<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 September 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 183,350 shares of the Company's Common Stock, par value
$.001, outstanding on September 30, 2000.
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1
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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 September 30, 2000 (unaudited)
and March 31, 2000................................................................................ 3
Consolidated Statements of Operations for the Three and Six
Months Ended September 30, 2000 and 1999 (unaudited) ............................................. 4
Consolidated Statements of Cash Flows for the Six
Months Ended September 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................................................................................... 32
Item 6. Exhibits and Reports on Form 8-K.................................................................... 32
Signatures....................................................................................................... 33
</TABLE>
2
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PART I.
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
TVN Entertainment Corporation
Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
September 30, 2000 March 31, 2000
------------------- ---------------
(Unaudited) (Audited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 7,161 $ 26,492
Restricted short-term investments 22,627 22,128
Trade and other accounts receivable, less allowance
for doubtful accounts of $1,376 and $184 at
September 30, 2000 and March 31, 2000, respectively 8,491 5,971
Prepaid expenses and other current assets 1,976 1,554
Net assets of PSN - 951
---------- ---------
Total current assets 40,255 57,096
Restricted cash 1,157 1,981
Restricted investments - 11,247
Property and equipment, net 73,724 90,395
Intangible assets, net 9,643 11,224
Other assets, net 5,277 6,550
---------- ---------
Total assets $ 130,056 $ 178,493
========== =========
Liabilities, Redeemable Convertible Preferred Stock and
Stockholders' Deficit
Current liabilities:
Accounts payable $ 17,833 $ 7,341
Accrued liabilities 13,882 14,298
License fees payable 11,389 10,305
Deferred revenue and advances 1,961 2,787
Accrued interest 7,671 6,783
Current portion of capitalized leases 4,261 11,276
Current portion of notes payable 7,965 7,848
---------- ---------
Total current liabilities 64,962 60,638
Capitalized leases 80,801 89,667
Notes payable 17,451 17,972
Senior notes due 2008 156,945 156,358
---------- ---------
Total liabilities 320,159 324,635
Commitments and contingencies
Series B redeemable convertible preferred stock;
Liquidation value: $54,414 53,645 53,445
Stockholders' deficit:
Series A convertible preferred stock; liquidation value: $18,750 8 8
Common stock - -
Additional paid-in-capital 22,938 23,138
Note receivable from shareholder (69) (69)
Accumulated deficit (266,625) (222,664)
---------- ---------
Total stockholders' deficit (243,748) (199,587)
---------- ---------
Total liabilities and stockholders' deficit $ 130,056 $ 178,493
========== =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
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TVN Entertainment Corporation
Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
The three months ended September 30, The six months ended September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $ 12,358 $ 10,126 23,733 $ 15,968
Operating expenses:
Cost of revenue (exclusive of
depreciation shown separately below) 10,972 8,332 21,061 14,662
Selling 3,113 2,613 5,309 4,460
General and administrative 6,045 4,365 11,298 6,308
Depreciation and amortization 2,122 3,450 5,155 6,693
Amortization of intangible assets 790 994 1,580 1,233
--------- --------- --------- ---------
Total operating expenses 23,042 19,754 44,403 33,356
--------- --------- --------- ---------
Loss from operations (10,684) (9,628) (20,670) (17,388)
Interest expense 10,237 11,332 19,766 22,081
Interest income (587) (1,541) (1,369) (3,481)
Other (income) and expense - 138 - 138
Loss from equity investments - - 2,080 -
--------- --------- --------- ---------
Loss from continuing operations (20,334) (19,557) (41,147) (36,126)
Loss from discontinued operations - 3,181 440 4,957
Estimated loss on disposal of discontinued operations 1,308 - 2,376 -
--------- --------- --------- ---------
Net loss (21,642) (22,738) (43,963) (41,083)
Accretion of Series B redeemable convertible
preferred stock (100) (100) (200) (198)
--------- --------- --------- ---------
Net loss applicable to common stockholders $ (21,742) $ (22,838) $(44,163) $(41,281)
========= ========= ========= =========
Basic and diluted net loss per share
applicable to common stockholders:
Net loss applicable to common stockholders
from continuing operations $ (111.45) $(128.88) $(225.50) $(238.16)
Net loss applicable to common stockholders
from discontinued operations (7.13) (20.86) (15.36) (32.50)
--------- --------- --------- ---------
Net loss applicable to common stockholders $ (118.58) $ (149.74) $(240.86) $(270.66)
========= ========= ========= =========
Weighted average common shares 183,350 152,517 183,350 152,517
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
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TVN Entertainment Corporation
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
The six months ended September 30,
----------------------------------------
2000 1999
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(43,963) $(41,083)
Adjustments to reconcile net loss to net cash used for
operating activities:
Net loss from discontinued operations 2,816 4,957
Depreciation and amortization 5,155 6,693
Amortization of intangible assets 1,580 1,233
Provision for doubtful accounts 1,034 182
Gain on disposal of property, plant and equipment 255 -
Accretion note discount 1,078 828
Amortization of debt issuance costs 145 366
Loss on equity investments 2,080 -
Other non-cash charges - 138
Changes in assets and liabilities:
Accounts receivable (3,554) (4,118)
Prepaid expenses and other current assets (422) (1,816)
Other assets 163 (23)
Accounts payable 8,381 2,670
Accrued liabilities (504) 337
License fees payable 1,084 1,632
Deferred revenue and advances (826) 1,854
Accrued interest 1,046 (691)
---------- ---------
Net cash used for continuing operations (24,452) (26,841)
Net cash used for discontinued operations (1,865) (4,829)
---------- ---------
(26,317) (31,670)
---------- ---------
Cash flows from investing activities:
Restricted cash 824 312
Restricted short-term investments 10,748 12,358
Purchases of property and equipment (1,078) (3,054)
Disposal of property and equipment (6) -
Acquisition of NMN, net of cash acquired - (165)
Acquisition of GRTV Network, net of cash acquired - (216)
Investment in Chromazone, LLC, net of cash acquired (1,150) -
Investment in subsidiary - (1,700)
---------- ---------
Net cash provided from investing activities 9,338 7,535
---------- ---------
Cash flows from financing activities:
Repayments of capitalized leases (2,040) (3,460)
Repayments of notes payable (312) (5,105)
---------- ---------
Net cash used for financing activities (2,352) (8,565)
Net decrease in cash and cash equivalents (19,331) (32,700)
Cash and cash equivalents at the beginning of period 26,492 84,343
---------- ---------
Cash and cash equivalents at the end of period $ 7,161 $ 51,643
---------- ---------
</TABLE>
5
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The accompanying notes are an integral part of the financial statements.
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 $36.1
million and $243.7. million, respectively at September 30, 2000. 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 restructure
our existing debt and/or raise additional capital through a private placement of
new securities. We are seeking new funding from potential strategic partners,
from financial entities such as venture capital funds and investment companies
or from the sale of the business.
The ability of the Company to restructure its debt and equity capitalization,
raise additional capital and to 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
Commitments
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.
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.
6
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TVN Entertainment Corporation
Notes to Consolidated Financial Statements
(In thousands, except share data)
(Unaudited)
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
$12.4 million and $924, respectively, at September 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 also 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 these obligations to TVN's former general partners and
that these obligations will not be subordinated to any debt obligations of the
Company.
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 and continues to have 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.
In December 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) TVN's designation of TV/COM to obtain
a Digicipher II technology license from General Instrument and (ii) its
obligation to utilize such license as and when obtained, 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 of $1.0
million plus interest and general damages in excess of $25 million, as well as
other unspecified costs. We filed our answer to the amended complaint and also
our cross-complaint against TV/Com. We are currently negotiating with TV/COM in
an effort to settle 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
require large cash outlays. However, based on the Company's current financial
condition, there can be no assurance that the impact of any judgement would not
be material to the Company's cash flows.
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.
7
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The music marketing services operating segment is a start-up company, New Media
Network, Inc., that plans to market and sell
8
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TVN Entertainment Corporation
Notes to Consolidated Financial Statements
(In thousands, except share data)
(Unaudited)
entertainment products such as music, movies and games. New Media Network
requires additional funding to execute its business plan. The Company is
currently evaluating the ongoing viability of New Media Network and may decide
to discontinue funding the operations of this segment. 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 September 30, 2000 and 1999.
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 Six Months Ended
Sept 30, 2000 Sept 30, 1999 Sept 30, 2000 Sept 30, 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenue:
Digital cable service $ 4,208 $ 3,296 $ 8,555 $ 8,052
Transponder services (1) 3,856 4,733 8,718 9,695
Media time sales 7,582 6,001 13,775 6,001
Music marketing services (24) 215 135 215
Intersegment elimination (2) (3,264) (4,119) (7,450) (7,995)
------------- ------------- ------------- -------------
Total revenue $ 12,358 $ 10,126 $ 23,733 $ 15,968
============= ============= ============= =============
Operating loss:
Digital cable service $ (4,769) $ (6,305) $ (9,005) $ (12,158)
Transponder services (1) (226) 4,359 2,002 8,667
Media time sales (1,354) (426) (2,763) (426)
Music marketing services (1,423) (715) (3,041) (715)
Intersegment elimination (2) - (2,097) (1,125) (4,830)
------------- ------------- ------------- -------------
Operating loss excluding depreciation and amortization (7,772) (5,184) (13,935) (9,462)
Depreciation and amortization (2,912) 4,444 6,735 7,926
------------- ------------- ------------- -------------
Operating loss $ (10,684) $ (9,628) $ (20,670) $ (17,388)
============= ============= ============= =============
</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.
9
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TVN Entertainment Corporation
Notes to Consolidated Financial Statements
(In thousands, except share data)
(Unaudited)
4. Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements." The staff
accounting bulletin is effective no later than the fourth quarter of the
Company's fiscal year 2001. The Company is in the process of determining the
impact that adoption will have in its consolidated financial statements.
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 September 30,
2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Sept 30, 2000 Sept 30, 1999 Sept 30, 2000 Sept 30, 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Numerator:
Net loss from continuing operations $ (20,334) $ (19,557) $ (41,147) $ (36,126)
Loss from discontinued operations (1,308) (3,181) (2,816) (4,957)
Accretion of redeemable Series B preferred stock (100) (100) (198) (198)
------------- ------------- ------------- -------------
Net loss applicable to common stockholders $ (21,742) $ (22,838) $ (44,161) $ (41,281)
============= ============= ============= =============
Denominator:
Weighted average shares 183,350 152,517 183,350 152,517
============= ============= ============= =============
Basic and diluted net loss applicable to
common stockholders
Continuing operations $ (111.45) $ (128.88) $ (225.50) $ (238.16)
Discontinued operations (7.13) (20.86) (15.36) (32.50)
------------- ------------- ------------- -------------
Basic and diluted net loss applicable to
common stockholders $ (118.58) $ (149.74) $ (240.86) $ (270.66)
============= ============= ============= =============
</TABLE>
6. Income Taxes
As a result of net losses for the three and six months ended September 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
September 30, 2000 and 1999.
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.
The Company has included in the financial statements the estimated loss of $2.0
million for the wind down of PSN operations for the six months ended September
30, 2000. The loss from discontinued operations for this segment was $1.5
million for the three months ended September 30, 1999 and $2.5 million for the
six months ended September 30, 1999. Revenues were $6.0 million for the three
months ended September 1999 and $3.5 million and $ 9.8 million for the six
months ended September 30, 2000 and 1999, respectively.
10
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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 six months ended September 30, 2000. The loss from discontinued
operations for this segment was $1.7 million for the three months ended
September 30, 1999 and $2.5 million for the six months ended September 30, 1999.
Revenues were $400 thousand and $4.2 million for the three months ended
September 30, 2000 and 1999, respectively. Revenues were $2.4 million and $8.0
million for the six months ended September 30, 2000 and 1999, respectively.
The Company has presented the operations of these segments as discontinued
operations for all periods presented.
11
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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, 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.
12
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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 Six Months Ended
September 30, September 30,
------------------------------------ ---------------------------------
2000 1999 2000 1999
---------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of revenue 88.8% 82.3% 88.7% 91.8%
Selling 25.2% 25.8% 22.4% 27.9%
General and administrative 48.9% 43.1% 47.6% 39.5%
Depreciation and amortization 17.2% 34.1% 21.7% 41.9%
Goodwill amortization 6.4% 9.8% 6.7% 7.7%
---------------- ---------------- -------------- ---------------
Total operating expenses 186.5% 195.1% 187.1% 208.8%
---------------- ---------------- -------------- ---------------
Loss from continuing operations (86.5%) (95.1%) (87.1%) (108.8%)
---------------- ---------------- -------------- ---------------
Interest expense 82.8% 111.9% 83.3% 138.3%
Interest income (4.8%) (15.2%) (5.8%) (21.8%)
Other (income) and expense - 1.3% - 0.9%
Loss on equity investments - - 8.8% -
---------------- ---------------- -------------- ---------------
Net loss from continuing operations (164.5%) (193.1%) (173.4%) (226.2%)
Loss from discontinued operations - 31.4 1.9% 31.0%
Estimated loss on disposal 10.6% - 10.0% -
---------------- ---------------- -------------- ---------------
Net loss (175.1%) (224.5%) (185.3%) (257.2%)
================ ================ ============== ===============
</TABLE>
Three Months Ended September 30, 2000 Compared with Three Months Ended
September 30, 1999
Revenue. Total revenue increased $2.2 million, or 22.0%, to $12.4 million
in the three months ended September 30, 2000 from $10.1 million in the three
months ended September 30, 1999. Revenue generated by our Digital Cable
Television service increased $900,000 or 27.0% to $4.2 million in the three
months ended September 30, 2000 from $3.3 million in the three months ended
September 30 1999. The increase was primarily attributable to an $816,000
increase in Marquee Mix revenues. Revenue generated by the GRTV Network for
media time increased $1.6 million or 26.4% to $7.6 million in the three months
ended September 30, 2000 from $6.0 million in the three months ended September
30, 1999.
Operating Expenses
Cost of Revenue. Cost of revenue increased $2.7 million, or 31.7%, to $11.0
million in the three months ended September 30, 2000 from $8.3 million in the
three months ended September 30, 1999 and, as a percentage of revenue, increased
to 88.8% in the three months ended September 30, 2000 from 82.3% in the three
months ended September 30, 1999. The increase, as a percentage of revenue, is
primarily attributable to fixed costs such as uplink expenses that were absorbed
by the home shopping and home satellite dish business units in the three months
ended September 30, 1999 that were not eliminated upon discontinuing the
operations of these business units in June 2000 and July 2000, respectively.
13
<PAGE>
Selling. Selling expenses increased $500,000, or 19.1%, to $3.1 million in
the three months ended September 30, 2000 from $2.6 million in the three months
ended September 30, 1999, and, as a percentage of revenue, decreased to 25.2% in
the three months ended September 30, 2000 from 25.8% in the three months ended
September 30, 1999. The decrease as a percentage of revenue is primarily
attributable to the increase in revenue. The dollar increase is primarily
attributable to recording a provision for doubtful accounts for the receivable
from Netsmart, Inc.
General and Administrative. General and administrative expenses increased
$1.6 million, or 38.5 to $6.0 million in the three months ended September 30,
2000 from $4.4 million in the three months ended September 30, 1999 and, as a
percentage of revenue, increased to 48.9 % in the three months ended September
30, 2000 from 43.1% in the three months ended September 30, 1999. The increase,
as a percentage of revenue, is primarily attributable to an increase of
approximately $600,000 in professional fees incurred by New Media Network to
assist with the integration of its operating technology and the development of
its retail accounting software. Approximately $300,000 of the increase is
attributable to signing bonuses paid to new management, approximately $320,000
is attributable to consulting fees associated with the ongoing development of
our video on demand applications and approximately $300,000 is attributable to
legal, accounting and other professional fees.
Depreciation and Amortization. Depreciation and amortization decreased
$1.4 million, or 38.5%, to $2.1 million in the three months ended September 30,
2000 from $3.5 million in the three months ended September 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
decreased $204,000 or 20.5% to $790,000 in the three months ended September 30,
2000 from $994,000 in the three months ended September 30, 1999. The decrease is
primarily attributable to the write-off of the Panda Shopping Network goodwill
as of March 31, 2000.
Interest Expense/Interest Income. Interest expense decreased $1.1 million
or 9.7%, to $10.2 million in the three months ended September 30, 2000 from
$11.3 million in the three months ended September 30, 1999. The decrease is
attributable to the redemption of approximately $33.9 million of senior notes in
October 1999. Interest income decreased $954,000 or 61.9%, to $587,000 in the
three months ended September 30, 2000 from $1.5 million in the three months
ended September 30, 1999. The decrease is attributable to lower operating cash
balances during the three months ended September 30, 2000 as compared to the
three months ended September 30, 1999.
Loss from discontinued operations. In June 2000, 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 zero and approximately $1.5 million for the three months ended
September 30, 2000 and September 30, 1999, respectively. In July 2000, 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. Operating losses for the home satellite dish operating
segment totaled $1.7 million for the three months ended September 30, 1999.
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 September
30, 2000 or the three months ended September 30, 1999.
Six Months Ended September 30, 2000 Compared with Six Months Ended
September 30, 1999
Revenue. Total revenue increased $7.7 million, or 48.6%, to $23.7 million
in the six months ended September 30, 2000 from $16.0 million in the six months
ended September 30, 1999. Revenue generated by the GRTV Network for media time
increased $7.8 million or 130.0% to $13.8 million in the six months ended
September 30, 2000 from $6.0 million in the six months ended September 30, 1999.
GRTV Network generated revenue for only three of the six months ended September
30, 1999 as the Company acquired its interest in GRTV Network on July 1, 1999.
Operating Expenses
Cost of Revenue. Cost of revenue increased $6.4 million, or 43.6%, to $21.1
million in the six months ended September 30, 2000 from $14.7 million in the six
months ended September 30, 1999 and, as a percentage of revenue, decreased to
88.7% in the six months ended September 30, 2000 from 91.8% in the six months
ended September 30, 1999. The decrease, as a percentage of revenue, is primarily
attributable to the inclusion of the operations of GRTV Network for six of the
six months ended September 30, 2000 as compared to three of the six months ended
September 30, 1999. We acquired our interest in GRTV Network on July 1, 1999.
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.
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Selling. Selling expenses increased $849,000 or 19.0%, to $5.3 million in
the six months ended September 30, 2000 from $4.5 million in the six months
ended September 30, 1999 and, as a percentage of revenue, decreased to 22.4% in
the six months ended September 30, 2000 from 27.9% in the six months ended
September 30, 1999. The increase is attributable to recording a provision for
doubtful accounts for the receivable from Netsmart, Inc.
General and Administrative. General and administrative expenses increased
$5.0 million, or 79.1%, to $11.3 million in the six months ended September 30,
2000 from $6.3 million in the six months ended September 30, 1999 and, as a
percentage of revenue, increased to 47.6% in the six months ended September 30,
2000 from 39.5% in the six months ended September 30, 1999. Approximately $3.2
million of the increase is attributable to general and administrative expenses
incurred by New Media Network and GRTV Network, Inc. during the three months
ended June 30, 2000 as compared to zero during the three months ended June 30,
1999. We had not acquired our interests in these entities until July 1, 1999.
The balance of the increase is attributable to expenses incurred during the
three months ended September 30, 2000 for professional fees incurred by New
Media Network for assistance with the integration of its operating technology
and the development of its retail accounting software, signing bonuses paid to
new management and legal, accounting and other professional fees.
Depreciation and Amortization. Depreciation and amortization decreased $1.5
million, or 23.0%, to $5.2 million in the six months ended September 30, 2000
from $6.7 million in the six months ended September 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 $347,000 and $1.6 million in the six months ended September 30, 2000
as compared to $1.2 in the six months ended September 30, 1999. The increase is
attributable to the amortization of goodwill generated upon the acquisition of
our interests in New Media Network and GRTV. We did not acquire interest in
these entities until July 1, 1999.
Interest Expense/Interest Income. Interest expense decreased $2.3 million,
or 10.5%, to $19.8 million in the six months ended September 30, 2000 from $22.1
million in the six months ended September 30, 1999. The decrease is primarily
attributable to the redemption of $33.9 million in senior notes in October 1999.
Interest income decreased $2.1 million, or 60.7%, to $1.4 million in the six
months ended September 30, 2000 from $3.5 million in the six months ended
September 30, 1999. The decrease is attributable to lower operating cash
balances during the six months ended September 30, 2000 as compared to the six
months ended September 30, 1999.
Loss from equity investments. During the six months ended September 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
Company in which we have an equity interest. Chromazone, LLC currently owns an
equity 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. Netsmart is currently pursuing a sale of its
assets. There can be no assurance that such a sale will occur, or that
Chromazone, LLC will fund future operations for Netsmart.
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
zero and approximately $2.5 million for the six months ended September 30, 2000
and September 30, 1999, respectively. 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 $2.5 million for the six months ended September 30, 2000 and 1999,
respectively.
Estimated loss on disposal of discontinued operations. We recorded an
estimated loss on disposal of PSN and the home satellite dish operating segment
totaling $2.1 million and $300,000, respectively, for the six months ended
September 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 six months ended September
30, 2000 or the six months ended September 30, 1999.
Liquidity and Capital Resources
The Company has been funded through a combination of equity, debt and lease
financing. As of September 30, 2000, the Company had current assets of $40.3
million, including $7.2 million of cash and cash equivalents and current
liabilities of $65.0 million, resulting in a working capital deficit of $24.7
million. The Company invests excess funds in short-term, interest
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bearing investment grade securities until such funds are needed to fund the
operating needs and capital expenditures of the Company's business.
Since inception, we have incurred operating losses and as of September 30,
2000, have a total deficit of $266.6 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 December 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 restructure our existing debt and/or raise additional capital through
a private placement of new securities. We are seeking new funding from potential
strategic partners, from financial entities such as venture capital funds and
investment companies or from the sale of the business. 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 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.
Cash Used For Operating Activities
The Company's operating activities used $26.3 million and $31.7 million in
the six months ended September 30, 2000 and 1999, respectively. Cash used for
operations in the six months ended September 30, 2000 is primarily attributable
to the net loss of $44.0 million partially offset by the $2.1 million loss on
equity investments, depreciation and amortization and other changes in working
capital items such as accounts payable. Cash used for operations in the three
months ended September 30, 1999 is primarily due to the net loss of $41.1
million partially offset by non-cash expenses, such as depreciation and
amortization, and other changes in working capital items.
Cash Provided By and Used For Investing Activities
Cash used for investing activities was $9.3 million and $7.5 million in the
six months ended September 30, 2000 and 1999, respectively. Cash used for
investing activities for the six months ended September 30, 2000 primarily
consisted of $10.7 million in proceeds from the maturity of securities purchased
as security for the senior notes offset by $1.1 million used for capital
expenditures and a $1.2 million investment in Chromazone LLC. Cash used for
investing activities for the six months ended September 30, 1999 included
approximately $12.3 million in proceeds from the maturity of securities
purchased as security for the senior notes offset by $3.1 million used for
capital expenditures.
Cash Used For Financing Activities
Cash used for financing activities was $2.4 million and $8.6 million in the
six months ended September 30, 2000 and September 30, 1999, respectively. Cash
provided by financing activities for the six months ended September 30, 2000
consists of capitalized lease payments and repayments of notes payable totaling
$2.0 million and $312,000 respectively. Cash used for financing activities for
the six months ended September 30, 1999 consists of repayments of capitalized
leases and notes payable totaling $3.5 million and $5.1 million, respectively.
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Factors Affecting Future Results
We anticipate that our existing capital and cash from operations may be
inadequate to satisfy our capital requirements beyond December 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 December 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 restructure our existing debt and/or raise additional
capital through a private placement of new securities. We are seeking new
funding from potential strategic partners, from financial entities such as
venture capital funds and investment companies or from the sale of the
business. However, we are unable to predict the precise amount of future capital
that we will require and whether additional financing will be available 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.
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 September 30, 2000, we had
outstanding indebtedness of approximately $320.2 million and a stockholders'
deficit of approximately $243.7 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 $44.0 million for the six months ended September 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.
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.
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Absent a restructuring of our existing debt, we will not be able to service our
indebtedness.
Absent a restructuring of our existing debt, we will not be able to fully
service and make all payments due on our indebtedness beyond the near future.
We cannot be certain that we will be successful in developing and maintaining
positive cash flow from operations. If we are unable to generate sufficient cash
flow from operations and financings we may have to reduce or delay the
deployment of our digital content express services. We cannot be certain that
any restructuring or additional debt or equity financings can be accomplished on
satisfactory terms, if at all. If we cannot restructure our existing debt, there
will likely be 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 $44.0 million for
the six months ended September 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.
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
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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;
. 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.
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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
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;
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. 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 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.
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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 and one third party affiliate for our DCX services and
we do not yet have an agreement with a cable operator for delivery of our VOD
products and services. Our ability to obtain additional agreements will depend
upon, among other things, the successful 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.
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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.
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
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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 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.
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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 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
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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.
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 customer billing and subscriber management services. These systems
and resources are part of the transactional services that we offer with our TVN
Digital
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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.
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
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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, Ian Aaron, our President and Chief Executive Officer and
other senior level operating, 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. 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.
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 have discontinued 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.
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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. Our Securityholders Agreement dated as of August 29, 1997
provides that under certain circumstances specified therein the holders of a
majority of the shares of PGI stock may elect to appoint a majority of our Board
of Directors. 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 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
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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 could be
unenforceable by a court or could be subordinated to claims of other
creditors, or the note holders required to return payments already
received.
In particular, if we caused a subsidiary to pay a dividend in order to
enable us to make payments in respect of the 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.
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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.
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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.
PART II. OTHER INFORMATION
ITEM I. LEGAL PROCEEDINGS
In December 1999, we were served with a lawsuit filed in California state
court by TV/COM International, Inc., a company with which we entered into a
memoranda of understanding concerning (i) TVN's designation of TV/Com to obtain
a Digicipher II encryption technology license from General Instrument and (ii)
its obligation to utilize such license as and when obtained, 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 of $1.0
million plus interest and general damages in excess of $25 million, as well as
other unspecified costs. We filed our answer to the amended complaint and also
our cross-complaint against TV/Com. We are currently negotiating with TV/COM in
an effort to settle 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 require
large cash outlays. However, based on the Company's current financial condition,
there can be no assurance that the impact of any judgement would not be material
to the Company's cash flows.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Employment Agreement (Ian Aaron)
10.2-Employment Agreement (Sheldon Rabinowitz)
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 September 30, 2000.
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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: November 14, 2000
By: /s/ Stuart Z. Levin
--------------------------------------
Stuart Z. Levin, Chairman of the Board
of Directors (Principal Executive Officer)
Date: November 14, 2000
By: /s/ Ian Aaron
----------------------------------
Ian Aaron, President and Chief Executive Officer
Date: November 14, 2000
By: /s/ Sheldon Rabinowitz
----------------------------------
Sheldon Rabinowitz
Chief Financial Officer and Senior Executive Vice President
Date: November 14, 2000
By: /s/ John C. McWilliams
----------------------------------
John C. McWilliams
Sr. Vice President, Finance
(Principal Accounting Officer)
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