low power television (LPTV"), among other means of
distribution. Martin D. Weiss ("Weiss') is Consultant's President, CEO,
principal owner and managing operator.
B. TVN owns, operates and is marketing under the name "TVN Digital Cable
Television", digital PPV programming and transactional services to cable
operators whose cable subscribers receive and decode the digitally
compressed video, audio and data signals, including PPV movies, events and
other programming, and to whom TVN will deliver interactive and electronic
commerce services such as home shopping.
C. In connection with TVN's pending acquisitions of PSN, TVN wishes to engage
Consultant and Consultant wishes to provide for TVN the consulting services
described below.
NOW THEREFORE, in consideration of the mutual promises and terms and
conditions contained herein, Consultant and TVN agree as follows:
1. Engagement and Term
-------------------
1.1 TVN hereby engages Consultant to provide the following consulting
services for TVN, commencing upon the date shown above, and continuing up
to and including September 4, 1999; Consultant agrees to provide the
personal services of Weiss to perform, or direct the performance of, the
Consulting Services.
1.2 The Consulting Services:
a. Consultant will assist TVN with the continued operation and expansion of
the PSN business concurrently being acquired by TVN; and
1
<PAGE>
b. Consultant will assist TVN to develop enhanced and interactive HS
Services, business plans and strategies, which will enable TVN to provide
home shopping and transactional services and related applications,
including delivery via digital set-tops and online, to cable and home
satellite dish subscribers.
2. Acceptance of Engagement
------------------------
2.1 Consultant hereby accepts this consulting engagement by TVN upon the
terms, conditions and provisions of this Agreement, and agrees that it
will, and will cause Weiss to devote his time, attention, talents, best
efforts and abilities to, ably and effectively perform these consulting
services for TVN. Consultant agrees that it will cause Weiss to personally
perform these consulting services for TVN, it will not permit him to
delegate them to others, and it will make him available for meetings and
conferences by phone and, upon reasonable advance notice by TVN, at TVN's
offices in Burbank, CA.
2.2 Consultant will use its best efforts to cause Weiss to (i) timely
perform the above described consulting services, (ii) introduce potential
Network, Cable, DBS and LPTV leads for TVN's home shopping services, and
(iii) assist TVN in renewing as many of PSN's current affiliation
agreements as are capable of being renewed, and enter into new such
agreements to launch TVN's home shopping services. Consultant acknowledges
and agrees that TVN shall be the sole and exclusive owner worldwide of all
rights (including copyright, trademark, worldwide web and Internet rights)
in and to all programs, reports, studies, proposals, schedules, lists,
plans, models and other materials created, worked on or prepared by
Consultant or Weiss for TVN.
3. Compensation
------------
As full and complete compensation for all consulting services to be
performed and expenses incurred by Consultant hereunder, TVN agrees to pay
Consultant the sum of $13,000 per month at TVN's regular payroll dates
(currently bi-weekly). This is the entire compensation TVN will pay
Consultant for the Consulting Services. Consultant will submit to TVN an
invoice prior to each bi-weekly payroll date for Consultant's services
during the preceding two week period. All such compensation will be paid
without withholding for or deducting federal, state or local income or
other taxes, for which Consultant shall be solely and entirely responsible.
Consultant will submit an invoice prior to each payment due date for the
consulting services rendered during that month.
2
<PAGE>
4. Confidentiality and Proprietary Information
-------------------------------------------
Consultant and Weiss will have access to, and will become acquainted with,
various trade secrets and confidential and proprietary information relating
to TVN's business, including but not limited to: shopping business plans,
marketing and operations; sources of shopping inventory; proprietary
software and programs; business, financial and marketing plans; research
and analysis; business relationships; contracts, systems, plans and
technologies. Accordingly, Consultant and Weiss shall hold in strictest
confidence and shall not disclose any such trade secrets or confidential or
proprietary information to third parties, directly or indirectly, during
the term of this engagement, or use same other than for the direct benefit
of TVN and solely for the purposes above described and shall sign the
attached Non-Disclosure Agreement.
5. Independent Contractor
----------------------
The parties agree that the relationship created herein with Consultant is
that of employer and independent contractor. The parties agree that in
performing the consulting services and duties specified herein Consultant
shall not be an employee of TVN; rather it will act as an independent
contractor and shall have control of its work, subject to review by TVN.
Consultant will be responsible for payment of its own federal, state or
local income or other taxes, for compensation to Weiss and for his medical
coverage, and for its and his workers compensation insurance. It is
expressly understood and agreed that in the performance of its duties and
obligations hereunder, Consultant shall have no authority to execute any
agreement, incur any obligation, or make any representations or commitments
for or on behalf of TVN, without having obtained TVN's prior written
consent.
6. Termination
-----------
Upon the expiration, or any termination by either party, of this agreement,
TVN's sole obligations to Consultant shall be to pay the unpaid portion of
the agreed monthly compensation per paragraph 4 hereof, and Consultant's
obligations to TVN shall be to a) return to TVN all materials, including
work in progress, programs, disks, work papers, information and documents,
provided to, obtained by or prepared in connection with the services
performed for TVN, b)provide a final report, if requested by TVN, on the
status of any work in progress or remaining to be done, and c) continue to
comply with the above-described non-disclosure/confidentiality obligations.
7. Indemnification
---------------
Consultant shall indemnify, defend and hold TVN harmless from any and all
judgements, claims, causes of action, demands, damages or liabilities in
connection
3
<PAGE>
with any third party action, suit or proceeding to which TVN is made a
party by reason of any misrepresentation made by Consultant or Weiss, or
for activities outside the scope of Consultant's duties or obligations
provided for hereunder, or by reason of Consultant's or Weiss' grossly
negligent or willful misconduct in performing his duties hereunder. Upon
receiving any such third party claim, action, suit or proceeding, TVN shall
tender the defense of such action to Consultant, who shall be responsible
for retaining counsel for and approved by TVN, and shall be solely
responsible for all costs, reasonable attorneys' fees and expenses incurred
in such defense. Weiss agrees that he will be a guarantor of Consultant's
performance under this paragraph 7, and will perform such obligation
himself if Consultant is unable, unwilling or fails to perform as agreed
herein.
8. Notices
-------
Any notice given pursuant to this Agreement may be served personally on the
party to be notified or may be mailed, with postage thereon fully prepaid,
by certified or registered mail with return receipt requested, addressed as
follows:
If to TVN:
TVN Entertainment Corporation
2901 West Alameda Avenue
Burbank, California 91505
Attention: James B. Ramo, President
With a Copy to:
Arthur Fields, Senior Executive Vice-President
If to Consultant to:
PandAmerica Corp.
Attn: Martin D. Weiss
3460 Torrance Blvd., #100
Torrance, California 90503
Or at such other address as either party may from time to time designate in
writing to the other party, and any notice shall be deemed delivered when
given, if personally served, the next day if delivery any national
overnight mail carrier, or three (3) business days after mailing, if mailed
pre-paid by certified mail.
9. Entire Agreement and Amendment
------------------------------
4
<PAGE>
This Agreement contains the entire understanding and agreement between the
parties hereto; it supersedes any prior written or oral agreements or
discussions between us regarding acting as a Consultant for TVN, all of
which are merged herein. There are no representations, agreements,
arrangements, or understandings, either oral or written, between the
parties relating to the subject matter of this Agreement which are not
fully expressed as set forth herein. This Agreement may be amended only in
a writing duly executed by each party.
10. Governing Law
-------------
The laws of the State of California applicable to agreements which are to
be performed wholly within such state shall govern this Agreement,
including its interpretation, construction, performance and enforcement.
All claims, disputes, causes of action and issues arising out of or
relating to this Agreement and consulting relationship including without
limitation your hiring, performance, any compensation or bonus claim,
and/or any termination or alleged discrimination or harassment, whether
based on race, color, religion, sex, national origin, age, disability or
otherwise, shall be resolved via binding arbitration in Los Angeles,
California under the Commercial Arbitration Rules of the American
Arbitration Association then in effect. Accordingly, we each understand
that we are waiving (giving up) our right to a trial by jury of any such
claims, disputes or causes of action between Consultant and TVN, or its
employees, officers, directors and agents.
11. Interpretation
--------------
This Agreement has been fully negotiated by both parties hereto, therefore,
it shall not be interpreted for or against either party hereto as the sole
drafter hereof. All pronouns and any variation thereof shall be deemed to
refer to the masculine, feminine, or neuter and to the singular or plural,
as the identity of the person or persons may require for proper
interpretation of this Agreement. Mutually executed fax copies may be used
as originals for all purposes.
12. Successors
----------
Except as expressly provided in section 2 hereof, this Agreement shall
inure to the benefit of and shall be binding upon the parties, and their
heirs, successors, assigns, and grantees, and TVN's associated, affiliated,
subsidiary, and parent companies.
TVN ENTERTAINMENT CORPORATION
a Delaware Corporation
5
<PAGE>
By:_______________________________
James B. Ramo, President
CONSULTANT
W&K Pharmacy, Inc. dba
PandAmerica Corp.
By:___________________________
Martin D. Weiss
President
________________________________
Martin D. Weiss, an individual
providing his personal
services on behalf of
Consultant and as a guarantor
of Consultant under (P)7
hereof
6
<PAGE>
EXHIBIT E
BILL OF SALE AND ASSIGNMENT OF PURCHASED ASSETS
KNOW BY THESE PRESENTS THAT:
W&K Pharmacy, Inc., d/b/a/ PandaAmercia Corporation, a California
corporation (the "Company"), pursuant to that certain Agreement for Purchase and
Sale of Assets, dated as of January 18, 1999, (the "Purchase Agreement"), by and
among the Company, Martin D. Weiss and TVN Entertainment Corporation, a Delaware
corporation ("Buyer"), for and in consideration of the Purchase Price set forth
in Article II of the Purchase Agreement, and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, does
hereby grant, bargain, sell, convey, transfer, assign, set over and deliver unto
Buyer, its successors and assigns, the Purchased Assets, as defined and
described in the Purchase Agreement.
TO HAVE AND TO HOLD, all and singular, all of the properties, assets and
rights granted and transferred hereby, with the appurtenances thereof, unto
Buyer, its successors and assigns forever, to and for their own use and benefit.
For the consideration aforesaid, the Company hereby constitutes and
appoints Buyer, its successors and assigns, the true and lawful attorney or
attorneys of the Company, with full power of substitution, for the Company and
in its name and stead, or otherwise, but on behalf and for the benefit of Buyer,
its successors and assigns, to demand and receive from time to time, any and all
properties hereby given, granted, bargained, sold, assigned, transferred,
conveyed, set over, confirmed and delivered and give receipts and releases for
and in respect to the same and any part thereof, and from time to time to
institute and prosecute in the name of the Company or otherwise, but for the
benefit of Buyer, its successors and assigns, any and all proceedings at law, in
equity or otherwise, which Buyer, its successors or assigns, making proper in
order to collect, assert or enforce any claim, right or title of any kind in and
to the properties hereby given, granted, bargained, sold, assigned, transferred,
set over, confirmed, delivered or conveyed, and to defend or compromise any or
all actions, suits or proceedings in respect of any of said properties and do
all such acts and things in relation thereto as Buyer, its successors and
assigns, shall deem advisable, the Company hereby declaring that the appointment
made and the powers hereby granted are coupled with an interest and shall be
irrevocable by the Company in any manner and for any reason.
The Company for itself and its successors and assigns, does hereby covenant
with Buyer, its successors and assigns, that the Company and its successors and
assigns will do, execute, acknowledge and deliver, or will cause to be done,
executed, acknowledged and delivered all such further acts, deeds, bills of
sale, transfers, assignments, conveyances and powers of attorney, conveying and
confirming unto Buyer, its successors and assigns, all and singular, the
properties hereby granted, sold, assigned, transferred, conveyed and delivered
as Buyer, its successors or assigns, shall reasonably require.
To the extent that the assignment of any claim, suit, contract, license,
lease, charter, commitment, sales order or purchase order to be assigned to
Buyer hereby shall require the consent
<PAGE>
of the other party thereto, this instrument shall not constitute an assignment
of the same if such consent has not been given and if an assignment or attempted
assignment without such consent of said other party would constitute a breach
thereof or in any way adversely affect the rights, powers, privileges, or
liabilities of the Company or Buyer thereunder; provided, however, that once
-------- -------
such consent is obtained, this instrument shall effect an assignment of such
claim, suit, contract, license, lease, charter, commitment, sales order or
purchase order. The Company agrees that it will use its reasonable best efforts
to obtain any required consent of the other party or parties to all such claims,
suits, contracts, licenses, leases, charters, commitments, sales orders or
purchase orders of the Company to the assignment thereof to Buyer and will
cooperate with Buyer in any arrangement which Buyer shall consider designed to
provide for Buyer the benefits under any such claims, suits, contracts,
licenses, leases, charters, commitments, sales orders or purchase orders which
are not assigned hereby, including enforcement for the benefit of Buyer of any
and all rights, powers and privileges of the Company against the other party or
parties thereto arising in respect of any default, breach or cancellation by
such other party or parties or otherwise.
All capitalized terms used herein shall have the meaning assigned to them
in the Purchase Agreement unless otherwise defined herein.
IN WITNESS WHEREOF, W&K Pharmacy, Inc., d/b/a/ PandaAmercia Corporation, a
California corporation has caused this instrument to be signed in its name by
its duly authorized officer and its corporate seal to be hereunto affixed, to be
effective as of the 18th day of January, 1999.
W&K Pharmacy, Inc., d/b/a/ PandaAmercia
Corporation, a California corporation
By:____________________________________
Title:__________________________________
-2-
<PAGE>
EXHIBIT F
DISPUTE RESOLUTION
1. Binding Arbitration.
-------------------
Any dispute, claim or controversy of whatever nature arising out of or
relating to a claim for indemnification under Article IX of the Agreement (the
"Arbitrable Provisions"), including, without limitation, any action or claim
based on tort, contract, or statute, or concerning the interpretation, effect,
termination, validity, performance and/or breach of any of the Arbitrable
Provisions, shall be resolved by final and binding arbitration in accordance
with the Commercial Arbitration Rules of the American Arbitration Association
administered by [service], Los Angeles, California _____, Telephone: ( )
_________ (the "Administrator").
The parties hereby incorporate the provisions of California Code of Civil
Procedure, Sections 1283.05 and 1283.1 (relating to discovery) into this
Agreement, which shall be a part of and applicable to any arbitration
proceedings arising hereunder. Any arbitration, mediation, court action, or
other adjudicative proceeding arising out of or relating to this Agreement shall
be held in Los Angeles, California. Notwithstanding the foregoing or any other
provision contained in this Exhibit, the parties shall have the right to request
provisional relief from a court of competent jurisdiction pursuant to California
Code of Civil Procedure Section 1281.8.
2. Initiation.
----------
Arbitration shall be initiated by either party in the following manner:
2.1 Timing. Unless barred by an applicable statute or period of
------
limitations, either party may initiate an arbitration at any time after a
dispute has arisen by serving upon the other party and filing with the
Administrator a written Demand for Arbitration, including a general description
of the nature of the claim and the nature and amount of damages and/or other
relief sought (the "Demand for Arbitration"). A claim shall be forever barred if
on the date the Demand for Arbitration is filed with the Administrator, the
claim, if asserted in a civil action, would be barred under law by an applicable
statute or period of limitations.
2.2 Response. If the responding party desires to file a response and/or
--------
counterclaim to the Demand for Arbitration, it shall do so within twenty (20)
calendar days after service of the Demand for Arbitration. Any response to a
counterclaim shall be filed and served within ten (10) calendar days after
service of the counterclaim, but no such response shall be required. A failure
to file a counterclaim or response will not operate to delay the arbitration
proceedings.
2.3 Further Pleadings. After the filing of the Demand for Arbitration, any
-----------------
counterclaim, and/or any responses thereto, no further claims or counterclaims
may be made or filed in that proceeding except by order of the arbitrator made
on a duly noticed motion to the arbitrator.
<PAGE>
3. Appointment and Powers of Arbitrator.
------------------------------------
The dispute shall be submitted to a single arbitrator chosen by the parties
from a list of retired judges provided by the Administrator. The Administrator
shall provide such list to the parties twenty (20) days after the Demand for
Arbitration is filed. Should the parties be unable to agree on a choice of
arbitrator within ten (10) days after receipt of the list from the
Administrator, then either party may request the Administrator to furnish a list
of three names and each side may strike one name, thereby nominating the
remaining person as the arbitrator. If more than one name remains, the
Administrator shall choose an arbitrator from the list of remaining names.
If the designated arbitrator shall die, become incapable of, unwilling to,
or unable to serve or proceed with the arbitration, the Administrator shall
appoint a replacement arbitrator, and such replacement arbitrator shall have all
such powers as if he or she had been originally appointed as the arbitrator.
Should either party refuse or neglect, after reasonable notice, to furnish
the arbitrator with any papers or information demanded or to attend hearings
before the arbitrator, the arbitrator is empowered by both parties to proceed
with the remainder of the arbitration process set forth in this Exhibit.
The arbitrator is authorized to issue an award for compensatory damages,
and/or to grant any equitable remedy or other relief he or she deems just and
equitable and within the scope of the Agreement, including, but not limited to,
an injunction or order for specific performance. The arbitrator shall not have
the authority to award exemplary or punitive damages.
4. Costs and Fees.
--------------
The arbitrator, in his or her discretion, shall be authorized to determine
whether a party is the prevailing party, and if so, to award to that prevailing
party reimbursement for its share of the costs and fees of the Administrator and
the arbitrator, and reimbursement for its reasonable attorneys' fees,
disbursements pursuant to California Code of Civil Procedure Section 1033.5, and
costs arising from the arbitration. However, until any such order is issued,
the parties shall bear equally the costs and fees of the Administrator and the
arbitrator.
5. Location and Date of Arbitration Hearing.
----------------------------------------
The arbitration shall be held in Los Angeles, California, and shall
commence no later than six months following the service of the Demand For
Arbitration.
6. Pre-Hearing Conferences.
-----------------------
Within twenty (20) days of the time that the arbitrator is chosen, the
arbitrator shall hold a Pre-Hearing Conference with the parties for the purpose
of exploring or mediating a mutually agreed resolution of such dispute,
narrowing the issues, establishing a discovery schedule, arranging an
-2-
<PAGE>
acceptable procedure for any law and motion proceedings and in all respects
arranging for the most expeditious hearing feasible of the matters in dispute.
7. Discovery.
---------
The parties shall have the right to conduct the following discovery:
7.1 Exchange of Documents. At the Pre-Hearing Conference, the parties
---------------------
shall exchange requests for production of no more than fifteen (15) categories
of documents (the "Document Request List") that are relevant to the issues in
the arbitration and that are to be produced by the other side. Subject to any
disputes as to production, the responsive documents shall be produced by the
responding party, or made available for inspection, at the requesting party's
option, within twenty (20) days of the exchange of the Document Request Lists.
Any disputes as to production of documents shall be addressed to the arbitrator
as promptly as possible, and in any event no more than ten (10) days after
completion of the twenty-day production period, and shall promptly and
informally be resolved by the arbitrator.
7.2 Exchange of Witness Lists. Within twenty (20) days after the
--------------------------
production of documents, the parties shall exchange a list of: (i) any fact
witnesses they intend to call at the arbitration hearing, and (ii) any other
persons who may have material information about the dispute. The fact witness
list also shall include a brief description of each identified person's
knowledge.
7.3 Fact Witness Depositions. The parties shall have the right to take
------------------------
depositions of no more than five (5) fact (non-expert) witnesses at any time
commencing fifteen (15) days after the production of documents and up until
fifteen (15) days prior to the commencement of the arbitration hearing. The
time available for the deposition of each fact witness shall not exceed two
eight-hour days, including breaks, unless a party or its counsel is found by the
arbitrator, on motion duly made, to have wilfully obstructed discovery, in which
event the arbitrator may award the costs of preparing and arguing such motion to
the prevailing party.
7.4 Expert Witnesses. The parties shall exchange lists of up to three (3)
----------------
expert witnesses, along with a statement of the witnesses' backgrounds, opinions
and published articles or papers, if any, thirty (30) days prior to the
commencement of the arbitration hearing. Between the 10th and 20th day preceding
the arbitration hearing, each party shall have the right to depose the other
party's experts, however, the time available for the deposition of each expert
witness shall not exceed two eight-hour days, including breaks unless a party or
its counsel is found by the arbitrator, on motion duly made, to have wilfully
obstructed discovery, in which event the arbitrator may award the costs of
preparing and arguing such motion to the prevailing party. At least five (5)
business days prior to any expert's scheduled deposition, the party designating
the expert shall provide the other party with copies of any reports or other
documents the expert intends to offer at the arbitration hearing and all
documents that have been provided to the expert by such designating party.
7.5 Additional Discovery. Any additional discovery may occur only at the
--------------------
discretion of the arbitrator and allowed only upon a showing of good cause.
-3-
<PAGE>
8. Conduct of the Arbitration Hearing.
----------------------------------
The arbitration hearing shall be conducted according to the discretion of
the arbitrator. Judicial rules relating to the order of proof, the conduct of
the hearing and the presentation and admissibility of evidence need not be
followed. Any relevant information, including hearsay, may be admitted by the
arbitrator regardless of its admissibility as evidence in court, but the
arbitrator also shall be authorized to exclude evidence including if the
prejudicial or cumulative effort of such evidence would outweigh its probity.
The parties shall have the power to subpoena witnesses to attend the
arbitration hearing pursuant to California Code of Civil Procedure Section
1282.6. The arbitrator shall have full power to give such directions and to make
such orders in the conduct of the arbitration, including setting pre-arbitration
procedures and scheduling any motions to correct or amend the arbitration award,
as he or she deems just and appropriate, subject to the provisions of the last
paragraph of Section 3 hereof..
9. Award.
-----
The arbitrator shall, within fifteen (15) calendar days after the
conclusion of the arbitration hearing, issue a written award and a brief written
statement of decision describing the reasons for the award, including the
calculation of any compensatory damages awarded.
10. Survival.
--------
The provisions in this Exhibit shall survive and apply in all events,
including, without limitation, after the breach, repudiation and/or termination
of the Arbitrable Provisions.
11. Notice.
------
Any notice or document required to be served by one party on the other
party under this Exhibit shall be served in accordance with Section 11.4 of the
Agreement. After a party appears in the arbitration proceeding through its
attorney, all further service shall be made upon that party's attorney.
12. Finality of Award.
-----------------
The award of the arbitrator shall be final and binding upon the parties
without appeal or review except as permitted by California law. Any party may
apply to any court of competent jurisdiction for confirmation and entry of
judgment based on said award. In connection with any application to confirm,
correct or vacate the arbitration award, any appeal of any order rendered
pursuant to any such application, or any other action required to enforce the
arbitration award, the prevailing party shall be entitled to recover its
reasonable attorneys' fees, disbursements and costs incurred in such post-award
activities.
-4-
<PAGE>
Exhibit 10.18
ASSET ACQUISITION AGREEMENT
BY AND AMONG
TVN ENTERTAINMENT CORPORATION,
GRTV NETWORK, INC.,
GUTHY-RENKER CORPORATION
AND
GUTHY-RENKER TELEVISION NETWORK, INC.
JULY 30, 1999
CLOSING EFFECTIVE AS OF JULY 1, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I ACQUISITION OF GRTV ASSETS AND ASSUMPTION OF GRTV LIABILITIES................ 2
1.1 Purchase of Assets........................................................... 2
------------------
1.2 Consideration................................................................ 3
-------------
1.3 Closing...................................................................... 3
-------
1.4 No Further Ownership Rights in GRTV Assets................................... 4
------------------------------------------
1.5 Treatment of Certain Liabilities............................................. 4
--------------------------------
1.6 Allocation of Aggregate Consideration........................................ 5
-------------------------------------
1.7 Excluded Assets.............................................................. 6
---------------
ARTICLE II REPRESENTATIONS AND WARRANTIES.............................................. 6
2.1 Representations and Warranties of Guthy-Renker and GRTV with respect to GRTV. 6
----------------------------------------------------------------------------
2.2 Representations and Warranties of Guthy-Renker............................... 20
----------------------------------------------
2.3 Investment Representations of Guthy-Renker and GRTV.......................... 22
---------------------------------------------------
2.4 Representations and Warranties of TVN and Newco regarding Newco.............. 23
---------------------------------------------------------------
2.5 Representations and Warranties of TVN........................................ 25
-------------------------------------
ARTICLE III POST-CLOSING COVENANTS..................................................... 28
3.1 Expenses..................................................................... 28
--------
3.2 Public Announcements......................................................... 28
--------------------
3.3 [Intentionally Deleted]...................................................... 29
3.4 Transfer Taxes............................................................... 29
--------------
3.5 GRTV Employees............................................................... 29
--------------
3.6 GRTV Designations............................................................ 29
-----------------
3.7 Access to Books, Records and Employees....................................... 30
--------------------------------------
3.8 Financial Information and Reports............................................ 30
---------------------------------
3.9 Benefit Plans................................................................ 31
-------------
ARTICLE IV CONDITIONS PRECEDENT........................................................ 31
4.1 Conditions to Each Party's Obligation at Closing............................. 31
------------------------------------------------
4.2 Conditions of Obligations of TVN and Newco................................... 32
------------------------------------------
4.3 Conditions of Obligation of Guthy-Renker and GRTV............................ 33
-------------------------------------------------
ARTICLE V INDEMNIFICATION.............................................................. 33
5.1 Indemnification.............................................................. 33
---------------
5.2 Limitations and Expiration................................................... 34
--------------------------
5.3 Indemnity Offset Against Promissory Note..................................... 36
----------------------------------------
5.4 Representative of Guthy-Renker; Claims By the TVN Indemnified Persons........ 36
---------------------------------------------------------------------
5.5 Representative of TVN and Newco; Claims By the Guthy-Renker Indemnified
-----------------------------------------------------------------------
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
Persons...................................................................... 37
-------
5.6 Third Party Claims........................................................... 39
------------------
5.7 Survival of Representations, Warranties and Covenants........................ 40
-----------------------------------------------------
ARTICLE VI GENERAL PROVISIONS.......................................................... 40
6.1 Extension; Waiver............................................................ 40
-----------------
6.2 Dispute Resolution........................................................... 40
------------------
6.3 Notices...................................................................... 43
-------
6.4 Interpretation............................................................... 44
--------------
6.5 No Transfer.................................................................. 44
-----------
6.6 Severability................................................................. 44
------------
6.7 Other Remedies............................................................... 44
--------------
6.8 Further Assurances........................................................... 44
------------------
6.9 Absence of Third Party Beneficiary Rights.................................... 45
-----------------------------------------
6.10 Mutual Drafting.............................................................. 45
---------------
6.11 Governing Law................................................................ 45
-------------
6.12 Amendment.................................................................... 45
---------
6.13 Scope of Representations and Warranties...................................... 45
---------------------------------------
6.14 Schedules; Materiality....................................................... 45
----------------------
6.15 Entire Agreement............................................................. 46
----------------
6.16 Definitions.................................................................. 46
-----------
6.17 Counterparts................................................................. 50
------------
</TABLE>
-ii-
<PAGE>
SCHEDULES AND EXHIBITS
Exhibit A Form of Transition Services Agreement
Exhibit B Form of Promissory Note
Exhibit C Form of Noncompetition Agreement
Exhibit D Form of Security Agreement
Exhibit E-1 Form of Thomas Employment Agreement
Exhibit E-2 Form of Riley Employment Agreement
Exhibit F-1 Bill of Sale and Assumption Agreement
Exhibit F-2 Form of Copyright Assignment
Exhibit G Form of TVN Guaranty
Article I Schedules
Schedule 1 GRTV Assets
Schedule 1.5 GRTV Liabilities
Schedule 1.8 Excluded Assets
Disclosure Schedule
Schedule 2.1(b) Subsidiaries
Schedule 2.1(c) GRTV Third-Party Consents, Waivers, and Approvals
Schedule 2.1(f) Material Adverse Changes and Other Events
Schedule 2.1(g) Additional Liabilities
Schedule 2.1(i) Major Contracts
Schedule 2.1(m) Litigation
Schedule 2.1(n) GRTV and Third-Party Intellectual Property
Schedule 2.1(o) Real Property, Leaseholds and Tangible Property
Schedule 2.1(p) Environmental Permits
Schedule 2.1(q) Government Authorizations and Permits
Schedule 2.1(r) Employee Agreements and Plans
Schedule 2.1(s) Transactions with Affiliates
Schedule 2.1(t) Interests of Officers
Schedule 2.1(u) GRTV Customers
Schedule 2.1(w) GRTV Employees
Schedule 2.1(z) Sufficiency of GRTV Assets
Representations and Warranties of Guthy-Renker
Schedule 2.2(b) Guthy-Renker Third-Party Consents, Approvals and
Authorizations
Schedule 2.2(c) Conflicts of Interest of Stockholders
-iii-
<PAGE>
ASSET ACQUISITION AGREEMENT
---------------------------
THIS ASSET ACQUISITION AGREEMENT (the "Agreement") is executed on July 30,
1999 (the "Execution Date") and shall be effective as of July 1, 1999 (the
"Effective Closing Date"), by and among TVN Entertainment Corporation, a
Delaware corporation ("TVN"), GRTV Network, Inc., a Delaware corporation
("Newco"), Guthy-Renker Corporation, a Delaware corporation ("Guthy-Renker"),
and Guthy-Renker Television Network, Inc., a Delaware corporation ("GRTV").
RECITALS:
A. Each of Gregory A. Thomas ("Thomas"), T&T Productions, Inc., a
California corporation controlled by Thomas (collectively with Thomas, the
"Thomas Parties"), Guthy-Renker and GRTV has entered into that certain Sale,
Termination and Release Agreement of even date herewith (the "Thomas Termination
Agreement"), pursuant to which, among other things, (i) Guthy-Renker purchased
from the Thomas Parties 775 shares of the issued and outstanding Common Stock of
GRTV, which shares represent all of the shares of Common Stock of GRTV held by
the Thomas Parties, (ii) the parties thereto terminated that certain Omnibus
Stock Plan Grant Agreement dated as of January 1, 1998 by and between Thomas and
GRTV and in connection therewith, all options granted thereunder or required to
be granted in the future to Thomas, and (iii) the parties thereto terminated
that certain Stockholders Agreement dated as of January 1, 1998 by and between
Guthy-Renker, GRTV and the Thomas Parties. In addition, Thomas, Guthy-Renker,
GRTV and Newco have agreed to amend that certain Employment Agreement dated as
of January 1, 1998, by and among Guthy-Renker, GRTV and Thomas to delete Guthy-
Renker and GRTV as parties to such agreement and to add Newco as a party to such
agreement, among other things.
B. As a result of the consummation of the transactions set forth in the
Thomas Termination Agreement, Guthy-Renker owns 11,916 shares of Common Stock
of GRTV, which shares are all of the issued and outstanding shares of capital
stock of GRTV.
C. Each of James-Riley ("Riley") and GRTV have entered into that certain
Termination and Release Agreement (the "Riley Termination Agreement") to
terminate (among other things) that certain Amended and Restated Employment
Agreement dated as of April 15, 1999 and effective as of January 1, 1999 between
Riley and GRTV.
D. GRTV is engaged in the business of acquiring media time in quantities
from cable service providers and television broadcasters and reselling such
media time in packages to direct response infomercial and product sales
fulfillment companies (the "GRTV Business").
E. Guthy-Renker desires to sell and TVN desires to acquire the assets
used in the GRTV Business listed on Schedule 1 hereof (the "GRTV Assets"),
subject to the GRTV Liabilities, on the terms and subject to the conditions set
forth in this Agreement.
<PAGE>
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, the parties agree as follows:
ARTICLE I
ACQUISITION OF GRTV ASSETS AND ASSUMPTION OF GRTV LIABILITIES
1.1 Purchase of Assets. On the terms and subject to the conditions of this
------------------
Agreement, on the Execution Date and for the consideration set forth in Section
1.2:
(a) Newco will purchase the GRTV Assets from GRTV, and GRTV shall
sell, transfer, assign and deliver the GRTV Assets, and Newco will assume the
GRTV Liabilities, pursuant to Section 1.5 hereof;
(b) Guthy-Renker and Newco shall enter into a Transition Services
Agreement in the form attached hereto as Exhibit A (the "Transition Services
Agreement");
(c) TVN and Newco shall execute and deliver to GRTV the Promissory
Note in the form attached hereto as Exhibit B (the "Promissory Note");
(d) TVN, Newco, Guthy-Renker and GRTV shall enter into the
Noncompetition Agreement in the form attached hereto as Exhibit C (the
"Noncompetition Agreement");
(e) TVN, Newco and GRTV shall enter into the Security Agreement in
the form attached hereto as Exhibit D (the "Security Agreement");
(f) TVN shall enter into the Guaranty in the form attached hereto as
Exhibit G (the "Guaranty");
The Transition Services Agreement, Guaranty and Noncompetition Agreement are
referred to herein collectively as the "Supplemental Agreements" and
individually as a "Supplemental Agreement." The Promissory Note and the Security
Agreement are referred to herein collectively as the "Loan Documents" and
individually as a "Loan Document." In addition, Thomas and Newco shall enter
into the Amended and Restated Employment Agreement in the form attached hereto
as Exhibit E-1 (the "Thomas Employment Agreement") and Riley and Newco shall
enter into the Employment Agreement in the form attached hereto as Exhibit E-2
(the "Riley Employment Agreement" and collectively with the Thomas Employment
Agreement, the "Employment Agreements").
-2-
<PAGE>
1.2 Consideration.
-------------
(a) TVN and Newco agree to pay to GRTV in consideration for the
purchase of the GRTV Assets an aggregate of cash in the amount of U.S.
$13,302,000, and to assume and timely discharge and perform all of the GRTV
Liabilities (the "Aggregate Consideration") pursuant to the terms and subject to
the conditions set forth in this Agreement and the Exhibits hereto. The parties
agree that the Aggregate Consideration and the other obligations on TVN's and
Newco's part to be performed under the terms of this Agreement, the Supplemental
Agreements and the Loan Documents constitute full and fair equivalent
consideration for the GRTV Assets exchanged therefor and the covenants,
agreements and performances of Guthy-Renker and GRTV under this Agreement and
the Supplemental Agreements.
(b) On the Closing Date, TVN and Newco shall pay cash in the amount
of $302,000 to GRTV (or, alternatively, such payment may be made by wire
transfer of immediately available funds to an account designated by GRTV) and
deliver to GRTV the Promissory Note in the aggregate principal amount of
$13,000,000.
1.3 Closing. The closing of the purchase and sale of the GRTV Assets and
-------
the entering into of the Supplemental Agreements and the Loan Documents
(collectively, the "Closing") is taking place contemporaneously with the
execution and delivery of this Agreement at the offices of TVN at 2901 West
Alameda Avenue, 7/th/ Floor, Burbank, California 91505 and shall be effective as
of the Effective Closing Date, except as otherwise provided in the
Noncompetition Agreement.
(a) At the Closing, Guthy-Renker and GRTV shall deliver to TVN and
Newco copies of the Thomas Termination Agreement executed by Guthy-Renker, GRTV
and each of the Thomas Parties.
(b) [Intentionally Deleted].
(c) At the Closing, Guthy-Renker and GRTV shall deliver to TVN and
Newco all bills of sale and other documents of assignment as reasonably required
by TVN and Newco with respect to the transfer of GRTV's interest in all of the
GRTV Assets, duly endorsed for transfer to Newco including, but not limited to:
(i) the bill of sale, assignment and assumption agreement
attached hereto as Exhibit F-1 (the "Bill of Sale and Assumption Agreement");
(ii) the copyright assignment attached hereto as Exhibit F-2
(the "Copyright Assignment"); and
(iii) an assignment of GRTV's membership interests in Coast to
Coast Media LLC ("Coast to Coast").
-3-
<PAGE>
(d) At the Closing, TVN and Newco shall deliver to GRTV the amount of
$302,000 and the Bill of Sale and Assumption Agreement in the manner set forth
at Section 1.2(b) hereof.
(e) At the Closing, TVN and Newco shall deliver to GRTV the
Promissory Note and Security Agreement each duly executed by Newco and TVN.
(f) At the Closing, Guthy-Renker, GRTV, TVN and Newco shall deliver
to each other executed copies of the Transition Services Agreement and the
Non-Competition Agreement.
(g) At the Closing, TVN shall deliver to GRTV the Guaranty duly
executed by TVN.
1.4 No Further Ownership Rights in GRTV Assets. The amounts paid in
------------------------------------------
respect of the GRTV Assets in accordance with the terms of this Agreement shall
be deemed to have been delivered in full satisfaction of all rights pertaining
thereto, and following the Execution Date, none of GRTV, Guthy-Renker or any
other stockholder of GRTV shall have any further rights to, or ownership in, the
GRTV Assets, except as set forth in the Loan Documents.
1.5 Treatment of Certain Liabilities.
--------------------------------
(a) GRTV Liabilities.
----------------
(i) At and after the Effective Closing Date, GRTV shall retain
those liabilities of GRTV (collectively, the "Excluded Liabilities") that are:
(1) a trade payable, account payable or other liability
owed to any member of the GRC Group (the "GRC Intercompany Liability") or any
indebtedness to fund working capital of other activities of GRTV from
Guthy-Renker or any member of the GRC Group (the "GRC Lines of Credit");
(2) Taxes of Guthy-Renker, GRTV or any member of the GRC
Group for any taxable period and Taxes relating to the GRTV Assets and
attributable to taxable periods on or before the Effective Closing Date, which
are due and payable by Guthy-Renker or GRTV, except as set forth in Section 3.4;
(3) obligations with respect to optionees or any
stockholders of GRTV;
(4) obligations with respect to any Incentive Plans or
Rights Plans, except for bonuses and accrued vacation payable to the GRTV
Employees listed on Schedule 1.5 in the amounts set forth thereon shall be
included in the GRTV Liabilities and cash in amounts sufficient to offset such
amounts payable has been included in the GRTV Assets;
(5) obligations with respect to the Thomas Termination
Agreement, any accrued indebtedness due from GRTV or Guthy-Renker to the Thomas
Parties or
-4-
<PAGE>
any bonuses due from GRTV or Guthy-Renker to the Thomas Parties based on
revenues recognized prior to the Effective Closing Date;
(6) obligations of GRTV and Guthy-Renker with respect to
any litigation, award, settlement or other agreement with Tony Adams, the
defense, compromise and settlement of which shall be controlled by Guthy-Renker;
(7) all obligations of GRTV and Guthy-Renker to Wex
including without limitation, pursuant to the Wex Termination Agreement and the
Settlement Agreement and General Release Agreement dated October 7, 1998 between
GRTV and Wex;
(8) all obligations of GRTV and Guthy-Renker to Brooke
Thomas and Riley including without limitation, pursuant to certain Amended and
Restated Employment Agreement dated as of April 15, 1999 and effective as
of January 1, 1999 between Riley and GRTV and the Amended and Restated
Employment Agreement between GRTV and Brooke Thomas;
(9) all liabilities relating to any other litigation,
disputes or claims related to the conduct of the GRTV Business for actions
occurring on or before the Execution Date; and
(10) all liabilities of GRTV other than the GRTV
Liabilities.
(ii) Except for the Excluded Liabilities, Newco shall assume,
timely discharge and perform (as part of the Aggregate Consideration) (A) all of
the liabilities of GRTV set forth on the GRTV unaudited balance sheet as of June
30, 1999, (B) all of the liabilities of GRTV arising in the ordinary course
of the GRTV Business between June 30, 1999 and the Execution Date and (C) all of
the liabilities of GRTV set forth on Schedule 1.5 hereof (collectively the
"GRTV Liabilities").
(b) Liabilities of Guthy-Renker. At and after the Effective Closing
---------------------------
Date, Newco and TVN will not assume or perform any liabilities or obligations of
Guthy-Renker (except to the extent such liabilities and obligations are included
in the GRTV Liabilities). Guthy-Renker shall remain solely responsible for
satisfying, discharging or performing all other liabilities, debts, contracts
and obligations of Guthy-Renker on a timely basis in accordance with their
respective terms.
1.6 Allocation of Aggregate Consideration. The parties hereto agree to
-------------------------------------
Execution Date (i) use their good faith efforts to agree upon an allocation of
the Aggregate Consideration among the GRTV Assets within 30 days after the
Execution Date (provided, however, that the parties hereby agree that in no
event shall the amount be so allocated to depreciable personal property exceed
the adjusted tax basis of such property as of the Effective Closing Date); (ii)
to report the transactions contemplated hereby in accordance with the allocation
agreed upon by the parties in computing their taxable income and otherwise in
preparing and filing their tax returns for federal, state and local income tax
purposes; and (iii) that, in the event any audit, proceeding, suit, action or
investigation is brought against the other party before the Internal Revenue
Service or any state, local or foreign
-5-
<PAGE>
counterpart, the United States Tax Court or any Federal or state court of
competent jurisdiction, each will at all times use its commercially reasonable
efforts to maintain and defend the reporting positions agreed on in this
Agreement, and use its commercially reasonable efforts to obtain a settlement or
resolution consistent with such position in any such proceeding.
1.7 Excluded Assets. The parties hereto agree and acknowledge that the
---------------
GRTV Assets include only the assets listed on Schedule 1 hereto and do not
include any other property or assets of Guthy-Renker and/or any other member of
the GRC Group, including, without limitation, (i) any assets of Guthy-Renker
other than those used in the GRTV Business, (ii) any assets of GRTV which are or
have been used by GRTV only in its conduct of its business other than the GRTV
Business, (iii) the systems, hardware and software, tools and people associated
with corporate accounting, information processing, facilities, purchasing,
Guthy-Renker's Intellectual Property, shipping, customer support, telephone
support, human resources, legal, business services functions and other similar
functions and (iv) any of the rights, property and assets set forth on Schedule
1.8 hereof (collectively, the "Excluded Assets").
ARTICLE II
REPRESENTATIONS AND WARRANTIES
2.1 Representations and Warranties of Guthy-Renker and GRTV with respect
--------------------------------------------------------------------
to GRTV. Except as disclosed in the Schedules attached hereto and hereby made a
- -------
part hereof, referring specifically to the representations and warranties in
this Agreement which identify the section and subsection to which such
disclosure relates and which are delivered by Guthy-Renker and GRTV to TVN and
Newco prior to the execution of this Agreement (collectively, the "Disclosure
Schedule"), Guthy-Renker and GRTV represent and warrant to TVN and Newco, as of
the Execution Date, as set forth below. As used in this Agreement, (i)
"Subsidiary" means a corporation or other entity 25% or more of whose voting
securities are owned or are otherwise controlled directly or indirectly by a
parent corporation or other intermediary entity in an amount sufficient to elect
at least a majority of the board of directors or other managers of such
corporation or other entity and (ii) the term "Material Adverse Effect" means
any change, event or effect that is materially adverse to the business, assets
(including intangible assets), liabilities, financial condition or results of
operations of the subject company or assets.
(a) Organization, Standing and Power.
--------------------------------
(i) GRTV is a corporation duly incorporated and validly existing
under the laws of the State of Delaware and is in good standing under the laws
of the States of Delaware and California, and has all requisite power and
authority to own, operate and lease its properties and to carry on the GRTV
Business as now being conducted.
(b) Capital Structure and Subsidiaries. Except as set forth on the
----------------------------------
Disclosure Schedule, as of the Execution Date, (i) Guthy-Renker is the sole
stockholder of GRTV and (ii) GRTV will have no Subsidiaries nor any direct or
indirect equity interest in or loans to any partnership, corporation, joint
venture, business association or other entity.
-6-
<PAGE>
(c) Authority.
---------
(i) GRTV has all requisite corporate power and authority to
enter into this Agreement, the Supplemental Agreements and the Loan Documents,
in each case to which it is a party, to perform its obligations hereunder and
thereunder, and to consummate the transactions contemplated hereby and thereby.
The execution and delivery of this Agreement, the Supplemental Agreements, and
the Loan Documents, in each case to which it is a party, the performance by GRTV
of its obligations hereunder and thereunder and the consummation of the
transactions contemplated hereby and thereby have been duly and validly
authorized by all necessary corporate action on the part of GRTV, including the
unanimous approval by the Board of Directors of GRTV and the consent of
Guthy-Renker as its sole stockholder. This Agreement, the Supplemental
Agreements and the Loan Documents, in each case to which it is a party, have
been duly executed and delivered by GRTV and constitute legal, valid and binding
obligations of GRTV enforceable against GRTV in accordance with the terms herein
and therein, except as enforcement may be limited by bankruptcy, insolvency, or
other similar laws affecting the enforcement of creditors' rights generally and
except that the availability of equitable remedies is subject to the discretion
of the court before which any proceeding therefor may be brought.
(ii) Except as set forth in the Disclosure Schedule, the
execution and delivery of this Agreement, the Supplemental Agreements and the
Loan Documents, in each case to which GRTV is a party, do not, and the
consummation of the transactions contemplated hereby and thereby will not
conflict with or result in any violation of any material statute, law, rule,
regulation, judgment, order, decree or ordinance applicable to GRTV or its
properties or assets, or conflict with or result in any breach or default (with
or without notice or lapse of time, or both) under, or give rise to a right of
termination, cancellation or acceleration of any obligation or to loss of a
material benefit under, or result in the creation of a Lien on any of the GRTV
Assets pursuant to (A) any provision of the Certificate of Incorporation or
Bylaws of GRTV or (B) any material agreement, contract, note, mortgage,
indenture, lease, instrument, permit, concession, franchise or license to which
GRTV is a party or by which GRTV or any of its properties or assets may be bound
or affected, except for any conflict, violation, breach, default, right, Lien or
encumbrance which would not have a Material Adverse Effect on Newco's interest
in the GRTV Assets or TVN's ability to operate the GRTV Business as currently
conducted by GRTV. Schedule 2.1(c) lists all consents, waivers and approvals
under any of GRTV's agreements, contracts, licenses or leases required to be
obtained by GRTV in connection with the consummation of the transactions
contemplated hereby, by the Supplemental Agreements and the Loan Documents (the
"Third-Party Consents").
(iii) No consent, approval, order or authorization of, or
registration, declaration or filing with, any court, administrative agency,
commission, regulatory authority or other governmental authority or
instrumentality or the United States government (a "Governmental Entity"), is
required by or with respect to GRTV in connection with the execution and
delivery of this Agreement or the consummation of the transactions contemplated
hereby, except for (A) such consents, approvals, orders, authorizations,
registrations, declarations and filings as may be required under the laws of any
foreign country, which if not obtained or made would not have a Material Adverse
Effect on the GRTV Assets or GRTV Liabilities or TVN's ability to operate the
GRTV
-7-
<PAGE>
Business as currently conducted by GRTV and (B) such other consents,
authorizations, filings, approvals and registrations which if not obtained or
made would not have a Material Adverse Effect on the GRTV Assets or GRTV
Liabilities.
(d) Financial Statements. Guthy-Renker has furnished TVN and Newco
--------------------
with audited financial statements of GRTV for the fiscal year ended January 3,
1999 (the "Audited Financial Statements") and GRTV's unaudited balance sheet as
of June 30, 1999 (the "Interim Balance Sheet") and GRTV's unaudited statement of
operations for the period ended June 30, 1999 (the "Interim Income Statement";
the foregoing financial statements are referred to collectively as the "GRTV
Financial Statements"). The GRTV Financial Statements have been prepared in
accordance with GAAP consistently applied (except that the Interim Balance Sheet
and Interim Income Statement do not contain notes otherwise required by GAAP and
are subject to normal year-end adjustments) and fairly present, in all material
respects, the financial position of GRTV as at the dates thereof and the results
of its operations and changes in financial position for the periods then ended.
There has been no change in GRTV's accounting policies since January 3, 1999.
(e) Receivables. The accounts receivable that are shown on the
-----------
Interim Balance Sheet arose in the ordinary course of business, and the
allowance for doubtful accounts has been provided in accordance with GAAP and
consistent with the past practice of GRTV.
(f) No Material Adverse Change. Except as set forth on the Disclosure
--------------------------
Schedule and as contemplated by this Agreement, the Supplemental Agreements and
the Loan Documents, since January 3, 1999, GRTV has conducted its businesses in
the ordinary course and there has not occurred:
(i) Any change in the condition of the GRTV Assets
constituting a Material Adverse Effect on such GRTV Assets (ordinary wear and
tear excepted), either individually or in the aggregate;
(ii) Any damage, destruction or loss, whether covered by
insurance or not, that have had a Material Adverse Effect on the GRTV Assets,
individually or in the aggregate;
(iii) Any increase in or modification of the salary or wages
payable or to become payable by GRTV to any of its officers who are employees or
other employees, except in the ordinary course of business consistent with past
practice;
(iv) Any acquisition or sale of a material amount of property
or assets of GRTV;
(v) Any incurrence, assumption or guarantee by GRTV of any
debt for money borrowed from an affiliate, a bank or a lending institution
("Borrowed Money") other than borrowings reflected in the GRC Intercompany
Liabilities and the GRC Lines of Credit;
(vi) Any creation or assumption by GRTV of any Lien
on any of the GRTV Assets, other than in the ordinary course of business;
-8-
<PAGE>
(vii) Any making of any loan, advance or capital contribution
to or investment in any person other than (A) loans or advances for travel or
other business expenses made in the ordinary course of business of GRTV and (B)
other loans and advances in an aggregate amount which does not exceed $10,000
outstanding at any time;
(viii) Any entry into, amendment of, relinquishment, termination
or non-renewal by GRTV of any contract, lease transaction, commitment or other
right or obligation other than in the ordinary course of business;
(ix) Any transfer or grant of a right under the GRTV
Intellectual Property (as defined in Section 2.1(n) hereof) included in the GRTV
Assets by GRTV, other than those transferred or granted in the ordinary course
of business consistent with past practice;
(x) Any labor dispute, other than routine individual
grievances, or any activity or proceeding by a labor union or representative
thereof to organize any employees of GRTV; or
(xi) Any agreement or arrangement made by GRTV to take any
action which, if taken prior to the date hereof, would have made any
representation or warranty set forth in this Section 2.1(f) untrue or incorrect
as of the date when made.
(g) Absence of Undisclosed Liabilities. Except as set forth in the
----------------------------------
Disclosure Schedule, GRTV has no liabilities or obligations (whether absolute,
accrued or contingent, and whether or not determined or determinable) of a
character which, under GAAP, are required to be accrued, shown, disclosed or
indicated in a balance sheet of GRTV that are not reflected on the January 3,
1999 Balance Sheet, the Interim Balance Sheet, as of the respective dates
thereof or Schedule 1.5 hereof, except for liabilities and obligations (A)
arising in the ordinary course of the GRTV Business between June 30, 1999 and
the Execution Date or (B) which would not have a Material Adverse Effect on the
GRTV Assets or TVN's ability to operate the GRTV Business as currently conducted
by GRTV.
(h) Taxes.
-----
(i) For purposes of this Agreement, the following terms have
the following meanings: "Tax" (and, with correlative meaning, "Taxes" and
"Taxable") means (A) any and all federal, state, local, United States and other
foreign jurisdictions taxes and similar governmental obligations, charges,
imposts and assessments, including without limitation any income (gross or net),
alternative or add-on minimum tax, gross income, gross receipts, value added,
goods and services, sales, use, environmental, ad valorem, corporation capital,
property transfer, transfer, franchise, profits, license, withholding, payroll,
employment, excise, severance, stamp, occupation, premium, property, net worth,
environmental or windfall profit tax, custom, duty or other tax, assessment or
similar governmental charge of any kind whatsoever, together with any interest
or any penalty, addition to tax or additional amount imposed by any governmental
entity (a "Taxing Authority") responsible for the imposition of any such tax
(United States or other foreign jurisdiction), (B) any liability for the payment
of any amounts of the type described in (A) as a result
-9-
<PAGE>
of being a member of an affiliated, consolidated, combined or unitary group for
any Taxable period and (C) any liability for the payment of any amounts of the
type described in (A) or (B) as a result of any express or implied obligation to
indemnify or reimburse any other person.
(ii) All Tax returns, statements, reports and forms (including
estimated Tax returns and reports and information returns and reports) required
to be filed with any Taxing Authority with respect to any Taxable period ending
on or before the date hereof, by GRTV (collectively, the "GRTV Returns"), have
been or will be filed when due (including any extensions of such due date),
except where the failure to file such GRTV Return would not have a Material
Adverse Effect on the GRTV Assets, the GRTV Liabilities or TVN's ability to
operate the GRTV Business. Such GRTV Returns are true and correct in all
material respects, and all amounts shown due on such GRTV Returns on or before
the date hereof have been or will be paid on or before such date. The Interim
Balance Sheet accrues all actual and contingent liabilities in accordance with
GAAP for Taxes with respect to all periods through such date.
(iii) No material Tax liability since January 3, 1999 has been
incurred other than in the ordinary course of business. Since January 3, 1999,
GRTV has withheld and paid to the applicable financial institution or Taxing
Authority all amounts required to be withheld. GRTV has not granted any
extension or waiver of the limitation period applicable to any GRTV Returns.
(iv) There is no material claim, audit, action, suit,
proceeding, or investigation now pending or (to the Knowledge of Guthy-Renker or
GRTV) threatened against or with respect to GRTV in respect of any Tax or
assessment. No notice of deficiency or similar document of any Tax Authority has
been received by Guthy-Renker or GRTV with respect to GRTV.
(v) There are no Liens (and immediately following the Closing
Date there will be no Liens) on the GRTV Assets relating to or attributable to
Taxes other than Liens for Taxes not yet due and payable. Neither GRTV or Guthy-
Renker has any Knowledge of any basis for the assertion of any claim relating or
attributable to Taxes which, if adversely determined, would result in any Lien
on the GRTV Assets.
(vi) GRTV has heretofore provided or made available to TVN true
and correct copies of all material GRTV Returns, and, as reasonably requested by
TVN prior to or following the date hereof, information statements, reports, work
papers, Tax opinions and memoranda and other Tax data and documents reasonably
available relating to the GRTV Returns.
(i) Major Contracts. Schedule 2.1(i) lists with respect to GRTV:
---------------
(i) Any union contract, any employment contract or other
arrangement or contract providing for future payments, salary or wages in excess
of $25,000 annually, written or oral, with any officer, consultant, director or
employee which is not terminable by it on 30 days' notice or less without
penalty or obligation to make payments related to such termination, other than
such agreements, arrangements or requirements as may be imposed or implied by
law;
-10-
<PAGE>
(ii) Any plan, contract or arrangement, written or oral,
providing for bonuses, pensions, deferred compensation, severance pay or
benefits, retirement payments, profit-sharing, phantom stock, stock appreciation
rights, or the like;
(iii) Any joint venture contract or arrangement or any other
agreement which has involved or is expected to involve a sharing of profits of
GRTV with other persons including employee bonus or variable compensation
arrangements;
(iv) Any existing affiliate agreement, advertiser agreement,
distribution agreement, volume purchase agreement, or other similar agreement or
pursuant to which GRTV has granted or received most favored nation pricing
provisions or exclusive marketing rights related to any product, group
of products or territory;
(v) Any lease for real or personal property (including leases
with options to purchase) in which the amount of payments which GRTV is required
to make on an annual basis exceeds $25,000;
(vi) Any material agreement, contract, mortgage, indenture,
lease, instrument, license, franchise, permit, concession, arrangement,
commitment or authorization which may be, by its terms, terminated or breached
by reason of the execution of this Agreement or the transactions contemplated
hereby which are otherwise listed in Schedule 2.1(c);
(vii) Except for trade indebtedness incurred in the ordinary
course of business and leases for real or personal property (including leases
with options to purchase), any instrument evidencing or related in any way to
indebtedness incurred in the acquisition of companies or other entities or
indebtedness for Borrowed Money by way of direct loan, sale of debt securities,
purchase money obligation, conditional sale, guarantee, or otherwise, except as
reflected in the GRTV Financial Statements;
(viii) Any material license agreement, either as licensor or
licensee (excluding software licenses from third parties relating to software
which is generally available to the public on standard commercial terms and
nonexclusive software licenses granted to affiliates, original equipment
manufacturers ("OEMs"), customers or end-users in the ordinary course of
business);
(ix) Any material Internet Service Provider, web hosting,
Internet transaction processing or similar agreement related to GRTV's Internet
sales activities;
(x) Any contract containing covenants purporting to limit
GRTV's freedom to compete in any line of business in any geographic area;
(xi) Any contract for the lease or sublease as lessee, lessor,
sublessee or sublessor of real or personal property of GRTV, any license of
computer software used by GRTV, any agreement to receive or supply programming
or merchandise, or any agreement to access television broadcast or satellite
services, requiring payments in excess of $25,000 per year; or
-11-
<PAGE>
(xii) Any other agreement, contract or commitment where the
amount remaining to be paid is in excess of $25,000.
Except as set forth on the disclosure schedule, each agreement,
contract, mortgage, indenture, plan, lease, instrument, permit, concession,
franchise, arrangement, license, commitment or authorization listed on Schedule
2.1(i) (each a "Major Contract") is valid and binding on GRTV, and is in full
force and effect (except with respect to oral agreements as to the latter
clause), and neither GRTV nor, to the Knowledge of Guthy-Renker or GRTV, any
other party thereto, has breached any provision of, or is in default under the
terms of, any such Major Contract, in any material respect.
(j) Restrictions on Business Activities. There is no material
-----------------------------------
agreement, judgment, injunction, order or decree binding upon GRTV which has or
could reasonably be expected to have the effect of prohibiting or materially
impairing any business practice of GRTV, any acquisition of property by GRTV or
the conduct of business by GRTV as currently conducted. GRTV has not entered
into any agreement under which GRTV is restricted from selling, licensing or
otherwise distributing any of its technology or products to or providing
services to, customers or potential customers or any class of customers in any
geographic area, during any period of time or in any segment of the market.
(k) Compliance with Law. To Guthy-Renker's or GRTV's Knowledge, GRTV
-------------------
is in compliance and has conducted its business so as to comply with all laws,
rules and regulations, judgments, decrees or orders of any Governmental Entity
applicable to its operations or with respect to which compliance is a condition
of engaging in the business thereof, except to the extent that failure to comply
would, individually or in the aggregate, not have had and is expected not to
have a Material Adverse Effect on the GRTV Assets, the GRTV Liabilities or TVN's
ability to operate the GRTV Business as currently conducted by GRTV. To the
Knowledge of Guthy-Renker or GRTV, there are no material judgments or orders,
injunctions, decrees, stipulations or awards (whether rendered by a court or
administrative agency or by arbitration), other than those that are applicable
to the industry as a whole, against Guthy-Renker, GRTV or their affiliates
regarding the GRTV Business or against any of the GRTV Assets.
(l) No Defaults. GRTV is not, nor has it received notice that it
-----------
would be with the passage of time, in default or violation of any material term,
condition or provision of (A) any material judgment, decree, order, injunction
or stipulation applicable to GRTV or (B) any material agreement, note, mortgage,
indenture, contract, lease or instrument, permit, concession, franchise or
license to which GRTV is a party or by which the GRTV Assets may be bound, which
default or violation would have a Material Adverse Effect on the GRTV Assets,
the GRTV Liabilities or TVN's ability to conduct the GRTV Business as currently
conducted by GRTV.
(m) Litigation. Except as set forth on the Disclosure Schedule,
----------
there is no action, suit, proceeding, claim or investigation pending or, to the
Knowledge of Guthy-Renker or GRTV, threatened, against GRTV which could,
individually or in the aggregate, have a Material Adverse Effect on the GRTV
Assets or TVN's ability to conduct the GRTV Business as currently conducted
-12-
<PAGE>
by GRTV or which in any manner challenges or seeks to prevent, enjoin, alter or
materially delay any of the transactions contemplated hereby (each a "Material
Litigation"). The Disclosure Schedule sets forth with respect to each Material
Litigation the forum, the parties thereto, a brief description of the subject
matter thereof and the amount of damages claimed.
(n) Technology.
----------
(A) Definitions. As used in this Section 2.1(n) and
-----------
elsewhere in this Agreement, the following terms have these definitions:
"Intellectual Property" shall mean any or all of the following and all rights
in, arising out of, or associated therewith: (i) all United States,
international and foreign patents and applications therefor and all reissues,
divisions, renewals, extensions, provisionals, continuations and
continuations-in-part thereof, (ii) all inventions (whether patentable or not),
invention disclosures, improvements, trade secrets, proprietary information,
know how, technology, technical data and customer lists, and all documentation
relating to any of the foregoing; (iii) all copyrights, copyrights registrations
and applications therefor, and all other rights corresponding thereto throughout
the world; (iv) all industrial designs and any registrations and applications
therefor throughout the world; (v) all trade names, logos, common law trademarks
and service marks, trademark and service mark registrations and applications
therefor throughout the world; (vi) all databases and data collections and all
rights therein throughout the world; and (vii) any similar or equivalent rights
to any of the foregoing anywhere in the world. "Registered Intellectual
Property" means all United States, international and foreign: (i) patents and
patent applications (including provisional applications); (ii) registered
trademarks, applications to register trademarks, intent-to-use applications, or
other registrations or applications related to trademarks; (iii) registered
copyrights and applications for copyright registration; and (iv) any other
Intellectual Property that is the subject of an application, certificate,
filing, registration or other document issued, filed with, or recorded by any
state, government or other public legal authority. "GRTV Intellectual Property"
means any Intellectual Property used by GRTV in connection with the GRTV
Business.
(i) Schedules. Schedule 2.1(n) hereto sets forth a
---------
complete list of the GRTV Intellectual Property including, without limitation,
any Registered Intellectual Property other than (A) all inventions not reduced
to tangible form, invention disclosures, improvements, trade secrets,
proprietary information, know-how, technology, technical data and customer lists
and all documentation related to any of the foregoing, and (B) generally
available shrink-wrapped licensed computer software and computer software that
was embedded in equipment upon its acquisition by GRTV. Schedule 2.1(n)
specifies the jurisdictions in which any patent or trademark included in any
Registered Intellectual Property, which is included in the GRTV Assets, has been
issued or registered or in which an application for issuance or registration has
been filed, including the respective registration numbers in the proper U.S. or
foreign offices, as applicable. Pursuant to this Agreement and subject to the
terms, conditions and restrictions set forth herein and therein, Newco shall, as
of the Effective Closing Date, have the right to use, hold for use or otherwise
exploit all of the GRTV Intellectual Property included in the GRTV Assets in a
manner not materially different than that in which such Intellectual Property is
used, held for use or otherwise exploited by GRTV as of the Effective Closing
Date.
-13-
<PAGE>
(ii) Confidentiality. Guthy-Renker and GRTV have used
---------------
commercially reasonable measures to protect the secrecy, confidentiality and
value of the GRTV Intellectual Property included in the GRTV Assets.
(iii) Infringers. To the Knowledge of Guthy-Renker or GRTV,
----------
no person is infringing or misappropriating the GRTV Intellectual Property
included in the GRTV Assets. As of the date hereof, Guthy-Renker or GRTV have
not made any claim in writing of a violation, infringement, misuse or
misappropriation by others of rights of GRTV to or in connection with the GRTV
Intellectual Property included in the GRTV Assets.
(iv) Pending Claims. As of the date hereof, there is no
--------------
pending or, to the Knowledge of Guthy-Renker or GRTV, threatened claim by any
third person of a violation, infringement, misuse or misappropriation by GRTV of
any Intellectual Property owned by any third person, that would, individually or
in the aggregate, have a Material Adverse Effect on the GRTV Assets or the
ability of TVN to operate the GRTV Business. There are no interferences or other
contested inter partes proceedings, either pending or, to the Knowledge of
Guthy-Renker or GRTV, threatened, in any domestic or foreign copyright office,
patent and trademark office or any other Governmental Entity relating to any
pending application with respect to any GRTV Intellectual Property included in
the GRTV Assets.
(A) Clear Title. Each item of GRTV Intellectual
-----------
Property included in the GRTV Assets, including all Registered Intellectual
Property, is free and clear of any Liens of any kind. For purposes of this
subsection (iv), Liens will exclude any end-user licenses granted in the
ordinary course of business and Liens for Taxes not yet due and payable.
(B) Trademarks and Copyrights. GRTV (i) is the
-------------------------
exclusive owner of all trademarks and trade names included in the GRTV Assets
and (ii) owns exclusively, and has good title to, all copyrighted works that are
included in the GRTV Assets.
(C) Transfers.
---------
(1) GRTV has not transferred ownership of, or
granted any license of or right to use or authorized the retention of any rights
to use, any of the GRTV Intellectual Property included in the GRTV Assets to any
other person except for licenses of such GRTV Intellectual Property to
affiliates, OEMs, customers and end-users made in the ordinary course of
business.
(2) Guthy-Renker has not transferred ownership
of, or granted any license of or right to use or authorized the retention of any
GRTV Intellectual Property included in the GRTV Assets to any persons other then
GRTV and members of the GRC Group made in the ordinary course of business.
(D) Transferability. Except as set forth on the
---------------
Disclosure Schedule, all of the GRTV Intellectual Property included in the GRTV
Assets, including any item
-14-
<PAGE>
thereof, will be fully transferable, alienable or licensable by or between GRTV
and TVN or Newco without restriction and without payment of any kind to any
third party.
(E) No Loss of Rights. Other than with respect to the
-----------------
Third-Party Consents listed on Schedule 2.1(c) and the consents and approvals
listed on Schedule 2.2(c) and the transfers by Guthy-Renker and GRTV pursuant to
this Agreement, the consummation of the transactions contemplated by this
Agreement will not result in the loss of, or otherwise adversely affect, any
ownership rights of GRTV or Guthy-Renker in the GRTV Intellectual Property
included in the GRTV Assets or result in the breach or termination of any
license, contract or agreement to which GRTV or Guthy-Renker is a party with
respect to such GRTV Intellectual Property included in the GRTV Assets which
loss, breach or termination would have a Material Adverse Effect on the GRTV
Assets or the ability of TVN to operate the GRTV Business as currently conducted
by GRTV.
(F) Non-Infringement. To Guthy-Renker's Knowledge, the
----------------
conduct of the GRTV Business in the manner currently conducted by GRTV does not
infringe or misappropriate any Intellectual Property right of any third person,
or constitute unfair competition or trade practices under the laws of any
jurisdiction that would, individually or in the aggregate, have a Material
Adverse Effect on the GRTV Assets or TVN's ability to operate the GRTV Business
as currently conducted by GRTV, nor do Guthy-Renker or GRTV have Knowledge of
any basis therefor.
(G) No Claims. There are no contracts, licenses or
---------
agreements between GRTV and any other person with respect to the GRTV
Intellectual Property under which there is any dispute of which Guthy-Renker or
GRTV has Knowledge regarding the scope of such agreement or performance under
such agreement including with respect to any payments to be made or received by
GRTV thereunder.
(H) No Standing Orders. No GRTV Intellectual Property
------------------
included in the GRTV Assets is subject to any proceeding or outstanding decree,
order, judgement, agreement or stipulation that restricts in any manner the use,
transfer or licensing thereof by GRTV or that would have a Material Adverse
Effect on the GRTV Assets or the ability of TVN to operate the GRTV Business as
currently conducted by GRTV.
(v) Indemnification. Neither GRTV nor its affiliates have
---------------
entered into any agreement to indemnify any person against any charge of
infringement by a third party relating to the GRTV Intellectual Property
included in the GRTV Assets.
(0) Title to Properties; Absence of Liens and Encumbrances; Condition
-----------------------------------------------------------------
of Equipment.
------------
(i) Schedule 2.1(o) sets forth a true and complete list of all
real property owned or leased by GRTV and material tangible personal property
owned or leased by GRTV, and true, correct and complete copies of all such
leases have been delivered to TVN.
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<PAGE>
(ii) GRTV has good and valid title to, or, in the case of leased
properties and assets, valid leasehold interests in, all of the tangible
properties and assets, real, personal and mixed, included in the GRTV Assets,
free and clear of any Liens, except as reflected in Schedule 2.1(o) hereof and
except for such imperfections of title and encumbrances, if any, which are not
substantial in character, amount or extent, and which do not materially detract
from the value, or interfere with the present use, of the property subject
thereto or affected thereby.
(iii) The GRTV Assets constituting tangible personal property are
in good working condition, ordinary wear and tear excepted, and, to
Guthy-Renker's Knowledge, conform in all material respects to the requirements
of all laws, ordinances and regulations applicable to their use and ownership or
lease by GRTV; and the buildings and structures containing the premises of GRTV
are suitable in all material respects and properly zoned for the purpose for
which they are currently used, have been properly maintained in all material
respects in accordance with applicable leases to the extent GRTV is required to
do so, and there are no material outstanding work orders with respect to any
maintenance, repair or alterations to be performed by GRTV thereon, except in
any such case, which would not have a Material Adverse Effect on the GRTV Assets
or the ability of TVN to operate the GRTV Business as currently conducted by
GRTV.
(p) Environmental Matters.
---------------------
(i) No substance that is regulated by any Governmental Entity
or that has been designated by any Governmental Entity to be radioactive, toxic,
hazardous or otherwise a danger to health or the environment (a "Hazardous
Material") is present in, on or under any property that GRTV has at any time
owned, operated, occupied or leased as a result of the conduct of the GRTV
Business, except as permitted by the laws or regulations in force as of the date
hereof and except if any such case would not have a Material Adverse Effect on
the GRTV Assets or the ability of TVN to operate the GRTV Business as currently
conducted by GRTV.
(ii) GRTV has not transported, stored, used, manufactured,
released or exposed its employees or any other person to any Hazardous Material
in violation of any applicable statute, rule, regulation, order or law, except
where such violation would not have a Material Adverse Effect on the GRTV Assets
or the ability of TVN to operate the GRTV Business as currently conducted by
GRTV.
(iii) GRTV has obtained all permits, licenses and other
authorizations ("Environmental Permits"), if any, required to be obtained by it
under the laws of any Governmental Entity to which it is subject relating to
pollution or protection of the environment (collectively, "Environmental Laws"),
except where the failure to obtain such permit would not have a Material Adverse
Effect on the GRTV Assets or the ability of TVN to operate the GRTV Business.
The Disclosure Schedule sets forth a true and complete list of all material
Environmental Permits, if any, each of which is in full force and effect. GRTV
is in compliance in all material respects with (A) all terms and conditions of
the Environmental Permits and (B) all other material obligations contained in
the Environmental Laws or contained in any regulation, code, plan, order,
decree, judgment, notice or demand letter issued, entered, promulgated or
approved thereunder except where such
-16-
<PAGE>
violation would not have a Material Adverse Effect on the GRTV Assets or the
ability of TVN to operate the GRTV Business as currently conducted by GRTV. GRTV
has not received any notice and is not aware of any past or present condition or
practice of the business conducted by GRTV which forms or could reasonably be
expected to form the basis of any claim, action, suit, proceeding, hearing or
investigation against GRTV arising out of the manufacture, processing,
distribution, use, treatment, storage, spill, disposal, transport, or handling,
or the emission, discharge, release or threatened release into the environment,
of any Hazardous Material except where such violation would not have a Material
Adverse Effect on the GRTV Assets or the ability of TVN to operate the GRTV
Business as currently conducted by GRTV.
(q) Governmental Authorizations and Permits. The Disclosure Schedule
---------------------------------------
accurately lists all licenses, authorizations, permits, concessions,
certificates and other franchises of any Governmental Entity, if any, required
to operate the GRTV Business of which GRTV is the holder, other than the
Environmental Permits, except where the failure to obtain such licenses,
authorizations, permits, concessions, certificates and other franchises would
not have a Material Adverse Effect on the GRTV Assets or TVN's ability to
operate the GRTV Business as currently conducted by GRTV (collectively, the
"GRTV Permits"). The GRTV Permits, if any are included in the GRTV Assets, are
in full force and effect. There is not now pending or, to the Knowledge of
Guthy-Renker or GRTV, is there threatened, any action, suit, investigation or
proceeding against GRTV before any Governmental Entity with respect to the GRTV
Permits, if any are included in the GRTV Assets, nor is there any issued or
outstanding written notice, order or complaint with respect to the violation by
GRTV of the terms of any GRTV Permit included in the GRTV Assets or any rule or
regulation applicable thereto, except where such failure would not have a
Material Adverse Effect on the GRTV Assets or TVN's ability to operate the GRTV
Business as currently conducted by GRTV.
(r) Employee Benefit Plans and Compensation.
---------------------------------------
(i) For purposes of this Section 2.1(r) and elsewhere in this
Agreement, the following terms shall have the meanings set forth below:
(A) "Affiliate" shall mean any other person or entity
---------
under common control with GRTV within the meaning of Section 414(b), (c), (m) or
(o) of the Code and the regulations thereunder.
(B) "Employee Plan" shall refer to any plan, program,
-------------
policy, practice, contract, agreement or other arrangement providing for
bonuses, severance, retention, termination pay, deferred compensation, pensions,
profit sharing, performance awards, phantom stock, stock appreciation rights,
other stock or stock-related awards, fringe benefits or other employee benefits
of any kind, whether formal or informal, written or otherwise, funded or
unfunded and whether or not legally binding.
(C) "Employee" shall mean any current, former or retired
--------
employee, consultant, officer or director of GRTV.
-17-
<PAGE>
(D) "Employee Agreement" shall refer to each employment,
------------------
severance, consulting or similar agreement or contract between GRTV and any
Employee.
(ii) Schedule. Schedule 2.1(r) contains an accurate and
--------
complete list of each Employee Plan and each Employee Agreement currently
maintained by GRTV as of the Effective Closing Date and the date hereof (each, a
"GRTV Employee Plan").
(iii) Documents. GRTV has provided or made available to TVN and
---------
Newco, (i) correct and complete copies of all documents embodying each GRTV
Employee Plan and each Employee Agreement including all amendments thereto and
copies of all forms of agreement and enrollment used therewith; (ii) the most
recent annual actuarial valuations, if any, prepared for each GRTV Employee
Plan; (iii) the most recent annual report (Series 5500 and all schedules
thereto), if any, required under the GRTV Employee Retirement Income Security
Act of 1974, as amended ("ERISA") or the Code in connection with each GRTV
Employee Plan or related trust; (iv) the most recent summary plan description
together with the most recent summary of material modifications thereto, if any,
required under ERISA with respect to each GRTV Employee Plan; (v) all Internal
Revenue Service ("IRS") determination letters, if any, relating to GRTV Employee
Plans; (vi) if the GRTV Employee Plan is funded, the most recent annual and
periodic accounting of GRTV Employee Plan assets; and (vii) administrative
service agreements, group annuity contracts and group insurance contracts that
are included in the GRTV Assets.
(iv) Pension Plans. GRTV does not now, nor, to the Knowledge of
-------------
GRTV or Guthy-Renker has it ever, maintained, established, sponsored,
participated in, or contributed to, any Employee Plan, which is subject to Title
IV of ERISA or Section 412 of the Code.
(v) Multiemployer Plans. To the Knowledge of GRTV or Guthy-
-------------------
Renker, at no time has GRTV contributed to or been obligated to contribute to
any multiemployer plan, as defined in Section 3(37) of ERISA.
(vi) Employment Matters. Except for violations that would not
------------------
have a Material Adverse Effect on the GRTV Assets or TVN's ability to operate
the GRTV Business as currently conducted by GRTV, individually or collectively,
GRTV (i) is in compliance with all applicable laws, rules and regulations
respecting employment, employment practices, terms and conditions of employment
and wages and hours, in each case, with respect to Employees in all material
respects; (ii) has withheld all amounts required by law or by agreement to be
withheld from the wages, salaries and other payments to Employees or other
persons who by virtue of their activities performed on behalf of GRTV may be
deemed employees within the meaning of applicable law; (iii) is not liable for
any arrears of wages or any taxes or any penalty for failure to comply with any
of the foregoing; and (iv) is not liable for any payment to any trust or other
fund or to any governmental or administrative authority, with respect to
unemployment compensation benefits, social security or other benefits or
obligations for Employees or other persons who by virtue of their activities
performed on behalf of GRTV may be deemed employees within the meaning of
applicable law (other than routine payments to be made in the normal course of
business and consistent with past practice).
-18-
<PAGE>
(s) Transactions with Affiliates. Except as set forth on the
----------------------------
Disclosure Schedule, as contemplated in this Agreement and for regular salary
payments and fringe benefits under an individual's compensation package with
GRTV and confidentiality, nondisclosure and technology assignment agreements,
none of the officers, employees or directors of GRTV is a party to any
transactions with GRTV. Except as set forth in the Interim Balance Sheet and the
January 3, 1999 Balance Sheet, there have been no assumptions or guarantees by
GRTV of any obligations of such individuals.
(t) Interests of Officers. Except as set forth on the
---------------------
Disclosure Schedule, none of GRTV's officers or directors has any material
interest in any of the GRTV Assets or is a beneficiary of any of the GRTV
Liabilities other than the GRTV Liabilities relating to the Thomas Employment
Agreement.
(u) Brokers. No agent, broker, investment banker or other firm
-------
or person is or will be entitled to any broker's or finder's fee or any other
commission or similar fee ("Broker's or Finder's Fee") by any action of any
member of the GRC Group on behalf of GRTV in connection with any of the
transactions contemplated by this Agreement.
(v) Customers; Backlog; Returns and Complaints.
------------------------------------------
Schedule 2.1(v) sets forth a true, correct and complete list of the current
customers of GRTV as of the Execution Date ("Customers"). To Guthy-Renker's and
GRTV's Knowledge, (i) as of the date hereof there are no material complaints by
Customers concerning GRTV's services and (ii) there are no former customers of
GRTV that have terminated their agreements with GRTV or failed to renew such
agreements due to unresolved disputes with or complaints to GRTV.
(w) Employees. The Disclosure Schedule identifies all current
---------
GRTV employees and sets forth the job title of each such employee. GRTV has
previously provided to TVN and Newco a schedule setting forth the cash
compensation of the employees listed on the Disclosure Schedule during the
period from January 1, 1998 to June 28, 1999. As of the date hereof, none of the
employees identified as key employees on the Disclosure Schedule has tendered to
Guthy-Renker a written or oral notice ofhis or her intention to resign or
retire.
(x) Questionable Payments. None of Guthy-Renker or GRTV nor,
---------------------
to the Knowledge of Guthy-Renker or GRTV, after reasonable inquiry, any
director, officer or other employee of GRTV has: (i) made any payments or
provided services or other favors in the United States of America or in any
foreign country in order to obtain preferential treatment or consideration by
any Governmental Entity with respect to any aspect of the GRTV Business; or (ii)
made any political contributions which would not be lawful under the laws of the
United States (including the Foreign Corrupt Practices Act) or the foreign
country in which such payments were made with respect to any aspect of the GRTV
Business. None of Guthy-Renker or GRTV, nor, to the Knowledge of Guthy-Renker or
GRTV after reasonable inquiry, any director, officer or other employee of GRTV,
nor, to Guthy-Renker or GRTV's Knowledge after reasonable inquiry, any supplier
of GRTV has been the subject of any inquiry or investigation by any Governmental
Entity in connection with payments or benefits or other favors to or for the
benefit of any governmental or
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<PAGE>
armed services official, agent, representative or employee with respect to any
aspect of the GRTV Business or with respect to any political contribution made
by GRTV.
(y) Import/Export. GRTV has not violated any United States
-------------
and foreign import and export control laws and regulations, import and export
licensing laws and regulations and customs regulations applicable to GRTV where
the failure to comply would have a Material Adverse Effect on the GRTV Assets or
TVN's ability to operate the GRTV Business. GRTV has not been cited by the
United States Department of Commerce, the United States Customs Service or any
other relevant Governmental Entity for any material violation of United States
laws or regulations relating to importing or exporting of products, materials or
services. All goods imported into the United States or any other country by GRTV
and included in the GRTV Assets, if any ("Imported Goods"), have with such
exceptions as are not material to the GRTV Assets been properly valued and
classified in accordance with applicable tariff laws, rules and regulations and
all proper duties, tariffs or excise taxes have been paid with respect to the
Imported Goods. No penalties have been assessed, asserted or claimed with
respect to any Imported Goods.
(z) Sufficiency of GRTV Assets. Except as set forth on the
--------------------------
Disclosure Schedule, the GRTV Assets (including the GRTV Intellectual Property
included therein) comprise all of the material assets of GRTV used by it to
operate the GRTV Business in the ordinary course as currently conducted.
(aa) Disclosure. With respect to this Section 2.1, no
----------
representation or warranty made by Guthy-Renker or GRTV, nor the Disclosure
Schedule and other Schedules to this Agreement contains as of the Execution Date
any untrue statement of a material fact, or omits as of the Execution Date to
state a material fact necessary to make the statements or facts contained herein
or therein not misleading in light of the circumstances under which they were
furnished.
2.2 Representations and Warranties of Guthy-Renker. Except as
----------------------------------------------
disclosed in the Disclosure Schedule, Guthy-Renker represents and warrants to
TVN and Newco as of the Execution Date as set forth below.
(a) Organization, Standing and Power. Guthy-Renker is a
--------------------------------
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware and has all requisite power and authority to own,
operate and lease its properties and to carry on its business as now being
conducted or as proposed to be conducted.
(b) Authority.
---------
(i) Guthy-Renker has all requisite corporate power and
authority to enter into this Agreement and the Supplemental Agreements to which
Guthy-Renker is a party, to perform its obligations hereunder and thereunder,
and to consummate the transactions contemplated hereby and pursuant to such
Supplemental Agreements to which Guthy-Renker is a party. The execution and
delivery of this Agreement and the Supplemental Agreements, the performance by
Guthy-Renker of its obligations hereunder and thereunder, and the consummation
of the transactions contemplated hereby and thereby have been duly and validly
authorized by all necessary corporate
-20-
<PAGE>
action on the part of Guthy-Renker, including the approval by the Board of
Directors of GuthyRenker. This Agreement has been duly executed and delivered by
Guthy-Renker and constitutes a legal, valid and binding obligation of Guthy-
Renker enforceable against Guthy-Renker in accordance with the terms herein,
except as enforcement may be limited by bankruptcy, insolvency, or other similar
laws affecting the enforcement of creditors' rights generally and except that
the availability of equitable remedies is subject to the discretion of the court
before which any proceeding therefor may be brought.
(ii) Except as set forth in the Disclosure Schedule,
the execution and delivery of this Agreement does not, and the consummation of
the transactions contemplated hereby will not conflict with or result in any
violation of any material statute, law, rule, regulation, judgment, order,
decree, or ordinance applicable to Guthy-Renker or its properties or assets, or
conflict with or result in any breach or default (with or without notice or
lapse of time, or both) under, or give rise to a right of termination,
cancellation or acceleration of any obligation or to loss of a material benefit
under, or result in the creation of a Lien on any of the GRTV Assets pursuant to
any provision of (A) the certificate of incorporation or bylaws of Guthy-Renker
or (B) any material agreement, contract, note, mortgage, indenture, lease,
instrument, permit, concession, franchise or license to which Guthy-Renker is a
party or by which Guthy-Renker or any of its respective properties or assets may
be bound or affected, except for any conflict, violation, breach, right, lien or
encumbrance that would not have a Material Adverse Effect on Guthy-Renker's
ability to fulfill its obligations under this Agreement or under the Supplement
Agreements and Loan Documents to which Guthy-Renker is a party.
(iii) No consent, approval, order or authorization
of, or registration, declaration or filing with, any Governmental Entity, is
required by or with respect to Guthy-Renker in connection with the execution and
delivery of this Agreement or the consummation of the transactions contemplated
hereby, except for such consents, authorizations, filings, approvals, orders,
declarations and registrations which if not obtained or made would not have a
Material Adverse Effect on Guthy-Renker's ability to fulfill its obligations
under this Agreement or under the Supplemental Agreements to which Guthy-Renker
is a party. Any consents, approvals or authorizations of third parties required
in connection with the transactions contemplated by this Agreement and the
Supplemental Agreements to which Guthy-Renker is a party are listed on Schedule
2.2(b) hereto.
(iv) Ownership of Capital Stock. Guthy-Renker is the
--------------------------
sole stockholder of GRTV (except as set forth on the Disclosure Schedule) and
has full power and authority to cause GRTV to transfer the GRTV Assets to TVN
and Newco.
(c) Conflicts of Interest of Stockholders. Except as set forth
-------------------------------------
on the Disclosure Schedule, Guthy-Renker has no direct or indirect ownership
interest representing 25% or more of the capital stock of any firm or
corporation listed on Schedule 2.2(c) hereto which competes with GRTV, or in any
other firm or corporation which has a significant business relationship with
GRTV (other than with respect to the GRC Intercompany Liabilities, the GRC Lines
of Credit and Guthy-Renker's interest, through GRTV, in Coast to Coast).
-21-
<PAGE>
(d) Disclosure of Information. Guthy-Renker represents that it, its
-------------------------
advisors and representatives have had an opportunity to review such documents,
instruments, and books and records and to ask questions and receive answers from
TVN regarding the terms and conditions contemplated by this Agreement and the
assets, liabilities and condition (financial or otherwise) of TVN and such other
matters as Guthy-Renker has deemed necessary. The foregoing, however, does not
limit or modify the representations and warranties with respect to TVN and Newco
set forth in this Agreement or the right of Guthy-Renker and GRTV to rely
thereon.
(e) No Violations of Representations. Neither Guthy-Renker nor any of
--------------------------------
its officers, directors or agents has Knowledge that any of the representations
and warranties made by TVN herein are inaccurate or incomplete or that a breach
of any such representation or warranty has occurred or is occurring. Neither
Guthy-Renker nor any of its officers, directors or agents has failed to disclose
to TVN the fact of such inaccurate or incomplete representation or warranty, or
that a breach has occurred, or failed to give TVN the opportunity to correct
such inaccurate or incomplete representation or warranty or to cure such breach.
(f) Disclosure. With respect to this Section 2.2, no representation or
----------
warranty made by Guthy-Renker, nor the Disclosure Schedule and other Schedules
to this Agreement or the Exhibits to this Agreement contains as of the Execution
Date hereof any untrue statement of a material fact or omits as of the Execution
Date to state a material fact necessary to make the statements or facts
contained herein or therein not misleading in light of the circumstances under
which they were furnished.
2.3 Investment Representations of Guthy-Renker and GRTV. Guthy-Renker
----------------------------------------------------
and GRTV represent and warrant to TVN and Newco as of the Execution Date with
respect to the Promissory Note and the shares of TVN Common Stock issuable upon
conversion thereof.
(a) Purchase Entirely for Own Account. This Agreement is made
---------------------------------
with TVN and Newco in reliance upon Guthy-Renker's and GRTV's representations to
TVN and Newco, which by Guthy-Renker's and GRTV's execution of this Agreement,
Guthy-Renker and GRTV hereby confirm, that the Promissory Note and the shares of
TVN Common Stock into which such Promissory Note is convertible will be acquired
for investment for GRTV's own account, not as a nominee or agent, and not with a
view to the resale or distribution of any part thereof and that GRTV has no
present intentions of selling, granting any participation in, or otherwise
distributing the same.
(b) Investment Experience. Guthy-Renker and GRTV understand that the
----------------------
Promissory Note and the shares of TVN Common Stock into which such Promissory
Note is convertible have not been, and prior to an appropriate registration
statement's becoming effective will not be, registered under the Securities Act,
by reason of a specific exemption from the registration provisions of the
Securities Act which depends upon, among other things, the bona fide nature of
the investment intent and the accuracy of Guthy-Renker's and GRTV's
representations as expressed herein. Guthy-Renker and GRTV acknowledge that they
are able to fend for themselves, can bear the economic risk of such investment
and have such knowledge and experience in financial and business matters that
they are capable of evaluating the merits and risks of the investment in the
-22-
<PAGE>
Promissory Note and the shares of TVN Common Stock into which such Promissory
Note may be converted.
(c) Legends. Guthy-Renker and GRTV understand that the shares
-------
of TVN Common Stock into which the Promissory Note may be converted may bear one
or all of the following legends:
(i) "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT
TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED."
(ii) Any legend required by the Blue Sky laws of any state to
the extent such laws are applicable to the shares represented by the certificate
so legended.
A certificate shall not bear such legends if in the opinion of
counsel reasonably satisfactory to TVN the securities represented thereby may be
publicly sold without registration under the Securities Act and any applicable
state securities laws.
(d) Restricted Securities. Guthy-Renker and GRTV understand that
---------------------
the Promissory Note may be and the shares of TVN Common Stock into which such
Promissory Note may be converted will be characterized as "restricted
securities" under the federal securities laws inasmuch as they are being
acquired from TVN and Newco in a transaction not involving a public offering and
that under such laws and applicable regulations such Promissory Note and the
shares of TVN Common Stock into which such Promissory Note may be converted may
be resold without registration under the Securities Act only in certain limited
circumstances. Guthy-Renker and GRTV acknowledge that the Promissory Note and
the shares of TVN Common Stock into which such Promissory Note may be converted
must be held indefinitely unless subsequently registered under the Securities
Act or an exemption from such registration is available.
(e) Accredited Investor. GRTV is an accredited investor as defined
-------------------
in Rule 501(a) of Regulation D promulgated under the Securities Act.
2.4 Representations and Warranties of TVN and Newco regarding Newco.
---------------------------------------------------------------
Except as disclosed in the schedules attached hereto and hereby made a part
hereof, referring specifically to the representations and warranties in this
Agreement which identifies the section and subsection to which such disclosure
relates and which has been delivered by TVN and Newco to Guthy-Renker and GRTV
prior to the execution of this Agreement (the "TVN Disclosure Schedule"), TVN
and Newco jointly and severally represent and warrant as of the Execution Date
to Guthy-Renker and GRTV as set forth below.
(a) Organization, Standing and Power. Newco is a corporation
--------------------------------
validly existing and in good standing under the laws of the State of Delaware
and has all requisite corporate power
-23-
<PAGE>
and authority to own, lease and operate its properties and to carry on its
business as now being conducted or proposed to be conducted pursuant to this
Agreement, the Supplemental Agreements and the Loan Documents.
(b) Newco Capital Structure. The authorized capital stock of Newco
-----------------------
consists of 1,000 shares of Common Stock, par value $0.001 per share ("Newco
Common Stock") and no shares of preferred stock. There are issued and
outstanding 1,000 shares of Newco Common Stock that are owned by TVN and are
free and clear of any Liens. The outstanding Newco Common Stock is validly
issued, fully paid and nonassessable and not subject to preemptive rights
created by statute, or by Newco's Certificate of Incorporation or Bylaws, each
as in effect as of the Closing Date, or by any agreement to which TVN or Newco
is a party or to which TVN or Newco may be bound. The Newco Common Stock was
issued in compliance with federal and state securities laws, except for any
noncompliance that would not have a Material Adverse Effect on Newco or Newco's
ability to acquire GRTV Assets or fulfill its obligations pursuant to this
Agreement, the Supplemental Agreements and the Loan Documents. Other than as set
forth in this Section 2.4(b), there are no outstanding shares of Newco Common
Stock, preferred stock or any other equity securities of Newco, and there are no
options, warrants, calls, conversion rights, commitments or agreements of any
character to which Newco or TVN is a party or by which Newco or TVN may be bound
that require Newco to issue any of the foregoing.
(c) Authority.
---------
(i) Newco has all requisite corporate power and authority to
enter into this Agreement, the Supplemental Agreements and the Loan Documents,
to perform its obligations hereunder and thereunder, and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of this
Agreement, the Supplemental Agreements and the Loan Documents, the performance
by Newco of its obligations hereunder and thereunder and the consummation of the
transactions contemplated hereby and thereby have been duly and validly
authorized by all necessary corporate action on the part of Newco, including the
unanimous approval by the Board of Directors of Newco and the consent of TVN.
This Agreement, the Supplemental Agreements and the Loan Documents have been
duly executed and delivered by Newco and constitute legal, valid and binding
obligations of Newco enforceable against Newco in accordance with the terms
herein and therein, except as enforcement may be limited by bankruptcy,
insolvency, or other similar laws affecting the enforcement of creditors' rights
generally and except that the availability of equitable remedies is subject to
the discretion of the court before which any proceeding therefor may be brought.
(ii) Except as set forth in the Disclosure Schedule,
the execution and delivery of this Agreement, the Supplemental Agreements and
the Loan Documents do not, and the consummation of the transactions contemplated
hereby and thereby will not conflict with or result in any violation of any
material statute, law, rule, regulation, judgment, order, decree or ordinance
applicable to Newco or its properties or assets, or conflict with or result in
any breach or default (with or without notice or lapse of time, or both) under,
or give rise to a right of termination, cancellation or acceleration of any
obligation or to loss of a material benefit under, or result in the
-24-
<PAGE>
creation of a Lien on any of the properties or assets of Newco pursuant to (A)
any provision of the Certificate of Incorporation or Bylaws of Newco or (B) any
material agreement, contract, note, mortgage, indenture, lease, instrument,
permit, concession, franchise or license to which Newco is a party or by which
Newco or any of its properties or assets may be bound or affected, except for
any conflict, violation, breach, default, right, Lien or encumbrance which would
not have a Material Adverse Effect on Newco, Newco's interest in the GRTV Assets
or TVN's ability to operate the GRTV Business or Newco's ability to fulfill its
obligations hereunder or thereunder. No consents, waivers and approvals under
any of Newco's agreements, contracts, licenses or leases are required to be
obtained in connection with the consummation of the transactions contemplated
hereby and by the Supplemental Agreements and the Loan Documents.
(iii) No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity, is required
by or with respect to Newco in connection with the execution and delivery of
this Agreement, the Supplemental Agreements and the Loan Documents, or the
consummation of the transactions contemplated hereby or thereby, except for (A)
such consents, approvals, orders, authorizations, registrations, declarations
and filings as may be required under the laws of any foreign country, which if
not obtained or made would not have a Material Adverse Effect on Newco and (B)
such other consents, authorizations, filings, approvals and registrations which
if not obtained or made would not have a Material Adverse Effect on Newco or
Newco's ability to fulfill its obligations hereunder or thereunder.
(d) Absence of Prior Business Activity. Prior to the Execution
----------------------------------
Date, Newco has conducted no business activities and has no assets, liabilities
or obligations (whether absolute, accrued or contingent, and whether or not
determined or determinable) other than those provided by or due to TVN in
connection with the initial capitalization of Newco.
(e) Disclosure. With respect to this Section 2.4, no
----------
representation or warranty made by TVN or Newco regarding Newco, nor the TVN
Disclosure Schedule and other Schedules to this Agreement or the Exhibits to
this Agreement contains as of the Execution Date any untrue statement of a
material fact or omits as of the Execution Date to state a material fact
necessary to make the statements or facts contained herein or therein not
misleading in light of the circumstances under which they were furnished.
2.5 Representations and Warranties of TVN. Except as disclosed in the
-------------------------------------
TVN Disclosure Schedule, TVN represents and warrants as of the Execution Date to
Guthy-Renker and GRTV as set forth below.
(a) Organization; Standing and Power. TVN is a corporation duly
--------------------------------
incorporated, validly existing and in good standing under the laws of the State
of Delaware and has all requisite corporate power and authority to own, lease
and operate its properties and to carry on its businesses as now being
conducted.
-25-
<PAGE>
(b) Authority.
---------
(i) TVN has all requisite corporate power and authority to
enter into this Agreement, the Supplemental Agreements and the Loan Documents
and to consummate the transactions contemplated hereby and thereby. The
execution and delivery by TVN of this Agreement, the Supplemental Agreements,
the Loan Documents and the consummation of the transactions contemplated by this
Agreement, Supplemental Agreements and the Loan Documents have been duly
authorized by all necessary corporate action on the part of TVN, including the
approval by the board of directors of TVN. This Agreement has been duly executed
and delivered by TVN and constitutes a valid and binding obligation of TVN
enforceable in accordance with its terms, except as enforcement may be limited
by bankruptcy, insolvency, or other similar laws affecting the enforcement of
creditors' rights generally and except that the availability of equitable
remedies is subject to the discretion of the court before which any proceeding
therefor may be brought.
(ii) Except as set forth in the Disclosure Schedule, the
execution and delivery of this Agreement, the Supplemental Agreements and the
Loan Documents and the consummation of the transactions contemplated hereby and
thereby will not conflict with or result in any violation of any material
statute, law, rule, regulation, judgment, order, decree or ordinance applicable
to TVN or its properties or assets, or conflict with or result in any breach or
default (with or without notice or lapse of time, or both) under, or give rise
to a right of termination, cancellation or acceleration of any obligation or to
loss of a material benefit under, or result in the creation of a Lien on any of
the properties or assets of TVN, under (A) any provision of the charter
documents or bylaws of TVN or (B) any material agreement, contract, note,
mortgage, indenture, lease, instrument, permit, concession, franchise or license
to which TVN is a party or by which TVN or its properties or assets may be bound
or affected.
(iii) No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity is required by
or with respect to TVN in connection with the execution and delivery of this
Agreement, the Supplemental Agreements to which it is a party or the Loan
Documents or the consummation by TVN of the transactions contemplated hereby and
thereby except for such consents, approvals, orders, authorizations,
registrations, declarations and filings which if not obtained or made would not
have a Material Adverse Effect on TVN or on TVN's ability to fulfill its
obligations hereunder and under the Supplemental Agreements to which it is a
party or the Loan Documents.
(c) SEC Documents; TVN Financial Statements. TVN has furnished or made
---------------------------------------
available to Guthy-Renker a true and complete copy of its Registration Statement
on Form S-4 and the amendments filed to date to such Registration Statement
(collectively, the "SEC Documents"), which TVN filed under the Securities Act of
1933, as amended (the "Securities Act"), with the Securities and Exchange
Commission (the "SEC"). As of their respective filing dates, the SEC Documents
complied in all material respects with the requirements of the Securities Act,
and none of the SEC Documents contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary
in order to make the statements made therein, in light
-26-
<PAGE>
of the circumstances under which they were made, not misleading, except to the
extent corrected by a document subsequently filed by or on behalf of TVN with
the SEC and included in the SEC Documents. The consolidated financial statements
of TVN, including the notes thereto, included in the SEC Documents (the "TVN
Financial Statements") are complete and correct, comply as to form in all
material respects with applicable accounting requirements and with the published
rules and regulations of the SEC with respect thereto, have been prepared in
accordance with GAAP applied on a consistent basis throughout the periods
involved (except as may be indicated in the notes thereto or, in the case of
unaudited statements, as permitted by the SEC's rules and regulations), and
fairly present the consolidated financial position of TVN and the results of its
operations and cash flows as of the respective dates and for the periods
indicated thereon (subject, in the case of the unaudited statements, to normal
recurring accounting adjustments). There has been no change in TVN's accounting
policies or estimates except as described in the notes to the TVN Financial
Statements.
(d) No Material Adverse Change. Since March 31, 1999, TVN has
--------------------------
conducted its business in the ordinary and usual course and there has not
occurred: (a) any material adverse change in the financial condition, results of
operations, liabilities, assets (including intangible assets), business of TVN
and its Subsidiaries, taken as a whole; (b) any amendment or change in the
Certificate of Incorporation or Bylaws of TVN; or (c) any damage to, destruction
or loss of any assets of TVN or its Subsidiaries (whether or not covered by
insurance) that materially and adversely affects the financial condition or
business of TVN and its Subsidiaries, taken as a whole.
(e) Litigation. There is no action, suit or proceeding of any nature
----------
pending or to TVN's Knowledge, threatened against TVN or any Subsidiary, nor, to
the Knowledge of TVN, is there any reasonable basis therefor which could
reasonably be expected to result in a Material Adverse Effect on TVN or TVN's
ability to fulfill its obligations hereunder and under the Supplemental
Agreements to which it is a party and the Loan Documents.
(f) Compliance with Law. TVN and each of its Subsidiaries is in
-------------------
compliance and has conducted its business so as to comply with all laws, rules
and regulations, judgments, decrees or orders of any Governmental Entity
applicable to its operations or with respect to which compliance is a condition
of engaging in the business thereof, except to the extent that failure to comply
would, individually or in the aggregate, not have had and is excepted not to
have a Material Adverse Effect on TVN or TVN's ability to fulfill its
obligations hereunder and under the Supplemental Agreements to which it is a
party and the Loan Documents. There are no material judgments or orders,
injunctions, decrees, stipulations or awards (whether rendered by a court or
administrative agency or by arbitration), other than those (to the Knowledge of
TVN) that are applicable to the industry as a whole, against TVN, its
Subsidiaries or other affiliates regarding TVN's or any of its Subsidiaries'
business or against any of TVN's or any of its Subsidiaries' respective
properties or business.
(g) No Defaults. TVN is not, nor has it received notice that it would
-----------
be with the passage of time, (i) in violation of any provision of the
Certificate of Incorporation or Bylaws of TVN or (ii) in default or violation of
any material term, condition or provision of (A) any material judgement, decree,
order, injunction or stipulation applicable to TVN or (B) any material
agreement,
-27-
<PAGE>
note, mortgage, indenture, contract, lease or instrument, permit, concession,
franchise or license to which TVN is a party or by which TVN or its properties
or assets may be bound.
(h) Brokers. No agent, broker, investment banker or other firm or
-------
person is or will be entitled to any Broker's or Finder's Fee by reason of any
action for or on behalf of TVN in connection with any of the transactions
contemplated by this Agreement.
(i) No Violations of Representations. Neither TVN nor any of its
--------------------------------
officers, directors or agents has knowledge that any of the representations and
warranties made by Guthy-Renker and GRTV herein are inaccurate or incomplete or
that a breach of any such representation or warranty has occurred or is
occurring. Neither TVN nor any of its 6fficers, directors or agents has failed
to disclose to Guthy-Renker and GRTV the fact of such inaccurate or incomplete
representation or warranty, or that a breach has occurred, or failed to give
Guthy-Renker and GRTV the opportunity to correct such inaccurate or incomplete
representation or warranty or to cure such breach.
(j) Disclosure. With respect to this Section 2.5, no representation or
----------
warranty made by TVN, nor the TVN Disclosure Schedule and other Schedules to
this Agreement or the Exhibits to this Agreement contains as of the Execution
Date hereof any untrue statement of a material fact or omits as of the Execution
Date to state a material fact necessary to make the statements or facts
contained herein or therein not misleading in light of the circumstances under
which they were furnished.
ARTICLE III
POST-CLOSING COVENANTS
3. 1 Expenses. All costs and expenses incurred in connection with this
--------
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such expense other than as set forth in Section 3.4 hereof.
3.2 Public Announcements. TVN, Newco, Guthy-Renker and GRTV agree that
--------------------
none of them shall, nor shall they permit their affiliates to: (i) issue any
press release or make any public announcement with respect to this Agreement or
the transactions contemplated by this Agreement or (ii) publicly file all or any
part of this Agreement or the Exhibits hereto or any description thereof, except
as may be required by any applicable law, governmental rule or regulation
(including for this purposes any rules of any securities exchange on which
shares of stock of TVN are or may be traded), except with the prior consultation
with, review of and consent by Guthy-Renker or TVN, as the case may be. If any
party is subject to any such legal or regulatory requirement, such party shall,
to the extent possible, allow the other party (TVN or Guthy-Renker, as the case
may be), reasonable time to review and comment on such release, announcement or
filing in advance of its issuance or filing and use reasonable efforts in good
faith to accept the reasonable and good faith comments of such other party;
provided, however, that prior to the filing of this Agreement with the
Securities and Exchange Commission, should such filing be necessary, no such
prior review by the other party shall be required. It is the intention of the
parties that the initial announcement of the execution of this Agreement or the
transactions contemplated hereby shall be a joint press release of the parties
and
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that the contents of such press release shall be agreed upon as of the date
hereof by each of the parties.
3.3 [Intentionally Deleted].
3.4 Transfer Taxes. TVN and Newco shall be responsible for and shall pay
--------------
and discharge promptly when due all sales, use, excise, value added or other
similar transfer taxes (the "Transfer Taxes") related to the sale of the GRTV
Assets to Newco. Guthy-Renker, GRTV, TVN and Newco shall cooperate in good faith
to take all reasonable steps to reduce or eliminate any transfer taxes,
including, where available, electronic transmission and delivery of the GRTV
Assets; provided, however, that in no event shall Guthy~Renker or GRTV be
required to pay or incur any out of pocket costs or expenses in connection
therewith.
3.5 GRTV Employees. Effective as of the Execution Date, TVN will offer
--------------
employment to all those persons who are GRTV Employees on such date (including
employees on leave, disability or workers compensation) and such employment will
be on substantially the same terms and conditions (including without
limitation, the same base pay and comparable benefits in the aggregate) as
currently in effect with GRTV; provided, however that such Employees shall be
entitled only to the salary structure and those benefits generally available to
similarly situated employees of TVN and its Subsidiaries; and provided further
that the terms of the offers of employment to Thomas, Riley and Brooke Thomas
shall be governed by employment agreements between Newco and such individuals.
The benefits to be provided to the Employees shall recognize all service
recognized by GRTV for all purposes to the extent permitted by law. The
employment of all Employees with Newco will be deemed to have commenced
immediately after 11:59 p.m., Los Angeles local time, on the Execution Date.
Guthy-Renker and GRTV agree to (i) terminate the employment with GRTV of the
Employees who have agreed to become employees of Newco at Closing and to pay any
and all liabilities relating to such termination, including, without limitation
any payments and benefits due such Employees pursuant to accrued salary and
wages, pension, retirement, savings, health, welfare and other benefits of the
Employees under any Guthy-Renker or GRTV plans, policies or practices,
(provided, however, that Newco shall be responsible for and shall pay any and
all severance payments payable to Employees hired by Newco hereunder and
relating to their employment by Newco (the "Post Closing Severance Obligation"),
and all bonuses and accrued vacation to Employees included in the GRTV
Liabilities); such payment to be made in a manner consistent with GRTV's
policies and procedures applicable to its employees, and (ii) provide to each
Employee any notice (which notice shall be reasonably acceptable to TVN and
Newco) required under any law or regulations in respect of such termination
including, without limitation COBRA. Guthy-Renker and Newco shall be responsible
for providing continuation health coverage, to the extent required under COBRA,
to all Employees and their eligible dependents who have experienced a qualifying
event before or on the Execution Date and who (i) elect continuation coverage
within the time period prescribed by COBRA and (ii) who are otherwise qualified
beneficiaries (as defined in Section 4980B(g)(l) of the Code).
3.6 GRTV Designations. The parties hereto agree that during the period
-----------------
commencing as of the Effective Closing Date and continuing until the one (1)
year anniversary date thereof, Newco
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shall have the right to use the trademarks and tradenames "GRTV" and "GRTV
Network" as identified in Schedule 2.1(n), Item 1 (collectively, the "GRTV
Designations") solely in connection with the operation of the GRTV Business by
Newco consistent with the use of the GRTV Designations by GRTV on the Execution
Date; provided, however, that in no event shall the GRTV Designations be used in
connection with the pay per view business of TVN and/or its affiliates. TVN and
Newco agree to use their best efforts to (i) cause the GRTV Designations used by
Newco hereunder to be changed to exclude the name "Guthy-Renker" and (ii) cause
Newco to oversticker or replace any document, packaging, advertisement or other
reference to the GRTV Designations, in either case including any variation or
stylized version of such GRTV Designations in both cases as soon as practicable
after the Execution Date and in all events on or to the first anniversary of
the Effective Closing Date. However, TVN and Newco shall have no obligation to
make any changes to any document, packaging, advertisement or other reference to
Guthy-Renker or the GRTV Designations that have been delivered to any supplier,
customer or creditor of GRTV by Guthy-Renker or GRTV prior to the Execution
Date.
3.7 Access to Books, Records and Employees. Guthy-Renker and GRTV shall
--------------------------------------
provide to TVN and Newco, and Newco and TVN shall provide to Guthy-Renker and
GRTV, and any of such parties' professional advisors upon prior notice access to
the books and records of Newco and GRTV, as the case may be, and to employees of
Newco and GRTV, as the case may be, as may be reasonably necessary or take any
actions necessary to fulfill their obligations pursuant to this Agreement, the
Supplemental Agreements and the Loan Documents.
3.8 Financial Information and Reports. Until the Promissory Note is paid
---------------------------------
in full, TVN and Newco shall furnish to Guthy-Renker:
(a) as soon as available and in any event within forty-five (45) days
after the end of each interim fiscal quarter of each fiscal year of TVN, a
consolidated and consolidating balance sheet of TVN and its subsidiaries as of
the end of such interim fiscal period, and a consolidated and consolidating
statement of earnings and shareholders' equity of TVN and its subsidiaries for
such fiscal period and for the period beginning on the first day of such fiscal
year and ending on the date of such balance sheet, setting forth in comparative
form the corresponding figures for the corresponding period of the preceding
fiscal year, all in reasonable detail and certified by the chief financial
officer of TVN;
(b) as soon as available and in any event within ninety (90) days
after the last day of each fiscal year of TVN, consolidated and consolidating
financial statements which have been examined by TVN's regular independent
public accountants of recognized standing, covering the operations of TVN and
its subsidiaries as of the end of such year, and a consolidated and
consolidating statement of earnings, shareholders' equity and changes in
financial position for TVN and its subsidiaries for the year then ended, each on
a comparative basis with corresponding financial statements for the preceding
fiscal year, which financial statements shall be accompanied by a report of such
independent public accountants stating in substance that such financial
statements have been prepared in accordance with GAAP consistently applied;
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(c) promptly upon any officer of TVN learning of the same, notice of
the occurrence of any material change in the financial status of TVN, and notice
of the initiation of any litigation against TVN which could, if adversely
determined, have a Material Adverse Effect on the GRTV Assets, the financial
condition or operations of TVN or TVN's ability to fulfill its obligations under
this Agreement, the Supplemental Agreements to which TVN is a party and/or the
Loan Documents.
3.9 Benefit Plans. Guthy-Renker and GRTV will retain responsibility for
-------------
any and all retention payments and reporting thereof owed pursuant to any and
all retention plans, programs and arrangements of GRTV existing prior to Closing
(the "Incentive Plans") and any amounts payable or to be paid in connection with
all of GRTV's outstanding stock appreciation rights and phantom stock rights
including, but not limited to, those granted pursuant to the 1996 Incentive Plan
(collectively, the "Rights Plans"), except for (and in connection with) the
bonuses and vacation included in the GRTV Liabilities. To the extent applicable,
Guthy-Renker and GRTV will retain liability for payment and reporting of all
withholding related to any stock appreciation rights payable or due to the
Employees owed pursuant to any and all Rights Plans on or prior to the Execution
Date.
ARTICLE IV
CONDITIONS PRECEDENT
4.1 Conditions to Each Party's Obligation at Closing. The respective
------------------------------------------------
obligation of each party under this Agreement shall be subject to the
satisfaction or waiver prior to the Execution Date of the following conditions:
(a) Approvals. All authorizations, consents, orders or approvals of,
---------
or declarations or filings with any Governmental Entity necessary for the
consummation of the transactions contemplated by this Agreement, the
Supplemental Agreements and the Loan Documents shall have been filed, occurred
or been obtained, other than any state or federal security law filings to be
made after the Execution Date or if failure to make such filing or obtain such
approval would not be materially adverse to TVN or Newco taken as a whole.
(b) Legal Action. No temporary restraining order, preliminary
------------
injunction or permanent injunction or other order preventing the consummation of
the transactions contemplated hereby shall have been issued by any Governmental
Entity and remain in effect, and no litigation seeking the issuance of such an
order or injunction, or seeking the imposition against Guthy-Renker, GRTV, TVN
or Newco of substantial damages if the transactions contemplated hereby are
consummated, shall be pending which, in the good faith judgment of Guthy-Renker
and TVN's respective boards of directors or a senior executive of each of the
foregoing (acting upon the advice of their respective counsel) has a reasonable
probability of resulting in such order, injunction or damages. In the event any
such order or injunction shall have been issued, each party agrees to use its
reasonable efforts to have any such injunction lifted.
(c) Statutes. No action shall have been taken, and no statute, rule,
--------
regulation or order shall have been enacted, promulgated or issued or deemed
applicable to the transactions contemplated by this Agreement, by any
Governmental Entity which would (i) make the
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<PAGE>
consummation of the transactions contemplated hereby illegal, (ii) prohibit
TVN's or Newco's ownership or operation of all or a material portion of the GRTV
Business or GRTV Assets, or compel TVN, Newco, GRTV or Guthy-Renker, to dispose
of or hold separate all or a material portion of the GRTV Business or GRTV
Assets or (iii) render TVN, Guthy-Renker or GRTV unable to consummate the
transactions contemplated hereby.
(d) Compliance with Laws. At the Execution Date, the purchase of
--------------------
the GRTV Assets by Newco, the assumption of the GRTV Liabilities by Newco, the
execution, delivery and performance of the obligations of each of the parties
set forth in each of the Supplemental Agreements and the Loan Documents, shall
be legally permitted by all laws and regulations to which TVN, Newco,
Guthy-Renker and/or GRTV are subject. Guthy-Renker, GRTV, TVN and Newco shall
have complied with, and the sale of the GRTV Assets shall be effective under,
all applicable federal and state securities laws.
4.2 Conditions of Obligations of TVN and Newco. The obligations of TVN at
------------------------------------------
the Closing are subject to the satisfaction of the following conditions, unless
waived by TVN and Newco:
(a) Representations and Warranties. The representations and
------------------------------
warranties of Guthy-Renker and GRTV set forth in this Agreement shall be true
and correct in all material respects (except for such representations and
warranties which are qualified by their terms by a reference to materiality,
which representations and warranties as so qualified shall be true as written)
as of the Execution Date except as otherwise contemplated by this Agreement and
the Supplemental Agreements.
(b) Execution of Noncompetition Agreement. Guthy-Renker and GRTV
-------------------------------------
shall have executed and delivered to TVN and Newco a Noncompetition Agreement,
in the form set forth as Exhibit D hereto.
(c) GRTV and Guthy-Renker Stockholder Actions. Guthy-Renker shall
-----------------------------------------
have provided evidence satisfactory to TVN of all necessary stockholder
approvals required in connection with the transactions contemplated hereby.
(d) GRTV Employee Agreements and Employee Benefits.
----------------------------------------------
(i) Savings Plan. Guthy-Renker shall have amended the
------------
Guthy-Renker Retirement Savings Plan (the "Savings Plan") to the extent
permissible under applicable law, if and as necessary (A) to cause the active
participation of the Employees who will be employees of Newco as of the day
after the Execution Date therein to cease as of the Execution Date, and (B) to
permit the Employees who will be employees of Newco as of the day after the
Execution Date to elect to take distributions (subject to applicable law) of
their accounts thereunder and, if such Employees so elect, to roll them over,
directly or otherwise, in accordance with applicable law and regulations and (C)
if possible, to provide for the full vesting of all Employees who will be
employees of Newco as of the day after the Execution Date participating in the
Savings Plan.
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(ii) Confidentiality Agreements. Guthy-Renker and GRTV shall
--------------------------
have assigned to Newco its rights with respect to GRTV and the GRTV Intellectual
Property included in the GRTV Assets to any existing nondisclosure and invention
assignment agreements with each current and former employee and consultant of
GRTV.
(e) Compensation Schedules. TVN shall have received a compensation
----------------------
schedule pursuant to the requirements set forth in Section 2.1(w) hereof and in
substantially the form attached hereto as Schedule 2.1(w).
(f) Other Agreements. Each of Guthy-Renker and the Thomas Parties
----------------
shall have executed the Thomas Termination Agreement. Thomas and Newco shall
have entered into the Thomas Employment Agreement. Riley and Newco shall have
entered into the Riley Employment Agreement. TVN, Newco, Guthy-Renker and GRTV
shall have entered into the Transition Services Agreement and the Noncompetition
Agreement.
4.3 Conditions of Obligation of Guthy-Renker and GRTV. The obligations of
-------------------------------------------------
Guthy-Renker and GRTV at the Closing are subject to the satisfaction of the
following conditions unless waived by Guthy-Renker and GRTV:
(a) Representations and Warranties. The representations and
------------------------------
warranties of TVN and Newco set forth in this Agreement shall be true and
correct in all material respects (except for such representations and warranties
which are qualified by their terms by a reference to materiality, which
representations and warranties as so qualified shall be true as written) as of
the Execution Date except as otherwise contemplated by this Agreement, the
Supplemental Agreements and the Loan Documents.
(b) Loan Documents. TVN and Newco shall have executed and delivered
--------------
the Promissory Note and Security Agreement to Guthy-Renker and GRTV.
(c) Supplemental Agreements. TVN and Newco shall have executed and
-----------------------
delivered to Guthy-Renker and GRTV the Transition Services Agreement and the
Noncompetition Agreement, and TVN shall have executed and delivered the Guaranty
to Guthy-Renker and GRTV.
ARTICLE V
INDEMNIFICATION
5.1 Indemnification.
---------------
(a) From and after the Execution Date, Guthy-Renker and GRTV shall
indemnify, defend and hold harmless TVN, Newco and the officers, directors,
employees, shareholders, assigns and successors and the affiliates of the
foregoing persons and entities (individually, a "TVN Indemnified Person" and
collectively, the "TVN Indemnified Persons"), from and against and in respect of
any and all claims, demands, lawsuits, actions, causes of actions,
administrative proceedings (including informal proceedings), losses,
assessments, costs, damages, punitive damages, judgments, liabilities (including
sums paid in settlement of claims), penalties, fines,
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interest (including interest from the date of such damages), and costs and
expenses including reasonable legal fees and disbursements of every kind, nature
and description (collectively "Damages") that are actually incurred by a TVN
Indemnified Person and that arise or result from or relate to, directly or
indirectly, (i) any breach of any of the representations, warranties, and
covenants given or made by Guthy-Renker or GRTV in this Agreement, the
Disclosure Schedule hereto and other Schedules listed herein and (ii) any
Excluded Liabilities.
(b) From and after the Execution Date, TVN and Newco shall indemnify,
defend and hold harmless Guthy-Renker, GRTV and the respective officers,
directors, employees, shareholders, assigns and successors and the affiliates of
the foregoing persons and entities (individually, a "Guthy-Renker Indemnified
Person" and collectively, "Guthy-Renker Indemnified Persons") from and against
and in respect of any and all Damages that are actually incurred by a
Guthy-Renker Indemnified Person and that arise or result from or relate to,
directly or indirectly, (i) any breach of any of the representations,
warranties, and covenants given or made by TVN or Newco in this Agreement, the
TVN Disclosure Schedule and other Schedules listed herein, (ii) the GRTV
Liabilities, the use of the GRTV Assets, the GRTV Designations and the operation
of the GRTV Business by Newco, TVN or any of their respective affiliates after
the Execution Date (including, without limitation, the Post Closing Severance
Obligation), and (iii) all other actions taken or omitted to be taken by TVN or
Newco after the Execution Date.
(c) The TVN Indemnified Persons and the Guthy-Renker Indemnified
Persons shall be referred to herein as the "Indemnified Persons."
(d) For purposes of this Agreement, Damages shall be net of
insurance, indemnities or other third-party payments recovered by an Indemnified
Person (it being agreed that an Indemnified Person shall use commercially
reasonable efforts to pursue such recoveries), net of out-of-pocket costs of
obtaining any such recovery, and in no event shall Damages include any special,
consequential or similar damages, regardless of the foreseeability of such
damages. In determining the amount of any Damages under this Section 5, there
shall be (i) deducted an amount equal to the present value of any income or
similar Tax benefit (whether federal, state, local or otherwise) that is, or
would reasonably expected to be, realized by the Indemnified Person by reason of
such Damages during the current and future taxable periods; and (ii) added an
amount equal to the amount of Tax, if any, which will be payable by the
Indemnified Person (including any Tax payable by the Indemnified Person by
reason of any additional payments pursuant to this clause (ii)) with respect to
any indemnification payment made pursuant to this Section 5. Present value of
the income or similar Tax benefit shall be calculated using the applicable
federal mid-term interest rate in effect for the month in which the payment of
the Damages is to be made as published by the Internal Revenue Service in the
Internal Revenue Bulletin.
5.2 Limitations and Expiration. Notwithstanding the above:
--------------------------
(a) There shall be no liability for indemnification under this
Section 5 unless and until the aggregate amount of all Damages claimed by the
Guthy-Renker Indemnified Persons or the TVN Indemnified Persons, as the case may
be, exceeds $250,000, and all liability for such
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Indemnified Persons' Damages under this Section 5 shall exclude the first
$250,000 of such Indemnified Persons' Damages once such threshold has been
exceeded. The foregoing limitations shall not apply to Claims or Damages with
respect to Taxes under Section 2.1(h), clause (ii) of 5.1(a) or clauses (ii) and
(iii) of 5.1(b).
(b) The maximum liability for Damages under this Section 5 payable by
Guthy-Renker and GRTV to the TVN Indemnified Persons shall be an aggregate of
the lesser of $4.5 million or the amounts paid by TVN or Newco under the
Promissory Note, except with respect to Claims relating to Taxes in Section
2.1(h) or any of the Excluded Liabilities, and an aggregate of $4.5 million
payable by TVN and Newco to the Guthy-Renker Indemnified Persons, except with
respect to Claims relating to clauses (ii) and (iii) of Section 5.1(b).
Indemnification under this Section 5 shall be the exclusive remedy of the TVN
Indemnified Persons or the Guthy-Renker Indemnified Persons, as the case may be,
and shall be in lieu of any statutory, other contractual, equitable or common
law remedy any party may have for a breach of a representation, warranty or
covenant contained herein, and all such other rights and remedies are hereby
irrevocably waived, other than (i) any non-monetary remedy pursuant to Section
6.2 (except for recission or similar remedies), (ii) any cause of action by any
party to this Agreement with respect to the fraudulent inducement of this
Agreement and (iii) any Claim or cause of action by a Guthy-Renker Indemnified
Person relating to TVN's or Newco's failure to pay the Promissory Note pursuant
to its terms and conditions (other than any right of offset TVN or Newco may
have hereunder) or failure to perform any of their other obligations under the
Loan Documents.
(c) The indemnification obligations under this Section 5 shall
terminate on the later of (i) 18 months after the Execution Date, except in the
case of indemnification obligations of TVN and Newco with respect to the payment
of the Promissory Note (or with respect to any of their obligations under the
other Loan Documents) or the issuance of TVN Common Stock upon conversion or
payment thereof, which shall survive until such time as the Promissory Note is
paid in full, less the amount of any Approved Claim properly offset by TVN or
Newco in accordance with Section 5.3 hereof, or such shares of TVN Common Stock
have been issued (the "Indemnification Deadline Date"), or (ii) with respect to
any and all claims for Damages ("Claims") under this Agreement pending as of the
Indemnification Deadline Date ("Pending Claims"), the final resolution of such
Pending Claims; provided, however, that the indemnification obligations of TVN
and Newco hereunder relating to Claims under clauses (ii) and (iii) of Section
5.1(b) shall survive indefinitely. Notwithstanding anything to the contrary in
this Section 5, the Promissory Note may only be used to pay indemnification
obligations in accordance with Section 5.3 hereof based on Claims made by the
TVN Indemnified Persons on or prior to the date that is 18 months after the
Execution Date (the "Release Date"), and all amounts due at such time shall be
paid and released to Guthy-Renker and GRTV pursuant to the terms of the
Promissory Note. Notwithstanding anything to the contrary in the foregoing, the
indemnification obligations in this Section 5 shall terminate upon the
expiration of the applicable statute of limitations for (i) Guthy-Renker and
GRTV with respect to representations, warranties and covenants with respect to
the Taxes set out in Section 2.1(h) and (ii) TVN and Newco with respect to the
covenants regarding Taxes set out in Section 3.4.
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5.3 Indemnity Offset Against Promissory Note. TVN and Newco shall have the
----------------------------------------
right to offset, on a dollar for dollar basis, any "Approved Claim" (as defined
herein) for indemnification under this Section 5 (subject to the limitations
set forth in this Section 5) against any amounts payable to GRTV under the
Promissory Note; provided that such right of offset shall terminate on the
Release Date. Any offset made in accordance with the provisions of this
Section 5.3 shall be made by written notice from TVN to Guthy-Renker included in
the TVN Officer's Certificate in accordance with Section 5.4(b) hereof. For
purposes hereof, the term "Approved Claim" includes only (i) a Claim with
respect to which (and only to the extent) Guthy-Renker fails to timely object
pursuant to Section 5.4(c) hereof, and (ii) any other Claim which is finally
resolved, pursuant to Sections 5.4(d) and 6.2 hereof, in a manner requiring GRTV
and/or Guthy-Renker to pay Damages pursuant to this Section 5.
5.4 Representative of Guthy-Renker; Claims By the TVN Indemnified Persons.
---------------------------------------------------------------------
(a) Guthy-Renker's Chief Financial Officer (or such other
representative designated by Guthy-Renker) shall be appointed by Guthy-Renker as
its agent for and on its behalf to give and receive notices and communications,
to authorize delivery to any TVN Indemnified Person of the amounts due in
satisfaction of Claims, to object to such deliveries, to agree to, negotiate,
enter into settlements and compromises of, and demand arbitration and comply
with orders of courts and awards or arbitrators with respect to such Claims, and
to take all actions necessary or appropriate in the judgement of such Guthy-
Renker officer for the accomplishment of the foregoing.
(b) Subject to Section 5.6 hereof, upon receipt by Guthy-Renker's
Chief Financial Officer (or such other representative designated by Guthy-
Renker) (with a copy to Guthy-Renker's General Counsel) at any time prior to the
Indemnification Termination Date of a certificate signed by an officer of TVN (a
"TVN Officer's Certificate") providing notice of any Claim and specifying in
reasonable detail the date such Damages were paid, incurred or otherwise arose,
the nature of the misrepresentation or breach to which such Damages are related,
the dollar amount of such Damages and the delivery instructions, if any, to be
followed by Guthy-Renker in paying out such Claim (and, prior to the Release
Date, stating whether all or any portion of such Damages will be offset against
any amounts payable to GRTV under the Promissory Note pursuant to Section 5.3
hereof), Guthy-Renker shall deliver to the TVN Indemnified Person an amount
equal to such Damages (less the amount of any such Damages properly offset in
accordance with Section 5.3 hereof by TVN or Newco against amounts payable under
the Promissory Note), as promptly as practicable, but no later than 30 days
after receipt of the TVN Officer's Certificate provided that no such payment or
delivery shall be made if Guthy-Renker delivers written notice to TVN prior to
the expiration of such 30 day period that Guthy-Renker disputes in good faith
the Claim set forth in the TVN Officer's Certificate, with the basis for such
dispute set forth in reasonable detail except as otherwise provided in Section
5.4(c) below. Guthy-Renker and GRTV shall be entitled to conclusively rely on
such TVN Officer's Certificate and shall make distributions only in accordance
with the terms thereof.
(c) Objections to Claims. For a period of 30 days after receipt of
--------------------
the TVN Officers' Certificate delivered in accordance with the terms hereof,
neither Guthy-Renker nor GRTV
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shall make delivery of the amounts requested in the Claim. After the expiration
of such 30 day period, Guthy-Renker shall without further notice or
authorization of any kind, make delivery of the amount of Damages in accordance
with Section 5.4(b).
(d) Resolution of Conflicts: Arbitration. In case Guthy-Renker
------------------------------------
objects in writing to any Claim made in any TVN Officer's Certificate as
described in Section 5.4(b).
(i) TVN shall have 30 days to respond in a written statement
to the objection of Guthy-Renker. If after such 30 day period there remains a
dispute as to any Claims, TVN and Guthy-Renker shall attempt in good faith for
60 days to agree upon the rights of the respective parties with respect to each
of such Claims. If Guthy-Renker and TVN should so agree, a memorandum setting
forth such agreement shall be prepared and signed by both parties.
(ii) If no such agreement can be reached after good faith
negotiation, either TVN or Guthy-Renker may, by written notice to the other,
demand resolution of the matter in accordance with Section 6.2 hereof, unless
the amount of the Damage is at issue in pending litigation with a third party
(subject to Section 5.6 hereof), in which event arbitration shall not be
commenced until such amount is ascertained or both parties agree to arbitration.
(e) Guthy-Renker and GRTV shall have reasonable access to
information retained by TVN and Newco after the Execution Date about the GRTV
Assets and the GRTV Business and the reasonable assistance of TVN's and Newco's
officers and employees for purposes of performing its duties and exercising its
rights hereunder, provided that Guthy-Renker shall treat confidentially and not
disclose any non-public information from or about TVN or Newco to anyone other
than Guthy-Renker, GRTV and their officers, directors, employees,
representatives and agents or the arbitrators appointed pursuant to Section
6.2(b), except (i) on a need to know basis to individuals who agree to treat
such information confidentially, (ii) as may be required by law or order of any
Governmental Entity or (iii) as may be necessary or desirable in connection with
any third party claim pursuant to Section 5.6 hereof.
(f) Actions of Agent. A decision, act, consent or instruction of
----------------
TVN, taken with respect to this Section 5.4 shall constitute a decision of all
the TVN Indemnified Persons and shall be final, binding and conclusive upon each
of the TVN Indemnified Persons, and Guthy-Renker and GRTV may rely upon any
decision, act, consent or instruction of TVN taken in such manner as being the
decision, act, consent or instruction of each and every such TVN Indemnified
Person. Guthy-Renker are hereby relieved from any liability to any person for
any acts done by them in accordance with such decision, act, consent or
instruction of TVN taken in such manner.
5.5 Representative of TVN and Newco; Claims By the Guthy-Renker
-----------------------------------------------------------
Indemnified Persons.
- -------------------
(a) TVN's Chief Financial Officer (or other representative
designated by TVN) shall be appointed by TVN and Newco as their agent for and on
their behalf to give and receive notices and communications, to authorize
delivery to any Guthy-Renker Indemnified Person of the amounts due in
satisfaction of claims, to object to such deliveries, to agree to, negotiate,
enter into
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settlements and compromises of, and demand arbitration and comply with orders of
courts and awards or arbitrators with respect to such claims, and to take all
actions necessary or appropriate in the judgement of such TVN officer for the
accomplishment of the foregoing.
(b) Subject to Section 5.6 hereof, upon receipt by the Chief
Financial Officer (or other representative designated by TVN and Newco) at any
time prior to the Indemnification Termination Date of a certificate signed by an
officer of Guthy-Renker (a "Guthy-Renker Officer's Certificate") providing
notice of any Claim and specifying in reasonable detail the date such Damages
were paid, incurred or otherwise arose, the nature of the misrepresentation or
breach to which such Damages are related, the dollar amount of such Damages and
the delivery instructions to be followed by TVN in paying out such Claim, TVN
shall deliver to Guthy-Renker an amount equal to such Damages, as promptly as
practicable, but no later than 30 days after receipt of the Guthy-Renker
Officer's Certificate, provided that no such payment or delivery shall be made
if TVN delivers written notice to Guthy-Renker prior to the expiration of such
30 day period that TVN disputes in good faith the Claim set forth in the
Guthy-Renker Officer's Certificate, with the basis for such dispute set forth in
reasonable detail.
(c) Objections to Claims. For a period of 30 days after receipt of
--------------------
the Guthy-Renker Officer's Certificate delivered in accordance with the terms
hereof, TVN shall make no delivery of the amounts requested in the Claim. After
the expiration of such 30 day period, TVN shall, without further notice or
authorization of any kind, make delivery of the amount of Damages in accordance
with Section 5.5(b).
(d) Resolution of Conflicts; Arbitration. In case TVN objects in
------------------------------------
writing to any Claim made in any Guthy-Renker Officer's Certificate as described
in Section 5.5(b).
(i) Guthy-Renker shall have 30 days to respond in a written
statement to the objection of TVN. If after such 30 day period there remains a
dispute as to any Claims, Guthy-Renker and TVN shall attempt in good faith for
60 days to agree upon the rights of the respective parties with respect to each
of such Claims. If Guthy-Renker and TVN should so agree, a memorandum setting
forth such agreement shall be prepared and signed by both parties.
(ii) If no such agreement can be reached after good faith
negotiation, either TVN or Guthy-Renker may, by written notice to the other,
demand resolution of the matter in accordance with Section 6.2 hereof, unless
the amount of the Damage is at issue in pending litigation with a third party
(subject to Section 5.6 hereof), in which event arbitration shall not be
commenced until such amount is ascertained or both parties agree to arbitration.
(e) TVN and Newco shall have reasonable access to information
retained by Guthy-Renker and GRTV after the Closing Date about GRTV, the GRTV
Assets and the GRTV Business and the reasonable assistance of Guthy-Renker's and
GRTV's officers and employees for purposes of performing its duties and
exercising its rights as agent for TVN and Newco, provided that TVN or GRTV
shall treat confidentially and not disclose any non-public confidential
information from or about Guthy-Renker to anyone other than TVN, Newco and their
officers, directors, employees, representatives and agents or the arbitrators
appointed pursuant to
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Section 6.2(b), except (i) on a need to know basis to individuals who agree to
treat such information confidentially, (ii) as may be required by law or order
of any Governmental Entity, or (iii) as may be necessary or desirable in
connection with any third party claim pursuant to Section 5.6 hereof.
(f) Actions of Agent. A decision, act, consent or instruction of
----------------
Guthy-Renker, taken with respect to this Section 5.5 shall constitute a decision
of all the Guthy-Renker Indemnified Persons and shall be final, binding and
conclusive upon each of the Guthy-Renker Indemnified Persons, and TVN and Newco
may rely upon any decision, act, consent or instruction of Guthy-Renker taken in
such manner as being the decision, act, consent or instruction of each and every
such Guthy-Renker Indemnified Person. TVN and Newco are hereby relieved from any
liability to any person for any acts done by them in accordance with such
decision, act, consent or instruction of Guthy-Renker taken in such manner.
5.6 Third Party Claims. If any action, suit, investigation or other legal
------------------
proceeding shall be commenced, or any claim or demand shall be asserted, by a
third party (each, a "Third Party Claim") against a Guthy-Renker Indemnified
Person or TVN Indemnified Person, as the case may be, the Indemnified Person
shall give written notice (the "Third Party Claim Notice"), within ten (10) days
following receipt of such Third Party Claim, to the parties obligated to provide
indemnification hereunder (the "Indemnifying Person"). Such Third Party Claim
Notice shall state the nature and the basis of such Third Party Claim, and a
reasonable estimate of the amount thereof, and shall include a copy of any
written claim, process or legal proceeding. If the failure to give such Third
Party Claim Notice materially and adversely affects the Indemnifying Person's
ability to assume and successfully defend such Third Party Claim, such notice
shall be a condition precedent to any liability of the Indemnifying Person under
this Section 5.
(a) The Indemnifying Person shall have the right to assume (by notice
to the Indemnified Person within (15) days after receipt of the Third Party
Claim Notice), at its sole cost and expense, entire control of the defense,
compromise and settlement of such Third Party Claim, subject to the right of the
Indemnified Person to participate (at its own cost and expense and with counsel
of its choice) in the defense thereof. If the Indemnifying Person assumes
control of the Third Party Claim, the Indemnified Person shall cooperate fully
in all respects with the Indemnifying Person in any such defense, compromise or
settlement, including, without limitation, by making available to the
Indemnifying Person all pertinent information and all books and records under
the control of the Indemnified Person. The Indemnifying Person shall keep the
Indemnified Person fully informed of the status of such Third Party Claim until
its resolution or settlement. The Indemnifying Person shall not compromise or
settle any such Third Party Claim without the prior written approval of the
Indemnified Person; provided, however, that if such prior written approval is
withheld by the Indemnified Person, the liability of the Indemnifying Person
with respect to such Claim shall be limited to the amount of the settlement
recommended by the Indemnifying Person and not approved by the Indemnified
Person in defending such Third Party Claim.
(b) If the Indemnifying Person elects not to assume the defense of a
Third Party Claim within the fifteen (15) day period set forth above, the
Indemnified Person shall control the
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defense, compromise and settlement of such Third Party Claim, and the
Indemnifying Person will be entitled to participate (at its sole cost and
expense and with counsel of its choice) in such defense.
(c) In all events, (a) the Indemnified Person shall not admit any
liability with respect to, or settle, compromise or discharge, any Third Party
Claim without the Indemnifying Person's prior written consent, and (b) neither
party shall, without the written consent of the other parties, settle or
compromise or consent to the entry of any judgment with respect to any Third
Party Claim if the effect thereof is to admit any criminal liability by, or to
permit any injunctive relief or other order providing non-monetary relief to be
entered against, the other parties.
5.7 Survival of Representations, Warranties and Covenants. For the
-----------------------------------------------------
purposes of asserting Claims under this Section 5;
(a) all representations, warranties and covenants made by Guthy-Renker
and GRTV in or pursuant to this Agreement will survive the Closing and will
remain in effect until the later of (i) the Indemnification Deadline Date,
(ii) the final resolution of any and all Pending Claims, provided that from and
after the Indemnification Deadline Date, such indemnification obligations shall
survive only to the extent of such Pending Claims and (iii) with respect to the
representations, warranties and covenants with respect to the Taxes set out in
Section 2.1(h), until expiration of the applicable statute of limitations; and
(b) all representations, warranties and covenants made by TVN and
Newco and covenants made by TVN or Newco to be performed after the Closing will
survive the Closing and will remain in effect until the later of (i) the
Indemnification Deadline Date, (ii) the final resolution of any and all Pending
Claims, provided that from and after the Indemnification Deadline Date, such
indemnification obligations shall survive only to the extent of such Pending
Claims, (iii) with respect to the covenants with respect to Taxes set out in
Section 3.4, until expiration of the applicable statute of limitations and
(iv) with respect to Claims under clauses (ii) and (iii) of Section 5.1(b),
indefinitely.
ARTICLE VI
GENERAL PROVISIONS
6.1 Extension; Waiver. At any time, each of Guthy-Renker, GRTV, TVN and
-----------------
Newco by action taken by its board of directors or duly authorized officer, may,
to the extent legally allowed, (i) extend the time for the performance of any of
the obligations or other acts of the other, (ii) waive any inaccuracies in the
representations and warranties made to it contained herein or in any document
delivered pursuant hereto and (iii) waive compliance with any of the agreements
or conditions for the benefit of it contained herein. Any agreement on the part
of a party hereto to any such extension or waiver shall be valid only if set
forth in an instrument in writing signed on behalf of such party.
6.2 Dispute Resolution.
------------------
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(a) If any claim, demand, issue or dispute arises between TVN or
Newco, as the case may be, and Guthy-Renker or GRTV, as the case may be,
regarding this Agreement or the transactions contemplated hereby (each, a
"Dispute"), the persons named in the notice provisions of Section 6.3 for each
interested party shall attempt in good faith to resolve the Dispute. If those
individuals have not agreed to a resolution within fifteen (15) days from the
date on which the Dispute was first presented to them, any party, by written
notice to the other parties, may require that the Dispute be submitted for
resolution to the Chief Financial Officer of each of Guthy-Renker and TVN. The
Chief Financial Officers shall meet, in person or by other means satisfactory to
them, to attempt to resolve the Dispute within fifteen days after the reference
of the matter to them. If the Chief Financial Officers reach a decision within
such fifteen day period their decision shall be final and binding on the parties
hereto. If the Chief Financial Officers fail to resolve the Dispute within such
period, either of the Chief Financial Officers may refer the matter, on notice
to the other, to the Chief Executive Officers of Guthy-Renker and TVN (the
"Chief Executive Officers"). The Chief Executive Officers shall meet, in person
or by other means satisfactory to them, to attempt to resolve the Dispute within
fifteen days after the reference of the matter to them. If the Chief Executive
Officers reach a decision within such fifteen day period their decision shall be
final and binding on the parties hereto. If the Chief Executive Officers fail to
resolve the Dispute within such period, the matter may be referred by either
party for arbitration as provided in Section 6.2(b).
(b) Arbitration.
-----------
(i) Except as otherwise provided in Section 6.2(a) hereof, in
the event of any Dispute, such Dispute shall be submitted to and resolved by
final and binding arbitration as provided for by the Commercial Arbitration
Rules of the American Arbitration Association ("AAA"). Arbitration shall be the
sole and exclusive method for resolving any Dispute, and each of TVN or Newco,
as the case may be, and Guthy-Renker, GRTV, as the case may be, are giving up
any right that each might otherwise have for a judge or jury to decide the
Dispute subject to Section 6.2(e) hereof.
(ii) If a written request for arbitration is not made within the
limitations periods applicable to a claim under applicable federal or state law,
that Dispute shall be waived. TVN or Newco, as the case may be, and Guthy-Renker
or GRTV, as the case may be, will select an arbitrator by mutual agreement. If
TVN or Newco, as the case may be, and Guthy-Renker or GRTV, as the case may be,
are unable to agree on a neutral arbitrator, the parties will obtain a list of
seven (7) arbitrators from the AAA. TVN or Newco, as the case may be, and
Guthy-Renker or GRTV, as the case may be, will alternately strike names from the
list, with Guthy-Renker or GRTV, as the case may be, striking first, until only
one name remains. The remaining person shall be the arbitrator. Both TVN and
Newco, as the case may be, and Guthy-Renker or GRTV, as the case may be, will
have the opportunity to conduct all discovery as provided for in the Federal
Rules of Civil Procedure, and the arbitrator shall have the power to decide any
discovery disputes between the parties. The arbitrator may also hear and decide
motions for summary disposition of any dispute as provided by applicable state
law and other motions.
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(iii) The arbitrator shall conduct a hearing in accordance with
the commercial arbitration rules of the AAA, except as expressly provided herein
or as otherwise agreed by the parties to such Dispute. Within thirty (30) days
following the hearing and the submission of the matter to the arbitrator, the
arbitrator shall issue a written opinion and award, which shall be signed and
dated. The arbitrator's award shall decide all Disputes and issues submitted by
Guthy-Renker or GRTV, as the case may be, and TVN or Newco, as the case may be,
and the arbitrator may not decide any Dispute or issue not submitted. The
arbitrator shall be permitted to award only those remedies in law or equity
which are requested by either TVN or Newco, as the case may be, or Guthy-Renker
or GRTV, as the case may be, and allowed by law, but in no event may any
punitive or exemplary damages be sought or awarded. The cost of the arbitrator
and other incidental costs of arbitration, including the cost of a court
reporter, shall be shared equally by both Guthy-Renker or GRTV, as the case may
be, and TVN or Newco, as the case may be. Each of Guthy-Renker, GRTV, TVN and
Newco shall bear their own costs for legal representation in any arbitration
proceeding, provided, however, that the arbitrator shall have the authority to
require either party to pay the reasonable attorney's fees for the prevailing
party's representation during the arbitration (as determined by the arbitrator),
and the costs of the arbitrator as part of any remedy that may be ordered.
(iv) Arbitration hearings hereunder shall commence within 120
days of the selection of the neutral arbitrator, and such hearings shall take
place in Los Angeles, California. Arbitration proceedings will be conducted
confidentially and all documents, testimony and records shall be received, heard
and maintained by the arbitrator in confidence, available for the inspection
only by the arbitrator, Guthy-Renker, GRTV, TVN and Newco and their respective
attorneys and their respective experts who shall agree in advance and in writing
to receive all such information confidentially and to maintain such information
in confidence. The decree or award rendered by the arbitrator may be entered as
a final and binding judgment in any court having jurisdiction thereof.
(c) All negotiations and proceedings pursuant to Sections 6.2(a) and
(b) shall be confidential and shall be treated as compromise and settlement
negotiations for purposes of the United States Federal Rules of Evidence and any
applicable state rules of evidence provided that any party may specifically
waive these rights of privileges and confidentiality with respect to any
communications it makes pursuant to those sections. No such confidentiality or
privilege shall apply to communications made to any independent accounting firm.
(d) The resolution of any dispute submitted pursuant to
Sections 6.2(a) or (b) shall be final and binding upon the parties to this
Agreement. No party to this Agreement shall initiate, and each party to this
Agreement shall cause its affiliates not to initiate, any legal proceeding,
except as provided in Section 6.2(e), and except to enforce the decisions of the
arbitrator hereunder.
(e) Nothing in this Section 6.2 shall preclude (i) any party from
seeking prearbitral interim or permanent injunctive relief, specific performance
or other equitable remedies in relation to any Disputes (prior to the
appointment of an arbitrator as provided herein) where such party reasonably
believes that such relief is necessary to prevent irreparable harm that cannot
be calculated or fully or adequately compensated by recovery of damages or
(ii) Guthy-Renker and/or
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GRTV from exercising any and all available remedies, in law or equity, pursuant
to or in connection with the Loan Documents.
6.3 Notices. All notices and other communications hereunder shall be in
-------
writing and shall be deemed given when received if delivered personally or
mailed by registered or certified mail (return receipt requested), sent by
telecopy with a copy via earliest overnight delivery and confirmation of
facsimile received, or sent by recognized overnight delivery service, return
receipt requested, to the parties at the following addresses and telecopy
numbers (or at such other address or number for a party as shall be specified by
like notice):
(a) if to TVN or Newco, to:
TVN Entertainment Corporation
2901 West Alameda Avenue
Burbank, California 91505
Attn: Stuart Z. Levin
Telecopy No.: (818) 526-5001
Telephone No.: (818) 526-5000
with copies to:
Legal Department
TVN Entertainment Corporation
2901 West Alameda Avenue
Burbank, California 91505
Attn: Arthur Fields
Telecopy No.: (818) 526-5003
Telephone No.: (818) 526-5022
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304
Attn: Robert P. Latta
Telecopy No.: (650) 845-5000
Telephone No.: (650) 320-4646
(b) if to GRTV or Guthy-Renker to:
Guthy-Renker Corporation
3340 Ocean Park Blvd. #3055
Santa Monica, California 90405
Attn: Kevin Knee
Telecopy No.: (310) 581-3287
Telephone No.: (310) 581-6250
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with copies to:
Guthy-Renker Corporation
Legal Department
3340 Ocean Park Blvd. #3055
Santa Monica, California 90405
Attn: Bennet Van de Bunt
Telecopy No.: (310) 581-3232
Telephone No.: (310) 581-6250
Venable Baetjer Howard & Civiletti LLP
1201 New York Avenue NW
Suite 1000
Washington, D.C. 20005-3917
Attn: Robert J. Bolger, Esq.
Telecopy No.: (202) 962-8300
Telephone No.: (202) 962-4800
6.4 Interpretation. When a reference is made in this Agreement to
--------------
Sections, Schedules or Exhibits, such reference shall be to a Section, Schedules
or Exhibit to this Agreement unless otherwise indicated. The words "include,"
"includes" and "including" when used herein shall be deemed in each case to be
followed by the words "without limitation." The table of contents and headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement.
6.5 No Transfer. This Agreement and the rights and obligations set forth
-----------
herein may not be transferred or assigned by operation of law or otherwise
without the consent of each party hereto. This Agreement is binding upon and
will inure to the benefit of the parties hereto and their respective successors
and permitted assigns.
6.6 Severability. If any provision of this Agreement, or the application
------------
thereof, will for any reason and to any extent be invalid or unenforceable, the
remainder of this Agreement and application of such provision to other persons
or circumstances will be interpreted so as reasonably to effect the intent of
the parties hereto. The parties further agree to replace such void or
unenforceable provision of this Agreement with a valid and enforceable provision
that will achieve, to the extent possible, the economic, business and other
purposes of the void or unenforceable provision.
6.7 Other Remedies. Except as otherwise provided herein, any and all
--------------
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby or by law or equity on
such party, and the exercise of any one remedy will not preclude the exercise of
any other.
6.8 Further Assurances. Each party agrees to cooperate fully with the
------------------
other parties and to execute such further instruments, documents and agreements
and to give such further written
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assurances as may be reasonably requested by any other party to evidence and
reflect the transactions described herein and contemplated hereby and to carry
into effect the intents and purposes of this Agreement.
6.9 Absence of Third Party Beneficiary Rights. No provision of this
-----------------------------------------
Agreement is intended, nor will be interpreted, to provide to create any third
party beneficiary rights or any other rights of any kind in any client,
customer, affiliate, stockholder, employee, partner or any party hereto or any
other person or entity unless specifically provided otherwise herein, and,
except as so provided, all provisions hereof will be personal solely between the
parties to this Agreement.
6.10 Mutual Drafting. This Agreement is the joint product of TVN, Newco,
---------------
Guthy-Renker and GRTV, and each provision hereof has been subject to the mutual
consultation, negotiation and agreement of TVN, Newco, Guthy-Renker, and GRTV
and shall not be construed for or against any party hereto.
6.11 Governing Law. This Agreement shall be governed in all respects,
-------------
including validity, interpretation and effect, by the laws of the State of
California (without giving effect to its choice of law principles).
6.12 Amendment. This Agreement may not be amended except by an instrument
---------
in writing signed on behalf of each of the parties hereto.
6.13 Scope of Representations and Warranties. Notwithstanding anything
---------------------------------------
herein to the contrary, it is the explicit intent of each party hereto that
neither Guthy-Renker, GRTV, Newco nor TVN is making any representation or
warranty whatsoever, express or implied, beyond those expressly given in this
Agreement, including, but not limited to, in the case of Guthy-Renker and GRTV,
any implied warranty or representation as to condition, merchantability,
suitability or fitness for a particular purpose as to any of the businesses,
properties or assets of GRTV, and it is understood that TVN and Newco take such
business, properties and assets on an "as is" and "where is" basis. It is
understood that any cost estimates, projections or other predictions contained
or referred to in the Schedules hereto and any cost estimates, projections or
predictions or any other information concerning GRTV contained or referred to in
other materials that have been provided to TVN, Newco or any of their
affiliates, agents or representatives are not and shall not be deemed to be
representations or warranties of Guthy-Renker, GRTV or any of their affiliates.
6.14 Schedules; Materiality. An item disclosed in a Schedule hereto in
----------------------
response to one subsection of this Agreement shall be deemed disclosed in
response to any other subsection in which it is required to be disclosed,
provided such disclosure for one subsection would be sufficient for the purpose
of disclosure for such other subsection. It is understood and agreed that
neither the specification of any dollar amount in the representations and
warranties contained in this Agreement nor the inclusion of any specific item in
the Schedules is intended to imply that such amounts or higher or lower amounts,
or the items so included or other items, are or are not material, and neither
party shall use the fact of the setting of such amounts or the fact of the
inclusion of any such item in the Schedules in any dispute or controversy
between the parties as to whether any obligation, item or matter is or is not
material for purposes of this Agreement.
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6.15 Entire Agreement. This Agreement, the Disclosure Schedule and
----------------
other Schedules listed herein and the Exhibits hereto constitute the entire
agreement among the parties with respect to the subject matter hereof and
supersede all prior agreements and understandings, both written and oral, among
the parties with respect to the subject matter hereof (including, without
limitation, (A) that certain letter of intent dated March 5, 1999 and amended as
of April 22, 1999, by and among TVN, Newco, GRTV and Guthy-Renker and (B) that
certain Closing Agreement dated as of July 1, 1999 by and among the parties
hereto) and are not intended to confer upon any other person any rights or
remedies hereunder except as otherwise expressly provided herein.
6.16 Definitions. As used herein, the definitions set forth below shall
-----------
apply:
(a) "AAA" has the meaning set forth in Section 6.2(b).
(b) "Affiliate" has the meaning set forth in Section 2.1(r).
(c) "Aggregate Consideration" has the meaning set forth in
Section 1.2
(d) "Approved Claims" has the meaning set forth in Section 5.3.
(e) "Audited Financial Statements" has the meaning set forth in
Section 2.1(d).
(f) "Bill of Sale and Assumption Agreement" has the meaning set forth
in Section 1.3.
(g) "Borrowed Money" has the meaning set forth in Section 2.1(f).
(h) "Broker's or Finder's Fee" has the meaning set forth in
Section 2.1(u).
(i) "Chief Executive Officers" has the meaning set forth in
Section 6.2(a).
(j) "Claims" has the meaning set forth in Section 5.2(c).
(k) "Closing" has the meaning set forth in Section 1.3.
(1) "Code" means the Internal Revenue Code of 1986, as amended.
(m) "Copyright Assignment" has the meaning set forth in Section 1.3.
(n) "Damages" has the meaning set forth in Section 5.1.
(0) "Dispute" has the meaning set forth in Section 6.2.
(p) "Disclosure Schedule" has the meaning set forth in the preamble
to Section 2.1.
(q) "Effective Closing Date" means July 1, 1999.
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(r) "Employee" has the meaning set forth in Section 2.1(r).
(s) "Employee Agreement" has the meaning set forth in Section 2.1(r).
(t) "Employee Plan" has the meaning set forth in Section 2.1(r).
(u) "Environmental Laws" has the meaning set forth in Section 2.1(p).
(v) "Environmental Permits" has the meaning set forth in
Section 2.1(p).
(w) "ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
(x) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(y) "Excluded Liabilities" has the meaning set forth in Section 1.5.
(z) "Execution Date" has the meaning set forth in the preamble to
this Agreement.
(aa) "GAAP" means generally accepted accounting principles.
(bb) "Governmental Entity" has the meaning set forth in
Section 2.1(c)(iii).
(cc) "GRC Group" means Guthy-Renker and any other entity controlled
by, controlling or under common control with Guthy-Renker, including GRTV.
(dd) "GRC Intercompany Accounts" has the meaning set forth in
Section 1.5.
(ee) "GRC Lines of Credit" has the meaning set forth in Section 1.5
hereof.
(ff) "GRTV" means Guthy-Renker Television Network, Inc., a Delaware
corporation.
(gg) "GRTV Assets" has the meaning set forth in the Recitals to this
Agreement.
(hh) "GRTV Business" has the meaning set forth in the Recitals to this
Agreement.
(ii) "GRTV Designations" has the meaning set forth in Section 3.6.
(jj) "GRTV Financial Statements" has the meaning set forth in
Section 2.1(d).
(kk) "GRTV Intellectual Property" has the meaning set forth in
Section 2.1(n).
(ll) "GRTV Liabilities" has the meaning set forth in Section 1.5.
(mm) "GRTV Permits" has the meaning set forth in Section 2.1(q).
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(nn) "GRTV Returns" has the meaning set forth in Section 2.1(h).
(oo) "Guthy-Renker" means Guthy-Renker Corporation, a Delaware
corporation.
(pp) "Guthy-Renker Indemnified Person" has the meaning set forth in
Section 5.1(b).
(qq) "Guthy-Renker Officer's Certificate" has the meaning set forth
in Section 5.5(b).
(rr) "Hazardous Material" has the meaning set forth in
Section 2.1(p).
(ss) "Imported Goods" has the meaning set forth in Section 2.1(y).
(tt) "Incentive Plans" shall have the meaning set forth in
Section 3.9 hereof.
(uu) "Indemnification Deadline Date" has the meaning set forth in
Section 5.2(c) hereof.
(vv) "Indemnifying Person" has the meaning set forth in Section 5.6.
(ww) "Intellectual Property" has the meaning set forth in
Section 2.1(n).
(xx) "Interim Balance Sheet" has the meaning set forth in
Section 2.1(d).
(yy) "IRS" means Internal Revenue Service.
(zz) "Knowledge" means, when used with respect to Guthy-Renker or
GRTV, the actual knowledge of Bill Guthy, Greg Renker, Bennett van de Bunt,
Kevin Knee or Thomas, and means, when used with respect to TVN, the knowledge of
Stuart Z. Levin, James B. Ramo or Arthur F. Fields.
(aaa) "Liens" shall mean any liens, pledges, charges, claims, options,
restrictions on transfer, mortgages, security interests or other encumbrances of
any sort.
(bbb) "Loan Documents" has the meaning set forth in Section 1.1.
(ccc) "Major Contracts" has the meaning set forth in Section 2.1(i).
(ddd) "Material Adverse Effect" has the meaning set forth in the
preamble to Section 2.1.
(eee) "Material Litigation" has the meaning set forth in Section
2.1(m).
(fff) "Newco" means GRTV Network, Inc., a Delaware corporation and
wholly-owned subsidiary of TVN.
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(ggg) "Newco Common Stock" has the meaning set forth in
Section 2.4(b).
(hhh) "Noncompetition Agreement" means the noncompetition agreement,
substantially in the form attached hereto as Exhibit C, to be executed by TVN
and Guthy-Renker.
(iii) "OEM" means original equipment manufacturer.
(jjj) "Pending Claims" has the meaning set forth in Section 5.2(c).
(kkk) Post Closing Severance Obligation has the meaning set forth in
Section 3.5.
(lll) "Promissory Note" means the agreement substantially in the form
attached hereto as Exhibit B to be executed by each of TVN and Newco.
(mmm) "Registered Intellectual Property" has the meaning set forth in
Section 2.1(n).
(nnn) "Release Date" has the meaning set forth in Section 5.2(c).
(ooo) "Restricted Securities" has the meaning set forth in
Section 2.3(d).
(ppp) "Rights Plan" has the meaning set forth in Section 3.9.
(qqq) "Riley" means James Riley.
(rrr) "Riley Employment Agreement" has the meaning set forth in the
Recitals to this Agreement.
(sss) "Savings Plan" has the meaning set forth in Section 4.2(d).
(ttt) "SEC" means Securities and Exchange Commission.
(uuu) "SEC Documents" has the meaning set forth in Section 2.5(c).
(vvv) "Securities Act" means the Securities Act of 1933, as amended.
(www) "Security Agreement" has the meaning set forth in Section 1.1.
(xxx) "Significant Customers" has the meaning set forth in
Section 2.1(v).
(yyy) "Subsidiary" has the meaning set forth in Section 2.1.
(zzz) "Supplemental Agreements" has the meaning set forth in
Section 1.1.
(aaaa) "Tax" has the meaning set forth in Section 2.1(h).
(bbbb) "Taxing Authority" has the meaning set forth in Section 2.1(h)
hereof.
-49-
<PAGE>
(cccc) "Third-Party Claim Notice" has the meaning set forth in
Section 5.6.
(dddd) "Third-Party Claims" has the meaning set forth in Section 5.6.
(eeee) "Third-Party Consents" has the meaning set forth in
Section 2.1(c).
(ffff) "Thomas" means Gregory A. Thomas.
(gggg) "Thomas Employment Agreement" has the meaning set forth in the
recitals to this Agreement.
(hhhh) "Thomas Parties" means Gregory A. Thomas and T&T Productions,
Inc., collectively.
(iiii) "Thomas Termination Agreement" has the meaning set forth in the
Recitals to this Agreement.
(jjjj) "Trademark Assignment" has the meaning set forth in
Section 1.3.
(kkkk) "Transition Services Agreement" has the meaning set forth in
Section 1.1.
(llll) "T&T" means T&T Productions, Inc., a California corporation
controlled by Gregory A. Thomas.
(mmmm) "TVN" means TVN Entertainment Corporation, a Delaware
corporation.
(nnnn) "TVN Financial Statements" has the meaning set forth in
Section 2.5(c).
(oooo) "TVN Indemnified Person" has the meaning set forth in
Section 5.1(a).
(pppp) "TVN Officer's Certificate" has the meaning set forth in
Section 5.4(b).
(qqqq) "TVN Option" has the meaning set forth in Section 1.7.
(rrrr) "Wex" means Michael Wex.
6.17 Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
of the parties and delivered to the other party.
[REMAINDER OF PAGE LEFT BLANK INTENTIONALLY]
-50-
<PAGE>
IN WITNESS WHEREOF, TVN, Newco, GRTV and Guthy-Renker have caused this
Agreement to be signed by their respective officers thereunto duly authorized,
all as of the date first written above.
TVN ENTERTAINMENT CORPORATION GUTHY-RENKER CORPORATION
By: /s/ Arthur Fields By: /s/ B. Van de Bunt
-------------------------- --------------------------
Name: Arthur Fields Name: B. Van de Bunt
------------------------ ------------------------
GRTV NETWORK, INC. GUTHY-RENKER TELEVISION NETWORK, INC.
By: /s/ Arthur Fields By: /s/ B. Van de Bunt
-------------------------- --------------------------
Name: Arthur Fields Name:
------------------------ ------------------------
[SIGNATURE PAGE FOR ASSET ACQUISITION AGREEMENT]
<PAGE>
BILL OF SALE, ASSIGNMENT
AND ASSUMPTION AGREEMENT
THIS BILL OF SALE, ASSIGNMENT AND ASSUMPTION AGREEMENT is executed on
July 30, 1999 and shall be effective as of July 1, 1999, by and between
Guthy-Renker Television Network, Inc., a Delaware corporation ("Seller"), and
GRTV Network, Inc., a Delaware corporation ("Buyer").
WHEREAS, Seller and Buyer are parties to that certain Asset
Acquisition Agreement of even date herewith and effective as of July 1, 1999, by
and among Seller, Buyer, and certain other parties (the "Asset Purchase
Agreement") pursuant to which Seller has agreed to sell to Buyer, and Buyer has
agreed to purchase, certain assets of Seller and, in connection therewith, Buyer
has agreed to assume certain liabilities of Seller;
NOW THEREFORE, pursuant to the transactions contemplated by the Asset
Purchase Agreement, and for the consideration therein set forth, the parties
hereto take the following actions and make the following agreements:
1. Capitalized Terms. Capitalized terms used herein without
-----------------
definitions shall have the meanings ascribed in the Asset Purchase Agreement.
2. Sale and Assignment. Seller hereby sells, transfers, conveys and
-------------------
assigns to Buyer and its successors and assigns, absolutely and irrevocably, all
of Seller's right, title and interest in and to the GRTV Assets.
3. Assumption. Buyer hereby assumes the GRTV Liabilities and agrees to
----------
pay, perform and discharge the GRTV Liabilities in accordance with the
respective terms thereof.
4. Incorporation of Terms of Asset Purchase Agreement. This Bill of
--------------------------------------------------
Sale, Assignment and Assumption Agreement does not, nor shall it be deemed to,
supersede, extinguish or merge any of the representations, warranties,
indemnities and limitations set forth in the Asset Purchase Agreement, including
without limitation, all representations, warranties, indemnities and limitations
therein made with respect to the GRTV Assets and/or the GRTV Liabilities, all of
which are incorporated herein by reference, and which provisions shall remain in
full force and effect as provided therein.
5. Entire Agreement, Amendment and Waivers. This Bill of Sale,
---------------------------------------
Assignment and Assumption Agreement and the Asset Purchase Agreement, together
with the exhibits and schedules attached thereto, constitute the entire
agreement between the parties pertaining to the subject matter hereof and
supersede all prior and contemporaneous agreements, understandings, negotiations
and discussions, whether oral or written, of the parties, and there are no
representations, warranties or other agreements among the parties in connection
with the subject matter hereof except as set forth specifically herein or
therein or contemplated hereby or thereby. No supplement, modification or waiver
of this Bill of Sale, Assignment and Assumption Agreement shall be binding
unless executed in writing by the party to be bound thereby. No waiver of any of
the provisions of
<PAGE>
this Bill of Sale, Assignment and Assumption Agreement shall be deemed or shall
constitute a waiver of any other provision hereof (whether or not similar), nor
shall such waiver constitute a continuing waiver unless otherwise expressly
provided.
6. Binding Agreement. This Bill of Sale, Assignment and Assumption
-----------------
Agreement constitutes the legal, valid and binding obligations of each party
enforceable in accordance with its terms and shall be binding upon and inure to
the benefit of the parties and their respective successors and assigns.
7. Governing Law. This Bill of Sale, Assignment and Assumption
-------------
Agreement shall be deemed to be made under, and shall be governed by, and
construed in accordance with, the laws of the State of California, without
regard to principles of conflict of laws.
8. Counterparts. This Bill of Sale, Assignment and Assumption
------------
Agreement may be executed in one or more counterparts, each of which shall be
deemed an original but all of which shall constitute one and the same
instrument.
[THIS SPACE INTENTIONALLY LEFT BLANK]
2
<PAGE>
IN WITNESS WHEREOF, the parties have hereunto set their hands on the
day first above written.
WITNESS GUTHY-RENKER TELEVISION
NETWORK, INC.
By: /s/ B. Van de Bunt
________________________ ---------------------------
Name: /s/ B. Van de Bunt
--------------------
Title: /s/ GVP
--------------------
GRTV NETWORK, INC.
By: /s/ Arthur Fields
________________________ ---------------------------
Name: /s/ Arthur Fields
---------------------
Title: /s/ Sr. Exec. V.P.
--------------------
3
<PAGE>
CERTIFICATION
-------------
State of Calif. )
) ss.
County of Los Angeles )
On this 30 day of July, 1999, before me the undersigned, a Notary Public
in and for the County and State aforesaid, personally appeared
B. Van de Bunt, who is personally known to me (or proved to me on the basis of
satisfactory evidence) to be the person whose name is subscribed to within
instrument and acknowledged to me that he executed the same in his authorized
capacity and that by his signature on such instrument the person, or the entity
upon behalf of which the person acted, executed the instrument.
WITNESS, my hand and official seal.
[SEAL APPEARS HERE] /s/ Hilary K. Rogers
----------------------
Signature
State of Calif. )
) ss.
County of Los Angeles )
On this 30 day of July, 1999, before me the undersigned, a Notary
Public in and for the County and State aforesaid, personally appeared
Arthur Fields, who is personally known to me (or proved to me on the basis of
satisfactory evidence) to be the person whose name is subscribed to within
instrument and acknowledged to me that he executed the same in his authorized
capacity and that by his signature on such instrument the person, or the entity
upon behalf of which the person acted, executed the instrument.
WITNESS, my hand and official seal.
/s/ Hilary K. Rogers
----------------------
[SEAL APPEARS HERE] Signature
<PAGE>
SECURITY AGREEMENT
------------------
THIS SECURITY AGREEMENT ("Agreement"), dated as of July 1, 1999, by and
between GRTV Network, Inc., a Delaware corporation ("Debtor"), TVN Entertainment
Corporation, a Delaware corporation ("TVN") and sole stockholder of Debtor, and
Guthy-Renker Television Network, Inc., a Delaware corporation ("Secured Party").
WHEREAS, Debtor, Secured Party and TVN are parties to that certain
Asset Acquisition Agreement, dated as of July 1, 1999, (the "Purchase
Agreement"), pursuant to which Debtor and TVN have become indebted to Secured
Party for the principal sum of $13,000,000, all as more particularly set forth
in that certain Promissory Note dated as of July 1, 1999, executed by Debtor and
TVN to the order of Secured Party (the "Note").
WHEREAS, as additional security for the prompt and complete payment of
all indebtedness evidenced by the Note and for certain other obligations of
Debtor and TVN set forth below, Debtor and TVN agree that Debtor shall grant
Secured Party a security interest in the property hereinafter described.
WHEREAS, capitalized terms used herein but not otherwise defined herein
shall have the meanings ascribed to them in the Purchase Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual
promises and other agreements hereinafter contained, Debtor and TVN hereby agree
with Secured Party for its benefit as follows:
1 . Grant of Security Interest. Debtor hereby grants, and TVN shall
---------------------------
cause Debtor to grant, to Secured Party a continuing security interest in the
following property of Debtor, wherever located, whether the same is now owned or
hereafter acquired (the "Collateral"):
(a) all inventories and merchandise, including without
limitation raw materials, work in process, finished products, goods in
transit, materials used or consumed in the manufacture or production
thereof, all packing materials, supplies and containers relating to or
used in connection with the foregoing, all goods in which Debtor has an
interest in mass or an interest or right as a consignee and all goods
which are returned to or repossessed by Debtor, whether used or
consumed in Debtor's business, held for sale or lease, furnished under
service contracts, or otherwise, and all bills of lading, warehouse
receipts, documents of title or general intangibles relating to any of
the foregoing (collectively, the "Inventory");
(b) all goods, equipment, machinery, tools, molds, dies,
furniture, fixtures (whether or not attached to real property),
furnishings, trade fixtures, motor vehicles, materials and parts and
all other tangible personal property (collectively, the "Equipment");
(c) all rights to the payment of money or other form of
consideration, accounts, notes, accounts receivable, drafts, documents,
chattel paper, choses in action,
<PAGE>
undertakings, surety bonds, insurance policies, acceptances and all
other forms of claims, demands, instruments and receivables, together
with all guarantees, security agreements, leases and rights and
interests securing the same and all right, title and interest of Debtor
in the merchandise which gave or shall give rise thereto, including the
right of stoppage in transit, repossession and resale (collectively,
the "Receivables");
(d) all agreements, contracts, credits, letters of credit,
security indentures, purchase and sale orders, warranty rights and
contract rights of any nature, whether written or oral, and all
consents or other authorizations relating thereto, to the extent
assignable (collectively, the "Contracts");
(e) all licenses, permits, franchises, certificates and other
governmental authorizations and approvals of any nature whatsoever, to
the extent assignable (collectively, the "Licenses and Permits");
(f) all deposit accounts, including without limitation, all
demand, time, savings, passbook, custodial, safekeeping, escrow or like
accounts maintained by Debtor with Secured Party or any bank, savings
and loan association, credit union or like organization, and all money,
cash, cash equivalents, investment securities, deposits and prepayments
of Debtor in any such deposit account (all of the foregoing being
deemed to be in any such account as soon as the same is put in transit
to such account by mail or other courier);
(g) all trademarks, trade names, trade styles, and service
marks (and all prints and labels on which any of the foregoing appear),
designs, letters patent of the United States or any other country,
other general intangibles, and all registrations, recordings, reissues,
extensions, renewals, continuations, continuations-in-part and licenses
thereof (including applications for registration and recording);
(h) all other proprietary rights and confidential
information, technology, processes, trade secrets, computer programs,
source codes, software, customer lists, sales literature and
catalogues, price lists, subscriber information, formulae, goodwill and
all applications and registrations relating to any of the foregoing;
(i) all real property, leases, easements, rights-of-way and
other interests in real property;
(j) all stocks, bonds, debentures, securities, subscription
rights, options, warrants, puts, calls, certificates, partnership
interests, joint venture interests, investments and/or brokerage
accounts and all rights, preferences, privileges, dividends,
distributions, redemption payments or liquidation payments with respect
thereto;
(k) all files, correspondence, books and records of Debtor,
including without limitation, books of account and ledgers of every
kind and nature, all electronically recorded data relating to the
Collateral, Debtor or the business thereof, all computer
2
<PAGE>
programs, tapes, discs and data processing software containing the
same, and all receptacles and containers for such records;
(l) all other goods, accounts, general intangibles,
documents, instruments, rights, interests and properties of every kind
and description, tangible or intangible, real or personal;
(m) all rights, remedies, powers and/or privileges of Debtor
with respect to any of the foregoing; and
(n) all cash and non-cash proceeds, replacements, products,
additions, accessions and substitutions of any of the foregoing.
Nothing in this Agreement shall be deemed to constitute an assumption
by Secured Party of any liability or obligation of Debtor with respect to any of
the Collateral.
The security interest hereby assigned, granted and conveyed to Secured
Party shall be a first priority security interest in the Collateral.
2. Security for Obligations. This Agreement secures and the Collateral
------------------------
is collateral security for the prompt payment or performance in full when due,
whether at stated maturity, by acceleration or otherwise (including the payment
of amounts which would become due but for the operation of the automatic stay
under Section 362(a) of the Bankruptcy Code, 11 U.S.C. (S) 362(a)), of all
obligations now or hereafter arising under the Note, this Agreement and any
future pledge by TVN of all of the issued and outstanding shares of Debtor as
additional security for payment of all indebtedness under the Note
(collectively, the "Loan Documents") whether for principal or interest
(including, without limitation, interest which, but for the filing of a petition
in bankruptcy with respect to Debtor, would accrue on such obligations) or
payments of fees and expenses including, without limitation, attorneys' fees
incurred by Secured Party in order to collect amounts due from TVN or Debtor
under the Loan Documents following an Event of Default as defined in Section 7
of this Agreement (all such obligations being the "Secured Obligations").
It is the intention of Debtor and TVN that the continuing grant of
security interests provided for herein shall remain as security for the payment
and performance of the Secured Obligations, whether now existing or hereinafter
incurred. No notice of the continuing grant of such security interests,
therefore, shall be required to be stated on the face of any document
representing any such Secured Obligation nor shall it otherwise be necessary to
identify any such Secured Obligation as being secured hereby. Any such Secured
Obligation shall be deemed to have been made pursuant to Section 9204 of the
Uniform Commercial Code of the State of California (the "Code").
3. Representations and Warranties. Debtor and TVN jointly and severally
------------------------------
represent and warrant as follows as of the date hereof (unless the context
provides otherwise):
3
<PAGE>
(a) Status of Debtor. Debtor is a corporation duly organized, validly
----------------
existing and in good standing under the laws of the State of Delaware and
is duly qualified to conduct business in the State of California. Debtor
has the requisite power and authority to own its assets and to transact the
business in which it is presently engaged and in which it proposes to
engage and to grant to Secured Party the security interests in the
Collateral as herein provided;
(b) Binding Agreement. This Agreement has been duly authorized and
-----------------
validly executed and delivered and constitutes the legal, valid and binding
obligations of Debtor and TVN enforceable against each of Debtor and TVN in
accordance with its terms;
(c) Title to Collateral. Except for the security interests granted to
-------------------
Secured Party hereby, Debtor has good and marketable title to all of the
Collateral, free and clear of any lien, pledge, charges, claims, options,
restrictions on transfer, mortgage, security interest or other encumbrance
of any sort (collectively, "Lien"), except as otherwise permitted in
Section 5(a) hereof. No effective financing statement or other instrument
similar in effect covering all or any part of the Collateral has been
executed by Debtor and filed in any recording office, except such as may
have been filed in favor of Secured Party relating to this Agreement;
(d) No Default or Required Consent. Neither the execution and
------------------------------
delivery of this Agreement by Debtor and TVN nor the effectuation by
Secured Party of any of its rights and remedies hereunder, whether upon
default or otherwise, will result in a breach of or constitute a default
under any charter provision or the bylaws of Debtor or any agreement or
instrument to which Debtor or TVN is a party or by which any of the
Collateral is bound, nor violate any law or any rule or regulation of any
administrative agency or any order, writ, injunction or decree of any court
or administrative agency, nor does any of the foregoing require the consent
of any person, entity or governmental agency or any notice or filing with
any governmental or regulatory body;
(e) First Priority. Upon the execution and delivery of this Agreement
--------------
by Debtor and TVN and the filing of appropriate financing statements with
the appropriate governmental agencies or, as applicable, upon Secured
Party's taking possession of the Collateral, Secured Party will have a
perfected first priority security interest in and to the Collateral for the
full amount of all of the Secured Obligations;
(f) Credit Information. Any and all credit or other information
------------------
heretofore furnished to Secured Party by Debtor and TVN in connection with
the Secured Obligations or Debtor's and TVN's financial condition or the
value or condition of the Collateral is true and correct, and all such
information hereafter furnished to Secured Party by Debtor and TVN will be
true and correct when furnished;
(g) No Litigation. There is no legal, administrative or other
-------------
proceeding pending or to the best knowledge of Debtor and TVN, threatened
against Debtor's title to the Collateral or against Debtor's grant of a
security interest therein hereunder, nor does Debtor or TVN know of any
basis for the assertion of any such claim;
4
<PAGE>
(h) Location of Debtor and Collateral. Schedule 3(h) hereto
--------------------------------- -------------
identifies the principal place of business of Debtor and the location of
the Collateral; and
(i) Disclosure. Debtor and TVN have disclosed to Secured Party all
----------
facts which are or may be material to this Agreement. No representation or
warranty or other information or statements provided by Debtor or TVN, or
on their behalf in connection with this Agreement contains any untrue
statement of a material fact or omits or will omit to state a material fact
necessary in order to make the statements therein not false or misleading.
4. Affirmative Covenants. Debtor and TVN covenant that until such time as
---------------------
all of the Secured Obligations are paid or satisfied in full (subject to any
rights which Debtor and TVN may have pursuant to Section 5.3 of the Purchase
Agreement), they will, in addition to any representations, warranties and
covenants contained in any of the other Loan Documents, undertake the following
unless Secured Party shall otherwise consent in writing:
(a) Conduct of Business and Maintenance of Assets and Licenses.
----------------------------------------------------------
Debtor shall do, and TVN shall cause to be done, all things necessary to
preserve in full force and effect Debtor's existence, its corporate powers
and authority, its qualifications to carry on business in all applicable
jurisdictions, and all rights, interests and assets necessary to the
conduct of its business;
(b) Delivery of Collateral. With respect to any Collateral as to
----------------------
which Secured Party's security interest may be perfected only by possession
of such Collateral, Debtor shall, and TVN shall cause Debtor to, upon
demand of Secured Party deliver possession of same in pledge to Secured
Party, endorsed or accompanied by such instruments of assignment or
transfer which (i) Secured Party may reasonably require to perfect its
security interest and (ii) shall be stamped or marked in such manner as
Secured Party may reasonably require for such perfection;
(c) Defense of Title, Protection of Security and Legal Proceedings.
--------------------------------------------------------------
Except as provided in Article V of the Purchase Agreement, Debtor shall,
and TVN shall cause Debtor to, at its own expense, defend its title to the
Collateral against the adverse claims of all persons, and take any and all
actions necessary or desirable to preserve, protect and defend the security
interests of Secured Party in the Collateral and the perfection and
priority thereof against any and all such adverse claims, including
appearing in and defending all actions and proceedings which purport to
affect any of the foregoing; provided, however, that Debtor shall not be
required hereunder to defend its title to the Collateral against any person
or entity who claims any title to or any interest in the Collateral
pursuant to or in connection with any agreement or transaction with
Secured Party or the GRC Group. Debtor shall, and TVN shall cause Debtor
to, promptly reimburse Secured Party for any and all sums, including costs,
expenses and actual attorneys' fees, which Secured Party may pay or incur
in defending, protecting or enforcing its security interests in the
Collateral or the perfection or priority thereof;
5
<PAGE>
(d) Financial Information and Reports. Debtor and TVN shall furnish
---------------------------------
to Secured Party:
(i) as soon as available and in any event within forty-five
(45) days after the end of each interim fiscal quarter of each fiscal
year of TVN, a consolidated and consolidating balance sheet of TVN and
its subsidiaries (including Debtor) as of the end of such interim
fiscal period, and a consolidated and consolidating statement of
earnings and shareholders' equity of TVN and its subsidiaries
(including Debtor) for such fiscal period and for the period beginning
on the first day of such fiscal year and ending on the date of such
balance sheet, setting forth in comparative form the corresponding
figures for the corresponding period of the preceding fiscal year, all
in reasonable detail and certified by the chief financial officer of
TVN;
(ii) as soon as available and in any event within ninety (90)
days after the last day of each fiscal year of TVN, consolidated and
consolidating financial statements which have been examined by TVN's
regular independent public accountants of recognized standing, covering
the operations of TVN and its subsidiaries (including Debtor) as of the
end of such year, and a consolidated and consolidating statement of
earnings, shareholders' equity and changes in financial position for
TVN and its subsidiaries (including Debtor) for the year then ended,
each on a comparative basis with corresponding financial statements for
the preceding fiscal year, which financial statements shall be
accompanied by a report of such independent public accountants stating
in substance that such financial statements have been prepared in
accordance with generally accepted accounting principles consistently
applied;
(iii) promptly upon any officer of TVN or Debtor learning of the
same, notice of the occurrence of any material change in the financial
status of TVN or Debtor, as the case may be, and notice of the
initiation of any litigation against TVN or Debtor which could, if
adversely determined, have a material adverse effect on the financial
condition or operations of TVN or Debtor, as the case may be;
(iv) promptly upon any officer of TVN or Debtor learning of the
same, notice of the occurrence of any material default by Debtor under
any media agreement with any cable, MSO or television programming
company affecting more than one million subscribers which has been
assigned by Secured Party to Debtor in connection with the Purchase
Agreement.
(e) Tax Returns. Debtor and TVN shall furnish to Secured Party within
-----------
ten (10) days following the date of filing, copies of all federal, state
and local income tax and property tax returns of Debtor and TVN.
(f) Payment of Taxes. Debtor shall, and TVN shall cause Debtor to,
----------------
pay or cause to be paid all taxes and other levies with respect to the
Collateral when the same
6
<PAGE>
become due and payable other than any taxes required to be paid by Secured
Party or its affiliates pursuant to Section 1.5 of the Purchase Agreement;
(g) Use and Maintenance of Collateral. Debtor shall, and TVN shall
---------------------------------
cause Debtor to, (i) comply with all laws, statutes and regulations
pertaining to its use and ownership of the Collateral and its conduct of
its business; (ii) properly care for and maintain all of the Equipment in
good condition, free of misuse, abuse, waste and deterioration, reasonable
wear and tear of intended use excepted; (iii) keep accurate and complete
books and records pertaining to the Collateral in accordance with generally
accepted accounting principles; and (iv) promptly and completely perform
all of its obligations under the Contracts, and maintain in full force and
effect all of the Licenses and Permits except in each case where the non-
compliance or non-performance of any of the covenants set forth in this
subsection (f) would not have a Material Adverse Effect on Debtor or the
value of the Collateral;
(h) Insurance. Debtor shall, and TVN shall cause Debtor to, at its
---------
own expense, keep the Collateral insured against loss by fire, property
damage, theft and other extended coverage hazards for the full replacement
value thereof and liability coverage in such amounts as Secured Party had
maintained in effect with respect to the business transferred to Debtor as
of the Effective Closing Date. The terms of all such insurance policies
shall be comparable in terms and amount of coverage as those policies in
effect on the Effective Closing Date and shall be written by companies
reasonably satisfactory to Secured Party. Such policies shall provide that
coverage shall not lapse for any reason whatsoever without the insurer
giving to Secured Party fifteen (15) days' prior written notice, and copies
of the policies of such insurance and certificates of insurance shall be
made available to Secured Party and shall be delivered to Secured Party
within thirty (30) days following the date of execution of this Agreement;
(i) Inspection. Debtor shall, and TVN shall cause Debtor to, give
----------
Secured Party such information as may be reasonably requested concerning
the Collateral and shall at all reasonable times and upon reasonable notice
permit Secured Party and its agents and representatives to enter upon any
premises upon which the Collateral is located for the purpose of inspecting
the Collateral. Furthermore, Secured Party and its accountants and other
agents shall at all reasonable times on reasonable notice have full access
to and the right to audit and/or inspect any and all of Debtor's books and
records pertaining to the Collateral, to confirm and verify the value of
the Collateral and to do whatever else Secured Party reasonably may deem
necessary or desirable to protect its interests; provided, however, that
any such action which involves communicating with customers of Debtor shall
be carried out by Secured Party through Debtor's independent auditors
unless an Event of Default (as defined in Section 7 below) occurs and is
continuing, in which case Secured Party shall then have the right directly
to notify such customers; and further provided that Secured Party shall
keep confidential all nonpublic information obtained by Secured Party in
the course of such reviews unless otherwise required by law;
7
<PAGE>
(j) Notification. Debtor shall, and TVN shall cause Debtor to, notify
------------
Secured Party in writing within three (3) business days of the actual
knowledge of TVN or Debtor of the occurrence of (i) an Event of Default or
of the occurrence of an event which, with notice or lapse of time, or both,
would constitute an Event of Default, or (ii) any event which materially
and adversely affects the value of the Collateral, the ability of Debtor or
Secured Party to dispose of the Collateral or the rights and remedies of
Secured Party in relation thereto; and
(k) Further Assurances. Debtor and TVN agree that at any time and
------------------
from time to time, at their expense, Debtor and TVN will promptly execute
and deliver all further instruments and documents, and take all further
action, that Secured Party deems necessary or that Secured Party may
reasonably request, in order to perfect and to protect any security
interest granted or purported to be granted hereby or to enable Secured
Party to exercise and to enforce its rights and remedies hereunder with
respect to any Collateral.
5. Negative Covenants. Debtor and TVN covenant that until such time as
------------------
all of the Secured Obligations are paid or satisfied in full, they will not, in
addition to any representations, warranties and covenants contained in any of
the other Loan Documents, undertake the following without the prior written
consent of Secured Party:
(a) Sale or Hypothecation of Collateral. Debtor shall not, and TVN
-----------------------------------
shall not cause Debtor to, directly or indirectly, whether voluntarily,
involuntarily, by operation of law or otherwise (i) sell, assign, transfer,
exchange, lease, lend, grant any option with respect to or dispose of any
of the Collateral (other than inventory items sold or leased in the
ordinary course of Debtor's business), or any of Debtor's rights therein,
nor (ii) create or permit to exist any Lien on or with respect to any of
the Collateral, except for (x) the Lien in favor of Secured Party (y) the
GRTV Liabilities and (z) Liens to secure Permitted Debt (defined as
indebtedness for financing provided to Debtor from time to time by one or
more banks or other financial institutions for working capital or other
ordinary business purposes provided that such Lien is junior to the Lien in
favor of Secured Party. The inclusion of "proceeds" as a component of the
Collateral shall not be deemed a consent by Secured Party to any sale,
assignment, transfer, exchange, lease, loan, granting of an option with
respect to or disposition of all or any part of the Collateral;
(b) Location of Collateral; Changes of Name. Except for inventoried
---------------------------------------
goods sold or leased in the ordinary course of business or vehicles or
other property moved in the ordinary course of business, Debtor shall not,
and TVN shall not cause Debtor to, cause or allow, without giving to
Secured Party at least fifteen (15) days' prior written notice (i) any of
the Collateral to be moved; (ii) move its principal place of business or
the location of its books or records; or (iii) change its name, its trade
or fictitious business name(s) or its form of doing business;
(c) Certain Agreements. Debtor shall not, and TVN shall not cause
------------------
Debtor to, cause, suffer or permit to occur any compromise, adjustment,
amendment, modification,
8
<PAGE>
settlement, waiver, substitution or termination in respect of any
Receivable, Contract, License or Permit, other than in the ordinary course
of Debtor's business;
(d) Reservation of Collateral. Debtor shall not, and TVN shall not
-------------------------
cause Debtor to, cause or allow anything to be done which might materially
impair, or fail to do anything necessary or advisable in order to prevent
the destruction of or substantial diminution of the value of the Collateral
and to preserve the security interests of Secured Party therein;
(e) Capital Stock; Distributions. Debtor will not, and TVN shall not
----------------------------
cause Debtor to, issue, sell, assign, transfer, convey, or otherwise
dispose of, or part with control of, or reclassify any shares of its
capital stock, except for shares of its capital stock issued to employees
pursuant to a stock option plan or similar plan, provided that all shares
of capital stock so issued are pledged to Secured Party pursuant to terms
and conditions satisfactory to Secured Party in its sole discretion. Debtor
will not, and TVN shall not cause Debtor to, pay or declare any dividend,
whether cash, stock or otherwise on any class of its capital stock or make
any other distribution on account of any class of its capital stock, or
redeem, purchase or otherwise acquire, directly or indirectly, any shares
of its capital stock;
(f) Extraordinary Transactions. Debtor will not, and TVN shall not
--------------------------
cause Debtor to, merge, consolidate, or combine with any other person or
entity, reorganize, liquidate or dissolve, or sell, lease, transfer or
otherwise dispose of all or any substantial part of its assets;
(g) Prohibition on Hazardous Materials. Debtor will not, and TVN
----------------------------------
shall not cause Debtor to, place, store, or permit to be placed or stored
any hazardous material or substance which requires remediation under any
federal, state, or local statute, regulation, ordinance, or order on any
property owned, controlled or operated by Debtor or for which Debtor is
responsible, other than those such materials or substances which are
actually present on said property on the date of this Agreement; and
(h) Related Party Transactions. Debtor will not, and TVN shall not
--------------------------
cause Debtor to, enter into any transaction with any officer, director or
stockholder of Debtor, any family member of any such person, or any entity
in which any such person has an interest, or make any advance or loan to
any such person or entity except on terms which are not more favorable to
any such person or entity than terms which Debtor could obtain in an arms
length transaction with an unrelated third party.
6. Secured Party May Perform. If Debtor or TVN fail to perform any
-------------------------
agreement or covenant contained herein, Secured Party may itself perform or
cause the performance of such agreement or covenant, and the expenses of Secured
Party incurred in connection therewith, plus interest at the maximum rate
permitted by law from the date of such advance to the date of reimbursement,
shall be deemed "Secured Obligations" for all purposes hereunder and shall be
payable by Debtor pursuant to Section 11. However, nothing in this Agreement
shall obligate Secured Party to so act.
9
<PAGE>
7. Events of Default. The occurrence of any of the following shall
-----------------
constitute an event of default ("Event of Default") hereunder:
(a) Default Under Note Etc. The default in the prompt and complete
----------------------
payment or performance of the Note; the default in the prompt and complete
payment and/or performance of any term, condition or covenant in favor of
Secured Party contained in any Loan Document or in any indenture or other
instrument delivered pursuant thereto or hereto; the default in the prompt
and complete payment and performance of any other Secured Obligation; or
the occurrence of any other event of default specified in any of the
foregoing; in each such case, where such default is not cured within any
applicable grace period which may be granted in any such agreement,
indenture or other instrument with respect to such default or, if no
specific grace period is granted with respect to such default, where such
default is not cured within ten (10) days after written notice thereof from
Secured Party or any successor in interest thereto;
(b) Dissolution of Debtor Etc. The cessation of Debtor or TVN as a
-------------------------
going concern;
(c) Breach of Agreement. The material breach of any representation,
-------------------
warranty, covenant or agreement of Debtor or TVN contained in this
Agreement or any other Loan Document or in any document, certificate or
instrument delivered pursuant thereto or hereto which breach is not cured
within ten (10) days after written notice from Secured Party or any
successor of interest thereto;
(d) Adverse Judgments. The entry of a final judgment for the payment
-----------------
of money in excess of $1,000,000 rendered by any court of competent
jurisdiction against Debtor, and if the same is not discharged or execution
thereunder stayed, whether pursuant to appeal or otherwise, within thirty
(30) days of the entry thereof, or if any final order, ruling or direction
of any competent authority is issued with respect to Debtor which
materially adversely affects Debtor, or which requires a substantial or
material adverse change in the business or affairs of Debtor, or a material
disposition of assets of Debtor; or
(e) Adverse Change. Any material adverse change in the financial
--------------
condition of Debtor that continues for a period of thirty (30) days or
more.
8. Remedies upon Default. If any Event of Default shall have occurred
---------------------
hereunder:
(a) Acceleration of Indebtedness. Secured Party may declare any or
----------------------------
all Secured Obligations, or any part thereof, to be immediately due and
payable without demand or notice and Secured Party may proceed to collect
the same.
(b) Notification to Third Parties. Secured Party may notify any
-----------------------------
account debtor obligated on any of the Receivables or any purchaser of
Collateral or any other
10
<PAGE>
person of Secured Party's interest in the Collateral and instruct any such
persons to make payments thereon directly to Secured Party.
(c) Compromise of Claims. Secured Party may grant extensions, compromise
--------------------
claims and settle Collateral for less than face value, all without prior notice
to Debtor and TVN.
(d) Use of Trade Names, Etc. Secured Party may use in connection with any
-----------------------
assembly or disposition of the Collateral, any trademark, trade name, trade
style, copyright, patent right, technical process or other proprietary right
used or utilized by Debtor.
(e) Other Rights Against Debtor Hereunder. Secured Party may exercise in
-------------------------------------
respect of the Collateral, in addition to other rights and remedies provided for
herein or otherwise available to it, all the rights and remedies of a secured
party under the Code, and Secured Party may also without notice except as
specified below sell the Collateral or any part thereof in one or more parcels
at public or private sale, for cash, on credit or for future delivery, and upon
such other terms as Secured Party in its sole and absolute discretion may deem
commercially reasonable. Debtor agrees that, to the extent notice of sale shall
be required by law, at least ten (10) days' notice to Debtor of the time and
place of any public sale or the time after which any private sale is to be made
shall constitute reasonable notification. Secured Party shall not be obligated
to make any sale of Collateral regardless of notice of sale having been given.
Secured Party may adjourn any public or private sale from time to time by
announcement at the time and place fixed therefor, and such sale may, without
further notice, be made at the time and place to which it was so adjourned.
Debtor and TVN hereby waive any claims against Secured Party arising by reason
of the fact that the price at which any Collateral may have been sold at such a
private sale was less than the price which might have been obtained at a public
sale, even if Secured Party accepts the first offer received and does not offer
such Collateral to more than one offeree, and in all events such sale shall be
deemed to be commercially reasonable. At any such public or private sale,
Secured Party may be the purchaser of the Collateral.
(f) Application of Proceeds. Any cash held by Secured Party as Collateral
-----------------------
and all cash proceeds received by Secured Party in respect of any sale of,
collection from, or other realization upon all or any part of the Collateral
may, in the direction of Secured Party, be held by Secured Party as collateral
for, and/or then or at any time thereafter applied (after payment of any amounts
payable to Secured Party pursuant to Section 11) in whole or in part by Secured
Party against all or any part of the Secured Obligations in the following order:
first to late penalties under the Note, next to accrued but unpaid interest
under the Note, next to the principal amount outstanding under the Note, then to
any Secured Obligations due and owing other than those based upon the Note. Any
surplus of such cash or cash proceeds held by Secured Party and remaining after
payment in full of all the Secured Obligations shall be paid over to Debtor or
to whomsoever may be lawfully entitled to receive such surplus. In a like
manner, Debtor shall, and TVN shall cause Debtor to, pay to Secured Party,
without demand, whatever amount of the
11
<PAGE>
Secured Obligations remains unpaid after the Collateral has been sold and
the proceeds applied as aforesaid, together with interest thereon from the
date of demand at the highest rate specified in the Note, which interest
shall also constitute a part of the Secured Obligations.
(g) Other Rights. Secured Party shall not be obligated to resort to
------------
its rights or remedies with respect to any other security for or guaranty
or payment of the Secured Obligations before resorting to its rights and
remedies against Debtor hereunder. All rights and remedies of Secured Party
shall be cumulative and not in the alternative.
9. Secured Party Appointed Attorney-in-Fact. Debtor hereby appoints
----------------------------------------
Secured Party as Debtor's attorney-in-fact with full authority in the place and
stead of Debtor and in the name of Debtor or otherwise, after an Event of
Default, in Secured Party's sole and absolute discretion to take any action and
to execute any instrument which Secured Party may deem necessary or advisable to
accomplish the purposes of this Agreement. Debtor acknowledges that the
foregoing grant of power of attorney is coupled with an interest and is
irrevocable.
10. Liability and Indemnification. Secured Party shall not be liable to
-----------------------------
Debtor or TVN for any act (including, without limitation, any act of active
negligence) of or omission by Secured Party with respect to this Agreement
unless Secured Party's conduct constitutes willful misconduct or gross
negligence. Debtor and TVN agree to indemnify and to hold Secured Party harmless
from and against all losses, liabilities, claims, damages, costs and expenses
(including actual attorneys' fees and disbursements) with respect to (a) any
action taken (including, without limitation, any act of active negligence) or
any omission by Secured Party with respect to this Agreement, provided that
Secured Party's conduct does not constitute willful misconduct or gross
negligence, and (b) any claims arising out of Secured Party's security interest
therein.
11. Expenses. Debtor will, and TVN shall cause Debtor to, upon demand pay
--------
to Secured Party the amount of any and all expenses, including the fees and
expenses of its counsel and of any experts and agents, which Secured Party may
incur in connection with (a) the administration of this Agreement, (b) the
custody or preservation of, or the sale of, collection from, or other
realization upon, any of the Collateral, (c) the exercise or enforcement of any
of the rights of Secured Party hereunder, and (d) the failure by Debtor or TVN
to perform or observe any of the provisions hereof.
12. Security Interest Absolute. Except as set forth in Article V of the
--------------------------
Purchase Agreement, all rights of Secured Party and security interests
hereunder, and all Secured Obligations of Debtor and TVN hereunder, shall be
absolute and unconditional irrespective of:
(a) any lack of validity or enforceability of the Note, any other Loan
Document or any other document or any other agreement or instrument
relating thereto;
(b) any change in the time, manner or place of payment of, or in any
other term of, all or any of the Secured Obligations, or any other
amendment or waiver of or any consent to any departure from the Note, any
other Loan Document any other document or any other agreement or instrument
relating thereto;
12
<PAGE>
(c) any exchange, release or non-perfection of any other collateral,
or any release or amendment or waiver of or consent to departure from any
guaranty for all or any of the Secured Obligations; or
(d) any other circumstance which might otherwise constitute a defense
available to, or a discharge of, Debtor.
13. Amendments, Waiver. No amendment or waiver of any provision of this
------------------
Agreement nor consent to any departure by Debtor or TVN herefrom shall in any
event be effective unless the same shall be in writing and signed by Secured
Party, Debtor and TVN, and then such waiver or consent shall be effective only
in the specific instance and for the specific purpose for which given.
14. Notices. All notices, demands and requests of any kind which any party
-------
may be required or desires to serve upon any other party hereunder shall be in
writing and shall be delivered and be effective in accordance with the notice
provision of the Note.
15. Continuing Security Interest; Assignment of Obligations. This
-------------------------------------------------------
Agreement shall create a continuing security interest in the Collateral and
shall (a) remain in full force and effect until payment in full of the Secured
Obligations, (b) be binding upon Debtor and TVN, their successors and assigns,
(c) inure, together with the rights and remedies of Secured Party hereunder, to
the benefit of Secured Party and its successors, transferees and assigns, (d)
constitute, along with the Loan Documents, the entire agreement between Debtor,
TVN and Secured Party, and (e) be severable in the event that one or more of the
provisions herein is determined to be illegal or unenforceable. Without limiting
the generality of the foregoing clause (c), Secured Party may assign or
otherwise transfer any Secured Obligation to any other person or entity, and
such other person or entity shall thereupon become vested with all the benefits
in respect thereof granted to Secured Party herein or otherwise. Upon the
payment in full of the Secured Obligations, Secured Party, within thirty (30)
days thereafter at the expense of Debtor, shall release the security interests
in the Collateral granted herein and execute such termination statements as may
be necessary therefor, to the extent that such Collateral shall not have been
sold or otherwise applied pursuant to the terms hereof.
16. Return of Collateral. Subject to any duty imposed by law or otherwise
--------------------
to the holder of any subordinate lien on the Collateral known to Secured Party,
and subject to the direction of a court of competent jurisdiction, upon payment
in full of the Secured Obligations Debtor shall be entitled to the return of all
Collateral in the possession of Secured Party; provided, however, that Secured
Party shall not be obligated to return to Debtor or deliver to the holder of any
subordinate lien any such Collateral until it is satisfied that all amounts with
respect to the Secured Obligations are no longer subject to being recaptured
under applicable bankruptcy or insolvency laws or otherwise. The return of
Collateral, however effected, shall be without recourse to Secured Party and
Secured Party shall be entitled to receive appropriate documentation to such
effect. The return of Collateral shall be effected without representation or
warranty and shall not entitle Debtor or TVN to any right to any endorsement.
13
<PAGE>
17. Cumulative Rights, No Waiver. The several rights and remedies of
----------------------------
Secured Party hereunder or referred to herein shall, to the full extent
permitted by law, be construed as cumulative, and no one of them shall be
exclusive of the others. No delay or omission of Secured Party in exercising any
right or remedy provided in this Agreement or arising from any default of any
Secured Obligation shall be construed as an acquiescence therein, a waiver of
such default or a waiver of or limitation upon the right of Secured Party to
exercise, at any time and from time to time thereafter, any right or remedy
under this Agreement. No waiver of any breach of any of the covenants or
conditions of this Agreement shall be construed to be a waiver of or
acquiescence in any preceding or subsequent breach of the same or any other
condition or covenant. If the performance of any Secured Obligation is at any
time secured by any other instrument or instruments, the exercise by Secured
Party of any right or remedy under any such other instrument shall not be
construed as or deemed to be a waiver of any limitation upon the right of
Secured Party to exercise, at any time and from time to time thereafter, any
right or remedy under this Agreement or under any such other instrument.
18. Governing Law; Terms. This Agreement shall be governed by, and
--------------------
construed in accordance with, the laws of the State of California. Each party
hereto irrevocably consents to jurisdiction of any state or federal court
sitting in the County of Los Angeles in the State of California over any suit,
action, or proceeding arising out of or relating to this Agreement. Each party
hereto irrevocably waives, to the fullest extent permitted by law, any objection
that they may now or hereafter have to the laying the venue of any such suit,
action, or proceeding brought in any such court, and any claim that any such
suit, action, or proceeding brought in any such court has been brought in an
inconvenient forum. Unless otherwise defined herein or in the Purchase
Agreement, terms defined in the Code are used herein as therein defined.
19. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
20. Severability. If any one or more of the terms or provisions of this
------------
Agreement shall for any reason be held to be invalid, illegal or unenforceable,
in whole or in part, or in any respect, or in the event that any one or more of
the provisions of this Agreement operate or would prospectively operate to
invalidate this Agreement, then and in either of those events, such provision or
provisions only shall be deemed null and void and shall not affect any other
provision of this Agreement and the remaining provisions of this Agreement shall
remain operative and in full force and effect and shall in no way be affected,
prejudiced or disturbed thereby.
21. TRIAL BY JURY. DEBTOR AND TVN HEREBY WAIVE, AND COVENANT
-------------
THAT THEY WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE), ANY
RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE, CLAIM, DEMAND,
ACTION OR CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS AGREEMENT, THE
SUBJECT MATTER HEREOF OR ANY LOAN DOCUMENT OR ANY SECURED OBLIGATION, IN EACH
CASE WHETHER NOW EXISTING OR HEREAFTER ARISING OR WHETHER IN CONTRACT OR IN TORT
OR OTHERWISE.
14
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their respective officers thereunto duly
authorized as of the date first above written.
DEBTOR:
GRTV NETWORK, INC.
By: /s/ Arthur Fields
------------------------------
Name: Arthur Fields
Title: Sr. Exec. V.P.
TVN:
TVN ENTERTAINMENT CORPORATION
By: /s/ Arthur Fields
------------------------------
Name: Arthur Fields
Title: Sr. Exec. V.P.
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their respective officers thereunto duly
authorized as of the date first above written.
SECURED PARTY:
GUTHY-RENKER TELEVISION NETWORK,
INC.
By: /s/ B. Van de Bunt
------------------------------
Name: B. Van de Bunt
Title: EVP
16
<PAGE>
SCHEDULE 3(h)
-------------
Location of Debtor and Collateral
---------------------------------
17
<PAGE>
ASSIGNMENT AGREEMENT
THIS ASSIGNMENT AGREEMENT (the "Assignment") is executed as of this
1st day of July, 1999 (the "Effective Date"), by and between GUTHY-RENKER
TELEVISION NETWORK, INC., a Delaware Corporation ("Assignor") and GRTV NETWORK,
INC., a Delaware corporation ("Assignee").
WHEREAS, Assignor and Assignee are parties to that certain Asset
Acquisition Agreement dated as of July 1, 1999 (the "Purchase Agreement"),
pursuant to which Assignor is selling to Assignee, and Assignee is acquiring
from Assignor, substantially all of the assets of Assignor;
WHEREAS, Assignor owns all of the issued and outstanding member
interests in Coast-to-Coast Media, LLC, a California limited liability company
("CTC");
WHEREAS, as of the Effective Date, Assignor desires to assign to
Assignee its membership interest in the LLC (the "CTC Interest") pursuant to the
terms and conditions set forth in the Purchase Agreement; and
NOW, THEREFORE, in consideration of the foregoing, the consideration
set forth in the Purchase Agreement and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto, intending to be legally bound, hereby agree as follows:
1. Recitals. The foregoing recitals are made a part of this
--------
Agreement.
2. Assignment of Interest. Assignor hereby sells, transfers, grants,
----------------------
conveys and assigns to Assignee all of Assignor's rights, title and interest in
and to the CTC Interest.
3. Representations and Warranties of Assignor. Assignor hereby
------------------------------------------
represents and warrants to Assignee as follows, as of the date hereof:
(i) Assignor is not a party to or bound by any written or oral
contract or agreement which grants to any person or entity, whatsoever, an
option or right of first refusal or other right to acquire the CTC Interest at
any time, or upon the happening of any stated event. Assignor has not sold,
transferred, granted, conveyed or assigned any other right or interest in or to
the CTC Interest.
(ii) Assignor is the lawful owner of record and the beneficial
owner of the CTC Interest, free and clear of all liens, encumbrances, claims and
other charges thereon of every kind. Except for the CTC Interest, there are no
other issued and outstanding member interests in CTC.
<PAGE>
4. Further Assurances. From time to time, at the request of any party
------------------
hereto, without further consideration, (i) Assignor shall execute and deliver,
or cause to be executed and delivered, such further instruments of conveyance
and take such other action as reasonably may be required to more effectively
sell, transfer, grant, convey and assign the CTC Interest or any portion thereof
to Assignee; and (ii) each party shall execute and deliver, or cause to be
executed and delivered, such additional or supplemental certificates,
instruments and documents, and take such other action as reasonably may be
required to more effectively carry out the intention of the parties hereto and
facilitate the performance of this Agreement.
5. Miscellaneous.
-------------
(a) Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of California, without regard
to principles of conflicts of laws.
(b) Successors and Assigns. This Agreement shall be binding upon
----------------------
and inure to the benefit of the parties hereto and their respective successors
and assigns.
(c) Execution in Counterparts. This Agreement may be executed in
-------------------------
two or more counterparts, each of which shall be deemed an original, but all
of which shall constitute one and the same instrument.
(d) Titles and Headings. Titles and headings to sections herein
-------------------
are inserted for convenience of reference only and are not intended to be a part
of or to affect the meaning or interpretation of this Agreement.
(e) Gender. In this Agreement, the use of the singular shall
------
include the plural, and the use of the neutral gender shall include the
masculine and feminine genders, and vice versa.
(f) Survival. Subject to the terms and conditions of the Purchase
--------
Agreement, the representations and warranties of Assignee made in this Agreement
shall survive the execution and delivery hereof.
-2-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
WITNESS: ASSIGNOR:
--------
GUTHY-RENKER TELEVISION
NETWORK, INC.
By: /s/ B. Van de Bunt (SEAL)
- ----------------------- --------------------------
Ben Van de Bunt
Corporate Secretary
ASSIGNEE:
--------
GRTV NETWORK, INC.
By: /s/ Arthur Fields (SEAL)
- ----------------------- --------------------------
-3-
<PAGE>
ASSIGNMENT OF COPYRIGHTS
WHEREAS, Guthy-Renker Television Network, Inc., a Delaware corporation,
having a principal place of business at 3340 Ocean Park Boulevard, Santa Monica,
California 90405 (hereinafter "Assignor"), and GRTV Network, Inc., a Delaware
corporation, having its principal place of business at 2901 West Alameda
Avenue, Burbank, California 91505 (hereinafter "Assignee") are parties to that
certain Asset Acquisition Agreement effective as of July 1, 1999 (the
"Agreement") between TVN Entertainment Corporation, Assignee, Guthy-Renker
Corporation and Assignor pursuant to which Assignor sold, conveyed, transferred,
assigned and delivered to Assignee all of Assignor's right, title and interest
in and to the GRTV Assets used in the GRTV Business (each, as defined in the
Agreement), including the copyrights listed as Item 6 on Schedule 1 of the
Agreement (collectively, the "Works").
NOW, THEREFORE, for good and valuable consideration the receipt of which is
hereby acknowledged, Assignor hereby transfers, conveys and assigns to Assignee
all of Assignor's right, title and interest whatsoever, throughout the world, in
and under the Works, to have and to hold the same, unto Assignee, its successors
and assigns, for the full duration of all such rights, and any renewals and
extensions thereof.
Assignor further transfers, conveys and assigns unto Assignee the entire
right, title and interest in and to any and all causes of action and rights of
recovery for past infringement of the Works herein assigned, and Assignee shall
bear the costs for recordation of the assignment set forth herein and the
further prosecution and maintenance of the Works.
This Assignment is made pursuant to and is subject to all the terms of the
Agreement.
<PAGE>
IN WITNESS WHEREOF, Guthy-Renker Television Network, Inc., has caused this
instrument to be signed in it name by its duly authorized officer to be
effective as of the ___ day of July, 1999.
GUTHY-RENKER TELEVISION NETWORK,
INC.
By: /s/ B. Van de Bunt
-------------------------------------
Name: B. Van de Bunt
Title: EVP
Acknowledged and Accepted:
GRTV NETWORK, INC.
By: /s/ Arthur Fields
---------------------------
Name: Arthur Fields
Title: Sr. Exec. V.P.
-2-
<PAGE>
CERTIFICATION
-------------
State of Calif. )
---------------- )ss.
County of Los Angeles )
---------------
On this 30 day of July, 1999, before me the undersigned, a Notary
Public in and for the County and State aforesaid, personally appeared Ben Van de
Bunt, who is personally known to me or proved to me on the basis of satisfactory
evidence) to be the person whose name is subscribed to within instrument and
acknowledged to me that he executed the same in his authorized capacity and that
by his signature on such instrument the person, or the entity upon behalf of
which the person acted, executed the instrument.
WITNESS, my hand and official seal.
[NOTARY PUBLIC SEAL] /s/ Hilary K. Rogers
---------------------------
Signature
State of Calif. )
---------------- )ss.
County of Los Angeles )
---------------
On this 30 day of July, 1999, before me the undersigned, a Notary
Public in and for the County and State aforesaid, personally appeared Arthur
Fields, who is personally known to me (or proved to me on the basis of
satisfactory evidence) to be the person whose name is subscribed to within
instrument and acknowledged to me that he executed the same in his authorized
capacity and that by his signature on such instrument the person, or the entity
upon behalf of which the person acted, executed the instrument.
WITNESS, my hand and official seal.
[NOTARY PUBLIC SEAL] /s/ Hilary K. Rogers
---------------------------
Signature
<PAGE>
MEDIA ACCESS, CONSULTING AND SERVICES AGREEMENT
This Media Access, Consulting and Services Agreement (the "Agreement") is
made as of July 1, 1999 by and among Guthy-Renker Corporation, a Delaware
corporation ("GRC"), TVN Entertainment Corporation, a Delaware corporation
("TVN"), and GRTV Network, Inc. ("GRTN").
WHEREAS, GRC hereby agrees to provide certain rights and services to TVN
and GRTN and TVN and GRTN hereby agrees to pay GRC for such rights and services
on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the parties hereto agree as follows:
1. GRC Services and Deliverables.
-----------------------------
(a) Media and Spot Time.
-------------------
(i) GRTN Right to Broadcast GRC Programming. Subject to the terms of
---------------------------------------
this Agreement, GRC hereby grants to GRTN the right to
broadcast, during the Term (as defined below), any available (as
determined in accordance with the procedure set forth in Section
1(d) below) direct response infomercial from the Infomercial
Library (defined below) on any unsold GRTN media time, with
revenue sharing as is more fully set forth in Section 4 below.
(ii) Media Time. During the Term, GRC agrees to buy infomercial/spot
----------
media from GRTN on a priority basis (i.e., GRC shall buy
infomercial/spot media from GRTN, rather than from a third
party, where commercially and economically reasonable to do so
in GRC's sole discretion (in comparison to other long-form
and/or short-form direct-response media opportunities), and at
the then prevailing GRTN market rates.
(b) Consulting Services. GRC agrees to provide TVN and GRTN during the
-------------------
Term with the following consulting services: (i) input regarding GRC's
experiences regarding product selection, infomercial production and worldwide
operations, (ii) similar consulting services as were provided by GRC to Guthy-
Renker Television Network, Inc., ("GRTV") immediately prior to the acquisition
of GRTV's business by TVN, and (iii) such other consulting services as the
parties hereto agree upon from time to time, all of which shall be designed to
assist the ongoing business of GRTN with a minimum of disruption; provided,
however, that in no event shall GRC be required to (A) devote any more than a
reasonable amount of time (as determined by GRC in its reasonable discretion) in
connection with the services to be provided by GRC hereunder, or (B) incur any
out of pocket costs or expenses in connection with such services, without the
prior written consent of GRC.
(c) Merchandise Procurement and Order Fulfillment Relationships. During
-----------------------------------------------------------
the Term, GRC agrees to provide TVN and GRTN with consulting services regarding
merchandise procurement and order fulfillment, including, without limitation,
the identity of domestic and international vendors to utilize therefor;
provided, however, that in no event shall GRC be required to (i) devote any more
than a reasonable amount of time (as determined by GRC in its reasonable
discretion) in connection with the services to be provided by GRC hereunder, or
(ii) incur any out of pocket costs or expenses in connection with such services,
without the prior written consent of GRC.
(d) Direct Response Infomercial Library. During the Term, GRC agrees to
-----------------------------------
continue to provide GRTN access to its full and complete library of all current
GRC direct response infomercial broadcast
Page 1 of 8
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<PAGE>
quality videotapes relating to the sale of GRC goods and/or services (an
"Infomercial" or collectively, the "Infomercial Library") within a reasonable
time following execution of this Agreement. GRC further agrees to keep current
the Infomercial Library by providing infomercial videotapes relating to new GRC
products within a reasonable time following the conclusion of their production.
In the event that GRTN wishes to utilize any of the Infomercials, GRTN shall
first contact GRC's head of media to determine which Infomercials are currently
available for use, and GRC shall, in accordance with the practices previously in
effect with GRTV but in no event later than one (1) business day from such
request, apprise GRTN as to which of the Infomercials are available for
broadcast and the time frame during which GRTN shall be entitled to broadcast
such without being required to contact GRC again. Notwithstanding any provision
of this subsection 1(d) to the contrary, GRC retains the sole and exclusive
right to determine the Infomercial Library and may make additions, deletions and
other changes and provide notice of such to GRTN. All Infomercials supplied by
GRC shall be of broadcast quality and shall be in such format as GRTN may
reasonably designate, all consistent with the processes in effect prior to the
sale of GRTV to TVN.
(e) GRC Products for Distribution by TSI. During the Term, in the event
------------------------------------
that TVN's television shopping network (Panda/TVN Shopping, Inc., "TSI") wishes
to purchase from GRC any of the products distributed by or through GRC, GRC
agrees to use its best efforts to provide such products to TSI subject to the
terms of one or more separate distribution agreements between GRC and TSI for
one or more of such products, which agreement(s) shall (i) be on terms mutually
satisfactory to GRC and TSI, (ii) provide pricing consistent with that offered
by GRC to its most favored shopping channel clients and (iii) be subject to all
legal and contractual rights, if any, of GRC to sell any such products. TSI
shall only be permitted to sell GRC products purchased under this Section 1(e)
by means of its hosts on its shopping channel and not through the airing of any
GRC Infomercial.
2. Fees for Services and Deliverables.
----------------------------------
(a) The fees payable by GRTN to GRC for the services which GRC has agreed
to provide under Section 1 above (the "GRC Services") shall be FIFTEEN MILLION
DOLLARS ($15,000,000), payable as is more fully set forth in Section 2(b),
below.
(b) At the end of each calendar month during the Term (defined below), GRC
shall invoice GRTN for the sum of TWO HUNDRED FIFTY THOUSAND DOLLARS ($250,000)
payable for the GRC Services (the "Monthly Fee"), and GRTN shall pay said sum to
GRC within thirty (30) days following GRTN's receipt of such invoice. There
shall be no interest charged, due, or owing on said $250,000 per month payments,
unless paid more than fifteen (15) days late, whereupon interest shall accrue at
ten percent (10%) per annum on the unpaid amount.
3. Term. This Agreement shall commence on the date hereof and shall continue
----
until July 1, 2004 (the "Term").
4. Revenue Sharing. For any GRC direct response infomercial aired by GRTN
---------------
pursuant to Section 1(a) above in which a GRC product or service is sold via
GRTN:
(a) GRTN will receive TWENTY FIVE PERCENT (25%) of all Gross Revenues
(defined below) from cosmetics, fitness, exercise and/or other equipment or hard
goods and related products sold, which shall be paid in accordance with Section
4(b) below, and GRC shall provide GRTN with a report due at the end of each
monthly which lists all data required to determine Gross Revenues and GRTN's
share thereof for that month. GRTN will receive THIRTY-THREE AND ONE-THIRD
PERCENT (33-l/3%) of all Gross Revenues (defined below) from soft goods and
related products, ideas and/or services (including, without limitation, video
tapes and discs, books and audio tapes and discs) sold, which shall be paid in
accordance with Section 4(b) below, and GRC shall provide GRTN with a report due
at the end of each monthly which lists all data required to determine Gross
Revenues and GRTN's share thereof for that month.
Page 2 of 8
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<PAGE>
(b) All fees due and owing by GRC to GRTN under Section 4(a) shall be
credited against the Monthly Fee payable by GRTN for the following calendar
month. In the event that the fees due and owing under Section 4(a) exceed the
Monthly Fee (or in the event of the final calendar month under the Term), GRC
shall pay such fees directly to GRTN.
(c) For purposes of this Section 4, the term "Gross Revenue" shall be
computed by multiplying the price of each product or service sold via GRTN by
the number of sales made for such item, without deduction for returns, refunds,
credits, charge backs and bad debt. Gross Revenue shall not include uncompleted
sales such as credit card declines or instances where payment is not received by
GRC.
(d) All sales will be deemed complete when merchandise is shipped.
(e) GRTN, or its authorized representative, shall be entitled to audit
GRC's books and records directly relating to GRC's obligations under this
Section 4, upon reasonable advance written notice to GRC. GRTN may conduct such
an audit no more than two (2) times per year. GRC, or its authorized
representative, shall be entitled to audit GRTN's books and records directly
relating to GRTN's obligations under this Section 4, upon reasonable advance
written notice to GRTN. GRC may conduct such an audit no more than two (2) times
per year
5. Returns and Warranties.
----------------------
(a) Except as is provided in Section 5(b) below, for all GRC provided
products sold via GRTN, GRC shall process all product returns, including any
which the customer finds to be defective in workmanship or material, or which
are damaged in shipment from GRC, or which are sent back by the customer within
applicable return periods. GRC agrees to handle all warranty claims with regard
to any GRC products sold via GRTN. GRC agrees to indemnify and hold GRTN
harmless for all damages, liability, loss and expense, including, without
limitation, reasonable attorney's fees ("Claims"), actually incurred by GRTN
resulting from defects or damage arising from any GRC product sold via GRTN, and
for any Claims based upon the content of the Infomercial Library and/or any
products provided by, or on behalf of, GRC. In no event shall GRC, TVN or GRTN
be liable hereunder for any special, consequential or similar damages,
regardless of the foreseeability of such damages.
(b) In the event that GRTN or TSI takes title to GRC provided products and
such products are damaged due to acts or omissions of GRTN or TSI, as
applicable, or any agent of GRTN or TSI, as applicable, then with regard to
products so damaged, the obligations of Section 5(a) above shall not apply to
GRC.
6. Confidentiality. The terms and pricing set forth herein is confidential
---------------
information and shall be held by the parties in strictest confidence and not
disclosed to any third party (other than to any entity controlling, controlled
by, or under common control with a party hereto) without the other party's prior
written consent. The parties confidential obligations of confidentiality
hereunder shall not apply to confidential information which (i) is now, or
hereafter becomes, through no act or failure to act by the party seeking
disclosure (the "Disclosing Party"), generally known or available, (ii) is
hereafter furnished by the non-Disclosing Party to others without restriction on
disclosure; (iii) is authorized in writing by the non-Disclosing Party for
public disclosure; or (iv) is pursuant to a judicial order or government
regulation (provided, however, that the Disclosing Party shall first have given
notice, where practicable, to the non-Disclosing Party and shall either itself
obtain, or allow the Disclosing Party an opportunity to obtain, a protective
order preventing or limiting such compelled disclosure, and then any required
disclosure shall be the minimum required by applicable law. The burden of proof
on any exception under this Section 6 shall be on the Disclosing Party.
7. Representations. Each party hereto represents and warrants that: it has the
---------------
right to enter into this Agreement, it will comply with all of the terms herein,
and that the execution and performance of this
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REV. 8.0
<PAGE>
Agreement will not result in any violation of, be in conflict with, or
constitute a default under, with or without the passage of time or the giving
of notice of, any other agreement to which it is bound.
8. Breach. No breach committed hereunder shall be grounds for termination of
------
this Agreement unless written notice thereof has been provided to the breaching
party with a thirty (30) day cure period. In the event a default is curable, but
is not cured within such thirty (30) day period, the breaching party must as
soon as practicable within such thirty (30) day period initiate such cure and
thereafter diligently and promptly complete measures to cure such default, in
which case the breaching party shall have such additional cure period as the
parties may reasonably agree given the nature and magnitude of the default, and
the impact of the default on this Agreement.
9. TVN Guarantee. TVN agrees to guarantee GRTN's full and faithful performance
-------------
of all of GRTN's obligations hereunder, as set forth in that certain Guaranty of
even date herewith, a copy of which is attached hereto as Exhibit "A" (the
"Guaranty").
10. Dispute Resolution.
------------------
(a) Resolution by CFO's. If any dispute arises between the GRC and TVN or
-------------------
GRTN, as the case may be, regarding this Agreement or the transactions
contemplated hereby, the persons named in the notice provisions of Section 10
for each interested party shall attempt in good faith to resolve the dispute. If
those individuals have not agreed to a resolution within fifteen (15) days from
the date on which the dispute was first presented to them, any party, by written
notice to the other parties, may require that the dispute be submitted for
resolution to the Chief Financial Officer of each of TVN and GRC. The Chief
Financial Officers shall meet, in person or by other means satisfactory to them,
to attempt to resolve the dispute within fifteen days after the reference of the
matter to them. If the Chief Financial Officers reach a decision within such
fifteen day period their decision shall be final and binding on the parties
hereto. If the Chief Financial Officers fail to resolve the dispute within such
period, either of the Chief Financial Officers may refer the matter, on notice
to the other, to the Chief Executive Officers of TVN and GRC (the "Chief
Executive Officers"). The Chief Executive Officers shall meet, in person or by
other means satisfactory to them, to attempt to resolve the dispute within
fifteen days after the reference of the matter to them. If the Chief Executive
Officers reach a decision within such fifteen day period their decision shall be
final and binding on the parties hereto. If the Chief Executive Officers fail to
resolve the dispute within such period, the matter may be referred by either
party for arbitration as provided in Section 10(b).
(b) Arbitration.
-----------
(i) Except as otherwise provided in Section 10(a) hereof, in the
event of any claim, demand, issue or dispute between TVN or GRTN,
as the case may be, and GRC, or any of GRC's shareholders,
directors, officers, managers, supervisors, and/or employees
(except for claims for workers' compensation, unemployment
insurance, or any matter within the jurisdiction of the state
labor commissioner) (each a "dispute" hereinbelow) the dispute
shall be submitted to and resolved by final and binding
arbitration as provided for by the California Arbitration Act,
California Code of Civil Procedure, Section 1280, et. seq. Except
-------
as provided in this paragraph, arbitration shall be the sole and
exclusive method for resolving any Agreement-related dispute, and
each of TVN or GRTN, as the case may be, and GRC are giving up
any right that each might otherwise have for a judge or jury to
decide the dispute; provided, however, that either TVN or GRTN,
as the case maybe, or GRC may request equitable relief, including
but not limited to injunctive relief, from a court of competent
jurisdiction.
PAGE 4 OF 8
REV. 8.0
<PAGE>
(ii) If a written request for arbitration is not made within the
limitations periods applicable to a claim under applicable
federal or state law, that dispute shall be waived. TVN or GRTN,
as the case may be, and GRC will select an arbitrator by mutual
agreement. If TVN or GRTN, as the case may be, and GRC are
unable to agree on a neutral arbitrator, GRC will obtain a list
of seven (7) arbitrators from the Alternative Dispute Resolution
Service. TVN or GRTN, as the case may be, and GRC will
alternately strike names from the list, with TVN or GRTN, as the
case may be, striking the first name, until only one name
remains. The remaining person shall be the arbitrator. Both TVN
or GRTN, as the case may be, and GRC will have the opportunity
to conduct all discovery as provided for the California Code of
Civil Procedure, and the arbitrator shall have the power to
decide any discovery disputes between the parties. The
arbitrator may also hear and decide motions for summary
disposition of any dispute as provided by applicable state law.
(iii) The arbitrator shall conduct a hearing in a manner to be
mutually agreed upon by TVN or GRTN, as the case may be, and
GRC, or by the arbitrator if TVN or GRTN, as the case may be,
and GRC cannot agree, provided, however, that both TVN or GRTN,
as the case may be, and GRC shall have the opportunity to call
witnesses under oath, and to examine and cross-examine all
witnesses who appear at the hearing. Within thirty (30) days
following the hearing and the submission of the matter to the
arbitrator, the arbitrator shall issue a written opinion and
award which shall be signed and dated. The arbitrator's award
shall decide all dispute and issues submitted by TVN or GRTN, as
the case may be, and GRC, and the arbitrator may not decide any
dispute or issue not submitted. The arbitrator shall be
permitted to award only those remedies in law or equity which
are requested by either TVN or GRTN, as the case may be, or GRC
and allowed by law, but in no event may any punitive or
exemplary damages be sought or awarded. The cost of the
arbitrator and other incidental costs of arbitration, including
the cost of a court reporter, shall be shared equally by both
TVN or GRTN, as the case may be, and GRC. Each of TVN, GRTN and
GRC shall bear their own costs for legal representation in any
arbitration proceeding, provided, however, that the arbitrator
shall have the authority to require either party to pay the
reasonable attorney's fees for the prevailing party's
representation during the arbitration (as determined by the
arbitrator) and the cost of the arbitrator, as part of any
remedy that may be ordered.
(iv) Hearings in the proceeding shall commence within 120 days of the
selection of the neutral arbitrator. Arbitration shall take
place in a location selected by the party who is not the party
requesting arbitration. Arbitration proceedings will be
conducted confidentially and all documents, testimony and
records shall be received, heard and maintained by the
arbitrator in confidence under seal, available for the
inspection only by the arbitrator, TVN, GRTN and GRC and their
respective attorneys and their respective experts who shall
agree in advance and in writing to receive all such information
confidentially and to maintain such information in confidence.
The decree or award rendered by the arbitrator may be entered as
a final and binding judgment in any court having jurisdiction
thereof. Reasonable notice of the time and place of arbitration
shall be given to all persons, other than the parties, as shall
be required by law, in which case such persons or those
authorized representatives shall have the right to attend and/or
participate in all the arbitration hearings in such manner as
the law shall require.
<PAGE>
(c) All negotiations and proceedings pursuant to Sections 10(a) and (b)
shall be confidential and shall be treated as compromise and settlement
negotiations for purposes of the United States Federal Rules of Evidence and any
applicable state rules of evidence provided that any party may specifically
waive these rights of privileges and confidentiality with respect to any
communications it makes pursuant to those sections. No such confidentiality or
privilege shall apply to communications made to an independent accounting firm.
(d) The resolution of any dispute submitted pursuant to Sections 10(a) or
(b) shall be final and binding upon the parties to this Agreement. No party to
this Agreement shall initiate, and each party to this Agreement shall cause its
affiliates not to initiate, any legal proceeding, except as provided in Section
10(e).
(e) Nothing in this Section 10 shall preclude any party from seeking
interim or permanent injunctive relief, specific performance or other equitable
remedies in relation to any disputes where party reasonably believes that such
relief is necessary to prevent irreparable harm that cannot be calculated or
fully or adequately compensated by recovery of damages.
11. Notices. All notices and other communications hereunder shall be in
--------
writing and shall be deemed given when received if delivered personally or
mailed by registered or certified mail (return receipt requested), sent by
telecopy with a copy via earliest overnight delivery and confirmation of
facsimile received, or sent by recognized overnight delivery service, return
receipt requested, to the parties at the following addresses and telecopy
numbers (or at such other address or number for a party as shall be specified by
like notice):
(a) if to TVN or GRTN, to:
TVN Entertainment Corporation
2901 West Alameda Avenue
Burbank, California 91505
Attn: Stuart Z. Levin
Telecopy No.: (818) 526-5001
Telephone No.: (818) 526-5000
with copies to:
Legal Department
TVN Entertainment Corporation
2901 West Alameda Avenue
Burbank, California 91505
Attn: Arthur Fields
Telecopy No.: (818) 526-5003
Telephone No.: (818) 526-5022
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304
Attn: Robert P. Latta
Telecopy No.: (650) 845-5000
Telephone No.: (650) 320-4646
PAGE 6 OF 8
REV. 8.0
<PAGE>
(b) if to Guthy-Renker to:
Guthy-Renker Corporation
3340 Ocean Park Blvd. #3055
Santa Monica, California 90405
Attn: Kevin Knee
Telecopy No.: (310) 581-3287
Telephone No.: (310) 581-6250
with copies to:
Guthy-Renker Corporation
Legal Department
3340 Ocean Park Blvd. #3055
Santa Monica, California 90405
Attn: Bennett Van De Bunt
Telecopy No.: (310) 581-3232
Telephone No.: (310) 581-6250
Venable Baetjer Howard & Civiletti LLP
1201 New York Avenue NW
Suite 1000
Washington, D.C. 20005-3917
Attn: Robert J. Bolger, Esq.
Telecopy No.: (202) 962-8300
Telephone No.: (202) 962-4800
12. General Provisions.
------------------
(a) This Agreement shall inure to the benefit of each party's successors
in interest, its affiliates and permitted assigns, and each and every other
corporation or firm which is under its common control. No term or provision of
this Agreement may be amended, waived, released, discharged or modified in any
respect except in writing, signed by the parties hereto.
(b) Neither party may delegate any of its rights or obligations under this
Agreement or assign any of its rights hereunder without the prior written
consent of the other party, which consent may be withheld in such other party's
sole discretion.
(c) No failure or delay on the part of any party to this Agreement in
exercising any right, power or remedy hereunder shall operate as a waiver
thereof; nor shall any single or partial exercise of any such right, power or
remedy preclude any other or further exercise thereof or the exercise of any
other right, power or remedy hereunder. No breach of any provision hereof can be
waived unless in writing.
(d) This Agreement is made and entered into, and shall be construed in
accordance with, the internal laws of the State of California (without giving
effect to its choice of law principles).
(e) This Agreement and the Guaranty sets forth the entire understanding
between the parties hereto with respect to the subject matter hereof, and there
are no terms, conditions, representations, warranties or covenants other than
those expressly contained herein. This Agreement and the Guaranty supersede any
previous agreements or understandings between the parties with respect to the
subject matter hereof, whether written or oral, all of which are merged herein.
PAGE 7 OF 8
REV. 8.0
<PAGE>
(f) Neither party shall be liable for any delay or failure which is
directly attributable to fire, flood, earthquake, or public disaster; strike,
labor dispute or unrest; embargo, riot, war, insurrection or civil unrest; any
act of God, any act of legally constituted authority; or any other cause beyond
the that party's control.
(g) In no event will either party be liable for any indirect, incidental,
consequential, special or punitive damages (including, without limitation,
damages for loss of business, profits or revenues, loss of goodwill, business
interruption, or failure to realize expected savings) arising out this
Agreement, even if said party has been advised of the possibility of such
damages.
(h) The headings herein are for convenience only, and do not modify or
limit the terms of this Agreement, nor shall they be given any effect in the
construction or interpretation thereof.
(i) Each party acknowledges that the language contained in this Agreement
is the product of an arms length negotiation conducted by that party's duly
appointed legal counsel. As a result, neither party (i) shall be deemed to have
drafted this Agreement or (ii) shall be entitled to construe this Agreement,
either in whole or in part, against the other party on the theory that contract
provisions are construed against the party that drafted it.
(j) This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original and will become effective and binding upon the
parties at such time as all of the signatories hereto have signed each
counterpart of the Agreement. Copies of this Agreement may be transmitted via
telefax for signature and each mutually executed fax copy may be used for all
purposes as an original by either party.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the day and year first
written above.
GRTV NETWORK, INC. GUTHY-RENKER CORPORATION
By: /s/ Arthur Fields By: /s/ B. Van de Bunt
---------------------------- -------------------------------
Name: Arthur Fields Name: Ben Van de Bunt
-------------------------- -----------------------------
Title: Sr. Exec. V.P. Title: EVP and Corporate Secretary
------------------------- ----------------------------
Date: 7/30/99 Date: 7/30/99
-------------------------- -----------------------------
TVN ENTERTAINMENT CORPORATION
By: /s/ Arthur Fields
----------------------------
Name: Arthur Fields
--------------------------
Title: Sr. Exec. V.P.
-------------------------
Date: 7/30/99
--------------------------
PAGE 8 OF 8
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<PAGE>
TRANSITION SERVICES AGREEMENT
This TRANSITION SERVICES AGREEMENT (the "Agreement") is made and entered
into as of July 1, 1999 (the "Effective Date") by and between Guthy-Renker
Corporation, a Delaware corporation ("GRC") and GRTV Network, Inc. ("GRTN").
WHEREAS, GRTN is a wholly owned subsidiary of TVN Entertainment Corporation
("TVN");
WHEREAS, GRC and TVN have entered into a transaction for GRTN to acquire
from GRC substantially all of the assets of Guthy-Renker Television Network,
Inc., a wholly owned subsidiary of GRC ("GRTV");
WHEREAS, GRC, GRTN and TVN wish to facilitate the continued operations of
GRTV's business by GRTN with a minimum of disruption to such business;
WHEREAS, GRC will provide to GRTN the use of that portion of GRC's leased
office space currently occupied by GRTV on the terms and conditions set forth
herein; and
WHEREAS, GRC will provide to GRTN certain accounting, information,
administrative and other services on the terms described below, on the terms and
conditions set forth herein.
NOW, THEREFORE, in consideration of the premises, the covenants contained
herein, and for other good and valuable consideration the receipt and
sufficiency are hereby acknowledged, the parties hereto agree as follows:
1. Office Space.
------------
(a) Premises. GRC presently occupies the premises located at 3340
--------
Ocean Park Boulevard, Santa Monica, California 90405 (the "Premises"), of which
approximately five thousand five hundred (5,500) square feet is currently
occupied by GRTV (the "Office Space"). Additionally, GRTV is currently utilizing
thirty-three (33) parking spaces (the "Parking Spaces").
(b) Term. GRC agrees that GRTN may use the Office Space and Parking
----
Spaces for a period commencing on the Effective Date and ending on the
Termination Date (as defined below) (the "Term").
(c) Rent. During each month of the Term, GRTN shall pay GRC such
----
amounts as GRC is then paying to its landlord for the Premises, currently the
sum of two dollars and thirteen cents ($2.13) per square foot, for GRTN's use
of the Office Space and the sum of sixty six dollars ($66) for each of the
Parking Spaces (the "Monthly Rental"). To the extent that the actual out-of-
pocket costs incurred by GRC to provide the use of the Office Space increases or
decreases during the Term (e.g., the landlord increases the rent for the
Premises or the landlord properly assesses operating expenses which GRC then
actually pays),
Page 1 of 11
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<PAGE>
as evidenced by reasonably detailed documentation presented to GRTN, the Monthly
Rental may be adjusted upward or downward to reflect such actual cost to GRC;
provided, however, that in no event shall the Monthly Rental increase or
decrease during the Term by more than fifteen percent (15%) of the Monthly
Rental specified in this Section 1.3.
(d) Signs. Except as may be stated below, GRTN shall not affix to any
-----
part of the Premises any sign, advertisement, or notice without the prior
written consent of the landlord, if required, and GRC. GRC will make good faith
efforts to secure any such required consent from the landlord. Notwithstanding
the foregoing, GRTN shall be permitted to place a sign with its name in the
reception area, on the directory board, if any, within the Premises, and in the
vicinity of the Office Space in order to allow for reasonable identification of
the Office Space as occupied by GRTN. In addition, GRTN shall be permitted to
affix a name plate on or near the door of each office included within the Office
Space with the name of GRTN and/or the person(s) occupying such office.
2. Office Furniture and Equipment. During the Term, GRTN may continue to
------------------------------
utilize the existing office furniture and equipment currently located in the
Office Space at no added cost to GRTN.
3. Other Services. During the Term, GRC shall provide GRTN with such of
--------------
the services listed on Exhibit "A" attached hereto (i.e., repairs, maintenance,
copying, printing, telephone and utilities) as GRTN may reasonably request and
as was provided to GRTV immediately prior to the acquisition of its business by
TVN, at the prices set forth on Exhibit "A"; provided, however, that if GRTN
requests that GRC provide Accounting, Information, and/or Administrative
services listed on Exhibit "A", then GRTN will pay for all services listed on
Exhibit "A" under each such requested category. To the extent that the actual
out-of-pocket costs incurred by GRC to provide such services increases or
decreases during the Term, as evidenced by reasonably detailed documentation
presented to GRTN, the prices therefor may be adjusted upward or downward to
reflect such actual cost to GRC; provided, however, that in no event shall such
prices increase or decrease during the Term by more than fifteen percent (15%)
of the prices in effect on the Effective Date.
4. Office Supplies and Postage. During the Term, GRC shall provide GRTN
---------------------------
with such office supplies and postage as GRTN may reasonably request, and as was
provided to GRTV immediately prior to the acquisition of its business by TVN, at
the prices set forth on Exhibit "A". To the extent that the actual out-of-pocket
costs incurred by GRC to provide such supplies and/or postage increases or
decreases during the Term, as evidenced by reasonably detailed documentation
presented to GRTN, the prices therefor may be adjusted upward or downward to
reflect such actual cost to GRC; provided, however, that in no event shall such
prices increase or decrease during the Term by more than fifteen percent (15%)
of the prices in effect on the Effective Date.
5. Accounting, Information and Administrative Services. During the Term,
---------------------------------------------------
GRC shall provide GRTN with such accounting, information and administrative
services as GRTN may reasonably request, and as was provided to GRTV immediately
prior to the acquisition of
Page 2 of 11
Rev. 12.0
<PAGE>
its business by TVN, at the prices set forth on Exhibit "A". To the extent that
the actual out-of-pocket costs incurred by GRC to provide such services
increases or decreases during the Term, as evidenced by reasonably detailed
documentation presented to GRTN, the prices therefor may be adjusted upward or
downward to reflect such actual cost to GRC; provided, however, that in no event
shall such prices increase or decrease during the Term by more than fifteen
percent (15%) of the prices in effect on the Effective Date.
6. Employee Differential Payments.
------------------------------
(a) For James Riley.
---------------
(i) Salary Differential. GRTN shall pay to GRC a fee in the
-------------------
total sum of seventy two thousand dollars ($72,000), which represents the salary
differential to be paid by GRC to James Riley ("Riley") pursuant to a separate
Termination and Release Agreement dated July 30, 1999 between Riley and GRTV
(the "Riley Differential Fee"). GRTN shall pay to GRC the amount of the Riley
Differential Fee in eighteen (18) equal monthly installments of four thousand
dollars ($4,000) each, with the first installment due on September 1, 1999. If
Riley's employment with GRTN is terminated by reason of Riley's resignation or
by GRTN for cause prior to Riley receiving an aggregate amount from GRC equal to
the full Riley Differential Fee from GRC, no further monthly installments shall
be payable from GRTV to GRC, except for any installments which were due, but
unpaid, prior to such termination. All payments payable by GRTV to GRC under
this Section 6(a) shall be paid in accordance with the payment procedures of
Section 7(b) below.
(ii) Bonus Differential. In the event that Riley is entitled to
------------------
receive a Performance Bonus (as such term is defined in the Employment Agreement
between Riley and GRTN of even date herewith) from GRTN: (i) GRTN shall notify
GRC in writing of the amount and date such Performance Bonus is payable to
Riley, (ii) GRC shall inform GRTN by written notice of the bonus differential
amount which GRC is obligated to pay to Riley pursuant to his Termination and
Release Agreement with GRC, and (iii) GRTN shall pay to GRC as a fee an amount
equal to such bonus differential amount to be paid by GRC to Riley within three
(3) business days prior to the due date for each such bonus differential as
provided in Riley's Termination and Release Agreement. The parties mutually
agree that the maximum bonus differential amount to be paid by GRC to Riley (and
GRTN to GRC) for the period ending June 30, 2000 shall be one hundred two
thousand eight hundred twelve dollars ($102,812), and the parties mutually agree
that the maximum bonus differential amount to be paid by GRC to Riley (and GRTN
to GRC) for the period ending March 31, 2001 shall be one hundred two thousand
four hundred thirty eight dollars ($102,438).
(b) For Greg Thomas. GRTN shall pay to GRC a fee in the total sum of
---------------
one hundred eighty seven thousand five hundred dollars ($187,500), which
represents the salary differential to be paid by GRC to Greg Thomas ("Thomas")
pursuant to a separate Termination and Release Agreement dated July 30, 1999
between Thomas and GRTV (the "Thomas Differential Fee"). GRTN shall pay to GRC
the amount of the Thomas Differential Fee in forty-two (42) equal monthly
installments, with the first installment due on September
Page 3 of 11
REV. 12.0
<PAGE>
1, 1999. In the event that Thomas does not receive the full Thomas Differential
Fee from GRC, the monthly installments payable from GRTV to GRC shall be
adjusted pro-rata to reflect the actual amount of salary differential paid by
GRC to Thomas, which shall be paid by GRTV to GRC in accordance with the payment
procedures of Section 7(b) below.
7. Payment.
-------
(a) GRTN shall pay GRC a fee for GRC's accounting, information, and
administrative and management services during the "Transition Period" commencing
as of July 1, 1999 and expiring on July 31, 1999 (the "Management Fee"). The
Management Fee shall be in an amount equal to (1) the aggregate amount of pre-
tax net income recognized by GRTN during the Transition Period and (2) the
amount of capital expenditures and prepaid expenses (currently anticipated not
to exceed the sum of $100,000), employee payroll and cost of employee benefits
paid by GRTV during the Transition Period, actually incurred by GRC (on behalf
of GRTV) and/or GRTV and supported by reasonably particularized invoices, all as
mutually determined by TVN and GRC. No later than forty-five (45) days following
the expiration of the Transition Period, GRC shall deliver to GRTN a detailed
income statement for the Transition Period (the "Transition Period Income
Statement") in a form substantially similar to the form of monthly income
statement regularly prepared by GRC, on behalf of GRTV, prior to the sale of
GRTV's assets to GRTN. The Transition Period Income Statement shall calculate
the amount of pre-tax net income of the GRTV Business during the Transition
Period and be accompanied by reasonably sufficient workpapers and other backup
documents and data with respect to such calculation of pre-tax net income,
reflecting the gross sales, revenues, costs and expenses of the GRTN business
during such Transition Period. No later than five (5) business days following
delivery of the Transition Period Income Statement GRTN shall pay GRC by wire
transfer an amount equal to the amount of such pre-tax net income set forth on
the Transition Period Income Statement as the Management Fee pursuant to this
Subsection 7(a), provided that if GRTN disagrees with the amount or the
calculation of the pre-tax income reflected on the Transition Period Income
Statement, GRTN shall provide written notice to GRC no later than the expiration
of such 5 day period, which notice shall set forth in reasonable detail the
basis for its disagreement. If GRTN provides such notice to GRC, then GRC and
GRTN agree to resolve any dispute pursuant to the provisions of Section 11
below, except that if GRC and GRTN are unable to resolve such dispute by mutual
agreement pursuant to the provisions of Section 11, then, in lieu of
arbitration, the parties will select a mutually acceptable independent
accounting firm in accordance with the procedure set forth in Section 11 (with
respect to the selection of an arbitrator) to resolve such dispute and the
determination of such independent accounting firm shall be final and binding on
the parties. GRTN shall pay GRC (i) that part of the Management Fee relating to
the pre-tax net income of GRTN within five (5) business days following final
determination of the amount of such pre-tax net income by the parties or by the
independent accounting firm pursuant to the provisions of this Section 7(a) and
Section 11 and (ii) that part of the Management Fee relating to the capital
expenditures, prepaid expenses, employee payroll and benefits costs paid by GTRV
within five (5) business days following the determination of such amount by GRTN
and GRC.
Page 4 of 11
Rev. 12.0
<PAGE>
(b) During the Term, GRC will submit to GRTN monthly invoices for the
Monthly Rent, the pro-rated portion of the Riley Differential Fee, the pro-rated
portion of the Thomas Differential Fee, and for the services which GRC has
provided to GRTN since the prior invoice, payable net thirty (30) days. Such
monthly invoices shall not include any services which GRTN did not actually
receive, nor shall it include any amounts which GRTN has otherwise directly paid
to GRC pursuant to this Agreement (such as rent and parking). Payments shall be
sent to GRC's address as provided in Section 14 hereof or at such other place as
shall be designated in writing by GRC. If this Agreement shall commence or
terminate on a day other than the first day of a month, any and all Monthly Rent
payments for any such partial month shall be prorated on a per diem basis.
Payments which are more than fifteen (15) days late, whereupon interest shall
accrue at ten percent (10%) per annum.
8. Termination/Expiration.
----------------------
(a) Expiration. The obligations of the parties with respect to
----------
Sections 1 through 5, inclusive, shall terminate one (1) year from the date
hereof, unless sooner terminated in accordance with Section 8(b).
(b) Termination. Except as is set forth in Section 8(e) below, either
-----------
party shall have the right to terminate this Agreement (or any of Sections 1
through 5, inclusive) by providing sixty (60) days prior written notice to the
other party; provided, however, that in all events, Section 10 hereof shall
survive any such termination. In the event that one party terminates only part
of this Agreement, such party shall include a description of those services
which it is terminating. In the event that GRC elects to partially terminate
this Agreement, GRTN shall have the right, but not the obligation, to terminate
the remainder of the Agreement effective as of the partial termination date upon
written notice provided to GRC no later than such partial termination date.
Notwithstanding the above, GRC may not tender notice of its intent to terminate
this Agreement, in whole or in part, within the initial six (6) months of the
Term.
(c) Termination Date. As used herein, the term "Termination Date"
----------------
shall mean the date upon which GRC's obligation to render services under
Sections 1 through 5, inclusive, have expired in accordance with Section 8(a) or
have been terminated in accordance with Section 8(b).
(d) Subordination. This Agreement is expressly subject and subordinate
-------------
to each and every provision contained in the Office Lease, by and between Guthy-
Renker Corporation and Spieker Properties, L.P., a California limited
partnership by Spieker Properties, Inc., a Maryland corporation, its General
Partner, as successor-in-interest to Barclay-Curci Investment Company, a
California general partnership, as Landlord, dated June 26, 1997, including but
not limited to Article 28.
(e) Continuation of Differential Fee. Notwithstanding anything to the
--------------------------------
contrary contained herein, (i) the obligations of the parties with respect to
Section 6(a) shall continue until such time as GRTN has fully paid to GRC the
amounts owed to GRC as
Page 5 of 11
Rev. 12.0
<PAGE>
provided in Section 6(a) and (ii) the obligations of the parties with respect to
Section 6(b) shall continue until such time as GRTN has fully paid to GRC the
amount owed to GRC as provided in Section 6(b).
9. Insurance. Each of GRC and GRTN agree to cause the naming of the other
---------
as a loss payee and additional insured under their respective comprehensive
general or commercial liability insurance policies within a reasonable time
following the mutual execution of this Agreement.
10. Indemnity. GRTN agrees to indemnify and hold GRC, its officers,
---------
directors, employees, shareholders, successors, assigns and affiliates
(collectively, the "GRC Indemnitees") harmless for all damages, liability, loss
and expense, including, without limitation, reasonable attorney's fees, incurred
by the GRC Indemnitees resulting from GRTN's or TVN's (or any of their
respective affiliates, employees, agents and representatives) use of the Office
Space.
11. Dispute Resolution.
------------------
(a) Resolution by CFOs. If any dispute arises between GRTN and GRC
------------------
regarding this Agreement or the transactions contemplated hereby, the parties
shall attempt in good faith to resolve the dispute. If the parties have not
agreed to a resolution within fifteen (15) days from the date on which the
dispute was first presented, either party, by written notice to the other party,
may require that the dispute be submitted for resolution to the Chief Financial
Officer of each of GRC and GRTN. The Chief Financial Officers shall meet, in
person or by other means satisfactory to them, to attempt to resolve the dispute
within fifteen days after the reference of the matter to them. If the Chief
Financial Officers reach a decision within such fifteen day period their
decision shall be final and binding on the parties hereto. If the Chief
Financial Officers fail to resolve the dispute within such period, either of the
Chief Financial Officers may refer the matter, on notice to the other, to the
Chief Executive Officers of GRC and GRTN (the "Chief Executive Officers"). The
Chief Executive Officers shall meet, in person or by other means satisfactory to
them, to attempt to resolve the dispute within fifteen days after the reference
of the matter to them. If the Chief Executive Officers reach a decision within
such fifteen day period their decision shall be final and binding on the parties
hereto. If the Chief Executive Officers fail to resolve the dispute within such
period, the matter may be referred by either party for arbitration as provided
in Section 11(b).
(b) Arbitration.
-----------
(i) Except as otherwise provided in Section 11(a) hereof, in the
event of any claim, demand, issue or dispute between GRC and
GRTN, or any of GRTN's shareholders, directors, officers,
managers, supervisors, and/or employees (except for claims for
workers' compensation, unemployment insurance, or any matter
within the jurisdiction of the state labor commissioner) (each
a "dispute" hereinbelow) the dispute shall be submitted to and
Page 6 of 11
Rev. 12.0
<PAGE>
resolved by final and binding arbitration as provided for by
the California Arbitration Act, California Code of Civil
Procedure, Section 1280, et. seq. Except as provided in this
paragraph, arbitration shall be the sole and exclusive
method for resolving any Agreement-related dispute, and each
of GRC and GRTN are giving up any right that each might
otherwise have for a judge or jury to decide the dispute;
provided, however, that GRC or GRTN may request equitable
relief, including but not limited to injunctive relief, from
a court of competent jurisdiction.
(ii) If a written request for arbitration is not made within the
limitations periods applicable to a claim under applicable
federal or state law, that dispute shall be waived. GRC and
GRTN will select an arbitrator by mutual agreement. If GRC
and GRTN are unable to agree on a neutral arbitrator, GRTN
will obtain a list of seven (7) arbitrators from the
Alternative Dispute Resolution Service. GRC and GRTN will
alternately strike names from the list, with GRC striking
the first name, until only one name remains. The remaining
person shall be the arbitrator. Both GRC and GRTN will have
the opportunity to conduct all discovery as provided for the
California Code of Civil Procedure, and the arbitrator shall
have the power to decide any discovery disputes between the
parties. The arbitrator may also hear and decide motions for
summary disposition of any dispute as provided by applicable
state law.
(iii) The arbitrator shall conduct a hearing in a manner to be
mutually agreed upon by GRC and GRTN, or by the arbitrator
if GRC and GRTN cannot agree, provided, however, that both
GRC and GRTN shall have the opportunity to call witnesses
under oath, and to examine and cross-examine all witnesses
who appear at the hearing. Within thirty (30) days following
the hearing and the submission of the matter to the
arbitrator, the arbitrator shall issue a written opinion and
award which shall be signed and dated. The arbitrator's
award shall decide all dispute and issues submitted by GRC
and GRTN, and the arbitrator may not decide any dispute or
issue not submitted. The arbitrator shall be permitted to
award only those remedies in law or equity which are
requested by either GRC or GRTN and allowed by law, but in
no event may any punitive or exemplary damages be sought or
awarded. The cost of the arbitrator and other incidental
costs of arbitration, including the cost of a court
reporter, shall be shared equally by both GRC
Page 7 of 11
Rev. 12.0
<PAGE>
and GRTN. Each of GRC and GRTN shall bear their own costs
for legal representation in any arbitration proceeding,
provided, however, that the arbitrator shall have the
authority to require either party to pay the reasonable
attorneys fees for the prevailing party's representation
during the arbitration (as determined by the arbitrator),
and the costs of the arbitrator as part of any remedy that
may be ordered.
(iv) Hearings in the proceeding shall commence within 120 days of
the selection of the neutral arbitrator. Arbitration shall
take place in a location selected by the party who is not
the party requesting arbitration. Arbitration proceedings
will be conducted confidentially and all documents,
testimony and records shall be received, heard and
maintained by the arbitrator in confidence under seal,
available for the inspection only by the arbitrator, GRC and
GRTN and their respective attorneys and their respective
experts who shall agree in advance and in writing to receive
all such information confidentially and to maintain such
information in confidence. The decree or award rendered by
the arbitrator may be entered as a final and binding
judgment in any court having jurisdiction thereof.
Reasonable notice of the time and place of arbitration shall
be given to all persons, other than the parties, as shall be
required by law, in which case such persons or those
authorized representatives shall have the right to attend
and/or participate in all the arbitration hearings in such
manner as the law shall require.
(c) All negotiations and proceedings pursuant to Sections 11(a) and
(b) shall be confidential and shall be treated as compromise and settlement
negotiations for purposes of the United States Federal Rules of Evidence and any
applicable state rules of evidence provided that any party may specifically
waive these rights of privileges and confidentiality with respect to any
communications it makes pursuant to those sections. No such confidentiality or
privilege shall apply to communications made to an independent accounting firm.
(d) The resolution of any dispute submitted pursuant to Sections 11(a)
or (b) shall be final and binding upon the parties to this Agreement. No party
to this Agreement shall initiate, and each party to this Agreement shall cause
its affiliates not to initiate, any legal proceeding, except as provided in
Section 11(e).
(e) Nothing in this Section 11 shall preclude any party from seeking
interim or permanent injunctive relief, specific performance or other equitable
remedies in relation to any disputes where party reasonably believes that such
relief is necessary to prevent irreparable harm that cannot be calculated or
fully or adequately compensated by recovery of damages.
Page 8 of 11
Rev. 12.0
<PAGE>
12. Breach. No breach committed hereunder shall be grounds for termination
------
of this Agreement unless written notice thereof has been provided to the
breaching party with a reasonable opportunity to cure.
13. Assignment. GRTN shall not have the right to assign any of its rights
----------
under this Agreement without the prior written consent of GRC, which consent may
be withheld in GRC's sole discretion.
14. Notices. All notices and other communications hereunder shall be in
-------
writing and shall be deemed given when received if delivered personally or
mailed by registered or certified mail (return receipt requested), sent by
telecopy with a copy via earliest overnight delivery and confirmation of
facsimile received, or sent by recognized overnight delivery service, return
receipt requested, to the parties at the following addresses and telecopy
numbers (or at such other address or number for a party as shall be specified by
like notice):
(a) if to GRTN, to:
c/o TVN Entertainment Corporation
2901 West Alameda Avenue
Burbank, California 91505
Attn: Stuart Z. Levin
Telecopy No.: (818) 526-5001
Telephone No.: (818) 526-5000
with copies to:
Legal Department
TVN Entertainment Corporation
2901 West Alameda Avenue
Burbank, California 91505
Attn: Arthur Fields
Telecopy No.: (818) 526-5003
Telephone No.: (818) 526-5022
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304
Attn: Robert P. Latta
Telecopy No.: (650) 845-5000
Telephone No.: (650) 320-4646
Page 9 of 11
Rev. 12.0
<PAGE>
(b) if to Guthy-Renker to:
Guthy-Renker Corporation
3340 Ocean Park Blvd. #3055
Santa Monica, California 90405
Attn: Kevin Knee
Telecopy No.: (310) 581-3287
Telephone No.: (310) 581-6250
with copies to:
Guthy-Renker Corporation
Legal Department
3340 Ocean Park Blvd. #3055
Santa Monica, California 90405
Attn: Bennett Van de Bunt
Telecopy No.: (310) 581-3232
Telephone No.: (310) 581-6250
Venable Baetjer Howard & Civiletti LLP
1201 New York Avenue NW
Suite 1000
Washington, D.C. 20005-3917
Attn: Robert J. Bolger, Esq.
Telecopy No.: (202) 962-8300
Telephone No.: (202) 962-4800
15. Entire Agreement. This Agreement contains the entire agreement and
----------------
understanding of the parties hereto with respect to the subject matter contained
herein, and supercedes any and all prior agreements or understanding whether
written or oral. No modification or amendment to this Agreement shall be
effective unless such modification or amendment is in writing and signed by the
party to be bound thereby.
16. Binding Effect. This Agreement shall be binding upon and inure to the
--------------
benefit of the parties hereto, and their respective successors.
17. Headings. The headings herein are for convenience only, and do not
--------
modify or limit the terms of this Agreement, nor shall they be given any effect
in the construction or interpretation thereof.
18. Construction. Each party acknowledges that the language contained in
------------
this Agreement is the product of an arms length negotiation conducted by each
party's duly appointed legal counsel. As a result, neither party (i) shall be
deemed to have drafted this Agreement nor (ii) shall be entitled to construe
this Agreement, either in whole or in part,
Page 10 of ll
Rev. 12.0
<PAGE>
against the other party on the theory that contract provisions are construed
against the party that drafted them.
19. Relationship Between the Parties. This Agreement does not create a
--------------------------------
partnership or a joint venture between the parties and neither party shall be
deemed an agent or partner of the other or have the power or right to bind the
other party in any manner whatsoever unless previously confirmed in writing by
the other party.
20. Governing Law. This Agreement shall be construed, interpreted,
-------------
governed, and enforced in accordance with the laws of the State of California
without regard to principles of conflict of laws.
21. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original and will become
effective and binding upon the parties at such time as all of the signatories
hereto have signed each counterpart of the Agreement. Copies of this Agreement
may be transmitted via telefax for signature and each mutually executed fax copy
may be used for all purposes as an original by either party.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their duly authorized representatives as of the day and year first written
above.
GUTHY-RENKER CORPORATION GRTV NETWORK, INC.
By: /s/ B. Van de Bunt By: /s/ Arthur Fields
------------------------------ ------------------------------
Name: B. Van de Bunt Name: Arthur Fields
----------------------------- -----------------------------
Title: EVP Title: Sr. Executive V.P.
---------------------------- ----------------------------
Date: 7-30-99 Date: 7/30/99
---------------------------- ----------------------------
<PAGE>
Transition Services Agreement
Exhibit "A"
GRTV
SUMMARY OF ANNUAL OVERHEAD COSTS
FOR THE YEAR ENDING 12/31/99
<TABLE>
<CAPTION>
ALLOCATED TOTAL
----------- -------
WAGES
- ----- Employee
(INCLUDING 20% BENEFITS) Equivalent 120%
-------------------------
<S> <C> <C> <C> <C> <C>
ACCOUNTING
CONTROLLER 5% 0.05 5,400 $6,500
ACCOUNTING MANAGER 20% 0.20 15,000 18,000
DIVISION ACCOUNTANT 100% 1.00 48,200 55,400
GENERAL ACCOUNTANT 15% 0.15 7,128 8,600
ACCTS PAYABLE 50% 0.50 15,101 18,100
A/P SUPERVISOR 5% 0.05 2,046 2,500
PAYROLL 20% 0.20 7,920 9,500
--------- ---------
TOTAL ACCOUNTING 2.15 118,600
--------- ---------
INFORMATION SERVICES
SYSTEMS PROGRAMMER - GENERAL 50% 0.50 33,000 39,600
SYSTEMS MAINTENANCE - PD 20% 0.20 9,372 11,200
SYSTEMS SUPPORT - SM 43% 0.43 21,589 25,900
--------- ---------
TOTAL INFO SYSTEMS 1.13 78,700
--------- ---------
ADMINISTRATIVE
RECEPTIONIST 43% 0.43 15,855 19,000
FACILITIES ADMIN & MAINTENANCE 43% 0.43 48,155 57,800
--------- ---------
TOTAL ADMINISTRATIVE 0.86 76,800
--------- ---------
TOTAL ALLOCATED WAGES 4.14 272,100 272,100
--------- ---------
TOTAL WAGES & BENEFITS
OTHER COSTS
- -----------
DEPRECIATION (COMPUTERS & FACILITIES) 3.0% 61,000
EQUIPMENT LEASE 28.0% of SM Cost 16,600
REPAIRS & MAINTENANCE 28.0% of SM Cost 50,900
SUPPLIES & PRINTING 20.0% 65,200
POSTAGE 20.0% 35,800
TELEPHONE & UTILITIES 20.0% 69,800
SATELLITE RENTAL CHG - SANTA MONICA 1,200
---------
TOTAL OTHER COSTS 300,600 300,600
--------- ---------
TOTAL OVERHEAD COSTS $572,700 $572,700
--------- ---------
TOTAL PER MONTH $47,725
---------
</TABLE>
<TABLE>
<CAPTION>
TOTAL EMPLOYEES SM PO Other Total
-- -- ----- -----
<S> <C> <C> <C> <C>
GRTV/CTC 33 0 0 33
OTHER GRC 44 88 3 135
---------------------------------------------
TOTAL 77 88 3 168
---------------------------------------------
PCT OF GRTV TO TOTAL 43% 0% 0% 20%
---------------------------------------------
RENTABLE SQUARE FEET
TOTAL SANTA MONICA SQUARE FEET 21,971
GRTV SQUARE FEET 6,102
PCT OF GRTV TO TOTAL 28%
----------
</TABLE>
<PAGE>
GUARANTY
THIS GUARANTY (the "Guaranty") is made by TVN ENTERTAINMENT CORPORATION, a
Delaware corporation (the "Guarantor"), to and for the benefit of GUTHY-RENKER
CORPORATION, a Delaware corporation (the "Beneficiary"). For good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Guarantor hereby covenants and agrees as follows:
1. Purpose. GRTV Network, Inc., a Delaware corporation (the "Company"),
-------
and Beneficiary have entered into that certain Media Access, Consulting and
Services Agreement of even date herewith (the "Media Access Agreement") and that
certain Transition Services Agreement of even date herewith (the "Transition
Services Agreement"), and such Media Access Agreement and such Transition
Services Agreement are of direct interest and benefit to Guarantor. To induce,
and as a condition of, the execution and delivery of the Media Access Agreement
and the Transition Services Agreement by Beneficiary, Guarantor has agreed to
guarantee the full and prompt payment when due of all obligations of the Company
to Beneficiary arising out of the Media Access Agreement and out of the
Transition Services Agreement (collectively, the "Obligations").
2. Guaranty. Guarantor hereby unconditionally and irrevocably guarantees
--------
the full and punctual payment of the Obligations when and as due in accordance
with the terms and conditions of the Media Access Agreement and the Transition
Services Agreement. If the Company fails to pay any of the Obligations when due,
Guarantor shall pay or satisfy on demand in full all of the Obligations then
due. Such guaranty is absolute, continuing, unconditional and not subject to any
recoupment, set off, reduction or defense, without regard to the liability of
any other person, and shall not be affected in any manner by reason of any
action or omission by Beneficiary. Beneficiary shall be under no obligation to
pursue any of Beneficiary's rights against the Company before pursuing
Beneficiary's rights against Guarantor hereunder.
3. Rights of Beneficiary to Deal with Guarantor. Beneficiary may, without
--------------------------------------------
compromising, impairing, diminishing, or in any way releasing Guarantor from
Guarantor's obligations hereunder, following notice to Guarantor, at any time
or from time to time: (a) waive or excuse a default or defaults by the Company
of any of the Obligations, or delay in exercising any or all of Beneficiary's
rights or remedies with respect to such default or defaults; (b) grant
extensions of time for payment or performance by the Company of any of the
Obligations; (c) release the Company of any of the Obligations; or (d) modify,
change, renew, extend, or amend the Media Access Agreement or the Transition
Services Agreement in any respect.
4. Waivers by Guarantor. Guarantor hereby waives (a) any and all notices
--------------------
whatsoever with respect to the enforceability of this Guaranty or with respect
to the Obligations, including, but not limited to, the notice and enforceability
of (i) Beneficiary's acceptance hereof or Beneficiary's intention to act, or
Beneficiary's action, in reliance herein, and (ii) any default by the Company
with respect to any of the Obligations; and (b) any right of subrogation against
the Company until the Obligations have been paid in full.
5. Duration. This Guaranty shall be a continuing one and shall be binding
--------
upon Guarantor, until the entire amount of the Obligations due to Beneficiary
has been paid or satisfied in full.
6. Remedies Cumulative. All rights and remedies hereunder are irrevocable
-------------------
and cumulative, and shall be in addition to all rights and remedies set forth in
any other instrument or document or available under any law or at equity,
whether now existing or hereafter enacted.
7. Governing Law. This Guaranty is to be governed by, and construed and
-------------
enforced in accordance with, the laws of the State of California, without regard
to principles of conflict of laws.
8. Binding Agreement. This Guaranty is binding upon and enforceable
-----------------
against Obligor, its successors and assigns, and shall inure to the benefit of,
and may be enforced by, Beneficiary and its successors and assigns.
IN WITNESS WHEREOF, the undersigned has duly executed this Guaranty as
of this 1st day of July, 1999.
TVN ENTERTAINMENT CORPORATION
By: /s/ Arthur Fields
----------------------------
Name: Arthur Fields
-------------------------
Title: Sr. Exec. V.P.
-------------------------
ONLY PAGE
Rev. 8.0
<PAGE>
NON-COMPETITION AGREEMENT
THIS NON-COMPETITION AGREEMENT (the "Agreement") is executed on July 30,
1999 (the "Execution Date"), by and among TVN Entertainment Corporation, a
Delaware corporation ("TVN"), GRTV Network, Inc., a Delaware corporation
("Newco"), Guthy-Renker Corporation, a Delaware corporation ("Guthy-Renker") and
Guthy-Renker Television Network, Inc., a Delaware corporation ("GRTV").
Background
----------
A. TVN, Newco, Guthy-Renker and GRTV are parties to that certain Asset
Acquisition Agreement of even date herewith (the "Purchase Agreement"),
providing for the acquisition (the "Acquisition") by Newco of substantially all
of the GRTV Assets including the goodwill associated with the GRTV Business.
Unless otherwise provided in this Agreement, the definitions used herein shall
have the meanings given to them in the Purchase Agreement.
B. Guthy-Renker and GRTV are receiving the Aggregate Consideration in
consideration for the sale of the GRTV Assets.
C. As a condition to the Acquisition, the Purchase Agreement contemplates,
among other things, that Guthy-Renker and GRTV will enter into this Agreement as
of the Execution Date.
NOW THEREFORE, in consideration of the Aggregate Consideration and mutual
promises made herein, TVN, Newco, Guthy-Renker and GRTV (collectively referred
to as the "Parties") hereby agree as follows:
1. Covenant Not to Compete or Solicit.
----------------------------------
(a) Non-Competition. During the period commencing on the Execution
---------------
Date and ending on the date 42 months from the Execution Date (the "Noncompete
Period"), Guthy-Renker and GRTV will not, directly or indirectly, as a member,
partner or stockholder or in any other capacity of or for any person, firm,
partnership, company or corporation (other than TVN and Newco or any of their
respective affiliates), without the prior written consent of Newco or TVN:
(i) own, manage, operate, control or participate in the
ownership, management, operation or control of, any business engaged (in the
geographic area referred to in Section 1(d) below) in the same or substantially
similar business as the GRTV Business, engaged in by GRTV as of the Execution
Date; or
(ii) solicit, encourage, hire or take any other action which is
intended to induce any then current employee of TVN, Newco or any subsidiary
of TVN, including Newco, to terminate his or her employment with TVN or any
subsidiary of TVN to become an employee or consultant of Guthy-Renker or GRTV,
its subsidiaries or any other affiliate of Guthy-Renker or knowingly interfere
in any manner with the contractual or employment relationship between TVN, Newco
or any subsidiary of TVN and any employee of Newco or TVN.
<PAGE>
For purposes of this Agreement, the term "GRTV Business" shall mean the
business of acquiring media time in quantities from cable service operators and
television broadcasters and reselling media time in packages to direct response
infomercial and product sales fulfillment companies.
(b) Limitations.
-----------
(i) Notwithstanding anything herein to the contrary, the
Noncompete Period shall terminate immediately upon (A) any Default by TVN or
Newco as defined in and pursuant to that certain Promissory Note dated as of
July 1, 1999 in the aggregate principal amount of $13,000,000 payable by TVN and
Newco to GRTV, or (B) the material failure of either TVN or Newco to perform
their obligations pursuant to that certain Media Access, Consulting and Services
Agreement of even date herewith, by and among TVN, Newco and Guthy-Renker,
and/or the Guaranty to such agreement executed by TVN, which failure is not
cured within 30 days following written notice from Guthy-Renker or GRTV to TVN
and Newco.
(ii) The parties hereto acknowledge and agree that nothing in
this Agreement is intended to prohibit, restrict or otherwise limit the ability
of Guthy-Renker and its affiliates (collectively, the "GRC Group") to continue
the GRC Group's existing business activities other than the GRTV Business
including to (A) continue to sell, market, promote and distribute the GRC
Group's products and infomercials and (B) acquire media time for use by the GRC
Group in connection with the transmission and broadcasting of the GRC Group's
infomercial and other direct response content and to sell or otherwise transfer
any media time which was originally intended to be used by the GRC Group in the
event such acquired media time cannot reasonably be utilized by the GRC Group in
connection with its infomercial and direct response business, all of which is
reasonably consistent with the GRC Group's media acquisition and sales prior to
the Execution Date (except that upon the occurrence of unusual events such as
wars or other "Acts of God," the GRC Group may sell such media time in greater
quantities than it has in the past).
(c) Severability. The covenants contained in the preceding paragraphs
------------
shall be construed as a series of separate covenants, one for each county, city
and state of any geographic area where any business is presently carried on by
GRTV or TVN with respect to the GRTV Business. Except for geographic coverage,
each such separate covenant shall be identical in terms to the covenant
contained in the preceding paragraphs. If, in any judicial proceeding, a court
refuses to enforce any of such separate covenants (or any part thereof), then
such unenforceable covenant (or such part) shall be eliminated from this
Agreement to the extent necessary to permit the remaining separate covenants (or
portions thereof) to be enforced. In the event that the provisions of this
Section 1 are deemed to exceed the time, geographic or scope limitations
permitted by applicable law, then such provisions shall be reformed to the
maximum time, geographic or scope limitations, as the case may be, permitted by
applicable laws.
(d) Worldwide Effect. Guthy-Renker, GRTV, TVN and Newco acknowledge
----------------
that Guthy-Renker's and GRTV's covenants not to compete or solicit contained in
this Section 1 are given in conjunction with the Acquisition. Guthy-Renker,
GRTV, TVN and Newco also acknowledge that the business of TVN and GRTV are
worldwide and, therefore, any actions taken
-2-
<PAGE>
by Guthy-Renker or GRTV in violation of this Agreement anywhere would harm TVN's
and Newco's business.
(e) Injunctive Relief. Guthy-Renker and GRTV acknowledge that breach
-----------------
of this Section 1 would cause irreparable injury to TVN and Newco and agree that
in the event of such breach, TVN and Newco shall have available, in addition to
any other right or remedy available (including ascertainable damages), the right
to seek injunctive relief without the necessity of proving actual damages.
2. Dispute Resolution and Arbitration.
----------------------------------
(a) Resolution by Officers. If any claim, demand, issue or dispute
----------------------
arises between TVN or Newco, as the case may be, and Guthy-Renker or GRTV, as
the case may be, regarding this Agreement or the transactions contemplated
hereby (each, a "Dispute"), the persons named in the notice provisions of
Section 3(c) for each interested party shall attempt in good faith to resolve
the Dispute. If those individuals have not agreed to a resolution within fifteen
(15) days from the date on which the Dispute was first presented to them, any
party, by written notice to the other parties, may require that the Dispute be
submitted for resolution to the Chief Financial Officer of each of Guthy-Renker
and TVN. The Chief Financial Officers shall meet, in person or by other means
satisfactory to them, to attempt to resolve the Dispute within fifteen days
after the reference of the matter to them. If the Chief Financial Officers reach
a decision within such fifteen day period their decision shall be final and
binding on the parties hereto. If the Chief Financial Officers fail to resolve
the Dispute within such period, either of the Chief Financial Officers may refer
the matter, on notice to the other, to the Chief Executive Officers of Guthy-
Renker and TVN (the "Chief Executive Officers"). The Chief Executive Officers
shall meet, in person or by other means satisfactory to them, to attempt to
resolve the Dispute within fifteen days after the reference of the matter to
them. If the Chief Executive Officers reach a decision within such fifteen day
period their decision shall be final and binding on the parties hereto. If the
Chief Executive Officers fail to resolve the Dispute within such period, the
matter may be referred by either party for arbitration as provided in Section
2(b).
(b) Arbitration.
-----------
(i) Except as otherwise provided in Section 2(a) hereof, in the
event of any Dispute, such Dispute shall be submitted to and resolved by final
and binding arbitration as provided for by the Commercial Arbitration Rules of
the American Arbitration Association ("AAA"). Except as provided in Section
2(a), arbitration shall be the sole and exclusive method for resolving any
Dispute, and each of TVN or Newco, as the case may be, and Guthy-Renker or GRTV,
as the case may be, are giving up any right that each might otherwise have for
a judge or jury to decide the Dispute subject to Section 2(e) hereof. If a
written request for arbitration is not made within the limitations periods
applicable to a claim under applicable federal or state law, that Dispute shall
be waived.
(ii) TVN or Newco, as the case may be, and Guthy-Renker or GRTV,
as the case may be, will select an arbitrator by mutual agreement. If TVN or
Newco, as the case may be, and Guthy-Renker or GRTV, as the case may be, are
unable to agree on a neutral arbitrator, the
-3-
<PAGE>
parties will obtain a list of seven (7) arbitrators from the AAA. TVN or Newco,
as the case may be, and Guthy-Renker or GRTV, as the case may be, will
alternately strike names from the list, with Guthy-Renker, as the case may be,
striking first, until only one name remains. The remaining person shall be the
arbitrator. Both TVN and Newco, as the case may be, and Guthy-Renker or GRTV, as
the case may be, will have the opportunity to conduct all discovery as provided
for in the Federal Rules of Civil Procedure, and the arbitrator shall have the
power to decide any discovery disputes between the parties. The arbitrator may
also hear and decide motions for summary disposition of any dispute as provided
by applicable state law and other motions.
(iii) The arbitrator shall conduct a hearing in accordance with the
commercial arbitration rules of the AAA, except as expressly provided herein or
as otherwise agreed by the parties to such Dispute. Within thirty (30) days
following the hearing and the submission of the matter to the arbitrator, the
arbitrator shall issue a written opinion and award which shall be signed and
dated. The arbitrator's award shall decide all Disputes and issues submitted by
Guthy-Renker or GRTV, as the case may be, and TVN or Newco, as the case may be,
and the arbitrator may not decide any Dispute or issue not submitted. The
arbitrator shall be permitted to award only those remedies in law or equity
which are requested by either TVN or Newco, as the case may be, or Guthy-Renker
and GRTV, as the case may be, and allowed by law, but in no event may any
punitive or exemplary damages be sought or awarded. The cost of the arbitrator
and other incidental costs of arbitration, including the cost of a court
reporter, shall be shared equally by both Guthy-Renker or GRTV, as the case may
be, and TVN or Newco, as the case may be. Each of Guthy-Renker, GRTV, TVN and
Newco shall bear their own costs for legal representation in any arbitration
proceeding, provided, however, that the arbitrator shall have the authority to
require either party to pay the reasonable attorney's fees for the prevailing
party's representation during the arbitration (as determined by the arbitrator)
and the costs of the arbitrator, as part of any remedy that may be ordered.
(iv) Arbitration hearings hereunder shall commence within 120 days of
the selection of the neutral arbitrator, and such hearings shall take place in
Los Angeles, California. Arbitration proceedings will be conducted
confidentially and all documents, testimony and records shall be received, heard
and maintained by the arbitrator in confidence, available for the inspection
only by the arbitrator, Guthy-Renker, GRTV, TVN and Newco and their respective
attorneys and their respective experts who shall agree in advance and in writing
to receive all such information confidentially and to maintain such information
in confidence. The decree or award rendered by the arbitrator may be entered as
a final and binding judgment in any court having jurisdiction thereof.
(c) All negotiations and proceedings pursuant to Sections 2(a) and (b)
shall be confidential and shall be treated as compromise and settlement
negotiations for purposes of the United States Federal Rules of Evidence and any
applicable state rules of evidence provided that any party may specifically
waive these rights of privileges and confidentiality with respect to any
communications it makes pursuant to those sections. No such confidentiality or
privilege shall apply to communications made to any independent accounting firm.
(d) The resolution of any dispute submitted pursuant to Sections 2(a) or
(b) shall be final and binding upon the parties to this Agreement. No party to
this Agreement shall initiate,
-4-
<PAGE>
and each party to this Agreement shall cause its affiliates not to initiate, any
legal proceeding, except as provided in Section 2(e), and except to enforce the
decisions of the arbitrator hereunder.
(e) Nothing in this Section 2 shall preclude any party from seeking
pre-arbitral interim or permanent injunctive relief, specific performance or
other equitable remedies in relation to any Disputes (prior to the appointment
of an arbitrator as provided herein) where such party reasonably believes that
such relief is necessary to prevent irreparable harm that cannot be calculated
or fully or adequately compensated by recovery of damages.
3. Miscellaneous.
-------------
(a) Severability. If any portion of this Agreement is held by a court
------------
of competent jurisdiction to conflict with any federal, state or local law and
is not reformed, such portion of this Agreement shall be of no force or effect
and this Agreement shall otherwise remain in full force and effect and be
construed as if such portion had not been included in this Agreement.
(b) No Assignment. Except as expressly provided herein, Guthy-Renker
-------------
and GRTV shall not assign this Agreement or any rights or obligations under this
Agreement without the prior written consent of TVN. Except as expressly provided
herein, TVN and Newco shall not assign this Agreement without the prior written
consent of Guthy-Renker.
(c) Notices. All notices and other communications hereunder shall be
-------
in writing and shall be deemed given when received if delivered personally or
mailed by registered or certified mail (return receipt requested), sent by
telecopy with a copy via earliest overnight delivery and confirmation of
facsimile received, or sent by recognized overnight delivery service, return
receipt requested, to the parties at the following addresses and telecopy
numbers (or at such other address or number for a party as shall be specified by
like notice):
(i) if to TVN or Newco, to:
TVN Entertainment Corporation
2901 West Alameda Avenue
Burbank, California 91505
Attn: Stuart Z. Levin
Telecopy No.: (818) 526-5001
Telephone No.: (818) 526-5000
with copies to:
Legal Department
TVN Entertainment Corporation
2901 West Alameda Avenue
Burbank, California 91505
Attn: Arthur Fields
Telecopy No.: (818) 526-5003
Telephone No.: (818) 526-5022
-5-
<PAGE>
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304
Attn: Robert P. Latta
Telecopy No.: (650) 845-5000
Telephone No.: (650) 320-4646
(ii) if to GRTV or Guthy-Renker to:
Guthy-Renker Corporation
3340 Ocean Park Blvd. #3055
Santa Monica, California 90405
Attn: Kevin Knee
Telecopy No.: (310) 581-3287
Telephone No.: (310) 581-6250
with copies to:
Guthy-Renker Corporation
Legal Department
3340 Ocean Park Blvd. #3055
Santa Monica, California 90405
Attn: Bennet Van de Bunt
Telecopy No.: (310) 581-3232
Telephone No.: (310) 581-6250
Venable Baetjer Howard & Civiletti LLP
1201 New York Avenue NW
Suite 1000
Washington, D.C. 20005-3917
Attn: Robert J. Bolger, Esq.
Telecopy No.: (202) 962-8300
Telephone No.: (202) 962-4800
(d) Entire Agreement. This Agreement and the Purchase Agreement
----------------
contain the entire agreement and understanding of the parties and supersedes all
prior discussions, agreements and understandings relating to the subject matter
of this Agreement. This Agreement may not be changed or modified, except by an
agreement in writing executed by TVN, GRTV and Guthy-Renker; provided, however,
--------- -------
that any consent or waiver permitted under this Agreement may be in a writing
executed solely by TVN or Guthy-Renker, as the case may be.
(e) Waiver of Breach. The waiver of a breach of any term or provision
----------------
of this Agreement shall not operate as or be construed to be a waiver of any
other previous or subsequent breach of this Agreement.
-6-
<PAGE>
(f) Governing Law. This Agreement shall be governed in all respects,
-------------
including validity, interpretation and effect, by the laws of the State of
California (without giving effect to its choice of law principles).
(g) Headings. All captions and section headings used in this Agreement
--------
are for convenient reference only and do not form a part of this Agreement.
(h) Counterparts. This Agreement may be executed in counterparts, and
------------
each counterpart shall have the same force and effect as an original and shall
constitute an effective, binding agreement on the part of each of the
undersigned.
[REMAINDER OF PAGE INTENTIONALLY BLANK]
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
TVN ENTERTAINMENT CORPORATION GUTHY-RENKER CORPORATION
By: /s/ Arthur Fields By: /s/ B. Van de Bunt
------------------------- --------------------------
Name: Arthur Fields Name: B. Van de Bunt
------------------------ ------------------------
GRTV NETWORK, INC. GUTHY-RENKER TELEVISION
NETWORK, INC.
By: /s/ Arthur Fields By: /s/ B. Van de Bunt
------------------------- --------------------------
Name: Arthur Fields Name: B. Van de Bunt
------------------------ ------------------------
[SIGNATURE PAGE FOR NON-COMPETITION AGREEMENT]
-8-
<PAGE>
ASSUMPTION OF AND FIRST AMENDMENT TO
EMPLOYMENT AGREEMENT
THIS ASSUMPTION OF AND FIRST AMENDMENT TO EMPLOYMENT AGREEMENT, shall be
effective as of July 1, 1999, (this "First Amendment") and is entered into by
and between GRTV Network, Inc. (the "Company") and Gregory A. Thomas (the
"Executive"). All terms not defined herein shall have the same definitions as
those ascribed to them in the Agreement (defined below).
WHEREAS, Executive and Guthy-Renker Television Network, Inc. ("GRTV") are
parties to that certain Employment Agreement effective as of January 1, 1998
(the "Agreement"); and
WHEREAS, substantially all of the assets of GRTV have been purchased by TVN
Entertainment Corporation ("TVN"); and
WHEREAS, the Company, a wholly owned subsidiary of TVN, desires to assume
the Agreement, as amended herein, to retain the services of Executive.
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the parties hereto agree that the Agreement shall be assumed by the Company, as
amended hereby:
A. All references in the Agreement, as amended hereby, to the "Company" shall
mean "GRTV Network, Inc." and all references in this First Amendment to the
"Company" shall be as defined in this First Amendment.
B. All references in the Agreement, as amended hereby, to "Guthy-Renker
Corporation" shall mean "TVN Entertainment Corporation" and all references
in this First Amendment to "Guthy-Renker Corporation" shall continue to
mean "Guthy-Renker Corporation".
C. All references in the Agreement, as amended hereby, to "Guthy-Renker
Television Network, Inc." shall mean "GRTV Network, Inc." and all
references in this First Amendment to "Guthy-Renker Television Network,
Inc." shall continue to mean "Guthy-Renker Television Network, Inc."
D. All references in the Agreement, as amended hereby, to "GRC" shall mean
"TVN" and all references in this First Amendment to "TVN" shall be as
defined in this First Amendment.
E. All references in the Agreement to a "Guaranteed Bonus" are deleted.
F. The following text is added to the end of Section 2(a) of the Agreement:
At some point, TVN may change the name of the Company, or combine the
Company's business with another wholly owned TVN subsidiary with a
different name, but this employment agreement will continue in effect
in either event.
G. Sections 2(c) and 2(d) of the Agreement are deleted in their entirety.
H. The following text is added as a new Section 2(c):
(c) Executive shall report to the Chief Executive Officer of Company.
Currently James Ramo is the Acting Chief Executive Officer, but a new
Chief Executive Officer may be later appointed by TVN or Company.
Company and/or TVN shall determine
Page 1 of 8
Rev. 6.0
<PAGE>
the timing, in its/their sole discretion, of such appointment, if any,
and the identity of the individual so appointed. Executive shall not
have any right of approval or prior notice of such appointment, but if
Michael Wex is so appointed and Executive determines that he does not
wish to report to him, Executive may terminate this Agreement by
written notice to Company, in which event Company shall have no
further obligations or liabilities under this Agreement (including,
without limitation, under Section 4 hereof) except to pay Executive
solely the following sums: (i) any accrued but unpaid amounts of Base
Salary for the period through the date of termination and (ii) an
amount equal to six (6) months of Executive's then current Base Salary
as severance, all paid within thirty (30) calendar days of Executive's
notice of termination hereunder.
I. Section 3 of the Agreement is modified so that the term shall commence as
of July 1, 1999.
J. Section 4 of the Agreement is deleted in its entirety and is replaced by
the following text:
4. Compensation.
------------
4.1 Base Salary. During the period of July 1, 1999 through
-----------
March 31, 2000, Executive will be paid on the basis of an
annual salary (each, the "Base Salary") of TWO HUNDRED THOUSAND DOLLARS
($200,000.00) per year. During the period of April 1, 2000 through March 31,
2001, Executive will be paid on the basis of an annual salary of TWO HUNDRED
TWENTY FIVE THOUSAND DOLLARS ($225,000.00) per year. During the period of April
1, 2001 through December 31, 2001, Executive will be paid on the basis of an
annual salary of TWO HUNDRED FIFTY THOUSAND DOLLARS ($250,000.00) per year.
4.2 Bonuses.
-------
(a) Performance Bonus. Provided that the Executive is not
-----------------
then in material breach of this Agreement the Executive will be eligible to
receive a performance bonus (a "Performance Bonus") of up to ONE HUNDRED TWENTY
FIVE PERCENT (125%) of the Executive's blended average salary in effect during
such period (the "Maximum Bonus"), based upon annual milestones achieved by the
Company relative to those projected in the Company Business Plan for that fiscal
year, and also taking into account the overall financial results at the Company
and TVN during that year, but, subject to Section 4.2(a)(iii), the Executive's
Performance Bonus will be guaranteed at ONE HUNDRED THOUSAND DOLLARS
($100,000.00) per fiscal year and paid in cash. The Executive's Performance
Bonus shall be calculated as follows:
(i) For Fiscal Year 2000. For the Company's fiscal
--------------------
year ending 2000 (July 1, 1999 through March 31, 2000):
(A) If the Company generates at least THREE
MILLION DOLLARS ($3,000,000.00) of Net Profits during such period, the Executive
will be entitled to receive THREE QUARTERS (3/4) of the Maximum Bonus as the
Executive's Performance Bonus.
(B) If the Company generates less than THREE
MILLION DOLLARS ($3,000,000.00) of Net Profits during such period, the Executive
will receive a pro-rated portion of the Maximum Bonus as his Performance Bonus.
For example, in the event that the Company generates ONE MILLION EIGHT HUNDRED
THOUSAND DOLLARS
Page 2 of 8
Rev. 6.0
<PAGE>
($1,800,000.00) of Net Profits during fiscal year 2000, which is SIXTY PERCENT
(60%) of the such milestone, the Executive will receive the sum of ONE HUNDRED
TWELVE THOUSAND FIVE HUNDRED DOLLARS ($112,500.00) as the Executive's
Performance Bonus.
(ii) For Fiscal Year 2001 and Beyond. For the
-------------------------------
Company's fiscal year ending 2001 and each fiscal year thereafter:
(A) If the Company attains the milestones
mutually agreed upon for each such fiscal year, and subject to Section
4.2(a)(iii) below, the Executive will be entitled to receive the Maximum Bonus
as the Executive's Performance Bonus.
(B) If the Company fails to attain such
mutually agreed upon milestones for each such fiscal year, the Executive will
receive a pro-rated portion of the Maximum Bonus as the Executive's Performance
Bonus. For example, in the event that the parties mutually agree that a
milestone for fiscal year 2001 is FIVE MILLION DOLLARS ($5,000,000) of Net
Profits, and the Company generates FOUR MILLION DOLLARS ($4,000,000.00) of Net
Profits during such fiscal year, which is EIGHTY PERCENT (80%) of such
milestone, the Executive will receive the sum of TWO HUNDRED TWENTY FIVE
THOUSAND DOLLARS ($225,000.00), which is EIGHTY PERCENT (80%) of ONE HUNDRED
TWENTY FIVE PERCENT (125%) of the Executive's salary in effect during fiscal
year 2001.
(iii) Proration of Bonus. In the event that the
------------------
Executive is not employed with the Company at the conclusion of a fiscal year
because either (A) Executive was terminated by Company without cause or (B)
Executive resigns or otherwise terminates his employment other than pursuant to
Section 2(c), the Executive's Performance Bonus (including the Minimum Bonus)
for such fiscal year shall be pro-rated based upon the number of months which
the Executive was employed with the Company during such fiscal year.
(b) Net Profits. For purposes of this Agreement, "Net
-----------
Profits" shall mean the net profits before income taxes solely for the Company's
business, but shall not include amounts paid by or on behalf of Company to Guthy
Renker Corporation under that certain Media Access, Consulting and Services
Agreement, dated as of July 1, 1999. For purposes of calculating "Net Profits",
the amount of the expenses of TVN, owner of a majority of the issued and
outstanding common stock of the Company, attributed to the Company as an
indirect expense for TVN services provided to the Company (the "Indirect
Expenses") shall be a fixed amount (as opposed to a percentage of gross
revenues) jointly calculated and agreed upon by the Executive and TVN's
Financial Officer, and the Executive and he shall make good faith efforts to
agree upon such amounts; provided, however, that if no agreement is reached
after such good faith efforts, then TVN's Financial Officer determination shall
prevail.
(c) Payment. Each bonus payable under this Section 4.2
-------
will be payable within ninety (90) days after each March 31 fiscal year-end,
based upon the applicable Company milestone figures compiled by TVN's finance
department.
4.3 Stock Options.
-------------
(a) Grant. Upon the Executive's execution of this document
-----
and the assumption of the Agreement, as amended hereby, by the Company, and upon
the Executive's meeting eligibility requirements, the Executive will be granted
a stock option, which shall be, to the extent permitted under the applicable
rules of Section 422(d) of the Internal Revenue Code of 1986 (IRC), as amended,
an "incentive stock option" (as defined in Section 422 of the IRC) to purchase a
Page 3 of 8
Rev. 6.0
<PAGE>
total of ONE HUNDRED THOUSAND (100,000) shares of TVN Common Stock, with a per
share exercise price as determined by TVN's Board of Directors, based on the
then current fair market value of TVN's Common Stock (currently anticipated to
be approximately $11.00 per share). This option shall be exercisable for a
term of ten (10) years (or shorter upon any termination of the Executive's
employment other than for "cause") and shall vest as is set forth below. This
option grant will be subject to the terms, definitions and provisions of TVN's
Stock Option Plan and an appropriate Stock Option Agreement which will be
entered into by the Executive and TVN, both of which will be provided to the
Executive within a reasonable time following the mutual execution of this letter
agreement.
(b) Vesting.
-------
(i) FIFTY THOUSAND (50,000) shares of the stock
options granted under Section 4.3(a) shall vest as follows:
(A) Contingent upon the Executive's continued
employment by the Company on December 31, 1999, the Executive will vest at that
time the same percentage of the Executive's TVN option shares as the percentage
that had vested under the Executive's prior stock option agreement with GRC had
the Executive still been employed by GRC, (i.e., 1/3 of the Executive's GRC
option shares vested upon the Executive's completion of one (1) year of
employment by GRC (i.e., on January 1, 1999); so 1/3 of this TVN option shares
grant will be vested on December 31, 1999).
(B) Contingent upon the Executive's continued
employment by the Company on April 1, 2000, the Executive will vest an
additional 1/3 of this TVN option shares grant at that time, and the remaining
1/3 unvested portion of this TVN option shares grant will vest per the vesting
provisions of the TVN Stock Option Plan (5 year vesting commencing July 1,
1999).
(ii) FIFTY THOUSAND (50,000) shares of the stock
options grant under Section 4.3(a) shall vest as provided in TVN's Stock Option
Plan, over five (5) years at the rate of 20% of the shares originally subject to
the option one year from the commencement date of the Term, and one-sixtieth
(1/60) of the shares originally subject to the option each month thereafter,
conditioned upon Executive's continued employment with the Company as of each
vesting date. This option grant will be subject to the terms, definitions and
provisions of TVN's Stock Option Plan and the standard form Stock Option
Agreement which will be entered into by the Executive and TVN, both of which
will be provided to the Executive upon signing this First Amendment.
4.4 Adjustments to Compensation. During the Term, the Company
---------------------------
shall not reduce the Executive's Base Salary or Annual Bonus without the
Executive's prior written consent.
K. Section 5(a) of the Agreement is deleted in its entirety and is replaced by
the following text:
Subject to meeting eligibility requirements, the Executive will be
included in the Company's employee benefit plans then available to
other employees at the same level as the Executive, including a health
care plan that has a waiting period for eligibility, and qualification
requirements, including those applicable to pre-existing medical
conditions. This will be described in the plan, which will be provided
to the Executive.
Page 4 of 8
Rev. 6.0
<PAGE>
L. The following text is added as a new Section 5(d):
(d) The Company will reimburse Executive for the COBRA premiums
incurred by him if any, between July 1, 1999 and such time as the
Executive becomes eligible for coverage under the Company's health
care plan.
M. The last sentence of Sections 6(c), 6(d)(l), 6(e)(l) and 6(g) of the
Agreement are deleted in their entirety.
N. Section 6(e)(2)(vi) of the Agreement is deleted in its entirety and is
replaced with the following text:
(vi) the appropriation by Executive of any material business
opportunity which the TVN board of directors, in good faith,
reasonably believes to be a corporate opportunity of the Company.
In the event that Executive has not previously made a material
misrepresentation of his intention with regard to such
appropriation, Executive will have five (5) days following notice
of such determination by the board to cure such business
opportunity appropriation.
0. Section 6(f)(i) is modified to delete the text, "Guaranteed Bonus".
P. Section 6(f)(ii) is modified so that the phrase "the Executive's Guaranteed
Bonus pursuant to Section 4.2(c) hereof or any other" is deleted.
Q. The second sentence (commencing with "For example,") of Section 7(a)(5) is
deleted in its entirety.
R. Section 7(b)(3) of the Agreement is deleted in its entirety and is replaced
by the following text:
(3) Nothing in this Section 7 is intended to prohibit the Executive
from (a) for a period not to extend beyond December 31, 1999,
actively participating in the completion of Executive's current
infomercial project relating to a Windows '98 product; provided that
Executive shall not do so during Company's normal business hours of
9:00AM through 6:00PM, Monday through Friday, or (b) providing passive
financing of third-party infomercials so long as (i) such infomercials
are produced by someone other than Executive and who is not under
Executive's direction or control, (ii) Executive's financing of such
infomercials does not take away from, or interfere with, Executive's
focus on his full-time duties for the Company, and (iii) Executive
does not manage/oversee the media buying for or backend process of
such infomercials. If the Company believes that Executive's passive
financing of infomercials or work on the Windows '98 infomercial
project is taking away from his full-time duties for the Company, it
shall notify Executive and give him fifteen (15) days to cure. If
Executive fails to so cure, then the Company may elect to terminate
this Agreement. It is understood that passive financing (i.e., acting
solely in the manner of a limited partner) of third party infomercials
undertaken in accordance with this Section 7(b)(3) shall not be deemed
to be in competition with the Company.
Page 5 of 8
Rev. 6.0
<PAGE>
S. The following text is added as a new Section 7(d):
(d) Nonsolicitation.
---------------
(i) Executive agrees that he and his agents and
representatives will not, during the twelve (12)-month
period following the cessation of Executive's employment,
or in contemplation of the cessation of his employment
hereunder, induce, entice or solicit employees of Company,
its parent company, or its subsidiaries (each, a "Company
Employee"), to leave his or her employment with Company,
its parent company, or its subsidiaries, without first
obtaining the written consent of the Chief Operating
Officer of TVN.
(ii) With the sole exception of those activities permitted
under Section 7(b)(3) above, during the term of this
Agreement, Executive will not (i) become employed by, (ii)
perform consulting services for, or (iii) engage in any
other occupation for an entity which, primarily, is in the
infomercial, media buying or television direct response
business.
(iii) Commencing six (6) months following the cessation of
Executive's employment hereunder, in the event that a
Company Employee initiates a solicitation to Executive for
employment with Executive, Executive shall be presumed not
to have violated Section 7(d)(i) above if both Executive
and such Company Employee provide Company with sworn
statements that Executive had not induced, enticed or
solicited such Company Employee to leave Company's employ
and to become employed by Executive.
T. Section 13 of the Agreement is deleted in its entirety and is replaced by
the following text:
13. Notices. All notices and other communications hereunder shall be
------------
in writing and shall be deemed given when received if delivered
personally or mailed by registered or certified mail (return receipt
requested), sent by telecopy with a copy via earliest overnight
delivery and confirmation of facsimile received, or sent by recognized
overnight delivery service, return receipt requested, to the parties
at the following addresses and telecopy numbers (or at such other
address or number for a party as shall be specified by like notice):
If to the Executive:
Gregory A. Thomas
1056 Corsica Drive
Pacific Palisades, CA 90272
Page 6 of 8
Rev. 6.0
<PAGE>
with a copy to:
De Castro, West & Chodorow, Inc.
Fourteenth Floor East
10960 Wilshire Boulevard
Los Angeles, California 90024-3881
Attn: Rich Furman
Telecopy No.: (310) 473-0123
Telephone No.: (310) 478-2541
If to the Company, to:
c/o TVN Entertainment Corporation
2901 West Alameda Avenue
Burbank, California 91505
Attn: James B. Ramo
Telecopy No.: (818) 526-5001
Telephone No.: (818) 526-5000
with a copy to:
Legal Department
TVN Entertainment Corporation
2901 West Alameda Avenue
Burbank, California 91505
Attn: Arthur Fields
Telecopy No.: (818) 526-5003
Telephone No.: (818) 526-5022
or to such other address as a party provides (in accordance herewith)
to the other party from time to time. Notice shall be effective when
so delivered personally or by courier service, or if by facsimile,
upon receipt, or if mailed, three (3) days after the date of mailing.
U. Section 1 5 of the Agreement is deleted in its entirety, and is replaced
with the following text:
15. Successors and Assigns. This Agreement shall be binding upon and
----------------------
inure to the benefit of the parties hereto and their respective
heirs, personal representatives, successors and permitted
assigns. The Executive may not assign any of his rights or
obligations hereunder without the prior written consent of the
Company.
V. Section 20 of the Agreement is deleted in its entirety, and is replaced
with the following text:
20. Guarantee. The performance and obligations of the Company under
---------
this Agreement, as amended hereby, shall be guaranteed by TVN.
W. Each party represents and warrants that it has full power and authority to
enter into this First Amendment and to undertake each of the amendments set
forth herein.
Page 7 of 8
Rev. 6.0
<PAGE>
X. This First Amendment may be executed in one or more counterparts, each of
which shall be deemed an original, and will become effective and binding
upon the parties at such time as all of the signatories hereto have signed
each counterpart of this Agreement. Each of the parties hereto shall sign a
sufficient number of counterparts so that each party will receive a fully
executed originals of this Agreement.
Y. All provisions of the Agreement not herein expressly modified shall remain
in full force and effect as originally presented in the Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be
executed by their duly authorized representatives as of the day and year first
written above.
<TABLE>
<CAPTION>
GRTV NETWORK, INC. GREGORY A. THOMAS
<S> <C>
By: /s/ Arthur Fields /s/ Gregory A. Thomas
------------------------------- --------------------------
Name: Arthur Fields Date: July 30, 1999
Title: Senior Executive Vice President
Date: July 30, 1999
</TABLE>
The undersigned is executing this document solely to agree to be bound it
obligations under Section V of this First Amendment, and for no other purpose.
TVN ENTERTAINMENT CORPORATION
By: /s/ Arthur Fields
-------------------------------------
Name: Arthur Fields
Title: Senior Executive Vice President
Date: July 30, 1999
Page 8 of 8
Rev. 6.0
<PAGE>
THIS CONVERTIBLE PROMISSORY NOTE (THE "NOTE") AND THE
SECURITIES ISSUABLE ON THE CONVERSION HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), AND MAY NOT BE OFFERED, SOLD OR OTHERWISE
TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF
SUCH REGISTRATION, AN EXEMPTION THEREFROM UNDER SUCH ACT,
OR THE DELIVERY OF AN OPINION OF COUNSEL IN A FORM
AND SUBSTANCE REASONABLY SATISFACTORY TO TVN
ENTERTAINMENT CORPORATION THAT SUCH OFFER, SALE OR
TRANSFER, PLEDGE OR HYPOTHECATION IS NOT REQUIRED UNDER
THE ACT.
CONVERTIBLE PROMISSORY NOTE
---------------------------
$13,000,000.00 As of July 1, 1999
FOR VALUE RECEIVED, the undersigned, TVN ENTERTAINMENT CORPORATION, a
Delaware corporation ("TVN"), and GRTV NETWORK, INC., a Delaware corporation
("Newco"), jointly and severally promise to pay to the order of GUTHY-RENKER
TELEVISION NETWORK, INC., a Delaware corporation ("Holder"), at 41-550 Eclectic,
Suite 200, Palm Desert, California 92260, or at such other place, either within
or without the State of California, as Holder may from time to time designate in
writing, the principal sum of THIRTEEN MILLION DOLLARS ($13,000,000.00) (the
"Principal Amount") together with interest thereon in accordance with the terms
and conditions set forth in this promissory note (the "Note"). For purposes of
this Note, (i) the portion of the initial Principal Amount equal to Four Million
Dollars ($4,000,000.00) is referred to herein as the "First Principal Amount,"
and (ii) the remaining Nine Million Dollars ($9,000,000.00) of the initial
Principal Amount is referred to herein as the "Second Principal Amount."
1. Interest. The unpaid First Principal Amount of this Note and the
--------
unpaid Second Principal Amount of this Note shall bear interest at a rate equal
to six percent (6%) and nine percent (9%), respectively, per annum, compounded
semi-annually, and calculated on the basis of a 365 day year. Interest on both
the First Principal Amount and the Second Principal Amount shall accrue from
July ___, 1999, and shall be payable from time to time in accordance with
Sections 2, 3 and 4 hereof. This Note shall not be construed to require payment
of any interest in excess of the maximum amount permitted by law.
2. Repayment. The Principal Amount and all accrued but unpaid
---------
interest thereon shall be repaid (in lawful money of the United States of
America, except as expressly provided in Section 4 hereof) as follows:
<PAGE>
(a) On the first anniversary date hereof, Two Million Dollars
($2,000,000.00) of the First Principal Amount, and all accrued but unpaid
interest on the entire Principal Amount, shall be due and payable.
(b) On the second anniversary date hereof, Two Million Dollars
($2,000,000.00) of the First Principal Amount, and all accrued but unpaid
interest on the entire remaining Principal Amount (including, without
limitation, that portion of the First Principal Amount which is due and payable
at such time pursuant to this Section 2(b)), shall be due and payable.
(c) At any time, and from time to time, commencing on the earlier
to occur of (i) the fifth anniversary date hereof or (ii) the consummation by
TVN of a "TVN Initial Public Offering" (as defined herein), Holder may demand
payment of all or any portion of the Second Principal Amount and all accrued but
unpaid interest thereon (each, a "Demand"). With respect to each such Demand,
Holder shall deliver a written notice to TVN and Newco setting forth (i) the
Second Principal Amount (and all accrued but unpaid interest thereon) to be paid
by TVN and Newco in connection with such Demand, and (ii) the date on which such
payment shall be due and payable, which date shall be no earlier than five (5)
business days from the date such notice is provided to TVN and Newco.
For purposes of this Note, the term "TVN Initial Public Offering" shall mean any
underwritten public offering of shares of TVN's common stock ("TVN Shares")
under the Act and declared effective pursuant to a registration statement filed
by TVN under the Act with the United States Securities and Exchange Commission
(the "Commission") (a "Registration Statement"), as a result of which TVN Shares
are listed or traded on any United States nationally recognized stock exchange
or quotation system.
3. Optional Prepayment. TVN and Newco shall have the right, at any
-------------------
time and from time to time, upon at least five (5) business days' prior written
notice by TVN or Newco to Holder, to prepay this Note in whole or in part,
together with all accrued but unpaid interest on the Principal Amount to be
paid, without premium or penalty, on the date specified in such notice,
whereupon the Principal Amount specified in such notice (and all accrued but
unpaid interest thereon) shall become due and payable on the date specified;
provided, however, that each such payment of Principal Amount shall be not less
than One Million Dollars ($1,000,000.00).
4. Payment in TVN Shares.
---------------------
(a) Notwithstanding anything in Sections 2 and 3 hereof to the
contrary:
(i) At Holder's option, exercisable upon written notice to
TVN and Newco any time after the occurrence of a TVN Initial Public Offering
(including, without limitation, in the event, any time after the occurrence of a
TVN Initial Public Offering, Holder receives a notice of prepayment pursuant to
Section 3 hereof), all
-2-
<PAGE>
or any portion of the Second Principal Amount (in the case of prepayment
pursuant to Section 3 hereof, such portion not to exceed the amount to be
prepaid) shall be payable, in lieu of cash as provided in Sections 2(c) and 3
hereof, by converting such portion of the Second Principal Amount into TVN
Shares to be issued by TVN to Holder on the terms and conditions set forth in
this Section 4; or
(ii) At TVN's and Newco's option, exercisable upon written
notice to Holder (A) within three (3) business days after TVN's and Newco's
receipt of a Demand pursuant to Section 2(c) hereof, or (B) included in TVN's
and Newco's notice of prepayment pursuant to Section 3 hereof any time after the
occurrence of a TVN Initial Public Offering, all or any portion of the Second
Principal Amount to be paid in accordance with the Demand (or to be prepaid by
TVN and Newco, as the case may be) shall be payable, in lieu of cash as provided
in Sections 2(c) and 3 hereof, by converting such portion of the Second
Principal Amount into TVN Shares to be issued by TVN to Holder on the terms and
conditions set forth in this Section 4.
(b) All TVN Shares issued to Holder hereunder shall be valued
based on the initial offering price per share in connection with the TVN Initial
Public Offering (if Holder makes a Demand or TVN and Newco provide notice of
prepayment, as the case may be, within thirty (30) days after consummation of
the TVN Initial Public Offering), or alternatively (if Holder makes such Demand
or TVN and Newco provide notice of prepayment any time after such thirty (30)
day period), based on the average closing trading price per share of such TVN
Shares as reported on the appropriate stock exchange for the five (5) trading
days immediately preceding the date of such issuance.
(c) In addition, all TVN Shares issued to Holder hereunder shall
be, at TVN's and Newco's option, either (i) properly registered and freely
transferable under the Act pursuant to an effective Registration Statement with
respect to such TVN Shares, subject only to a "Standoff Restriction" (as
defined herein), or (ii) TVN shall permit Holder to (A) include the TVN Shares
issued to Holder hereunder in any Registration Statement filed by TVN either for
its own account or the account of any other security holder (other than a
Registration Statement relating solely to TVN's employee benefit plans or an
acquisition), and (B) require TVN on a one-time basis to file a Registration
Statement with respect to the TVN Shares issued to Holder hereunder, subject to
standard limitations, in either case subject to Section 4(e) hereof; provided,
however, that Holder shall not have the rights set forth in clauses (i) or (ii)
of this subsection (c) if at the time of issuance of such TVN Shares to Holder,
Holder may freely transfer such TVN shares under Rule 144(k) promulgated under
the Act and Holder receives an opinion of its counsel to this effect, in form
and substance reasonably satisfactory to Holder. For purposes hereof, "Standoff
Restriction" means that (x) Holder shall not sell, make any short sale of, loan,
grant any option for the purchase of, or otherwise dispose of any TVN Shares
(except as permitted by the underwriter in connection with the registration)
without the prior written consent of TVN or its underwriters, as the case may
be, for such period of time (not to exceed one hundred eighty (180) days) from
the effective date of such Registration Statement as may be requested by TVN or
such underwriters, and (y) Holder shall be subject to such
-3-
<PAGE>
underwriters' standard form of lock-up agreement, if such underwriter requires
Holder to enter into such agreement.
(d) TVN covenants and agrees to:
(i) make and keep public information available, as those
terms are defined in Rule 144 promulgated under the Act, at all times after the
effective date as of which TVN becomes subject to the reporting requirements of
the Securities Act or the Securities Exchange Act of 1934, as amended (the
"Exchange Act");
(ii) use its best efforts to file with the Commission in a
timely manner all reports and other documents required of TVN under the Act and
the Exchange Act;
(iii) furnish to Holder, promptly upon Holder's request, (i)
a written statement by TVN as to its compliance with the reporting requirements
of Rule 144 (at any time, and from time to time, after ninety (90) days after
the effective date of the TVN Initial Public Offering) and the Act and the
Exchange Act, (ii) a copy of the most recent annual or quarterly report of TVN,
and (iii) such other reports and documents of TVN and other information in the
possession of or reasonably obtainable by TVN as an investor may reasonably
request in availing itself of any rule or regulation of the Commission allowing
an investor to sell any such securities without registration;
(iv) if TVN Shares are issued to Holder hereunder, TVN will
use its best efforts to register and qualify TVN Shares under such state
securities or blue sky laws of such jurisdictions as shall be reasonably
requested by Holder, provided that TVN shall not be required in connection
therewith or as a condition thereto to qualify to do business or to file a
general consent to service of process in any such states or jurisdiction; and
(v) in the event that TVN issues to Holder unregistered TVN
Shares, TVN further covenants to use commercially reasonable efforts to cause
such TVN Shares to be registered pursuant to a shelf Registration Statement
within six (6) months following the issuance of such shares. TVN covenants to
keep such Registration Statement continuously effective, in compliance with all
applicable laws, for a reasonable period of time, not to exceed six (6) months,
subject to customary blackout periods. The six (6) month period shall be
extended by the duration of any blackout period in the event Holder has not sold
all registered shares prior to the end of said six (6) month period. At its
option, TVN may, within the time periods set forth above, satisfy its
obligations to register such TVN Shares under this subsection (d)(v) by
permitting Holder to "Piggy Back" on a TVN Registration Statement. Holder and
TVN shall, as a condition of such registration, enter into a customary
registration agreement including, without limitation, mutual indemnification
provisions.
(e) In the event Holder receives payment of the Second Principal
Amount in TVN Shares pursuant to this Section 4 and such TVN Shares issued
-4-
<PAGE>
to Holder hereunder cannot be sold or transferred without restriction pursuant
to Rule 144(k), or such TVN Shares are not properly registered and immediately
transferrable without any Standoff Restriction, then, at Holder's option, TVN
and Newco shall be required to pay to Holder, in cash at the time such TVN
Shares are issued to Holder, that portion of the Second Principal Amount equal
to the amount of any and all federal, state, local or foreign income or other
taxes payable by Holder as a result of Holder's receipt of such TVN Shares, and
the remainder of the Second Principal Amount shall be converted into TVN Shares
pursuant to this Section 4.
(f) No fractional shares of TVN Shares shall be issued upon
conversion of this Note. In lieu of any fractional share to which Holder would
otherwise be entitled, TVN and Newco, will pay to Holder cash in an amount equal
to the Principal Amount that would otherwise constitute a fractional share.
(g) Upon conversion of the Second Principal Amount pursuant to
this Section 4, TVN shall, as soon as practicable thereafter (and at TVN's sole
cost and expense), issue and deliver to Holder a certificate or certificates for
the number of TVN Shares to which Holder is entitled upon conversion, together
with a certified or cashier's check (or wire transfer of immediately available
funds) payable to Holder for all cash amounts payable as described herein.
(h) In the event any portion of the Second Principal Amount is
paid by converting such portion into TVN Shares in accordance with this Section
4, any and all accrued but unpaid interest on such Second Principal Amount shall
be paid by converting such interest into TVN Shares in the same manner as such
Second Principal Amount.
5. Late Interest and Costs. Any payment required to be made hereunder
-----------------------
(including any payment of interest and/or Principal Amount) which is not made on
the date that such payment is due and payable shall continue as a joint and
several obligation of TVN and Newco until it is fully paid, and TVN and Newco
agree to pay, to the extent permitted by law, late interest thereon at a rate
equal to twelve percent (12%) per annum, compounded quarterly, such late
interest to accrue from the date such overdue payment becomes due and payable
until all such amounts are paid. TVN and Newco shall also pay, promptly upon
demand, all reasonable costs of collection, including reasonable attorneys' fees
if this Note is referred to an attorney for collection after "Default" (as
defined herein), whether or not any action shall be instituted to enforce or
collect this Note.
6. Default Interest Rate. Upon any failure by TVN and Newco to pay
---------------------
the full amount of the Principal Amount, accrued but unpaid interest thereon,
and/or costs of collection permitted hereunder, as and when any payment under
this Note becomes due and payable, the interest rate applicable to the remaining
Principal Amount under the Note shall be increased, without notice or demand
upon TVN and Newco, to fifteen percent (15%) per annum, compounded quarterly.
-5-
<PAGE>
7. Offset. Pursuant to the terms and conditions, and subject to the
------
limitations, set forth in Article V of that certain Asset Acquisition Agreement
by and among TVN, Newco, Holder and Guthy-Renker Corporation, a Delaware
corporation ("GRC"), dated as of July 1, 1999 (the "Asset Acquisition
Agreement"), TVN and Newco have the right to offset, on a dollar for dollar
basis, any "Approved Claim" (as defined in the Asset Acquisition Agreement)
against any portion or all of the remaining Principal Amount due to the Holder
under this Note. In the event TVN and Newco exercise such right of offset, the
remaining Principal Amount of this Note shall be reduced to an amount equal to
the remaining Principal Amount of the Note immediately prior to such offset,
less the amount of "Damages" (as defined in the Asset Acquisition Agreement)
properly offset against the Principal Amount under the Asset Acquisition
Agreement. Any such reduction of Principal Amount shall be made pro-rata between
the First Principal Amount and the Second Principal Amount in accordance with
the "Applicable Percentages" (as defined herein); provided, however, that to
the extent such pro-rata reduction would exceed the remaining First Principal
Amount or Second Principal Amount, as the case may be, such excess shall offset
and reduce any remaining Principal Amount. For purposes hereof, the Applicable
Percentages shall be 30.77% for the First Principal Amount and 69.23% for the
Second Principal Amount.
8. Application of Payments. All payments on this Note shall be
-----------------------
applied first to costs of collection permitted hereunder, then to accrued but
unpaid interest, and any remainder shall be applied to the First Principal
Amount and then to the Second Principal Amount outstanding under the Note. All
payments under Sections 2, 3 or 4 hereof shall be reflected on Schedule A
attached hereto as soon as practicable after such payments are made.
9. Waiver of Presentment, etc. Each of TVN and Newco waives
--------------------------
presentment and demand for payment, notice of intent to accelerate maturity,
notice of acceleration of maturity, protest or notice of protest and nonpayment,
bringing of suit and diligence in taking any action to collect any sums owing
hereunder. From time to time, without affecting the obligation of TVN and Newco
to pay the outstanding Principal Amount of this Note, without giving notice to
or obtaining the consent of TVN and Newco, and without liability on the part of
the Holder, the Holder may, at its option, extend the time for payment of
interest hereon and/or the Principal Amount hereof, reduce the payments
hereunder, release anyone liable on this Note, accept a renewal of this Note,
modify the terms and time of payment of this Note, join in any extension or
subordination or exercise any option or election hereunder, or modify the rate
of interest or period of principal repayment or principal due date of this Note.
No one or more of such actions shall constitute a novation.
10. Default.
-------
(a) For purposes of this Note, a "Default" shall be deemed to
occur if (i) TVN and Newco fail to pay any amount due under this Note and such
payment is not made within ten (10) days after Holder provides written notice to
TVN and Newco of TVN and Newco's failure to pay; (ii) either TVN or Newco
becomes
-6-
<PAGE>
insolvent or makes an assignment for the benefit of creditors; (iii) either TVN
or Newco applies for the benefit of, or files a case under, any provision of the
federal bankruptcy law or any other law relating to insolvency or relief of
debtors; (iv) a case or proceeding is brought against TVN or Newco under any
provision of the federal bankruptcy law or any other law relating to insolvency
or relief of debtors which is not dismissed within sixty (60) days after the
commencement thereof (v) either TVN or Newco fails to fully perform, comply
with or observe any of its respective covenants, agreements or other obligations
under (A) that certain Media Access, Consulting and Services Agreement of even
date herewith, by and among GRC, TVN and Newco, and/or that certain related
Guaranty of even date herewith, by TVN, (B) any future pledge agreement by TVN
pursuant to which TVN pledges shares of the issued and outstanding stock of
Newco as additional security for payment of this Note; (C) that certain Security
Agreement of even date herewith, by and between TVN, Newco and Holder; and/or
(D) that certain Transition Services Agreement of even date herewith, by and
between GRC and Newco; or (vi) an "Event of Default" occurs under (and as
defined in) that certain Indenture dated as of July 29, 1998, by and between
TVN, as issuer, and The Bank of New York, as trustee.
(b) Upon the occurrence of a Default, Holder may, at its option,
without further notice or demand, (i) declare the entire unpaid Principal
Amount, net of any Approved Claims, and all accrued but unpaid interest thereon,
immediately due and payable, (ii) pursue any and all other rights, remedies and
recourses available to Holder (including, without limitation, the rights of
Holder set forth in Article V of the Asset Acquisition Agreement), or (iii)
pursue any combination of the foregoing, all remedies hereunder being
cumulative.
(c) Holder shall have the right to rescind any acceleration in
payment of this Note for Default as aforesaid, if the Holder so elects, in which
event this Note shall be construed, interpreted and enforced in the same manner
as if Holder had not elected to declare the unpaid Principal Amount, net of any
Approved Claims, and accrued but unpaid interest thereon at once due and
payable.
(d) Failure by Holder to exercise any of the foregoing options
upon the occurrence of a Default shall not constitute a waiver of the right to
exercise the same or any other option at any subsequent time in respect of the
same or any other Default, and no single or partial exercise of any right or
remedy shall preclude any other or further exercise of the same or any other
right or remedy. Holder shall have no duty to exercise any or all of the rights
and remedies herein provided or contemplated. The acceptance by Holder of any
payment hereunder that is less than payment in full of all amounts due and
payable at the time of such payment shall not constitute a waiver of the right
to exercise any of the foregoing options at that time or at any subsequent time,
or nullify any prior exercise of any such option without the express written
consent of Holder.
11. Mutilated, Destroyed, Lost or Stolen Note. If this Note becomes
-----------------------------------------
mutilated or defaced, or is destroyed, lost or stolen, Newco and TVN shall
execute and
-7-
<PAGE>
deliver a new note of like Principal Amount in exchange and substitution for the
mutilated or defaced Note, or in lieu of, and in substitution for, the
destroyed, lost or stolen Note. In the case of any destroyed, lost or stolen
Note, Holder shall furnish to Newco and TVN (i) evidence to TVN and Newco's
reasonable satisfaction of the destruction, loss or theft of such Note and (ii)
such security or indemnity as may be reasonably required to hold Newco and TVN
harmless from liability in connection therewith.
12. Assignment. The respective rights and obligations of Newco, TVN
----------
and Holder under this Note shall be binding upon and inure to the benefit of
their respective successors, heirs and assigns, administrators and transferees.
Notwithstanding the foregoing, Holder may not assign, pledge or otherwise
transfer this Note without the prior written consent of Newco and TVN, which
shall not be unreasonably withheld; provided, however, that Holder shall be
permitted to assign, pledge or otherwise transfer this Note to any member of the
"GRC Group" (as defined in the Asset Acquisition Agreement) without obtaining
such consent, but Holder shall give TVN and Newco written notice of such
transfer to a member of the GRC Group within thirty (30) days after the
effective date of such transfer and such transferee shall be obligated to
fulfill the Holders' obligations hereunder, including the right of offset set
forth in Section 7 hereof and Article V of the Asset Acquisition Agreement, and
shall evidence its assumption of such obligations in writing satisfactory to TVN
and Newco in their reasonable discretion.
13. Waiver and Amendment. Any provision of this Note including,
--------------------
without limitation, the due date hereof, and the observance of any term hereof,
may be amended, waived or modified (either generally or in a particular instance
and either retroactively or prospectively) only with the written consent of
Newco, TVN and Holder.
14. Confession of Judgement. Any attorney at law may appear in any
-----------------------
court of record in the State of California or in the United States, after demand
on this Note following a Default, and waive the issuing of service of process
and confess a judgment against TVN and/or Newco in favor of Holder for the
amount then appearing due hereunder, together with interest, costs of suit and
reasonable attorneys' fees, and thereupon release all errors and waive all right
of appeal.
15. Remedies Cumulative. All rights and remedies hereunder are
-------------------
irrevocable and cumulative, and shall be in addition to all rights and remedies
set forth in any other instrument or document or available under any law or at
equity, whether now existing or hereafter enacted.
16. Governing Law. This Note is to be governed by, and construed and
-------------
enforced in accordance with, the laws of the State of California, without regard
to principles of conflict of laws.
17. Notice. All notices and other communications hereunder shall be
------
in writing and shall be deemed given when received if delivered personally or
mailed by registered or certified mail (return receipt requested), sent by
telecopy with a copy via
-8-
<PAGE>
earliest overnight delivery and confirmation of facsimile received, or sent by
recognized overnight delivery service, return receipt requested, to the parties
at the following addresses and telecopy numbers (or at such other address or
number for a party as shall be specified by like notice):
(a) if to TVN or Newco, to:
TVN Entertainment Corporation
2901 West Alameda Avenue
Burbank, California 91505
Attn: Stuart Z. Levin
Telecopy No.: (818) 526-5001
Telephone No.: (818) 526-5000
with copies to:
Legal Department
TVN Entertainment Corporation
2901 West Alameda Avenue
Burbank, California 91505
Attn: Arthur Fields
Telecopy No.: (818) 526-5003
Telephone No.: (818) 526-5022
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304
2901 West Alameda Avenue
Burbank, California 91505
Attn: Robert P. Latta, Esq.
Telecopy No.: (650) 845-5000
Telephone No.: (650) 320-4646
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<PAGE>
(b) if to Holder, to:
Guthy-Renker Corporation
3340 Ocean Park Blvd. #3055
Santa Monica, California 90405
Attn: Kevin Knee
Telecopy No.: (310) 581-3287
Telephone No.: (310) 581-6250
with copies to:
Guthy-Renker Corporation
Legal Department
3340 Ocean Park Blvd. #3055
Santa Monica, California 90405
Attn: Bennet Van de Bunt, Esq.
Telecopy No.: (310) 581-3232
Telephone No.: (310) 581-6250
Venable Baetjer Howard & Civiletti LLP
Suite 1000
1201 New York Avenue, NW
Washington, DC 20005-3917
Attn: Robert J. Bolger, Esq.
Telecopy No.: (202) 962-8300
Telephone No.: (202) 962-4800
18. Amendments. This Note may not be modified or changed except by an
----------
agreement in writing signed by Obligor and Holder.
19. Binding Agreement. This Note is binding upon and enforceable
-----------------
against Obligor, its successors and assigns, and shall inure to the benefit of,
and may be enforced by, Holder and its successors and assigns.
20. Time of the Essence. Time is of the essence hereof for all
-------------------
purposes.
21. Counterparts. This Note may be executed in one or more
------------
counterparts, all of which shall be considered one and the same instrument and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party.
-10-
<PAGE>
IN WITNESS WHEREOF, the undersigned have duly executed this Note as of
date first above written.
TVN ENTERTAINMENT CORPORATION
By: /s/
------------------------
Name:
Title:
GRTV NETWORK, INC.
------------------
By: /s/
------------------------
Name:
Title:
Acknowledged and Accepted:
GUTHY-RENKER TELEVISION NETWORK, INC.
By: /s/
--------------------------
Name:
Title:
-11-
<PAGE>
PROMISSORY NOTE
OF
TVN ENTERTAINMENT CORPORATION
AND
GRTV NETWORK, INC.
Schedule A
----------
Original Principal Amount: $13,000,000.00
<TABLE>
<CAPTION>
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<S> <C> <C> <C> <C> <C> <C> <C>
Payment of First Principal Payment of Second Principal Initials Initials Intials
First Prinicpal Amount Following Second Principal Amount Following of of of
Date Amount Payment Amount Payment TVN Newco Holder
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</TABLE>
<PAGE>
EXHIBIT 10.19
ORIGINATION, UPLINK AND POST-PRODUCTION SERVICES AGREEMENT
BETWEEN 4MC-BURBANK, INC.
AND
TVN ENTERTAINMENT CORPORATION
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Identification.................................................................................... 1
2. Recitals.......................................................................................... 1
3. Payment of Outstanding 1999 Arrearages and Delivery of Notes...................................... 3
4. Original Services and Interim Services............................................................ 3
5. Determination of Actual Commencement Date......................................................... 4
5.1 TVN's Right to Inspect and Approve Facility............................................ 4
5.2 Approval Process....................................................................... 5
5.3 Failure to Satisfy..................................................................... 6
5.4 SeaChange System....................................................................... 7
6. New Services, Facility, Personnel and Equipment................................................... 8
6.1 Description of New Services............................................................ 8
6.2 Execution of Sublease; New Services Facility........................................... 8
6.3 New Services Personnel................................................................. 11
6.4 Equipment for New Services............................................................. 13
6.5 Supervision and Control By TVN......................................................... 13
6.6 Availability of Certain Rooms Within Facility.......................................... 13
6.7 TVN's Right to Locate or Relocate Certain Equipment.................................... 14
6.8 Location of Certain Antennae........................................................... 14
7. Term; Renewal Terms............................................................................... 14
8. Consideration..................................................................................... 15
8.1 Consideration for Services............................................................. 15
8.2 Equipment Budget....................................................................... 16
8.3 Additional Equipment................................................................... 19
8.4 Additional Personnel................................................................... 20
8.5 Overtime, Weekend and Holiday Hours.................................................... 20
8.6 Additional Services.................................................................... 20
9. Default and Remedies; Termination................................................................. 21
9.1 Payment Default........................................................................ 21
9.2 Other TVN Default...................................................................... 21
9.3 4MC Default; TVN Termination........................................................... 22
9.4 Disputed Amounts....................................................................... 23
9.5 Duty to Mitigate....................................................................... 23
9.6 TVN's Option to Acquire Equipment Upon 4MC Default..................................... 23
10. Facility Security................................................................................. 25
10.1 Generally.............................................................................. 25
10.2 Additional Security Measures........................................................... 25
</TABLE>
2
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
11. Maintenance....................................................................................... 25
12. Service Interruption.............................................................................. 26
12.1 Service Interruptions.................................................................. 26
12.2 Service Interruption Credit............................................................ 26
12.3 Continuous Service Failure............................................................. 27
12.4 Exception for SeaChange System; Other Causes of Service Interruptions.................. 28
13. Playboy Services Severable........................................................................ 28
14. Representations, Warranties and Covenants......................................................... 29
14.1 Of TVN................................................................................. 29
14.2 Of 4MC................................................................................. 29
15. Limitation of Liability........................................................................... 30
15.1 Limitation of Liability................................................................ 30
15.2 Force Majeure Event.................................................................... 30
15.3 Warranties Disclaimed.................................................................. 31
16. Indemnification................................................................................... 31
16.1 Indemnification by 4MC................................................................. 31
16.2 Indemnification by TVN................................................................. 31
16.3 Indemnification Procedure.............................................................. 32
17. Non-Hire.......................................................................................... 32
</TABLE>
3
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
18. Confidential Information.......................................................................... 32
19. Options Upon Expiration of Term................................................................... 33
19.1 Reduced Monthly Fee During Renewal Term(s)............................................. 33
19.2 TVN's Option to Purchase Equipment..................................................... 33
19.3 Reduction of Services During Renewal Term(s)........................................... 34
19.4 Equipment Purchase Option Upon Expiration.............................................. 35
19.5 Best Efforts to Provide Stand-Alone Generator.......................................... 35
20. Restrictions Regarding Provision of Certain Services.............................................. 35
21. Miscellaneous..................................................................................... 35
21.1 Assignment and Subcontracting.......................................................... 35
21.2 Notices................................................................................ 36
21.3 Governing Law.......................................................................... 37
21.4 Entire Agreement....................................................................... 37
21.5 Waiver of Breach....................................................................... 38
21.6 Independent Contractor................................................................. 38
21.7 Confidentiality........................................................................ 38
21.8 Disputed Matters; Arbitration.......................................................... 38
21.9 Severability........................................................................... 39
21.10 Counterparts........................................................................... 39
21.11 Definitions............................................................................ 39
</TABLE>
4
<PAGE>
EXHIBITS
--------
Exhibit Description
A Form of Fiscal 1997 Note
B Form of Fiscal 1998 Note
C-1 Description of Original Services
C-2 Description of Interim Services
D Description of New Services
E Basement Space to be Provided by 4MC
F Basement Floor Plan
G Sixth Floor Space Plans
H Rack Elevation Drawings
I New Services Personnel
J Equipment and Equipment Expenditures
K Equipment, Information, Programming Materials and Services
To Be Provided By TVN
L Schedule of Increases in Monthly Fee Based on Additional
Capital Equipment
M Implementation Schedule
N Form of Sublease
O Rates for Overtime, Weekends and Holidays
P Rate Card for Additional Services
ORIGINATION, UPLINK AND POST-PRODUCTION SERVICES AGREEMENT
----------------------------------------------------------
1. Identification
--------------
This Origination, Uplink and Post-Production Services Agreement is entered
into on May 28, 1999 by and between 4MC-Burbank, Inc., a Delaware corporation
("4MC"), and TVN Entertainment Corporation, a Delaware corporation ("TVN").
2. Recitals
--------
2.1 On or about November 11, 1989, TVN and Compact Video Services, Inc.
("Compact") entered into that certain Uplink-Playback Service Deal Memorandum,
as amended from time to time (the "Memorandum"), whereby Compact agreed to
provide certain network origination, playback, uplink, post-production and
related services to TVN for TVN's analog and certain digital signal programming
transmitted from the Galaxy III R and Galaxy IX satellites and previously from
other satellites. On August 4, 1993, Compact's rights and obligations under the
Memorandum were assigned to, and assumed by, 4MC. Since then, 4MC has been
providing these services (the "Original Services," as hereinafter defined) to
TVN pursuant to the Memorandum. 4MC is a wholly-owned subsidiary of Four Media
Company, a Delaware corporation.
2.2 In August 1996, 4MC supplied to TVN an additional approximately 1100
square feet of space for TVN's compression system services, with a build-out at
an approximate cost of $469,264. On June 11, 1997, 4MC commenced the provision
of certain additional services to TVN for TVN's digital signal programming
transmitted from the Galaxy IX satellite based upon interim server equipment
which was purchased by 4MC for approximately One Million One Hundred Thousand
One Hundred Sixty Dollars ($1,100,160) in order to provide such services to TVN
at TVN's request (the "Interim Services"). In addition, 4MC hired seven
additional personnel to provide the Interim Services.
2.3 Pursuant to that certain Letter Agreement dated August 19, 1997 by and
between TVN and 4MC, TVN agreed to pay certain amounts to 4MC representing
arrearages due and owing to 4MC on account of the Original Services and Interim
Services performed by 4MC to and including August 3, 1997 (the "1997
Arrearages"). An aggregate of Two Million Three Hundred Thousand Dollars
($2,300,000) of the 1997 Arrearages was to be paid in cash on or prior to
December 31, 1997, and such amount was timely paid, and the remaining amount of
the 1997 Arrearages was to be represented by a promissory note in the principal
amount of Four Million Four Hundred Thirty-Six Thousand Three Hundred Thirty-
Seven Dollars ($4,436,337), with interest to accrue from September 1, 1997
through February 28, 1998 at 10% per annum equaling Two Hundred Twenty-One
Thousand Eight Hundred Seventeen Dollars ($221,817), with no principal or
interest payments to be payable until March 31, 1998, at which time principal
and interest aggregating Four Million Six Hundred Fifty-Eight Thousand One
Hundred Fifty-Four Dollars ($4,658,154) was to be payable in sixty (60) equal
monthly installments of Ninety-Eight Thousand Nine Hundred Seventy-Two Dollars
and One
5
<PAGE>
Cent ($98,972.01). Although the promissory note described above was not
executed on August 19, 1997, TVN commenced making monthly payments of
Ninety-Eight Thousand Nine Hundred Seventy-Two Dollars and One Cent ($98,972.01)
on March 31, 1998 and has made five such monthly installments, leaving an
outstanding principal balance of Four Million Three Hundred Fifty Two Thousand
Three Hundred Twenty-Nine Dollars and Nine Cents ($4,352,329.09) as of July 31,
1998. A copy of the promissory note dated March 1, 1998 (the "Fiscal 1997 Note")
is attached hereto as Exhibit "A".
2.4 Pursuant to an oral agreement by and between TVN and 4MC, TVN agreed
to pay certain amounts to 4MC representing arrearages due and owing to 4MC on
account of the Original Services, the Interim Services, and other post
production services performed by 4MC to and including August 2, 1998 totaling
Five Million Five Hundred Eighty-Two Thousand Dollars ($5,582,000) (the "1998
Arrearages"), which were to be paid by TVN on or prior to October 31, 1998, and
such amounts were timely paid by TVN.
2.5 For the period from August 3, 1998 to April 30, 1999, TVN owes the
following amounts to 4MC:
(a) For 4MC's continuing provision of the Original Services, the
Interim Services and other post-production services through January 31, 1999, a
monthly fee equal to Four Hundred Twenty-Four Thousand Dollars ($424,000) (the
"Interim Monthly Fee") for a period of six (6) months from August 3, 1998
through January 31, 1999, for an aggregate of Two Million Five Hundred
Forty-Four Thousand Dollars ($2,544,000);
(b) For the period from February 1, 1999 through April 30, 1999, a
reduced Interim Monthly Fee (the "Reduced Interim Monthly Fee") equal to Three
Hundred Twenty-Six Thousand Dollars ($326,000) per month for a period of three
(3) months for an aggregate of Nine Hundred Seventy-Eight Thousand Dollars
($978,000);
(c) Nine (9) monthly payments under the Fiscal 1997 Note (from August
31, 1998 to April 30, 1999), or an aggregate of Eight Hundred Ninety Thousand
Seven Hundred Forty-Eight Dollars and Nine Cents $(890,748.09).
(d) Eight (8) monthly payments under the Fiscal 1998 Note (from
September 1, 1998 through April 1, 1998), or an aggregate of Three Hundred
Thirty-Four Thousand Three Hundred Eighty Dollars and Sixteen Cents
($334,380.16); and
(e) Additional post-production and related services for an aggregate
6
<PAGE>
amount totaling Two Hundred Thirty One Thousand Two Hundred Seventy Two Dollars
($231,272). The amounts owing under subparagraphs (a), (b), (c), (d) and (e)
total Four Million Nine Hundred Seventy Eight Thousand Four Hundred Dollars and
Twenty-Five Cents ($4,978,400.25) and shall be collectively referred to as the
"1999 Arrearages").
2.6 4MC anticipates that on or about August 1, 1999 (or such earlier or
later date as the New Services can be fully provided by 4MC to TVN, as mutually
determined by 4MC and TVN in accordance with Section 5 below), 4MC will be able
to provide TVN with new network origination, playback, uplink, monitoring and
post-production services based on certain new technology, as more particularly
described in Section 6.1 below (the "New Services"). On May 21, 1999, TVN paid
to 4MC an amount equal to Two Million Five Hundred Thousand Dollars ($2,500,000)
in partial payment of the 1999 Arrearages.
2.7 The parties desire to enter into this Agreement to provide for (a)
TVN's payment of the outstanding 1999 Arrearages to 4MC, (b) the terms and
conditions of 4MC's provision of the Original Services and Interim Services to
TVN, and (c) the terms and conditions of 4MC's provision of the New Services to
TVN, all as hereinafter set forth.
3. Payment of Outstanding 1999 Arrearages and Delivery of Notes.
------------------------------------------------------------
Concurrently with the execution hereof, TVN shall deliver to 4MC a check in
the amount of One Million Four Hundred Thousand Dollars ($1,400,000),
representing partial payment of the outstanding balance of the 1999 Arrearages;
and shall deliver the executed Fiscal 1997 Note and the executed "Fiscal 1998
Note" (as hereinafter defined) to 4MC. On or before July 2, 1999, TVN shall
deliver to 4MC a check in the amount of One Million Seventy Eight Thousand Four
Hundred Dollars and Twenty Five Cents ($1,078,400.25), representing payment in
full of the outstanding balance of the 1999 Arrearages.
4. Original Services and Interim Services
--------------------------------------
From and after the date of this Agreement, and continuing until the Actual
Commencement Date (as hereunder defined), 4MC shall provide (a) the Original
Services it has provided to TVN, including: uplinking; playback, monitoring and
control of one-inch videotape systems; duplication; editing services; and
certain personnel necessary to provide the Original Services (the "Original
Services Personnel"), as well
7
<PAGE>
as (b) the Interim Services it is now providing to TVN: namely, the additional
services for TVN's digital signal programming transmitted from the Galaxy IX
satellite using digital server equipment; and certain personnel necessary to
provide the Interim Services ("Interim Services Personnel"); all (including a
list of Interim Services Personnel) as more particularly described on Exhibits
"C-1" and "C-2", respectively, attached hereto and incorporated herein by this
reference. On the Actual Commencement Date, 4MC shall cease to provide the
Original Services and the Interim Services for TVN, because 4MC shall commence
providing the New Services for TVN. TVN's execution of this Agreement shall be
deemed TVN's approval of (a) the description of the Original Services and the
Interim Services and (b) the number, description and identity of the Original
Services Personnel and Interim Services Personnel, all as described on Exhibits
"C-1" and "C-2," respectively. 4MC acknowledges that TVN shall have the right to
supervise and direct all Original Services Personnel and Interim Services
Personnel in connection with the Original Services and the Interim Services,
respectively, provided by 4MC, and 4MC shall provide the Original Services and
Interim Services under TVN's direct supervision and control. The Memorandum
shall be of no further force or effect from and after the date of this Agreement
and this Agreement shall supersede and replace any and all previous agreements
between the parties, other than the Fiscal 1997 Note and the Fiscal 1998 Note.
5. Determination of Actual Commencement Date.
-----------------------------------------
4MC anticipates that the New Services can be fully provided to TVN at the
"Facility" (as hereinafter defined) on or about August 1, 1999, subject to the
terms of this Section 5.
5.1 TVN's Right to Inspect and Approve Facility. Subject to the terms of
-------------------------------------------
Section 5.2 below, TVN shall have the right to inspect and approve or disapprove
the Facility prior to the "Actual Commencement Date" (as defined in Section 5.2
below) to determine 4MC's compliance with subsections (a), (b) and (c) of this
Section 5.1. The Actual Commencement Date shall be the day on which TVN
determines in good faith the following and delivers a confirmation notice to 4MC
stating that 4MC has complied with subsections (a), (b) and (c) of this Section
5.1 or is deemed to have confirmed compliance with said subsections as set forth
in Section 5.2 below:
(a) The Facility has been renovated and reconstructed by 4MC in
compliance with the Floor Plans;
(b) All of the Equipment (as hereinafter defined) has been installed
and
8
<PAGE>
is operational, the Facility is operational for the provision of the New
Services for TVN, and 4MC is capable of providing the New Services for TVN with
the New Services Personnel; and
(c) The Facility may be lawfully occupied and is useable for 4MC's
provision of the New Services for TVN as described herein.
5.2 Approval Process. TVN shall determine in good faith whether the
----------------
conditions set forth in Section 5.1 have been satisfied in accordance with the
following procedures:
(a) 4MC shall notify TVN in writing that the Facility is in
compliance with subsections (a), (b) and (c) of Section 5.1 (the "First
Commencement Notice");
(b) TVN shall have six (6) business days from its receipt of the
First Commencement Notice to notify 4MC in writing that TVN confirms 4MC's
compliance with subsections (a), (b) and (c) of Section 5.1, or does not confirm
such compliance, and the specific reasons therefor (the "Response Notice").
TVN's failure to respond in writing to the First Commencement Notice within six
(6) business days after receipt thereof shall be deemed TVN's disagreement with
4MC's assertion of compliance with subsections (a), (b) and (c) of Section 5.1.
If the Response Notice indicates non-confirmation of compliance or if TVN fails
to deliver the Response Notice, the parties, within six (6) business days after
the expiration of such six (6) business-day period, shall meet and confer to
identify the problems causing non-compliance, if any. If after such meeting or,
if there has been no meeting because of TVN's failure to meet and confer to
identify the problems causing non-compliance, after the expiration of such six
(6) business-day period, 4MC still believes that it has complied with
subsections (a), (b) and (c) of Section 5.1, 4MC shall send a second notice of
compliance to TVN (which addresses such non-compliance problems as have been
identified by TVN, if any) (the "Second Commencement Notice"), which notice may
not be sent earlier than twelve (12) business days after 4MC's delivery of the
First Commencement Notice. TVN's failure to respond in writing to the Second
Commencement Notice within six (6) business days after receipt thereof shall be
deemed TVN's confirmation of 4MC's compliance with subsections (a), (b) and (c)
of Section 5.1 and, in such event, the Actual Commencement Date will be six (6)
business days after TVN's receipt of the Second Commencement Notice. If, after
the parties have met and conferred, 4MC acknowledges that additional steps are
required to comply with subsections (a), (b) and/or (c) of Section 5.1, 4MC
shall promptly implement any actions necessary to bring the Facility into such
compliance and, at such time as 4MC believes that the Facility is in compliance
with subsections (a), (b) and (c) of Section 5.1, 4MC shall deliver to TVN the
Second Commencement Notice. TVN shall have six (6) business days from the
9
<PAGE>
date of receipt of the Second Commencement Notice to then deliver an additional
Response Notice (or if TVN requires more than six (6) business days to deliver a
Response Notice to 4MC, TVN shall request an additional six (6) days in which to
deliver a Response Notice). This approval process shall continue until TVN has
delivered a Response Notice to 4MC which indicates confirmation of 4MC's
compliance with subsections (a), (b) and (c) of Section 5.1, in which event the
date of such Response Notice shall be deemed the Actual Commencement Date, or if
TVN fails to respond in writing to a Second Commencement Notice within six (6)
days of its receipt thereof, such failure to respond shall be deemed TVN's
confirmation of 4MC's compliance and the Actual Commencement Date will be six
(6) business days after TVN's receipt of the Second Commencement Notice.
The foregoing notwithstanding, at any time and from time to time, 4MC may
request that TVN inspect and/or test, as appropriate, a particular piece of
equipment or sub-system. TVN shall conduct such test or inspection within the
ten (10) business days thereafter and all of the same time periods and
procedures contained in Section 5.2(b) above shall be applicable to the subject
test and/or inspection. Once a particular piece of equipment or sub-system has
been approved or deemed approved by TVN on a stand-alone basis, TVN shall no
longer have the right to disapprove the same on a stand-alone basis (unless such
piece of equipment or sub-system subsequently fails), but may disapprove the
same as part of a full system or as part of the fully integrated and operating
Facility. In connection with the approval process described in this Article 5,
TVN shall (a) timely evaluate any particular piece of equipment and/or system
and/or subsection upon 4MC's request and (b) state all of TVN's known objections
thereto in TVN's applicable Response Notice. Moreover, TVN acknowledges that
each applicable Response Notice shall contain only those items of non-compliance
which would (a) negatively impact 4MC's ability to provide the New Services to
TVN or (b) delay the Actual Commencement Date.
5.3 Failure to Satisfy. In the event that the Facility and/or 4MC does not
------------------
comply with subsections (a), (b) or (c) of Section 5.1 above, and such failure
to comply (a "Facility Failure") exists on or after December 1, 1999 (for
purposes of this Section 5.3, the "Liquidated Damages Date") (which shall not
include a Facility Failure that is directly caused by either (a) a Force Majeure
event, or (b) TVN's request for modifications to the Basement Floor Plan, the
Sixth Floor Space, the Equipment, the New Services and the staffing of such
services, if and only if such modification delays the build-out and/or the
staffing of the Facility or otherwise causes a delay, or (c) any unreasonable
act or failure to act by TVN which constitutes a violation of TVN's obligations
under this Agreement, including without limitation and for illustration purposes
only, a Facility Failure caused by TVN's failure to timely approve as set forth
in Sections 6.2, 6.3, 6.4 and/or 8.2 below or (d) any other event not within
4MC's
10
<PAGE>
control (including without limitation and for illustration purposes only, (i)
delays in the delivery of any Equipment listed on Exhibit "J" so long as 4MC has
timely ordered all such Equipment and has taken all other necessary action to
obtain timely delivery of such Equipment, or (ii) delays in the granting of
appropriate required licenses, approvals, and/or permits by the appropriate
authorities or third parties, so long as 4MC has taken all necessary actions to
obtain such required licenses, approvals and permits in a timely manner, or
(iii) TVN's rejection of the "SeaChange System" (as hereinafter defined) and
acceptance of an "Alternate Server System" (as hereinafter defined), or (iv)
access to the Sixth Floor Space (as hereinafter defined) for construction is
denied to 4MC by TVN on the date the Sublease is executed by TVN and 4MC)), then
from and after the Liquidated Damages Date, the following sums shall be paid by
4MC to TVN for each day that the Facility is not in compliance with subsections
(a), (b) and/or (c) of Section 5.1:
Liquidated Damages
Days of Delay Payment Amount
------------- --------------
1st-10th day $ 2,500 per day
11th-15th day $ 5,000 per day
16th-20th day $10,000 per day
21st-25th day $15,000 per day
Each day thereafter $20,000 per day.
THE SUMS PAYABLE TO TVN AS SET FORTH ABOVE SHALL BE DEEMED LIQUIDATED
DAMAGES FOR 4MC'S FAILURE TO TIMELY SATISFY ITS OBLIGATIONS UNDER SECTION 5.1,
THE PARTIES HAVING RECOGNIZED THAT IT WOULD BE EXTREMELY DIFFICULT TO FORECAST
OR DETERMINE IN ADVANCE THE AMOUNT OF DAMAGE TVN WOULD INCUR AS A RESULT OF SUCH
DELAY.
TVN's initials:__________ 4MC's initials:__________
The sums payable to TVN as set forth above shall be applied as a credit
against the Monthly Fee due and payable on the first day of the month after the
Actual Commencement Date (and any subsequent Monthly Fees, until the entire
credit has been applied). If the Facility Failure continues to and including
December 31, 1999, TVN shall have the right to terminate this Agreement by
written notice to 4MC without
11
<PAGE>
further liability or obligation hereunder except for immediate payment to 4MC of
any amounts owing hereunder up to such termination date for services theretofore
rendered by 4MC (and 4MC shall immediately pay to TVN all sums owing under this
Section 5.3 and shall use its best efforts to assist TVN to transition to
another facility and another provider of the New Services). TVN acknowledges
that 4MC has taken possession of the Sixth Floor Space from the "Master
Landlord" (as hereinafter defined).
5.4 SeaChange System. The parties acknowledge that the basic configuration
----------------
of the SeaChange System consists of two SeaChange digital servers to be utilized
by 4MC in providing the New Services, such that some Program Channels (as
hereinafter defined) of the first (primary) server shall be protected by a
Program Channel of the second (back-up) server (the "SeaChange System"). If, as
of June 30, 1999 (the "SeaChange Compliance Date"), the SeaChange System does
not substantially comply with the performance requirements as set forth in
Exhibit D (as determined by TVN in its sole discretion) and 4MC and TVN have
developed a mutually acceptable specification for an "Alternate Server System"
as of the SeaChange Compliance Date, TVN may reject the SeaChange System and
accept the Alternate Server System in place of the SeaChange System. 4MC
estimates that the cost of the Alternate Server System may exceed Six Million
Dollars ($6,000,000), which cost (a) will be covered by, and subject to the
limitations of, 4MC's Fifteen Million Dollar ($15,000,000) maximum Equipment
Expenditure commitment, (b) will replace the cost of the SeaChange System as a
line item in the Equipment Budget, and (c) will result in an increase in the
Monthly Fee as calculated in accordance with Section 8.2. 4MC further estimates
that the implementation period for the Alternate Server System may exceed eight
(8) months from the SeaChange Compliance Date, and the Actual Commencement Date
may be delayed as a result thereof. Further, pursuant to a purchase agreement
between 4MC and SeaChange dated April 10, 1998 (the "Purchase Agreement"), 4MC
has incurred approximately Two Million Seventy Thousand Four Hundred Fifty Four
Dollars and Thirty Five Cents ($2,070,454.35) in connection with the purchase,
installation and implementation of the SeaChange System and, if such system is
rejected and SeaChange fails to refund such sum to 4MC, TVN shall reimburse 4MC,
no later than August 1, 1999, for fifty percent (50%) of the amount of any
uncollected refund of such sum. One-half of any additional refund received by
4MC from SeaChange shall be paid to TVN as and when received. TVN shall also
share equally with 4MC all additional charges actually incurred and required to
be paid by 4MC to SeaChange for cancellation of the Purchase Agreement between
4MC and SeaChange.
6 New Services, Facility, Personnel and Equipment
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6.1 Description of New Services. From and after the Actual Commencement
---------------------------
Date, 4MC shall provide to TVN the New Services, including uplink, downlink,
feature and interstitial programming origination (including server control,
video server playout and server loading and storage), event programming
origination (including downlink, event monitoring and control, live insertions
and delayed broadcast), pass-through programming origination, digital music
service, monitoring and control, editing, audio and graphics, MPEG 2 encoding,
and other services and space such as library space, supervisor meetings, and
creative and technical support, all as more particularly described on Exhibit
"D" attached hereto and incorporated herein by this reference.
6.2 Execution of Sublease; New Services Facility. Concurrently with the
--------------------------------------------
execution of this Agreement, 4MC's parent, Four Media Company, shall enter into
a Sublease (the "Sublease") with TVN for the entire sixth floor of the building
located at 2901 West Alameda Avenue Burbank, California (the "Building"). The
form of the Sublease is attached hereto as Exhibit "N". TVN understands and
agrees that the Sublease requires the consent of the landlord under 4MC's lease
of the sixth floor of the Building ("Master Landlord"). Immediately upon
execution of the Sublease, 4MC shall deliver the Sublease to the Master Landlord
and obtain its approval, if required. If the Master Landlord fails to approve
the Sublease, then the Sublease shall be null and void and 4MC and TVN shall
either: (x) obtain such other space, including certain basement space in the
Building, as may be mutually agreed upon, and 4MC shall deliver said space as
soon as reasonably possible with leasehold improvements in accordance with a
floor plan reasonably consistent with the Sixth Floor Space Plans, as may be
agreed upon in good faith between 4MC and TVN, or (y) expand the New Services to
make available certain space on the sixth floor of the Building for TVN's use
and occupancy, subject to TVN's approval, to administer and supervise the New
Services, in which event the Monthly Fee shall be increased accordingly by an
amount appropriate for such expansion of the New Services to encompass such
sixth floor space to be made available for TVN's use and occupancy. The New
Services facility shall be located in (a) certain basement space in the Building
("Basement Space") and, (b) certain TVN-provided space on the sixth floor of the
Building consisting of approximately 7,400 square feet (the "Sixth Floor
Space"), which space is shown on the Floor Plans (as defined below) and shall be
suitable for all uses described in Exhibits "F" and "G" (the Basement Space and
the Sixth Floor Space (or other mutually approved space as described in Section
6.2(x)) together shall constitute the "Facility"). The Basement Space is
described on Exhibit "E" attached hereto, and the floor plan of such
reconfigured basement space is set forth on Exhibit "F" attached hereto (the
"Basement Floor Plan"). The Sixth Floor Space, including the floor plan thereof,
is described on Exhibit "G" attached hereto (the "Sixth Floor Space Plans"). The
Basement Floor Plan and the Sixth Floor Space Plans shall be together referred
to as the "Floor Plans". The rack elevation drawings for the Facility are
attached hereto as
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Exhibit "H." TVN's execution of this Agreement shall be deemed TVN's approval of
the Floor Plans and the rack elevation drawings. TVN shall deliver possession of
the Sixth Floor Space to 4MC, for construction purposes only, upon the later of
(i) the commencement date of the Sublease or (ii) the Master Landlord's consent
thereto. No later than the Actual Commencement Date, 4MC shall make available to
TVN certain areas in the basement of the Building for TVN's use in accordance
with the provisions of 4MC's lease of such space, which areas are denoted as
"Office Space" and "Expansion Space" on the Basement Floor Plan (collectively,
the "Office Space"). Demolition and construction of the Basement Space and the
Sixth Floor Space in compliance with the mutually approved Floor Plans ("TVN
Improvements") shall commence upon receipt by 4MC of (i) approval by the Master
Landlord of the TVN Improvements, and (ii) all required building permits and
approvals for the TVN Improvements, which shall be 4MC's responsibility to
obtain. Promptly after execution of this Agreement, 4MC shall have a licensed
architect approved by TVN prepare plans and specifications for the TVN
Improvements, and upon completion thereof, shall request approval from the
Master Landlord and any and all applicable governmental agencies, as well as
approval from TVN, which approval shall not be withheld provided such plans and
specifications comply with the approved Floor Plans. Upon receipt of such
approvals and issuance of the required building permits, 4MC shall engage a
contractor acceptable to TVN and shall commence the TVN Improvements. With
respect to any and all material modifications to the TVN Improvements which TVN
desires to make with respect to either of the Floor Plans, the following
procedures shall apply:
(a) TVN shall submit to 4MC a request for a modification to either or
both of the Floor Plans;
(b) Within ten business days of 4MC's receipt of such request, 4MC
shall provide to TVN a written estimate of the anticipated increase or decrease,
if any, in the Equipment Budget based upon such request (the "Buildout Cost
Estimate"), and, if applicable, the amount of additional time necessary to build
out the Facility due to such modification ("Revised Buildout Schedule");
(c) TVN shall provide a written acceptance or rejection of the
Buildout Cost Estimate and the Revised Buildout Schedule within five business
days of its receipt of the Buildout Cost Estimate and Revised Buildout Schedule;
(d) If such acceptance or rejection is not received within five
business days of TVN's receipt of the Buildout Cost Estimate and Revised
Buildout Schedule, then such request shall not be implemented and 4MC shall
continue to build out the Facility in accordance with the unmodified Floor
Plans; or
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(e) If TVN accepts the Buildout Cost Estimate and the Revised
Buildout Schedule (by delivering a written notice of such acceptance within such
five business day period), then 4MC shall promptly implement such requested
modifications to the Floor Plans. If TVN rejects the Buildout Cost Estimate
and/or the Revised Buildout Schedule (and delivers timely written notice of such
rejection to 4MC), then the parties shall meet and confer in an attempt to
arrive at a mutually acceptable Buildout Cost Estimate and Revised Buildout
Schedule. However, if the parties cannot resolve such issues within seven (7)
business days after TVN's delivery of the written rejection notice to 4MC, then
TVN's request for modification shall not be implemented and 4MC shall continue
to buildout the Facility in accordance with the unmodified Floor Plans. 4MC may
relocate all facilities and services to be provided hereunder to different
premises in Burbank so long as: (i) 4MC delivers reasonably sufficient advance
written notice to TVN specifying the nature of the planned move, the new
location, the floor plan and engineering plan for such premises, with all
equipment and rack elevations, (ii) such premises will be substantially
equivalent in utility to the Facility for providing the New Services to TVN,
(iii) the New Services can continue to be provided to TVN as described in this
Agreement and (iv) TVN approves of such relocation in writing. Notwithstanding
the foregoing, 4MC shall have the right to relocate the two uplink antennae (as
described in Section 1.1 of Exhibit "D") and the four downlink antennae (as
described in Section 3.1 of Exhibit "D") (or substitute equivalent antennae),
earth station equipment, generators, UPS, interconnect circuits and equipment,
all of which are utilized in connection with the New Services, to other
locations within the "4MC Campus" (i.e., the Building and its associated parking
structure, 2813 W. Alameda, 2820 W. Olive and all contiguous exterior space)
with TVN's prior written consent, which consent may not be unreasonably
withheld. If, however, such relocation results in a Service Interruption (as
hereinafter defined), TVN shall be entitled to liquidated damages in an amount
based on Twenty Five Thousand Dollars ($25,000) per day for each full day, or a
prorated portion thereof for any partial day, of such Service Interruption until
full service is restored, and if there is a Continuous Service Failure (as
defined in Section 12.3), TVN may immediately terminate this Agreement upon
written notice to 4MC. In connection with the Interim Services, 4MC currently
provides TVN with certain technical and office space located in the basement of
the Building. TVN acknowledges that in order for 4MC to provide the New Services
to TVN, TVN will be required to vacate and remove equipment and property from a
mutually agreed portion of such space in order to allow 4MC to reconfigure and
reallocate such space in accordance with the Basement Floor Plan. TVN shall
deliver such space to 4MC and shall remove any and all of TVN's property and
equipment from such space no later than August 1, 1999.
6.3 New Services Personnel. The personnel to be employed by 4MC to
----------------------
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perform the New Services shall be referred to herein as the "New Services
Personnel". Exhibit "I" attached hereto and incorporated herein by reference
sets forth the position (including job description and qualifications) of each
New Services Personnel and the individual (by job description) and aggregate
budget for the New Services Personnel (the "Personnel Budget"). For each
individual position, the Personnel Budget includes base compensation, benefits
and taxes. TVN's execution of this Agreement shall be deemed TVN's approval of
the positions and persons included within the New Services Personnel (including
job description and qualifications) and the Personnel Budget. From time to time
after the execution of this Agreement but in any event no less than thirty (30)
days prior to the Actual Commencement Date, 4MC and TVN shall jointly determine
the individuals to be employed by 4MC for each position listed on Exhibit "I".
TVN may recommend a prospective employee to be hired by 4MC, and subject to 4MC
complying with its normal hiring practices (including background checks on all
prospective employees), 4MC shall employ such recommended individual. If TVN
recommends a prospective employee whose total compensation exceeds the amount
set forth for such position on Exhibit "I", such individual shall be employed by
4MC, so long as the aggregate compensation for all New Services Personnel does
not exceed the Personnel Budget. If the total compensation of such individual
would cause the Personnel Budget to be exceeded, any overage will be billed pro
rata to TVN monthly.
(a) TVN shall have the right, but not the obligation, to
supervise and direct all New Services Personnel (except for earth station and
engineering personnel other than those listed on Exhibit "I"), as well as 4MC
personnel (except for earth station and engineering personnel other than those
listed on Exhibit "I") performing any other broadcast services for TVN. With
respect to earth station personnel dealing with TVN's transponders, 4MC and TVN
shall create mutually approved procedures for such personnel. Such personnel
shall be under TVN's direction and control with respect to their services
related to TVN's transponders; TVN shall not knowingly compromise security
within the Facility.
(b) At any time during the Term, TVN may request in writing the
removal of any or all of the New Services Personnel. 4MC shall remove and
replace such staff within forty eight (48) hours of such request, subject to
availability of suitable staff replacements. Notwithstanding the foregoing, if
any New Services Personnel has committed an act of gross negligence or
misconduct, fraud or theft, or willful disobedience of TVN's direction, then
such staff member shall be removed immediately.
(c) TVN acknowledges that from time to time it may be necessary
for 4MC to hire or assign temporary or interim personnel. 4MC shall use its best
efforts to ensure that such temporary or interim personnel shall be qualified in
accordance with Exhibit "I" for the position to which such personnel are
assigned, and TVN shall have
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the right to approve the hiring of all such temporary or interim personnel,
which approval shall not be unreasonably withheld.
(d) TVN acknowledges that from time to time it may be necessary for
4MC to hire replacement New Services Personnel. In such event, 4MC shall deliver
to TVN a notice containing the name of the proposed replacement personnel and a
statement that such personnel is qualified under Exhibit "I" (a "Replacement
Notice"). TVN shall have the right to approve or disapprove such replacement
personnel for any lawful reason. If TVN has not approved or disapproved such
replacement personnel within three (3) business days after receipt of the
Replacement Notice, TVN shall be deemed to have approved such replacement
personnel. TVN's notice to 4MC of TVN's disapproval of any particular
replacement personnel shall state the particular reason for TVN's disapproval.
(e) From time to time during the Term, TVN may request that 4MC
increase the compensation (or pay a bonus) to a particular New Services
Personnel. If such increased compensation or bonus would not cause the aggregate
Personnel Budget to be exceeded, then 4MC shall implement such compensation
increase and/or bonus, as applicable. However, if such increase and/or bonus,
when added to the aggregate actual total compensation of New Services Personnel,
exceeds the amount of the Personnel Budget, then TVN shall be responsible for
payment of the amount of any such excess.
(f) If TVN directs either Interim Services Personnel and/or New
Services Personnel to perform a task and the performance of such task causes
such Interim Services Personnel and/or New Services Personnel not to perform the
Interim Services and/or the New Services, as applicable, in accordance with the
terms hereunder, 4MC shall not be liable for any problems and/or failure of the
Interim Services and/or New Services, as applicable, caused by such direction to
perform such task or any required redeployment of personnel.
6.4 Equipment for New Services. Upon the execution of this Agreement, 4MC
--------------------------
shall commence the development, design, construction and/or installation of the
equipment necessary to provide the New Services to TVN at the Facility. During
the first thirty (30) days following the execution of this Agreement, 4MC shall
place orders for the equipment to be utilized by 4MC to provide the New
Services, which list of equipment is set forth on Exhibit "J" attached hereto
and incorporated herein (the "Equipment"); provided, however, that certain items
of Equipment for which technical specifications require more time shall be
ordered within sixty (60) days following the execution of this Agreement. TVN's
execution of this Agreement shall be deemed TVN's approval of the Equipment
necessary the provide the New Services. TVN shall provide certain equipment and
other property for 4MC's use in performing the New
17
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Services for TVN, at TVN's expense and in conformance with 4MC's implementation
schedule, which equipment and other such property is set forth in Exhibit "K"
hereto. TVN's execution of this Agreement shall be deemed TVN's approval of such
Exhibit "K" equipment and property to be used in connection with the New
Services, as well as the implementation schedule prepared by 4MC, and attached
hereto as Exhibit "M" (the "Implementation Schedule"). Such Exhibit "K"
equipment and Exhibit "K" property shall remain the property of TVN, and TVN
shall provide 4MC with access to and use of such equipment and property in good
working order during the Term. The two (2) Sony FlexiCart systems owned by TVN
shall be used by TVN as it sees fit, and shall not be part of the equipment
provided by TVN in order for 4MC to provide the New Services, nor shall 4MC be
responsible for the operation and maintenance of these two (2) systems.
6.5 Supervision and Control By TVN. Notwithstanding any other provision of
------------------------------
this Agreement to the contrary, 4MC acknowledges that TVN shall have the right
to supervise and direct the selection, integration, installation, maintenance
and any redesign and/or redeployment of the Facility, the New Services, the New
Services Personnel, the Interim Services, the Interim Services Personnel and the
Equipment, and 4MC shall provide all of such services and manage such personnel
under TVN's direct supervision and control, consistent with the terms of this
Agreement.
6.6 Availability of Certain Rooms Within Facility. The edit bays, graphic
---------------------------------------------
rooms, sound rooms and other similar facilities within the Facility shall be
available to TVN twenty-four (24) hours each day, seven (7) days a week.
Notwithstanding the foregoing, TVN acknowledges that although all such rooms
shall be available twenty-four (24) hours each day, 4MC's staff and support with
respect to such rooms within the Facility shall only be available for forty (40)
hours per week to provide the applicable New Services, as more particularly set
forth on Exhibits "D" and "I" attached hereto. If TVN staffs any of such rooms
with its own personnel during periods when 4MC's staff is not present, TVN shall
be responsible for any operator error that occurs during such periods, and for
any damage caused by TVN's use of the Equipment in such rooms during such
periods. All other rooms in the Facility will be available to TVN twenty-four
(24) hours each day, and staffed in accordance with Exhibit "D," to provide the
applicable New Services.
6.7 TVN's Right to Locate or Relocate Certain Equipment. During the Term
---------------------------------------------------
or any Renewal Term, TVN shall have the right to request the location or
relocation of the editing, audio and graphics facilities, together with all
equipment related thereto. With respect to TVN's request for the original
location of any such facilities, 4MC shall timely accommodate such request and
implement such location. If TVN desires to relocate any such editing, audio
and/or graphics facilities, TVN shall obtain 4MC's prior
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written consent to such relocation, which consent shall not be unreasonably
withheld. TVN will bear all direct actual increased costs incurred as a result
of such location, and shall bear the entire cost of the relocation, including,
without limitation, moving costs, installation, buildout, increased travel costs
associated with affected New Services Personnel, other mutually approved costs
relating to affected New Services Personnel, and increased maintenance and
support costs of such relocated facilities, such payment to be received no later
than 30 days after TVN's receipt of the applicable invoice, with supporting
documentation.
6.8 Location of Certain Antennae. TVN acknowledges that 4MC shall have the
----------------------------
right to locate the four (4) receive-only antennae necessary to provide the New
Services to any location on the 4MC Campus so long as (a) such antennae provide
the same functionality as they would provide if located on the roof of the
Building, (b) TVN incurs no cost in connection with such location and (c) no
Service Interruption occurs during, or as result of, such location.
7. Term; Renewal Terms
-------------------
The term of this Agreement shall commence on the execution hereof and shall
continue until November 30, 2004 (the "Term"). TVN shall have the right to renew
this Agreement, in its sole discretion, for two (2) additional two (2)-year
periods (each a"Renewal Term"), upon TVN's delivery to 4MC of a renewal notice
(a "Renewal Notice") at least nine (9) months prior to the expiration of the
Term, or at least three (3) months prior to the expiration of the first Renewal
Term, as applicable. Upon TVN's exercise of the first two (2)-year Renewal Term,
the term of the Sublease shall expire on January 30, 2010 rather than January
30, 2005.
8. Consideration
-------------
8.1 Consideration for Services. In full and complete consideration for
--------------------------
4MC's provision of the Original Services, the Interim Services, the New Services
and other technical and engineering design services, TVN shall pay to 4MC and
4MC shall accept from TVN payments in the following amounts:
(a) Two Million One Hundred Sixty-Two Thousand Dollars ($2,162,000)
for technical and engineering design services performed by 4MC to and including
August 2, 1998 in connection with the buildout of the Facility, which TVN agreed
to pay to 4MC subject to the execution of this Agreement. TVN's obligation to
pay is represented by a promissory note for such amount with interest accruing
at the
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rate of six percent (6%) per annum compounded monthly from August 2, 1998 with
principal and interest payable in sixty (60) equal monthly installments of
Forty-One Thousand Seven Hundred Ninety-Seven Dollars and Fifty-Two Cents
($41,797.52) commencing on September 1, 1998 and the first day of each month
thereafter. A copy of the Promissory Note dated August 2, 1998 (the "Fiscal 1998
Note") is attached hereto as Exhibit "B".
(b) For the period from the date of execution of this Agreement
through July 31, 1999, TVN shall pay to 4MC for the Original Services and the
Interim Services a monthly fee equal to the Reduced Interim Monthly Fee,
prorated for any partial month. For the period commencing August 1, 1999 until
the Actual Commencement Date or November 1, 1999, whichever occurs earlier, the
Reduced Interim Monthly Fee shall increase to Three Hundred Seventy-Five
Thousand Dollars ($375,000) per month, pro rated for any partial month. Such
rate shall continue in effect from November 1, 1999 until the Actual
Commencement Date.
(c) For the period from the Actual Commencement Date to the
expiration of the Term, TVN shall pay to 4MC for the New Services and 4MC shall
accept from TVN a monthly fee equal to Four Hundred Seventy-Nine Thousand Two
Hundred Dollars ($479,200) (the "Monthly Fee"), prorated for any partial month.
(d) If this Agreement is renewed by TVN, then the Monthly Fee for the
year commencing on the first day of the first Renewal Term shall be Five Hundred
Fourteen Thousand Dollars ($514,000), subject to reduction in accordance with
Section 19.1. Each year thereafter during the Renewal Term, the Monthly Fee
shall increase by Ten Thousand Dollars ($10,000), subject to reduction in
accordance with Section 19.1.
(e) For each increase in the number of transponders in excess of
fifteen (15) to which 4MC uplinks hereunder, and for each decrease in the number
of transponders below fifteen (15) to which 4MC uplinks hereunder, in response
to a written request by TVN for such increase or decrease, as applicable, the
Monthly Fee shall increase (or decrease, as applicable) by Eight Thousand
Dollars ($8,000). Such Monthly Fee increase (or decrease, as applicable) shall
be effective as of the date the increased (or decreased) uplink service
commences (prorated for any partial month) and shall remain in effect for so
long as such increased (or decreased) uplink service is in effect.
(f) Unless otherwise expressly set forth in this Agreement, any costs
that are incurred by 4MC in order for 4MC to perform its obligations under this
Agreement shall be the sole and exclusive responsibility of 4MC, except that TVN
shall be responsible for the payment of any federal, state and/or municipal
sales tax and/or
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Universal Service telecommunications surcharge imposed for the performance of
the New Services, should any such tax be imposed and become due and payable
during the Term.
(g) 4MC shall send invoices to TVN for the Interim Monthly Fee, the
Reduced Interim Monthly Fee, or the Monthly Fee (all such fees collectively, the
"Fees"), as applicable, fourteen (14) days prior to the commencement of each
such month. Such fees shall be due on the first day of each month during the
Term. Any additional or occasional services requested by TVN (as described in
Section 8.6) shall be billed separately at the completion of such service and
shall be due within thirty (30) days from the date of invoice. All payments to
4MC hereunder shall be paid by check or via wire transfer to 4MC's bank account
at Tokai Bank ABA #122034268, 300 South Grand Avenue, Los Angeles, CA 90071,
Account #015-507276, 4MC-Burbank, Inc., or any other bank account designated by
4MC in writing.
8.2 Equipment Budget
----------------
(a) Attached hereto as Exhibit "J" is a detailed schedule of the
budgeted initial capital expenditures 4MC will make for the Equipment and the
wiring, installation and build-out of the Facility, including taxes and shipping
charges (the "Equipment Expenditures"), in the amount of approximately Ten
Million Dollars ($10,000,000) (the "Equipment Budget"). TVN's execution of this
Agreement shall be deemed TVN's approval of the Equipment Budget and all items
of Equipment shown thereon, and, following such execution, 4MC shall place
orders for all Equipment not heretofore ordered by 4MC in accordance with
Section 6.4 and so notify TVN in writing (together with copies of all such
orders). Within one hundred eighty (180) days after the Actual Commencement
Date, 4MC shall notify TVN of 4MC's actual Equipment Expenditures, which notice
shall be accompanied by reasonably detailed written evidence of such
expenditures by 4MC. If 4MC's aggregate actual documented costs of the Equipment
Expenditures (i) are lower than the Equipment Budget, then for each One Thousand
Dollar ($1,000) decrease in actual documented costs of the Equipment
Expenditures from the Equipment Budget, the Monthly Fee shall decrease by Twenty
Six Dollars ($26) (it being understood and agreed that the calculation of any
decrease in the Monthly Fee in accordance with this Section 8.2(a) (i) shall be
based on such One Thousand Dollars ($1,000) to Twenty Six Dollars ($26)
proportion), or (ii) are higher than the Equipment Budget, than for each One
Thousand Dollar ($1,000) increase in actual documented costs of the Equipment
Expenditures over the Equipment Budget (up to a maximum Fifteen Million Dollars
($15,000,000) in Equipment Expenditures), the Monthly Fee shall increase by
Twenty One Dollars and Twenty Six Cents ($21.26) (it being understood and agreed
that the calculation of any increase in the Monthly Fee in accordance with this
Section 8.2(a)(ii) shall be based on
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such One Thousand Dollars ($1,000) to Twenty One Dollars and Twenty Six Cents
($21.26) proportion). For illustration purposes only, assume that within one
hundred eight (180) days after the Commencement Date, 4MC delivers documentation
to TVN which demonstrates that the aggregate actual documented costs of the
Equipment Expenditures total Nine Million Nine Hundred Thousand Dollars
($9,900,000), resulting in a decrease of One Hundred Thousand Dollars ($100,000)
from the Equipment Budget. In such example, an amount equal to Two Thousand Six
Hundred Dollars ($2,600) would be deducted from the Monthly Fee. If, on the
other hand, 4MC delivers documentation to TVN which demonstrates that the
aggregate actual documented costs of the Equipment Expenditures total Eleven
Million Dollars ($11,000,000), resulting in an increase of One Million Dollars
($1,000,000) over the Equipment Budget, then, in such example, the Monthly Fee
would increase by Twenty One Thousand Two Hundred Sixty Dollars ($21,260).
During the period from the Actual Commencement Date to the date of completion of
the reconciliation of the actual Equipment Expenditures (the "Calculation
Date"), TVN shall pay to 4MC the full Monthly Fee. If the calculation of the
actual Equipment Expenditures results in a decrease or an increase of the
Monthly Fee, then the difference between (x) the total Monthly Fees paid from
the Actual Commencement Date to the Calculation Date, and (y) the amount of
Monthly Fees that should have been paid from the Actual Commencement Date to the
Calculation Date shall be determined. Such amount (the "Difference") shall then
be divided by the number of months remaining during the Term, and the resulting
amount shall be deducted from (or added to) each Monthly Fee payment owing
through the remainder of the Term, as applicable.
(b) Notwithstanding the provisions contained in subparagraph (a)
above, if TVN submits to 4MC a request for changes and/or additions to the
Equipment that would result in an increase or decrease in the Equipment
Expenditures and/or delays in the Implementation Schedule and/or the Actual
Commencement Date, then within ten (10) business days of 4MC's receipt of such
notice 4MC shall provide to TVN written notification of the following: (i) a
written estimate of the anticipated increase or decrease in the Equipment
Expenditures based on such request (the "Cost Estimate") and, (ii) if
applicable, revisions to the Implementation Schedule and the Actual Commencement
Date necessitated by such changes and/or additions ("Revised Implementation
Schedule"). TVN shall provide a written acceptance or rejection of such change
and/or addition within ten (10) business days of its receipt of the Cost
Estimate and Revised Implementation Schedule, if any. As and when TVN delivers
such written acceptance to 4MC, 4MC shall promptly implement the requested
change. If such acceptance or rejection is not received within ten (10) business
days of TVN's receipt of the Cost Estimate and Revised Implementation Schedule,
then such request shall not be implemented and 4MC may purchase the original
Equipment as provided hereunder. TVN acknowledges that any additions to the
Equipment must be technically
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compatible with 4MC's existing systems and Equipment. Notwithstanding the
foregoing, 4MC acknowledges that, during the period commencing after the Actual
Commencement Date up to the fourth anniversary of the Actual Commencement Date,
TVN shall have the right to request that 4MC purchase additional equipment up to
a maximum aggregate amount of Fifteen Million Dollars ($15,000,000) (including
the Equipment Expenditures) (the "Additional Capital Equipment") for TVN's use,
whether or not used to provide the New Services, so long as (a) such Additional
Capital Equipment is financable by 4MC and (b) if any such Additional Capital
Equipment is to be located anywhere other than the Facility, TVN shall obtain
4MC's prior written consent to such location, which consent shall not be
unreasonably withheld. Upon any such request from TVN, 4MC shall purchase such
Additional Capital Equipment after following the procedures described in this
subparagraph (b), and the Monthly Fee shall be increased by the amount of
dollars per $1,000 increase set forth on Exhibit "L", depending upon the date of
acquisition of the particular piece of Additional Capital Equipment, which
increase shall be effective as of the date set forth in Exhibit "L".
(c) The parties acknowledge that any changes to the SeaChange System
or routing switcher must be mutually approved in writing prior to the date on
which 4MC places the order for such systems, which approximate date is set forth
on the Implementation Schedule attached hereto as Exhibit "M". Changes to other
subsystems listed on the Implementation Schedule must be requested prior to the
date on which 4MC implements the migration from the existing one-inch
videotape-based facility and interim server to the SeaChange System or the
Alternate Server System, as more particularly described on Exhibit "M".
(d) TVN acknowledges that 4MC has committed to spending no more than
Fifteen Million Dollars ($15,000,000) in actual Equipment Expenditures
(including any Additional Capital Equipment) in connection with 4MC's
implementation and provision of the New Services.
(e) 4MC acknowledges that the Facility, the Equipment and any
Additional Capital Equipment shall be used by 4MC solely to provide the Interim
Services and/or New Services for TVN, and may not be used, or made available for
use, by any third party without TVN's prior written consent.
(f) The Equipment Budget includes, and is not in addition to, the
"Sublessee's Improvements" (as defined in the Sublease) to be provided by 4MC
(or provided by TVN and reimbursed by 4MC) pursuant to the terms of the
Sublease.
8.3 Additional Equipment. At TVN's request and according to TVN's need,
--------------------
4MC shall use its best efforts to provide supplementary rental equipment from an
outside source as requested throughout the Term, so long as such supplementary
23
<PAGE>
equipment is reasonably available, and the parties mutually agree on the rate to
be charged to TVN for such equipment.
(a) In the event TVN so elects, and with the exception of uplink
service equipment, TVN shall have the right to rent or lease additional
equipment (i.e., other than the equipment supplied by 4MC pursuant to this
Agreement) (the "Additional Equipment") from a source other than 4MC; provided,
however that, upon written notice to 4MC, TVN shall grant 4MC a first right to
bid on the securing of the Additional Equipment for TVN on terms and conditions
that are no less favorable than those offered to TVN by such other sources and
provided further that 4MC notifies TVN that 4MC elects to exercise such option
within three (3) business days of its grant (or if TVN has an immediate need for
certain Additional Equipment, 4MC shall have the same period of time as other
sources to provide such Additional Equipment, and if 4MC fails to provide such
Additional Equipment within such specified period of time, TVN may obtain such
Additional Equipment from another source). So long as 4MC can provide such
Additional Equipment to TVN on terms and conditions no less favorable than those
offered by other sources, TVN shall obtain the Additional Equipment from 4MC (or
any source for which 4MC is acting as an agent or representative), and 4MC shall
use its best efforts to supply the same and TVN shall pay 4MC an amount not less
than the rate that would have been charged by a third party. 4MC shall give TVN
or its designee 24-hour per day access to such Additional Equipment.
(b) If 4MC elects not to secure the Additional Equipment for TVN,
with the exception of uplink service equipment, TVN may then rent or lease the
Additional Equipment from any outside source engaged by TVN, provided such
Additional Equipment is reasonably compatible with the existing Equipment
located at the Facility and is delivered to 4MC in good and proper working
order. Any Additional Equipment installed from an outside source engaged by TVN
shall be installed and maintained at TVN's expense and liability or, if TVN
elects, TVN may engage 4MC to install and maintain such Additional Equipment.
Notwithstanding the foregoing, if any Additional Equipment to be installed in
the Facility relates to network origination services, then 4MC shall timely
install and maintain such Additional Equipment. 4MC shall have the right to
inspect the Additional Equipment prior to installation to confirm that such
Additional Equipment is not defective and is reasonably compatible with the
existing Equipment required pursuant to this Agreement. TVN shall be solely
responsible for any damages to the Additional Equipment and/or any materials
supplied by TVN hereunder which are a direct result of any installation of
Additional Equipment by a person or an entity other than 4MC or 4MC's designee.
Further, TVN shall be liable to 4MC for any damages to 4MC's equipment,
personnel and/or the Facility which are directly caused by such installation by
a person or an entity other than 4MC or 4MC's designee.
24
<PAGE>
8.4 Additional Personnel. TVN may request that additional personnel
--------------------
be added to the New Services Personnel complement provided by 4MC at any time
and from time to time. 4MC shall comply with the provisions of Section 6.3(e)
(which deals with replacement personnel) in connection with providing additional
New Services Personnel pursuant to TVN's request (except that the Notice shall
include the proposed total compensation of such additional personnel). If the
proposed total compensation for any additional New Services Personnel falls
within the Personnel Budget, then TVN shall not be required to make any
additional payments to 4MC on account of such additional personnel. To the
extent that any or all of the total compensation of such additional personnel,
when added to the aggregate existing compensation of New Services Personnel, is
in excess of the Personnel Budget, any such excess amount shall be billed to,
and payable by, TVN.
8.5 Overtime, Weekend and Holiday Hours. TVN shall pay overtime hours
-----------------------------------
for services worked by any or all Editors and MPEG Encoding Operators (as
defined in Exhibit "I") in excess of their regular hours in accordance with the
schedule attached hereto as Exhibit "O." The fee for any overtime hours, weekend
hours or holiday hours shall be prorated to the quarter-hour.
8.6 Additional Services. From and after the Commencement Date, TVN shall
-------------------
have the right, but not the obligation, to use all other services and/or
equipment and/or facilities of 4MC and/or its affiliates, including without
limitation, editing, titling, duplication, sound editing, graphics, production
and post-production services, not otherwise provided hereunder in connection
with TVN's production, post-production and network origination activities. TVN
shall be given scheduling priority over other customers of 4MC and its
affiliates (i.e., if TVN and another customer simultaneously request the same
services and/or equipment and/or facilities, TVN shall be given priority).
Notwithstanding the foregoing, 4MC shall have no obligation to "bump" a customer
that has previously scheduled services and/or equipment and/or facilities in
favor of TVN. In consideration for 4MC's provision of such additional services
and/or equipment and/or facilities, 4MC shall charge TVN the prices set forth on
the rate card attached hereto as Exhibit "P."
9. Default and Remedies; Termination.
---------------------------------
9.1 Payment Default. In the event of TVN's failure to pay any amounts
---------------
hereunder when due, TVN shall be in default of this Agreement and 4MC shall
deliver to TVN written notice of TVN's payment default (the "Payment Notice").
TVN shall then have five (5) business days from the date of receipt of such
Payment Notice to pay
25
<PAGE>
such delinquent amounts. A "Payment Default" shall be deemed to exist if such
payment is not received by 4MC within five (5) business days after TVN's receipt
of the Payment Notice, and upon such Payment Default, interest shall accrue on
any delinquent amounts due hereunder at the rate of one and one-half percent
(1-1/2 %) per month, and 4MC shall have the right to terminate this Agreement by
written notice to TVN and, in 4MC's sole option, cease all Original and Interim
Services, or New Services (if they have begun), for TVN without incurring any
liability on 4MC's part, and terminate the Sublease. In the event of a
termination of this Agreement pursuant to a Payment Default, TVN shall remain
liable for any unpaid Fees and charges and all Fees and charges that would have
been due for the remainder of the Term, or the applicable Renewal Term, had no
Payment Default occurred, subject to (a) the provisions of Section 9.5 herein,
and (b) application of a present value discount at the rate of six percent (6%).
All such Fees and charges shall be due and payable within seven (7) days after
TVN's receipt of the termination notice.
9.2 Other TVN Default. Upon the occurrence of the following: (a) any
-----------------
material breach of TVN's warranties or covenants in Section 14.1 herein or any
other representation, warranty or covenant contained herein; or (b) any default
under the Fiscal 1997 Note, the Fiscal 1998 Note or the Sublease; or (c) if TVN
or any parent or subsidiary of TVN shall seek relief under any applicable
bankruptcy statute, is placed in receivership, makes an assignment for the
benefit of creditors or commences a winding up or termination of its business
(each, a "TVN Default" hereunder), 4MC shall deliver written notice to TVN of
such TVN Default (the "TVN Default Notice"). TVN shall have five (5) business
days from the date of receipt of the TVN Default Notice to cure such TVN
Default, or if such TVN Default is not capable of cure within such five (5)
business day period, TVN shall have an additional ten (10) business days to cure
such default. If TVN fails to cure such TVN Default within such five (5)
business day period (or, if applicable, within the additional ten (10) business
day period), 4MC, at its sole option, may terminate this Agreement by written
notice to TVN and cease all Interim Services and New Services to TVN without
incurring any liability on 4MC's part, and terminate the Sublease. TVN
acknowledges that any payment default described in Section 9.2(b) is curable
within five (5) business days of receipt of the TVN Default Notice.
Notwithstanding the foregoing, upon a TVN Default under Section 9.2(c), 4MC may
immediately terminate this Agreement upon written notice to TVN and cease all
Original and Interim Services, or New Services (if they have begun) for TVN.
Upon termination of this Agreement due to a TVN Default, TVN shall remain liable
for any unpaid Fees and charges and all Fees and charges that would have been
due for the remainder of the Term, or the applicable Renewal Term, had no TVN
Default occurred, subject to (a) the provisions of Section 9.5 herein, and (b)
application of a present value discount at the rate of six percent (6%). All
such Fees and charges shall be due and payable within seven (7) days after TVN's
receipt of the termination notice.
26
<PAGE>
9.3 4MC Default; TVN Termination. In addition to any other termination
----------------------------
rights TVN may have under this Agreement, upon the occurrence of the following:
(a) any material breach of 4MC's warranties or covenants in Section 14.2 or any
other representation, warranty or covenant of 4MC contained herein, or (b) if
4MC or its parent shall seek relief under any applicable bankruptcy statute, is
placed in receivership, makes an assignment for the benefit of creditors or
commences a winding up or termination of its business (each a "4MC Default"),
TVN shall deliver written notice to 4MC of such 4MC Default (the "4MC Default
Notice"). 4MC shall have five (5) business days from the date of receipt of the
4MC Default Notice to cure such 4MC Default, or if such 4MC Default is not
capable of cure within such five (5) business day period, 4MC shall have an
additional ten (10) business days to cure such default. 4MC acknowledges that
nothing in this Section 9.3 shall (a) limit the performance standards and
specifications with which 4MC must comply pursuant to Article 12 herein and the
credits and termination rights contained therein or (b) limit or affect the
penalty provisions contained in Section 5.3. If 4MC fails to cure such 4MC
Default within such five (5) business day period (or, if applicable, within the
additional ten (10) business day period), TVN may, at its sole option,
immediately terminate this Agreement upon written notice to 4MC, in which event
(a) TVN shall have the right to acquire the Equipment in accordance with the
provisions of Section 9.6 herein, and (b) TVN shall remain liable for any unpaid
Fees and charges owing to the date of termination (less any damages, including
moving costs, incurred by TVN). Notwithstanding TVN's termination of this
Agreement under this Section 9.3, (x) the Sublease shall not automatically
terminate, but may be terminated at TVN's sole discretion, provided that TVN
delivers written notice to 4MC at least four (4) months prior to the date TVN
desires to terminate the Sublease, and (y) if TVN desires to acquire the
Equipment as provided in Section 9.6 and assumes responsibility for the New
Services, 4MC shall use its best efforts to permit TVN to continue to occupy the
Sixth Floor Space and the Basement Space for a period of time equal to the
remainder of the Term (or, if such termination occurs during a Renewal Term, the
remainder of such Renewal Term), either by requesting that the Master Landlord
enter into a direct lease with TVN for such space or by subleasing the Sixth
Floor Space and the Basement Space to TVN. If TVN terminates this Agreement in
accordance with the provisions of this Section 9.3 or Sections 5.3, 6.2(e), 12.3
or 15.2, TVN shall remain liable for any unpaid Fees and charges for services
rendered by 4MC prior to the date of such termination (less any damages,
including moving costs, incurred by TVN), which Fees and charges shall be due
and payable within seven (7) days after the date of TVN's termination notice,
but shall not be liable for any Fees and charges that would have been due for
services for the remainder of the Term. If TVN terminates this Agreement for any
other reason, TVN shall remain liable for any unpaid Fees and charges and all
Fees and charges that would have been due for the remainder of the Term, or the
applicable Renewal Term, subject to : (a) the provisions
27
<PAGE>
of Section 9.5 herein, and (b) application of a present value discount at the
rate of six percent (6%). All such fees and charges shall be due and payable
within seven (7) days after the date TVN terminates this Agreement. If TVN
terminates this Agreement by reason of a 4MC Default, 4MC will cooperate with,
and use its best efforts to assist, TVN to achieve the least disruptive
transition, over a reasonable period of time, to another facility and another
services provider of TVN's choice (unless TVN opts to acquire the Equipment,
remain at the Facility and assume responsibility to provide its own comparable
services), and 4MC shall continue to supply as many of the New Services as it is
capable of continuing to provide, at a pro rata Monthly Fee rate, until the move
to another facility is completed by TVN (which date shall in no event be later
than twelve [12] months after the date of 4MC's receipt of TVN's termination
notice).
9.4 Disputed Amounts. With respect to any adjustments based upon Equipment
----------------
Expenditures as described in Section 8.2 or other payments owed by TVN to 4MC
pursuant to invoices prepared by 4MC hereunder, TVN shall have the right to
reasonably contest any such invoices (within thirty [30] days of receipt of such
invoices) by requiring 4MC to provide written documentation substantiating any
such invoices. To the extent the parties cannot agree on a particular invoice,
both parties shall submit the relevant calculations and any relevant
documentation to a mutually approved independent third party accounting firm of
national standing who shall promptly render its decision as to the appropriate
payment obligation in writing, which decision shall be final and binding on the
parties. The fees and costs of such accounting firm shall be shared equally by
4MC and TVN. Payment of any contested amount shall be made within ten (10) days
of TVN's receipt of the independent third party accounting firm's written
decision, such payment to be in the amount specified in such written decision.
Notwithstanding the foregoing, TVN acknowledges that it shall have no offset
rights with respect to the Interim Monthly Fee and the Monthly Fee.
9.5 Duty to Mitigate. If either party terminates this Agreement due to the
----------------
other party's default or for any other reason, the non-defaulting party's rights
and remedies shall be subject to such party's obligation to use reasonable
efforts to mitigate such party's damages, including without limitation, 4MC
using reasonable efforts to secure replacement customers to utilize the
Facility, the Equipment and/or the New Services during the period remaining
under the Term and/or using reasonable efforts to sell the Equipment and/or TVN
finding replacement service providers to provide services substantially
equivalent to the New Services, as applicable.
9.6 TVN's Option to Acquire Equipment Upon 4MC Default. If TVN delivers a
--------------------------------------------------
termination notice to 4MC based upon a 4MC Default, then TVN shall have the
right and option to acquire the Equipment listed on Exhibit "J", as amended from
time to time, and the Additional Capital Equipment by TVN's delivery of written
notice to 4MC,
28
<PAGE>
within five (5) days after the date of the termination notice, of TVN's desire
to exercise such option to acquire the Equipment.
(a) If 4MC owns the Equipment, then the purchase price for the
Equipment and the Additional Capital Equipment shall be the undepreciated net
book value of the Equipment and the Additional Capital Equipment as of the date
of purchase (based upon straight line depreciation calculated over sixty [60]
months (without reference to salvage value)) plus the fourteen percent (14%)
residual value of the Equipment and the Additional Capital Equipment.
Concurrently with TVN's delivery of such sum to 4MC, 4MC shall assign and
deliver to TVN a bill of sale in form acceptable to TVN conferring good and
marketable title to all of the Equipment and the Additional Capital Equipment,
free and clear of all liens and encumbrances (it being understood that 4MC's
delivery of the Equipment and the Additional Capital Equipment free and clear of
encumbrances shall occur as soon as practicable after 4MC's lender has released
its lien on the Equipment and the Additional Capital Equipment, which release it
shall be 4MC's responsibility to obtain from such lender).
(b) If 4MC leases the Equipment and the Additional Capital Equipment
under equipment leases and/or other financing documents, then 4MC shall use its
best efforts to cause all such equipment leases to be assigned to TVN. If the
applicable equipment lessors will not permit such assignment, then 4MC shall
keep all such leases in full force and effect if and only if TVN timely pays all
monthly lease fees (and any other applicable fees in connection with such lease)
to 4MC, at which time 4MC will timely forward all such fees to the applicable
equipment lessor. TVN will assume any and all obligations under the applicable
equipment leases with respect to maintenance of the Equipment and the Additional
Capital Equipment. At the end of the applicable lease term, TVN shall timely pay
the residual value of the Equipment and the Additional Capital Equipment to 4MC,
at which time 4MC will timely forward such amount to the applicable equipment
lessor. Upon 4MC's acquisition of the Equipment and the Additional Capital
Equipment upon payment of such residual value, 4MC will timely transfer title to
the Equipment and the Additional Capital Equipment to TVN by delivery of a bill
of sale in form acceptable to TVN, free and clear of all liens and encumbrances
(it being understood that 4MC's delivery of the Equipment and the Additional
Capital Equipment free and clear of encumbrances shall occur as soon as
practicable after 4MC's lender has released its lien on the Equipment and the
Additional Capital Equipment, which release it shall be 4MC's responsibility to
obtain from such lender).
(c) The parties acknowledge that if TVN exercises its option
to acquire the Equipment and the Additional Capital Equipment pursuant to this
Section 9.6, TVN shall acquire all of the Equipment listed on Exhibit "J (except
for the generator, which shall be excluded from such acquisition unless the
provisions of Section 19.5 are
29
<PAGE>
applicable), and shall not have the right to acquire less than all of the
Equipment and Additional Capital Equipment.
10. Facility Security
-----------------
10.1 Generally. In order to secure the Facility, 4MC shall issue a badge
---------
or other form of identification to all personnel authorized to access the
technical, non-business office sections of the Facility. The badge or other form
of identification shall display the name and photograph of the authorized
person. TVN acknowledges that certain escorted guests of 4MC and/or its
affiliates may be issued temporary badges and may be allowed limited access to
the Facility (subject to TVN's prior approval, which shall not be unreasonably
withheld). 4MC acknowledges that TVN's refusal to permit access either (a) to
persons engaged in competitive activity with TVN or (b) during periods of heavy
activity within the Facility shall be deemed reasonable. All Facility access
doors shall be protected by key card locks or a security key pad system. An
access log reporting all access activity and all persons entering the Facility
will be available to TVN. Notwithstanding the foregoing, under no circumstances
shall TVN and/or its personnel interfere in any manner with 4MC's provision of
services, facilities, personnel and equipment to other customers of 4MC. TVN
further covenants that (a) neither it nor any of its personnel shall utilize
such right of access for any purposes other than in connection with the terms
and conditions of this Agreement and (b) TVN and its personnel shall be subject
to all security measures implemented by 4MC pursuant to the terms of this
Agreement, including, without limitation, those security measures described in
this Section 10. Visitors will only be permitted after sign-in and with security
badges; notwithstanding the foregoing, no visitors shall be permitted to visit
or tour the Facility without TVN's prior approval.
10.2 Additional Security Measures. As soon as practicable after this
----------------------------
Agreement is executed, the entire Building shall be fully secured, with access
only to employees, clients, vendors of TVN and 4MC, as well as guests approved
by TVN and 4MC, respectively.
11. Maintenance
-----------
4MC shall maintain the Equipment at a level of performance that is, at a
minimum, consistent with the relevant Equipment manufacturer's specifications. A
mutually agreed-upon maintenance schedule will be documented and implemented by
4MC during the Term. TVN acknowledges that portions of the New Services may be
temporarily interrupted for brief 4MC maintenance periods for all support
equipment
30
<PAGE>
operating on a full-time basis, in accordance with such maintenance schedule.
Notwithstanding the foregoing, in no event will TVN be taken off the air or
sustain a Service Interruption as a result of such maintenance.
12. Service Interruption
--------------------
12.1 Service Interruptions. A "Transmission Service Interruption" is
---------------------
defined as a loss of signal in a transmission (uplink) channel where the
transmitted radio frequency signal is absent or significantly degraded (without
regard to the number of programs on a particular transmission channel). A
"Program Channel Service Interruption" is defined as a loss of signal in a
Program Channel (as defined in Exhibit "D") where the video and/or audio
associated with the Program Channel is absent or significantly degraded. A
Transmission Service Interruption and a Program Channel Service Interruption are
each defined as a "Service Interruption." 4MC shall immediately notify TVN in
writing of a suspected or actual Service Interruption (the "Interruption
Notice"). Within two (2) business days after 4MC's delivery of the Interruption
Notice, 4MC shall deliver a "discrepancy report" to TVN, which shall state the
nature of the discrepancy, the estimated duration, date and time thereof (or,
actual, if known), and the steps taken by 4MC to remedy such discrepancy.
Subject to Sections 12.2 and 12.4, if (a) there exists a greater than .01%
Transmission Service Interruption per Digital Transmission Channel (as defined
in Exhibit "D") in any given month, and/or (b) if there exists a greater than
.10% Transmission Service Interruption per Analog Transmission Channel (as
defined in Exhibit "D") in any given month, and/or (c) if there exists a greater
than .01% Program Channel Service Interruption per Program Channel in any given
month (with respect to those Program Channels that are protected by a Program
Channel of the second (back-up) SeaChange Server (or other digital server))
and/or (d) if there exists a greater than .10% Program Channel Service
Interruption per Program Channel in any given month (with respect to those
Program Channels that are not protected by a Program Channel of the second (
back-up) SeaChange Server (or other digital server)), then TVN shall be entitled
to a credit for such Service Interruption (a "Service Interruption Credit") as
calculated below. All Service Interruption Credits shall be set forth in the
next billed invoice that follows the Service Interruption.
12.2 Service Interruption Credit. If a Service Interruption occurs, 4MC
---------------------------
shall issue a Service Interruption Credit to TVN based on the following table:
- --------------------------------------------------------------------------------
NUMBER OF MINUTES FOR EACH FOR EACH PROGRAM
OF SERVICE TRANSMISSION CHANNEL
INTERRUPTION CHANNEL
- --------------------------------------------------------------------------------
31
<PAGE>
- --------------------------------------------------------------------------------
1-5 minutes $50 per minute $20 per minute
- --------------------------------------------------------------------------------
6-10 minutes $75 per minute $30 per minute
- --------------------------------------------------------------------------------
11-30 minutes $150 per minute $60 per minute
- --------------------------------------------------------------------------------
31-45 minutes $200 per minute $80 per minute
- --------------------------------------------------------------------------------
46-60 minutes $250 per minute $100 per minute
- ---------------------------------------- ---------------------------------------
61-90 minutes $300 per minute $120 per minute
- ---------------------------------------- ---------------------------------------
over 90 minutes $400 per minute $160 per minute
- ---------------------------------------- ---------------------------------------
The above table sets forth the amount of credit for the incremental minutes
of a Service Interruption shown in the column labeled "Number of Minutes of
Service Interruption". For example, if a Service Interruption of one
Transmission Channel occurs for eighteen (18) minutes in duration, then the
Service Interruption Credit would be calculated as follows: five (5) minutes at
Fifty Dollars ($50) per minute, equaling Two Hundred Fifty Dollars ($250); five
(5) minutes at Seventy-Five Dollars ($75) per minute, equaling Three Hundred
Seventy-Five Dollars ($375); and eight (8) minutes at One Hundred Fifty Dollars
($150) per minute, equaling One Thousand Two Hundred Dollars ($1,200), for a
total Service Interruption Credit of One Thousand Eight Hundred Twenty-Five
Dollars ($1,825).
In addition to the Service Interruption Credit, 4MC shall credit TVN an
amount equal to the actual monetary damages and demonstrable lost revenue due to
such Service Interruption, for which TVN must provide to 4MC reasonable
documentation within thirty (30) days after such damage or loss. Any credit
granted to TVN shall be first applied to the current Monthly Fee.
Notwithstanding the foregoing, TVN shall be limited to a maximum aggregate
credit hereunder (including Service Interruption Credits and lost revenue
credits) of One Hundred Fifty Thousand Dollars ($150,000) in any twelve-month
period during the Term.
12.3 Continuous Service Failure. If at any time during the Term (a) there
--------------------------
shall be a Service Interruption which continues for a period of two (2)
consecutive days or (b) if in any twelve (12)-month period there shall be two
(2) or more non-continuous Service Interruptions, each of which interruption
continues for a period of twelve (12) hours or (c) if in any twelve (12)-month
period there shall be three (3) or more non-continuous Service Interruptions,
each of which interruption continues for a period of three (3) or more hours
(any of (a), (b) or (c), a "Continuous Service Failure"), then TVN shall have
the right to immediately terminate this Agreement upon written notice to 4MC.
12.4 Exception for SeaChange System; Other Causes of Service
-------------------------------------------------------
Interruptions. The parties acknowledge and agree that the SeaChange System which
- -------------
4MC is currently attempting to implement as part of the New Services is new and
untested
32
<PAGE>
technology; therefore, TVN shall not be entitled to any Service Interruption
Credit due to Service Interruptions caused by or involving the SeaChange System
or the Alternate Server System, until the parties agree that a fully operative
digital server system has been implemented. In addition, TVN shall not be
entitled to any Service Interruption Credit nor to terminate this Agreement in
the event of a Continuous Service Failure if (a) there has been a significant
server system upgrade requested by TVN or required by the manufacturer and such
Service Interruption or Continuous Service Failure occurs as a result of such
significant server system upgrade during the ninety (90)-day period following
the implementation of such significant system upgrade, or (b) if there has been
a manufacturer's software upgrade or any other upgrade other than an upgrade
described in subparagraph (a) of this Section 12.4 and such Service Interruption
or Continuous Service Failure occurs as a result of the manufacturer's software
upgrade or such other upgrade during the thirty (30) day period following the
implementation of such upgrade. TVN shall be entitled to terminate this
Agreement in the event of a Continuous Service Failure caused by the failure of
such digital server system, if such Continuous Service Failure occurs at any
time after the Actual Commencement Date, subject to the terms of the prior
sentence. In addition, TVN shall have no right to Service Interruption Credits
and/or termination of this Agreement if a Service Interruption or a Continuous
Service Failure is caused by TVN's actions or omissions to act where such
actions or omissions are required hereunder, or by any equipment provided by
TVN, or any equipment or material provided by third parties who have contracted
with TVN, and were not provided by 4MC. TVN shall have no right to Service
Interruption Credits and/or termination of this Agreement, nor shall 4MC be
deemed in default hereunder, if a Service Interruption and/or a Continuous
Service Failure is caused by the failure of any equipment or other property
provided by TVN to 4MC under this Agreement, including the equipment set forth
on Exhibit "K", as well as the satellite receivers and any other equipment and
property of TVN located at the Facility, to be "Year 2000 Compliant" (as
hereinafter defined).
13. Playboy Services Severable
--------------------------
The Playboy AdultVision origination playback and monitoring service (the
"Playboy Service") provided to TVN shall be included as part of the New Services
at no increase in the Monthly Fee; provided, however, that the Playboy Service
-------- -------
is terminable by TVN upon forty-five (45) days prior written notice. In the
event the Playboy Service is cancelled by TVN, the Monthly Fee shall be reduced
by $10,000 per month. Any termination of the Playboy Service by TVN hereunder
shall be independent of the rights and duties of the parties hereunder, and this
Agreement shall continue in full force and effect notwithstanding such
termination.
33
<PAGE>
14. Representations, Warranties and Covenants
-----------------------------------------
14.1 Of TVN. TVN hereby represents, warrants and covenants to 4MC as
------
follows:
(a) TVN is in compliance and will continue to comply with all
applicable governmental laws, rules, regulations and administrative requirements
relating to this Agreement, possesses all licenses, permits or other
authorizations or exemptions necessary to effectuate the terms of this
Agreement, and shall maintain all such licenses, permits and other similar
authorizations in good standing as may be required by the appropriate
governmental authorities.
(b) To the best of TVN's knowledge, (i) the material to be
transmitted, received or otherwise processed by 4MC for TVN shall not infringe
upon the rights of third parties; (ii) TVN has and will continue to have all
necessary consents, approvals, licenses and other rights from third parties
(including governmental agencies) required for the transmission, reception and
other processing of such material; and (iii) such material will not be
defamatory.
(c) TVN has the full power and authority to enter into this
Agreement.
14.2 Of 4MC. 4MC represents, warrants and covenants to TVN as follows:
------
(a) 4MC is in compliance and will continue to comply with all
applicable governmental laws, rules, regulations and administrative requirements
relating to this Agreement, possesses all licenses, permits or other
authorizations or exemptions necessary to effectuate the terms of this
Agreement, and shall maintain all such licenses, permits and other similar
authorizations in good standing with the appropriate governmental authorities.
(b) 4MC has the full power and authority to enter into this
Agreement.
(c) The Equipment complies with all applicable manufacturers
specifications, and will continue to so comply during the Term.
(d) Any unionization of 4MC (or any of its affiliates) will
not adversely affect nor interfere with 4MC's performance of the New Services,
or any of TVN's rights hereunder.
(e) 4MC has the full and complete right and authority to provide
the
34
<PAGE>
Interim Services and New Services at the Facility.
(f) All Equipment, Additional Capital Equipment (if such
equipment is being used to provide the New Services) and other equipment and
property utilized by 4MC to provide the New Services (except for the equipment
and property provided by TVN for 4MC's use hereunder), any of which constitutes,
contains, or relies upon computer software, computer firmware, computer hardware
(whether general or special purpose or imbedded) and other similar or related
items of automated, computerized and/or software systems, are "Year 2000
Compliant". As used in this Agreement, the term "Year 2000 Compliant" means that
the equipment and property is able to perform all of the following functions:
(i) handle date information before, during and after January 1, 2000, including
but not limited to accepting date input, providing date output, and performing
calculations on dates or portions of dates; (ii) function accurately and without
interruption before, during and after January 1, 2000, without any change in
operations associated with the advent of the new century; (iii) respond to
two-digit year-date input in a way that resolves the ambiguity as to century in
a disclosed, defined, and predetermined manner; and (iv) store and provide
output of date information in ways that are unambiguous as to century.
15. Limitation of Liability
-----------------------
15.1 Limitation of Liability. EXCEPT AS OTHERWISE EXPRESSLY SET FORTH
-----------------------
HEREIN, EACH PARTY'S LIABILITY FOR ANY DAMAGES ARISING OUT OF, RESULTING FROM,
OR RELATED TO THE PROVISION OR USE OF THE NEW SERVICES, INCLUDING WITH
LIMITATION, LIABILITIES ARISING OUT OF NEGLIGENCE, MISTAKES AND OMISSIONS,
INTERRUPTIONS, DELAYS, ERRORS OR OTHER DEFECTS IN THE NEW SERVICES OR FAILURE TO
FURNISH THE NEW SERVICES, WHETHER CAUSED BY ACTS OF COMMISSION OR OMISSION,
SHALL BE LIMITED TO THE CHARGE ALLOCABLE TO, OR THE MONTHLY FEE FOR, SUCH FAULTY
OR DEFECTIVE NEW SERVICE, UNLESS SUCH DAMAGE IS THE RESULT OF GROSS NEGLIGENCE,
RECKLESSNESS OR WILLFUL MISCONDUCT. IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR
ANY INCIDENTAL, PUNITIVE OR CONSEQUENTIAL DAMAGES.
15.2 Force Majeure Event. NOTWITHSTANDING THE PROVISIONS OF SECTION 15.1
-------------------
ABOVE, NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY LOSS OF, DEFECTS IN OR
ANY INABILITY TO FURNISH THE ORIGINAL, INTERIM OR NEW SERVICES DUE TO ACTS OF
GOD; NATURAL DISASTER OR CATASTROPHE; ACTS OF GOVERNMENT; WARS; RIOTS; STRIKES,
LOCKOUTS OR OTHER LABOR DIFFICULTY INVOLVING OR DIRECTED AT ANY PARTY
35
<PAGE>
OTHER THAN 4MC, ITS PARENT COMPANY AND/OR ANY OF ITS AFFILIATES; OR ANY OTHER
CAUSES BEYOND THAT PARTY'S CONTROL (EACH OF THE ABOVE EVENTS TO BE REFERRED TO
AS A "FORCE MAJEURE" EVENT), NOR SHALL TVN BE LIABLE FOR PAYMENT OF THE MONTHLY
FEE DURING A FORCE MAJEURE EVENT. NOTWITHSTANDING THE FOREGOING, IF A FORCE
MAJEURE EVENT CONTINUES FOR A MINIMUM OF TWENTY (20) DAYS AND 4MC IS UNABLE TO
PERFORM ITS OBLIGATIONS HEREUNDER DURING SUCH TIME, THEN TVN, IN ITS SOLE
DISCRETION, MAY TERMINATE THIS AGREEMENT UPON WRITTEN NOTICE TO 4MC.
15.3 Warranties Disclaimed. EXCEPT AS OTHERWISE EXPRESSLY SET FORTH
---------------------
HEREIN, ANY AND ALL EXPRESS AND IMPLIED WARRANTIES RELATING TO THE NETWORK
ORIGINATION, UPLINK AND POST-PRODUCTION SERVICES, INCLUDING WITHOUT LIMITATION,
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A SPECIFIC PURPOSE OR USE, ARE
EXPRESSLY DISCLAIMED.
16. Indemnification
---------------
16.1 Indemnification by 4MC. 4MC shall defend, indemnify and hold
----------------------
harmless TVN, its affiliates and their respective officers, directors,
shareholders, employees, agents and successors from and against any and all
claims, demands, suits, judgments, losses, damages or expenses of any nature
whatsoever (including reasonable attorneys' fees) (collectively, "Claims") of
any sort for which TVN may be liable to any third party which relate to or arise
or result from (a) the interference by the operations of 4MC hereunder with any
third-party satellite user (b) 4MC's failure to maintain necessary licenses, (c)
injury to persons, damage to property or other claims resulting from any act or
omission of 4MC in connection with 4MC's provision of services hereunder, and
(d) 4MC's breach of any material representation, warranty or covenant contained
herein. This indemnification obligation shall survive any termination of this
Agreement.
16.2 Indemnification by TVN. TVN shall defend, indemnify and hold harmless
----------------------
4MC, its affiliates and their respective officers, directors, shareholders,
employees, agents and successors from and against any and all Claims of any sort
for which 4MC may be liable to any third party which relate to or arise or
result from (a) the content of any programming transmitted, received or
otherwise processed by 4MC pursuant to this Agreement, including without
limitation, any claim for libel, slander, copyright infringement,(b) any other
claims resulting from any act or omission of TVN or patrons, suppliers or
clients of TVN relating to the services to be performed hereunder , and (c)
TVN's breach of any material representation, warranty or covenant contained
herein.
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<PAGE>
This indemnification obligation shall survive any termination of this Agreement.
16.3 Indemnification Procedure. In any case where either party seeks
-------------------------
indemnification, the indemnified party shall notify the indemnifying party as
promptly as possible of any claim, litigation, or threatened claim or litigation
for which the indemnified party seeks indemnification; provided, however, that
the failure by the indemnified party to promptly notify the indemnifying party
of any such claim, litigation or threatened claim or litigation shall not affect
indemnifying party's indemnification obligations unless indemnifying party can
demonstrate actual prejudice caused by the delay in providing notice. The
indemnifying party shall afford indemnified party the opportunity to participate
in, and, at the indemnifying party's option, control, compromise, settle,
defend, or otherwise resolve the claim or litigation (and neither party shall
effect any such compromise or settlement without the prior written consent of
the indemnifying party, which consent shall not be reasonably withheld), and the
indemnified party shall cooperate with indemnifying party in the defense of such
claim.
17. Non-Hire.
--------
During the Term and for a period of one year thereafter, without the other
party's express prior written approval, neither TVN nor 4MC shall, directly or
indirectly, employ, attempt to employ, solicit for employment by others, or
induce or attempt to influence a termination of employment by, any employee of
the other party; or induce or attempt to induce a consultant or other
independent contractor to sever that person's relationship with the other party;
or assist any other person, firm or entity in the solicitation of any such
consultant or employee.
18. Confidential Information
------------------------
18.1 4MC and TVN acknowledge that in the course of 4MC's provision of
the New Services to TVN hereunder, either party may become acquainted with
certain "Confidential Information" of the other party. "Confidential
Information" of either party shall mean any information relating to such party's
business, business concepts, and/or ideas relating to programming and/or other
products, including all intellectual property pertaining to the foregoing
(regardless of the stage of development of such) (collectively the "Products"),
which is not generally known other than by such party. Confidential Information
may include, without limitation, the concepts, ideas, designs, formats, and
contents of the New Services and the overall marketing and business plan with
respect to the New Services; and may include, without limitation, engineering
designs, technologies, designs, devices, outlines, sketches, videos, copyrights,
and any actual
37
<PAGE>
or contemplated trademark, trade name or service mark. Each party agrees that it
shall not use, disclose, disseminate or otherwise communicate, directly or
indirectly, in whole or in part, during the term of this Agreement, any
Confidential Information of the other party, except as necessary to implement
the terms of this Agreement, without the other party's prior written consent,
nor shall either party permit any of its representatives, subsidiaries, parent
entity, or any third party person acting for or on its behalf, to do any of the
foregoing. In addition, neither party shall reproduce or copy or summarize any
Confidential Information of the other party without such other party's prior
written consent in each instance. 4MC shall cause each and every staff member
employed by 4MC pursuant to this Agreement, as well as any other 4MC employee
who may have access to TVN's Confidential Information, to agree to be bound in
writing by this Section 18. The obligations set forth in this Section 18 shall
survive the termination or cancellation of this Agreement.
18.2 Upon termination of the Term or any earlier termination of this
Agreement pursuant to the terms hereunder, each party shall promptly return to
the other party all manuals, documents, files, reports, programming,
Confidential Information and any other data, materials or property belonging to
such other party.
18.3 TVN shall cause all of its employees who may have access to 4MC's
Confidential Information to agree to be bound in writing by this Section 18.
19. Options Upon Expiration of Term
-------------------------------
19.1 Reduced Monthly Fee During Renewal Term(s). Notwithstanding any
------------------------------------------
other provision of this Agreement to the contrary, the Monthly Fee during
the Renewal Term(s) shall be reduced by an amount equal to the sum of (a) the
actual aggregate documented Equipment Expenditures (incurred to the date ninety
[90] days from and after the Commencement Date) divided by sixty (60) and (b)
Sixteen Thousand Dollars ($16,000). By way of example, if the Monthly Fee during
the first year of the first Renewal Term is Five Hundred Fourteen Thousand
Dollars ($514,000) and the actual aggregate documented Equipment Expenditures
total Ten Million Dollars ($10,000,000), then the Monthly Fee during the first
year of the first Renewal Term would be Three Hundred Thirty-One Thousand Three
Hundred Thirty Four Dollars ($331,334) ($514,000 minus the sum of $166,666
[$10,000,000 divided by 60] and $16,000).
19.2 TVN's Option to Purchase Equipment. Within five (5) business days
----------------------------------
after the commencement of the first Renewal Term, TVN shall have the right to
purchase all, but not less than all, of the Equipment listed on Exhibit "J", as
amended from time to
38
<PAGE>
time, and the Additional Capital Equipment (except for the generator, which
shall be excluded from such purchase unless the provisions of Section 19.5 are
applicable), from 4MC for a purchase price of One Dollar ($1). Concurrently with
TVN's delivery of such sum to 4MC (which shall occur within ten [10] business
days after the commencement of the Renewal Term), 4MC shall assign and deliver
to TVN a bill of sale in form acceptable to TVN conferring good and marketable
title to all of the Equipment and the Additional Capital Equipment free and
clear of all liens and encumbrances (it being understood that 4MC's delivery of
the Equipment and the Additional Capital Equipment free and clear of
encumbrances shall occur as soon as practicable after 4MC's lender has released
its lien on the Equipment and the Additional Capital Equipment , which release
it shall be 4MC's responsibility to obtain from such lender). From and after the
date of TVN's purchase of the Equipment and the Additional Capital Equipment
until the expiration of the Renewal Term(s), 4MC shall have the right to utilize
the Equipment and the Additional Capital Equipment at the Facility in order to
continue rendering the New Services for TVN hereunder, if TVN has renewed this
Agreement for full service.
19.3 Reduction of Services During Renewal Term(s). TVN shall have the
--------------------------------------------
right to limit the services to be provided by 4MC during the Renewal Term(s) to
uplink services performed using two 4MC uplink antennae and downlink services
performed using two 4MC downlink antennae (which reduced services are more
particularly described in Section 1.4 of Exhibit D), in which event the Monthly
Fee shall be reduced to One Hundred Twenty-Five Thousand Dollars ($125,000) (for
15 uplink Transmission Channels) during the Renewal Term(s). TVN acknowledges
that the reduced Monthly Fee shall cover 4MC's cost of providing the earth
stations, UPS, and generator, but shall not cover the cost of air conditioning,
electricity and the space to be occupied by TVN in the basement. TVN and 4MC
shall negotiate the rental rate to be paid by TVN for such basement space. TVN
shall be billed monthly for air conditioning and electricity costs. TVN
acknowledges that its right to limit the services to be provided by 4MC during
the Renewal Term(s) and to pay the reduced Monthly Fee as described in this
Section 19.3 (the "Reduced Services Option") shall only be available if (a) TVN
delivers written notice to 4MC at least six (6) months prior to the expiration
of the Term of TVN's exercise of the Reduced Services Option, and (b) TVN
purchases all, but not less than all, of the Equipment listed on Exhibit "J", as
amended from time to time, and the Additional Capital Equipment (except for the
generator, which shall be excluded from such purchase unless the provisions of
Section 19.5 are applicable), from 4MC for a purchase price equal to (a)
fourteen percent (14%) of the aggregate actual Equipment Expenditures (including
all Additional Capital Equipment) up to the first Ten Million Dollars
($10,000,000) of such Equipment Expenditures, plus (b) One Dollar ($1.00) for
all Equipment Expenditures (including Additional Capital Equipment), if any, in
excess of Ten Million Dollars ($10,000,000) and up to Fifteen Million Dollars
($15,000,000)
39
<PAGE>
(together, the "Equipment Buyout Price"). Concurrently with TVN's delivery of
the Equipment Buyout Price to 4MC (which shall occur within ten [10] business
days after the commencement of the first Renewal Term), 4MC shall assign and
deliver to TVN a bill of sale in form acceptable to TVN, conferring good and
marketable title to all of the Equipment and the Additional Capital Equipment
free and clear of all liens and encumbrances (it being understood that 4MC's
delivery of the Equipment and the Additional Capital Equipment free and clear of
encumbrances shall occur as soon as practicable after 4MC's lender has released
its lien on the Equipment and the Additional Capital Equipment, which release it
shall be 4MC's responsibility to obtain from such lender).
19.4 Equipment Purchase Option Upon Expiration. Upon the expiration of
-----------------------------------------
the Term or any Renewal Term, TVN shall have the option to purchase all, but not
less than all, of the Equipment and the Additional Capital Equipment (except for
the generator, which shall be excluded from such purchase unless the provisions
of Section 19.5 are applicable) for the Equipment Buyout Price, so long as TVN
delivers written notice to 4MC no later than four (4) months prior to the
expiration of the Term or the applicable Renewal Term of its desire to exercise
such option. TVN acknowledges that all costs of removal of the Equipment from
the Facility, if any, shall be borne by TVN.
19.5 Best Efforts to Provide Stand-Alone Generator. 4MC shall use its best
---------------------------------------------
efforts to provide a stand-alone electrical generator capable of providing
sufficient power for the New Services. If 4MC is successful in providing such a
generator, then such generator shall be included in the Equipment to be
purchased by TVN under Sections 9.6, 19.2, 19.3 and 19.4.
20. Restrictions Regarding Provision of Certain Services
----------------------------------------------------
4MC acknowledges that, with respect to any and/or all "Digital Services"
(as hereinafter defined) to be provided at the Facility, 4MC shall not provide
any Digital Services to an unaffiliated third party ("Third Party") at the
Facility unless such Digital Services are performed in conjunction with TVN (if
4MC desires to provide such Digital Services), on terms to be negotiated in good
faith between 4MC and TVN for such joint provision of Digital Services
(including the allocation of certain fees and the obligation to share payment
(as mutually agreed) of any new capital expenditures which 4MC must incur in
connection with the provision of such Digital Services). For purposes of this
Section 20, "Digital Services" shall mean (a) playback of audio and video from a
digital server, (b) digital compression services, and (c) satellite uplink
services.
40
<PAGE>
21. Miscellaneous
-------------
21.1 Assignment and Subcontracting. Except as otherwise provided herein,
-----------------------------
this Agreement is personal to each party and shall not be assigned or
subcontracted in whole or in part without the prior written consent of the
other, such consent not to be unreasonably withheld. Notwithstanding the
foregoing, each party may assign this Agreement to its parent corporation, any
other entity owned or controlled by such parent corporation, or any entity
acquiring substantially all of the assets of a party, provided the assigning
party remains liable for all obligations incurred hereunder prior to the
effective date of any such permitted assignment. In addition, 4MC shall have the
right to utilize third party subcontractors in connection with uplink and
interconnect services, subject to TVN's approval, which approval shall not be
unreasonably withheld.
21.2 Notices. Any notice given under this Agreement, unless specifically
-------
stated otherwise, shall be in writing and shall either be delivered in person or
sent by overnight mail or express courier service, by registered or certified
mail, postage prepaid, or by facsimile or telecopy transmission, direct to the
attention of the party intended as the recipient at the address listed below. If
delivered by messenger, service conclusively shall be deemed received on the
date signed for delivery. If sent by registered or certified mail, postage
prepaid and correctly addressed, service conclusively shall be deemed received
three (3) business days after deposit with the United States postal service. If
sent by overnight mail or express courier service, service shall conclusively be
deemed received one (1) business day after prepaid dispatch, with a signed
receipt, by a recognized overnight mail or express courier service. If sent by
facsimile or telecopy transmission, service shall conclusively be deemed
received on the date and at the time imprinted on any such notice by the
receiving facsimile or telephone machine, with a copy also sent via overnight
mail or express courier service. Either party may change its address by written
notice to the other party.
If to 4MC: 4MC-Burbank, Inc.
2813 W. Alameda Avenue
Burbank, CA 91505
Attn: James T. Conlon
Tel. No.: (818) 840-7156
Fax No.: (818) 846-5197
With a copy to: Four Media Company
c/o POP
625 Arizona Avenue
Santa Monica, CA 90401
41
<PAGE>
Attn: William E. Niles, Esq.
Vice President and General Counsel
Tel. No.: (310) 587-1279
Fax No.: (310) 587-1277
and: Greenberg Glusker Fields Claman
& Machtinger LLP
1900 Avenue of the Stars
Suite 2100
Los Angeles, CA 90067
Attn: Jill A. Cossman, Esq.
Tel. No.: (310) 201-7420
Fax No.: (310) 553-0687
If to TVN: TVN Entertainment Corporation
2901 West Alameda Avenue, 7th Floor
Burbank, CA 91505
Attn: Stuart Z. Levin
Tel. No.: (818) 526-5010
Fax No.: (818) 526-5001
With copies to: TVN Entertainment Corporation
[same address as above]
Attn: Arthur Fields, General Counsel
Tel. No.: (818) 526-5020
Fax No.: (818) 526-5001
and: TVN Entertainment Corporation
[same address as above]
Attn: Gregory Pasetta, Senior Vice President
Tel. No.: (818) 526-5050
Fax No.: (818) 526-5001
21.3 Governing Law. The validity, interpretation and performance of this
-------------
Agreement, and any dispute hereunder, shall be determined in accordance with the
laws of the State of California, without regard to choice of law principles.
21.4 Entire Agreement. This Agreement and all exhibits, which are
----------------
incorporated herein and made part hereof, contain the entire agreement of the
parties with respect to its subject matter and supersedes all prior agreements,
negotiations, representations and proposals, written or oral, relating to its
subject matter. Each party hereby acknowledges that any and all representations,
warranties, covenants and
42
<PAGE>
agreements made by such party and contained in any exhibit to this Agreement are
hereby expressly binding upon such party. This Agreement may not be modified
except by an agreement in writing signed by both parties. Neither party shall be
bound by or liable to the other party for any representation, promise or
inducement made by an agent or person in the other party's employment which is
not embodied in this Agreement.
21.5 Waiver of Breach. No forbearance by either party to enforce any
----------------
provision or to give notice of the breach of any provision of this Agreement
shall constitute a waiver of such provision or right or be deemed to effect an
amendment or modification of this Agreement.
21.6 Independent Contractor. The parties hereto acknowledge that 4MC is
----------------------
an independent contractor and nothing contained herein shall be deemed to
create, and the parties hereto do not intend to create, any relationship of
employer/employee, partnership, joint venture or agency, nor shall any similar
relationship be deemed to exist between them.
21.7 Confidentiality. The rates, terms and conditions of this Agreement
---------------
are confidential to the parties and their respected affiliates, attorneys,
agents and major lenders and, except as required by law, shall not be disclosed
by either party to any other entity or individual without the prior written
consent of the other party, which consent may be withheld in the sole and
absolute discretion of such other party. Either party may, however, disclose the
existence of this Agreement.
21.8 Disputed Matters; Arbitration. Any controversy, claim or dispute
-----------------------------
arising out of or in any way relating to this Agreement or the alleged breach
thereof shall be determined by binding arbitration by a retired California
Superior Court or Court of Appeal Judge selected by the American Arbitration
Association under its Commercial Arbitration Rules ("Rules") which are in effect
at the time of the arbitration or the demand therefor. The Rules are hereby
incorporated by reference. California Code of Civil Procedure (SS)1283.05, which
provides for certain discovery rights, shall apply to any such arbitration, and
said code section is also hereby incorporated by reference. In reaching a
decision, the arbitrator shall have no authority to change, extend, modify or
suspend any of the terms of this Agreement. The arbitration shall be commenced
and heard in Los Angeles County, California. The arbitrator(s) shall apply the
substantive law (and the law of remedies, if applicable) of California or
federal law, or both, as applicable to the claim(s) asserted. Judgment on the
award may be entered in any court of competent jurisdiction, even if a party who
received notice under the Rules fails to appear at the arbitration hearing(s).
The parties may seek, from a court of competent jurisdiction, provisional
remedies or injunctive relief in support of their
43
<PAGE>
respective rights and remedies hereunder without waiving any right to
arbitration. However, if any party seeks or obtains such provisional remedy, an
arbitration hereunder shall also be commenced and, if necessary, the merits of
the controversy or claim and/or the determination of an appropriate permanent
remedy shall be settled by arbitration in accordance with this Agreement.
21.9 Severability. If any provision of this Agreement is void or
------------
unenforceable or violates any applicable law, rule or regulation, such provision
shall in no way affect any other provision of this Agreement, or the validity or
enforceability of this Agreement.
21.10 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original and all of which taken
together shall constitute one agreement.
21.11 Definitions. The following terms are defined in the sections
-----------
indicated below:
(a) "4MC" is defined in Article I.
(b) "4MC Campus" is defined in Section 6.2(e).
(c) "4MC Default" is defined in Section 9.3.
(d) "4MC Default Notice" is defined in Section 9.3.
(e) "Actual Commencement Date" is defined in Section 5.2.
(f) "Additional Capital Equipment" is defined in Section 8.2(b).
(g) "Additional Equipment" is defined in Section 8.3(a).
(h) "Alternate Server System" is defined in Section 5.4.
(i) "Analog Transmission Channel" is defined in Exhibit "D."
(j) "Basement Floor Plan" is defined in Section 6.2.
(k) "Building" is defined in Section 6.2.
(l) "Buildout Cost Estimate" is defined in Section 6.2(b).
44
<PAGE>
(m) "Calculation Date" is defined in Section 8.2(a).
(n) "Claims" is defined in Section 16.1.
(o) "Compact" is defined in Section 2.1.
(p) "Confidential Information" is defined in Section 18.1.
(q) "Continuous Service Failure" is defined in Section 12.3.
(r) "Cost Estimate" is defined in Section 8.2(b).
(s) "Difference"is defined in Section 8.2(a).
(t) "Digital Services" is defined in Section 20.
(u) "Digital Transmission Channel" is defined in Exhibit "D."
(v) "Equipment" is defined in Section 6.4.
(w) "Equipment Budget" is defined in Section 8.2.
(x) "Equipment Buyout Price" is defined in Section 19.3.
(y) "Equipment Expenditures" is defined in Section 8.2.
(z) "Facility" is defined in Section 6.2.
(aa) "Facility Failure" is defined in Section 5.3.
(ab) "Fee" is defined in Section 8.1(g).
(ac) "First Commencement Notice" is defined in Section 5.2.
(ad) "Fiscal 1997 Note" is defined in Section 2.3.
(ac) "Fiscal 1998 Note" is defined in Section 8.1(a).
(af) "Floor Plans" is defined in Section 6.2.
(ag) "Force Majeure Event" is defined in Section 15.2.
(ah) "Implementation Date" is defined in Section 5.4.
(ai) "Implementation Schedule" is defined in Section 6.4.
(aj) "Interim Monthly Fee" is defined in Section 2.5(a).
(ak) "Interim Services" is defined in Section 2.2.
(al) "Liquidated Damages Date" is defined in Section 5.3.
(am) "Master Landlord" is defined in Section 6.2.
(an) "Memorandum" is defined in Section 2.1.
(ao) "Monthly Fee" is defined in Section 8.1(c).
(ap) "New Services" is defined in Section 2.6.
(aq) "New Services Personnel" is defined in Section 6.3.
(ar) "Office Space" is defined in Section 6.2.
(as) "Original Services" is defined in Section 2.1.
(at) "Original Services Personnel" is defined in Article 4.
(au) "Overpayment" is defined in Section 8.2.
(av) "Payment Notice" is defined in Section 9.1.
(aw) "Payment Default" is defined in Section 9.1.
(ax) "Personnel Budget" is defined in Section 6.3.
(ay) "Playboy Service" is defined in Article 13.
(az) "Products" is defined in Section 18.1.
(ba) "Program Channel Service Interruption" is defined in Section
12.1.
(bb) "Program Channel" is defined in Exhibit "D."
45
<PAGE>
(bc) "Reduced Interim Monthly Fee" is defined in Section 2.5(b).
(bd) "Reduced Services Option" is defined in Section 19.3.
(be) "Renewal Notice" is defined in Article 7.
(bf) "Renewal Term" is defined in Article 7.
(bg) "Replacement Notice" is defined in Section 6.3(d).
(bh) "Response Notice" is defined in Section 5.2.
(bi) "Revised Implementation Schedule" is defined in Section 8.2(b).
(bj) "Revised Buildout Schedule" is defined in Section 6.2(b).
(bk) "Rules" is defined in Section 21.8.
(bl) "SeaChange Compliance Date" is defined in Section 5.4.
(bm) "SeaChange System" is defined in Section 5.4.
(bn) "Second Commencement Notice" is defined in Section 5.2.
(bo) "Service Interruption Credit" is defined in Section 12.1.
(bp) "Service Interruption" is defined in Section 21.1.
(bq) "Sixth Floor Space Plans" is defined in Section 6.2.
(br) "Sixth Floor Space" is defined in Section 6.2.
(bs) "Sublease" is defined in Section 6.2.
(bt) "Term" is defined in Article 7.
(bu) "Third Party" is defined in Section 20.
(bv) "Transmission Service Interruption" is defined in Section 12.1.
(bw) "TVN" is defined in Article I.
46
<PAGE>
(bx) "TVN Default Notice" is defined in Section 9.2.
(by) "TVN Default" is defined in Section 9.2.
(bz) "TVN Improvements" is defined in Section 6.2.
(ca) "Upgrade Implementation Date" is defined in Section 5.4.
(cb) "Year 2000 Compliant" is defined in Section 14.2(f).
(cc) "1997 Arrearages" is defined in Section 2.3.
(cd) "1998 Arrearages" is defined in Section 2.4.
(ce) "1999 Arrearages" is defined in Section 2.5.
IN WITNESS WHEREOF, this Agreement has been executed as of the date first
above written.
4MC-BURBANK, INC.,
a Delaware corporation
By: /s/ John H. Donlon
---------------------------------
Its: Vice President
--------------------------------
TVN ENTERTAINMENT CORPORATION,
a Delaware corporation
By: /s/ Anthony Fields
---------------------------------
Its: Senior Executive Vice President
--------------------------------
The undersigned shall cause 4MC, its wholly owned subsidiary, to perform all of
4MC's obligations under
47
<PAGE>
this Agreement.
FOUR MEDIA COMPANY, a Delaware corporation
By: /s/ Christopher M.R. Phillips
------------------------------------
Its: Executive Vice President and Chief
-----------------------------------
Financial Officer
-----------------------------------
48
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EXHIBIT 10.13
[TVN ENTERTAINMENT CORPORATION LETTERHEAD]
November 24, 1997
David Sears Personal & Confidential
704 Magnolia Avenue
Pasadena, CA 91106 Via Fax: (323) 964-9446
Dear David:
We are very pleased that you have agreed to join our Sales and Marketing
department, to head up affiliate sales and marketing for DCTV. This position is
essential to our continued growth, so you will be an important and valued member
of our TVN team.
Summarized below are the terms agreed upon for your employment by TVN
Entertainment Corp:
1. You will be employed on a full time basis as a Senior Vice President,
Affiliate Sales and Marketing, reporting to me as President of TVN.
2. Your duties will include those usually attendant to a position involving
national affiliate sales and relations, and such other duties consistent
with your position as we may assign you from time-to-time. Your employment
will begin no later than Monday, December 8, 1997, and will continue
thereafter for a two (2) year term, unless terminated earlier by TVN for
cause. TVN will have the option to renew this agreement for an additional
two (2) year term by written notice exercising such option, sent to you at
least sixty (60) days prior to the expiration of the initial term.
3. You will be paid based on an annual salary of $170,000.00 (Annual Salary),
in accordance with TVN's payroll policies (currently bi-monthly). You will
receive a $25,000 bonus after you have signed this Agreement and commenced
your employment (Signing Bonus), and a $45,000 guaranteed bonus payable
promptly after TVN's March 31, 1998 fiscal year-end (Guaranteed Bonus). You
will receive an annual bonus equal to fifty percent (50%) of your Annual
Salary (Annual Bonus), if we attain the annual affiliate and subscriber
milestones in our DCTV Business Plan. These Plan milestones are for each
calendar year will be payable promptly after each March 31 fiscal year-end,
when the applicable milestone figures have been compiled by TVN's Finance
Department. You will be reimbursed for reasonable out-of-pocket expenses
incurred by you on behalf of TVN, upon presentation of appropriate
documentation and in accordance with TVN's expense reimbursement policies.
<PAGE>
David Sears
November 24, 1997
Page -2-
4. You will be granted a stock option, which shall be, to the extent permitted
under the applicable rules of Section 422(d) of the Internal Revenue Code
of 1986 (IRC), as amended, an "incentive stock option" (as defined in
Section 422 of the IRC), to purchase a total of 50,000 shares of TVN Common
Stock, with a per share exercise price as determined by TVN's Board of
Directors, after receiving information from our ouTVNde auditors, Coopers &
Lybrand. This option shall be exercisable for a term of ten (10) years (or
shorter upon any termination of your employment as provide for herein other
than for "cause") and shall vest at the rate of 20% of the shares
originally subject to the option one year from the commencement date of
your employment, and one-sixtieth (1/60th) of the shares originally subject
to the option each month thereafter, conditioned upon your continued
employment with TVN as of each vesting date. This option grant will be
subject to the terms, definitions and provisions of TVN's Stock Option Plan
and the standard form Stock Option Agreement which will be entered into by
you and TVN, both of which will be provided to you upon signing this letter
agreement.
5. Subject to meeting eligibility requirements, you will be included in TVN's
employee benefit plans then available to other employees at your level.
Currently, we offer a health care plan that has a first complete calendar
month waiting period for eligibility. It also has certain qualification
requirements, including those applicable to pre-existing medical
conditions, all as described in the plan, a copy of which will be provided
to you. You will be entitled to a total of 15 days per year of paid
vacation, for use at your discretion upon reasonable advance coordination
with me.
6. You acknowledge and agree that TVN shall own, in perpetuity and throughout
the universe, all creative and ownership rights in and to all materials
created, written, produced or worked on by you, or under your direction,
including, without limitation, all affiliate sales, marketing and
promotional materials created by you or under your direction, and all
property rights of any kind therein emanating from your work. You hereby
assign to TVN all such creative materials, and the copyright, publishing,
and other enumerated and related rights, which TVN shall be entitled to own
and register, as it sees fit, in TVN's name and for its sole benefit.
7. Upon any termination of your employment other than for "cause" as defined
below, TVN's sole obligations to you shall be to pay you (i) any unpaid
portion of the agreed Annual Salary for time worked prior to termination,
(ii) any unpaid Annual Bonus due, for a full year's work and with annual
milestones attained, and (iii) unpaid reimbursable expenses properly
incurred and documented prior to the date of such termination. In the event
of your termination by TVN for "cause", you shall be entitled only to
payment for items 7(i) and 7(iii) above, and the
<PAGE>
David Sears
November 24, 1997
Page -3-
exercise of the option shares which have fully vested as of the date of
such termination, subject to any damage caused to TVN or as a result of the
conduct giving rise to such termination for cause by TVN. Upon any
termination of your employment, including for cause by TVN, you shall (a)
return to TVN all materials, including all work in progress, work papers,
computer discs and files, information and documents created or worked on by
you for TVN, (b) provide a final report, if requested on the status of any
work in progress or remaining to be done, (c) continue to comply with your
separately documented non-disclosure and confidentiality obligations. For
purposes of this agreement, "cause" is defined as (i) an act of dishonesty
in connection with your duties and responsibilities as an employee and
which either causes substantial harm to TVN or results in your substantial
personal enrichment (ii) conviction of a felony, (iii) a willful act which
constitutes gross misconduct or which results in material injury to TVN, or
(iv) continued, substantial failure to perform your employment duties after
you have received one or more written demands for performance which set
forth the factual basis for the determination that you have substantially
failed to perform your duties, and you have had a reasonable time period in
which to cure defaults that are capable of being cured by subsequent
action. Termination for cause shall be effective upon delivery to you of a
notice stating that you have engaged in any of the above described "for
cause" conduct, specifying the particulars thereof, and that you have not
timely cured such defaults.
8. This contains our entire agreement for your employment by TVN; all prior
discussions, conversations and/or negotiations are merged herein; no
representations have been made to you by TVN or by any agent or
representative of TVN, or by you to TVN, other than those set forth herein
and in your employment application; and no agreements have been entered
into, other than those expressly described or set forth herein. The terms
of this employment agreement may not be modified or amended except by a
document signed both by you and on behalf of TVN. The laws of the State of
California applicable to agreements which are to be performed wholly within
such state shall govern this agreement, including its interpretation,
construction, performance and enforcement. All claims, disputes or issues
relating to your employment, including your hiring, work performance,
bonuses, and/or termination for any reason, shall be resolved by
arbitration in Burbank, California under the Commercial Arbitration Rules
of the American Arbitration Association then in effect. Accordingly, each
party hereby waives any right to a trial by jury of any dispute between you
and TVN, and/or its employees, officers, directors and agents .
9. Since you will have access to TVN confidential information during the
course of performing your duties, you are asked to sign a TVN
Confidentiality and Non-Disclosure Agreement, a copy of which is attached
hereto.
<PAGE>
David Sears
November 24, 1997
Page -4-
All of us at TVN look forward to working with you. Welcome aboard!
Sincerely,
/s/ James B. Ramo
James B. Ramo
JR:cd
Attachments
ACKNOWLEDGED AND AGREED:
I acknowledge and agree to the foregoing terms of my employment by TVN, and the
provisions of the attached TVN Confidentiality and Non-Disclosure Agreement,
both of which I have signed.
/s/ David Sears 11/24/97, 1997
- ------------------------------- --------
David Sears Date Signed
<PAGE>
provided, you will receive a lump sum payment for all Annual Salary and any
Guaranteed Annual Bonus payable during the period prior to the eighteenth
month, within thirty (30) days of the effective date of such
termination](still applicable?), (iii) unpaid auto allowance and
reimbursable expenses, if any, properly incurred and documented prior to
the date of such termination; and (iv) auto allowance for the remaining
Term.
15. In the event of your termination by TVN for "cause", you shall be entitled
only to payment for items 14(i) and 14(iii) above, and the exercise of your
TVN option shares which have fully vested as of the date of such
termination, subject to offset for any damage caused to TVN or as a result
of the conduct giving rise to such termination for cause. Upon any
termination of your employment, whether with or without cause, you shall
(a) return to TVN all of its materials in your possession or under your
control, including all work in progress, work papers, computer discs and
files, information and documents created or worked on by you for TVN, (b)
provide a final report, if requested on the status of any work in progress
or remaining to be done, (c) continue to comply with your separately
documented non-disclosure and confidentiality obligations. For purposes of
this agreement, "cause" is defined as (i) an act of dishonesty in
connection with your duties and responsibilities as an employee and which
either causes substantial harm to TVN, or results in your substantial
personal enrichment (ii) conviction of a felony, (iii) a material violation
of the conflict of interest provisions of paragraph 12 hereof, (iv) a
willful act which constitutes gross misconduct and which results in
material injury to TVN, or (v) continued, substantial and willful failure
to perform your employment duties after you have received one or more
written notices or demands for performance which set forth the factual
basis for the determination that you have substantially failed to perform
your duties, and you have had a reasonable time period in which to cure
such defaults as are capable of being cured by subsequent curative action.
Termination for cause shall be effective upon delivery to you of a notice
from TVN's CEO or Board of Directors stating that you have engaged in any
of the above described "for cause" conduct and specifying the particulars
thereof, and that you have not timely cured such defaults.
16. This contains our entire agreement for your employment by TVN; all prior
discussions, conversations and/or negotiations are merged herein; no
representations have been made to you by TVN, or by any agent or
representative of either, or by you to TVN, other than those set forth
herein and in your employment application; and no agreements have been
entered into, other than those expressly set forth herein. The terms of
this employment agreement may not be modified or amended except by a
document signed both by you and on behalf of TVN. Any mutually executed fax
copy shall be deemed an original, and may be used by either party as an
original agreement. The laws of the State of California applicable to
agreements which are to be performed wholly within such state shall govern
this agreement, including its interpretation, construction, performance and
enforcement.
17. All claims, disputes or issues relating to your employment, including your
hiring, work, performance, compensation, bonuses, stock options, benefits,
and/or termination for any reason, or based upon a claim of discrimination
of any kind (each " a dispute" herein), shall be resolved initially by non-
binding mediation efforts conducted by the parties, with the aid of an
independent impartial mediation service, if mutually desired, to be paid
for equally by the parties. If such mediation efforts are unsuccessful in
resolving each such dispute in a mutually acceptable manner, or if either
party not wish to participate in efforts at mediation,
<PAGE>
the dispute(s) shall be finally resolved solely by binding arbitration in
Burbank, California under the Commercial Arbitration Rules of the American
Arbitration Association then in effect. Accordingly, each party hereby
waives any right to a trial by jury of any dispute between you and TVN,
and/or their respective employees, officers, directors and agents. The
prevailing party in any such arbitration, as determined by the
arbitrator(s), shall be entitled to his or its reasonable attorney's fees
incurred in connection with, and the costs of, such arbitration proceeding,
including the costs for the arbitrator(s).
18. Since you will continue to have access to TVN's confidential information
during the course of performing your duties, as a material condition of
your continuing employment by TVN, you agree to sign the Confidentiality
and Non-Disclosure Agreement which is attached hereto.
We sincerely appreciate all of your prior work for TVN, and we're delighted that
you have agreed to take on this new, very important position.
Sincerely,
Stu Levin
for TVN Entertainment Corp.
Attachments
ACCEPTED AND AGREED:
The foregoing offer is accepted. I agree to the terms and conditions of my
employment by TVN contained therein and the provisions of the attached TVN
Confidentiality and Non-Disclosure Agreement, both of which I have signed after
obtaining advice from my legal counsel.
________________________________
Greg Pasetta
SL/kf
<PAGE>
EXHIBIT 23.1
Report of Independent Accountants
We hereby consent to the use in this Registration Statement on Form S-4 of
TVN Entertainment Corporation (the "Company") of our report dated May 12, 1999
relating to the financial statements of the Company, which appear in such
Registration Statement. We also consent to the references to us under the
heading "Expert" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
Century City, California
December 6, 1999
