<PAGE>
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________.
Commission file number: 333-78957
--------------------------
TVN ENTERTAINMENT CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 95-4138203
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2901 West Alameda Avenue, Seventh Floor
Burbank, California 91505
(Address of principal executive offices, including zip code)
(818) 526-5000
(Registrant's telephone number, including area code)
----------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [_]
There were 173,350 shares of the Company's Common Stock, par value
$.001, outstanding on June 30, 2000.
===============================================================================
<PAGE>
TVN ENTERTAINMENT CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
------- --------------------- --------
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of June 30,2000 (unaudited)
and March 31, 2000............................................................ 3
Consolidated Statements of Operations for the Three
Months Ended June 30, 2000 and 1999 (unaudited) .............................. 4
Consolidated Statements of Cash Flows for the Three
Months Ended June 30, 2000 and 1999 (unaudited) .............................. 5
Notes to Condensed Consolidated Financial Statements............................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................... 32
PART II. OTHER INFORMATION
-------- -----------------
Item 1. Legal Proceedings.................................................................. 33
Item 6. Exhibits and Reports on Form 8-K................................................... 34
Signatures ................................................................................... 35
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
TVN Entertainment Corporation
Consolidated Balance Sheets
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
June 30,2000 March 31, 2000
------------ --------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 11,743 $ 26,492
Restricted short-term investments 22,477 22,128
Trade and other accounts receivable, less allowance
for doubtful accounts of $371 and $184 at
June 30, 2000 and March 31, 2000, respectively 8,974 5,971
Prepaid expenses and other current assets 1,679 1,554
Net assets of PSN 206 951
--------- ---------
Total current assets 45,079 57,096
Restricted cash 1,981 1,981
Restricted investments 11,387 11,247
Property and equipment, net 75,402 90,395
Intangible assets, net 10,434 11,224
Other assets, net 5,471 6,550
--------- ---------
Total assets $ 149,754 $ 178,493
========= =========
Liabilities, Redeemable Convertible Preferred Stock and
Stockholders' Deficit
Current liabilities:
Accounts payable $ 11,897 $ 7,341
Accrued liabilities 12,280 14,298
License fees payable 10,643 10,305
Deferred revenue and advances 2,207 2,787
Accrued interest 12,970 6,783
Current portion of capitalized leases 4,157 11,276
Current portion of notes payable 7,899 7,848
--------- ---------
Total current liabilities 62,053 60,638
Capitalized leases 81,874 89,667
Notes payable 17,637 17,972
Senior notes due 2008 156,651 156,358
--------- ---------
Total liabilities 318,215 324,635
Commitments and contingencies
Series B redeemable convertible preferred stock;
liquidation value: $54,414 53,544 53,445
Stockholders' deficit:
Series A convertible preferred stock; liquidation value: $18,750 8 8
Common stock -- --
Additional paid-in-capital 23,039 23,138
Note receivable from stockholder (69) (69)
Accumulated deficit (244,983) (222,664)
--------- ---------
Total stockholders' deficit (222,005) (199,587)
--------- ---------
Total liabilities and stockholders' deficit $ 149,754 $ 178,493
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
TVN Entertainment Corporation
Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
The three months ended June 30,
----------------------------------------
2000 1999
----------------------------------------
<S> <C> <C>
Revenue $ 11,295 $ 5,841
Operating expenses:
Cost of revenue (exclusive of depreciation
shown separately below) 10,009 6,011
Selling 2,196 1,848
General and administrative 5,253 1,941
Depreciation and amortization 3,033 3,244
Amortization of intangible assets 790 238
------------ ------------
Total operating expenses 21,281 13,282
------------ ------------
Loss from operations (9,986) (7,441)
Interest expense 9,529 10,749
Interest income (782) (1,563)
Loss from equity investments 2,080 -
------------ ------------
Loss from continuing operations (20,813) (16,627)
Loss from discontinued operations 440 2,095
Estimated loss on disposal of discontinued operations 1,068 -
------------ ------------
Net loss (22,321) (18,722)
Accretion of Series B redeemable convertible
preferred stock (99) (99)
------------ ------------
Net loss applicable to common stockholders $ (22,420) $ (18,821)
============ ============
Basic and diluted net loss per share
applicable to common stockholders:
Net loss applicable to common stockholders from
continuing operations $ (120.63) $ (109.67)
Net loss applicable to common stockholders from
discontinued operations (8.70) (13.73)
------------ ------------
Net loss applicable to common stockholders $ (129.33) $ (123.40)
------------ ------------
Weighted average common shares 173,350 152,517
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
TVN Entertainment Corporation
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
The three months ended June 30,
----------------------------------
2000 1999
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (22,321) $ (18,722)
Adjustments to reconcile net loss to net cash used for operating activities:
Net loss from discontinued operations 1,508 2,095
Depreciation and amortization 3,033 3,244
Amortization of intangible assets 790 238
Provision for doubtful accounts (5) (89)
Gain on disposal of property, plant and equipment 250
Accretion of note discount 548 354
Amortization of debt issuance costs 145 192
Loss on equity investments 2,080
Changes in assets and liabilities:
Accounts receivable (3,010) (1,369)
Prepaid expenses and other current assets (35) (794)
Other assets 42 626
Accounts payable 3,457 1,427
Accrued liabilities (1,175) (1,872)
License fees payable 338 35
Deferred revenue and advances (580) 62
Accrued interest 6,189 5,861
------------ -------------
Net cash used for continuing operations (8,746) (8,712)
------------ -------------
Net cash used for discontinued operations (1,141) (2,033)
------------ -------------
(9,887) (10,745)
------------ -------------
Cash flows from investing activities:
Restricted short-term investments (490) (875)
Restricted cash 1 (1,016)
Investment in Chromazone, LLC, net of cash acquired (1,150) (165)
Purchases of property and equipment (681) (559)
------------ -------------
Net cash used for continuing operations (2,320) (2,615)
Net cash used for discontinued operations (627) -
------------ -------------
(2,947) (2,615)
------------ -------------
Cash flows from financing activities:
Repayments of capitalized leases (1,376) (1,667)
Repayments of notes payable (539) (3,662)
------------ -------------
Net cash used for financing activities (1,915) (5,329)
Net decrease in cash and cash equivalents (14,749) (18,689)
Cash and cash equivalents at the beginning of period 26,492 84,343
------------ -------------
Cash and cash equivalents at the end of period $ 11,743 $ 65,654
============ =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
TVN Entertainment Corporation
Notes to Consolidated Financial Statements
(In thousands, except share data)
(Unaudited)
1. Basis of Presentation
The financial statements are unaudited, other than the balance sheet at
March 31, 2000, and reflect all adjustments (consisting only of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of the Company's financial condition, operating results and cash
flows for the interim periods.
Certain items shown in the prior financial statements have been
reclassified to conform with the presentation of the current period.
Since inception, the Company has incurred operating losses. The Company has
a working capital deficit and a total stockholders' deficit of approximately
$17.0 million and $222.0 million, respectively at June 30, 2000. Management
intends to fund future anticipated losses 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 its new Digital Content Express service, a system to manage and ship digital
content to multiple distribution points worldwide. Digital Content Express will
include video on demand service, digital content preparation service and content
storage and transmission.
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 relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that might
result in the Company being unable to continue as a going concern.
These financial statements should be read in conjunction with the Company's
audited financial statements for the year ended March 31, 2000 and the notes
thereto.
2. Commitments and Contingencies
Leases
In April 2000, the Company amended a capital lease agreement by reducing
the number of primary C-Band transponders leased from eight to two. In June
2000, the Company amended another lease agreement reducing the number of primary
C-Band transponders from five to three, adding one reserve C-Band transponder
and adding one Ku-Band transponder. The effect of this transaction was to reduce
fixed assets and capitalized leases by a non-cash reduction of $14.1 million.
<PAGE>
Contingencies
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 included notes payable to the former general
partners and certain Company shareholders totaling $16.5 million and $1.1
million, respectively. Interest accrues on these obligations at prime plus 1%
and totaled $12.7 million and $921, respectively, at June 30, 2000. Repayment of
these loans and related accrued interest (collectively the "Contingent Debt")
will be paid 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 of its obligations to TVN's former general partners and will not
subordinate these obligations to other debt.
Because payment of these obligations is dependent upon available cash flow,
as defined, this debt represents contingent consideration related to the
acquisition of net assets. The Company has had negative operating cash flows and
payment of these obligations does not appear to be probable at this time.
Accordingly, these obligations 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 obligations when the
contingency is resolved.
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 concerning (i) TV/COM obtaining a
Digicipher II technology license from General Instrument and (ii) its obligation
to utilize such license for the manufacture of Digicipher II compatible
television set-top cable boxes for us, once it demonstrated its ability to do so
in quantity and to our specifications. The lawsuit alleges breach of contract,
fraud, negligent misrepresentation and related causes of action and asks the
court to award specific damages in excess of $25 million, as well as other
unspecified damages and costs. We filed a demurrer which questioned the legal
sufficiency of the complaint. The court granted our demurrer and gave TV/Com
leave to file an amended complaint which they did. We demurred again and the
court denied this demurrer. We filed our answer to the amended complaint and
also filed our cross-complaint against TV/Com. We are currently meeting with
TV/COM in an attempt to negotiate a settlement of the lawsuit. We believe that
plaintiff's claims in the lawsuit are not meritorious and we have retained
counsel to provide a vigorous defense and to pursue our cross-complaint.
In addition, the Company has been party to other legal and administrative
proceedings related 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.
<PAGE>
TVN Entertainment Corporation
Notes to Consolidated Financial Statements--(Continued)
(In thousands, except share data)
(Unaudited)
3. 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 Digital Cable Television
("DCTV") service, a turnkey digital delivery system with programming content,
including up to 32 channels of pay-per-view movies and events, and support
services which enables cable operators to expand their existing channel capacity
and PPV Feeds service, a pay-per-view programming service without support
services. The satellite transmission operating segment markets and sells
transponder capacity and uplinking services to the Company's other operating
segments and to third parties. 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 plans to market and sell entertainment products such as music, movies
and games. Panda Shopping Network and the Company's home satellite dish service
have been classified as discontinued operations and are not included in the
revenue and operating losses for the Company's operating segments as of June 30,
2000 and 1999.
<PAGE>
TVN Entertainment Corporation
Notes to Consolidated Financial Statements--(Continued)
(In thousands, except share data)
(Unaudited)
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). The chief operating decision maker does not use asset
information.
Revenue and operating losses for the Company's operating segments are as follows
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended
June 30, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
Revenue:
Digital cable services $ 4,347 $ 4,756
Transponder services (1) 4,862 4,961
Media time sales 6,113 --
Music marketing services 159 --
Intersegment elimination (2) (4,186) (3,876)
----------- -----------
Total revenue $ 11,295 $ 5,841
=========== ===========
Operating loss:
Digital cable services $ (4,239) $ (5,851)
Transponder services (1) 2,228 4,308
Media time sales (1,409) --
Music marketing services (1,620) --
Intersegment elimination (2) (1,123) (2,416)
----------- -----------
Operating loss excluding depreciation and amortization (6,163) (3,959)
Depreciation and amortization (3,823) 3,482
----------- -----------
Operating loss $ (9,986) $ (7,441)
=========== ===========
</TABLE>
(1) Includes charges to the Company's other operating segments for the use of
transponder time.
(2) Included charges to PSN and the home satellite dish service for transponder
and media time which are included in loss from discontinued operations.
<PAGE>
TVN Entertainment Corporation
Notes to Consolidated Financial Statements--(Continued)
(In thousands, except share data)
(Unaudited)
5. Earnings Per Share
The following table sets forth the computation of basic and diluted net loss per
share applicable to common stockholders for the three months ended June 30, 2000
and 1999:
<TABLE>
<CAPTION>
Three Months Ended
June 30, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
Numerator:
Net loss from continuing operations $ (20,813) $ (16,627)
Loss from discontinued operations (1,508) (2,095)
Accretion of redeemable Series B preferred stock (99) (99)
------------- -------------
Net loss applicable to common stockholders $ (22,420) $ (18,821)
============= =============
Denominator:
Weighted average shares 173,350 152,517
============= =============
Basic and diluted net loss applicable to common stockholders
Continuing operations $ (120.63) $ (109.67)
Discontinued operations (8.70) (13.73)
------------- -------------
Basic and diluted net loss applicable to common stockholders $ (129.33) $ (123.40)
============= =============
</TABLE>
6. Income Taxes
As a result of net losses for the three months ended June 30, 2000 and 1999, 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 as of June 30,
2000 and 1999.
<PAGE>
TVN Entertainment Corporation
Notes to Consolidated Financial Statements--(Continued)
(In thousands, except share data)
(Unaudited)
7. Discontinued operations
In June 2000, the Company decided to cease operations of PSN and close the
segment. The Company has reflected the operations of PSN as a discontinued
operation.
At June 30, 2000 net assets of PSN consisted of the following:
Current assets $ 166
Property and equipment, net 40
--------
Total net assets $ 206
========
The Company has included in the financial statements the estimated loss of $768
for the wind down of operations for the three months ended June 30, 2000. The
loss from discontinued operations for this segment was $1.3 million for the
quarter ended June 30, 1999. Revenues were $3.5 million and $3.7 million for the
three months ended June 30, 2000 and 1999, respectively.
In July 2000, the Company decided to cease operations of the home satellite dish
service and close the segment. The Company has included in the financial
statements a loss from operations of $440 and an estimated loss on disposal of
$300 for the three months ended June 30, 2000. The loss from discontinued
operations for this segment was $795 for the three months ended June 30, 1999.
Revenues were $1.8 million and $3.8 million for the three months ended June 30,
2000 and 1999, respectively.
The Company has presented the operations of these segments as discontinued
operations for all periods presented.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In addition to the other information in this report, certain statements in
the following Management's Discussion and Analysis of Financial Condition and
Results of Operation (MD&A) are forward looking statements. When used in this
report, the word "expects," "anticipates," "estimates," and similar expressions
are intended to identify forward looking statements. Such statements are subject
to risks and uncertainties that could cause actual results to differ materially
from those projected. Such risks and uncertainties are set forth below under
"Factors Affecting Future Results." The following discussion should be read in
conjunction with the Consolidated Financial Statements and notes thereto
included elsewhere in this report.
Overview
Our business plan contemplates that a substantial portion of
future revenues will be generated by our Video-On-Demand business and our
Digital Content Express business. Video-on-Demand (VOD) is a subset of the
broader Content-on-Demand market, which includes products such as Subscription
Video-on-Demand, News-on-Demand and various syndication products. These products
all require content to be loaded onto geographically-dispersed servers, which
can then be accessed by the end-user customer. This service allows consumers to
view video content through their cable systems with full VCR functionality
(i.e., the ability to start, pause, rewind, fast-forward,
<PAGE>
etc., whenever they wish). Providing this service requires the ability to
distribute professional grade digital video content to cable head-ends and other
VOD operators in a highly secure manner, and to manage the real-time
distribution of this content as required by the customer. The distribution,
monitoring and management of such content are among our core competencies.
We are also currently in the process of re-positioning ourself for our
new Digital Content Express (DCX) business, whose primary goal is to be a
leading system for the delivery and management of digital content, including
Video-on-Demand. With our DCX Service, customers such as movie studios,
television and Internet programmers and other content originators and
distributors, will be able to send content to us in any format and have us
convert it to digital format for shipment by us anywhere in the world.
Our existing integrated, end-to-end content management and delivery
capabilities are sufficient to offer this service within the United States, but
providing global coverage will require additional satellite transmitter
capacity. Regardless of the geographic points of delivery, the Company's
sophisticated ADONISS Content Management System allows all content deliveries to
be remotely controlled, scheduled and managed from the Company's Burbank,
California Digital Network Operations Center. Content will remain within our
transmission system end-to-end, thereby facilitating content security and
reliability.
Our Video-On-Demand business and our Digital Content Express business
have not commercially launched and have generated no 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 Video-on-Demand and Digital Content Express businesses. We expect to
continue experiencing negative operating margins and EBITDA while our Video-on-
Demand and Digital Content Express businesses are being marketed to cable
systems and content originators and distributors. The continued roll out of our
Video-on-Demand and Digital Content Express businesses requires significant
capitalized lease payments for satellite transmitter capacity and operating
expenditures, in particular selling expenses, a large portion of which will be
expended before any revenue is generated. We have experienced negative operating
cash flows and significant losses as we have marketed our historical businesses.
These losses will likely continue until we can establish a customer base of
cable systems and content originators and distributors that will generate
revenue sufficient to cover our costs.
<PAGE>
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>
Three Months Ended
June 30,
--------------------------
2000 1999
-------- --------
<S> <C> <C>
Revenue 100.0% 100.0%
Operating expenses:
Cost of revenue (exclusive of
depreciation shown separately below) 88.6% 102.9%
Selling 19.4% 31.7%
General and administrative 46.5% 33.2%
Depreciation and amortization 26.9% 55.5%
Amortization of intangible assets 7.0% 4.1%
-------- --------
Total operating expenses 188.4% 227.4%
-------- --------
Loss from operations (88.4%) (127.4%)
Interest expense 84.4% 184.0%
Interest income (6.9%) (26.8%)
Loss on equity investments 18.4% 0.0%
-------- --------
Net loss from continuing operations (184.3%) (284.6%)
Loss from discontinued operations 3.8% 35.9%
Estimated loss on disposal 9.5% -
-------- --------
Net loss (197.6%) (320.5%)
======== ========
</TABLE>
Three Months Ended June 30, 2000 Compared with Three Months Ended
June 30, 1999
Revenue. Total revenue increased $5.5 million, or 93.4%, to $11.3 million
in the three months ended June 30, 2000 from $5.8 million in the three months
ended June 30, 1999. Revenue generated by our Digital Cable Television service
decreased $500,000 or 10.4% to $4.3 million in the three months ended June 30,
2000 from $4.8 million in the three months ended June 30 1999. The decrease was
primarily attributable to a $1.1 million decrease in Marquee Mix revenues offset
by increases in our DCTV service revenues. The increase in DCTV service revenues
is primarily attributable to an increase in the number cable operators carrying
the DCTV service and a corresponding increase in the number of subscribers to
the DCTV service that purchased programming from us in the three months ended
June 30, 2000. After intercompany eliminations, satellite transmission service
revenue decreased $400,000 or 36.4% to $700,000 in the three months ended June
30, 2000 from $1.1 million in the three months ended June 30, 1999. The decrease
is primarily attributable to revenue generated by sales of satellite transmitter
time totaling $325,000 to the Guthy Renker Television Network in the three
months ended June 30, 1999 that was not replaced by sales of satellite
transmitter time to other third parties since the acquisition of Guthy Renker
Television Network in July 1999. These decreases were offset by approximately
$6.1 million in media time sales generated by the GRTV Network and $159,000 in
other operating revenues generated by New Media Network for the three months
ended June 30, 2000. We had not purchased our interest and commenced operation
of these entities as of June 30, 1999.
Operating Expenses
<PAGE>
Cost of Revenue. Cost of revenue increased $4.0 million, or 66.7%, to
$10.0 million in the three months ended June 30, 2000 from $6.0 million in the
three months ended June 30, 1999 and, as a percentage of revenue, decreased to
88.6% in the three months ended June 30, 2000 from 102.9% in the three months
ended June 30, 1999. The increase, as a percentage of revenue, is primarily
attributable to the inclusion of the operations of GRTV Network in the three
months ended June 30, 2000. Cost of revenue for the GRTV Network totaled $4.5
million and approximately 73.8% of revenues generated by this business unit for
the three months ended June 30, 2000. We had not acquired our interest in GRTV
Network as of June 30, 1999.
Selling. Selling expenses increased $348,000, or 18.8%, to $2.2
million in the three months ended June 30, 2000 from $1.8 million in the three
months ended June 30, 1999 and, as a percentage of revenue, decreased to 19.4%
in the three months ended June 30, 2000 from 31.7% in the three months ended
June 30, 1999. The decrease as a percentage of revenue was partially
attributable to the GRTV Network as selling expenses for this business unit were
approximately 17.2% of its $6.1 million in revenues for the three months ended
June 30, 2000, as compared to 38.9% of the $4.8 million in revenues generated by
our Digital Cable Television services for the three months ended June 30, 1999.
We had not acquired our interest and commenced operation of the GRTV Network as
of June 30, 1999. Selling expenses for our Digital Cable Television services
decreased approximately 803,000, and as a percentage of the business units
revenue, decreased to 24.1% in the three months ended June 30, 2000 from 38.9%
of revenue in the three months ended June 30, 1999. The decrease as a percentage
of revenue is attributable to an overall decrease in marketing costs incurred by
the business unit and in particular, advertising agency fees, trade show costs
and payroll.
General and Administrative. General and administrative expenses
increased $3.3 million, or 170.6%, to $5.3 million in the three months ended
June 30, 2000 from $1.9 million in the three months ended June 30, 1999 and, as
a percentage of revenue, increased to 46.5 % in the three months ended June 30,
2000 from 33.2% in the three months ended June 30, 1999. The increase as a
percentage of revenue is primarily attributable to approximately $1.8 million in
general and administrative expenses incurred by New Media Network, which
generated only $159,000 in revenue. The balance of the increase is primarily due
to approximately $1.4 million in general and administrative expenses incurred by
the GRTV Network. We had not acquired our interest in New Media Network and GRTV
Network as of June 30, 1999.
Depreciation and Amortization. Depreciation and amortization decreased
$211,000, or 6.5%, to $3.0 million in the three months ended June 30, 2000 from
$3.2 million in the three months ended June 30, 1999. The decrease is primarily
attributable to the decrease in property and equipment resulting from the
amendment to our capitalized leases for satellite transmitters in the three
months ended June 30, 2000.
Amortization of intangible assets. Amortization of intangible assets
increased $552,000 or 231.9% to $790,000 in the three months ended June 30, 2000
from $238,000 in the three months ended June 30, 1999. The increase is
attributable to the acquisition of our interests in New Media Network and the
GRTV Network at the beginning of the second quarter of fiscal 2000.
Interest Expense/Interest Income. Interest expense decreased $1.2
million or 11.4%, to $9.5 million in the three months ended June 30, 2000 from
$10.7 million in the three months ended June 30, 1999. The decrease is
attributable to the redemption of $33.9 million in senior notes in October 1999.
Interest income decreased $781,000 to $782,000 in the three months ended June
30, 2000 from $1.6 million in the three months ended June 30, 1999. The decrease
is attributable to lower operating cash balances during the three months ended
June 30, 2000 as compared to the three months ended June 30, 1999.
Loss from equity investments. During the three months ended June 30,
2000, we recorded a loss from equity investments totaling $2.1 million which
represented our share of the losses of Chromazone, LLC, a limited liability
corporation in which we have a majority interest. Chromazone, LLC currently owns
a majority interest in Netsmart, Inc., a start-up company, that plans to offer a
wide range of customer oriented electronic commerce services including internet
access, browsing and hosting services for affinity and affiliate partners as
well as other consumer features.
Loss from discontinued operations. In June, we ceased operations of
the Panda Shopping Network ("PSN") and closed the division. We have reflected
the operations of PSN as a discontinued operation. Operating losses for PSN
totaled approximately $1.3 million for the three months ended June 30, 1999. In
July, we ceased operations of our home satellite dish operating segment and
closed the division. We have reflected the operations of the home satellite dish
operating segment as a discontinued operation and have recorded a loss from
operations of the segment totaling $440,000 and $795,000 for the three months
ended June 30, 2000 and 1999, respectively.
<PAGE>
Estimated loss on disposal of discontinued operations. We recorded an estimated
loss on disposal of PSN and the home satellite dish operating segment totaling
$768,000 and $300,000, respectively, for the three months ended June 30, 2000.
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 three months
ended June 30, 2000 or the three months ended June 30, 1999.
Liquidity and Capital Resources
The Company has been funded through a combination of equity, debt and
lease financing. As of June 30, 2000, the Company had current assets of $45.1
million, including $11.7 million of cash and cash equivalents and current
liabilities of $62.1 million, resulting in a working capital deficit of $17.0
million. The Company invests excess funds in short-term, interest bearing
investment grade securities until such funds are needed to fund the capital
expenditure and operating needs of the Company's business.
Since inception, we have incurred operating losses and as of June 30,
2000, have a total deficit of $222.0 million. Our cash on hand and amounts
expected to be available through financing arrangements may not be sufficient
for us to fund our operating deficits beyond September 2000. There can be no
assurance, moreover, that we will not require additional capital sooner than
anticipated. We are making efforts to reduce expenses and are currently engaged
in a coordinated mutual effort with our investment banker, Morgan Stanley Dean
Witter, to raise additional capital through a private placement of new
securities. Together, we are seeking new funding from potential strategic
partners and customers for the Company's Digital Content Express business, and
from financial entities such as venture capital funds and investment companies.
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. Our inability to obtain required
financing could significantly reduce the value of our 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.
Cash Used For Operating Activities
The Company's operating activities used $9.9 million and $10.7
million in the three months ended June 30, 2000 and 1999, respectively. Cash
used for operations in the three months ended June 30, 2000 is primarily
attributable to the net loss of $22.3 million and the effect of non-cash items
such as a $3.0 million increase in accounts receivable partially offset by the
$2.1 million loss on equity investments, depreciation and amortization and other
changes in working capital items such as accrued interest. Cash used for
operations in the three months ended June 30, 1999 is primarily due to the net
loss of $18.7 million partially offset by non-cash expenses, such as
depreciation and amortization, and other changes in working capital items such
as accrued interest. The Company expects to generate negative cash flows from
operating activities as we market and deploy our Digital Content Express
services.
Cash Used For Investing Activities
Cash used for investing activities was $2.9 million and $2.6 million
in the three months ended June 30, 2000 and 1999, respectively. Cash used for
investing activities for the three months ended June 30, 2000 primarily
consisted of $681,000 in additions to property plant and equipment, $627,000 in
cash used for the investing activities of discontinued operations and a $1.2
million investment in Chromazone LLC. Cash used for investing activities for the
three months ended June 30, 1999 include $559,000 in additions to property plant
and equipment, a $1.0 million increase in restricted cash and an $875,000
increase in restricted short-term investments representing interest earned on
the restricted investments.
Cash Used For Financing Activities
Cash used for financing activities was $1.9 million and $5.3 million
in the three months ended June 30, 2000 and June 30, 1999, respectively. Cash
provided by financing activities for the three months ended June 30, 2000
<PAGE>
consists of capitalized lease payments and repayments of notes payable totaling
$1.4 million and $539,000, respectively. Cash used for financing activities for
the three months ended June 30, 1999 consists of repayments of notes payable and
capitalized leases totaling $3.7 million and $1.7 million, respectively.
Factors Affecting Future Results
We anticipate that our existing capital and cash from operations may be
inadequate to satisfy our capital requirements beyond September 2000.
Our cash on hand and amounts expected to be available through vendor
financing arrangements may not be sufficient for us to expand our digital
content businesses, new or existing, as currently planned and to fund our
operating deficits beyond September 2000. We cannot be certain, moreover, that
we will not require additional capital sooner than currently anticipated. We are
currently engaged in a coordinated mutual effort with our investment banker,
Morgan Stanley Dean Witter, to raise additional capital through a private
placement of new securities. Together, we are seeking new funding from potential
strategic partners and customers for the Company's Digital Content Express
business, and from financial entities such as venture capital funds and
investment companies. However, 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 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.
We have substantial existing debt and may 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 June 30, 2000, we had
outstanding indebtedness of approximately $318.2 million and a stockholders'
deficit of approximately $222.0 million. We cannot be certain that our
operations will generate sufficient cash flow to pay our obligations, including
our obligations on the notes issued by us in our 1998 debt financing ("the
notes"). Earnings were inadequate to cover fixed charges by the amount of $54.6
million and $76.6 million, for the years ended March 31, 1999 and March 31,
2000, respectively, and $22.3 million for the three months ended June 30, 2000.
The degree to which we have borrowed funds could have important consequences.
For example, it could:
. make it more difficult for us to satisfy our obligations 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 notes in the event of a change of
control.
<PAGE>
We may also incur additional indebtedness to finance the continued
development, commercial deployment and expansion of our businesses and for
funding operating losses or to take advantage of unanticipated opportunities.
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 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 content
products and services;
. the market acceptance, subscriber demand, rate of utilization and
pricing for our digital content products 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, most 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
notes. If we are unable to generate sufficient cash flow from operations and
financings to service our indebtedness, including the 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 notes. Any failure by us to satisfy our obligations with respect to the
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 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 $29.9 million, $53.8 million and $72.7
million in fiscal 1998, fiscal 1999 and fiscal 2000, respectively, and $22.3
million for the three months ended June 30, 2000. These net losses are
attributable to the significant costs incurred to develop, market and implement
our TVN Digital Cable Television 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 and make
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.
<PAGE>
Our existing capital and cash from operations may be inadequate to satisfy
obligations resulting from the discontinuance of certain of our business units.
We have discontinued or scaled back certain businesses and operations,
resulting in the layoff of a significant number of employees and the termination
or renegotiation of existing affiliate contracts, written and oral, with
vendors, suppliers and affiliates. We have taken certain accounting charges
therefore on our financial statements, but we may incur substantial additional
liabilities, costs and expenses in connection with the (i) shutdown or reduced
operations of such businesses, (ii) layoff of employees and (iii) termination
and/or renegotiation of existing contracts. We cannot be certain that the
additional funds currently anticipated for such obligations will be available to
us as and when needed. This may result in claims being asserted by such
employees, vendors, suppliers and/or affiliates, which could lead to litigation
against us, or the commencement of an involuntary bankruptcy proceeding, if we
are unable to satisfy such obligations as they come due.
We are a holding company for our subsidiaries and will depend on our
subsidiaries for repayment of the notes.
The notes are 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 significant 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, may therefore depend in part upon our subsidiaries making payments of
dividends, distributions, loans or other payments to us.
We anticipate that our subsidiaries may 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 guarantors of the notes, holders of the
notes will not have any direct claim on 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 our 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 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 permits 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;
<PAGE>
. 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.
Our historical financial information largely reflects losses sustained from our
digital cable programming and service business, so it may be of limited use in
predicting the future financial results from our new businesses.
Our current business plans will result in significant changes in our
financial performance. The historical financial information included herein for
the fiscal years ending 1996 to 1999 primarily reflects our large home satellite
dish and digital cable television businesses. The historical financial
information for the fiscal years ended 1999 and 2000 does not fully reflect the
many significant changes in our financial results that will occur as a result of
the launch of our digital content delivery and video-on-demand products and
services, nor the changes that will occur in our funding and operations in
connection with the such launch and roll-out. The continued roll out of these
new products and services requires significant operating expenditures,
particularly marketing 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 digital
content and video-on-demand products and 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 these new products and services to establish a sufficient revenue
generating customer base, end users and other
<PAGE>
customers. We cannot be certain that we will be able to successfully roll out
these new products and services or establish a sufficient customer base.
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:
. failure to add customers for our new digital content
products and services;
. customer expenditures and other costs relating to the expansion and
penetration of their respective digital content offerings;
. failure to maintain our affiliates for our existing DCTV and PPV Feeds
businesses;
. seasonal trends in home entertainment;
. the mix of satellite delivered digital content products and services
sold and the distribution channels for those products and services;
. with respect to our planned digital content delivery and management
business, our ability to react quickly to changing customer trends and
the need for some categories of such products and services;
. the general expansion of the digital content transmission and business-
to-business categories of services;
. general economic conditions; and
. specific economic conditions in the digital content, video-on-demand,
digital cable television, Internet and related industries.
Additionally, as a strategic response to a changing competitive
environment, we may elect from time to time to make pricing, service, product,
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,
inpart, on management's expectations regarding future contracts for these new
products and services and the revenue to be derived therefrom, if such revenues
are below expectations, the 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.
If we fail to achieve a significant customer base for our new digital content
delivery and video-on-demand products and services, we may be unable to cover
our costs or to repay the notes.
The continued roll out of our digital content delivery and video-on-demand
products 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
<PAGE>
losses while we continue to market our digital cable television programming and
services and it remains unlikely that we will establish a customer base of cable
operators and their subscribers that will generate revenue sufficient to cover
these costs. We cannot be certain that we will be able to successfully roll out
our new digital content delivery and video-on-demand products and services or
establish a sufficient VOD customer base therefore, or that we will generate
significant revenues from our digital cable programming, video-on-demand, 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.
Until late 1997, our efforts focused on providing national satellite
pay-per-view and related services to large home satellite dish owners, however,
since then we have devoted an increasing percentage of our personnel and
financial resources, and will need to continue to devote some more resources, to
the our digital cable television business, the related transactional services
and delivery systems, and our electronic commerce products and services.
Although our digital cable programming and services launched in late 1997, it
has thus far generated only modest revenues. In fiscal 2000, $16.0 million of
our total revenues were derived from our digital cable programming and services.
We believe that our future ability to service our indebtedness including the
notes, and to achieve profitability, is dependent upon our success in generating
substantial revenues from our new digital content delivery and video-on-demand
products and services. We expect to continue experiencing negative operating
margins and EBITDA while our Video-on-Demand and Digital Content Express
businesses are being marketed to cable systems and content originators and
distributors.
Because our new Digital Content Express and Video-on-Demand products and
services must succeed in markets new to us, we may encounter difficulties
achieving the level of revenue we have forecast for these businesses.
These new products and services will need to find acceptance in new and
newly evolving markets. We expect to expend and will continue to expend
substantial sums for our sales and marketing efforts to promote customer and
subscriber awareness of our Digital Content Express (DCX) and Video-on-Demand
(VOD) products and services. The digital content delivery and VOD markets are
new, but rapidly evolving. Therefore, it is difficult to predict the rate at
which these markets will grow, if at all. If these markets fail to grow, or grow
more slowly than anticipated, our sales will be lower than expected and our
operating results will be harmed. Even if the markets do grow, we cannot be
certain that these products and services will realize market acceptance or will
meet the technical or other requirements of cable operators or their
subscribers. The failure of our DCX or VOD Services 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 DCX and VOD products and
services have involved identifying specific market segments that we believe will
be the most receptive to these products and services. We cannot be certain that
we have correctly identified these markets or that our DCX and/or VOD products
and services will adequately address the needs of these 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.
Our success will depend in large part on our ability to sign long-term
agreements with cable operators to implement our Video-on-Demand Service and
with digital content distributors to utilize our DCX products and services.
To date, we have entered into agreements with only two affiliates in which
we have an equity interest for our DCX services and we do not yet have an
agreement with a cable operator, or other entity, for delivery of our VOD
products and services. Our ability to obtain additional agreements will depend
upon, among other things, the successful
<PAGE>
commercial deployment of our DCX products and services pursuant to our initial
agreements and our ability to demonstrate that our digital VOD programming and
services are reliable and more attractive to cable operators and their
subscribers than alternative VOD services. We cannot be certain that we will be
able to enter into new agreements with non-affiliated customers or that the
ongoing economic viability of our DCX or VOD products and services will be
successfully demonstrated.
We do not set the prices charged by cable operators to their subscribers
for VOD service or for the pay-per-view movies and events so delivered. The
level at which such prices are set may adversely affect the number of
subscribers and/or the rate at which subscribers purchase VOD delivered
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 VOD
programming and services is new, and our VOD 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 new VOD Service 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 or other
distributors of VOD programming and services who are willing:
. to be early adopters of new technology rather than waiting for
widespread industry implementation;
. to risk subscriber dissatisfaction if the removal of existing analog
channels is required to accommodate new digital VOD 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
VOD 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 or other distributors of digital cable television and/or
VOD programming and services, and/or their lack of acceptance of such
programming and services, would harm our operating results and our ability to
achieve sufficient cash flow to service our indebtedness, including the notes.
Selling and installing our Video-on-Demand service may require lengthy sales and
implementation cycles, with delays that could cause actual revenue and earnings
to be less than expected.
The decision by a cable or other VOD operator to deploy our VOD service is
often viewed as an important and strategic decision that may require us to
engage in a lengthy sales cycle. During this process, we will provide a
significant level of explanation to prospective cable and other VOD operators
regarding the use and benefits of our digital VOD programming and services to
cable and other VOD operators and their respective subscribers. Additionally,
the sales cycle can be delayed by the size of the transaction and prospective
implementation costs including purchasing, installing and maintaining new
digital television set-top cable boxes, installing and supporting required
digital server and related equipment at the operator's facility, as well as the
potential complexity of financing or other arrangements. The cable operator's
implementation of our VOD service involves a significant commitment of resources
over an extended period of time which may lead prospective operators to defer
indefinitely the decision to implement our VOD service 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 our VOD system installations would reduce our operating
results and could harm our business prospects.
<PAGE>
Because we expect cable operator agreements to generate a significant portion of
our Video-on-Demand 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 VOD 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 expect to recognize revenues under our cable operator
agreements only when our VOD Service is successfully integrated and operating
and subscriber billing by the operator 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 VOD Service and to achieve a meaningful
number of subscribers and/or the rate at which subscribers purchase pay-per-view
movies or events offered in a VOD format. We expect that the number and timing
of such cable operator agreements and the effect of anticipated lagging
revenues, all of which are difficult to forecast, may cause significant
fluctuations in our operating results, particularly on a quarterly basis.
Because we expect our agreements with digital content originators and
distributors to generate a significant portion of our Digital Content Express
and management service 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 DCX content delivery
and management service revenues will be generated from long-term agreements with
digital content originators, programmers and distributors. 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 expect to recognize revenues under our such agreements only
when our DCX products and services are successfully integrated and operating.
Accordingly, the recognition of revenues will lag the announcement of a new
agreement by at least the time necessary to implement the specific DCX service
and to achieve a meaningful number of customers. We expect that the number and
timing of such agreements and the effect of any lagging revenues, all of which
are difficult to forecast, may cause significant fluctuations in our operating
results, particularly on a quarterly basis.
We will operate in highly competitive markets and will face intense competition
from existing and potential competitors, which could limit our ability to gain
market share.
Our competitors for DCX and VOD products and services 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, Internet operators, television programmers, music,
entertainment and other digital content distributors, broadcast television
networks, home video companies featuring videocassette and digital video disk
hard drive recording and playback 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.
Because we are significantly smaller than most cable and telecommunication
companies and other distributors of digital content, 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 and telephone companies and other distributors of digital content that
generally have large installed subscriber bases and significant investments in,
and
<PAGE>
access to, competitive programming sources. In addition, these large companies
have the financial and technological resources to create their own digital
content delivery and management services and/or VOD services, including delivery
of per-per-view movies in a VOD format. We also face the risk that the current
trend of industry consolidation will continue with the result that smaller and
medium size cable and telephone company operators and/or content distributors
that might otherwise become our customers will be acquired by large companies.
Currently, the most likely available alternative for cable operators that wish
to offer digital services similar to those provided by small satellite dish is a
digital programming delivery service known as DIVA. Certain telephone companies
have also 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 (i) DIVA, cable or telephone companies, or other
companies that provide digital cable television programming and services in a
VOD format, or (ii) other digital content delivery and management systems or
distributors. Moreover, we cannot be certain that large cable and/or telephone
companies developing their own digital tiers of programming will not offer such
services to our target markets.
Because small dish satellite companies may introduce digital Video-on-Demand
programming and services to viewers, we may emerge from this initial phase of
introducing such television programming with only a limited market share.
We compete with companies offering digital television 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. 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, which formerly had its own small satellite
dish programming service, is now owned by and is operated in tandem with DirecTV
offering premium subscription programming such as multiple HBO and Showtime
channels. A former medium sized satellite dish service, PrimeStar, was also
acquired by DirecTV, and is no longer in service. During the past fiscal year,
local programming has generally unavailable through small dish satellite
services; however, recently enacted legislation has facilitated the ability of
small dish satellite companies to include local broadcasts in their digital
programming services and that service is now available from DirecTV and the Dish
Network in certain markets. Given small dish satellite systems' ability to
market directly to viewers, these companies may be better positioned to
introduce new digital television 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.
If our relationships with our programming providers falter, we may not be able
to obtain sufficient popular programming to offer to cable, telephone and other
television distribution 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 largely through on-going, unwritten arrangements that
have no specific renewal provisions. We also 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 Game Plan college
football 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 VOD television market
will depend on our ability to
<PAGE>
continue obtaining desirable programming and successfully market it to cable,
telephone and other television distribution operators and their subscribers, the
termination of sales and operating results.
If we cannot deliver programming to our customers and their subscribers within
time periods which may be advertised, our revenue will fall and our ability to
offer our programming and services will be harmed.
Our failure to deliver VOD television programming within the time periods
which may be advertised, whether or not within our control, could result in
dissatisfied subscribers and in lost orders for content which otherwise could
have been sold. Dissatisfied cable, telephone and other television distribution
operators and their subscribers may no longer choose to utilize our digital VOD
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 digital 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.
The loss of even a limited number of our satellite transmitters, and our Galaxy
X satellite transmitters in particular, could prevent us from offering our
digital programming and services and harm our results of operations.
We transmit our, and will transmit others', programming and other digital
content via our transponders leased on two PanAmSat satellites, Galaxy IIIR and
Galaxy X, both of which have desirable geostationary orbital positions with
transmission coverage of the continental United States. Our failure to maintain
sufficient, well-located satellite transponder capacity would impair our ability
to offer our digital VOD programming and services and would harm our results of
operations. We cannot be certain that we will be able to obtain replacement
transponder 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 transponder 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 signal transponders 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 transponders, 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
and other digital content, 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.
<PAGE>
Because we rely on Motorola (as successor by acquisition to General Instrument)
for technology and services which may be essential to our ongoing Digital Cable
Television and Video-On-Demand businesses, some of which are available only from
Motorola. We might be unable to operate our business if Motorola fails to meet
our expectations or if these technologies and services are no longer available
to us.
We are dependent on Motorola, which recently acquired General Instrument,
for services needed to turn on and off the showings of cable operators'
pay-per-view movies and events ordered by their subscribers, and for the
continued development and standardization of equipment and the analog and
digital cable transmission technologies, known as DCII technology, that is used
by the cable industry. Our relationship with Motorola, to whom we owe
substantial sums of money for digital and other equipment purchased by us,
includes not only the use of its DCII technology and encoding equipment to
digitally process our programming, but also includes its manufacture and supply
of DCII cable system equipment and television set-top cable boxes that are
important to the successful deployment of our VOD Service. We have no written
agreement with Motorola for the provision of its services to cable operators to
turn on and off their showings of the pay-per-view movies and events we plan to
transmit in VOD format, for which they are the only provider. If cable operators
were unable to continue to receive these services from Motorola on acceptable
terms, they would have no other readily available alternative. If Motorola were
unable for any reason to meet cable operators' deployment needs, 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 their 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 a very long
time, at least six months or more, 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.
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, encryption and other outsourced services supervised by our
personnel. Our revenue and our ability to offer our DCX and VOD products and
services would be harmed if our service providers were unable for any reason to
meet our scheduling or delivery requirements or if any of our uplink
transmissions failed to satisfy customer quality requirements. For instance, our
replay, editing and satellite transmission uplink 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 a renewable service agreement. Four Media
Company was recently 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.
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
<PAGE>
customer billing and subscriber management services. 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 and cost effective basis.
In addition, 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 and digital
content is characterized by rapidly changing technology. As a result, our
digital Video-on-Demand and Digital Content Express products and services may
become outdated.
Our future success and ability to remain competitive will depend in
significant part upon the technological quality of our VOD and DCX 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 results could
decline.
If our digital signals are pirated, we could lose substantial revenue.
While we use digital and analog encryption systems designed by Motorola's
predecessor, 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.
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.
<PAGE>
We consider our software, management 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 either of our Video-on-Demand or Digital Content Express
businesses 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 VOD and/or DCX businesses, 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.
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 , financial and legal officers. Our business plan was developed in large
part by 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.
A substantial portion of our revenues to date have been generated by pay-per-
view fees paid by subscribers to our satellite transmitted analog programming
for the large home satellite dish market and to our digital cable television
programming for the cable market. These revenues have not been sustainable.
<PAGE>
Revenues from our large home satellite dish business substantially
declined in fiscal 1998, in fiscal 1999, in fiscal 2000 and will be de minimus
in fiscal 2001 since we plan to discontinue that business. Revenue from our
digital cable television programming business will likely decline in fiscal 2001
because we have been repositioning that business so our historical revenues
therefrom may not be sustainable. The digital television home entertainment
business faces severe competition from competing forms of content delivery,
including digital content transmitted via small satellite dishes and the
Internet, and has not experienced growth as projected.
We may be unable to successfully integrate any new companies, products or
technologies we acquire.
We have made and may continue to make investments in and provide funding
for 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. In
June 1999, we acquired a majority interest in New Media Network, a start-up
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 the
Guthy-Renker Television Network, and we have operated that business since then.
It 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 continue to work for us. If we make
other types of acquisitions, we could have difficulty assimilating the acquired
technology, products or personnel 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
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 notes. Princes Gate
Investors II and its affiliates own 89.3% of our Series B Preferred Stock, which
ownership represents 54.8% of our outstanding voting capital stock on an as-
converted basis or 44.4% of the voting capital stock on an as-converted, diluted
basis including currently outstanding options and warrants exercisable for
voting capital stock. The general partners of Princes Gate Investors II (PGI)
and Morgan Stanley, our investment banker, are both wholly owned subsidiaries of
Morgan Stanley Dean Witter, and several of our directors are employees of Morgan
Stanley and/or PGI. 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.
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 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
<PAGE>
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 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.
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.
If a bankruptcy case were commenced by or against us under the Bankruptcy
Code of 1978, as amended, after the issuance of the notes, the claim of a note
holder with respect to the principal amount thereof may be limited to an amount
equal to the sum of:
. the initial offering price and
. that portion of the original issue discount that is not deemed to
constitute "unmatured interest" for purposes of the bankruptcy code.
. Any original issue discount that was not amortized as of the date of
any such bankruptcy filing would constitute "unmatured interest."
Our obligations under the notes may be diminished if the transfer of the notes
was fraudulent or made us insolvent.
Under applicable provisions of the federal bankruptcy law or comparable
provisions of state fraudulent transfer law, if, at the time we issued the notes
or made any payment in respect of the 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 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 notes could be voided or held to be unenforceable by a court or could
be subordinated to claims of other creditors, or the note holders could be
required to return payments already received.
<PAGE>
In particular, if we caused a subsidiary to pay a dividend in order to
enable us to make payments in respect of the notes, and such transfer were
deemed a fraudulent transfer, the holders of the 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 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 notes. If any subsidiary enters into
such a guarantee, and bankruptcy or insolvency proceedings are initiated by or
against that subsidiary within 90 days or, possibly, one year, after that
subsidiary issued a guarantee or after that subsidiary incurred obligations
under its guarantee in anticipation of insolvency, then all or a portion of the
guarantee could be avoided as a preferential transfer under federal bankruptcy
or applicable state law. In addition, a court could require holders of the 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 notes to foreclose upon and sell the pledged securities upon the
occurrence of an event of default on the 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 notes
are prohibited from foreclosing upon or disposing of a debtor's property without
prior bankruptcy court approval.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Due to the nature and maturity of our short-term investments we do not
believe such investments present significant market risk.
<PAGE>
PART II. OTHER INFORMATION
ITEM I. 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) TV/Com obtaining a Digicipher II
encryption technology license from General Instrument and (ii) its obligation to
utilize such license for the manufacture of Digicipher II compatible television
set-top cable boxes for us, once it demonstrated its ability to do so in
quantity and to our specifications. The lawsuit alleges breach of contract,
fraud, negligent misrepresentation and related causes of action and asks the
court to award specific damages in excess of $25 million, as well as other
unspecified damages and costs. We filed a demurrer which questioned the legal
sufficiency of the complaint. The court granted our demurrer and gave TV/Com
leave to file an amended complaint which they did. We demurred again and the
court denied this demurrer. We filed our answer to the amended complaint and
also filed our cross-complaint against TV/Com. We are currently meeting with
TV/COM in an attempt to negotiate a settlement of the lawsuit. We believe that
plaintiff's claims in the lawsuit are not meritorious and we have retained
counsel to provide a vigorous defense and to pursue our cross complaint.
In addition, we have been party to other legal and administrative proceedings
related 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
<PAGE>
operations or cash flows.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three month period ended
June 30, 2000.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TVN ENTERTAINMENT CORPORATION
Date: August 21, 2000 By: /s/ Stuart Z. Levin
--------------------
Stuart Z. Levin, Chairman of the Board
of Directors and Chief Executive
Officer (Principle Executive Officer)
Date: August 21, 2000 By: /s/ John McWilliams
-------------------
John McWilliams
Senior Vice President, Finance
Principle Accounting Officer)
