<PAGE> 1
- --------------------------------------------------------------------------------
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1999.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from .................... to ....................
COMMISSION FILE NUMBER 0-13102
THE NOSTALGIA NETWORK, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 84-0923659
(State or other jurisdiction of incorporation) (I.R.S. Employer Identification No.)
650 MASSACHUSETTS AVENUE NW WASHINGTON, DC 20001
(Address of principal executive office) (Zip Code)
</TABLE>
(202) 289-6633
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
The number of shares of the Registrant's Common Stock, $.04 par value as of the
close of the period covered by this Report was 20,274,371.
- --------------------------------------------------------------------------------
-1-
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of
June 30, 1999 and December 31, 1998 3
Statements of Operations
For the Three and Six Months Ended June 30, 1999 and 1998 4
Statements of Cash Flows
For the Six Months Ended June 30, 1999 and 1998 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7 - 12
Item 3. Quantitative and Qualitative Disclosure about Market Risk 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities and Use of Proceeds 12
Item 3. Default upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 13
Item 6. Exhibits and Report on Form 8-K 13
</TABLE>
-2-
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE NOSTALGIA NETWORK, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited) December 31,
June 30, 1999 1998
---------------------- ----------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $2,381,170 $539,371
Accounts receivable, less allowance of $279,000
and $302,000, respectively 1,101,917 935,230
Prepaid expenses 159,841 168,362
Cablecast rights 5,208,838 7,300,000
---------------------- ----------------------
TOTAL CURRENT ASSETS 8,851,766 8,942,963
Programming and cablecast rights - net 1,771,547 2,788,129
Property and equipment - net 1,098,738 1,191,879
Other assets 52,740 56,740
---------------------- ----------------------
TOTAL ASSETS $11,774,791 $12,979,711
====================== ======================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Current maturities of programming and cablecast fees $2,418,855 $5,085,827
Accounts payable 1,888,534 2,255,174
Accrued expenses and other liabilities 550,026 377,254
---------------------- ----------------------
TOTAL CURRENT LIABILITIES 4,857,415 7,718,255
---------------------- ----------------------
LONG-TERM OBLIGATIONS, LESS CURRENT MATURITIES
Notes and interest payable-related parties 78,642,595 66,214,998
Other 332,685 335,416
Cablecast licenses and fees payable 0 114,465
---------------------- ----------------------
TOTAL LONG-TERM LIABILITIES 78,975,280 66,664,879
---------------------- ----------------------
TOTAL LIABILITIES 83,832,695 74,383,134
---------------------- ----------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Preferred stock, convertible: $2 par value, 125,000 shares
authorized, 3,250 issued and outstanding 6,500 6,500
Common stock: $.04 par value, 30,000,000
shares authorized, 20,274,371
shares issued and outstanding in 1999 and 1998 810,975 810,975
Additional paid-in capital 30,213,554 30,213,554
Deficit (103,088,933) (92,434,452)
---------------------- ----------------------
TOTAL STOCKHOLDERS' DEFICIT (72,057,904) (61,403,423)
---------------------- ----------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $11,774,791 $12,979,711
====================== ======================
</TABLE>
-3-
<PAGE> 4
THE NOSTALGIA NETWORK, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended June 30,
---------------------------------------------
1999 1998
--------------------- ---------------------
<S> <C> <C>
OPERATING REVENUES:
Affiliate sales $615,340 $728,799
Advertising sales 754,916 667,886
--------------------- ---------------------
TOTAL OPERATING REVENUES 1,370,256 1,396,685
--------------------- ---------------------
OPERATING EXPENSES:
Programming, production and transmission 1,350,128 1,593,954
Programming amortization 2,122,042 1,831,126
Sales and marketing 834,633 2,675,067
Finance, general and administration 802,529 784,516
--------------------- ---------------------
TOTAL OPERATING EXPENSES 5,109,332 6,884,663
--------------------- ---------------------
LOSS FROM OPERATIONS (3,739,076) (5,487,978)
--------------------- ---------------------
OTHER INCOME AND (EXPENSE)
Interest and other - net (1,542,965) (1,068,614)
--------------------- ---------------------
NET LOSS ($5,282,041) ($6,556,592)
===================== =====================
LOSS PER COMMON SHARE - BASIC AND DILUTED $(0.26) $(0.32)
===================== =====================
WEIGHTED AVERAGE SHARES OUTSTANDING 20,274,371 20,274,371
===================== =====================
<CAPTION>
For the Six Months
Ended June 30,
-----------------------------------------------------
1999 1998
---------------------------- ----------------------
<S> <C> <C>
OPERATING REVENUES:
Affiliate sales $1,163,555 $1,387,977
Advertising sales 1,546,336 1,432,034
---------------------------- ----------------------
TOTAL OPERATING REVENUES 2,709,891 2,820,011
---------------------------- ----------------------
OPERATING EXPENSES:
Programming, production and transmission 2,551,635 2,871,291
Programming amortization 4,241,062 3,598,668
Sales and marketing 1,824,300 3,969,170
Finance, general and administration 1,864,104 1,499,986
---------------------------- ----------------------
TOTAL OPERATING EXPENSES 10,481,101 11,939,115
---------------------------- ----------------------
LOSS FROM OPERATIONS (7,771,210) (9,119,104)
---------------------------- ----------------------
OTHER INCOME AND (EXPENSE)
Interest and other - net (2,883,271) (2,022,069)
---------------------------- ----------------------
NET LOSS ($10,654,481) ($11,141,173)
============================ ======================
LOSS PER COMMON SHARE - BASIC AND DILUTED $(0.53) $(0.55)
============================ ======================
WEIGHTED AVERAGE SHARES OUTSTANDING 20,274,371 20,274,371
============================ ======================
</TABLE>
-4-
<PAGE> 5
THE NOSTALGIA NETWORK, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
--------------------------------------------------
1999 1998
---------------------- ----------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(10,654,481) $(11,141,173)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 4,383,862 3,741,775
Provision for losses on accounts receivable 252,000 204,000
Net change in operating assets and liabilities:
(Increase) in accounts receivable (418,687) (343,871)
Decrease (increase) in prepaid expenses and other assets 12,521 (175,363)
(Increase) decrease in accounts payable (366,640) 1,783,758
Increase in accrued expenses
and other liabilities 2,168,442 1,444,276
---------------------- ----------------------
Net cash used in operating activities (4,622,983) (4,486,598)
---------------------- ----------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of programming and cablecast rights (1,133,318) (2,625,884)
Purchases of property and other assets (49,659) (30,610)
---------------------- ----------------------
Net cash used in investing activities (1,182,977) (2,656,494)
---------------------- ----------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term obligations (2,352,241) (3,172,435)
Proceeds from financing 10,000,000 9,000,000
---------------------- ----------------------
Net cash provided by financing activities 7,647,759 5,827,565
---------------------- ----------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,841,799 (1,315,527)
CASH AND CASH EQUIVALENTS - BEGINNING 539,371 1,803,189
---------------------- ----------------------
CASH AND CASH EQUIVALENTS - ENDING $2,381,170 $487,662
====================== ======================
NONCASH INVESTING AND FINANCING ACTIVITIES:
Vendor financing of programming rights $982,711
====================== ======================
</TABLE>
-5-
<PAGE> 6
The Nostalgia Network, Inc.
NOTES TO FINANCIAL STATEMENTS
1. The financial information included herein is submitted pursuant to the
requirements of Form 10-Q and does not include all disclosures required
by generally accepted accounting principles. These unaudited financial
statements should be read in conjunction with the financial statements
and notes thereto included in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998 filed with the Securities and
Exchange Commission, which are incorporated herein by reference. The
accompanying interim financial statements reflect all adjustments
(consisting of normal recurring accruals only) which are, in the opinion
of management, necessary for a fair statement of the results for the
interim periods presented. The results of operations for interim periods
are not necessarily indicative of the results to be obtained for the
entire year.
2. Certain reclassifications have been made to the financial statements for
the comparative period of the prior fiscal year for consistency with the
presentation for the current period.
3. Cash and cash equivalents include highly liquid debt instruments with a
maturity of three months or less.
4. On March 27, 1999, the Company issued two substitution and replacement
notes to Crown Communications, Inc. ("Crown") and Concept Communications,
Inc. ("Concept") (together the "Majority Stockholders") in the amount of
$50,571,503 (which includes $4,500,000 of additional financing received
in the first quarter), and $20,598,036, respectively, at 7.75%, with the
principal and unpaid interest due January 1, 2000. These notes require
minimum monthly interest payments aggregating to $60,000 and replace
previously issued notes in the principal amounts of $47,810,006 and
$19,217,867 plus $2,761,497 and $1,380,169 in accrued and unpaid
interest, respectively. On March 22, 1999, and on June 9, 1999, the
Company issued two promissory notes to Crown in the principal amounts of
$3,500,000 and $2,000,000, respectively, at 7.75%, each due January 1,
2000. These notes are secured by certain Security Agreements between the
Majority Stockholders and the Company, as amended.
-6-
<PAGE> 7
ITEM 2. 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. This Form 10-Q contains certain "forward-looking
statements" which represent expectations or beliefs of the Company, including,
but not limited to, statements concerning the Company's operations, performance,
financial condition, plans, growth and strategies. Any statements contained in
this Form 10-Q that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the generality of the foregoing,
words such as "may," "will," "expect," "anticipate," "intend," "could,"
"estimate," or "continue" or the negative or other variations thereof or
comparable terminology are intended to identify forward-looking statements.
These statements by their nature involve substantial risks and uncertainties,
including, but not limited to, those relating to development of the Company's
network, the impact of internal and external problems caused by the Year 2000
computer problem, dependence on existing management and leverage and debt
service (including sensitivity to fluctuations in interest rates). Certain of
these risks and uncertainties are beyond the Company's control, and actual
results may differ materially depending on a variety of important factors,
including those described in this Form 10-Q.
For a discussion of the risks that may have an impact on the Company's results,
see the Company's Annual Report on Form 10-K for the year ended December 31,
1998, filed with the Securities and Exchange Commission on March 31, 1999.
Results of Operations
Total revenues decreased $110,120, or 3.9% (from $2,820,011 to $2,709,891) for
the six months ended June 30, 1999 (the "Period") as compared with the same
period during 1998 and decreased $26,429, or 1.9% (from $1,396,685 to
$1,370,256) for the three months ended June 30, 1999 (the "Quarter") as compared
with the same quarter during 1998. The decline resulted principally from
decreases in affiliate revenue offset partially by increases in advertising
revenue.
Overall advertising revenue increased $114,302 or 8.0% (from $1,432,034 to
$1,546,336) for the Period and increased $87,029, or 13.0% (from $667,886 to
$754,915) for the Quarter. Infomercial sales decreased $84,592, or 10.9% (from
$777,325 to $692,733) for the Period and decreased $35,745, or 10.7% (from
$333,200 to $297,455) for the Quarter. The Company believes that the infomercial
market in general has been soft, thus resulting in lower rates received for
infomercial time. Conventional advertising increased $198,894 or 30.4% (from
$654,709 to $853,603) for the Period and increased $122,774, or 36.7% (from
$334,686 to $457,460) for the Quarter. This was primarily as a result of
increased national spot buys.
Affiliate revenues decreased by $224,422, or 16.2% (from $1,387,977 to
$1,163,555) for the Period and decreased by $113,459, or 15.6% (from $728,799 to
$615,340) for the Quarter. This was primarily as a result of acquiring new
subscribers that have upfront zero fee carriage arrangements for the first
several years of their contract periods. These arrangements provide for long
term carriage for the Network with various multiple system operators with the
intent to
-7-
<PAGE> 8
generate higher revenue streams from advertising in the future. Management
firmly believes that the Company's niche, the nation's Boomer and over audience,
is a valuable market, which currently is not being served by any other network.
Government statistics show that this demographic is the fastest growing
population segment and will account for nearly 30.0% of the population in the
year 2000. As delivery technology continues to change, management believes the
Company's best approach is to increase branding of the Network and build
consumer demand for its product. For the remainder of 1999, the Company plans
to continue its efforts to develop new original programming specifically
targeted to America's Boomer and over audience and build upon the programming
ideas developed in 1998.
Operating expenses decreased $1,458,014, or 12.2% (from $11,939,115 to
$10,481,101) for the Period and decreased by $1,775,330, or 25.8% (from
$6,884,662 to $5,109,332) for the Quarter. The decrease for the Period was
primarily a result of a decrease of $319,656, or 11.1% (from $2,871,291 to
$2,551,635) in programming, production and transmission costs and a decrease in
sales and marketing costs of $2,144,870, or 54.0% (from $3,969,170 to
$1,824,300), offset in part by an increase in finance, general and
administrative costs of $364,118, or 24.3% (from $1,499,986 to $1,864,104). The
decrease for the Quarter was primarily the result of a decrease in programming,
production and transmission costs of $243,824, or 15.3% (from $1,593,953 to
$1,350,129), a decrease in sales and marketing costs of $1,840,434, or 68.8%
(from $2,675,067 to $834,633), offset by an increase in finance, general and
administrative costs of $18,012, or 2.3% (from $784,516 to $802,528).
Programming, production and transmission costs, net of $642,394 and $290,916 in
programming amortization costs for the Period and the Quarter, decreased by
$319,656, or 11.1% (from $2,871,291 to $2,551,635) for the Period and decreased
by $243,824, or 15.3% (from $1,593,953 to $1,350,129) for the Quarter. The
decrease is a result of a decrease in programming costs of $447,891, or 40.5%
(from $1,105,189 to $657,298) for the Period, and a decrease of $295,054, or
42.4% (from $696,117 to $401,063) for the Quarter, and a decrease in production
and traffic costs of $14,651, or 5.6% (from $262,826 to $248,175) for the
Period, and a decrease of $20,773, or 14.6% (from $142,816 to $122,043) for the
Quarter. These decreases were offset in part by an increase in transmission
costs of $142,886, or 9.5% (from $1,503,276 to $1,646,162) for the Period, and
an increase of $72,003, or 9.5% (from $755,020 to $827,023) for the Quarter.
Programming amortization costs increased by $642,394, or 17.8% (from $3,598,668
to $4,241,062) for the Period and increased $290,916, or 15.9% (from $1,831,126
to $2,122,042) for the Quarter primarily as a result of changes in the Network's
programming lineup and programming contracts. The Company expects to incur
additional increases in future programming and studio production costs as a
consequence of the Network's programming initiatives and the creation of new
original programs which has continued in 1999. These additional future
expenditures will adversely impact the Company's results of operations in the
short-term; however, management believes they are critical to the Company's
long-term survival and growth.
The Company continues its schedule of new and original productions in 1999,
including the following programs: GTV DanceSport spotlights a rapidly growing
trend in America, ballroom and performance dancing, which is slated to become a
recognized Olympic sport; More Money
-8-
<PAGE> 9
with The Dolans, starring Ken and Daria Dolan, the "first family of finance,"
which provides an entertaining program on money issues; Flea Market Movie, with
collectibles aficionado Christopher Kent appraising viewers' attic treasures
during movie breaks; The Bull and the Bear, stock market reports by a "Siskel
and Ebert" type pair of hosts, Llewellyn King and Linda Gasparello; The Real Me
Autobiographies, true stories of famous people told in their own words; and
American Soldier, which features interviews with World War II veterans as
wraparounds to the dramatic series, Combat!, Garrison's Gorillas and 12 O'Clock
High.
New programs for 1999 include American Couples, hosted by Nancy Glass, an hour
long show which celebrates the family values, love, commitment and partnership
of famous couples; Heroes & Sheroes, profiling ordinary men and women who have
performed heroic tasks for the benefit of their fellow man; American Families,
spotlighting regular families discussing contemporary solutions to issues raised
in episodes of the classic family programs Ozzie & Harriet and Make Room for
Daddy; Cookbook Cooking with Christopher Kent which features the Network's Flea
Market Movie host, Christopher Kent, who also is an accomplished chef, preparing
dishes from famous cookbooks; and the classic family western series Bonanza.
Sales and marketing expenses decreased by $2,144,870, or 54.0% (from $3,969,170
to $1,824,300) for the Period and decreased $1,840,434, or 68.8% (from
$2,675,067 to $834,633) for the Quarter. This decrease is a result of the
Company's decision in March 1999 to more closely align its sales and marketing
activities by consolidating these efforts at its headquarters in Washington,
D.C. Salaries and wages decreased by $121,577, or 15.0% (from $807,826 to
$686,269) for the Period and decreased by $88,259, or 22.6% (from $391,081 to
$302,822) for the Quarter. Travel and entertainment expenses decreased by
$180,391, or 68.9% (from $261,717 to $81,326) for the Period and decreased by
$131,735, or 80.8% (from $163,006 to $31,271) for the Quarter. Both of these
decreases were primarily due to the departure of personnel from positions that
have not been replaced. Convention expenses decreased by $547,645, or 94.2%
(from $581,216 to $33,571) for the Period and decreased by $509,553, or 96.2%
(from $529,737 to $20,184) for the Quarter. Advertising expenditures decreased
by $995,956, or 93.0% (from $1,070,245 to $74,289) for the Period and decreased
$821,346, or 93.1% (from $881,997 to $60,651) for the Quarter. Both of these
decreases also were due to the Company's efforts to reduce marketing costs.
Professional fees decreased by $217,519, or 70.9% (from $307,166 to $89,647)
for the Period and decreased by $104,132, or 40.3% (from $258,479 to $154,347)
for the Quarter primarily as a result of reduced expenditures on the Network's
affinity and new media efforts, as well as bringing the Network's public
relations operations in house. These decreases were offset in part by an
increase in marketing allowance costs of $134,743, or 168.0% (from $80,149 to
$214,892) for the Period and an increase of $32,598, or 104.3% (from $31,263 to
$63,861) for the Quarter.
Finance, general and administrative costs increased by $364,118, or 24.3% (from
$1,499,986 to $1,864,104) for the Period and increased by $18,012, or 2.3% (from
$784,516 to $802,528) for the Quarter. This increase was primarily as a result
of increases in legal and professional fees of $43,390, or 19.6% (from $221,336
to $264,326) for the Period and a decrease of $24,302, or 18.0% (from $134,670
to $110,368) for the Quarter, an increase in bad debt expenses of $48,000, or
3.5% (from $204,000 to $252,000) for the Period, and a decrease of $24,000, or
23.5% (from
-9-
<PAGE> 10
$102,000 to $78,000) for the Quarter, and an increase in consolidation and
retention costs of $266,123, or 100.0% (from $0 to $266,123) for the Period and
an increase of $72,361, or 100.0% (from $0 to $72,361) for the Quarter. This
increase is a result of the Company's decision in March 1999 to more closely
align its sales and marketing activities by consolidating these efforts at its
headquarters in Washington, D.C.
As a result of decreased revenues ($110,120), increased programming amortization
costs ($642,394), and increased finance, general and administrative costs
($364,118) offset by decreased programming, production and transmission costs
($319,656), and decreased sales and marketing costs ($2,144,870), the Company's
loss from operations decreased $1,347,894, or 14.7% (from $9,119,104 to
$7,771,210) for the Period. As a result of decreased revenues ($26,430),
increased programming amortization costs ($290,916), and increased finance,
general and administrative costs ($18,012) offset in part by decreased
programming, production and transmission costs ($241,825) and decreased sales
and marketing costs ($1,840,434), the Company's loss from operations decreased
$1,748,648, or 32.3% (from $5,487,978 to $3,739,076) for the Quarter.
Other expenses increased $861,202 or 42.6% (from $2,022,069 to $2,883,271) for
the Period and $474,351, or 44.4% (from $1,068,614 to $1,542,965) for the
Quarter, primarily as a result of interest on outstanding debt.
Liquidity and Capital Resources
Cash increased from $539,371 at December 31, 1998 to $2,381,170 at June 30,
1999, principally due to $10,000,000 in financing received in the Period, offset
by cash outlays to cover operating losses and repayments of certain debts.
Working capital increased from $1,224,708 at December 31, 1998 to $3,994,351 at
June 30, 1999, principally as a result of increased cash balances of $1,841,799.
Cablecast rights have decreased by $3,107,744 since December 31, 1998 as a
result of amortization of the Company's investment in its primetime line-up,
offset by acquisitions totaling $1,133,318. Total liabilities increased
primarily due to $10,000,000 in additional financing.
Cash used in operating activities increased $136,385, or 2.9% (from $4,486,598
to $4,622,983) for the Period compared to the six months ended June 30, 1998
(the "1998 Period"), principally as a result of decreases in accounts payable of
$2,150,398, or 120.5% (from $1,783,758 to ($366,640)), offset in part by
increases in depreciation of $632,087, or 16.9% (from $3,741,775 to $4,373,862),
and increases in accrued expenses of $724,166, or 50.1% (from $1,444,276 to
$2,168,442), primarily as a result of interest on additional borrowings.
Cash used in investing activities decreased $1,473,517, or 55.4% (from
$2,656,494 to $1,182,977) principally due to a decrease in purchases of
programming and cablecast rights.
Cash flows from financing activities increased $1,820,194, or 31.2% (from
$5,827,565 to $7,647,759) due principally to increased financing of $1,000,000,
or 11.1% (from $9,000,000 to $10,000,000) and decreased repayment of long-term
obligations of $820,194, or 25.8% (from $3,172,435 to $2,352,241).
-10-
<PAGE> 11
Since 1990, the Majority Stockholders have been the principal source of the
Company's capital. The Majority Stockholders have invested $2,300,000 and
provided $68,500,000 in financing since 1994, of which $10,000,000 was provided
during the Period. Additionally, the Majority Stockholders have committed to
advance as needed an additional $5,000,000 in debt financing for the remainder
of 1999. Management believes that these funds will be sufficient to satisfy the
Company's operating needs for 1999. In connection with the additional
borrowings, the Company has entered into security agreements, as amended,
pledging substantially all the Company's assets as security for its indebtedness
to the Majority Stockholders.
The Company believes that, in order to survive in the highly competitive market
for cable television programming, the Company will need significant additional
investment over the next four to five years. Such additional investment is
necessary to improve programming and increase distribution, which the Company
anticipates ultimately will increase advertising revenues and result in
substantial long-term revenue increases.
The Company's Board of Directors has directed its Executive Committee and
management to study the question of whether the Company should enter into, and
the potential opportunities for, a strategic alliance, and to make
recommendations to the Board of Directors. The Executive Committee and
management have been actively engaged in this pursuit. 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 the Company's future needs. There can be no assurance either that the
Company will be able to locate sufficient funding in excess of the funds
committed for 1999, or that it will be able to achieve a strategic alliance.
Year 2000 Issues
The Year 2000 problem is the result of computer programs being written using two
digits rather than four to define the applicable year. As a result, those
programs have time-sensitive software that recognizes a date using "00" as the
year 1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions or engage in similar
normal business.
The Company has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the Year 2000 issue. Based upon
its review, the Company believes that all of its systems are Year 2000 compliant
with the exception of the Company's "traffic system," pursuant to which the
Network's signal is distributed to affiliates. The Company has begun to replace
the traffic system with a system which is Year 2000 compliant and expects to
have the new system in place by the third quarter of 1999 at a cost not
anticipated to exceed $100,000.
The Company is in the process of contacting its significant suppliers and
affiliates that do not share information systems with the Company as to their
Year 2000 compliance. To date, the Company is not aware of any external agent
with a Year 2000 issue that would materially impact the Company's results of
operations, liquidity or capital resources. However, the Company has
-11-
<PAGE> 12
no means of ensuring that external agents will be Year 2000 compliant. The
inability of external agents to complete their Year 2000 compliance in a timely
fashion could materially impact the Company. The effect of noncompliance by
external agents is not determinable. Possible Year 2000 related problems due to
external agents could include loss of electrical power and telephone service and
supply shortages.
In the event the Company experiences difficulties with its systems or with
material external agents, the Company has contingency plans for certain critical
applications and is working on such plans for others. Contingency plans
generally consist of performing mission critical procedures manually or with
substitute systems which are Year 2000 compliant.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. None.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. None.
ITEM 3. DEFAULT UPON SENIOR SECURITIES. None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The 1999 Annual Meeting of Stockholders was held on June 9, 1999. The nominees
for Director elected at the meeting were as follows:
<TABLE>
<CAPTION>
Votes Cast
-----------------------------------------------------------------------
For Against Withheld
--- ------- --------
<S> <C> <C> <C>
Christopher A. Cates 19,028,529 117,500 -
Floyd Christofferson 19,028,529 117,500 -
Dianne M. Faure 19,028,529 117,500 -
Hiroshi Goto 19,028,529 117,500 -
Dong Moon Joo 19,028,529 117,500 -
Dr. S. Robert Lichter 19,028,529 117,500 -
Frederick W. Newton 19,028,529 117,500 -
SQuire D. Rushnell 19,028,529 117,500 -
Ambassador Phillip Sanchez 19,028,529 117,500 -
Robert J. Wussler 19,028,529 117,500
</TABLE>
The appointment of Grant Thornton, LLP as an independent accountant for 1999 was
ratified by a vote of 19,144,967 for, 0 against, 1,062 abstain.
-12-
<PAGE> 13
ITEM 5. OTHER INFORMATION. None.
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description
--- -----------
<S> <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)
27 Financial Data Schedule as required by Item 601 (c) of Regulation S-K
</TABLE>
(b) Reports on Form 8-K
The Company filed a Form 8-K with the United States Securities and Exchange
Commission on April 5, 1999, as amended by a Form 8-K/A filed with the United
States Securities and Exchange Commission on April 12, 1999, to report a change
in the Company's certifying accountants.
-13-
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated August 16, 1999
THE NOSTALGIA NETWORK, INC.
By: /s/ SQuire D. Rushnell
------------------------------------
SQuire D. Rushnell, President and
Chief Executive Officer
By: /s/ Diane Fuller
------------------------------------
Diane C. Fuller, Treasurer
-14-
<PAGE> 15
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <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)
27 Financial Data Schedule as required by Item 601 (c) of Regulation S-K
</TABLE>
-15-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from Form 10-Q
for the quarter ended June 30, 1999, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,381,170
<SECURITIES> 0
<RECEIVABLES> 1,380,617
<ALLOWANCES> 279,000
<INVENTORY> 6,980,385
<CURRENT-ASSETS> 8,851,766
<PP&E> 3,274,631
<DEPRECIATION> 2,175,892
<TOTAL-ASSETS> 11,774,791
<CURRENT-LIABILITIES> 4,857,415
<BONDS> 78,642,594
0
6,500
<COMMON> 810,975
<OTHER-SE> (72,875,379)
<TOTAL-LIABILITY-AND-EQUITY> 11,774,791
<SALES> 0
<TOTAL-REVENUES> 1,370,256
<CGS> 0
<TOTAL-COSTS> 5,109,332
<OTHER-EXPENSES> 1,542,965
<LOSS-PROVISION> 252,000
<INTEREST-EXPENSE> 1,542,965
<INCOME-PRETAX> (5,282,041)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,739,076)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,282,041)
<EPS-BASIC> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
