================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-K/A
Amendment No. 1
[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.
================================================================================
<PAGE>
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.
-2-
<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/ Martin A. Gallogly
------------------------------------------
Martin A. Gallogly, V.P., Treasurer, and Chief Financial Officer
-3-
<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)
</TABLE>
- ------------
* Management contract or compensatory plan, contract or arrangement.
E-1
<PAGE>
<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 Letter Agreement, dated as of April 16, 1996, between Registrant and
Concept Communications, Inc.
10.12 Letter Agreement, dated April 26, 1996, between Registrant and
Concept Communications,Inc.
10.13* 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)
10.14* 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)
10.15* 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)
10.16* 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)
10.17* Letter Agreement dated March 1, 1996 between the Registrant and Jack
Heim. (filed as Exhibit 10(c) to the Registrant's Report on Form 8-K
dated March 13, 1996, and incorporated herein by reference thereto)
27** Financial Data Schedule as required by Item 601 (c) of Regulation S-K E-15
</TABLE>
* Management contract or compensatory plan, contract or arrangement.
** Filed previously
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
</TABLE>
F-13
<PAGE>
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
4. NOTES PAYABLE AND LONG TERM DEBT (Concluded)
<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 options to acquire 25,000 shares, which will
vest with respect to 33 1/3% of the shares on the first, second and third
anniversaries of the grant date provided the optionee is still a director
as of that date, and which will expire ten years after the grant date.
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
EXHIBIT 10.11
Concept Communications, Inc.
650 Massachusetts Avenue, N.W.
Washington, D.C. 20001
(202) 789-2124 Fax: (202) 408-8891
April 16, 1996
Messrs. Robert Wussler & William H. Lash, III
The 144 Committee of The Nostalgia Network, Inc.
650 Massachusetts Avenue, N.W.
Washington, D.C. 20001
Gentlemen:
As an inducement to Concept Communications, Inc. ("Concept") to make a
bridge loan in the amount of $4.5 million (the "April 1996 Bridge Loan") to The
Nostalgia Network, Inc. ("Nostalgia"), Concept desires that Nostalgia agree to
certain terms as a condition to Concept making the April 1996 Bridge Loan.
These conditions are as follows:
Concept is extending the April 1996 Bridge Loan at a very favorable
interest rate to induce Nostalgia to pay accrued interest on such loan on a
monthly basis. Such monthly interest payments shall begin 30 days after the
loan is received, and every month thereafter, for so long as the April 1996
Bridge Loan is outstanding. Concept restates that all outstanding loans payable
by Nostalgia to Concept during calendar year 1996 shall not be callable before
February 1, 1997. However, other agreements and understandings between
Nostalgia and Concept notwithstanding, if on February 1, 1997, all interest
payments required on the April 1996 Bridge Loan have not been paid in full in
accordance with the terms of this letter, and all accrued and unpaid interest on
all other outstanding loans have not been paid in full, then all outstanding
loans payable by Nostalgia to Concept shall have their interest rates adjusted
as of February 1, 1997, to a rate equal to the Prime Rate, as published in the
Wall Street Journal, and adjusted from time to time, plus two (2) percentage
points ("Prime Plus Two").
This letter, in conjunction with Concept's letter to BDO Seidman ("BDO
Seidman Letter"), dated April 16, 1996, supersedes and completely replaces
Concept's March 21, 1996 letter ("March Letter") sent to Ambassador Sanchez,
which was previously withdrawn.
Nostalgia agrees that Concept's funding is to specifically cover
commitments existing as of December 31, 1995, and no money shall be used for
programming commitments entered into after December 31, 1995 unless specifically
approved by Concept. Nostalgia is aware that as of today both parties have not
completed a final budget for 1996.
Please indicate your acceptance to the terms hereof by executing this
agreement where indicated below.
<PAGE>
Sincerely,
CONCEPT COMMUNICATIONS, INC.
__________________________________
By Werner G. Seubert
ACCEPTED AND AGREED TO:
THE NOSTALGIA NETWORK, INC.
______________________________
By:
______________________________
By:
EXHIBIT 10.12
Concept Communications, Inc.
650 Massachusetts Avenue, N.W.
Washington, D.C. 20001
(202) 789-2124 Fax: (202) 408-8891
April 26, 1996
The Nostalgia Network, Inc.
650 Massachusetts Avenue, N.W.
Washington, D.C. 20001
Gentlemen:
Concept Communications, Inc. ("Concept") hereby offers to amend and
modify its letter agreement with the Nostalgia Network, Inc. ("Nostalgia") dated
as of April 16, 1996 (the "Agreement") as follows:
The second paragraph of the Agreement is hereby deleted in its
entirety and in lieu thereof the following is inserted:
"Concept is extending the April 1996 Bridge Loan at a very
favorable interest rate in return for Nostalgia's agreement
to pay accrued interest on the April 1996 Bridge Loan on a
monthly basis. Such monthly interest payments shall begin
on May 16, 1996, and shall continue on like date of every
month thereafter, for so long as the April 1996 Bridge Loan
is outstanding. If Nostalgia fails to make such monthly
interest payments when due, and such failure continues for a
period of ten (10) days after written notice is provided to
Nostalgia at its main offices, such notice to be effected by
hand delivery, by Federal Express or similar courier, with
receipt therefor, or by certified or registered mail,
postage prepaid, return receipt requested, then,
notwithstanding any provision to the contrary in that
certain promissory note issued by Nostalgia in favor of
Concept in principal amount of $4.5 million dated as of
April 16, 1996 (the "April 1996 Promissory Note"), the
interest rate on the April 1996 Bridge Loan shall be
adjusted, as of the first due date for which no payment was
received, to a rate then equal to the Prime Rate, as
published in the Wall Street Journal, and adjusted from time
to time, plus two (2) percentage points ("Prime Plus Two").
The third paragraph of the Agreement is hereby amended by appending
thereto the following:
"Concept restates that all outstanding loans payable by
Nostagia to Concept during calendar year 1996 shall not be
callable before February 1, 1997."
<PAGE>
Please indicate your acceptance to the terms hereof by executing this
agreement where indicated below.
Very Truly Sincerely Yours,
CONCEPT COMMUNICATIONS, INC.
_____________________________
By Werner G. Seubert,
Vice-President
ACCEPTED AND AGREED TO:
THE NOSTALGIA NETWORK, INC.
_______________________________________
By: Martin A. Gallogly, Vice-President
_______________________________________
By: Daniel C. Holdgreiwe, Secretary
