<PAGE>
As filed with the Securities and Exchange Commission on February 7, 2000
Registration No. 333-78957
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------
Amendment No. 3
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)
--------------
<TABLE>
<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. [_]
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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. The
prospectus for the exchange offer follows immediately after this explanatory
note. Following the exchange offer prospectus are the form of alternative pages
for the market-making prospectus.
<PAGE>
Subject to completion, dated February 7, 2000
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 , 2000.
<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
</TABLE>
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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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<C> <S>
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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<C> <S>
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
<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 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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<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 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.
</TABLE>
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 8 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 8
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
8 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
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<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.
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 45.4% of the voting capital stock on an as-converted,
diluted basis including currently outstanding options and warrants exercisable
for voting capital stock.
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<PAGE>
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 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
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<PAGE>
. 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
. 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
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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 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.
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<PAGE>
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 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.
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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."
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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>
33
<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.
34
<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.
35
<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
36
<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.
37
<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 $9.6 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
38
<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
39
<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>
40
<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,
41
<PAGE>
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 $638,000 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
$989,000 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
$5.5 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
8 months. There can be no assurance that we will not require additional capital
sooner than anticipated. We are making efforts to reduce expenses and may take
steps to raise additional capital in order to allow us to fund our operating
deficits for a longer period. We are unable, however, 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
To date, we have not experienced any disruption of business or key systems
as a result of year 2000 problems. Similarly, we have not been informed of any
year 2000 problems faced by our key suppliers, our satellite transmission
service provider, Four Media Company, our satellite provider, PanAm Sat
Corporation, or our cable operator affiliates relating to their products or
services. It is possible, however, that we, our customers or service providers
may encounter year 2000 problems later in this year. If such problems were to
arise, we could incur substantial costs or the interruption in or a failure of
certain normal business activities or operations, which could hurt our
business.
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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.
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.
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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 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.
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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.
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
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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
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.
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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.
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
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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.
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.
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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 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
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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 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
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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 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.
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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 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
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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.
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
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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 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.
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<PAGE>
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
On December 13, 1999, we were served with a lawsuit filed in California
state court by TV/COM International, Inc., a company with which we entered into
memoranda of understanding (MOU) concerning (i) it obtaining a DCII technology
license from General Instrument and (ii) its obligation to utilize such license
for the manufacture of DCII compatible television set-top cable boxes for us,
once TV/COM demonstrated its ability to do so in quantity and to our
specifications. Pursuant to this MOU, TV/COM provided us with a non-refundable
advance of $1.0 million and agreed to use its good faith best efforts to
provide, or have its parent company provide, a $3.0 million bridge loan to us.
This bridge loan was not provided, nor did TV/COM ever obtain the technology
license as required, as a result of which it had no ability to manufacture the
set-top boxes, in quantity or at all. TV/COM's lawsuit alleges breach of
contract, fraud and negligent misrepresentation, along with several related
causes of action. It asks the court to award specified damages of $1.0 Million
for the alleged non-repayment of its advance to us, an additional $23,950,000
for alleged lost profits and $100,000 of unspecified damages, as well as
punitive and other unspecified damages and costs. We have received an extension
of time until February 15, 2000 to move, answer or otherwise plead to the
complaint. We believe that the claims in the lawsuit are not meritorious and we
have retained counsel to provide a vigorous defense and assert our claims
against TV/COM and related parties.
In addition, we have been party to other 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
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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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
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.
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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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<PAGE>
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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<PAGE>
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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"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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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 $54,019, including principal and interest accrued
through September 30, 1999; and (ii) S. Robert Levine in the amount of $968,457
including principal and interest accrued through September 30, 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 September 30, 1999, the outstanding amount of such advances, net of
repayments, aggregated $175,000. 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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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.
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 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
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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)............................ 827,897 938,398 8.6
Arthur Fields(3).............................. 395,833 397,307 3.9
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)........................ 1,675,063 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 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.
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(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 727,797 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 1,574,963 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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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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(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 September 30, 1999, we had $306.0 million of indebtedness
outstanding including the old notes but excluding contingent notes payable of
$29.5 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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<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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 the Company's other operating
segments and 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
F-25
<PAGE>
TVN ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share data)
merchandise such as jewelry, watches and precious metal 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(1)............ 22,147 23,102 22,836 11,319 9,694
Home shopping service.. -- -- 3,131 -- 9,757
Media time sales....... -- -- -- -- 6,001
Music marketing
services.............. -- -- -- -- 215
Intersegment
eliminations(1)....... (14,904) (15,228) (14,256) (7,128) (7,995)
-------- -------- -------- -------- --------
Total revenue........ $ 33,380 $ 30,545 $ 39,812 $ 14,118 $ 34,185
Operating income/(loss):
Home satellite dish
service............... $(12,768) $(10,194) $(12,749) $ (6,136) $ (7,446)
Digital cable service.. (4,860) (14,343) (23,396) (11,762) (12,158)
Transponder
service(1)............ 21,138 21,970 21,364 10,456 9,428
Home shopping service.. -- -- (4) -- (2,928)
Media time sales....... -- -- -- -- (426)
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>
(1) Includes charges to the Company's other operating segments for the use of
transponder time.
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.
Pending Litigation
On December 13, 1999, the Company was served with a lawsuit filed in
California state court by TV/COM International, Inc., a company with which we
entered into memoranda of understanding (MOU) concerning (i) it obtaining a
Digicipher II encryption technology license from General Instrument and (ii)
its obligation to utilize such license for the manufacture of Digicipher II
encryption compatible television set-top cable boxes for us, once TV/COM
demonstrated its ability to do so in quantity and to our specifications. The
lawsuit alleges breach of contract, fraud and negligent misrepresentation along
with several related causes of action and asks the court to award specified
damages of $25,050,000 as well as other unspecified damages and costs. We have
received an extension of time until February 15, 2000 to file our answer to the
lawsuit. We have also scheduled meetings with TV/COM in an attempt to negotiate
a settlement of the lawsuit. We believe that the claims in the lawsuit are not
meritorious and we have retained counsel to provide a vigorous defense.
F-27
<PAGE>
[ALTERNATE COVER PAGE]
Subject to completion, dated February 7, 2000
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 & Company Incorporated and
Dean Witter Reynolds Incorporated and together with Morgan Stanley, 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 new notes because of the equity ownership of
our company by certain private investment partnerships which are affiliates of
Morgan Stanley Dean Witter. As of Novermber 15, 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 45.4% 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 , 2000.
<PAGE>
Table of contents [Alternate table of contents]
<TABLE>
<CAPTION>
Page
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<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>
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Page
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<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
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[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
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[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 new
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 notes 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 are 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
We did not receive any cash proceeds from the issuance of the new notes.
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 45.4% of the voting capital stock on
an as-converted, diluted basis including currently outstanding options and
warrants exercisable for voting capital stock as of November 15, 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 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
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[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
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[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
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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.
10.14* 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. 3 to Registration Statement to be signed on our
behalf by the undersigned, thereunto duly authorized, in the City of Burbank,
State of California on February 7, 2000.
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. 3 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 February 7, 2000
____________________________________ of Directors and Chief
Stuart Z. Levin Executive Officer
(Principal Executive
Officer)
Arthur Fields* Senior Executive Vice February 7, 2000
____________________________________ President, General
Arthur Fields Counsel, Chief
Administrative
Officer, Director and
Secretary
/s/ John McWilliams Senior Vice President, February 7, 2000
____________________________________ Finance (Principal
John McWilliams Financial and
Accounting Officer)
S. Robert Levine* Director February 7, 2000
____________________________________
S. Robert Levine, M.D.
Stephen R. Munger* Director February 7, 2000
____________________________________
Stephen R. Munger
Martin A. Pasetta* Director February 7, 2000
____________________________________
Martin A. Pasetta
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
David R. Powers* Director February 7, 2000
____________________________________
David R. Powers
Michael J. Ritter* Director February 7, 2000
____________________________________
Michael J. Ritter
Jerome H. Turk* Director February 7, 2000
____________________________________
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.
10.14* 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 5.1
[IRELL & MANELLA LLP LETTERHEAD]
February 7, 2000
TVN Entertainment Corporation
2901 Alameda Avenue
Seventh Floor
Burbank, California 91505
Re: New 14% Senior Notes Due 2008
Covered by Registration Statement on Form S-4
Ladies and Gentlemen:
We have acted as bond counsel to TVN Entertainment Corporation, a Delaware
corporation (the "Company"), in connection with the filing by the Company with
the Securities and Exchange Commission (the "Commission") of a registration
statement on Form S-4 (the "Registration Statement") under the Securities Act of
1933, as amended (the "Securities Act"). The Registration Statement relates to
the proposed issuance by the Company of $200 million in aggregate principal
amount of its 14% Senior Notes due 2008 (the "New Notes") in connection with the
proposed exchange of $1,000 principal amount of the New Notes for each $1,000
principal amount of its outstanding 14% Senior Notes due 2008 (the "Old Notes.
The Old Notes are, and the New Notes will upon issuance be, covered by that
certain indenture dated July 29, 1998 (the "Indenture") by and between the
Company and The Bank of New York, as trustee (the "Trustee"). This opinion
letter is delivered in accordance with the requirements of Item 601(b)(5) of
Regulation S-K under the Securities Act.
In connection with this opinion, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of: (i) the Registration
Statement, in the form filed with the Commission; (ii) the charter documents of
the Company, as currently in effect; (iii) the Indenture; (iv) the form of the
New Notes; and (v) resolutions of the Board of Directors of the Company relating
to, among other things, the issuance and exchange of the New Notes for the Old
Notes and the filing of the Registration Statement. We also have examined such
other documents as we have deemed necessary or appropriate as a basis for the
opinions set forth below.
In our examination, we have assumed the legal capacity of all natural
persons, the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified or photostatic copies, and the
authenticity of the originals of such latter documents. As to certain facts
material to this opinion, we have relied without independent verification upon
<PAGE>
TVN Entertainment Corporation
February 7, 2000
Page 2
oral or written statements and representations of officers and other
representatives of the Company and others.
Based upon the foregoing, and subject to the assumptions and limitations
set forth herein, we are of the opinion that, when (i) the Registration
Statement, as finally amended (including all necessary post-effective
amendments, if any), shall have become effective under the Securities Act and
(ii) the New Notes are duly executed, attested, issued and delivered by duly
authorized officers of the Company, and authenticated by the Trustee, all in
accordance with the terms of the Indenture and the prospectus contained in the
Registration Statement, against surrender and cancellation of a like principal
amount of Old Notes, the New Notes issued by the Company will be legally issued,
and the New Notes will constitute valid and binding obligations of the Company,
enforceable against the Company in accordance with their terms, except to the
extent that enforcement thereof may be limited by (i) bankruptcy, insolvency,
reorganization, arrangement, moratorium, fraudulent conveyance and other laws
relating to or affecting creditors' rights generally and (ii) general principles
of equity, whether such enforcement is considered in a proceeding in equity or
at law.
We have relied on the Form T-1 and the certificates delivered by the
Trustee as to the qualifications, authority, legal power and eligibility of the
Trustee to act as trustee under the Indenture and to perform in accordance with
the terms of the Indenture its duties thereunder.
This opinion is given in respect of the Indenture and the New Notes only,
and we express no opinion as to the legality, validity or binding effect of any
related document, instrument or agreement or any other matter beyond the matters
expressly set forth herein.
This opinion may not be used or relied upon and may not be otherwise
disclosed, quoted, filed with a governmental agency or otherwise referred to
without our prior written consent. However, we consent to the filing of this
opinion as an exhibit to the Registration Statement and to the use of our name
under the caption "Legal Matters" in the Registration Statement and prospectus
and any amendments thereto. In giving such consent, we do not concede that we
are experts within the meaning of the Securities Act or the rules and
regulations thereunder or that this consent is required by Section 7 of the
Securities Act.
Very truly yours,
IRELL & MANELLA LLP
/s/ Irell & Manella LLP
MSJ/JCK/KI
<PAGE>
EXHIBIT 23.1
Consent 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 "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
Century City, California
February 2, 2000
