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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NO. 0-13102
THE NOSTALGIA NETWORK, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 84-0923659
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION) IDENTIFICATION NO.)
650 MASSACHUSETTS AVENUE, N.W. 20001
WASHINGTON, D.C. (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (202) 289-6633
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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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 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 or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K [ X]
The aggregate market value of the voting stock held by non-affiliates of the
Company as of March 23, 1999 was approximately $377,000 based upon the last
reported 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 23, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
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Certain portions of the Company's Proxy Statement to be filed with the
Commission pursuant to Rule 14a-6 under the Securities Exchange Act of 1934 in
connection with the Company's 1999 Annual Meeting of Stockholders are
incorporated by reference in Part III, Items 10-13 of this Form 10-K.
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PART I
ITEM 1. BUSINESS
The Nostalgia Network, Inc. (the "Company" ) operates a television
programming service, GoodLife TV Network (the "Service" or "Network"), which
offers a variety of entertainment, information and lifestyle programming
exemplifying traditional American culture, values and a sense of community.
This programming mix targets the most neglected audience on television,
America's Boomer and over audience. The Company was originally incorporated in
Colorado in 1983. In 1987, the Company changed its name from Boston
Investments, Inc., and reincorporated in Delaware through a merger into its
wholly-owned subsidiary.
FINANCIAL INFORMATION
During 1998, the Network continued to focus on rebuilding and rebranding
its programming. In an effort to differentiate itself from its many
competitors, and in response to comments from cable system operators, the
Network continued its efforts to increase original programming. As part of its
branding efforts, the Network adopted the name GoodLife TV Network (after a
transitional period using the name Nostalgia Good-tv) which was deemed by
management to be more descriptive of the Network's emphasis on values oriented
programming, free of sex and violence.
The Company also continued its efforts to grow its subscriber base,
increasing it by 658,000 subscribers. At December 31, 1998, the Company had
7,718,000 subscribers, compared to 7,060,000 subscribers at December 31, 1997.
The Service Transmission Agreement between the Company and National Digital
Television Center providing for digital distribution of the Network's signal
through the Headend in the Sky program ("HITS") contributed significantly to
the Company's increase in subscribers.
The Company also continued in its analysis of and efforts to seek a
strategic alliance. The Company has engaged in active discussions with several
possible strategic partners, but no serious discussions have occurred. There
can be no assurance that the Company will be able to obtain a strategic
partner, or that any strategic partner will be willing to invest the sums
required by the Company in order to continue to grow the Network's subscriber
base.
In March 1999, to more closely align its sales and marketing activities,
the Company determined to consolidate these efforts at its headquarters in
Washington, DC. Consistent with this decision, the Company determined to close
its Englewood, Colorado and Ft. Washington, Pennsylvania offices, resulting in
a reduction of its staffing levels by eleven positions.
For a description of the revenue obtained by the Company from external
customers and the Company's loss and total assets, see the Company's audited
financial statements for the fiscal year ended December 31, 1998 and Notes
thereto. See Part II, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Financing for the Network has previously been provided by the Company's
majority stockholders, Concept Communications, Inc. ("Concept"), and Concept's
parent company, Crown Communications, Inc. ("Crown") (together the "Majority
Stockholders"). Crown loaned $19,000,000 to the Company during 1998. See Part
II, Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations." From January 1, 1999 through March 23, 1999, the
Company received an additional $8,000,000 in debt financing from Crown,
accruing interest at approximately 7.75%. Crown has committed to provide an
additional $7,000,000 to the Company, to be advanced as needed during 1999.
The Company believes that these funds in addition to revenues from continuing
operations will be sufficient to satisfy its operating needs for 1999.
DESCRIPTION OF BUSINESS
The Network's programming is telecast over a network of cable television,
wireless cable, satellite and video-dial-tone systems (each an "Affiliate").
The Company uplinks its programming from its facilities in Alexandria, Virginia
to a satellite which then transmits the programming to the Affiliates. The
Company derives revenue primarily from the sale of advertising time and from
fees paid by Affiliates for its programming. According to Kagan's Economics of
Basic Cable Networks, 1997 Edition ("Kagan"), there are over 78 million basic
cable subscribers in the United States and the industry reaches approximately
79.0% of all television households. Kagan projects that 83.0% of all
households having at least one television will have at least basic cable by
2000.
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1. Affiliated Cable Systems and Subscribers
The Network's programming is distributed by approximately 1,281 Affiliates,
from which the Network derives fees, typically based upon the number of monthly
subscribers in each Affiliate's system. On December 31, 1998, the Network had
7,718,000 subscribers, an increase of 9.3% from December 31, 1997, when the
Network had 7,060,000 subscribers. The length of each Affiliate contract
varies, but generally ranges from three to five years. Certain of the
Network's Affiliate contracts have expired and carriage is currently provided
on a month-to-month basis. Many of these Affiliates have declined to enter
into new contracts until their plans for channel expansion are completed. In
1998, the Network had revenues of $2,531,000 from Affiliate fees. Two multiple
system operator Affiliates accounted for 18.0% and 13.0% of Affiliate revenue
in 1998.
Each Affiliate has a limited number of "channels" over which programming
can be distributed to its subscribers. The must carry/retransmission consent
provisions of the Cable Act of 1992 caused Affiliates to increase the number of
channels allocated to broadcasters and affiliates of broadcasters, resulting in
a corresponding decrease in the number of channels available to independent
networks such as the Network. As a result of intense competition among cable
networks for this reduced number of channels, the per subscriber fees received
from Affiliates have declined and may continue to decline. See Part II, Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
2. Advertising
The Company also derives revenues from the sale of advertising receiving
fees for approximately, on average, 10 minutes of advertising time per hour of
programming, with an additional two minutes of each hour of programming
reserved for the use of Affiliates. The Company also derives advertising
revenue from the sale of time for infomercials, which are program length
advertisements, and from programming sponsorship and home shopping revenue
sharing arrangements. In 1998, the Company derived revenues of $2,966,000 from
advertising.
3. Demographics and Ratings
According to Nielsen's Homevideo Index's ("NHI") Fourth Quarter 1998
Audience Composition Report, the Network was first in Viewers Per Viewing
Household for both Post-49 Adults, as well as both Men and Women 35+, during
prime time (Monday through Friday, 8:00 p.m. through 11:00 p.m.). The Network's
ratings during prime time, as measured by NHI, reflect the Network's growing
share of household viewers. The following is a summary of the Network's prime
time ratings for the last five years:
<TABLE>
<CAPTION>
YEAR AVERAGE HIGH
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<S> <C> <C>
1994 0.2 0.4
1995 0.3 0.5
1996 0.5 0.6
1997 0.7 0.8
1998 0.7 0.9
</TABLE>
4. Programming
The Network has continued to expand and improve its original programming.
Following are descriptions of programs aired on GoodLife TV Network during
1998.
GTV Ballroom DanceSport (Original)
Competition dancing has become one of the fastest growing trends in the United
States. Through its exclusive agreement with DanceSport America, the Network
covers major dance competitions, including the national championships in Miami.
This exciting program showcases not only the top champions in each class, but
also provides insight into the techniques and fine points of competition.
Cafe DuArt (Original)
Renowned impressionist/comedian Louise DuArt serves as the owner/hostess of a
New York cabaret club where a wide variety of famous guests interact with the
club's staff in comedic settings. Musical variety acts are intertwined in the
comedic setting to provide a well balanced source of entertainment.
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The Real Me Autobiographies (Original)
Set in a casual atmosphere, The Real Me Autobiographies provides a unique
insight into the lives and significant influences of its guest hosts as they
tell their own stories in their own words.
The Bull & The Bear (Original)
The "Siskel and Ebert" of Wall Street, hosts Llewellyn King and Linda
Gasperillo answer viewer calls to provide unique insight into stocks and
investment opportunities.
More Money with the Dolans (Original)
Ken and Daria Dolan, "the first family of finance," present a one hour
televised version of their nationally syndicated daily radio program on money
issues. On More Money with the Dolans, Network viewers can call in questions
to Ken and Daria about retirement plans, investment and tax strategies, saving
money for college or how to get a good buy on a new car.
TV Book Shop (Original)
TV Book Shop interviews today's top authors on books of a particular interest
to the Network's audience. Going beyond just an overview of their latest work,
TV Book Shop probes the author's writing style and personal background.
Viewers are given the ability to order the books directly through an 800 number
or over the internet at Goodtv.com.
Issues & Answers (Original)
Issues & Answers, hosted by former White House Press Secretary Ron Nessen, has
unique qualities that set it apart from other political talk shows. First, the
programs deal with issues which are of relevance to the Post-49 audience.
Second, none of the guests are current members of Congress or the Executive
Branch, thereby freeing them from the constraints of party and politics and
enabling them to provide insight into the important issues.
Dennis Wholey (Original)
The Network featured two programs produced by noted television interviewer,
Dennis Wholey. Dennis Wholey: America! is a four day a week, half hour,
one-on-one interview in which Dennis reflects contemporary culture through
interviews with authors. This is America with Dennis Wholey is a weekly, hour
long roundtable discussion of a timely topic. Six interesting and influential
guests from the fields of entertainment, politics and industry contribute their
thoughts on the topic of the week.
GoodLife TV Branding (Original)
In rebranding the Network from Nostalgia Television to GoodLife TV, the Network
created an image campaign which focuses on people, especially the Boomer and
over generation, along with traditional culture, values and a sense of
community which clearly define "The GoodLife State of Mind." In these short ten
and fifteen second spots, real people, exemplifying the Network's demographic,
are pictured in everyday situations: a couple is seen on their sailboat,
another couple shop in a small store, a grandfather and grandson buy ice cream,
and a father and older son wash a vintage car. These vignettes allow the
audience to identify with the Network and reflect on why today may be the best
times of their lives.
Flea Market Movie (Original Elements)
The Network has added short segments to every commercial break in its movies
where its collectibles aficionado, Christopher Kent, dispenses his wit and
wisdom about all sorts of collectable items. In these short interstitials,
viewers can learn about the value of various collectibles. Additionally,
viewers can call to discuss or send in pictures of items for Christopher to
appraise.
American Soldier (Original Elements)
Interviews with veterans, focusing on their wartime experiences, are wrapped
around three classic dramatic television shows. The shows, which the Network
has licensed for two years, are Combat!, Twelve O'clock High and Garrison's
Gorillas. The programs and their wrap around elements are part of a weekday
and weekend block entitled, American Soldier.
GTV Variety Hour
The GTV Variety Hour features classic variety programs such as Tony Orlando and
Dawn, Leslie Uggams and Dean Jones. These programs, including all rights,
titles and interests, were purchased by the Network.
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Acquired Programming
One of the best loved television series, The Rockford Files, starring James
Garner, premiered on the Network in September 1996. The series consists of 125
hours licensed in a cable exclusive deal from Universal Television until August
1999. Other off-network series airing on the Network are The Love Boat and The
Streets of San Francisco, both of which enjoy strong viewership followings.
Dual Language Programming
In an effort to provide service to a broader community of viewers, the Network
commenced airing dual language programming during 1997. Found on the SAP
channel, where available, the Network provides Spanish language versions of The
Love Boat, The Rockford Files and The Streets of San Francisco.
Programming for the Visually Impaired
The Company has had a significant and mutually beneficial relationship with the
Narrative Television Network ("NTN"). Through grants from the U.S. Department
of Education, NTN was able to provide fifty hours of narrative tracks in 1998
for many of the Company's movies as well as for many of its episodes of The
Streets of San Francisco. Found on the SAP channel, where available, these
narrative tracks provide descriptive narratives of the on-screen action to
allow visually impaired viewers to better understand and account for noises and
actions they cannot visualize.
5. Patents, Trademarks, Licenses
The Company neither holds nor depends on any material patent, trademark,
license, franchise or concession except for its trademarks "Nostalgia Channel"
and "Nostalgia Television." In 1998, the Company licensed the right to use
"GoodLife TV Network" from Scripps Howard Broadcasting Company for a ten year
period.
6. Competition
There is intense competition among companies providing programming services
via cable television, direct broadcast satellite ("DBS") and other video
delivery systems. The Company must compete with other programmers for access
to limited channel space on Affiliates and viewers. The Company competes for
advertising revenues with other cable networks, broadcast television, radio and
print media. More generally, the Network competes with various other
leisure-time activities such as home videos, movie theaters, the internet and
other forms of information and entertainment.
A number of basic networks (such as USA Network, American Movie Classics
and Turner Network Television), pay television networks (such as The Disney
Channel) and superstations (such as WOR and WGN) provide programming directed
towards various sub-groups which are included in the Network's target audience.
Most of the companies providing programming services are comprised of a group
of programming services or are affiliated with cable system operators or motion
picture studios, and thus may enjoy advantages that independent services, such
as the Network, do not enjoy. Many of the Network's competitors have
substantially greater financial and other resources than the Network.
Technological advances over the next five years, such as digital
compression technology, which will allow cable systems to expand channel
capacity, and the development of fiber optic cable, which has the capacity to
carry a much greater number of channels than coaxial cable, are expected to
increase the number of available channels. The Company believes that the
increase in the number of channels will reduce competition for access to
channel space; however, it will also increase the competition for viewers.
There can be no assurance as to when technological advances will be
commercially implemented to increase significantly overall channel capacity.
Many of the Company's competitors pay the cable systems, DBS and other
video delivery systems a significant upfront "per subscriber" fee. This fee
may act as an incentive to a system to carry a certain network because it will
receive fees based upon the number of subscribers to that system. The Company
selectively does pay some competitive, upfront fees, but only in circumstances
judged to be most beneficial in terms of launch opportunities. The Company has
relied more on waiver of future fees to be paid to the Network by its
Affiliates, and on quality original programming and other branding efforts to
distinguish the Network from its competitors and, thereby, provide a
substantive reason for cable systems to choose the Network for carriage. While
this determination has, in the short term, a possible adverse impact on the
Network's ability to gain carriage, it is, in the Company's belief, the most
appropriate way to maximize the value and impact of the Company's financial
resources. The Company also is actively engaged in efforts to review and
identify potential strategic alliance partners that could provide support to
the Company's efforts to increase its subscriber base.
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7. Government Regulation
The Telecommunications Act of 1996 (the "1996 Act"), among other things,
repealed statutory provisions and regulations of the Federal Communications
Commission ("FCC") that prohibited telephone companies from operating cable
television or other multi-channel distribution systems in areas in which those
companies offer telephone service and restricted the ability of such telephone
companies to produce, acquire an interest in, or distribute programming in
which they have an interest. The 1996 Act limits the ability of telephone
companies to purchase existing cable systems, but otherwise imposes minimal
constraints upon their entry into multi-channel video distribution and program
production. Pursuant to the 1996 Act, the FCC has extended to common carriers
the regulations imposed upon traditional cable systems by the Cable Television
Consumer Protection and Competition Act of 1992 (the "1992 Act"). These
regulations are intended to prevent telephone companies from favoring program
services in which they have an interest and from unreasonably denying access to
unaffiliated programmers.
The 1996 Act also significantly relaxes multiple ownership and other
restrictions imposed by FCC rules on traditional over-the-air broadcast
stations and television networks, such as CBS, NBC, ABC, and Fox. The
legislation requires the FCC to adopt rules which allow the traditional
networks to operate more than one television network, except that none of the
four largest networks are permitted to merge with any of the other four or with
either of the two "emerging networks" (Time Warner's WB Network and the United
Paramount Network). Under the statute, companies that own and operate
television broadcast networks also will be permitted to own and operate cable
television systems, subject to certain safeguards designed to prevent
discrimination against unaffiliated program service providers.
The 1996 Act also modifies, to a limited extent, the system of rate
regulation imposed upon traditional cable operators pursuant to the 1992 Act.
Under the 1996 Act, rate regulation by the FCC of the upper tiers of service
expired on March 31, 1999; cable operators typically carry the Network on an
upper tier. Basic service, which cable operators are required to offer to all
subscribers, remains subject to rate regulation in communities in which the
cable system is not subject to "effective competition." The institution of an
alternative multi-channel video distribution system by a telephone company
serving substantially the same area as the cable system is deemed to constitute
"effective competition" under the 1996 Act.
The 1996 Act does not alter the "must carry" and "retransmission consent"
requirements of the 1992 Act. These provisions, coupled with rate regulation,
have forced cable systems to increase the number of channels carrying broadcast
or broadcaster-affiliated channels, causing a corresponding decrease in the
number of channels available to satellite distributed networks such as the
Network. In the past, the Network has lost carriage on cable systems because
the system needed to reassign the channel used by the Network either to comply
with the 1992 Act's must carry provisions or to fulfill a contractual
obligation to a broadcaster arising out of the "retransmission consent"
requirements of the 1992 Act. While the FCC relaxed its rate regulation rules
in 1995 to encourage cable company investment in additional channel capacity,
the end of upper tier rate regulations on March 31, 1999 may further encourage
cable operators to invest in new facilities that will accommodate additional
programming.
The Company is unable to predict what effect, if any, these legislative and
regulatory changes will have on its operations or finances. In general, the
Company believes that the relaxation of rate regulation and the introduction of
competition in the multi-channel distribution business will improve the
Company's ability to obtain carriage of the Network in markets in which the
service is not now available and will have a favorable effect on affiliate
subscriber fees earned by the Network. However, the entry of telephone
companies into the program production business and the relaxation of existing
constraints on broadcast stations and traditional broadcast networks are
expected to increase the competition the Network already faces for advertising
revenues and audiences.
8. Employees
On December 31, 1998, the Company had a total of forty one full-time,
non-union employees. On March 2, 1999, the Company announced its determination
to consolidate the Network's sales and marketing staffs at its headquarters in
Washington, DC, resulting in a reduction of its staffing levels by eleven
positions. The Company has experienced no work stoppage, is not a party to any
collective bargaining agreements, and believes that it enjoys good relations
with its current employees.
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ITEM 2. PROPERTIES
The Company's executive offices are located at 650 Massachusetts Avenue,
N.W., Washington, D.C., where the Company leases approximately 5,100 square
feet of office space and 900 square feet of storage space from Washington
Television Center, L.P., a subsidiary of U.S. Property Development Corporation,
of which Mr. Dong Moon Joo, a director of the Company, is an officer. The
lease provides for a base monthly rent of $13,944 and expires in November 1999.
It is anticipated that, upon expiration, this lease will be replaced in the
ordinary course of business.
The Company's traffic and finance facility, consisting of approximately
4,300 square feet in Alexandria, Virginia, is leased on a month-to-month basis
at a monthly rate of $3,896 from Atlantic Video, Inc. ("AVI"). During 1998,
Mr. Dong Moon Joo and Mr. Christopher Cates, each a director of the Company,
were directors or officers of AVI.
On March 2, 1999, the Company announced the closing of (i) its eastern
sales office at 220 Commerce Drive, Ft. Washington, Pennsylvania, where the
Company occupies approximately 1,580 square feet at a monthly rate of $2,304
under a lease that expires August 31, 2003, and (ii) its western sales office
located at 7951 East Maplewood Avenue, Suite 310, Englewood, Colorado, where
the Company occupies approximately 1,980 square feet at a monthly rate of
$2,413 under a lease that runs through July 14, 1999. The Company anticipates
subleasing or assigning the Ft. Washington, Pennsylvania lease and maintaining
the Englewood, Colorado lease until its expiration.
ITEM 3. LEGAL PROCEEDINGS
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 Company is named as a nominal defendant for purposes of the
derivative claims asserted. However, the Company has no liability, and a
summary judgment has been entered dismissing all counts in which the Company
had been named, although counts against the other individual defendants
continue. The Company is required to indemnify the directors and to pay the
cost of their defense.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1998, no matters were submitted to a vote of
security holders.
PART II
ITEM 5. MARKET PRICE FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
During 1998, the Company's Common Stock was traded on the NASDAQ OTC
Bulletin Board (the "Bulletin Board"). The following table sets forth, for
each quarterly period during 1998 and 1997, the high ask and low bid quotations
for the Company's publicly-traded securities as reported on the Bulletin Board.
These quotations are representative of prices between dealers, do not include
retail markups, markdowns or commissions, and may not represent actual
transactions. The Company's Common Stock Purchase Warrants (the "Warrants"),
exercisable at prices ranging from $1.25 to $4.80 per share for an average
price of $2.31 per share, and expiring 45 days after the effective date of the
Company's registration statement, as yet not filed, for the stock underlying
such Warrants, and Units (consisting of one share of Common Stock and one
Warrant) (the "Units") were not traded on the NASDAQ Bulletin Board in 1998.
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<TABLE>
<CAPTION>
Common Stock
------------
High Ask Low Bid
-------- -------
<S> <C> <C>
1998
----
First Quarter $0.06 $0.04
Second Quarter 0.05 0.03
Third Quarter 0.05 0.02
Fourth Quarter 0.04 0.01
1997
----
First Quarter 0.16 0.07
Second Quarter 0.10 0.07
Third Quarter 0.10 0.07
Fourth Quarter 0.10 0.05
</TABLE>
As of March 23, 1999, there were approximately 312 holders of record of the
Company's Common Stock.
The Company has not paid a dividend since its inception and does not
anticipate paying a dividend on its Common or Preferred Stock in the
foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following is a summary of selected financial data for the Company for
each of the last five fiscal years.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Number of Subscribers 7,718,000 7,060,000 7,694,000 8,905,000 8,927,000
Balance Sheet Data
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Total Assets $12,979,711 $16,997,972 $17,486,702 $23,955,541 $11,154,537
Long Term Obligations 66,664,879 45,989,547 28,202,711 22,881,635 3,096,540
Stockholders' Equity (Deficit) (61,403,423) (38,352,747) (19,464,221) (7,522,733) 1,953,634
Income Statement Data
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Affiliate Sales Revenue 2,530,714 2,579,376 3,850,745 4,205,324 5,014,547
Advertising Sales Revenue 2,965,896 4,474,597 5,652,938 5,812,663 7,206,501
Other Revenue 34,750 124,960 1,248,898 231,052
Total Operating Revenues 5,531,360 7,178,933 9,503,683 11,266,885 12,452,100
Operating Expenses 24,058,635 23,467,791 20,394,940 20,260,931 16,425,169
Loss From Operations (18,527,275) (16,288,858) (10,891,257) (8,994,046) (3,973,069)
Net Loss (23,050,676) (18,888,526) (11,941,488) (9,476,367) (4,231,177)
Net Loss Per Common Share -
Basic and Diluted (1.14) (0.93) (0.59) (0.47) (0.22)
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Form 10-K contains certain forward-looking statements which represent
the Company's expectations or beliefs, including, but not limited to, statements
concerning industry performance, regulatory environment and the Company's
operations, performance, financial condition, plans, growth and strategies.
Any statements contained in this Form 10-K which 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," "intent," "could," "estimate" or "continue," or the
negative or other variations thereof or comparable terminology are intended to
be forward-looking statements. These statements by their nature involve
substantial risks and uncertainties, certain of which are beyond the Company's
control, and actual results may differ materially depending on a variety of
important factors, many of which are beyond the control of the Company,
including:
Competition: The Company competes with other programmers for access to
limited channel space and for viewers. Over the past few years, competition
among television networks has increased dramatically. Currently such basic
networks as USA Network, American Movie Classics and Turner Network Television
provide programming directed at sub-groups included in the Company's targeted
audience. Moreover, other services targeting the baby boomer and over market
have sought to enter the market. Many competing services have an advantage
over the Company because they are owned by or affiliated with companies that
operate cable systems or own programming, and in general have greater financial
and technical resources than the Company. If one or more of these competitors
were to be successful in reaching the Company's target audience, the Company
would be adversely affected.
Distribution and Channel Capacity: Few individual cable systems have
channels available to launch new services. To achieve significant growth, the
Company will need to gain distribution not only with existing system operators
as they expand their systems with rebuilds or expand their system's territories
through overbuilds, but also with emerging cable competitors such as DBS
services and telephone company wired and wireless services. There can be no
assurance that such additional capacity will be built or that the Company will
gain additional distribution.
Advertising Revenues: The Company's advertising revenues will increase
substantially only if it is able to improve its audience size above current
levels. Most mature cable networks have found it very difficult to achieve
significant audience growth. This growth will depend on, among other things,
the Company's ability to produce or acquire attractive programming, create
consumer awareness demand, and achieve adequate distribution. There can be no
assurance that the Company's audience size will grow or that its advertising
revenues will increase.
Access to Programming: The Company's success will depend in part on its
ability to produce or acquire attractive programming. As competition
increases, the cost of acquiring existing programming also increases.
Producing new programming typically is more expensive than acquiring existing
programming, and new programming may not attract audiences. There can be no
assurance that the Company will be able to produce or acquire existing
programming or that any programs so produced or acquired will be successful.
Financing: The Company will need significant outside financing for the
foreseeable future. There can be no assurance that it will be able to obtain
such financing.
Regulation: The Company's major customers, cable system operators, are
subject to federal, state and local regulations. Changes in such regulations
could have a material adverse effect on the Company's business.
Control by Principal Stockholder: Currently, at least 70% of the votes
entitled to be cast at the Annual Meeting of Stockholders are held by the
Majority Stockholders. The Majority Stockholders have sufficient votes to
elect all members of the Board of Directors and decide all other matters to be
voted upon by the Company's stockholders and thus to control indirectly the
Company's business policies, strategies and management.
GENERAL COMMENTS
The Company's most important asset is its subscriber base. Substantially
all of the Company's revenues are a function of its subscriber base. Affiliate
revenue is measured directly by the number of the Company's subscribers.
Advertising revenue is based on viewership, which is a product of the number of
subscribers and the Company's Nielsen ratings. Over the past few years,
competition for subscribers among television networks like the Company has
increased dramatically. In part, this has been the result of
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<PAGE> 11
technological advances promising greatly expanded channel capacity that has
been repeatedly delayed. Technological advances have inspired the creation of
many new programming services, but the expanded capacity to carry those
services is not yet available.
Compounding the effects of this technological bottleneck was the 1992 Act,
which had the effect of allocating already scarce cable capacity to the owners
of broadcast television channels. The 1992 Act instituted the "must carry"
provisions which gave broadcasters, whose programming was of little interest to
cable subscribers, the right to demand carriage on local cable systems. In
many cases, cable operators had to discontinue carriage of network services like
that provided by the Company in order to carry such broadcast channels. To
those broadcasters whose programming was of interest to cable subscribers, the
1992 Act gave the right to demand payment for their programming (the
"retransmission consent" provisions). In lieu of cash payments, the cable
operators gave channel capacity to non-broadcast programming services
affiliated with these broadcasters. In many cases, services like that provided
by the Company had to be dropped to make room for affiliates of broadcasters.
Despite these changes, the Company's subscriber base has increased from
7,060,000 at December 31, 1997 to 7,718,000 at December 31, 1998, although the
subscriber base is still below 1994 and 1995 levels. Until such time as
channel capacity increases significantly, the Company will remain vulnerable to
subscriber declines.
The Company believes that baby boomer and older adults are a valuable
market which currently is not being served by any other network. Government
statistics show that this demographic is the fastest growing demographic
segment and will account for 30.0% of the population in 2000. As the
technological front continues to change, the Company believes that its best
approach is to further brand the Network and build consumer awareness of the
Network. In furtherance of this goal, the Company is actively pursuing
development of new original programming specifically targeted to Boomers and
over which will be unique to the Network. The Company believes that investment
in the Network programming and consumer awareness will provide a greater
long-term benefit than diverting funds for short-term launch opportunities.
The Company's revenues, ratings and subscriber base have not risen in
proportion to the costs of production of the Network's original programming.
The Company will continue to invest in original programming in an attempt to
increase ratings and subscribers to a point where revenues will exceed
expenditures, but there can be no assurance that such a point will be achieved
or that the Company will be able to obtain financing for such expenditures.
See Part I, Item 1, "Business - Competition."
RESULTS OF OPERATIONS
Fiscal year ended December 31, 1998 compared to fiscal year ended December
31, 1997
Net loss in 1998 increased $4,162,000, or 22.0% (from $18,889,000 to
$23,051,000). This increase was due principally to reduced revenues (a
reduction of $1,648,000); increased interest expenses (an increase of
$1,924,000); increased program amortization expenses (an increase of $867,000);
increased finance, general and administrative expenses (an increase of
$335,000); and increased programming, production and transmission expenses (an
increase of $136,000); offset by decreased sales and marketing expenses (a
decrease of $746,000).
Revenues:
Total revenues in 1998 decreased by $1,648,000, or 23.0% (from $7,179,000
to $5,531,000). This decrease was primarily attributed to advertising
revenues.
Affiliate revenues declined $48,000, or 1.9% (from $2,579,000 to
$2,531,000), reflecting earlier losses of subscribers as a result of
competition for scarce channel capacity. Additionally, increased competition
has put downward pressure on the rates which the Company can charge its
Affiliates. While subscriber losses are immediately reflected in Affiliate
revenue, the same is not true for increases in subscribers as it is common for
a new Affiliate to receive a minimum of two years of free service as an
incentive for commencing carriage of a programming service. For these reasons,
the Company expects future increases in its subscriber base, if any, to result
in less than fully proportionate increases in Affiliate revenues.
Advertising revenues decreased $1,509,000, or 33.7% (from $4,475,000 to
$2,966,000), primarily as a result of decreased rates associated with the
Company's reduced subscriber base from past years. Revenues from infomercials
decreased approximately $1,182,000, or 39.9%, primarily due to a decrease in
average rate per half hour which was primarily the result of market pressures
as well as a 10.0% decrease from 1997 with respect to the amount of time
devoted to this format. Revenues from short-format commercial
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<PAGE> 12
advertising (two minutes or less in length) decreased by approximately
$327,000, or 21.6%, due to a 26.3% decrease in the average rate charged per
spot. This decrease was due to market pressures and make goods to certain
advertisers. Other revenues decreased approximately $90,000, or 72.2% (from
$125,000 to $35,000) due to extraordinary collections of previously written-off
affiliate fees in the prior year.
Operating Expenses:
Total operating expenses increased $591,000, or 2.5% (from $23,468,000 to
$24,059,000). The increase was due principally to increased program
amortization expenses (an increase of $867,000); increased finance, general and
administrative expenses (an increase of $335,000); and increased programming,
production and transmission expenses (an increase of $136,000); offset by
decreased sales and marketing expenses (a decrease of $746,000).
Programming expenses for 1998 increased $136,000, or 2.5% (from $5,524,000
to $5,660,000). Programming costs, net of $4,179,000 in capitalized costs,
increased by $68,000, or 3.4% (from $1,977,000 to $2,045,000) primarily as a
result of costs associated with new original programs. Transmission costs
increased by $216,000, or 7.6% (from $2,857,000 to $3,073,000) primarily as a
result of incurring HITS transport fees, which allow the Company to transmit its
signal digitally, as well as incurring higher master control and uplink charges
for the year. Program, production and traffic expenses decreased $149,000
(from $691,000 to $542,000) primarily as a result of reduced Network branding
costs for the current year.
Programming amortization increased $867,000, or 12.6% (from $6,891,000 to
$7,758,000). The majority of this increase results from a shorter amortization
period for original programming, which comprises the bulk of capitalized costs.
Sales and marketing expenses decreased by $746,000, or 9.2% (from
$8,120,000 to $7,374,000) primarily as a result of the following: Advertising
expenses decreased by $1,556,000, or 55.0% (from $2,827,000 to $1,271,000) as a
result of not incurring satellite, ad sale and special programming advertising
costs within the current year; conventions and national events increased by
$318,000, or 32.0% (from $1,009,000 to $1,327,000) as a result of increased
presence and activities at cable trade shows and other special events;
professional fees increased by $123,000, or 27.2% (from $452,000 to $575,000)
as a result of increased public relations efforts and increased consulting in
relation to satellite sales and affinity programs; program guide costs
increased by $97,000, or 43.8% (from $223,000 to $320,000) as a result of
associated costs with redesigning the guides; employee related costs decreased
by $93,000, or 4.0% (from $2,307,000 to $2,214,000) primarily as a result of
decreased travel and entertainment expenses within the affiliate sales and
marketing areas.
Finance, general and administrative expenses increased by $335,000, or
11.4% (from $2,932,000 to $3,267,000). The increase was attributable to a
$432,000 or 423.0% increase in bad debt expense (from $102,000 to $534,000),
due primarily to an increase in Affiliate write-offs during the year as well as
any reserves for certain advertising revenues that were placed in litigation.
Personnel costs increased by $74,000, or 6.6% (from $1,118,000 to $1,192,000)
due to the addition of staff within the accounting department. Professional
fees decreased $74,000, or 13.1% (from $562,000 to $489,000) principally as a
result of reduced consulting and legal fees. Other expenses decreased by
$42,000, or 10.3% (from $406,000 to $364,000) primarily due to a reduction in
directors' fees, shareholders' expenses, repairs and maintenance expenses and
dues and subscriptions expenses. These were offset by increases in insurance
expenses that were related to increases in various policy coverages. Office
expenses decreased by $38,000, or 18.0% (from $211,000 to $173,000), primarily
due to lower general expenditures.
Net interest expense increased by $1,923,000, or 74.0% (from $2,600,000 to
$4,523,000) due to increased principal on the notes payable to Crown. Interest
expense is expected to increase in 1999 as a result of a full year's interest
on 1998 borrowings as well as interest on additional borrowings anticipated in
1999.
Fiscal year ended December 31, 1997 compared to fiscal year ended December
31, 1996
Net loss in 1997 increased $6,948,000, or 58% (from $11,941,000 to
$18,889,000). This increase was due principally to reduced revenues (a
reduction of $2,325,000); increased sales and marketing expenses (an increase
of $3,610,000); increased interest expense (an increase of $1,549,000); and
increased programming, production and transmission expenses (an increase of
$65,000); offset by decreases in finance, general and administrative expenses
(a decrease of $311,000) and decreased programming amortization expense (a
decrease of $292,000).
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<PAGE> 13
Revenues:
Total revenues in 1997 decreased by $2,325,000, or 24.5% (from $9,504,000
to $7,179,000). This decrease was primarily attributed to decreases in
Affiliate and advertising revenues.
Affiliate revenues declined $1,271,000, or 33%, (from $3,851,000 to
$2,579,000) reflecting a loss of subscribers as a result of competition for
scarce channel capacity. Additionally, increased competition has put downward
pressure on the rates which the Company can charge its Affiliates. While
subscriber losses are immediately reflected in Affiliate revenue, the same is
not true for increases in subscribers as it is common for a new Affiliate to
receive a minimum of two years of free service as an incentive for commencing
carriage of a programming service. For these reasons, the Company expects
future increases in its subscriber base, if any, to result in less than fully
proportionate increases in Affiliate revenues. The Company anticipates
Affiliate revenues for 1998 will continue to decline as it will reflect a full
year of the 1997 subscriber losses and any additional subscriber losses, if
any, in 1998.
Advertising sales decreased $1,178,000, or 20.8% (from $5,653,000 to
$4,475,000) primarily as a result of decreased rates associated with the
Company's reduced subscriber base. The Company anticipates advertising
revenues for 1998 will continue to decline as it will reflect a full year of
the 1997 subscriber losses and any additional subscriber losses, if any, in
1998. Revenues from infomercials decreased $845,000, or 22.2% primarily due to
a decrease in average rate per half hour as a result of lower subscriber
numbers and market pressures. Revenues from short-format commercial
advertising (two minutes or less in length) decreased by $333,000, or 18%, due
to lower subscriber numbers and market pressures. Other revenues increased
$125,000, or 100% (from $0 to $125,000) as a result of collection of amounts
previously written off as uncollectible.
Operating Expenses:
Total operating expenses increased $3,073,000, or 15% (from $20,395,000 to
$23,468,000). The increase was due principally to increased sales and
marketing expenses (an increase of $3,610,000); and increased programming,
production and transmission expenses (an increase of $65,000); offset by
decreases in finance, general and administrative expenses (a decrease of
$311,000) and decreased programming amortization expense (a decrease of
$292,000).
Programming, production and transmission expenses for 1997 increased
$65,000, or 1.2% (from $5,459,000 to $5,524,000). Programming costs, net of
$3,533,000 in capitalized costs, decreased by $146,000, or 6.9% (from
$2,123,000 to $1,977,000) primarily as a result of costs associated with new
original programs. During 1997, the Network increased its original programming
from two hours a day to eight hours a day. Many of the new programs, such as
Ballroom DanceSport Competitions and Cafe DuArt, are long lived in nature and,
as such, their production costs were capitalized and are being amortized over
the life of the program, which is generally two years. Network branding costs
increased $178,000, (from $10,000 to $188,000) as a result of developing a new
on-air look in association with the Network's new name. Transmission costs
increased by $92,000, or 3.3% (from $2,765,000 to $2,857,000) as a result of
costs associated with scrambling the Network's signal. Programming costs are
expected to increase in 1998 as a result of the Network's plans to increase
production of new original programs. Transmission expenses are expected to
increase in 1998 as a result of charges associated with the Network's HITS feed
and anticipated improvements in the Network's master control operations. See
Part 1, Item 1, Section 4.
Programming amortization decreased $292,000, or 4% (from $7,183,000 to
$6,891,000). The majority of this decrease results from a different mix of
programs and related license fees for prime-time programming.
Sales and marketing expenses increased by $3,610,000, or 80% (from
$4,510,000 to $8,120,000). Advertising expenses increased by $2,317,000, or
454.7% (from $510,000 to $2,827,000) as a result of increased trade
advertising, increased consumer advertising and awareness campaigns, as well as
combined trade and consumer advertising to the satellite community in
anticipation of the planned signal scrambling in third quarter 1997.
Conventions and national events increased by $444,000, or 79% (from $565,000 to
$1,009,000) as a result of increased presence and activities at cable trade
shows and other special events. Employee related costs increased by $364,000,
or 18.7% (from $1,943,000 to $2,307,000) primarily as a result of additional
advertising sales support staff, filling vacant affiliate sales positions and
increased travel and entertainment expenses. Professional fees increased by
$171,000, or 81% (from $211,000 to $382,000) as a result of increased public
relations efforts and increased consulting in relation to satellite sales and
affinity programs. Program guide costs increased by $68,000, or 43.8% (from
$155,000 to $223,000) as a result of redesigning the guides. Sales and
marketing expenses are expected to increase in 1998 as a result of the
Company's plans to increase consumer awareness advertising and other sales and
marketing initiatives.
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<PAGE> 14
Finance, general and administrative expenses decreased by $311,000, or 9.6%
(from $3,243,000 to $2,932,000). The decrease is primarily attributable to a
$341,000 or 75.7% decrease in bad debt expense (from $450,000 to $109,000) as a
result of improved credit and collections efforts. Professional fees decreased
by $194,000, or 26.8% (from $724,000 to $530,000) principally as a result of
reduced legal fees. Personnel costs decreased by $169,000, or 13.1% (from
$1,287,000 to $1,118,000) due to additional staff and costs in 1996 associated
with transition of the chief executive's office. Rent and lease costs increased
by $76,000, or 54.8% (from $139,000 to $214,000) as a result of restructuring
departmental charges. Litigation settlement income/expense increased by
$165,000, or 110% (from $150,000 income to $15,000 expense) as a result of
litigation settlements in each of the two years.
Interest expense increased by $1,549,000, or 147.5% (from $1,050,000 to
$2,600,000) due to interest on notes payable to the Majority Stockholders.
Interest expense is expected to increase in 1998 as a result of a full year's
interest on 1997 borrowings as well as interest on additional borrowings
anticipated in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Fiscal year ended December 31, 1998 compared to fiscal year ended December
31, 1997
Working capital increased $1,039,000 (or 559%) from $186,000 at December
31, 1997 to $1,225,000 at December 31, 1998. The increase is primarily a
result of increases in current portion of programming rights, offset by
increases in accounts payable.
Cash used in operating activities increased $3,123,000 (or 36.3%) from
($8,601,000) to ($11,724,000), due to an increased loss of $4,162,000, offset
by an increase in programming amortization and accrued interest.
Cash used in investing activities increased $560,000 (or 15.3%) from
($3,660,000) to ($4,220,000) due primarily to an increase in acquisition of
programming and cablecast rights of $821,000, offset by a decrease in the
acquisition of property and equipment of $231,000.
Cash provided by financing activities increased $2,036,000 (or 16.1%) from
$12,643,000 to $14,680,000, due primarily to decreased payments on financing
for programming and other debt of $2,536,000, offset by a decrease in financing
by Crown of $500,000.
In light of the Company's recurring losses, management is actively
monitoring expenses and examining operating methods to increase efficiencies.
These measures may provide short term improvement, but do not address the more
critical long term growth needs for the Network. In order to grow, the Network
needs to increase its Affiliate base which, in turn, will increase the
subscriber base and should allow the Network to increase its advertising rates
as well as Affiliate revenues. To provide for necessary future growth,
management continued its focus on an aggressive Affiliate marketing campaign
including consumer awareness advertising and events, prominent presence at
major trade shows and new trade advertising.
Increased competition from networks with strong strategic alliances and
significant financial resources continue to significantly effect the Company's
ability to increase its subscriber base and, correspondingly, has reduced
revenues from Affiliates and advertising. This competition also has increased
the costs which the Company must pay for programming. The Company does not
anticipate significant improvement in the results of its operations until such
time as the number of its subscribers increases significantly.
Since 1990, the Company's Majority Stockholders have been the principal
source of the Company's capital. The Majority Stockholders have invested
$2,300,000 and provided $58,500,000 in financing since 1994, including
$19,000,000 loaned by Crown to the Company in 1998. Additionally, as of March
23, 1999, Crown has provided $8,000,000 in debt financing to the Company since
January 1, 1999, and has committed to advance as needed an additional
$7,000,000 in debt financing during the balance of the calendar year. The
Company believes that these funds will be sufficient to satisfy its operating
needs for 1999. In connection with the borrowings, the Company has entered
into a security agreement pledging substantially all the Company's assets as
security for its indebtedness to the Majority Stockholders.
The Company continues to evaluate strategic alliance alternatives and has
had preliminary discussions with a number of potential strategic partners.
These discussions are preliminary and no definitive proposals or targeted
entities have been identified. The Company will actively continue to pursue
identification of potential strategic alliance candidates.
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<PAGE> 15
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 that the Company will be able to locate sufficient financing in
excess of that committed from Crown, nor that it will be able to achieve a
strategic alliance.
Fiscal year ended December 31, 1997 compared to fiscal year ended December
31, 1996
Working capital increased by $794,693 (or 131%) from a deficit of
($608,569) at December 31, 1996 to $186,124 at December 31, 1997, primarily as
a result of increases in current portion of programming rights and cash, offset
by increases in accounts payable.
Cash used in operating activities increased by $5,685,379 (or 195%) from
($2,915,657) to ($8,601,036) due to an increased loss of $6,947,038, and an
increase in gross reductions in accounts receivable of $1,032,094 due to
write-offs of bad debt and additional collection efforts. Offsetting these
amounts were an increase of $1,133,042 in long-term accrued interest expense;
an increase of $1,048,945 in accounts payable due to timing of payments and
increased expense volume; and a decrease of $417,000 in provision for losses on
accounts receivable as a result of reduced exposure to bad debts.
Cash used in investing activities increased by $3,286,375 (or 879%) from
($373,819) to ($3,660,194) for the years ended December 31, 1996 and 1997,
respectively, due primarily to an increase in acquisition of programming and
cablecast rights of $3,151,910.
Cash provided by financing activities increased by $8,788,660 (or 228%)
from $3,854,748 to $12,643,408 for the years ended December 31, 1996 and 1997,
respectively, due to an increase in financing by the Majority Stockholders of
$9,500,000, offset by increased payments on financing for programming and other
debt of $711,340.
MATERIAL COMMITMENTS
The Company leases transponder space and related services on a satellite at
a base monthly rental of $205,400. The lease provides for greater back-up
protection than did the Company's previous leases in the event of satellite
failure. The lease terminates with the life of the satellite, which is
expected in the year 2006, and requires the Company to pay a launch protection
fee of $1,000,000 plus capitalized interest at 12.0% and other direct costs.
As of March 23, 1999, the Company had issued and outstanding promissory
notes to Concept and Crown in the aggregate principal amount of $20,600,000 and
$50,572,000, respectively, bearing interest of approximately 7.75% per annum
which are due and payable on January 1, 2000.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), establishes standards for reporting and
display of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. Among other
disclosures, SFAS 130 requires that all items that are required to be
recognized under current accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. The Company adopted SFAS 130 during
the first quarter of 1998 and has no items of comprehensive income to report.
Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of a Business Enterprise" ("SFAS 131"), establishes standards for the
way that public enterprises report information about operating segments in
annual financial statements and requires reporting of selected information
about operating segments in interim financial statements issued to the public
for periods ending after December 15, 1997. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. SFAS 131 defines operating segments as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to allocate
resources and in assessing performance. The Company is engaged in one line of
business, the operation of GoodLife TV Network, and therefore reports as one
operating segment.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments"
("SFAS 133"). SFAS 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. SFAS 133 requires that an
entity recognize all derivatives as either assets or liabilities and measure
those instruments at fair market value. Under certain circumstances, a portion
of the derivative's gain or loss is initially
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<PAGE> 16
reported as a component of other comprehensive income and subsequently
reclassified into income when the transaction affects earnings. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized as income in the period of change. Presently, the Company does not
use derivative instruments either in hedging activities or as investments.
Accordingly, the Company believes that adoption of SFAS 133 will have no impact
on its financial position or results of operations.
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 intends
to replace the traffic system with one which is Year 2000 compliant 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
compliance with Year 2000 certification. 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 no means of ensuring that external agents will be Year 2000
compliant. The inability of external agents to complete their Year 2000
resolution process 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, supply shortages and flight
cancellations.
In the event that 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this Item are included herewith as a
separate section of this Report, commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This information is incorporated by reference under the heading "Election
of Directors" from the Company's proxy statement for its 1999 annual meeting of
stockholders presently scheduled to be held on June 9, 1999 (the "Annual
Meeting of Stockholders"), to be filed pursuant to Regulation 14A.
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<PAGE> 17
ITEM 11. EXECUTIVE COMPENSATION
This information is incorporated by reference under the heading "Executive
Compensation" from the Company's proxy statement for the annual meeting of
stockholders presently scheduled to be held on June 9, 1999, to be filed
pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is incorporated by reference under the heading "Security
Ownership of Certain Beneficial Owners and Management" from the Company's proxy
statement for the annual meeting of stockholders presently scheduled to be held
on June 9, 1999, to be filed pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is incorporated by reference under the heading "Certain
Relationships and Related Transactions" from the Company's proxy statement for
the annual meeting of stockholders presently scheduled to be held on June 9,
1999, to be filed pursuant OT Regulation 14A.
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
No reports on Form 8-K were filed during 1998.
(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.
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<PAGE> 18
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.
<TABLE>
<S> <C> <C>
THE NOSTALGIA NETWORK, INC.
Date: March 31, 1999 By: /s/ SQUIRE D. RUSHNELL
---------------------------------------------------------------------------
SQuire D. Rushnell, President, Chief Executive Officer and Director
Date: March 31, 1999 By: /s/ MARTIN A. GALLOGLY
---------------------------------------------------------------------------
Martin A. Gallogly, Vice President and Chief Financial Officer
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature and Title Date
- ------------------- ----
<S> <C>
/s/ PHILLIP SANCHEZ March 31, 1999
- -------------------------------------------
Ambassador Phillip Sanchez, Director and Chairman of the Board
/s/ CHRISTOPHER A. CATES March 31, 1999
- -------------------------------------------
Christopher A. Cates, Director
/s/ FLOYD CHRISTOFFERSON March 31, 1999
- -------------------------------------------
Floyd Christofferson, Director
/s/ DIANNE M. FAURE March 31, 1999
- -------------------------------------------
Dianne M. Faure, Director
/s/ HIROSHI GOTO March 31, 1999
- -------------------------------------------
Hiroshi Goto, Director
/s/ DONG MOON JOO March 31, 1999
- -------------------------------------------
Dong Moon Joo, Director
/s/ S. ROBERT LICHTER MARCH 31, 1999
- -------------------------------------------
S. Robert Lichter, Director
/s/ FREDERICK W. NEWTON March 31, 1999
- --------------------------------------
Frederick W. Newton, CPA, Director
/s/ SQUIRE D. RUSHNELL March 31, 1999
- --------------------------------------
SQuire D. Rushnell, Director
/s/ ROBERT J. WUSSLER March 31, 1999
- --------------------------------------
Robert J. Wussler, Director
</TABLE>
- 18 -
<PAGE> 19
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)
4.1 Specimen Common Stock Certificate (filed as Exhibit 4(a) to
the Registrant's Report of 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 March 31, 1997, made by the
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, 1997, and incorporated herein
by reference thereto)
10.2 Promissory Note, Dated March 31, 1997, made by the
Registrant payable to Crown Communications Corporation
(filed as Exhibit 10.2 to the Registrant's Report on Form
10-K for the Year Ended December 31, 1997, and incorporated
herein by reference thereto)
10.3 Promissory Note, Dated March 31, 1997, made by the
Registrant payable to Crown Communications Corporation
(filed as Exhibit 10.3 to the Registrant's Report on Form
10-K for the Year Ended December 31, 1997, and incorporated
herein by reference thereto)
10.4 Promissory Note, Dated July 8, 1997, made by the Registrant
payable to Crown Communications Corporation (filed as
Exhibit 10.4 to the Registrant's Report on Form 10-K for
the Year Ended December 31, 1997, and incorporated herein
by reference thereto)
10.5 Promissory Note, Dated September 18, 1997, made by the
Registrant payable to Crown Communications Corporation
(filed as Exhibit 10.5 to the Registrant's Report on Form
10-K for the Year Ended December 31, 1997, and incorporated
herein by reference thereto)
10.6 Promissory Note, Dated November 7, 1997, made by the
Registrant payable to Crown Communications Corporation
(filed as Exhibit 10.6 to the Registrant's
</TABLE>
E-1
<PAGE> 20
<TABLE>
<S> <C>
Report on Form 10-K for the Year Ended December 31, 1997,
and incorporated herein by reference thereto)
10.7 Promissory Note, Dated November 24, 1997, made by the
Registrant payable to Crown Communications Corporation
(filed as Exhibit 10.7 to the Registrant's Report on Form
10-K for the Year Ended December 31, 1997, and incorporated
herein by reference thereto)
10.8 Promissory Note, Dated December 31, 1997, made by the
Registrant payable to Crown Communications Corporation
(filed as Exhibit 10.8 to the Registrant's Report on Form
10-K for the Year Ended December 31, 1997, and incorporated
herein by reference thereto)
10.9 Promissory Note, Dated February 10, 1998, made by the
Registrant payable to Crown Communications Corporation
(filed as Exhibit 10.9 to the Registrant's Report on Form
10-K for the Year Ended December 31, 1997, and incorporated
herein by reference thereto)
10.10 Promissory Note, Dated March 2, 1998, made by the
Registrant payable to Crown Communications Corporation
(filed as Exhibit 10.10 to the Registrant's Report on Form
10-K for the Year Ended December 31, 1997, and incorporated
herein by reference thereto)
10.11 Promissory Note, Dated March 24, 1998, made by the
Registrant payable to Crown Communications Corporation
(filed as Exhibit 10.11 to the Registrant's Report on Form
10-K for the Year Ended December 31, 1997, and incorporated
herein by reference thereto)
10.12 Promissory Note, Dated March 22, 1999 made by the
Registrant payable to Crown Communications Corporation
10.13 Promissory Note, Dated March 27, 1999 made by the
Registrant payable to Crown Communications Corporation
10.14 Promissory Note, Dated March 27, 1999, made by the
Registrant payable to Concept Communications, Inc.
10.15 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)
10.16 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)
10.17 Agreement, Dated August 1, 1997, by and between the
Registrant and Atlantic Video, Inc. (filed as Exhibit 10.14
to the Registrant's Report on Form 10-K for the Year Ended
December 31, 1997, and incorporated herein by reference
thereto)
</TABLE>
E-2
<PAGE> 21
<TABLE>
<S> <C>
10.18* 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)
10.19* 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)
10.20* Employment Agreement, Dated May 13, 1996, between The
Nostalgia Network Inc., and SQuire Rushnell (filed as
Exhibit 10 (a) to the Registrant's Report on Form 8-K dated
May 13, 1996, and incorporated herein by reference thereto)
10.21* Stock Option Agreement, Dated May 13, 1996, between The
Nostalgia Network Inc., and SQuire Rushnell (filed as
Exhibit 10 (b) to the Registrant's Report on Form 8-K dated
May 13, 1996, and incorporated herein by reference thereto)
27 Financial Data Schedule as required by Item 601 (c) of
Regulation S-K
</TABLE>
* Management contract or compensatory plan, contract or arrangement.
E-3
<PAGE> 22
[GOODLIFE TV NETWORK LOGO]
THE NOSTALGIA NETWORK, INC.
FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
DECEMBER 31, 1998, 1997 AND 1996
F-1
<PAGE> 23
THE NOSTALGIA NETWORK, INC.
CONTENTS
PAGE
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-3
BALANCE SHEETS F-4
STATEMENTS OF OPERATIONS F-5
STATEMENTS OF CHANGES IN STOCKHOLDERS'
DEFICIT F-6
STATEMENTS OF CASH FLOWS F-7
NOTES TO FINANCIAL STATEMENTS F-8 - F-21
SCHEDULE II F-22
F-2
<PAGE> 24
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, 1998 and 1997 and the related statements
of operations, changes in stockholders' deficit and cash flows for each of the
three years in the period ended December 31, 1998. We have also audited Schedule
II for the years ended December 31, 1998, 1997 and 1996. 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. at December 31, 1998 and 1997, and the results of its operations
and cash flows for each of the three years in the period ended December 31,
1998, 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, 1998, 1997 and 1996.
BDO Seidman, LLP
Washington DC
March 23, 1999
F-3
<PAGE> 25
THE NOSTALGIA NETWORK, INC.
BALANCE SHEETS
DECEMBER 31,
<TABLE>
<CAPTION>
1998 1997
---- ----
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $539,371 $1,803,189
Accounts receivable, less allowance of $302,000
and $467,000 for doubtful accounts 935,230 723,766
Prepaid expenses 168,362 140,341
Programming and cablecast rights 7,300,000 6,880,000
-----------------------------------
TOTAL CURRENT ASSETS 8,942,963 9,547,296
Programming and cablecast rights, at cost - net 2,788,129 5,956,646
Property and equipment, at cost - net 1,191,879 1,441,290
Deposits 56,740 52,740
-----------------------------------
TOTAL ASSETS $12,979,711 $16,997,972
===================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of programming
and cablecast fees $5,068,000 $6,334,000
Accounts payable - Trade 1,976,255 2,010,924
- Related parties 278,919 343,321
Accrued expenses and other liabilities 395,081 672,927
-----------------------------------
TOTAL CURRENT LIABILITIES 7,718,255 9,361,172
-----------------------------------
LONG-TERM OBLIGATIONS, LESS CURRENT MATURITIES:
Programming and cablecast fees 114,465 2,338,835
Notes payable to related parties 62,832,873 41,417,194
Accrued interest payable - Related parties 3,382,125 1,876,508
Other 335,416 357,010
-----------------------------------
TOTAL LONG-TERM OBLIGATIONS 66,664,879 45,989,547
-----------------------------------
TOTAL LIABILITIES 74,383,134 55,350,719
-----------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Preferred stock, convertible: $2 par value, 125,000 shares
authorized, 3,250 shares 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 1998 and 1997 810,975 810,975
Additional paid-in capital 30,213,554 30,213,554
Deficit (92,434,452) (69,383,776)
-----------------------------------
TOTAL STOCKHOLDERS' DEFICIT (61,403,423) (38,352,747)
-----------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $12,979,711 $16,997,972
===================================
</TABLE>
The accompanying summary of accounting policies and notes are an integral part
of these financial statements.
F-4
<PAGE> 26
THE NOSTALGIA NETWORK, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
OPERATING REVENUES:
Affiliate revenues $2,530,714 $2,579,376 $3,850,745
Advertising revenues 2,965,896 4,474,597 5,652,938
Other 34,750 124,960 -
----------------------------------------------------
TOTAL OPERATING REVENUES 5,531,360 7,178,933 9,503,683
----------------------------------------------------
OPERATING EXPENSES:
Programming, production and transmission 5,659,937 5,524,078 5,458,931
Programming amortization 7,757,637 6,891,161 7,182,932
Sales and marketing 7,373,867 8,120,458 4,510,056
Finance, general and administrative 3,267,194 2,932,094 3,243,021
----------------------------------------------------
TOTAL OPERATING EXPENSES 24,058,635 23,467,791 20,394,940
----------------------------------------------------
LOSS FROM OPERATIONS (18,527,275) (16,288,858) (10,891,257)
INTEREST EXPENSE, NET:
Related parties (4,581,460) (2,689,000) (1,141,000)
Others 58,059 89,332 90,769
----------------------------------------------------
NET LOSS $ (23,050,676) $ (18,888,526) $ (11,941,488)
====================================================
LOSS PER COMMON SHARE - BASIC AND DILUTED $ (1.14) $ (0.93) $ (0.59)
====================================================
WEIGHTED AVERAGE SHARES OUTSTANDING 20,274,371 20,274,371 20,274,371
</TABLE>
The accompanying summary of accounting policies and notes are an integral part
of these financial statements.
F-5
<PAGE> 27
THE NOSTALGIA NETWORK, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
TOTAL
PREFERRED COMMON ADDITIONAL STOCKHOLDERS'
STOCK STOCK PAID-IN EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 3,250 $6,500 20,274,371 $810,975 $30,213,554 $(38,553,762) $(7,522,733)
Net loss for the year - - - - - (11,941,488) (11,941,488)
-----------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 3,250 6,500 20,274,371 810,975 30,213,554 (50,495,250) (19,464,221)
Net loss for the year - - - - - (18,888,526) (18,888,526)
-----------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 3,250 6,500 20,274,371 810,975 30,213,554 (69,383,776) (38,352,747)
Net loss for the year - - - - - (23,050,676) (23,050,676)
-----------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 3,250 $6,500 20,274,371 $810,975 $30,213,554 $(92,434,452) $(61,403,423)
===============================================================================================
</TABLE>
The accompanying summary of accounting policies and notes are an integral part
of these financial statements.
F-6
<PAGE> 28
THE NOSTALGIA NETWORK, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(23,050,676) $(18,888,526) $(11,941,488)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 286,159 310,416 294,270
Programming amortization 7,757,637 6,891,161 7,182,931
Provision for losses on accounts receivable 534,000 102,000 450,000
Net change in operating assets and liabilities:
(Increase) decrease in accounts receivable (745,464) (119,132) 147,962
(Increase) decrease in prepaid expenses (28,021) 5,657 35,267
Increase (decrease) in accounts payable (99,071) 998,175 (50,770)
Increase (decrease) in accrued expenses
and other liabilities (299,440) 121,155 (2,356)
Increase in accrued interest 3,921,296 1,978,058 968,527
------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (11,723,580) (8,601,036) (2,915,657)
------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in deposits (4,000) (35,000) (1,709)
Purchases of property and equipment (36,748) (267,294) (166,120)
Acquisition of programming and cablecast rights (4,179,120) (3,357,900) (205,990)
------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (4,219,868) (3,660,194) (373,819)
------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 19,000,000 19,500,000 10,000,000
Payments of long-term obligations (4,320,370) (6,856,592) (6,145,252)
------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 14,679,630 12,643,408 3,854,748
------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (1,263,818) 382,178 565,272
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 1,803,189 1,421,011 855,739
------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 539,371 $ 1,803,189 $ 1,421,011
================================================
</TABLE>
The accompanying summary of accounting policies and notes are an integral part
of these financial statements.
F-7
<PAGE> 29
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 GoodLife TV Network (the "Network"), a television programming service
offering a variety of entertainment, lifestyle and informational
programming to a target audience of "Boomers and over" via satellite to
cable television and alternative broadcasting systems ("Affiliates")
throughout the United States.
Significant accounting policies used by the Company are described below:
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
Capitalized programming costs, film library and cablecast rights are
recorded at the lower of unamortized costs or estimated net realizable
value. Capitalized programming costs, film library and cablecast rights
are amortized using the straight-line method, which approximates the
anticipated revenue stream, over the estimated useful life or the lives
of the rights agreements, respectively, in accordance with SFAS No. 63 -
Financial Reporting by Broadcasters as follows:
Programming costs - 2 years
Film library - 11 years
Cablecast rights - contract period
Cablecast rights for programs to be amortized within the following year
are classified as current assets. 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.
ADVERTISING COSTS
Advertising and promotional costs are charged to operating expenses as
incurred and amounted to $1,279,000, $2,828,000, and $510,000 for the
years ended December 31, 1998, 1997, and 1996, respectively.
F-8
<PAGE> 30
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE
Earnings per share is based on the weighted average number of shares of
common stock and dilutive common stock equivalents outstanding. Basic
earnings per share includes no dilution and is computed by dividing
income available to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution of securities that could share in the
earnings of an entity. Basic and diluted earnings per share are the same
during all three years because the impact of dilutive securities is
anti-dilutive.
The net loss per common share - basic is computed by dividing the net
loss for the period by the weighted average number of shares outstanding.
Convertible preferred stock, outstanding stock warrants and options are
not included in the diluted calculation 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 National Bank are insured by the Federal Deposit
Insurance Corporation up to $100,000. Balances in First Union's overnight
investment account are insured by the SPIC up to $500,000. Balances at
Correspondent 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
$388,072, $1,654,000, and $660,000 at December 31, 1998, 1997, and 1996,
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. Based on
the decline in sales and increase in operating expenses, the Company is
dependent on financing from the Majority Stockholders or other outside
sources in order to fund operations.
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.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current method of presentation.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), establishes standards for reporting
and display of comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include all changes in
equity except those resulting from investments by owners and
distributions to owners. Among other disclosures, SFAS 130 requires that
all items that are required to be recognized under current accounting
standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The Company adopted SFAS 130 during the first
quarter of 1998 and has no items of comprehensive income to report.
F-9
<PAGE> 31
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONCLUDED)
Statement of Financial Accounting Standards (SFAS) 131, "Disclosure about
Segments of a Business Enterprise", establishes standards for the way
that public enterprises report information about operating segments in
annual financial statements and requires reporting of selected
information about operating segments in interim financial statements
issued to the public for periods ending after December 15, 1997. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS 131 defines operating segments
as components of an enterprise about which separate financial information
is available that is evaluated regularly by the chief operating decision
maker in deciding how to allocate resources and in assessing performance.
The Company is engaged in one line of business, the operation of GoodLife
TV Network, and therefore reports as one operating segment.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments" ("SFAS 133"). SFAS 133 establishes accounting and reporting
standards for derivative instruments and for hedging activities. SFAS 133
requires that an entity recognized all derivatives as either assets or
liabilities and measure those instruments at fair market value. Under
certain circumstances, a portion of the derivative's gain or loss is
initially reported as a component of other comprehensive income and
subsequently reclassified into income when the transaction affects
earnings. For a derivative not designated as a hedging instrument, the
gain or loss is recognized in income in the period of change. Presently,
the Company does not use derivative instruments either in hedging
activities or as investments. Accordingly, the Company believes that
adoption of SFAS 133 will have no impact on its financial position or
results of operations.
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, should increase the subscriber base
allowing the Network to increase its advertising rates as well as
Affiliate revenues.
Management has continued its efforts to further brand the Network as the
only network targeted to the ever growing Boomer and over audience,
America's fastest growing demographic. In June 1998, the Network began
operating under the "GoodLife TV Network" name. Management believes that
this designation more accurately captures and reflects the Network's
mission and has been a significant help in presenting the Network to
potential customers. Management also continued its aggressive Affiliate
marketing campaign by having a prominent presence at major trade shows
and through trade advertising.
A critical component to the Network's growth is to continually brand and
improve the quality of programming and the Network's on air look.
Original programming is a key to such branding, as it allows the consumer
to differentiate the Network from other networks. The Network has
continued to produce new original programming reflecting the American
culture and traditional values of its Boomer and over audience. The
Network reflects the "good life state of mind" of its audience in its mix
of entertainment and information programs. GTV Ballroom DanceSport
showcases the sport of ballroom dance competitions, a dance form popular
with past generations that has become all the rage with today's
generation. The Network provides insight and coverage of all the major
dance competitions across the United States. Cafe DuArt, features
impressionist/comedian Louise DuArt, providing cabaret music, comedy and
a humorous slice of life set in a New York cabaret club. The Real Me
Autobiographies, features prominent guests recounting their life's
stories in their own words, surrounded by friends and family. The Bull &
The Bear provides stock market reports by a "Siskel and Ebert-type" pair
of hosts. More Money with the Dolans starring Ken and Daria Dolan, the
First Family of Finance, offers practical financial advice for everyday
Americans. TV Book Shop features author interviews and book picks of
interest to the Network's audience. Issues and Answers, a panel
discussion show hosted by Ron Nessen, provides the Network's audience
with insight into the issues facing today's active adults. This is
America with Dennis Wholey is a weekly, hour long roundtable discussion
with six interesting and influential guests from the fields of
entertainment, politics and industry. Management continues to search for
creative new programming ideas targeted to the Boomer and over audience,
and has several pilots in development for 1999.
F-10
<PAGE> 32
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
1. MANAGEMENT STATEMENT (CONCLUDED)
In addition to its new original programming, the Network continues to
offer its viewers classic off network television series. The Network
currently airs The Rockford Files, The Love Boat, and The Streets of San
Francisco. The Network has also revised its film series through the
introduction of Flea Market Movie, wherein short segments are added to
commercial breaks where the Network's collectibles aficionado,
Christopher Kent, dispenses his wit and wisdom about all sorts of
collectable items. The GTV Variety Hour features classic variety programs
such as Tony Orlando and Dawn, Leslie Uggams, The Lennon Sisters and
others. American Soldier features interviews with veterans, focusing on
their wartime experiences, which are wrapped around three classic
dramatic television shows: Combat!, Twelve O'clock High and Garrison's
Gorillas. These improvements to the programming line up have resulted in
tangible results where total day ratings were a .2 and Monday to Sunday
prime time ratings rose to a record .9 in November.
Crown Communications Corporation ("Crown") has provided $8,000,000 in
debt financing to the Company since January 1, 1999 and also has
committed to provide, as needed, an additional $7,000,000 in debt
financing during the balance of the calendar year. The Company believes
that these funds will be sufficient to satisfy its operating needs for
1999.
The Executive Committee of the Board of Directors and management continue
to evaluate strategic alliance alternatives and have had preliminary
discussions with a number of potential strategic partners. These
discussions are preliminary and no definitive proposals or targeted
entities have been identified. The Executive Committee and management
will continue to actively pursue identifying potential strategic alliance
candidates.
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 amount required to execute its plans for
future growth, or that it will be able to achieve a strategic alliance.
F-11
<PAGE> 33
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
2. PROPERTY AND EQUIPMENT
Major classifications of property and equipment and their respective
estimated service lives are summarized below:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C> <C>
Transponder $1,427,968 $1,427,968 12 years
Machinery and equipment 1,397,333 1,360,810 5 to 7 years
Furniture and fixtures 299,890 299,663 5 to 7 years
Leasehold improvements 99,780 99,780 5 years
----------------------------
3,224,971 3,188,221
Accumulated depreciation
and amortization (2,033,092) (1,746,931)
----------------------------
$1,191,879 $1,441,290
============================
</TABLE>
Depreciation expense included in Finance, General and Administrative
expenses was $286,000, $310,000, and $294,000, for 1998, 1997 and 1996,
respectively.
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. Original programs consist of series or specials developed and
produced by the Network. Music programs include musical series or
specials both those produced by the Network and those acquired or
licensed from third parties. The film library consists of vintage feature
films, interstitial material, and other programming produced and/or owned
by the Network. Film rights include broadcast licenses for films and
specialty programming. Other programming and cablecast rights include
production and post-production costs as well as costs to duplicate and
edit programs and interstitial materials for broadcasting.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Prime time series: $14,578,500 $14,323,500
Original programs 8,047,753 3,885,605
Music programs 1,537,095 1,537,095
Film library 1,266,667 1,266,667
Other 1,525,409 933,436
-----------------------------
26,955,424 21,946,303
Less accumulated amortization (16,867,295) (9,109,657)
-----------------------------
$10,088,129 $12,836,646
=============================
Consisting of:
Current $ 7,300,000 $6,880,000
Long term 2,788,129 5,956,646
-----------------------------
$10,088,129 $12,836,646
=============================
</TABLE>
F-12
<PAGE> 34
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 1999 2000 2001
---- ---- ----
<S> <C> <C> <C>
Amortization $7,300,000 $2,406,700 $68,100
Obligation maturities $5,068,000 $ 114,465
</TABLE>
The Company acquired or produced the following rights and materials
during the years ended December 31,
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Prime time series $ 255,000 $1,073,500 $ -
Original programs 4,162,100 3,532,600 500,000
Music programs - 1,185,500 312,000
Other 592,000 254,700 96,500
Film rights - - -
---------------------------------------
$5,009,100 $6,046,300 $ 908,500
=======================================
</TABLE>
4. NOTES PAYABLE TO RELATED PARTIES
Notes payable consists of the following:
<TABLE>
<CAPTION>
1998 1997
---------------------------
<S> <C> <C>
Notes payable to Concept Communications, Inc. bearing interest
approximating 7.75% per annum, due upon the earlier of an equity
investment of not less than the amount of the Notes or January 1,
2000; however, Concept has represented that the Notes will not be
called prior to January 1, 2000 unless replaced by an
equity investment. $19,217,867 $18,112,194
Notes payable to Crown Communications Corporation bearing interest
approximating 7.75% per annum, due upon the earlier of an equity
investment of not less than the amount of the Notes or January 1,
2000; however, Crown has represented that the Notes will not be
called prior to January 1, 2000 unless replaced by an
equity investment. $43,310,006 $23,000,000
</TABLE>
F-13
<PAGE> 35
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
4. NOTES PAYABLE TO RELATED PARTIES (CONCLUDED)
1998 1997
-----------------------------
<S> <C> <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. The note agreement contains certain restrictive
covenants including limitations on liens, disposition
of collateral and compliance with related contracts. 305,000 305,000
-----------------------------
$62,832,873 $41,417,194
=============================
</TABLE>
Subsequent to December 31, 1998, Crown has loaned the Company an
additional $8,000,000 and extended the due dates on all related debt to
January 1, 2000. In addition, the Majority Stockholders have extended
payments on the portion of accrued interest until 2000. In connection
with the additional borrowings and extension of the due dates, the
Company has entered into security agreements covering substantially all
the Company's assets in favor of the Majority Stockholders. Current
maturities of notes payable and long-term debt to related parties is as
follows:
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
$- $62,527,873 $- $305,000 $-
</TABLE>
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>
Options Price
Outstanding per Share
----------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at January 1, 1997 45,500 $.48 - 1.25
Canceled -
----------------------
Outstanding at December 31, 1997 45,500 $ .48 -1.25
Canceled -
Expired (12,000) $1.25
----------------------
Outstanding at December 31, 1998 33,500 $ .48 -1.25
======================
Exercisable at December 31, 1998 33,500 $ .48 -1.25
======
</TABLE>
F-14
<PAGE> 36
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
5. STOCK OPTIONS AND WARRANTS (CONTINUED)
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>
Options Price
Outstanding per Share
----------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at January 1, 1997 175,000 $ .48 - 1.57
Canceled -
----------------------
Outstanding at December 31, 1997 175,000 $ .48 - 1.57
Canceled -
----------------------
Outstanding at December 31, 1998 175,000 $ .48 - 1.57
======================
Exercisable at December 31, 1998 175,000 $ .48 - 1.57
======================
</TABLE>
In November, 1995, the Company's Board of Directors authorized
registration of the Company'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.
This action did not result in any additional shares being reserved for
options.
The 1996 Plan provides for all remaining reserved shares under the 1987
and 1990 Plans to be transferred into the 1996 Plan as well as 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 3,000 shares which vest over three
years. The 1996 Plan was approved to provide an option plan which
conforms to current securities law and was adopted by shareholder
approval at the Company's 1996 Annual Meeting. Data with respect to stock
options under the 1996 Plan are as follows:
<TABLE>
<CAPTION>
Shares Options Price
Reserved Outstanding per Share
--------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at January 1, 1997 1,006,166 30,000 $0.27
Granted (30,000) 30,000 $0.07
Canceled 9,000 (9,000) $0.27
-----------------------------------
Outstanding at December 31, 1997 979,166 51,000 $0.07 - 0.27
Granted (30,000) 30,000 $0.07
Canceled 12,000 (12,000) $0.07 - 0.27
-----------------------------------
Outstanding at December 31, 1998 961,166 69,000 $0.07 - 0.27
===================================
Exercisable at December 31, 1998 19,000 $0.07 - 0.27
===============
</TABLE>
F-15
<PAGE> 37
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
5. STOCK OPTIONS AND WARRANTS (CONCLUDED)
The exercise price of stock options at December 31, 1998 ranged from
$1.57 to $0.07 per share with a weighted exercise price and remaining
contractual life of $0.74 and seven years, respectively.
On May 13, 1996, the Company entered into an agreement with SQuire
Rushnell 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 $0.35, which was 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) May 12, 2006. 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,
1998, 629,880 shares were vested.
As of December 31, 1998, there were warrants outstanding to purchase
approximately 156,000 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 1997 or 1998. The
Warrants will expire 45 days after the filing of a post-effective
amendment to the related Registration Statement, as yet unfiled.
Total common shares reserved for issuance of subscribed stock, options,
warrants and conversion of preferred shares at December 31, 1998 were
approximately 2,287,500.
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 will expire 45 days after the filing of a post-effective
amendment to the related Registration Statement, 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.
F-16
<PAGE> 38
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
7. FEDERAL INCOME TAXES (CONTINUED)
At December 31, 1998, 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:
<TABLE>
<CAPTION>
Available for carryforward to
Year Ending December 31,
------------------------
<S> <C>
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 3,719,000
2010 8,787,000
2011 13,094,000
2012 19,644,000
2013 22,482,000
-----------------
Total $ 88,215,000
=================
</TABLE>
Under the asset and liability approach specified by Statement of
Financial Accounting Standards ("SFAS") No. 109 "Accounting for Income
Taxes", 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.
F-17
<PAGE> 39
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
7. FEDERAL INCOME TAXES (CONCLUDED)
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, 1998 and 1997 are
as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------------------
<S> <C> <C>
Current:
Allowance for doubtful accounts $103,000 $159,000
Accrued liabilities and other 81,000 75,000
----------------------------------
Total current deferred tax assets 184,000 234,000
----------------------------------
Long-Term:
Net operating loss carryforwards 29,993,000 22,349,000
Accumulated depreciation and amortization (397,000) (585,000)
----------------------------------
Total net long-term deferred tax assets 29,596,000 21,746,000
----------------------------------
Total net deferred tax assets 29,780,000 21,998,000
Valuation allowance (29,780,000) (21,998,000)
----------------------------------
Net deferred tax asset $ - $ -
==================================
</TABLE>
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
OFFICE LEASES
The Company entered into a five year lease agreement commencing November,
1994, with an entity affiliated with the Company's Majority Stockholders.
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.
Rental expense under this lease was $194,500, $184,600, and $172,000, for
the years ended December 31, 1998, 1997 and 1996, respectively.
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 were officers and
directors during 1998, for studio, production and post production
services, master control/uplink services and office space. Under the
terms of the agreement, which was renewed in August 1997, the Company is
required to purchase a minimum number of hours of such services during
each year at specified rates. The Company has agreed to pay a minimum
monthly fee of $93,000. If the Company does not actually purchase $93,000
of services in a month, the differences up to a maximum of $75,000 for
all months elapsed, subject to certain limitations, can be used as credit
for the fees in future months. Services rendered to the Company under
this agreement amounted to $1,397,000, $1,525,000, and $1,588,000, for
the years ended December 31, 1998, 1997 and 1996, respectively.
F-18
<PAGE> 40
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 Company is named as a nominal defendant for purposes
of the derivative claims asserted. However, the Company has no liability,
and a summary judgment has been entered dismissing all counts in which
the Company had been named, although counts against the other individual
defendants continue. The Company is required to indemnify the directors
and to pay the cost of their defense.
EMPLOYMENT AGREEMENTS
On May 13, 1996, the Company entered into a three year employment
agreement with SQuire Rushnell pursuant to which Mr. Rushnell serves as
the Company's President and Chief Executive Officer. The agreement
provides for an annual salary of $200,000 with annual merit increases of
not less than 5% of the immediately prior base salary and a $50,000 sign
on bonus. Commencing in the second year the agreement provides for annual
benchmark bonuses of $50,000, payable quarterly upon meeting or exceeding
certain budgetary goals as well as annual bonuses based upon reducing the
Company's deficit.
LEASES
TRANSPONDER
The Company leases satellite transponder space and services on a 24-hour
per day basis. In connection with the Company's 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, $2,464,800, and $2,464,800, for 1998, 1997 and 1996,
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-19
<PAGE> 41
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
9. COMMITMENTS AND CONTINGENCIES (CONCLUDED)
Lease expense for premises and equipment for 1998, 1997 and 1996, which
consisted entirely of minimum rentals, was $280,000, $273,000, $234,000,
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 Transmission Total
December 31, Leases Leases
------------ -------------------------------------------
<S> <C> <C> <C> <C>
1999 166,000 3,111,000 3,277,000
2000 29,000 2,885,000 2,914,000
2001 29,000 2,885,000 2,914,000
2002 30,000 2,885,000 2,915,000
2003 21,000 2,885,000 2,906,000
Thereafter - 5,350,000 5,350,000
</TABLE>
RATING SERVICE CONTRACT
The Company has contracted with a service that provides ratings reports,
analysis reports, demographic reports and other special reports. The
agreement, commencing September, 1995, covers a minimum period of five
years, requires a monthly base charge of approximately $30,000.
MAJOR CUSTOMERS
During 1998, two major customers accounted for 18% and 13% of Affiliate
revenues; during 1997, two major customers accounted for 20% and 12% of
Affiliate revenues; and during 1996, three major customer accounted for
17%, 15% and 11% of Affiliate revenues, respectively. Advertising sales
revenues from one agency accounted for 36% of advertising revenues in
1998 and 10% of advertising revenues in 1996.
10. STATEMENTS OF CASH FLOWS
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------
<S> <C> <C> <C>
Cash paid during the year for:
Interest $660,000 $635,000 $166,213
Income taxes None None None
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
FISCAL 1998
Programming acquisitions totaling $830,000 were financed through vendor
debt obligations.
Interest accrued and payable to Concept and Crown in the amounts of
$1,105,673 and $1,310,006, respectively, were recapitalized into notes
payable as part of a March 31, 1998 refinancing of debt owed to the
Majority Stockholders.
F-20
<PAGE> 42
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
10. STATEMENTS OF CASH FLOWS (CONCLUDED)
FISCAL 1997
Programming acquisitions totaling $2,659,000 were financed through vendor
debt obligations.
Interest accrued and payable to Concept in the amount of $1,612,194 was
recapitalized into a note payable as part of a March 31, 1997 refinancing
of debt owed to the Majority Stockholders.
FISCAL 1996
Programming acquisitions totaling $702,500 were financed through vendor
debt obligations.
F-21
<PAGE> 43
THE NOSTALGIA NETWORK, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER DEDUCTIONS END OF
Description OF YEAR EXPENSES ACCOUNTS (1) YEAR
----------- ------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996
Allowance for doubtful accounts receivable $2,258,000 $ 450,000 $ - $1,554,000 $1,154,000
========================================================================
Year ended December 31, 1997
Allowance for doubtful accounts receivable $1,154,000 $ 102,000 $ - $ 789,000 $ 467,000
========================================================================
Year ended December 31, 1998
Allowance for doubtful accounts receivable $ 467,000 $ 534,000 $ - $ 699,000 $ 302,000
========================================================================
</TABLE>
(1) Uncollectible accounts written off.
F-22
<PAGE> 1
EXHIBIT 10.12
PROMISSORY NOTE
---------------
<TABLE>
<S> <C> <C>
$3,500,000.00 Washington, D.C.
Maturity Date: January 1, 2000 March 22, 1999
</TABLE>
FOR VALUE RECEIVED, the undersigned, THE NOSTALGIA NETWORK, INC. a
Delaware corporation ("Maker"), hereby promises to pay to the order of CROWN
COMMUNICATIONS CORPORATION, a Delaware corporation, or any subsequent holder or
holders ("Holder") of this Promissory Note (this "Note"), at 650 Massachusetts
Avenue, N.W., Washington, D.C. 20001, or at such other place as Holder may from
time to time designate in writing, the principal sum of three million five
hundred thousand dollars ($3,500,000.00), together with all accrued interest on
such outstanding balance, in accordance with the terms and provisions of this
Note.
1. Interest; Payments. Interest shall accrue on the unpaid
principal balance of this Note (as well as on all accrued and unpaid interest)
from and after the date of this Note at a per annum rate equal to the Prime
Rate as published in the Wall Street Journal on March 22, 1999, compounded
monthly. The principal balance, together with all unpaid interest accrued
thereon, shall be due and payable on January 1, 2000 (the "Maturity Date").
2. Payments. All payments by Maker hereunder shall be applied (i)
first to any collection costs pursuant to Paragraph 8 hereof, (ii) second to
the interest due and unpaid under this Note, and (iii) thereafter, to any
principal owing under this Note.
3. Prepayment. Maker shall have the right to prepay, in part or in
full, without penalty, this Note (together with all accrued interest to the
date of prepayment on the amount of principal thus prepaid) at any time or
times.
4. Waiver Regarding Notice. Maker waives presentment, demand and
presentation for payment, protest and notice of protest, and, except as
otherwise specifically provided herein, any other notices of whatever kind or
nature, bringing of suit and diligence in taking any action to collect any sums
owing hereunder. From time to time, without in any way affecting the obligation
of Maker to pay the outstanding principal balance of this Note and any interest
accrued thereon and fully to observe and perform the covenants and obligations
of Maker under this Note, without giving notice to, or obtaining the consent
of, Maker, and without any liability whatsoever on the part of Holder, Holder
may, at its option, extend the time for payment of interest hereon and/or
principal of this Note, reduce the payments hereunder, release anyone liable on
this Note or accept a renewal of this Note, join in any extension or
subordination, or exercise any right or election hereunder. No one or more of
such actions shall constitute a novation or operate to release any party liable
for or under this Note, either as Maker or otherwise.
5. Events of Default. Each of the following shall constitute an
"Event of Default" hereunder:
(a) Maker's failure to make any required payment of principal
and/or interest under this Note, or any other amount due and payable under this
Note, which failure continues for a period of ten (10) days after
-1-
<PAGE> 2
written notice of such failure is sent by Holder to Maker;
(b) The occurrence of an event of default under that certain
Security Agreement by and between Maker and Holder dated as of March 21, 1997,
as amended (the "Security Agreement");
(c) The occurrence of an event of default under any outstanding
promissory notes by Maker payable to Concept Communications, Incorporated, a
Delaware corporation ("Concept");
(d) The occurrence of an event of default under any outstanding
promissory notes by Maker payable to Holder;
(e) The occurrence of an event of default under that certain
Security Agreement by and between Maker and Concept dated as of January 4,
1996;
(f) Maker's failure to perform any other obligation (other than
one that can be satisfied with the payment of money) required under this Note,
and the continuation of such failure for a period of ten (10) days after Holder
gives Maker written notice of such failure to perform; and
(g) Maker's insolvency, general assignment for the benefit of
creditors, or the commencement by or against Maker of any case, proceeding, or
other action seeking reorganization, arrangement, adjustment, liquidation,
dissolution, or composition of Maker's debts under any law relating to
bankruptcy, insolvency, or reorganization, or relief of debtors, or seeking
appointment of a receiver, trustee, custodian, or other similar official for
Maker or for all or any substantial part of Maker's assets.
6. Acceleration. Upon the occurrence of an Event of Default, Holder
shall have the right to cause the entire unpaid principal balance, together
with all accrued interest thereon, reasonable attorneys' and paralegal' fees
and all fees, charges, costs and expenses, if any, owed by Maker to Holder, to
become immediately due and payable in full by giving written notice to Maker.
7. Remedies. Upon the occurrence of an Event of Default, Holder may
avail itself of any legal or equitable rights which Holder may have at law or
in equity or under this Note, including, but not limited to, the right to
accelerate the indebtedness due under this Note as described in the preceding
sentence. The remedies of Holder as provided herein shall be distinct and
cumulative, and may be pursued singly, successively or together, at the sole
discretion of Holder, and may be exercised as often as occasion therefor shall
arise. Failure to exercise any of the foregoing options upon the occurrence of
an Event of Default shall not constitute a waiver of the right to exercise the
same or any other option at any subsequent time in respect to the same or any
other Event of Default, and no single or partial exercise of any right or
remedy shall preclude other or further exercise of the same or any other right
or remedy. Holder shall have no duty to exercise any or all of the rights and
remedies herein provided or contemplated. The acceptance by Holder of any
payment hereunder that is less than payment in full of all amounts due and
payable at the time of such payment shall not constitute a waiver of the right
to exercise any of the foregoing rights or remedies at that time, or nullify
any prior exercise of any such rights or remedies without the express written
consent of Holder.
8. Expenses of Collection. If this Note is referred to an attorney
for collection, whether or not any
-2-
<PAGE> 3
other action has been instituted or taken to enforce or collect under this
Note, Maker shall pay all of Holder's costs, fees (including reasonable
in-house and outside attorneys' and paralegal' fees) and expenses in connection
with such referral.
9. Governing Law. The provisions of this Note shall be governed and
construed according to the law of the District of Columbia, without giving
effect to its conflicts of law provisions.
10. Security. Payment of the indebtedness evidenced by this Note is
secured by certain assets of Maker pledged to Holder pursuant to the Security
Agreement.
11. No Waiver. Neither any course of dealing by Holder nor any
failure or delay on its part to exercise any right, power or privilege
hereunder shall operate as a waiver of any right or remedy of Holder hereunder
unless said waiver is in writing and signed by Holder, and then only to the
extent specifically set forth in said writing. A waiver as to one event shall
not be construed as a continuing waiver by Holder or as a bar to or waiver of
any right or remedy by Holder as to any subsequent event.
12. Notices.
(a) All notices hereunder shall be in writing and shall either
be hand delivered, with receipt therefor, or sent by Federal Express or similar
courier, with receipt therefor, or by certified or registered mail, postage
prepaid, return receipt requested, as follows:
<TABLE>
<S> <C>
If to Maker: The Nostalgia Network, Inc.
650 Massachusetts Avenue, N.W.
Washington, D.C. 20001
Attn: President
If to Holder: Crown Communications Corporation
650 Massachusetts Avenue, N.W.
Washington, D.C. 20001
Attn: General Counsel
with a copy to: Tucker, Flyer & Lewis
1615 L Street, N.W., Suite 400
Washington, D.C. 20036
Attn: Arthur E. Cirulnick, Esquire
</TABLE>
Notices shall be effective when received; provided, however, that if any notice
sent by courier or by certified or registered mail is returned as
undeliverable, such notice shall be deemed effective when mailed or given to
such courier.
(b) Any of the foregoing persons may change the address to
which notices are to be delivered to it hereunder by giving written notice to
the others as provided in Paragraph 13(a).
-3-
<PAGE> 4
13. Severability. In the event that any one or more of the
provisions of this Note shall for any reason be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision of this Note, and this Note shall be
construed as if such invalid, illegal or unenforceable provision had never been
contained herein.
14. Limitations of Applicable Law. In the event the operation of any
provision of this Note results in an effective rate of interest transcending
the limit of the usury or any other law applicable to the loan evidenced
hereby, all sums in excess of those lawfully collectible as interest for the
period in question shall, without further agreement or notice by any party to
this Note, be applied to the unpaid principal balance of this Note immediately
upon receipt of such monies by Holder, with the same force and effect as though
Maker had specifically designated such extra sums to be so applied to the
unpaid principal balance and Holder had agreed to accept such extra payment(s)
as a prepayment.
15. Captions. The captions herein are for convenience of reference
only and in no way define or limit the scope or content of this Note or in any
way affect its provisions.
16. Debtor-Creditor Relationship. Holder shall in no event be
construed for any purpose to be a partner, joint venturer or associate of
Maker, it being the sole intention of the parties to establish a relationship
of debtor and creditor.
17. Time of the Essence. It is expressly agreed that time is of the
essence in the performance of the obligations set forth in this Note.
IN WITNESS WHEREOF, Maker has executed this Promissory Note under seal on
this 22nd day of March 1999.
<TABLE>
<CAPTION>
MAKER:
<S> <C>
ATTEST: THE NOSTALGIA NETWORK, INC.,
A Delaware corporation
/s/ WILLARD R. NICHOLS
- ------------------------ By: /s/ WILLARD R. NICHOLS
Secretary --------------------------------------------------
Name: Willard R. Nichols
------------------------------------------------
Title: Vice President, General Counsel and Secretary
-----------------------------------------------
</TABLE>
[CORPORATE SEAL]
-4-
<PAGE> 1
EXHIBIT 10.13
PROMISSORY NOTE
---------------
<TABLE>
<S> <C>
$50,571,503.02 Washington, D.C.
Maturity Date: January 1, 2000 March 27, 1999
</TABLE>
FOR VALUE RECEIVED, the undersigned, THE NOSTALGIA NETWORK, INC. a
Delaware corporation ("Maker"), hereby promises to pay to the order of CROWN
COMMUNICATIONS CORPORATION, a Delaware corporation, or any subsequent holder or
holders ("Holder") of this Promissory Note (this "Note"), at 650 Massachusetts
Avenue, N.W., Washington, D.C. 20001, or at such other place as Holder may from
time to time designate in writing, the principal sum of fifty million five
hundred seventy one thousand five hundred three and 02/100 dollars
($50,571,503.02), together with all accrued interest on such outstanding
balance, in accordance with the terms and provisions of this Note.
1. Substitution and Replacement. This Note is given by Maker in
substitution and replacement of those certain promissory notes dated February
1, 1999 in the principal amount of $46,597,020.20; dated January 1, 1999 in the
principal amount of $2,000,000; and dated March 5, 1999 in the principal amount
of $1,500,000 (the "Old Notes"), respectively. Upon execution of this Note to
Holder, the Old Notes shall be deemed to be cancelled and of no further force
and effect.
2. Interest; Payments. Interest shall accrue on the unpaid
principal balance of this Note (as well as on all accrued and unpaid interest)
from and after the date of this Note at a per annum rate equal to the Prime
Rate as published in the Wall Street Journal on March 27, 1999, compounded
monthly, and interest of at least Fifty Five Thousand Dollars ($55,000) per
month shall be paid monthly on the last day of each month commencing March 31,
1999, until December 31, 1999. The principal balance, together with all
remaining unpaid interest accrued thereon, shall be due and payable on January
1, 2000 (the "Maturity Date").
3. Payments. All payments by Maker hereunder shall be applied (i)
first to any collection costs pursuant to Paragraph 9 hereof, (ii) second to
the interest due and unpaid under this Note, and (iii) thereafter, to any
principal owing under this Note.
4. Prepayment. Maker shall have the right to prepay, in part or in
full, without penalty, this Note (together with all accrued interest to the
date of prepayment on the amount of principal thus prepaid) at any time or
times.
5. Waiver Regarding Notice. Maker waives presentment, demand and
presentation for payment, protest and notice of protest, and, except as
otherwise specifically provided herein, any other notices of whatever kind or
nature, bringing of suit and diligence in taking any action to collect any sums
owing hereunder. From time to time, without in any way affecting the obligation
of Maker to pay the outstanding principal balance of this Note and any interest
accrued thereon and fully to observe and perform the covenants and obligations
of Maker under
-1-
<PAGE> 2
this Note, without giving notice to, or obtaining the consent of, Maker, and
without any liability whatsoever on the part of Holder, Holder may, at its
option, extend the time for payment of interest hereon and/or principal of this
Note, reduce the payments hereunder, release anyone liable on this Note or
accept a renewal of this Note, join in any extension or subordination, or
exercise any right or election hereunder. No one or more of such actions shall
constitute a novation or operate to release any party liable for or under this
Note, either as Maker or otherwise.
6. Events of Default. Each of the following shall constitute an
"Event of Default" hereunder:
(a) Maker's failure to make any required payment of principal
and/or interest under this Note, or any other amount due and payable under this
Note, which failure continues for a period of ten (10) days after written
notice of such failure is sent by Holder to Maker;
(b) The occurrence of an event of default under that certain
Security Agreement by and between Maker and Holder dated as of March 21, 1997,
as amended (the "Security Agreement");
(c) The occurrence of an event of default under that certain
promissory note dated as of the date hereof by Maker payable to Concept
Communications, Incorporated, a Delaware corporation ("Concept") in the
principal amount of $20,598,035.71;
(d) The occurrence of an event of default under that certain
Security Agreement by and between Maker and Concept, dated as of January 4,
1996;
(e) Maker's failure to perform any other obligation (other than
one that can be satisfied with the payment of money) required under this Note,
and the continuation of such failure for a period of ten (10) days after Holder
gives Maker written notice of such failure to perform; and
(f) Maker's insolvency, general assignment for the benefit of
creditors, or the commencement by or against Maker of any case, proceeding, or
other action seeking reorganization, arrangement, adjustment, liquidation,
dissolution, or composition of Maker's debts under any law relating to
bankruptcy, insolvency, or reorganization, or relief of debtors, or seeking
appointment of a receiver, trustee, custodian, or other similar official for
Maker or for all or any substantial part of Maker's assets.
7. Acceleration. Upon the occurrence of an Event of Default, Holder
shall have the right to cause the entire unpaid principal balance, together
with all accrued interest thereon, reasonable attorneys' and paralegals' fees
and all fees, charges, costs and expenses, if any, owed by Maker to Holder, to
become immediately due and payable in full by giving written notice to Maker.
-2-
<PAGE> 3
8. Remedies. Upon the occurrence of an Event of Default, Holder may
avail itself of any legal or equitable rights which Holder may have at law or
in equity or under this Note, including, but not limited to, the right to
accelerate the indebtedness due under this Note as described in the preceding
sentence. The remedies of Holder as provided herein shall be distinct and
cumulative, and may be pursued singly, successively or together, at the sole
discretion of Holder, and may be exercised as often as occasion therefor shall
arise. Failure to exercise any of the foregoing options upon the occurrence of
an Event of Default shall not constitute a waiver of the right to exercise the
same or any other option at any subsequent time in respect to the same or any
other Event of Default, and no single or partial exercise of any right or
remedy shall preclude other or further exercise of the same or any other right
or remedy. Holder shall have no duty to exercise any or all of the rights and
remedies herein provided or contemplated. The acceptance by Holder of any
payment hereunder that is less than payment in full of all amounts due and
payable at the time of such payment shall not constitute a waiver of the right
to exercise any of the foregoing rights or remedies at that time, or nullify
any prior exercise of any such rights or remedies without the express written
consent of Holder.
9. Expenses of Collection. If this Note is referred to an attorney
for collection, whether or not any action has been instituted or taken to
enforce or collect under this Note, Maker shall pay all of Holder's costs, fees
(including reasonable attorneys' and paralegals' fees) and expenses in
connection with such referral.
10. Governing Law. The provisions of this Note shall be governed and
construed according to the law of the District of Columbia, without giving
effect to its conflicts of laws provisions.
11. Security. Payment of the indebtedness evidenced by this Note is
secured by certain assets of Maker pledged to Holder pursuant to the Security
Agreement.
12. No Waiver. Neither any course of dealing by Holder nor any
failure or delay on its part to exercise any right, power or privilege
hereunder shall operate as a waiver of any right or remedy of Holder hereunder
unless said waiver is in writing and signed by Holder, and then only to the
extent specifically set forth in said writing. A waiver as to one event shall
not be construed as a continuing waiver by Holder or as a bar to or waiver of
any right or remedy by Holder as to any subsequent event.
13. Notices.
(a) All notices hereunder shall be in writing and shall either
be hand delivered, with receipt therefor, or sent by Federal Express or similar
courier, with receipt therefor, or by certified or registered mail, postage
prepaid, return receipt requested, as follows:
-3-
<PAGE> 4
<TABLE>
<S> <C>
If to Maker: The Nostalgia Network, Inc.
650 Massachusetts Avenue, N.W.
Washington, D.C. 20001
Attn: President
If to Holder: Crown Communications Corporation
650 Massachusetts Avenue, N.W.
Washington, D.C. 20001
Attn: General Counsel
with a copy to: Tucker, Flyer & Lewis
1615 L Street, N.W., Suite 400
Washington, D.C. 20036
Attn: Arthur E. Cirulnick, Esquire
</TABLE>
Notices shall be effective when received; provided, however, that if any notice
sent by courier or by certified or registered mail is returned as
undeliverable, such notice shall be deemed effective when mailed or given to
such courier.
(b) Any of the foregoing persons may change the address to
which notices are to be delivered to it hereunder by giving written notice to
the others as provided in Paragraph 13(a).
14. Severability. In the event that any one or more of the
provisions of this Note shall for any reason be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision of this Note, and this Note shall be
construed as if such invalid, illegal or unenforceable provision had never been
contained herein.
15. Limitations of Applicable Law. In the event the operation of any
provision of this Note results in an effective rate of interest transcending
the limit of the usury or any other law applicable to the loan evidenced
hereby, all sums in excess of those lawfully collectible as interest for the
period in question shall, without further agreement or notice by any party to
this Note, be applied to the unpaid principal balance of this Note immediately
upon receipt of such monies by Holder, with the same force and effect as though
Maker had specifically designated such extra sums to be so applied to the
unpaid principal balance and Holder had agreed to accept such extra payment(s)
as a prepayment.
16. Captions. The captions herein are for convenience of reference
only and in no way define or limit the scope or content of this Note or in any
way affect its provisions.
17. Debtor-Creditor Relationship. Holder shall in no event be
construed for any purpose to be a partner, joint venturer or associate of
Maker, it being the sole intention of the parties to establish a relationship
of debtor and creditor.
-4-
<PAGE> 5
18. Time of the Essence. It is expressly agreed that time is of the
essence in the performance of the obligations set forth in this Note.
IN WITNESS WHEREOF, Maker has executed this Promissory Note under seal on
this 27th day of March, 1999.
<TABLE>
<CAPTION>
MAKER:
------
<S> <C>
ATTEST: THE NOSTALGIA NETWORK, INC.,
a Delaware corporation
/s/ WILLARD R. NICHOLS
- ------------------------ By: /s/ WILLARD R. NICHOLS
Secretary --------------------------------------------------
Name: Willard R. Nichols
------------------------------------------------
Title: Vice President, General Counsel and Secretary
-----------------------------------------------
</TABLE>
[CORPORATE SEAL]
-5-
<PAGE> 1
EXHIBIT 10.14
PROMISSORY NOTE
---------------
<TABLE>
<S> <C>
$20,598,035.71 Washington, D.C.
Maturity Date: January 1, 2000 March 27, 1999
</TABLE>
FOR VALUE RECEIVED, the undersigned, THE NOSTALGIA NETWORK, INC. a
Delaware corporation ("Maker"), hereby promises to pay to the order of CONCEPT
COMMUNICATIONS INCCORPORATED, a Delaware corporation, or any subsequent holder
or holders ("Holder") of this Promissory Note (this "Note"), at 650
Massachusetts Avenue, N.W., Washington, D.C. 20001, or at such other place as
Holder may from time to time designate in writing, the principal sum of twenty
million five hundred ninety eight thousand thirty five and 71/100 dollars
($20,598,035.71), together with all accrued interest on such outstanding
balance, in accordance with the terms and provisions of this Note.
1. Substitution and Replacement. This Note is given by Maker in
substitution and replacement of that certain promissory note dated February 1,
1999 in the principal amount of $20,403,537.85. Upon execution of this Note to
Holder, the Old Note shall be deemed to be cancelled and of no further force
and effect.
2. Interest; Payments. Interest shall accrue on the unpaid
principal balance of this Note (as well as on all accrued and unpaid interest)
from and after the date of this Note at a per annum rate equal to the Prime
Rate as published in the Wall Street Journal on March 27, 1999, compounded
monthly, and interest of at least Five Thousand Dollars ($5,000) per month
shall be paid monthly on the last day of each month commencing March 31, 1999,
until December 31, 1999. The principal balance, together with all remaining
unpaid interest accrued thereon, shall be due and payable on January 1, 2000
(the "Maturity Date").
3. Payments. All payments by Maker hereunder shall be applied (i)
first to any collection costs pursuant to Paragraph 9 hereof, (ii) second to
the interest due and unpaid under this Note, and (iii) thereafter, to any
principal owing under this Note.
4. Prepayment. Maker shall have the right to prepay, in part or in
full, without penalty, this Note (together with all accrued interest to the
date of prepayment on the amount of principal thus prepaid) at any time or
times.
5. Waiver Regarding Notice. Maker waives presentment, demand and
presentation for payment, protest and notice of protest, and, except as
otherwise specifically provided herein, any other notices of whatever kind or
nature, bringing of suit and diligence in taking any action to collect any sums
owing hereunder. From time to time, without in any way affecting the obligation
of Maker to pay the outstanding principal balance of this Note and any interest
accrued thereon and fully to observe and perform the covenants and obligations
of Maker under this Note, without giving notice to, or obtaining the consent
of, Maker, and without any liability whatsoever on the part of Holder, Holder
may, at its option, extend the time for payment of
-1-
<PAGE> 2
interest hereon and/or principal of this Note, reduce the payments hereunder,
release anyone liable on this Note or accept a renewal of this Note, join in
any extension or subordination, or exercise any right or election hereunder. No
one or more of such actions shall constitute a novation or operate to release
any party liable for or under this Note, either as Maker or otherwise.
6. Events of Default. Each of the following shall constitute an
"Event of Default" hereunder:
(a) Maker's failure to make any required payment of principal
and/or interest under this Note, or any other amount due and payable under this
Note, which failure continues for a period of ten (10) days after written
notice of such failure is sent by Holder to Maker;
(b) The occurrence of an event of default under that certain
Security Agreement by and between Maker and Holder dated as of January 4, 1996,
as amended (the "Security Agreement");
(c) The occurrence of an event of default under that certain
promissory note dated as of the date hereof by Maker payable to Crown
Communications Corporation, a Delaware corporation ("Crown") in the principal
amount of $50,571,503.02;
(d) The occurrence of an event of default under that certain
Security Agreement by and between Maker and Crown, dated as of March 21, 1997;
(e) Maker's failure to perform any other obligation (other than
one that can be satisfied with the payment of money) required under this Note,
and the continuation of such failure for a period of ten (10) days after Holder
gives Maker written notice of such failure to perform; and
(f) Maker's insolvency, general assignment for the benefit of
creditors, or the commencement by or against Maker of any case, proceeding, or
other action seeking reorganization, arrangement, adjustment, liquidation,
dissolution, or composition of Maker's debts under any law relating to
bankruptcy, insolvency, or reorganization, or relief of debtors, or seeking
appointment of a receiver, trustee, custodian, or other similar official for
Maker or for all or any substantial part of Maker's assets.
7. Acceleration. Upon the occurrence of an Event of Default, Holder
shall have the right to cause the entire unpaid principal balance, together
with all accrued interest thereon, reasonable attorneys' and paralegals' fees
and all fees, charges, costs and expenses, if any, owed by Maker to Holder, to
become immediately due and payable in full by giving written notice to Maker.
8. Remedies. Upon the occurrence of an Event of Default, Holder may
avail itself of any legal or equitable rights which Holder may have at law or
in equity or under this Note,
-2-
<PAGE> 3
including, but not limited to, the right to accelerate the indebtedness due
under this Note as described in the preceding sentence. The remedies of Holder
as provided herein shall be distinct and cumulative, and may be pursued singly,
successively or together, at the sole discretion of Holder, and may be
exercised as often as occasion therefor shall arise. Failure to exercise any of
the foregoing options upon the occurrence of an Event of Default shall not
constitute a waiver of the right to exercise the same or any other option at
any subsequent time in respect to the same or any other Event of Default, and
no single or partial exercise of any right or remedy shall preclude other or
further exercise of the same or any other right or remedy. Holder shall have no
duty to exercise any or all of the rights and remedies herein provided or
contemplated. The acceptance by Holder of any payment hereunder that is less
than payment in full of all amounts due and payable at the time of such payment
shall not constitute a waiver of the right to exercise any of the foregoing
rights or remedies at that time, or nullify any prior exercise of any such
rights or remedies without the express written consent of Holder.
9. Expenses of Collection. If this Note is referred to an attorney
for collection, whether or any action has been instituted or taken to enforce
or collect under this Note, Maker shall pay all of Holder's costs, fees
(including reasonable attorneys' and paralegals' fees) and expenses in
connection with such referral.
10. Governing Law. The provisions of this Note shall be governed and
construed according to the law of the District of Columbia, without giving
effect to its conflicts of laws provisions.
11. Security. Payment of the indebtedness evidenced by this Note is
secured by certain assets of Maker pledged to Holder pursuant to the Security
Agreement.
12. No Waiver. Neither any course of dealing by Holder nor any
failure or delay on its part to exercise any right, power or privilege
hereunder shall operate as a waiver of any right or remedy of Holder hereunder
unless said waiver is in writing and signed by Holder, and then only to the
extent specifically set forth in said writing. A waiver as to one event shall
not be construed as a continuing waiver by Holder or as a bar to or waiver of
any right or remedy by Holder as to any subsequent event.
13. Notices.
(a) All notices hereunder shall be in writing and shall either
be hand delivered, with receipt therefor, or sent by Federal Express or similar
courier, with receipt therefor, or by certified or registered mail, postage
prepaid, return receipt requested, as follows:
<TABLE>
<S> <C>
If to Maker: The Nostalgia Network, Inc.
650 Massachusetts Avenue, N.W.
Washington, D.C. 20001
Attn: President
</TABLE>
-3-
<PAGE> 4
<TABLE>
<S> <C>
If to Holder: Crown Communications Corporation
650 Massachusetts Avenue, N.W.
Washington, D.C. 20001
Attn: General Counsel
with a copy to: Tucker, Flyer & Lewis
1615 L Street, N.W., Suite 400
Washington, D.C. 20036
Attn: Arthur E. Cirulnick, Esquire
</TABLE>
Notices shall be effective when received; provided, however, that if any notice
sent by courier or by certified or registered mail is returned as
undeliverable, such notice shall be deemed effective when mailed or given to
such courier.
(b) Any of the foregoing persons may change the address to
which notices are to be delivered to it hereunder by giving written notice to
the others as provided in Paragraph 13(a).
14. Severability. In the event that any one or more of the
provisions of this Note shall for any reason be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision of this Note, and this Note shall be
construed as if such invalid, illegal or unenforceable provision had never been
contained herein.
15. Limitations of Applicable Law. In the event the operation of any
provision of this Note results in an effective rate of interest transcending
the limit of the usury or any other law applicable to the loan evidenced
hereby, all sums in excess of those lawfully collectible as interest for the
period in question shall, without further agreement or notice by any party to
this Note, be applied to the unpaid principal balance of this Note immediately
upon receipt of such monies by Holder, with the same force and effect as though
Maker had specifically designated such extra sums to be so applied to the
unpaid principal balance and Holder had agreed to accept such extra payment(s)
as a prepayment.
16. Captions. The captions herein are for convenience of reference
only and in no way define or limit the scope or content of this Note or in any
way affect its provisions.
17. Debtor-Creditor Relationship. Holder shall in no event be
construed for any purpose to be a partner, joint venturer or associate of
Maker, it being the sole intention of the parties to establish a relationship
of debtor and creditor.
-4-
<PAGE> 5
18. Time of the Essence. It is expressly agreed that time is of the
essence in the performance of the obligations set forth in this Note.
IN WITNESS WHEREOF, Maker has executed this Promissory Note under seal on
this 27th day of March, 1999.
<TABLE>
<CAPTION>
MAKER:
------
<S> <C>
ATTEST: THE NOSTALGIA NETWORK, INC.,
a Delaware corporation
/s/ WILLARD R. NICHOLS By: /s/ WILLARD R. NICHOLS
- ------------------------ ------------------------------------------------
Secretary Name: Willard R. Nichols
------------------------------------------------
Title: Vice President, General Counsel and Secretary
-----------------------------------------------
</TABLE>
[CORPORATE SEAL]
-5-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from Form 10-K
for the year ended December 31, 1998 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 539,371
<SECURITIES> 0
<RECEIVABLES> 1,237,230
<ALLOWANCES> 302,000
<INVENTORY> 10,088,129
<CURRENT-ASSETS> 8,942,963
<PP&E> 3,224,971
<DEPRECIATION> 2,033,092
<TOTAL-ASSETS> 12,979,711
<CURRENT-LIABILITIES> 7,718,255
<BONDS> 66,214,998
0
6,500
<COMMON> 810,975
<OTHER-SE> (62,220,898)
<TOTAL-LIABILITY-AND-EQUITY> 12,979,711
<SALES> 0
<TOTAL-REVENUES> 5,531,360
<CGS> 0
<TOTAL-COSTS> 24,058,635
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 534,000
<INTEREST-EXPENSE> 4,581,460
<INCOME-PRETAX> (23,050,676)
<INCOME-TAX> 0
<INCOME-CONTINUING> (23,050,676)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,050,676)
<EPS-PRIMARY> (1.14)
<EPS-DILUTED> (1.14)
</TABLE>
