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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-13102
THE NOSTALGIA NETWORK, INC.
(Exact Name of Registrant as specified in Charter)
Delaware
(State of Other Jurisdiction 84-0923659
of Incorporation) (I.R.S. Employer
Identification No.)
650 Massachusetts Avenue NW
Washington, DC 20001
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, Including Area Code: (202) 289-6633
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange
------------------- On Which Registered
NONE -------------------
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.04 par value per share, Common Stock Purchase
Warrants and Units consisting of one share of Common Stock
and one Common Stock Purchase Warrant
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy of information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Company as of March 1, 1996 was approximately $2,159,045 based upon the average
bid and asked price for the Company's Common Stock on such date. The Company had
20,274,371 shares of Common Stock and 3,250 shares of Preferred Stock
outstanding on March 1, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Company's Proxy Statement to be filed with the
Commission pursuant to Rule 14a-6 under the Securities and Exchange Act of 1934
in connection with the Company's 1996 Annual Meeting of Shareholders are
incorporated by reference in Part III, Items 10-13 of this Annual Report on Form
10-K.
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PART I
ITEM 1. BUSINESS
The Nostalgia Network, Inc. (the "Company" or "Nostalgia") operates a
television programming service (the "Service") which offers a variety of
lifestyle and entertainment programming to a target audience of active adult
Americans who are 50 years of age or older. The Company was originally
incorporated in Colorado in 1983. In 1987 the Company changed its name from
Boston Investments, Inc. and reincorporated in Delaware through a merger into
its wholly-owned subsidiary. A long-inactive subsidiary of the Company has been
allowed to expire.
1995 Developments
In 1994 the Company experienced changes of both control and management
which enabled the Company to correct long-standing problems in its operations.
The effects of those corrections began to be felt in 1995 which saw an end to a
two year decline in the Service's number of subscribers and a doubling of its
Nielsen ratings. Subscribers to the Service fell from a high of approximately
12.2 million in January of 1993 to approximately 9.4 million in August of 1994
when new management assumed control of the Company. While new management
dramatically reduced the rate of subscriber loss, losses continued through the
end of 1994 when subscribers stood at approximately 8,927,000. (Subscriber
numbers represent management's best estimate of previous year subscriber
counts.)
During 1995 subscribers remained relatively constant, ending the year at
approximately 8,905,000. Nielsen ratings rose in 1995 from a full day rating of
.1 for the fourth quarter of 1994 to .2 in the fourth quarter of 1995. Weekday
prime time ratings for the same periods rose from .2 to .4. Financing for
needed improvements in the Service has been obtained from the Company's majority
shareholder, Concept Communications, Inc., ("Concept") which loaned $2,500,000
to the Company during 1994 and an additional $7,500,000 during 1995. See Part
II, Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations. Negotiations are underway for the conversion of this
debt to equity in the Company, but there can be no assurance that Concept and
the Company will reach agreement on the terms of such conversion.
Description of Business
The Company operates a television programming service which offers a
variety of lifestyle and entertainment programming to a target audience of
active adult Americans who are 50 years or older. Nostalgia's programming is
telecast over a network of cable television, wireless cable, and video-dial-tone
systems (each an "Affiliate"). The Company uplinks its programming from its
production facilities in Alexandria, Virginia to a satellite which then
transmits the programming back down to the Affiliates. The Company derives
revenue primarily from fees paid by Affiliates for its programming, and from the
sale of advertising time. According to the Cabletelevision Advertising Bureau's
1995 Cable TV Facts, there are over 62 million basic cable subscribers in the
United States and the industry reaches approximately two-thirds of all
television households. It is projected that 72 percent of all TV households
will have at least basic cable by the year 2000, although there can be no
assurances this estimate will be reached.
1. Affiliated Cable Systems and Subscribers
The Company's programming is distributed by approximately 790 Affiliates.
The Company derives fees from arrangements with Affiliates, typically based upon
the number of monthly subscribers in each Affiliate's system. The length of an
Affiliate contract varies, but generally ranges from three to five years.
Certain of the Company's affiliate contracts have expired and carriage is
currently provided on a month-to-month basis. Many of these Affiliates have
declined to enter into a new contract until their plans for channel expansion
are completed. In 1995 the Company derived revenues of $4,205,000 from
Affiliate fees. One multiple system operator ("MSO") accounted for 15%, 11% and
10% of revenues in 1995, 1994 and 1993, respectively.
Each Affiliate has a limited number of "channels" over which programming
can be distributed to its subscribers. The Cable Act of 1992 caused Affiliates
to increase the number of channels allocated to broadcasters and affiliates of
broadcasters, resulting in a corresponding decrease in the number of channels
available to independent networks such as Nostalgia. As a result of intense
competition among cable networks for this reduced number of channels, the per
subscriber fees received from Affiliates have declined and may continue to
decline. See Part II, Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations.
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2. Advertising
The Company also derives revenues from the sale of advertising time.
Nostalgia's programs average about 12 minutes of advertising time per hour.
Generally, under the terms of the Company's arrangements with its Affiliates,
two minutes of each hour's advertising time are reserved for the Affiliate's
local use. The Company derives revenue from the sale of the remaining ten
minutes of advertising time. In addition, the Company derives advertising
revenue from the sale of time for program length advertisements ("infomercials")
and from sharing in the revenue of "shop at home" services. In 1995 the Company
derived revenues of $5,813,000 from advertising. Revenues from one advertising
agency accounted for 15% of advertising revenues in 1995; two advertising
agencies accounted for 11% and 10.5% in 1994 and a combined 19% in 1993, of
advertising revenues, respectively. Revenues from the Company's home shopping
service accounted for almost all of other revenues in 1995
During 1995, RSTV, Inc., doing business as Via TV! ("Via") accounted for
almost all of other revenue and approximately 11% of total net revenues. Via
provided the Network with an interactive home shopping program service. Via was
to pay the Network a commission based on net sales, subject to certain base
minimums. During 1995, a contract dispute arose and Via ceased making
contractually obligated payments. The Network continued to air Via's
programming and accrued their minimum contractual obligations, however, due to
uncertainty regarding the collectibility of amounts from Via, during the second
half of 1995 management recorded a reserve against the revenue on a monthly
basis. Via's contract expired and the Network ceased airing their programming on
December 31, 1995. Subsequent to year end the Company entered into a stipulated
judgment agreement against Via in excess of the amounts recorded as receivable.
Subsequent to receiving the judgment, Via filed for bankruptcy protection. See
Part II, Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations.
3. Demographics and Ratings
The Company was first in Viewers Per Viewing Household for Women 50+ during
primetime, Monday - Sunday, 8pm - 11pm (fourth quarter 1995) as well as for
total day (third and fourth quarter, 1995) according to Nielsen's Homevideo
Index's ("NHI") Audience Composition Report. For Adults 50+, Nostalgia
consistently ranks in the top 3 during both primetime and total day.
The Company's ratings, as measured by NHI, reflect the Company's growing
share of household viewers. The following is a summary of the Company's Monday
through Friday primetime ratings for the last four years:
YEAR AVERAGE HIGH
1992 0.100 0.1
1993 0.125 0.2
1994 0.250 0.4
1995 0.3 0.5
4. Programming
Nostalgia takes its viewers back to a time when television was safe and
wholesome. Back to a time when the good guys won. When good acting and good
story lines, not sex and violence, won audiences. Nostalgia is the viable
alternative for consumers who are turned off by the programming on most cable
and network television. While a majority of Nostalgia Television's audience is
composed of older adults, our programming is suitable for all and embodies
traditional values and morals while both entertaining and informing the
audience.
In 1995 Nostalgia added The Streets of San Francisco and The Paper Chase to
its schedule. The Streets of San Francisco, licensed from Worldvision
Enterprises, originally aired in the mid 1970's on ABC and starred Karl Malden
and Michael Douglas as two homicide detectives. The Paper Chase, licensed from
20th Century Fox, aired originally on CBS and then on Showtime. The series
starred John Houseman as a cantankerous law professor who teaches his students
not only the letter of the law but the belief behind it. In 1995 Nostalgia added
a second package of The Love Boat to prime time. The Love Boat was a ratings
winner for Nostalgia in 1994, but with less then 80 episodes, the series quickly
weakened. This second package includes the first five seasons of the series, 140
hours, including a number of 90 minute and two part specials. None of the above
specials has ever been on a basic cable network.
Saturdays are Nostalgia's home for fifties television. In September 1995
six additional series were added to the programming mix. The series, all from
the old Four Star library, were licensed from New World/Genesis and include
series starring James
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Whitmore, David Janssen, Brian Keith, Wayne Rogers, Howard Duff and Michael
Ansara. Sundays are programmed to reflect a 1930's and 40's theme, making
maximum use of materials already part of Nostalgia Television's library.
Nostalgia has complimented its library of public domain films by licensing
22 features from three studios. The films, from Warner Brothers, Columbia Tri-
Star and Paramount, are all in color from the fifties, sixties and seventies and
feature a number of major stars. Each movie will be featured as part of Cinema
Spotlight. This movie-of-the-month concept showcases the movie with month long
promotions and specially produced wrap around segments featuring Bill Harris,
who previously was Showtime's entertainment reporter. Mr. Harris interviews the
stars, their family and co-workers about the film.
Nostalgia has a long term agreement with the Narrative Television Network
("NTN") to make programming accessible to the blind and visually impaired. Over
the past year Nostalgia Television has assisted NTN in narrating 26 of
Nostalgia's public domain films and in addition, with the cooperation of MCA
Universal and Worldvision Enterprises, has added narration to over 30 episodes
of Ironside and over 20 episodes of The Streets of San Francisco. NTN adds the
unobtrusive voice of a narrator to the existing soundtrack of motion pictures
and television series, describing the visual action that this audience would
miss. Nostalgia is the exclusive distributor of NTN.
Audience research indicates that music of the type older viewers enjoy
listening to is absent from today's television. In response, Nostalgia has
created a music program block called The Big Beat Broadcast. The Big Beat
Broadcast features both original and classic television music programs like The
Bing Crosby Specials. The Big Beat Broadcast also includes a music video segment
titled High Notes which presents artists like Tony Bennett, Willie Nelson,
Barbra Streisand and Frank Sinatra. Also, Nostalgia has produced a number of
live musical performances, including shows featuring Big Band and Cabaret acts.
In 1995 Nostalgia, in cooperation with The National Archives of The United
States, produced a number of timely documentaries that saluted America's
achievements. These documentaries included Lest We Forget, a retrospective look
at the battles for Europe from D-Day to VE Day, and The Struggle, The Fight, The
Victory, Suffrage at 75 a history of the suffragette movement from its inception
in the 1830's to the ratification of the amendment in 1920.
In 1995 Nostalgia began producing Issues & Answers, a thirty minute weekly
television program which looks at legislative and government issues of interest
to its audience. Notable guests have included Charles Bierbauer, Michael Deaver,
Frank Fahrenkop, Marlin Fitzwater, Thomas Foley, Haynes Johnson, Lyn Nofziger,
Michael Novak, Jody Powell, and William Proxmire.
5. Patents, Trademarks, Licenses
The Company neither holds nor depends on any material patent, trademark
license, franchise or concession except for its trademarks "Nostalgia Channel"
and "Nostalgia Television."
6. Competition
There is intense competition among companies providing programming services
via cable television and other video delivery systems. Nostalgia must compete
with other programmers for access to limited channel space on Affiliate systems
and must also compete with other programmers for viewers. In addition,
Nostalgia competes for advertising revenues with other cable networks, broadcast
television, radio and print media. More generally, the Service competes with
various other leisure-time activities such as home videos, movie theaters and
other forms of information and entertainment.
A number of basic networks (such as the USA Network, American Movie
Classics and Turner Network Television), pay television networks (such as The
Disney Channel), and superstations (such as WOR and WGN) provide programming
directed towards various sub-groups which are included in the Company's target
audience. At least two proposed programming services are promoting their
interest in launching networks to serve the adult 50+ demographic, though
neither has yet secured transponder space, announced a specific launch date, or
announced distribution alliances. Some of the companies providing programming
services are affiliated with cable system operators or motion picture studios,
and thus may enjoy advantages that independent services, such as the Company, do
not enjoy. Many of Nostalgia's competitors have substantially greater financial
and other resources than Nostalgia enjoys.
Technological advances over the next five years--such as digital compression
technology, which will allow cable systems to expand channel capacity, and the
development of fiber optic cable, which has the capacity to carry a much greater
number of channels
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than coaxial cable--are expected to dramatically increase the number of
available channels. This increase in the number of channels will dramatically
reduce the competition for access to channel space, but will significantly
increase the competition for viewers.
7. Satellite Distribution
The Company transmits its programming from its production facilities in
Alexandria, Virginia by means of an earth station transmitting antenna (called
an "uplink") provided to the Company by Atlantic Video, Inc. ("AVI"). Throughout
1995, Christopher A. Cates and Dong Moon Joo were officers or directors of AVI
and directors of the Company. The AVI uplink facility transmits the Nostalgia
programming to an orbiting communications satellite on which the Company owns a
transponder, which relays it to the Company's Affiliates. Under an agreement
expiring in September 1996, AVI provides to the Company certain exclusive
television production, post-production and master control/uplink services and
leases to the Company 3,000 square feet of office space in AVI's Alexandria,
Virginia production facilities. This agreement provides for minimum monthly
payments to AVI of $75,000, plus payment for office space rental, videotape
stock purchases and additional production/post-production services beyond a
certain level. The Company is required to purchase a minimum dollar value of
such services during each month at specified rates.
The Company's signal currently is unscrambled and can be received by an
owner of an appropriate earth station or dish without payment of subscriber
fees. Newly-available digital technology would allow the Company's transponder
to carry three or more additional signals in the same bandwidth now used by the
Nostalgia signal, and would also allow encryption of the signal at no additional
cost. The Company is currently formulating plans to digitize and encrypt its
signal.
8. Government Regulation
On February 8, 1996 the Telecommunications Act of 1996 (the "1996 Act") was
signed into law. Among other things, the 1996 Act repeals statutory provisions
and interpreting regulations of the Federal Communications Commission, ("FCC")
that prohibited telephone companies from operating cable television systems or
other multichannel distribution systems in areas in which companies offer
telephone service and that severely restricted the ability of such telephone
companies to produce, acquire an interest in, or distribute programming in which
they have an interest. The 1996 Act limits the ability of telephone companies
to purchase existing cable systems, but otherwise imposes minimal constraints
upon their entry into multi-channel video distribution and program production.
The FCC is required to adopt regulations, similar to those imposed upon
traditional cable systems by the Cable Television Consumer Protection and
Competition Act of 1992 ("the 1992 Act") designed to prevent telephone companies
from favoring program services in which they have an interest and from
unreasonably denying access to unaffiliated programmers.
The 1996 Act also significantly relaxes multiple ownership and other
restrictions imposed by FCC rules on traditional over-the-air broadcast stations
and television networks, such as CBS, NBC, ABC, and FOX. The legislation
requires the FCC to adopt rules which allow the traditional networks to operate
more than one television network, except that none of the four largest networks
are permitted to merge with any of the other four or with either of the two
"emerging networks" (Time Warner's WB Network and the United Paramount Network).
Under the new statute, companies that own and operate television broadcast
stations also will be permitted to own and operate cable television systems,
subject to certain safeguards designed to prevent discrimination against
unaffiliated program service providers.
The 1996 Act also modifies, to a limited extent, the system of rate
regulation imposed upon traditional cable operators pursuant to the 1992 Act.
Under the 1996 Act, rate regulation by the FCC of the upper tiers of service
will expire on March 30, 1999; cable operators typically carry Nostalgia on an
upper tier rather than as part of basic service. Basic service, which cable
operators are required to offer to all subscribers, remains subject to rate
regulation in communities in which the cable system is not subject to "effective
competition." The institution of an alternative multi-channel video
distribution system by a telephone company serving substantially the same area
as the cable system is deemed to constitute "effective competition" under the
1996 Act.
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The 1996 Act does not alter the "must-carry" and "retransmission consent"
requirements of the 1992 Act. These provisions, coupled with rate regulation,
have forced cable systems to increase the number of channels carrying broadcast
or broadcaster-affiliated channels, causing a corresponding decrease in the
number of channels available to satellite distributed networks such as
Nostalgia. In the past, the Company has lost carriage on cable systems because
the system needed to reassign the channel used by the Company either to comply
with the 1992 Act's must-carry provisions or to fulfill a contractual obligation
to a broadcaster arising out of the "retransmission consent" requirements of
that Act. In 1995, the FCC adopted regulations designed to provide cable
operators with incentives to increase channel capacity and to carry fledgling
services, like Nostalgia. The must-carry provisions of the 1992 Act have been
challenged, on First Amendment grounds, by a group of cable operators and cable
networks. Although the requirements have been upheld by the lower courts, the
Supreme Court of the United States has agreed to review the case and a decision
by the Supreme Court is expected in mid-1997.
The Company is unable to predict what effect, if any, these legislative and
regulatory changes will have on its operations or finances. In general, the
Company believes that the relaxation of rate regulation and the introduction of
competition in the multi-channel distribution business will improve the
Company's ability to obtain carriage of Nostalgia in markets in which the
service is not now available and will have a favorable effect on affiliate
subscriber fees earned by the Company. However, the entry of telephone
companies into the program production business and the relaxation of existing
constraints on broadcast stations and traditional broadcast networks are
expected to increase the competition the company already faces for advertising
revenues and audiences.
9. Employees
On December 31, 1995, the Company had a total of 34 full-time, non-union
employees. The Company has experienced no work stoppage, is not a party to any
collective bargaining agreements, and believes that it enjoys good relations
with its current employees. On March 1, 1996 the Company and John G. Heim
modified Mr. Heim's employment agreement with the company to provide that it
will expire on June 30, 1996. A search for a replacement for Mr. Heim is
currently being conducted by the Executive Committee of the Company's Board of
Directors.
ITEM 2. PROPERTIES
The Company's executive offices are located at 650 Massachusetts Avenue,
N.W., Washington, D.C., where the Company leases approximately 5,100 square feet
of space from the Washington Television Center, L.P. The lease provides for a
base monthly rent of $12,537 and expires in November 1999. Ninety-nine percent
of the interest in Washington Television Center, L.P. is owned by U.S. Property
Development Corporation. Throughout 1995, Mr. Dong Moon Joo was an officer and
director of U.S. Property and a director of the Company.
The Company's program production facility is located in Alexandria,
Virginia, where approximately 3,000 square feet are leased from Atlantic Video,
Inc. ("AVI") under a lease that expires in September 1996. Throughout 1995 and
1994, Christopher A. Cates and Dong Moon Joo were officers or directors of AVI
and directors of the Company. The monthly rent for that space is currently
$2,708.
The Company's eastern sales office is located at 220 Commerce Drive, Ft.
Washington, Pennsylvania, where the Company occupies approximately 1,580 square
feet under a lease that expires August 31, 1996. The Company's western sales
office is located at 7951 East Maplewood Avenue, Suite 310, Englewood Colorado,
where the Company occupies approximately 1,980 square feet under a lease that
runs through July 14, 1996.
It is expected that leases expiring during 1996 will be replaced with
comparable leases in the ordinary course of business.
ITEM 3. LEGAL PROCEEDINGS
Roger M. Rosenberg, et al., Delaware Chancery Court, Civil Action No.
11134. On September 29, 1989, this action was filed by shareholders of the
Company against four former directors of the Company. The Company is named as a
nominal defendant for purposes of the derivative claims asserted, but as to
those claims Nostalgia has no liability as a matter of Delaware law. The
Company is not named as a defendant in the purported class claims asserted in
the action and considers it unlikely that it will incur liability in connection
with those claims. The Company is obligated to advance defense costs in
connection with the suit.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1995, no matters were submitted to a vote of
security holders, through a solicitation of proxies or otherwise.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, their ages and positions with the
Company are set forth below:
Name Age Position
---- --- --------
John G. Heim 56 President, Chief Executive Officer and Director
Martin A. Gallogly 38 V.P., Treasurer and Chief Financial Officer
Daniel C. Holdgreiwe 44 General Counsel and Corporate Secretary
The terms of Mr. Heim's employment are covered by an agreement which
extends through June 30, 1996. See Notes to the Consolidated Financial
Statements. The remaining executive officers serve at the pleasure of Mr. Heim
and the Board of Directors. The following is a brief description for at least
the last five years of the current executive officers of the Company.
JOHN G. HEIM has served as President and CEO since August of 1994. Prior to
joining the Company, Mr. Heim held several executive positions in sales and
marketing at the Showtime Networks unit of Viacom, Inc. From November 1993
through August 1, 1994, he served as Executive Vice President of Showtime
Networks Sales and Marketing and as Co-President of PVI Transmission, Inc.; from
April 1991 through November 1993, he served as Executive Vice President Sales
and Marketing of Showtime Networks, Inc.; and from February 1984 through April
1991, he served as Executive Vice President Sales and Affiliate Marketing of
Showtime Networks, Inc. Prior to that time, Mr. Heim held sales marketing and
operations positions at the American Express Company. On March 1, 1996 the
Company and John G. Heim modified Mr. Heim's employment agreement with the
Company provide that it will expire on June 30, 1996. A search for a
replacement for Mr. Heim is currently being conducted by the Executive Committee
of the Company's Board of Directors.
MARTIN A. GALLOGLY has served as Treasurer and Chief Financial Officer of
the Company since June of 1994. Prior to joining the Company, Mr. Gallogly had
served as Chief Financial Officer of AVI since August 1992, as Treasurer of
Concept Communications, Inc. since April 1993, and as Chief Financial Officer of
Potomac Television/Communications, Inc. (a subsidiary of Concept) since August
1992. Mr. Gallogly served in various positions with the Washington, D.C. office
of BDO Seidman from 1984 through July 1992, most recently as Senior Manager -
Audit Division. Mr. Gallogly is a Certified Public Accountant.
DANIEL C. HOLDGREIWE has served as Corporate Secretary since June of 1994
and as General Counsel since August of 1994. Prior to joining the Company, Mr.
Holdgreiwe had served as General Counsel of Concept since June 1992. From 1986
to 1992, Mr. Holdgreiwe served as Executive Director of the Coalition for
Religious Freedom, a publicly supported, non-profit educational organization
concerned with First Amendment issues and problems of religious discrimination.
From 1985 to 1988, he also lectured at the Northern Virginia Law School in
Alexandria, Virginia, on constitutional law and other topics.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
During 1994 and 1995, the Company's Common Stock, Common Stock purchase
warrants and units (consisting of one share of Common Stock and one warrant)
were traded on the NASDAQ OTC Bulletin Board. The Company's publicly-traded
warrants are exercisable at $4.80 per share and expire 45 days after the
effective date of the Company's registration statement, as yet not filed, for
the stock underlying such warrants. The following table sets forth, for each
quarterly period during 1994 and 1995, the high ask and low bid quotations for
the Company's publicly-traded securities, as reported on the NASDAQ Bulletin
Board. These quotations are representative of prices between dealers, do not
include retail markups, markdowns or commissions, and may not represent actual
transactions.
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<TABLE>
<CAPTION>
COMMON STOCK UNITS WARRANTS
------------ ------------------ ------------
High Ask Low Bid High Ask Low Bid High Ask Low Bid
-------- ------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
1994
----
First Quarter $ 2.50 $ 1.12 $ 2.25 $1.25 $ .19 $ .02
Second Quarter 1.37 .81 1.50 .75 N/A .05
Third Quarter 1.44 1.06 1.25 .75 N/A N/A
Fourth Quarter 1.19 .81 1.25 .75 N/A N/A
1995
----
First Quarter $ 1.00 $ 0.69 $ 1.25 $ .75 $ .05 N/A
Second Quarter .88 .56 1.25 .75 .05 N/A
Third Quarter .69 .22 1.25 .50 .25 N/A
Fourth Quarter .56 .19 1.25 .50 .25 N/A
</TABLE>
1. Number of Common Stockholders
As of March 1, 1996, there were approximately 255 holders of record of the
Company's Common Stock.
2. Dividend Policy
The Company has paid no dividend since its inception and does not
anticipate paying any dividend on its Common or Preferred Stock in the
foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following is a summary of selected financial data for the Company for
each of the last five fiscal years.
<TABLE>
<CAPTION>
Fiscal Years Ended December 31,
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1995 1994 1993 1992 1991
--------- ----- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Cablecast Subscribers 8,905,000 8,927,000 11,000,000 12,200,000 10,900,000
Balance Sheet Data
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Total Assets $23,955,541 $11,154,537 $7,089,734 $9,228,271 $7,300,582
Long-Term Obligations 22,881,635 3,096,540 696,896 7,859,280 503,254
(including capital leases)
Stockholders' Equity (Deficit) (7,522,733) 1,953,634 3,810,917 (630,523) 1,858,609
Income Statement Data
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Affiliate Revenue 4,205,324 5,014,547 5,587,856 5,934,651 5,234,599
Advertising Sales Revenue 5,812,663 7,206,501 6,261,869 5,436,005 4,321,150
Other Revenue 1,248,898 231,052 1,081,794 - -
Total Operating Revenues 11,266,885 12,452,100 12,931,519 11,370,656 9,555,749
Operating Expenses 20,260,931 16,425,169 15,408,574 13,983,827 12,496,249
Loss from Operations (8,994,046) (3,973,069) (2,477,055) (2,613,171) (2,940,500)
Net Loss (9,476,367) (4,231,177) (3,297,725) (3,195,882) (3,182,700)
Net Loss Per Common Share (.47) (.22) (.22) (.23) (.26)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward looking statements. Certain matters discussed in this item,
and elsewhere in this form 10-K, are forward looking statements. These
forward-looking statements involve
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risks and uncertainties, including, but not limited to, economic conditions,
product demand and industry capacity, competition, regulatory environment, and
other risks indicated in filings with the Securities and Exchange Commission.
The following are factors to keep in mind.
Competition: The Company must compete with other programmers for access to
limited channel space and for viewers. Over the past few years, competition
among television networks has increased dramatically. Currently such basic
networks as the USA Network, American Movie Classics and Turner Network
Television provide programming directed at sub-groups included in the Company's
target audience Moreover, other services targeting the 50+ market (e.g. the
Lear/AARP partnership) are seeking to enter the market. Many competing services
have an advantage over the Company because they are owned by or affiliated with
companies that operate cable systems or own programming, and in general have
greater financial and technical resources than the Company. If any of these
competitors were to be successful in reaching the Company's target audience, the
Company would be adversely affected.
Distribution and Channel Capacity: Few individual cable systems have channels
available to launch new services. To achieve significant growth the Company will
need to gain distribution not only with existing system operators as they expand
their systems with rebuilds or expand into other system's territories through
overbuilds, but also with emerging cable competitors such as direct broadcast
satellite services and telephone company wired and wireless services.
Advertising Revenues: The Company's advertising revenues will increase
substantially only if it is able to improve its audience size above current
levels. Most mature cable networks have found it very difficult to achieve
significant audience growth. This growth will depend, among other things, on
the Company's ability to continue to acquire attractive programming, create
consumer awareness demand, and achieve adequate distribution.
Access to Programming: The Company's success will depend in part on its ability
to continue to purchase attractive programming. As competition increases, the
cost of acquiring existing programming also increases. Producing new
programming is more expensive than acquiring existing programming, and new
programming may not attract audiences.
Financing: The Company believes that it will need significant outside financing
during the period 1997 to 2000. There can be no assurance that it will be able
to obtain such financing.
Regulation: The Company's major customers, the cable system operators, are
subject to federal, state and local regulation. Changes in such regulations
could have a material effect on the Company's business.
Control by Principal Shareholder: Currently at least 70% of the votes entitled
to be cast at the annual meetings of the Company's shareholders are held by
Concept Communications, Inc. ("Concept"). Concept has sufficient votes to elect
all of the members of the Board of Directors and thus to control indirectly the
Company's business policies, strategies and management.
Replacement of CEO. The Company has amended its contract with its President and
CEO to expire on June 30, 1996. The skills and reputation of the person chosen
to fill that position could have a material impact on the Company's ability to
attract and hold Affiliates.
General Comments
The Company's most important asset is its subscriber base. Substantially
all of the Company's revenues are a function of its subscriber base: affiliate
revenue is measured directly by the number of the Company's subscribers; and
advertising revenue is based on viewership, which is a product of the number of
subscribers and the Company's Nielsen rating. Over the past few years,
competition for subscribers among television networks like the Company has
increased dramatically. In part this has been the result of technological
advances whose promise of greatly expanded channel capacity has been repeatedly
delayed. That promise inspired the creation of many new programming services,
but the expanded capacity to carry those services is not yet in place.
Compounding the effects of this technological bottleneck was the Cable
Television Consumer Protection and Competition Act of 1992 (the "1992 Act"),
which had the effect of allocating already scarce cable capacity to the owners
of broadcast television channels. The 1992 Act gave broadcasters, whose
programming was generally of little interest to cable subscribers, the right to
demand carriage on local cable systems. In many cases cable operators had to
discontinue carriage of network services like that provided by the Company in
order to carry such broadcast channels. To those broadcasters whose programming
was of interest to cable subscribers, the 1992 Act gave the right to demand
payment for their programming. In lieu of cash payments, the cable operators
gave channel
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capacity to non-broadcast programming services affiliated with these
broadcasters. In many cases services like that provided by the Company had to
be dropped to make room for affiliates of broadcasters.
Under previous management, the Company was particularly vulnerable to
these competitive pressures. Its subscriber base fell from a high of
approximately 12.2 million in January, 1993, to approximately 9.4 million in
August of 1994 when new management assumed control of the Company. With
financing from Concept, which had acquired majority ownership of the Company in
1994, the Company made dramatic improvements in the quality of the Service by
greatly increasing expenditures for programming and production and by decreasing
the time allotted to infomercials. These improvements allowed the Company to
increase its viewership from a weekday prime time Nielsen rating of .2 in the
fourth quarter of 1994 to a rating of .4 in the fourth quarter of 1995. Full
day ratings also rose from .1 to .2 for the same periods. At the same time new
management revitalized the Company's sales and marketing efforts. These changes
enabled the company to halt the two year decline in its subscriber base. The
company began 1995 with approximately 8,927,000 subscribers and ending the year
with approximately 8,905,000 subscribers. (Subscriber numbers represent
management's best estimate of previous year subscriber counts.)
In undertaking this action to preserve its most important asset, the
Company understood that revenues would not rise quickly enough to cover the cost
of the improved programming, and that substantial losses would be incurred until
increases in the Company's ratings and subscriber base rose substantially. Thus
the Company's financial losses in 1995 were expected. The Company's strategy is
to continue investment in programming in an attempt to increase ratings and
subscribers to a point where revenues will exceed expenditures, but there can be
no guarantee that such a point will be achieved. See Part I, Item 1, Section 6,
Competition. Neither can there be any guarantee that the Company will be able
to obtain financing for such an investment.
Results of Operations
Fiscal year ended December 31, 1995 compared to fiscal year ended
December 31, 1994
Net loss in 1995 increased $5,245,000, or 124% (from $4,231,000 to
$9,476,000). This increase was due principally to increased programming
amortization expense ($3,619,000); increased sales and marketing expenses
($1,446,000); reduced revenues ($1,185,000); increased finance, general and
administrative expenses ($536,000); and increased programming, production and
transmission expenses ($415,000) offset by charges of $2,180,000 in 1994
relating to library revaluation, relocation costs and settlement of litigation
which were not incurred in 1995.
Revenues:
Total revenues in 1995 decreased by $1,185,000, or 9.5% . This
decrease was primarily attributed to decreases in affiliate and advertising
revenues, offset by increases in other revenue related to the Company's shopping
service.
Affiliate revenues declined $809,000, or 16.1% , reflecting a full year
of 1994's decline in subscriber base. Additionally, increased competition has
put downward pressure on the rates which the Company can charge its affiliates.
While subscriber losses are immediately reflected in affiliate revenue, the same
is not true for increases in subscribers as it is common for a new affiliate to
receive some number of months free service as an incentive for commencing
carriage of a programming service. For these reasons, the Company expects any
future increases in its subscriber base to result in less than fully
proportionate increases in affiliate revenues.
Advertising sales decreased $1,394,000, primarily as a result of
decreased inventory of long-format paid programming, or infomercials. Revenues
from infomercials decreased $1,491,000, or 29.2% primarily due to a 54%
reduction in time allotted to infomercials, offset by a 53% increase in average
rate per half hour. The reduction in time allotted to infomercials was due in
part to management's strategy to gradually remove infomercials from the
Network's mid day schedule to improve the quality of its programming and also
due to converting overnight time from infomercials to an interactive home
shopping program. Increases in average rate per half hour are due partly to
increased demand resulting from reduced inventory of time and also to increased
sales and marketing efforts.
Revenues from short-format commercial advertising (two minutes or less in
length) increased by $97,000, or 4.6%. The increase was due to a 15.4% increase
in commercial spots available to sell as a result of changing programming during
the day time from infomercials to lifestyle programs formatted for standard
commercial spot insertions. The increased inventory was primarily during a
program block which traditionally provides lower average costs per spot and
whose content is typically obtained on a revenue sharing or barter basis,
resulting in the Network retaining less revenue per spot for spots aired during
those shows. Additionally, rates for initial sales of national advertising
were, in some cases, less than that which might have been obtained selling the
spot to a Direct
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Response advertiser; however, national advertisers have greater growth potential
and help improve the on air look of the Network, making them more attractive in
the long-term. The impact of these factors resulted in a net average rate
reduction of 9.4%.
During 1995, RSTV, Inc., doing business as Via TV! ("Via") accounted for
almost all of other revenue and approximately 11% of total net revenues. Via
provided the Network with an interactive home shopping program service. Via was
to pay the Network a commission based on net sales, subject to certain base
minimums. During 1995, a contract dispute arose and Via ceased making
contractually obligated payments. The Network continued to air Via's
programming and accrued their minimum contractual obligations, however, due to
uncertainty regarding the collectibility of amounts from Via, during the second
half of 1995 management recorded a reserve against the revenue on a monthly
basis. Via's contract expired and the Network ceased airing their programming on
December 31, 1995. Subsequent to year end the Company entered into a stipulated
judgment agreement against Via in excess of the amounts recorded as receivable.
Subsequent to receiving the judgment, Via filed for bankruptcy protection. See
Part II, Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Operating Expenses:
Total operating expenses increased $3,836,000, or 23.3% from $16,425,000 in
1994 to $20,261,000 in 1995. The increase was due principally to increased
programming amortization ($3,619,000); increased sales and marketing expenses
($1,446,000); increased finance, general and administrative ($536,000) and
increased programming, production and transmission ($415,000), offset by 1994
charges of $2,180,000 for library revaluation, relocation costs and litigation
settlement which were not incurred in 1995.
Programming, production and transmission expenses for 1995 increased
$415,000, or 9.7% over 1994. Production costs increased $540,000 due to
increased production of bumpers, wrappers and promotional spots related to new
programming and our improved on air look as well as ancillary charges relating
to new original productions. Revenue sharing costs decreased by $202,000 due to
outright purchase of rights for numerous programs replacing shows which had been
purchased on a revenue sharing basis. Personnel related charges decreased
approximately $113,000 due primarily to a bonus paid to a key employee in 1994
triggered by the change in control of the Network. Transmission expenses
increased $192,000 primarily as a result of a full year's service charges on the
new transponder versus less than ten months on that transponder in 1994 along
with amortizing certain deferred charges relating to the change in transponder.
Programming amortization increased $3,619,000, or 133.7% (from
$2,707,000 to $6,326,000). The majority of this increase results from a full
year of amortization related to prime-time programming versus four months being
included in 1994.
A critical component to future growth is to improve the quality of
programming and the Network's on air look. In May 1994 the network launched its
new programming with the premier cable run of The Love Boat, followed in the
fall with a new prime time line up including Marcus Welby, M.D., Ironside and It
Takes a Thief. In 1995 the network continued this effort, adding additional
series of The Love Boat from earlier seasons, as well as The Paper Chase and
Streets of San Francisco. In addition the Network has acquired the rights to
commence airing The Rockford Files in the fall of 1996. The Network has also
improved its Feature Presentation series by adding Cinema Spotlight, a series of
hosted movies selected from the libraries of Warner Brothers, Columbia Tri Star
and Paramount Pictures. In the fall of 1995 the Network premiered Nostalgia
Television Issues and Answers, a panel discussion show hosted by Ron Nessen.
Additional original programming produced by Nostalgia in 1995 includes big band
and cabaret music specials, documentary specials produced in connection with the
National Archives and Nostalgia's Big Beat Broadcast. The Network is currently
developing additional original programming to commence airing in 1996. The
Network's on air look has been enhanced with new logos, bumpers and promotions.
Sales and marketing expenses increased $1,446,000, or 47.2% due to
increased staff and a renewed sales and marketing effort. During 1994, due to
staffing decisions made by former management and transition during office
location moves, staff levels had been reduced to an extremely low level. During
1995 the sales and marketing offices resumed and maintained normal staffing
levels through the year, resulting in an increase in salaries, wages and
benefits of $584,000. Due to the addition of sales and marketing personnel,
related travel and entertainment expenses increased by $235,000. The renewed
sales and marketing efforts coupled with our new programming required production
of new sales and marketing materials, resulting in a $237,000 increase in
related costs. Advertising expenses, primarily trade advertising, increased by
$200,000. Increased presence and prominence at trade shows and conventions
resulted in an increase of $169,000 in related costs. Additionally, new in 1995
the Network sponsored two "National Events" at a cost of $85,000. Expenditures
for premiums increased by $75,000 in connection with increased presence at trade
shows and conventions. Expenditures for program guides decreased by $43,000
through efforts to redesign and reduce overall guide production costs. Rent and
lease expenses were reduced by $112,000 as a result of numerous factors,
including closure of the New
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York office in December 1994, relocation of the Western Sales office from Los
Angeles to Denver in July of 1994 and closure of the Los Angeles headquarters
during the second half of 1994 and termination of the abandoned office lease in
Dallas, Texas in May, 1995.
The first National Event, Lions Club Week on Nostalgia, was co-sponsored
with The Lions Club International, joining local Lions Clubs with Nostalgia's
local cable affiliates to support the Lions Club's Sight First campaign. The
other event was a Life Stage Matrix Marketing seminar, in which senior marketing
executives of top ranked MSO's were invited to join us in a seminar identifying
how to target and sell to persons 50 years old and older. This seminar helped
provide tools for our Affiliates to market to a hard to reach cable buying
audience as well as help further identify us as the experts in reaching older
demographics. Both events will be renewed in 1996 and additional smaller Life
Stage Matrix seminars will be sponsored on a regional basis.
Finance, general and administrative expenses increased by $536,000, or
12.7% in 1995. The increase is primarily attributable to $951,000 additional
bad debt expense over 1994 due to potential losses relating to Via TV!.
Salaries and benefits increased by $57,000 due to vacancies in various staff
positions during 1994 which were filled for the majority of 1995. Offsetting
these increases is a decrease of $505,000 in professional fees primarily as a
result of higher public relations and research expenditures in 1994 relating to
change in control of the Company and efforts to reformat the Network's
programming and on-air look.
During 1994 the Company incurred charges of $1,260,000 in revaluing its
film library; $545,000 for relocation expenditures related to moving the
Company's headquarters and western sales office from Los Angeles, California to
Washington DC and Denver Colorado, respectively; and $375,000 in litigation
settlement costs. No such similar expenditures were incurred in 1995.
Interest expense increased by $224,000, or 86.8% primarily due to interest
on bridge loans payable to Concept.
Fiscal Year Ended December 31, 1994 Compared to Fiscal Year Ended December 31,
1993:
Net loss in 1994 increased $933,452 (or 28.3%) from net loss in 1993. This
increase was due principally to charges in 1994 for revaluation of the film
library ($1,260,032), relocation and resulting severance ($545,000) as well as
increased programming amortization ($1,217,922) offset by reductions in finance,
general and administrative expenses of $2,167,412.
Revenues:
Total revenues in 1994 decreased by $479,419 (or 3.7%) from total revenues
in 1993. This decrease was due primarily to a decline in affiliate and other
revenues offset by a net increase in advertising sales.
Affiliate sales declined by $573,309 (or 10.3%) in 1994 , reflecting the
decline in the Company's subscriber base. In addition, increased competition
for channel capacity has put downward pressure on the rates which the Company
can charge its affiliates.
Advertising sales increased by $944,632 (or 15.1%) in 1994, reflecting both
increased advertising rates as well as increased ad inventory over 1993.
Revenues from long-format paid programming, or Infomercials, included in ad
sales increased in 1994 by $503,834 (or 11%) due principally to increased rates,
despite a 5% reduction in inventory during the fourth quarter. The fourth
quarter reduction in inventory signaled the beginning of Nostalgia's commitment
to improve its on-air look by reducing the amount of daytime infomercials by a
half hour per day, replacing it with quality programming. Former management
relied heavily on use of paid programming to generate short term cash flow;
however, its overuse directly contributed to the perception that Nostalgia's
programming was "weak" and thus speeded the erosion of the Company's subscriber
base.
Revenues from short-format commercial advertising (two minutes or less in
length) increased by $440,798 (or 26%) due principally to increased commercial
spot availability. During most of 1993 the Company provided The Americana
Television Network (Americana) up to 30 hours per week to air their programs,
which time was not available for the Company to sell commercials. Revenues from
this agreement, including any share of advertising revenues received by
Americana, are included in other revenues in 1993. No such contract existed in
1994. With the availability of the Americana block, and the additional time
available due to reduced infomercials, short-format advertising spot
availability increased.
Other revenue decreased by $850,742 (or 78.6%) in 1994 due principally to
termination of the Americana contract. Other revenues in 1994 consisted
principally of shopping related programming.
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Operating Expenses:
Total operating expenses in 1994 increased $1,016,595 (or 6.6%) from total
operating expenses in 1993. This increase was due principally to charges in
1994 for revaluation of the film library ($1,260,032), relocation ($545,000) and
settlement of litigation ($375,000) as well as increased programming
amortization ($1,217,922) offset by reductions in finance, general and
administrative expenses of $2,167,412.
Programming, production and transmission costs increased by $76,787 (or
1.8%) in 1994 due principally to a $121,000 increase in transponder costs
associated with the new transponder launched in March 1994, offset by reduced
production and post production costs.
Programming amortization increased by $1,217,922 (or 81.8%) in 1994 due
principally to the new fall prime time line up which included Marcus Welby,
M.D., Ironside and It Takes a Thief. These shows replaced, in part,
infomercials and programming provided to the Company on a revenue sharing basis.
During 1994 the Company took a one time charge of $1,260,032 due to
revaluation of the film library, changing its estimated useful life ($864,742)
and reducing it to its fair value ($395,290). The Company has changed its
programming direction away from films and black and white programs in favor of
color series and features, reducing usage of the film library to under 20% of
weekly air time. This substantial reduction caused management to believe the
historical value of the film library to be impaired. The fair value was
estimated based upon expected future cash flows from the library over its
estimated remaining useful life of 3 years, discounted at 9%.
Selling expenses decreased by $290,734 (or 8.7%) in 1994 primarily as a
result of reduced personnel costs, including travel and entertainment, of
$181,000. Additionally, due to fewer affiliate launches in 1994 launch support
fees dropped by $138,000. Rent and occupancy expenses decreased by $99,000 due
to office relocations, as well as additional reductions in other office
expenditures. Additionally, 1993 included $156,000 of marketing expenses
related to Americana which were not included in 1994. These savings were offset
by an increase of $154,000 in convention costs and an increase of $106,000 in
program guides and advertising costs.
Finance, general and administrative expenses decreased by $2,167,412 (or
34%) in 1994 due largely to $1,357,000 reduction in legal and professional costs
due to settlement of numerous legal actions outstanding during much of 1993.
Personnel costs, including travel and entertainment, decreased by $426,000
primarily due to controlled spending on travel and entertainment matters. Bad
debt expense decreased by $207,000.
Interest expense decreased by $562,562 (or 68.5%) due principally to
conversion of the $7,000,000 Tiger Notes in November 1993. This savings was
offset in part by increased interest charges of $168,000 to related parties.
In 1994 the Company incurred $545,000 in severance, moving and other costs
associated with relocating the Company's headquarters from Los Angeles,
California to Washington, D.C.
Settlement of litigation increased by $375,000 in 1994. The Company
settled two lawsuits relating to fees claimed in excess of $2,000,000 for
$375,000.
Liquidity and Capital Resources
Cash decreased by $1,926,944 (or 69.2%) from $2,782,683 at December 31,
1994 to $855,739 at December 31, 1995. The significant cash balance at the end
of 1994 is due to $2,500,000 in bridge financing received in December, 1994 from
Concept. The promissory note for the financing (the "Note") bears interest at
8.43% (6.45% prior to February 1996) and is due upon the earlier of an equity
investment of not less than the amount of the Note or October 31, 1996; however,
Concept has represented that the Note will not be called prior to February 1,
1997 unless it is replaced by an equity investment. As discussed more fully
below, during 1995 and 1996 Concept has provided additional debt financing to
the Company and has also committed to provide further debt-financing during the
balance of 1996.
Working capital decreased by $1,977,810 (or 78.4%) from $2,522,771 at
December 31, 1994 to $544,961 at December 31, 1995, primarily as a result of
$2,500,000 cash proceeds from long-term debt in 1994 and increases in
programming and cablecast fees.
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Current assets increased by $514,466 (or 5.9%) at December 31, 1995 from
$8,627,134 to $9,141,600. Programming and cablecast rights accounted for
$3,516,300 of the increase as a result of the new prime time line up. Accounts
receivable decreased $749,098 primarily as a result of increased collection
efforts and fully reserving the Via receivable.
Current liabilities increased by $2,492,276 (or 40.8%) from $6,104,363 at
December 31, 1994 to $8,596,639 at December 31, 1995. Current maturities of
programming and cablecast fees increased by $3,013,655, primarily due to amounts
owed on the new prime time line up. Accounts payable decreased $743,112
primarily due to payments to vendors.
Cash flows from operating activities decreased by $2,092,956 due to an
increased loss of $5,245,190, offset by an increase in non-cash expenses of
$3,288,843. The most significant items comprising these changes were additional
amortization of programming costs of $3,619,077 and the 1994 change in estimate
and write down of the film library of $1,260,032.
Cash used for investing activities increased by $145,982 due primarily to
the increase in acquisition of programming and cablecast rights of $185,867.
Cash provided by financing activities decreased by $1,448,977 due to an
increase in financing by Concept of $5,000,000, decrease from sale of stock of
$2,316,000, offset by increased payments for programming and other debt of
$4,132,977.
In light of the Company's recurring losses, management is actively
monitoring expenses and examining operating methods to increase efficiencies.
These measures may provide short term improvement, but do not address the more
critical long term growth needs for the Network. In order to grow, the Network
needs to increase its affiliate base which, in turn, will increase the
subscriber base allowing the Network to increase its advertising rates as well
as affiliate revenues. To provide for necessary future growth, management has
embarked on an aggressive affiliate marketing campaign including prominent
presence at major trade shows along with trade advertising.
A critical component to future growth is to improve the quality of
programming and the Network's on air look. In May, 1994, the Network launched
its new programming with the premier cable run of The Love Boat, followed in the
Fall with a new prime time line up including Marcus Welby, M.D., Ironside and It
Takes a Thief. In 1995, the Network continued this effort, adding additional
series of The Love Boat from earlier seasons, as well as The Paper Chase and
Streets of San Francisco. In addition the Company has acquired the rights to
commence airing The Rockford Files in the fall of 1996. The Network has also
improved its Feature Presentation series by adding Cinema Spotlight, a series of
hosted movies selected from the libraries of Warner Brothers, Columbia Tri Star
and Paramount Pictures. In the fall of 1995 the Network premiered Nostalgia
Television Issues and Answers, a panel discussion show hosted by Ron Nessen.
Additional original programming produced by Nostalgia in 1995 includes big band
and cabaret music specials, documentary specials produced in connection with the
National Archives and Nostalgia's Big Beat Broadcast. The Network is currently
developing additional original programming to commence airing in 1996. The
Network's on air look has been enhanced with new logos, bumpers and promotions.
In recent months, the Network has stabilized losses in its subscriber base
due to retransmission consent and it presently reaches approximately nine
million subscribers. Ratings have risen to a .2 Total Day and a .4 Monday to
Sunday Prime time. During 1995, the Network launched its Lifestage Matrix
program which provides Affiliates with the necessary training and tools to
effectively target the 50 years old and older demographic in their communities.
Additionally, the Network has forged a relationship with Lion's Club
International whereby its member organizations throughout the country will work
with Nostalgia and its Affiliates on its renowned SightFirst campaign. The
community affairs program, launched last fall, won rave reviews from Affiliates
and was a finalist for a Cable Television Public Affairs Association Beacon
Award.
Since 1990, Concept Communications, Inc. ("Concept"), the Company's
majority shareholder, has been a principal source of the Company's capital.
Concept bought common stock from the Company for $2.3 million in 1994 and
provided $2.5 million and $7.5 million in bridge loan financing during 1994 and
1995, respectively. Additionally, Concept has provided $6.5 million in debt
financing to the Company since January 1, 1996, and has also committed to
provide up to an additional $4.5 million in debt financing during the balance of
the calendar year. Management believes that these funds will be sufficient to
satisfy its operating needs for 1996. In connection with the additional
borrowings and Concept's agreement to extend the due dates on the bridge
financing to February 1, 1997, the Company has entered into a security agreement
covering substantially all the Company's assets in favor of Concept. Concept
has stated its intention that such financing be converted to equity once
Nostalgia and Concept are able to reach a mutual agreement as to the terms at
which such additional shares are to be sold to Concept.
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Management projected in 1995 that the Company would need additional
financing of approximately $20 million in the aggregate during the period 1996
through 2000. Based on the Company's experience in 1995 and on changes in the
industry, management now believes that the Company will require significantly
more funds during this period. Additional competition has both increased the
costs which the Company must pay for programming and decreased the revenue
potentials for the remaining years of the period. The Company also anticipates
increased sales and marketing costs will be necessary as a result of increased
competition.
Management has considered various steps the Company might take to achieve
profitability. It now believes that the Company's best alternative would be to
form an alliance with a strategic partner, such as a cable operator or a
diversified media company. By entering into an alliance, the Company would have
greater bargaining power in its dealings with cable system operators,
programming providers and advertisers. It might also gain better access to
distribution.
The Company's Board of Directors has directed its Executive Committee to
study the question of whether the Company should enter into a strategic
alliance, and to make recommendations to the full Board regarding this proposal.
The Executive Committee is now actively engaged in this study.
Because of the unpredictable factors involved in the search for a strategic
alliance, and the dynamic changes taking place in the industry, there is
considerable uncertainty about what the Company's needs will be in future years.
There can be no assurance either that the Company will be able to locate
sufficient financing in excess of the funds committed for 1996, or that it will
be able to achieve a strategic alliance.
Material Commitments
The Company leases transponder space and related services on a Satellite at
a base monthly rental of $205,400. The lease provides for greater back-up
protection than did the Company's previous satellites in the event of satellite
failure. The lease terminates with the life of the Satellite, which is expected
in the year 2006, and required the Company to pay a launch protection fee of
$1,000,000 plus capitalized interest at 12% and other direct costs.
As of March 15, 1996, Nostalgia had issued and outstanding promissory notes
to Concept in an aggregate principal amount of $12 million bearing interest at
rates ranging from 7.58 to 8.43% per annum and due and payable on October 1,
1996. Concept has represented that it does not intend to call any of these
promissory notes prior to February 1, 1997 or until the debt is exchanged for
equity.
Effect of New Accounting Pronouncements
Statement of Financial Accounting Standards No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("SFAS 121") does not apply to assets whose accounting is prescribed by
Statement of Financial Accounting Standards Nos. 53 and 63, "Financial Reporting
by Producers and Distributors of Motion Picture Films" and "Financial Reporting
by Broadcasters" which includes programming and cablecast rights. The Company
will adopt SFAS 121 effective January 1, 1996 for its other long-term assets.
Management does not anticipate that its adoption will have a material impact on
the financial statements.
Effective January 1, 1996, the Company will adopt Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). The accounting requirements of this statement are effective for
transactions entered into in fiscal years that begin after December 15, 1995.
Since the effective date for adopting SFAS 123 is subsequent to year end, SFAS
123 has not had any impact on the disclosures herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements required by this Item are included
herewith as a separate section of this Report, commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
As previously reported in the Company's Form 8-K filed on August 18, 1994,
Lane, Gorman Trubitt, L.L.P. ("LGT"), the Company's former independent public
accountants resigned effective August 11, 1994. The Company disagreed with
LGT's opinion
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modification in its report on the Company's financial statements for 1993
regarding the Company's ability to continue as a going concern and a statement
to that effect was included in the Company's Form 10-K for 1993. There were no
other disagreements with LGT. As previously reported in the Company's Form 8-K
filed February 10, 1995, the Company has engaged BDO Seidman as its independent
public accountants. There are no disagreements with the Company's current
independent public accountants, BDO Seidman.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Nostalgia will file a definitive proxy statement with the Securities and
Exchange Commission not later than 120 days after the end of the fiscal year
covered by this Form 10-K pursuant to Regulation 14A. The information called
for by this Item with respect to directors has been omitted pursuant to General
Instruction G(3). This information is incorporated by reference from the Proxy
Statement for the 1996 Annual Meeting. For information relating to the
Executive Officers of the Company, see Part I of this report. The Section 16(A)
reporting information is incorporated by reference from the Proxy Statement for
the 1996 Annual Meeting.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this Item with respect to executive
compensation has been omitted pursuant to General Instruction G(3). This
information is incorporated by reference from the Proxy Statement for the 1996
Annual Meeting.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this Item with respect to security ownership
of certain beneficial owners and management has been omitted pursuant to General
Instruction G(3). This information is incorporated by reference from the Proxy
Statement for the 1996 Annual Meeting.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this Item with respect to certain
relationships and transactions with management and others has also been omitted
pursuant to General Instruction G(3). This information is incorporated by
reference from the Proxy Statement for the 1996 Annual Meeting.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
--------------------
Reference is made to the listing on page F-1 for a list of all
financial statements and financial statement schedules filed as part of this
report.
(b) Reports on Form 8-K
-------------------
On January 19, 1996 the Company filed Form 8-K relating to the
execution of a January 4, 1996 Security Agreement granting Concept a security
interest in all of the Company's personal property and fixtures and the proceeds
thereof as security for a new loan of $1,000,000. On March 13, 1996 the Company
filed Form 8-K relating to (1) the amendment of the January 4, 1996 Security
Agreement to secure all promissory notes issued by the Registrant to Concept
and any other obligations of the Registrant to Concept in connection with a new
loan of $1,000,000 and the extension of all existing obligations until October
1, 1996; and, (2) the modification of John G. Heim's Employment Agreement to
provide that it will expire on June 30, 1996.
(c) Exhibits
--------
The Exhibits that are filed with this report, or that are incorporated
herein by reference, are set forth in the Exhibit Index beginning on page E-1.
-16-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
THE NOSTALGIA NETWORK, INC.
By: /s/ John G. Heim
------------------------------------------
John G. Heim, President, Chief Executive Officer, and Director
By: /s/ Martin A. Gallogly
------------------------------------------
Martin A. Gallogly, V.P., Treasurer, and Chief Financial Officer
Pursuant to the requirements of the Securities and Exchange act of 1934, this
report has been signed below by the following persons in the capacities and on
the date indicated.
Signature and Title Date
- ------------------- ----
/s/ Phillip Sanchez March 30, 1996
- -----------------------------------------
Ambassador Phillip Sanchez, Director and Chairman of the Board
/s/ Christopher A. Cates April 12, 1996
- -----------------------------------------
Christopher A. Cates, Director
/s/ Floyd Christofferson March 26, 1996
- -----------------------------------------
Floyd Christofferson, Director
/s/ Diane M. Faure March 27, 1996
- -----------------------------------------
Diane M. Faure, Director
/s/ Dong Moon Joo April 12, 1996
- -----------------------------------------
Dong Moon Joo, Director
/s/ Masahisa Kobayashi March 31, 1996
- -----------------------------------------
Masahisa Kobayashi, Director
/s/ William H. Lash III March 26, 1996
- -----------------------------------------
William H. Lash III, Director
/s/ Josette Shiner March 28, 1996
- -----------------------------------------
Josette Shiner, Director
/s/ Robert J. Wussler March 30, 1996
- -----------------------------------------
Robert J. Wussler, Director
-17-
<PAGE>
INDEX TO EXHIBITS
<TABLE>
Exhibit No. Description Page No.
----------- ----------- --------
<S> <C> <C>
3.1 Certificate of Incorporation, as amended (filed as Exhibit 3.1 to the
Registrant's Report on Form 10-K for the Year Ended December 31, 1994, and
incorporated herein by reference thereto)
3.2 Amended and Restated Bylaws (filed as Exhibit 3.2 to the Registrant's
Report on Form 10-K for the Year Ended December 31, 1994, and incorporated
herein by reference thereto)
4.1 Specimen Common Stock Certificate (filed as Exhibit 4(a) to the
Registrant's Report on Form 10-K for the Year Ended December 31, 1987, and
incorporated herein by reference thereto)
4.2 Specimen Common Stock Purchase Warrant Certificate (filed as Exhibit 4(b)
to the Registrant's Report on Form 10-K for the Year Ended December 31,
1987, and incorporated herein by reference thereto)
4.3 Specimen Preferred Stock Certificate (filed as Exhibit 4(c) to the
Registrant's Report on Form 10-K for the Year Ended December 31, 1987, and
incorporated herein by reference thereto)
10.1 Promissory Note, dated December 16, 1994, made by the Registrant payable to
Concept Communications, Inc. (filed as Exhibit 10.2 to the Registrant's
Report on Form 10-K for the Year Ended December 31, 1994, and incorporated
herein by reference thereto)
10.2 Promissory Note, dated March 29, 1995, made by Registrant payable to
Concept Communications, Inc. (filed as Exhibit 10.1 to the Registrant's
Report on Form 10-K for the Year Ended December 31, 1994, and incorporated
herein by reference thereto)
10.3 Letter Agreement, dated March 29, 1995, by and between the Registrant and
Concept Communications, Inc. regarding bridge loan. (filed as Exhibit 10.3
to the Registrant's Report on Form 10-K for the Year Ended December 31,
1994, and incorporated herein by reference thereto)
10.4 Promissory Note, dated July 24, 1995, made by Registrant payable to Concept E-3
Communications, Inc.
10.5 Promissory Note, dated October 2, 1995, made by Registrant payable to E-9
Concept Communications, Inc.
10.6 Promissory Note, dated January 4, 1996, made by the Registrant payable to
Concept Communications, Inc. (filed as Exhibit 1 to the Registrant's Report
on Form 8-K dated January 19, 1996, and incorporated herein by reference
thereto)
- ------------
* Management contract or compensatory plan, contract or arrangement.
E-1
<PAGE>
</TABLE>
<TABLE>
<S> <C> <C>
10.7 Security Agreement, dated January 4, 1996, between the Registrant and
Concept Communications, Inc. (filed as Exhibit 2 to the Registrant's Report
on Form 8-K dated January 19, 1996, and incorporated herein by reference
thereto)
10.8 Promissory Note, dated February 26, 1996, made by the Registrant payable to
Concept Communications, Inc. (filed as Exhibit 10 (b) to the Registrant's
Report on Form 8-K dated March 13, 1996, and incorporated herein by
reference thereto)
10.9 Letter Agreement dated February 26, 1996 between the Registrant and Concept
Communications, Inc. (filed as Exhibit 10 (a) to the Registrant's Report on
Form 8-K dated March 13, 1996, and incorporated herein by reference
thereto)
10.10 Agreement, dated March 31, 1992, by and between the Registrant and
Atlantic Video, Inc. (filed as Exhibit 10.4 to the Registrant's Report on
Form 10-K for the Year Ended December 31, 1994, and incorporated herein by
reference thereto)
10.11* 1987 Stock Option Plan (filed as Exhibit 10(i) to the Registrant's Report
on Form 10-K for the Year Ended December 31, 1987, and incorporated herein
by reference thereto)
10.12* 1990 Stock Option Plan (filed as Exhibit 10(tt) to the Registrant's
Report on Form 10-K for the Year Ended December 31, 1990, and incorporated
herein by reference thereto)
10.13* Employment Agreement, dated August 2, 1994, by and between the Registrant
and John G. Heim. (filed as Exhibit 10.8 to the Registrant's Report on Form
10-K for the Year Ended December 31, 1994, and incorporated herein by
reference thereto)
10.15* Stock Option Agreement, dated August 2, 1994, by and between the
Registrant and John G. Heim. (filed as Exhibit 10.9 to the
Registrant's Report on Form 10-K for the Year Ended December 31, 1994,
and incorporated herein by reference thereto)
27 Financial Data Schedule as required by Item 601 (c) of Regulation S-K E-15
</TABLE>
E-2
<PAGE>
[GRAPHIC OMITTED]
THE NOSTALGIA NETWORK, INC.
FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
DECEMBER 31, 1995, 1994 AND 1993
F-1
<PAGE>
THE NOSTALGIA NETWORK, INC.
CONTENTS
Page
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-3 - F-4
BALANCE SHEETS F-5
STATEMENTS OF OPERATIONS F-6
STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY (DEFICIT) F-7
STATEMENTS OF CASH FLOWS F-8
NOTES TO FINANCIAL STATEMENTS F-9 - F-23
SCHEDULE II F-24
F-2
<PAGE>
Report of Independent Certified Public Accountants
--------------------------------------------------
To the Board of Directors and Stockholders
The Nostalgia Network, Inc.
We have audited the accompanying balance sheets of The Nostalgia Network,
Inc. (the "Company") as of December 31, 1995 and 1994 and the related statements
of operations, changes in stockholders' equity and cash flows for the years then
ended. We have also audited schedule II for the years ended December 31, 1995
and 1994. These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Nostalgia Network, Inc.
as of December 31, 1995 and 1994 and the results of its operations and cash
flows for the years then ended, in conformity with generally accepted accounting
principles. Also, in our opinion, schedule II presents fairly, in all material
respects, the information set forth therein for the years ended December 31,
1995 and 1994.
BDO Seidman, LLP
Washington DC
March 8, 1996
F-3
<PAGE>
Report of Independent Certified Public Accountants
--------------------------------------------------
To the Board of Directors and Stockholders
The Nostalgia Network, Inc.
We have audited the accompanying consolidated statements of operations,
changes in stockholders' equity and cash flows of The Nostalgia Network, Inc.
and Subsidiary (the "Company") for the year ended December 31, 1993. We have
also audited schedule II for the year ended December 31, 1993. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, results of operations and cash flows of The Nostalgia
Network, Inc. and Subsidiary for the year ended December 31, 1993, in conformity
with generally accepted accounting principles. Also, in our opinion, schedule II
presents fairly, in all material respects, the information set forth therein for
the year ended December 31, 1993.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred recurring losses from operations
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also discussed in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Lane Gorman Trubitt, L.L.P.
Dallas, Texas
February 11, 1994
F-4
<PAGE>
<TABLE>
<CAPTION>
THE NOSTALGIA NETWORK, INC.
BALANCE SHEETS
December 31,
1995 1994
---- ----
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 855,739 $ 2,782,683
Accounts receivable, less allowance of $2,258,000
and $1,291,000 for doubtful accounts 1,304,596 2,053,694
Prepaid legal fees 75,000 316,494
Prepaid expenses 106,265 190,563
Programming and cablecast rights 6,800,000 3,283,700
----------------------------
Total current assets 9,141,600 8,627,134
Programming and cablecast rights, at cost - net 13,185,348 839,856
Property and equipment, at cost - net 1,612,562 1,660,790
Deposits 16,031 26,757
----------------------------
Total assets $ 23,955,541 $ 11,154,537
============================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of:
Programming and cablecast fees $ 6,200,000 $ 3,186,335
Notes payable and long-term debt - Related parties 17,000 18,113
- Others 138,493 294,012
Accounts payable - Trade 1,146,876 1,417,174
- Related parties 259,964 732,778
Accrued expenses and other liabilities 834,306 455,951
----------------------------
Total current liabilities 8,596,639 6,104,363
----------------------------
LONG-TERM OBLIGATIONS, less current maturities:
Programming and cablecast fees 11,901,542 115,347
Notes payable and long-term debt - Related parties 10,356,096 2,872,048
Accrued interest payable - Related parties 569,250 95,186
Other 54,747 13,959
----------------------------
Total long-term obligations 22,881,635 3,096,540
----------------------------
Total liabilities 31,478,274 9,200,903
----------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock: $2 par value, 125,000 shares
authorized, 3,250 shares issued and outstanding 6,500 6,500
Common stock subscribed -- 16,000
Common stock: $.04 par value, 30,000,000
shares authorized, 20,274,371 and 20,241,037
shares issued in 1995 and 1994, respectively 810,975 809,641
Additional paid-in capital 30,213,554 30,343,888
Deficit (38,553,762) (29,077,395)
-----------------------------
(7,522,733) 2,098,634
Treasury stock - 0 and 21,994 shares at cost, respectively -- (145,000)
-----------------------------
Total stockholders' equity (deficit) (7,522,733) 1,953,634
-----------------------------
Total liabilities and stockholders' equity
(deficit) $ 23,955,541 $ 11,154,537
============================
</TABLE>
The accompanying summary of accounting policies and notes are an Integral part
of these financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
THE NOSTALGIA NETWORK, INC.
STATEMENTS OF OPERATIONS
For the Years Ended December 31,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Operating Revenues:
Affiliate sales $ 4,205,324 $ 5,014,547 $ 5,587,856
Advertising sales 5,812,663 7,206,501 6,261,869
Other 1,248,898 231,052 1,081,794
--------------------------------------------
Total operating revenues 11,266,885 12,452,100 12,931,519
--------------------------------------------
Operating Expenses:
Programming, production and transmission 4,682,928 4,267,913 4,191,126
Programming amortization 6,325,975 2,706,898 1,488,976
Sales and marketing 4,508,084 3,062,181 3,352,915
Finance, general and administrative 4,743,944 4,208,145 6,375,557
--------------------------------------------
Subtotal 20,260,931 14,245,137 15,408,574
Revaluation of film library -- 1,260,032 --
Relocation costs -- 545,000 --
Settlement of litigation -- 375,000 --
------------------------------------------
Total operating expenses 20,260,931 16,425,169 15,408,574
--------------------------------------------
Loss from operations (8,994,046) (3,973,069) (2,477,055)
Interest Expense 482,321 258,108 820,670
--------------------------------------------
Net loss $ (9,476,367) $ (4,231,177) $ (3,297,725)
============================================
Loss per common share $ (.47) $ (.22) $ (.22)
============================================
Weighted average shares outstanding 20,267,704 19,504,488 14,857,418
============================================
</TABLE>
The accompanying summary of accounting policies and notes are an Integral part
of these financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
THE NOSTALGIA NETWORK, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended December 31, 1995, 1994 and 1993
Total
Preferred Common Common Additional Common Stockholders'
Stock Stock Stock Paid-In Stock-In Equity
Shares Amount Shares Amount Subscribed Capital Treasury Deficit (Deficit)
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1992 3,875 $7,750 14,384,166 $575,367 $ - $20,479,853 $(145,000) $(21,548,493) $ (630,523)
Sale of common Stock
through exercise
of warrants
Net loss for the year - - 4,634,995 185,399 218,125 7,335,641 - - 7,739,165
- - - - - - - (3,297,725) (3,297,725)
-------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1993 3,875 7,750 19,019,161 760,766 218,125 27,815,494 (145,000) (24,846,218) 3,810,917
Conversion of Preffered (625) (1,250) 62,500 2,500 - (1,250) - - -
Common stock
Sale of Common Stock - - 869,565 34,783 - 1,965,217 - - 2,000,000
through exercise
of warrants - - 289,811 11,592 (202,125) 564,427 - - 373,894
Net loss for the year - - - - - - - (4,231,177) (4,231,177)
-------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1994 3,250 6,500 20,241,037 809,641 16,000 30,343,888 (145,000) (29,077,395) 1,953,634
Issuance of common
stock subscribed,
21,994 from Treasury - - 33,334 1,334 (16,000) (130,334) 145,000 - -
Net loss for the year - - - - - - - (9,476,367) (9,476,367)
-------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1995 3,250 $6,500 20,274,371 $810,975 $ - $30,213,554 $ - $(38,553,762) $(7,522,733)
=============================================================================================================
</TABLE>
The accompanying summary of accounting policies and notes are an Integral part
of these financial statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
THE NOSTALGIA NETWORK, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(9,476,367) $(4,231,177) $(3,297,725)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 175,000 228,202 153,576
Programming amortization 6,325,975 2,706,898 1,488,976
Revaluation of film library -- 1,260,032 --
Amortization of debt issue costs and note
payable discount -- -- 98,384
Provision for losses on accounts receivable 967,000 (16,000) 772,000
Net change in operating assets and liabilities:
Increase in accounts receivable (217,902) (658,861) (116,666)
(Increase) decrease in prepaid expenses 325,792 23,032 (156,229)
Increase (decrease) in accounts payable (743,112) 823,046 946,047
Increase (decrease) in accrued expenses
and other liabilities 893,206 207,376 587,195
-------------------------------------------
Net cash provided by (used in)
operating activities (1,750,408) 342,548 475,558
-------------------------------------------
Cash flows from investing activities:
Decrease (Increase) in deposits 10,727 (13,200) (292,529)
Purchases of property and equipment (259,972) (275,930) (5,862)
Acquisition of programming and cablecast rights (2,087,067) (1,901,200) (104,122)
-------------------------------------------
Net cash used in investing activities (2,336,312) (2,190,330) (402,513)
-------------------------------------------
Cash flows from financing activities:
Proceeds from notes payable 7,500,000 2,500,000 --
Payments of long-term obligations (5,340,224) (1,207,247) (16,666)
Proceeds from sale of common stock and
additional paid-in capital -- 2,316,000 218,125
-------------------------------------------
Net cash provided by financing activities 2,159,776 3,608,753 201,459
-------------------------------------------
Net (decrease) increase in cash and cash
equivalents (1,926,944) 1,760,971 274,504
Cash and cash equivalents - beginning of year 2,782,683 1,021,712 747,208
-------------------------------------------
Cash and cash equivalents - end of year $ 855,739 $ 2,782,683 $ 1,021,712
===========================================
</TABLE>
The accompanying summary of accounting policies and notes are an Integral
part of these financial statements.
F-8
<PAGE>
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Nostalgia Network, Inc. (the "Company") is engaged in the operation of
Nostalgia Television (the "Network"), a television programming service
offering a variety of entertainment, lifestyle and informational
programming to a target audience of active adult Americans who are 50 years
of age or older via satellite to cable television and alternative
broadcasting systems throughout the United States.
Significant accounting policies used by the Company are described below:
Basis of Presentation
---------------------
During 1995, the Company dissolved its wholly-owned subsidiary, which had
no recorded assets or liabilities and had no operations for many years.
There was no gain or loss on the dissolution. The consolidated financial
statements of prior years include the accounts of the Company and its
wholly-owned subsidiary after elimination of all significant intercompany
balances and transactions.
Revenue Recognition
-------------------
Revenues from providing programming services to cable systems and sales to
advertisers are recognized on a monthly basis as the services are provided.
The Company grants credit to cable systems and advertisers throughout the
United States.
Property and Equipment
----------------------
Depreciation and amortization are calculated based on estimated service
lives of depreciable assets by the straight-line method.
Leasehold improvements are amortized over the lives of the respective
leases or the service lives of the improvements, whichever is shorter.
Major repairs or replacements of property and equipment are capitalized.
Maintenance, repairs and minor replacements are charged to operations as
incurred.
When property or equipment are retired or otherwise disposed of, their cost
and related accumulated depreciation are removed from the accounts and any
resulting gain or loss is included in operations.
Programming and Cablecast Rights
--------------------------------
The film library and cablecast rights are amortized using the straight-line
method, which approximates the anticipated revenue stream, over the
estimated useful life not to exceed eleven years or the lives of the rights
agreements, respectively, in accordance with SFAS No. 63 - Financial
Reporting by Broadcasters. Cablecast rights for programs to be amortized
within the following year are classified as current assets. Prior to 1994,
the film library was being amortized over a 20 year life. The Company
periodically evaluates its programming and cablecast rights for possible
changes in estimated useful life or the possibility of impairment. If a
programming or cablecast right is considered potentially impaired, an
analysis is performed consisting of a comparison of future projected net
cash flows to the carrying value of such asset. Any excess carrying value
over future projected net cash flows is written off due to impairment. See
Note 3 for discussion of write-downs due to a change in estimated useful
life and impairment in fiscal 1994.
F-9
<PAGE>
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Concluded)
Net Loss Per Common Share
-------------------------
The net loss per common share is computed by dividing the net loss for the
period by the weighted average number of shares outstanding. Outstanding
stock warrants, options and preferred shares are not included in the
calculations because their effect would be anti-dilutive.
Cash Equivalents
----------------
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
The Company maintains its cash balances in First Union National Bank of
Washington and Correspondent Services Corporation in McLean, Virginia.
Balances at First Union are insured by the Federal Deposit Insurance
Corporation up to $100,000. Balances at Correspondence Services Corporation
are insured up to $5,000,000 through a combination of $500,000 SPIC
insurance and an additional $4,500,000 insurance policy provided by Aetna.
Uninsured balances approximate $16,000 and $2,600,000 at December 31, 1995
and 1994, respectively.
Risks and Uncertainties
-----------------------
The Network competes with other programmers for access to limited channel
space and must also compete with other programmers for viewers. The Company
believes that by targeting the 50 years old and older market they have
distinguished themselves from other cable providers.
Use of Estimates
----------------
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make certain
estimates and assumptions particularly as it relates to the valuation of
accounts receivable and programming and cablecast rights and the disclosure
of contingent assets and liabilities. Actual results could differ from
those estimates.
F-10
<PAGE>
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
1. MANAGEMENT STATEMENT
In light of the Company's recurring losses, management is actively
monitoring expenses and examining operating methods to increase
efficiencies. These measures are intended to address short term operating
requirements, but do not address the more critical long term growth needs
for the Network. In order to grow, the Network needs to increase its
affiliate base which, in turn, will increase the subscriber base allowing
the Network to increase its advertising rates as well as affiliate
revenues. To provide for necessary future growth, management has embarked
on an aggressive affiliate marketing campaign including a prominent
presence at major trade shows along with trade advertising.
A critical component to future growth is to improve the quality of
programming and the Network's on air look. In May 1994, the Network
launched its new programming with the premier cable run of The Love Boat,
followed in the Fall with a new prime time line up including Marcus Welby,
M.D., Ironside and It Takes a Thief. In 1995, the Network continued this
effort, adding additional series of The Love Boat from earlier seasons, as
well as The Paper Chase and Streets of San Francisco. In addition the
Company has acquired the rights to commence airing The Rockford Files in
the fall of 1996. The Network has also improved its Feature Presentation
series by adding Cinema Spotlight, a series of hosted movies selected from
the libraries of Warner Brothers, Columbia Tri Star and Paramount Pictures.
In the fall of 1995 the Network premiered Nostalgia Television Issues and
Answers, a panel discussion show hosted by Ron Nessen. Additional original
programming produced by Nostalgia in 1995 includes big band and cabaret
music specials, documentary specials produced in connection with the
National Archives and Nostalgia's Big Beat Broadcast. The Network is
currently developing additional original programming to commence airing in
1996. The Network's on air look has been enhanced with new logos, bumpers
and promotions.
In recent months, the Network has stabilized losses in its subscriber base
due to retransmission consent and it presently reaches approximately nine
million subscribers. Ratings have risen to a .2 Total Day and a .4 Monday
to Sunday Prime time. During 1995, the Network launched its Lifestage
Matrix program which provides affiliates with the necessary training and
tools to effectively target the 50 years old and older demographic in their
communities. Additionally, the Network has forged a relationship with
Lion's Club International whereby its member organizations throughout the
country will work with Nostalgia and its affiliates on its renowned
SightFirst campaign. The community affairs program, launched last fall, won
rave reviews from affiliates and was nominated for a Cable Television
Public Affairs Association Beacon Award.
Concept Communications, Inc. ("Concept"), the Company's majority
shareholder, has provided $6.5 million in debt financing to the Company
since January 1, 1996, and has also committed to provide up to an
additional $4.5 million in debt financing during the balance of the
calendar year. Management believes that these funds will be sufficient to
satisfy its operating needs for 1996.
Management projected in 1995 that the Company would need additional
financing of approximately $20 million in the aggregate during the period
1996 through 2000. Based on the Company's experience in 1995 and on changes
in the industry, management now believes that the Company will require
significantly more funds during this period. Additional competition has
both increased the costs which the Company must pay for programming and
decreased the revenue potentials for the remaining years of the period. The
Company also anticipates increased sales and marketing costs will be
necessary as a result of increased competition.
Management has considered various steps the Company might take to achieve
profitability. It now believes that the Company's best alternative would be
to form an alliance with a strategic partner, such as a cable operator or a
diversified media company. By entering into an alliance, the Company would
have greater bargaining power in its dealings with cable system operators,
programming providers and advertisers. It might also gain better access to
distribution.
F-11
<PAGE>
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
1. MANAGEMENT STATEMENT (Concluded)
The Company's Board of Directors has directed its Executive Committee to
study the question of whether the Company should enter into a strategic
alliance, and to make recommendations to the full Board regarding this
proposal. The Executive Committee is now actively engaged in this study.
Because of the unpredictable factors involved in the search for a strategic
alliance, and the dynamic changes taking place in the industry, there is
considerable uncertainty about what the Company's needs will be in future
years. There can be no assurance that the Company will be able to locate
financing in the required amount (in excess of the funds committed by
Concept for 1996), or that it will be able to achieve a strategic
alliance.
2. PROPERTY AND EQUIPMENT
Major classifications of property and equipment and their respective
estimated service lives are summarized below:
1995 1994
---- ----
Transponder $ 1,427,968 $ 1,427,968 12 years
Machinery and equipment 989,466 869,870 5 to 7 years
Furniture and fixtures 247,535 208,188 5 to 7 years
Leasehold improvements 89,838 89,491 5 years
----------------------------
2,754,807 2,595,517
Accumulated depreciation
and amortization (1,142,245) (934,727)
----------------------------
$ 1,612,562 $ 1,660,790
===========================
Depreciation expense included in Sales, General and Administrative expenses
was $175,000, $112,162, and $153,576 for 1995, 1994 and 1993, respectively.
Deposits of approximately $762,000 in 1993 were transferred to property and
equipment in 1994 as they related to the transponder which was placed in
service the same year.
3. PROGRAMMING AND CABLECAST RIGHTS
Prime time series consist of broadcast licenses for classic television
series and other programming acquired from various film studios or other
sources. The film library consists of vintage feature films, interstitial
material, and other programming produced and/or owned by the Company. Film
rights include broadcast licenses for films and specialty programming.
Other programming and cablecast rights include costs to duplicate and edit
programs for broadcasting as well as costs to produce programs and
interstitial materials.
1995 1994
---- ----
Prime time series $20,083,000 $ 4,532,000
Film library 1,191,667 1,191,667
Film rights 750,000 1,634,500
Other 1,640,272 1,610,644
----------------------------
23,664,939 8,968,811
Less accumulated amortization (3,679,591) (4,845,255)
----------------------------
$ 19,985,348 $ 4,123,556
============================
Consisting of:
Current $ 6,800,000 $ 3,283,700
Long term 13,185,348 839,856
----------------------------
$ 19,985,348 $ 4,123,556
============================
F-12
<PAGE>
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
3. PROGRAMMING AND CABLECAST RIGHTS (Concluded)
Estimated future amortization of programming and cablecast rights and
maturities of related long-term obligations are approximately as follows:
<TABLE>
<CAPTION>
Year 1996 1997 1998 1999 2000
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Amortization $6,800,000 $5,570,000 $3,944,000 $3,139,000 $ 532,000
Obligation maturities 6,200,000 5,466,000 4,208,000 2,228,000 -
</TABLE>
The Company acquired the following rights and materials during the years
ended December 31,:
1995 1994 1993
---- ---- ----
Prime time series $20,197,000 $ 4,532,000 $ -
Other 1,107,567 306,200 104,122
Film rights 750,000 136,000 -
Revaluation of Film Library:
The Company's film library consists of approximately 850 film titles, 700
short entertainment programs ranging from 3 to 20 minutes in length and
approximately 400 serial episodes of varying lengths. The programs are
primarily black and white prints of varying quality and are available
through the public domain. From inception, this library was the primary
source of the Network's programming. In recent years the Network gradually
reduced the air time allotted to library titles.
In the second half of 1994, management redirected the Network's programming
emphasis, moving away from black and white productions in favor of color
features. Additionally, the Company has begun to invest significant funds
to acquire cablecast rights to popular television series. The Company
invested $4,500,000 in 1994 and $20,197,000 in 1995; this trend is expected
to continue into the future. Television series are now aired where films
were once featured. The new on air look reduced the library usage to
approximately 20% of weekly air time. This substantial reduction in usage
caused management to believe the historical value of the film library to be
impaired.
At December 31, 1994, management reassessed both the useful life and fair
value of the film library. Management determined the film library had three
years of remaining useful life and, accordingly, reduced the life from
twenty years to eleven years, resulting in an $864,742 charge accounted for
as a change in estimate. The fair value was based upon expected future cash
flows from the programming over the library's estimated remaining useful
life of 3 years. The expected future cash flows was then discounted at a
rate of 9%. The revised fair value resulted in a one time charge to
operations of $395,290.
4. NOTES PAYABLE AND LONG TERM DEBT
Notes payable consists of the following:
<TABLE>
<CAPTION>
Related Parties 1995 1994
--------------- ----------------------------
<S> <C> <C>
Bridge loans payable to Concept Communications, Inc.
bearing interest ranging from 5.58% to 6.59%,
increasing to 7.58% to 8.59% in February, 1996, due
upon the earlier of an equity investment of not less
than the amount of the Notes or October 1, 1996;
however, Concept has represented that the Notes will
not be called prior to February 1, 1997 . unless
replaced by an equity investment. $10,000,000 $ 2,500,000
F-13
<PAGE>
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
4. NOTES PAYABLE AND LONG TERM DEBT (Concluded)
</TABLE>
<TABLE>
<CAPTION>
Related Parties 1995 1994
---------------
<S> <C> <C>
Subordinated note payable to Atlantic Video in the
principal amount of $305,000, bearing interest at the
rate of 2.5% per quarter, compounded quarterly, with
principal and interest payable on March 31, 2002,
after which date the interest rate is increased to
3.75% per quarter, secured by accounts receivable.
The note agreement contains certain restrictive
covenants including limitations on liens, disposition
of collateral and compliance with accounts and
related contracts. 305,000 305,000
Tenant improvement contribution payable to an
affiliate in 60 monthly payments of $1,410, including
interest at 8% 68,096 85,161
--------------------------
10,373,096 2,890,161
Less current portion 17,000 18,113
--------------------------
$10,356,096 $2,872,048
==========================
</TABLE>
Subsequent to December 31, 1995, Concept has loaned the Company an
additional $6,500,000 and extended the due dates on all related debt to
February 1, 1997. In connection with the additional borrowings and
extension of the due dates the Company has entered into a security
agreement covering substantially all the Company's assets in favor of
Concept. Current maturities of notes payable and long-term debt to
related parties is as follows:
1996 1997 1998 1999 2000 Thereafter
---- ---- ---- ---- ---- ----------
$17,000 $10,017,000 $17,000 $17,096 $- $305,000
Notes payable - other relates to various vendor financing agreements, the
majority of which expire in 1996.
In November 1993, Tiger Communications Company, LP ("Tiger") exercised
warrants to acquire 4,634,995 shares of common stock of the Company. In
connection therewith, Tiger elected to apply principal of $7,000,000 under
certain subordinated promissory notes of the Company issued to Tiger in
February and May 1992 and related accrued interest payable of $1,269,990 to
the purchase of the shares. Accordingly, after offset of $748,950 in
unamortized debt issuance costs and note discounts, the Company recognized
$185,399 in common stock and $7,335,641 in additional paid-in capital at
December 31, 1993. In connection with the foregoing, the Company granted
certain registration rights with respect to the Common Stock issuable upon
exercise of the warrants (see Note 5).
F-14
<PAGE>
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
5. STOCK OPTIONS AND WARRANTS
On July 15, 1987, the Company's Board of Directors adopted an Employee
Stock Option Plan (the "1987 Plan") which provides for discretionary grants
to employees, officers or directors employed by the Company or its parent,
as well as other individuals who perform services for the Company. The 1987
Plan was approved by the Company's shareholders on August 31, 1987. 325,000
shares of stock have been reserved for issuance pursuant to the 1987 Plan.
Data with respect to stock options under the 1987 Plan are as follows:
<TABLE>
<CAPTION>
Shares Options Price
Reserved Outstanding per Share
------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1993 166,600 158,400 $.48 - 1.63
Exercised - -
Canceled 102,900 (102,900) $.48 - 1.63
------- ---------
Outstanding at December 31, 1994 269,500 55,500 $.48 - 1.63
Exercised - -
Canceled 10,000 (10,000) $.48 - 1.63
------ -------
Outstanding at December 31, 1995 279,500 45,500 $.48 - 1.63
======= ======
Exercisable at December 31, 1995 - 45,500 $ .48 - 1.25
======
</TABLE>
On August 21, 1990, the Company's Board of Directors adopted an Incentive
and Nonqualified Stock Option Plan (the "1990 Plan") which provides for
discretionary grants to employees, officers and directors of the Company.
The 1990 Plan was approved by the Company's shareholders on October 2,
1990. 1,000,000 shares of stock have been reserved for issuance pursuant
to the 1990 Plan. Data with respect to stock options under the 1990 Plan
are as follows:
<TABLE>
<CAPTION>
Shares Options Price
Reserved Outstanding per Share
------------------------------------------
<S> <C> <C> <C>
Outstanding at December 31, 1993 802,000 198,000 $.48 - 1.57
Exercised - (33,334) $.48
Canceled 55,666 (55,666) $.48 - 1.57
------ --------
Outstanding at December 31, 1994 857,666 109,000 $ .48 - 1.57
Granted (178,000) 178,000 $1.00
Exercised - -
Canceled 71,000 (71,000) $ .48 - 1.57
------ -------
Outstanding at December 31, 1995 750,666 216,000 $ .48 - 1.57
======= =======
Exercisable at December 31, 1995 38,000 $ .48 - 1.57
======
</TABLE>
F-15
<PAGE>
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
5. STOCK OPTIONS AND WARRANTS (Concluded)
In August 1995, the Board of Directors authorized granting options for
178,000 shares of stock to key management and employees under the 1990
plan. The options vest annually over a three year period at an exercise
price of $1.00.
In November, 1995, the Board of Directors authorized registration of
Nostalgia's existing stock option plans and agreements under the Securities
Act of 1933 and the establishment of a new stock option plan (the "1996
Plan") which will replace the two existing plans going forward. This action
did not result in any additional shares being reserved for options. The
1996 Plan anticipates all remaining reserved shares under the 1987 and 1990
Plans will be transferred into the 1996 Plan as will any subsequent
cancellations of any options currently outstanding in the 1987 and 1990
Plans. Additionally, the 1996 Plan provides for annual "formula" grants to
nonemployee directors of 25,000 shares, 25% of which are immediately
vested, the remainder vest over three years. The 1996 Plan was approved to
provide an option plan which conforms to current securities law. In order
to be adopted, the 1996 Plan will require shareholder approval at the
Company's 1996 Annual Meeting.
On August 2, 1994, the Company entered into an agreement with John G. Heim
to be employed as the Company's President and Chief Executive Officer.
Under the terms of the contract the Company entered into a stock option
agreement which reserves 839,840 shares of common stock at an exercise
price of $1.174, which is equal to the fair market value at the date of
grant. The shares vest at a rate of 25% each nine months and the options
expire at the earliest of (a) purchase of all shares, (b) 90 days following
termination of employment, or (c) August 2, 2004. The number of shares
vesting in a given period can be accelerated and/or additional options
granted if the number of shares vesting is less than 1% of the total shares
of common stock outstanding on such date.
At December 31, 1995, there were warrants outstanding to purchase
approximately 371,000 shares of the Company's common stock at prices
ranging from $1.25 to $4.80 per share for an average price of $2.31 per
share. No options or warrants were exercised during 1995. Warrants expire
as follows: 215,000 in 1997 and 156,000 45 days after post-effective
amendment to Form S-18 of the Company, as yet unfiled.
During 1992, the Company entered into warrant agreements in connection with
the $7,000,000 notes payable discussed in Note 4. The agreements consist of
a) a five-year warrant exercisable commencing on February 24, 1993 (or
earlier under certain circumstances), for the purchase of up to one million
shares of the Company's common stock for $1.75 per share, b) a five-year
warrant exercisable commencing on May 15, 1993 (or earlier under certain
circumstances), for the purchase of up to one million shares of the
Company's common stock for $2.00 per share and c) a five-year warrant
exercisable commencing on February 24, 1993 (or earlier under certain
circumstances), for the purchase of up to three million shares of the
Company's common stock for $1.75 per share. In November 1993, warrants for
4,634,995 shares of common stock were exercised (see Note 4).
Total common shares reserved for issuance of subscribed stock, options,
warrants and conversion of preferred shares at December 31, 1995 were
approximately 2,828,000.
F-16
<PAGE>
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
6. CAPITAL STOCK
Common Stock
------------
On November 13, 1984, the Company completed a public offering of 12,500,000
units of stock at $.02 per unit (156,250 units at $1.60 adjusted for all
splits). Each unit originally consisted of one share of the Company's
common stock and one purchase warrant to purchase one share of common stock
at $.06 per share ($4.80 per share adjusted for all splits). The warrants
are exercisable by the holder commencing May 13, 1985 and expire 45 days
after the effective date of the post-effective amendment to Form S-18 of
the Company, as yet unfiled. Shares of common stock issued for other than
cash have been assigned amounts equivalent to the fair value of the assets
received in exchange.
Preferred Stock
---------------
Each share of preferred stock is convertible into 100 shares of common
stock at the option of the holder thereof. Each preferred share is entitled
to vote as 100 shares of common stock. Preferred shareholders are entitled
to preferential rights on dividends. To date, no dividends have been
declared or paid.
7. FEDERAL INCOME TAXES
The Company has incurred net operating losses since its inception for
income tax purposes. Accordingly, since realization of benefits from these
losses is not assured, tax benefits were not recorded for financial
statement purposes.
At December 31, 1995, the Company has unused net operating loss
carryforwards which will be limited. Internal Revenue Code Section 382
provides that certain changes in ownership of the Company can limit the
amount of income that can be offset by net operating losses. The amount of
the limitation is approximately $1,700,000 per year. The net operating loss
carryforwards prior to the application of the limitations are as follows:
Available for carryforward to
Year Ending December 31,
-----------------------
1998 - 2000 $ 87,000
2001 1,323,000
2002 3,493,000
2003 1,725,000
2004 2,424,000
2005 3,630,000
2006 2,786,000
2007 2,803,000
2008 2,218,000
2009 2,976,000
2010 8,500,000
-------------
Total $ 31,965,000
=============
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 109 - Accounting for Income Taxes as of January 1, 1993. Adoption of
the new statement did not have an effect on the Company's financial
position or results of operations.
F-17
<PAGE>
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
7. FEDERAL INCOME TAXES (Concluded)
Under the asset and liability approach specified by SFAS No. 109, deferred
tax assets and liabilities are determined based on the difference between
the financial statement and tax bases of assets and liabilities as measured
by the currently enacted tax rates. Deferred tax expense or benefit is the
result of the changes in deferred tax assets and liabilities.
Deferred income taxes arise from the difference between the financial
statement and income tax basis of assets and liabilities. Principal items
comprising net deferred tax assets as of December 31, 1995 and 1994 are as
follows:
1995 1994
--------------------------
Current:
Allowance for doubtful accounts $ 768,000 $ 439,000
Accrued liabilities 129,000 42,000
--------------------------
Total current deferred tax assets 897,000 481,000
--------------------------
Long-Term:
Net operating loss carryforwards 10,868,000 7,978,000
Program library 381,000 428,000
Accumulated depreciation (100,000) (81,000)
--------------------------
Total net long-term deferred tax assets 11,149,000 8,325,000
--------------------------
Total net deferred tax assets 12,046,000 8,806,000
Valuation allowance (12,046,000) (8,806,000)
--------------------------
Net deferred tax asset $ - $ -
==========================
Management believes that a valuation allowance is necessary due to
uncertainty regarding the timing and amount of future utilization of net
operating loss carryforwards.
8. RELATED PARTY TRANSACTIONS
Board Members
-------------
During 1992, the Company entered into agreements whereby a former member of
The Board of Directors was to repay the balance of unauthorized consulting
and finder's fees of $650,000 paid to him by the Company. The Company has a
note receivable of $275,000 and accounts receivable of $70,000 due from the
former member of The Board of Directors. The note receivable is secured by
a warrant to purchase 100,000 shares of the Company's stock, bears interest
at the rate of 8% per annum, and is past due. The Company has recorded
a full reserve against these receivables.
Interest Expense
----------------
Interest expense to related parties was approximately $512,000, $168,000,
and $805,000, for the years ended December 31, 1995 1994 and 1993,
respectively.
F-18
<PAGE>
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
8. RELATED PARTY TRANSACTIONS (Concluded)
Office Leases
-------------
During 1990, the Company entered into a month-to-month sublease agreement
for its Los Angeles, California offices with an entity affiliated with a
former director. The Company paid $112,433 and $191,491 in rents under the
sublease for the years ended December 31, 1994, and 1993, respectively.
The sublease expired and those offices were closed in September, 1994.
During 1994 the Company closed its California offices and relocated to
Washington, DC. The Company entered into a five year lease agreement
commencing November, 1994, with an entity affiliated with the Company's
majority shareholder. The lease calls for base monthly rental payments of
$12,537, plus 2% per year escalation and pro-rata increases in operating
expenses and real estate taxes. The lease provides for three months rental
abatement and a five year renewal option at the then prevailing market
rate. For financial reporting purposes, the lease payments are being
recognized on a straight-line basis over the initial term of the lease. The
Company was required to contribute $70,000 for above building standard
buildout items to be paid in 60 monthly installments of $1,410, including
8% interest.
Production and Post Production Services
---------------------------------------
During 1990, the Company entered into an agreement with Atlantic Video,
Inc., an entity of which two directors of the Company are officers and
directors, for studio, production and post production services, master
control/uplink services and office space. Under the terms of the agreement,
which expires September 30, 1996, the Company is required to purchase a
minimum number of hours of such services during each year at specified
rates. This agreement was amended in 1992 to reduce the minimum levels of
service required to be purchased by the Company. The Company has agreed to
pay a minimum monthly fee of $75,000. If the Company does not actually
purchase $75,000 of services in a month, the differences up to a maximum of
$50,000 for all months elapsed, subject to certain limitations, can be used
as credit for the fees in future months. Any credits remaining at the end
of the term are automatically extinguished. Services rendered to the
Company under this agreement amounted to $1,173,000, $900,000, and
$980,000, for the years ended December 31, 1995, 1994 and 1993,
respectively.
Related party receivables and payables are as follows:
1995 1994
---------------------
Accounts receivable:
Note receivable - former Board member $ 275,000 $275,000
Former management and Board members 70,000 70,000
Current and former employees 5,900 12,044
Less reserve for bad debts (345,000) (345,000)
----------- -----------
Total $ 5,900 $ 12,044
=======================
Accounts payable:
Atlantic Video, Inc $ 259,964 $732,778
=========== ============
F-19
<PAGE>
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
9. COMMITMENTS AND CONTINGENCIES
Litigation
----------
Roger M. Rosenberg, et al v. Sam Oolie, et al. On or about September 29,
1989, an action was commenced in the Delaware Court of Chancery for New
Castle County (the "Rosenberg/Cooke action"). The Company is identified as
a nominal defendant in the Rosenberg/Cooke action and, as to the purported
derivative claims, has no liability as a matter of Delaware Law. The
Company is required to advance the Directors defense costs.
Michael E. Marcovsky v. The Nostalgia Network, Inc. et al. On or about June
13, 1994, an action was commenced in the Superior Court for the County of
Los Angeles (the "Marcovsky action"). On January 27, 1994, Nostalgia's
Board of Directors adopted resolutions providing, among other things, for
Mr. Marcovsky's termination for cause as the Company's Chief Executive
Officer and removal as Chairman of the Board. Mr. Marcovsky alleged that he
was wrongfully terminated and demanded in excess of $1,000,000, to which
the Company responded with numerous counter claims in excess of that
amount. Pursuant to an agreement between the parties this action has
been dismissed with prejudice.
Employment Agreements
---------------------
On August 2, 1994, the Company entered into an employment agreement with
John G. Heim pursuant to which Mr. Heim serves as the Company's President
and Chief Executive Officer. The agreement provides for an annual salary of
$300,000 with annual merit increases of not less than 5% of the immediately
prior base salary and a $150,000 sign on bonus payable prior to December
31, 1994. For the first two contract years he is not eligible for bonuses.
Subsequent to December 31, 1995, this agreement was amended to reflect an
expiration date of June 30, 1996, and to provide for Mr. Heim to continue
to consult with the Company after that date should the Company desire his
services. The Company is actively searching for a replacement for Mr. Heim.
Leases
------
Transponder
The Company leases satellite transponder space and services on a 24-hour
per day basis. In connection with the Company's new satellite transponder,
which launched in March, 1994, a launch protection fee of $1,000,000 was
paid and interest costs of $284,000 were capitalized along with other costs
to acquire the transponder. The basic monthly rate is $205,400 for a term
spanning the life of the satellite, which is estimated to be twelve years.
Expense for satellite transponder space and services was $2,464,800,
$2,313,000, and $2,202,000 for 1995, 1994 and 1993, respectively.
Office, Studio, and Equipment
The Company conducts operations from leased premises which include studio,
office, sales and storage facilities. The Company also leases certain
production and communication equipment including its transponder. Generally
the leases provide for renewal for various periods at stipulated rates.
Some of the leases provide that the Company pay taxes, maintenance,
insurance and other occupancy expenses applicable to leased premises.
F-20
<PAGE>
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
9. COMMITMENTS AND CONTINGENCIES (Concluded)
Lease expense for premises and equipment for 1995, 1994 and 1993, which
consisted entirely of minimum rentals, was $226,000, $338,000, and
$469,000, respectively. Approximate minimum rental commitments under all
noncancellable leases, including the transponder lease having terms in
excess of a year are as follows:
<TABLE>
<CAPTION>
Year Ending Facility Uplink Transponder Total
December 31, Leases Leases Lease
------------ --------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 $206,000 $225,000 $ 2,464,800 $ 2,895,800
1997 157,000 - 2,464,800 2,621,800
1998 160,000 - 2,464,800 2,624,800
1999 163,000 - 2,464,800 2,627,800
2000 - - 2,464,800 2,464,800
Thereafter - - 12,324,000 12,324,000
</TABLE>
Rating Service Contract
-----------------------
On September 4, 1990, the Company contracted with a service that provides
ratings reports, analysis reports, demographic reports and other special
reports. The agreement, commencing October 1990, covers a minimum period of
five years, requires a monthly base charge of $40,000 reduced by a 50%
discount if the Company's annual gross advertising billings are less than
or equal to $10,000,000. The base charge is further reduced by 30% for the
first two years, 25% for the third year, 20% for the fourth year and 10%
for the fifth year. Surcharges and adjustments are also made to the base
charge for metered sample households and changes in the Consumer Price
Index. The Company is in the process of renewing this contract for an
additional five year period under substantially similar terms and
conditions as experienced in the past year.
Major Customers
---------------
During 1995, 1994 and 1993, a major customer accounted for 15%, 11%, and
10% of affiliate revenues, respectively. Advertising sales revenues from
one agency accounted for 16% of advertising sales in 1995; revenues from
two advertising agencies accounted 11% and 10.5% in 1994, and two agencies
combined accounted for 19%, in 1993, respectively.
During 1995, RSTV, Inc., doing business as Via TV! ("Via") accounted for
almost all of other revenue and approximately 11% of total net revenues.
Via provided the Network with an interactive home shopping program service.
Via was to pay the Network a commission based on net sales, subject to
certain base minimums. During 1995, a contract dispute arose and Via ceased
making contractually obligated payments; however, due to uncertainty
regarding the collectibility of the amounts due from Via, during the second
half of 1995 management recorded a reserve against the revenue on a monthly
basis. The Network continued to air Via's programming and accrued their
minimum contractual obligations. Via's contract expired and the Network
ceased airing their programming on December 31, 1995. Subsequent to year
end the Company entered into a stipulated judgment agreement against Via in
excess of the amounts recorded as receivable. Subsequent to receiving
the judgment, Via filed for bankruptcy protection.
F-21
<PAGE>
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
10. RELOCATION EXPENSES
On June 30, 1994, the Company closed its California Headquarters and
relocated to temporary space in its programming and production offices in
Alexandria, Virginia, until construction of permanent offices in Washington
DC was completed in November, 1994. The move located the Company's
headquarters in closer proximity to the majority of its divisional offices,
with the programming and production offices 15 minutes away, the eastern
affiliate sales office in suburban Philadelphia and the ad sales office in
New York. This closer proximity provides greater synergy amongst the
divisions and allows more cost effective and efficient travel between
offices for meetings. Concurrently, the western affiliate sales office was
relocated to Denver to provide greater proximity to many of the larger
multiple system operators ("MSO") and place the office more centrally in
its region to reduce travel time and expenses. In connection with the
moves, the Company incurred $545,000 for related severance and relocation
costs.
11. RECLASSIFICATIONS AND FOURTH QUARTER ADJUSTMENTS
Certain prior year amounts have been reclassified to conform to the current
method of presentation.
During the fourth quarter of 1994 the Company changed the estimated useful
life of its film library. The aggregate effect of this change was to
increase net loss by $864,742, or $.05 per share. Additionally, the Company
revalued its film library due to changes in the nature of the Company's
programming and reduced usage of the film library. The aggregate
effect of this was to increase net loss by $395,290, or $.02 per share.
During the fourth quarter of 1993, the Company reviewed its accounts and
note receivable which resulted in adjustments which decreased affiliate
revenues and accounts receivable and increased the allowance for doubtful
accounts and bad debt expense. The aggregate effect of these items was to
increase the net loss for the fourth quarter by approximately $980,000 or
$.07 per share.
12. STATEMENTS OF CASH FLOWS
Supplemental disclosure of cash flow information:
<TABLE>
<CAPTION>
1995 1994 1993
-----------------------------------
<S> <C> <C> <C>
Cash paid during the year for:
Interest $233,000 $50,200 None
Income taxes None None None
</TABLE>
Supplemental schedule of noncash investing and financing activities:
Fiscal 1995
-----------
Programming acquisitions totaling $19,967,500 were financed through
vendor debt obligations.
The Company reissued 21,994 shares of treasury stock at a carrying
cost of $145,000 in connection with issuance of common stock
subscribed at December 31, 1995.
Fiscal 1994
-----------
Programming acquisitions totaling $3,073,000 were financed through
vendor debt obligations and $605,349 of programming payables were
refinanced through a note payable.
F-22
<PAGE>
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
12. STATEMENTS OF CASH FLOWS (Concluded)
Leasehold improvements and furniture purchases totaling $123,801 were
financed through vendor debt obligations.
The transponder acquisition was financed in part through application
of $832,784 in deposits and execution of a note payable for $460,004.
625 shares of preferred stock were converted into 62,500 shares of
common stock.
The Company determined that accounts payable of $57,984, associated
with debt acquisition costs, were not owed by the Company and,
accordingly, offset the amounts against additional paid in capital.
Fiscal 1993
-----------
Tiger exercised its option to convert its subordinated note of
$7,000,000 and accrued interest of $1,269,990 into 4,634,995 shares of
common stock. Unamortized debt issue costs and note discounts of
$748,950 were offset against additional paid-in capital.
13 FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value at December
31, 1995.
Notes payable and long-term debt: The carrying amounts of the Company's
notes payable and long-term debt are estimated using discounted cash flow
analyses, based on the Company's current incremental borrowing rates for
similar types of borrowing arrangements. No material differences exist
between the Company's incremental borrowing rates and the stated rates of
interest. The carrying amounts approximate fair value at December 31, 1995.
14 EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" ("SFAS 121") does not apply to assets whose accounting is prescribed by
Statement of Financial Accounting Standards Nos. 53 and 63, "Financial
Reporting by Producers and Distributors of Motion Picture Films" and
"Financial Reporting by Broadcasters" which includes programming and
cablecast rights. The Company will adopt SFAS 121 effective January 1, 1996
for its other long-term assets. Management does not anticipate that its
adoption will have a material impact on the financial statements.
Effective January 1, 1996, the Company will adopt Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"). The accounting requirements of this statement are effective
for transactions entered into in fiscal years that begin after December 15,
1995. The Company does not intend to adopt the fair value method,
therefore, there will be no impact on the financial statements.
F-23
<PAGE>
<TABLE><CAPTION>
THE NOSTALGIA NETWORK, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Charged to
Beginning Costs and Other Balance at
Description of Year Expenses Accounts Deductions (1) End of Year
----------- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1993
Allowance for doubtful accounts receivable $ 535,000 $ 881,782 $ -- $ 109,782 $ 1 ,307,000
=========================================================================
Year ended December 31, 1994
Allowance for doubtful accounts receivable $1,307,000 $ 675,000 $ -- $ 691,000 $ 1,291,000
=========================================================================
Year ended December 31, 1995
Allowance for doubtful accounts receivable $1,291,000 $1,541,000 $ -- $ 574,000 $ 2,258,000
=========================================================================
</TABLE>
(1) Uncollectible accounts written off.
F-24
<PAGE>
PROMISSORY NOTE
$1,500,000
Washington, D.C.
Maturity Date: February 1, 1996
July 24, 1995
FOR VALUE RECEIVED, the undersigned, THE NOSTALGIA NETWORK,
INC., a Delaware Corporation ("Maker"), hereby promises to pay to
the order of CONCEPT COMMUNICATIONS, INC., a Delaware
corporation, or any subsequent holder or holders ("Holder") of
this Promissory Note (this "Note"), at 650 Massachusetts Avenue,
N.W., Washington, D.C., 20001, or at such other place as Holder
may from time to time designate in writing, the principal sum of
One Million Five Hundred Thousand Dollars ($1,500,000), together
with all accrued interest on such outstanding balance, in
accordance with the terms and provisions of this Note.
1. Principal and Interest. Interest shall accrue on
the outstanding principal balance of this Note from March 29,
1995, at the rate of six and nine hundredths percent (6.59%) per
annum, and the principal balance together with all interest
accrued thereon, shall be payable on February 1, 1996 (the "Ma-
turity Date"). In the event that the principal balance and all
accrued interest is not paid on or before February 1, 1996,
interest shall accrue thereafter on all unpaid amounts at the
rate of eight and nine hundredths percent (8.59%) per annum.
2. Payments. All payments by Maker hereunder shall
be applied (i) first to the interest due and unpaid under this
Note, and (ii) thereafter, to any principal owing under this
Note.
3. Prepayment. Maker shall have the right to prepay,
in part or in full, without penalty, this Note (together with all
accrued interest to the date of prepayment on the amount of prin-
cipal thus prepaid) at any time or times. The purpose of this
loan is to provide a bridge until Maker is able to negotiate an
equity investment not less than the principal amount hereof. If
this investment occurs prior to the Maturity Date, Maker shall be
E-3
<PAGE>
required to prepay all amounts owed hereunder.
4. Waiver Regarding Notice. Maker waives
presentment, demand and presentation for payment, protest and
notice of protest, and, except as otherwise specifically provided
herein, any other notices of whatever kind or nature, bringing of
suit and diligence in taking any action to collect any sums owing
hereunder. From time to time, without in any way affecting the
obligation of Maker to pay the outstanding principal balance of
this Note and any interest accrued thereon and fully to observe
and perform the covenants and obligations of Maker under this
Note, without giving notice to, or obtaining the consent of,
Maker, and without any liability whatsoever on the part of
Holder, Holder may, at its option, extend the time for payment of
interest hereon and/or principal of this Note, reduce the
payments hereunder, release anyone liable on this Note or accept
a renewal of this Note, join in any extension or subordination,
or exercise any right or election hereunder. No one or more of
such actions shall constitute a novation or operate to release
any party liable for or under this Note, either as Maker or
otherwise.
5. Events of Default. Each of the following shall
constitute an "Event of Default" hereunder:
a. Maker's failure to make any required payment
of principal and/or interest under this Note, or any other amount
due and payable under this Note on or before the date on which
such payment is due under this Note; and
b. Maker's failure to make any required payment
when due of any other amounts owed by Maker to Holder; and
c. Maker's insolvency, general assignment for
the benefit of creditors, or the commencement by or against Maker
of any case, proceeding, or other action seeking reorganization,
arrangement, adjustment, liquidation, dissolution, or composition
of Maker's debts under any law relating to bankruptcy,
insolvency, or reorganization, or relief of debtors, or seeking
appointment of a receiver, trustee, custodian, or other similar
official for Maker or for all or any substantial part of Maker's
assets.
6. Acceleration. Upon the occurrence of an Event of
Default, Holder shall have the right to cause the entire unpaid
E-4
<PAGE>
principal balance, together with all accrued interest thereon,
reasonable attorneys' and paralegals' fees and all fees, charges,
costs and expenses, if any, owed by Maker to Holder, to become
immediately due and payable in full by giving written notice to
Maker.
7. Remedies. Upon the occurrence of an Event of
Default, Holder may avail itself of any legal or equitable rights
which Holder may have at law or in equity or under this Note,
including, but not limited to, the right to accelerate the
indebtedness due under this Note as described in the preceding
sentence. The remedies of Holder as provided herein shall be
distinct and cumulative, and may be pursued singly, successively
or together, at the sole discretion of Holder, and may be
exercised as often as occasion therefor shall arise. Failure to
exercise any of the foregoing options upon the occurrence of an
Event of Default shall not constitute a waiver of the right to
exercise the same or any other option at any subsequent time in
respect to the same or any other Event of Default, and no single
or partial exercise of any right or remedy shall preclude other
or further exercise of the same or any other right or remedy.
Holder shall have no duty to exercise any or all of the rights
and remedies herein provided or contemplated. The acceptance by
Holder of any payment hereunder that is less than payment in full
of all amounts due and payable at the time of such payment shall
not constitute a waiver of the right to exercise any of the
foregoing rights or remedies at that time, or nullify any prior
exercise of any such rights or remedies without the express
written consent of Holder.
8. Expenses of Collection. If this Note is referred
to an attorney for collection, whether or not suit has been filed
or any other action instituted or taken to enforce or collect
under this Note, Maker shall pay all of Holder's costs, fees
(including reasonable attorneys' and paralegals' fees) and
expenses in connection with such referral.
9. Governing Law. The provisions of this Note shall
be governed and construed according to the law of the District of
Columbia, without giving effect to its conflicts of laws
provisions.
10. No Waiver. Neither any course of dealing by
Holder nor any failure or delay on its part to exercise any
right, power or privilege hereunder shall operate as a waiver of
E-5
<PAGE>
any right or remedy of Holder hereunder unless said waiver is in
writing and signed by Holder, and then only to the extent
specifically set forth in said writing. A waiver as to one event
shall not be construed as a continuing waiver by Holder or as a
bar to or waiver of any right or remedy by Holder as to any
subsequent event.
11. Notices.
a. All notices hereunder shall be in writing and
shall either be hand delivered, with receipt therefor, or sent by
Federal Express or similar courier, with receipt therefor, or by
certified or registered mail, postage prepaid, return receipt
requested, as follows:
If to Maker: The Nostalgia Network, Inc.
650 Massachusetts Avenue, N.W.
Washington, D.C. 20001
Attn: President
If to Holder: Concept Communications, Inc.
650 Massachusetts Avenue, N.W., Second Floor
Washington, D.C. 20001
Notices shall be effective when received; provided, however, that
if any notice sent by courier or by certified or registered mail
is returned as undeliverable, such notice shall be deemed
effective when mailed or given to such courier.
b. Either of the foregoing persons may change
the address to which notices are to be delivered to it hereunder
by giving written notice to the others as provided in this
Paragraph 11.
12. Severability. In the event that any one or more
of the provisions of this Note shall for any reason be held to be
invalid, illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect any other
provision of this Note, and this Note shall be construed as if
such invalid, illegal or unenforceable provision had never been
contained herein.
13. Limitations of Applicable Law. In the event the
operation of any provision of this Note results in an effective
E-6
<PAGE>
rate of interest transcending the limit of the usury or any other
law applicable to the loan evidenced hereby, all sums in excess
of those lawfully collectible as interest for the period in
question shall, without further agreement or notice by any party
to this Note, be applied to the unpaid principal balance of this
Note immediately upon receipt of such monies by Holder, with the
same force and effect as though Maker had specifically designated
such extra sums to be so applied to the unpaid principal balance
and Holder had agreed to accept such extra payment(s) as a
prepayment.
14. Captions. The captions herein are for convenience
of reference only and in no way define or limit the scope or
content of this Note or in any way affect its provisions.
15. Debtor-Creditor Relationship. Holder shall in no
event be construed for any purpose to be a partner, joint
venturer or associate of Maker, it being the sole intention of
the parties to establish a relationship of debtor and creditor.
16. Time of the Essence. It is expressly agreed that
time is of the essence in the performance of the obligations set
forth in this Note.
E-7
<PAGE>
IN WITNESS WHEREOF, Maker has executed this Promissory Note
on this 24th day of July, 1995, pursuant to due authority.
MAKER:
ATTEST: THE NOSTALGIA NETWORK, INC.,
a Delaware corporation
/s/ ROBERT J. WUSSLER By: /s/ WILLIAM LASH, III
Robert Wussler William Lash
Nostalgia 144 Committee Nostalgia 144
Committee
E-8
<PAGE>
PROMISSORY NOTE
$2,000,000
Washington, D.C.
Maturity Date: February 1, 1996
October 2, 1995
FOR VALUE RECEIVED, the undersigned, THE NOSTALGIA NETWORK,
INC., a Delaware Corporation ("Maker"), hereby promises to pay to
the order of CONCEPT COMMUNICATIONS, INC., a Delaware
corporation, or any subsequent holder or holders ("Holder") of
this Promissory Note (this "Note"), at 650 Massachusetts Avenue,
N.W., Washington, D.C., 20001, or at such other place as Holder
may from time to time designate in writing, the principal sum of
Two Million Dollars ($2,000,000), together with all accrued
interest on such outstanding balance, in accordance with the
terms and provisions of this Note.
1. Principal and Interest. Interest shall accrue on
the outstanding principal balance of this Note from March 29,
1995, at the rate of five and fifty-eight hundredths percent
(5.58%) per annum, and the principal balance together with all
interest accrued thereon, shall be payable on February 1, 1996
(the "Maturity Date"). In the event that the principal balance
and all accrued interest is not paid on or before the Maturity
Date, interest shall accrue thereafter on all unpaid amount at
the rate equal to that accruing on six month United States
Treasury bills as of such date plus two percentage points.
2. Payments. All payments by Maker hereunder shall
be applied (i) first to the interest due and unpaid under this
Note, and (ii) thereafter, to any principal owing under this
Note.
3. Prepayment. Maker shall have the right to prepay,
in part or in full, without penalty, this Note (together with all
accrued interest to the date of prepayment on the amount of prin-
cipal thus prepaid) at any time or times. The purpose of this
loan is to provide a bridge until Maker is able to negotiate an
equity investment not less than the principal amount hereof. If
this investment occurs prior to the Maturity Date, Maker shall be
E-9
<PAGE>
required to prepay all amounts owed hereunder.
4. Waiver Regarding Notice. Maker waives
presentment, demand and presentation for payment, protest and
notice of protest, and, except as otherwise specifically provided
herein, any other notices of whatever kind or nature, bringing of
suit and diligence in taking any action to collect any sums owing
hereunder. From time to time, without in any way affecting the
obligation of Maker to pay the outstanding principal balance of
this Note and any interest accrued thereon and fully to observe
and perform the covenants and obligations of Maker under this
Note, without giving notice to, or obtaining the consent of,
Maker, and without any liability whatsoever on the part of
Holder, Holder may, at its option, extend the time for payment of
interest hereon and/or principal of this Note, reduce the
payments hereunder, release anyone liable on this Note or accept
a renewal of this Note, join in any extension or subordination,
or exercise any right or election hereunder. No one or more of
such actions shall constitute a novation or operate to release
any party liable for or under this Note, either as Maker or
otherwise.
5. Events of Default. Each of the following shall
constitute an "Event of Default" hereunder:
a. Maker's failure to make any required payment
of principal and/or interest under this Note, or any other amount
due and payable under this Note on or before the date on which
such payment is due under this Note; and
b. Maker's failure to make any required payment
when due of any other amounts owed by Maker to Holder; and
c. Maker's insolvency, general assignment for
the benefit of creditors, or the commencement by or against Maker
of any case, proceeding, or other action seeking reorganization,
arrangement, adjustment, liquidation, dissolution, or composition
of Maker's debts under any law relating to bankruptcy,
insolvency, or reorganization, or relief of debtors, or seeking
appointment of a receiver, trustee, custodian, or other similar
official for Maker or for all or any substantial part of Maker's
assets.
6. Acceleration. Upon the occurrence of an Event of
Default, Holder shall have the right to cause the entire unpaid
E-10
<PAGE>
principal balance, together with all accrued interest thereon,
reasonable attorneys' and paralegals' fees and all fees, charges,
costs and expenses, if any, owed by Maker to Holder, to become
immediately due and payable in full by giving written notice to
Maker.
7. Remedies. Upon the occurrence of an Event of
Default, Holder may avail itself of any legal or equitable rights
which Holder may have at law or in equity or under this Note,
including, but not limited to, the right to accelerate the
indebtedness due under this Note as described in the preceding
sentence. The remedies of Holder as provided herein shall be
distinct and cumulative, and may be pursued singly, successively
or together, at the sole discretion of Holder, and may be
exercised as often as occasion therefor shall arise. Failure to
exercise any of the foregoing options upon the occurrence of an
Event of Default shall not constitute a waiver of the right to
exercise the same or any other option at any subsequent time in
respect to the same or any other Event of Default, and no single
or partial exercise of any right or remedy shall preclude other
or further exercise of the same or any other right or remedy.
Holder shall have no duty to exercise any or all of the rights
and remedies herein provided or contemplated. The acceptance by
Holder of any payment hereunder that is less than payment in full
of all amounts due and payable at the time of such payment shall
not constitute a waiver of the right to exercise any of the
foregoing rights or remedies at that time, or nullify any prior
exercise of any such rights or remedies without the express
written consent of Holder.
8. Expenses of Collection. If this Note is referred
to an attorney for collection, whether or not suit has been filed
or any other action instituted or taken to enforce or collect
under this Note, Maker shall pay all of Holder's costs, fees
(including reasonable attorneys' and paralegals' fees) and
expenses in connection with such referral.
9. Governing Law. The provisions of this Note shall
be governed and construed according to the law of the District of
Columbia, without giving effect to its conflicts of laws
provisions.
10. No Waiver. Neither any course of dealing by
Holder nor any failure or delay on its part to exercise any
right, power or privilege hereunder shall operate as a waiver of
E-11
<PAGE>
any right or remedy of Holder hereunder unless said waiver is in
writing and signed by Holder, and then only to the extent
specifically set forth in said writing. A waiver as to one event
shall not be construed as a continuing waiver by Holder or as a
bar to or waiver of any right or remedy by Holder as to any
subsequent event.
11. Notices.
a. All notices hereunder shall be in writing and
shall either be hand delivered, with receipt therefor, or sent by
Federal Express or similar courier, with receipt therefor, or by
certified or registered mail, postage prepaid, return receipt
requested, as follows:
If to Maker: The Nostalgia Network, Inc.
650 Massachusetts Avenue, N.W.
Washington, D.C. 20001
Attn: President
If to Holder: Concept Communications, Inc.
650 Massachusetts Avenue, N.W., Second Floor
Washington, D.C. 20001
Notices shall be effective when received; provided, however, that
if any notice sent by courier or by certified or registered mail
is returned as undeliverable, such notice shall be deemed
effective when mailed or given to such courier.
b. Either of the foregoing persons may change
the address to which notices are to be delivered to it hereunder
by giving written notice to the others as provided in this
Paragraph 11.
12. Severability. In the event that any one or more
of the provisions of this Note shall for any reason be held to be
invalid, illegal or unenforceable in any respect, such inva-
lidity, illegality or unenforceability shall not affect any other
provision of this Note, and this Note shall be construed as if
such invalid, illegal or unenforceable provision had never been
contained herein.
13. Limitations of Applicable Law. In the event the
operation of any provision of this Note results in an effective
E-12
<PAGE>
rate of interest transcending the limit of the usury or any other
law applicable to the loan evidenced hereby, all sums in excess
of those lawfully collectible as interest for the period in
question shall, without further agreement or notice by any party
to this Note, be applied to the unpaid principal balance of this
Note immediately upon receipt of such monies by Holder, with the
same force and effect as though Maker had specifically designated
such extra sums to be so applied to the unpaid principal balance
and Holder had agreed to accept such extra payment(s) as a
prepayment.
14. Captions. The captions herein are for convenience
of reference only and in no way define or limit the scope or
content of this Note or in any way affect its provisions.
15. Debtor-Creditor Relationship. Holder shall in no
event be construed for any purpose to be a partner, joint
venturer or associate of Maker, it being the sole intention of
the parties to establish a relationship of debtor and creditor.
16. Time of the Essence. It is expressly agreed that
time is of the essence in the performance of the obligations set
forth in this Note.
E-13
<PAGE>
IN WITNESS WHEREOF, Maker has executed this Promissory Note
on this second day of October, 1995, pursuant to due authority.
MAKER:
ATTEST: THE NOSTALGIA NETWORK, INC.,
a Delaware corporation
/s/ DANIEL C. HOLDGREIWE By:/s/ MARTIN A. GALLOGLY
Daniel C. Holdgreiwe Marty Gallogly
Secretary Vice-President
E-14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Financial Data Schedule as Required by Item 601(c) of Regulation S-K
This Schedule contains summary financial information extracted from Form 10-K
for the year ended December 31, 1995, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 855,739
<SECURITIES> 0
<RECEIVABLES> 3,562,596
<ALLOWANCES> 2,258,000
<INVENTORY> 19,985,348
<CURRENT-ASSETS> 9,141,600
<PP&E> 2,754,807
<DEPRECIATION> 1,142,245
<TOTAL-ASSETS> 23,955,541
<CURRENT-LIABILITIES> 8,596,639
<BONDS> 28,613,131
0
6,500
<COMMON> 810,975
<OTHER-SE> (8,340,208)
<TOTAL-LIABILITY-AND-EQUITY> 23,955,541
<SALES> 0
<TOTAL-REVENUES> 11,266,885
<CGS> 0
<TOTAL-COSTS> 20,260,931
<OTHER-EXPENSES> 482,321
<LOSS-PROVISION> 967,000
<INTEREST-EXPENSE> 482,321
<INCOME-PRETAX> (9,476,367)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,476,367)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,476,367)
<EPS-PRIMARY> (0.47)
<EPS-DILUTED> (0.47)
</TABLE>
