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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1999.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from .................... to ....................
COMMISSION FILE NUMBER 0-13102
THE NOSTALGIA NETWORK, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 84-0923659
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation)
650 MASSACHUSETTS AVENUE NW, WASHINGTON, DC 20001
(Address of principal executive office) (Zip Code)
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(202) 289-6633
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
The number of shares of the Registrant's Common Stock, $.04 par value as of the
close of the period covered by this Report was 20,274,371.
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TABLE OF CONTENTS
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Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of
March 31, 1999 and December 31, 1998 3
Statements of Operations
For the Three Months Ended March 31, 1999 and 1998 4
Statements of Cash Flows
For the Three Months Ended March 31, 1999 and 1998 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7 - 11
Item 3. Quantitative and Qualitative Disclosure about
Market Risk 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities and Use of Proceeds 12
Item 3. Default upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Report on Form 8-K 12
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE NOSTALGIA NETWORK, INC.
BALANCE SHEETS
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(Unaudited)
March 31, 1999 December 31, 1998
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ASSETS
CURRENT ASSETS
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Cash and cash equivalents $ 4,284,386 $ 539,371
Accounts receivable, less allowance of $330,000
and $302,000, respectively 967,988 935,230
Prepaid expenses 129,280 168,362
Cablecast rights 6,497,246 7,300,000
------------ ------------
Total current assets 11,878,900 8,942,963
Programming and cablecast rights - net 1,752,028 2,788,129
Property and equipment - net 1,120,479 1,191,879
Other assets 55,740 56,740
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Total assets $ 14,807,147 $ 12,979,711
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Current maturities of long-term obligations $ 3,850,571 $ 5,085,827
Accounts payable 1,593,818 2,255,174
Accrued expenses and other liablilities 444,848 377,254
------------ ------------
Total current liabilities 5,889,237 7,718,255
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LONG-TERM OBLIGATIONS, LESS CURRENT MATURITIES
Notes and interest payable - related parties 75,330,341 66,214,998
Other 330,423 335,416
Cablecast licenses and fees payable 33,007 114,465
------------ ------------
Total long-term liabilities 75,693,771 66,664,879
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Total liabilities 81,583,008 74,383,134
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock: $2 par value, 125,000 shares authorized,
3,250 issued and outstanding 6,500 6,500
Common stock: $0.04 par value, 30,000,000 shares
authorized, 20,274,371 and 20,274,371 shares issued
and outstanding, respectively 810,975 810,975
Additional paid-in capital 30,213,554 30,213,554
Deficit (97,806,890) (92,434,452)
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Total stockholders' deficit (66,775,861) (61,403,423)
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Total liabilities and stockholders' deficit $ 14,807,147 $ 12,979,711
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See accompanying notes to the financial statements -3-
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THE NOSTALGIA NETWORK, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
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For the Three Months
Ended March 31,
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1999 1998
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OPERATING REVENUES
Affiliate revenue $ 548,215 $ 659,178
Advertising sales revenue 791,421 764,148
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Total operating revenues 1,339,636 1,423,326
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OPERATING EXPENSES
Programming, production and transmission 1,201,507 1,277,337
Programming amortization 2,119,020 1,767,542
Sales and marketing 989,667 1,294,103
Finance, general and administration 1,061,575 715,470
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Total operating expenses 5,371,769 5,054,452
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LOSS FROM OPERATIONS (4,032,133) (3,631,126)
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OTHER INCOME AND (EXPENSE)
Interest and other - net (1,340,305) (953,455)
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INCOME (LOSS) BEFORE PROVISION FOR
FEDERAL INCOME TAXES (5,372,438) (4,584,581)
PROVISION FOR FEDERAL INCOME TAXES - -
------------ -----------
NET LOSS $(5,372,438) $(4,584,581)
============ ============
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.26) $ (0.23)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 20,274,371 20,274,371
============ ===========
</TABLE>
See accompanying notes to the financial statements -4-
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THE NOSTALGIA NETWORK, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
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For the Three Months
Ended March 31,
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1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(5,372,439) $(4,584,581)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 2,190,419 1,838,997
Provision for losses on accounts receivable 174,000 102,000
Net change in operating assets and liabilities:
Increase in accounts receivable (206,758) (202,121)
Decrease (increase) in prepaid expenses & other assets 40,082 (176,619)
(Decrease) increase in accounts payable (661,356) 1,261,482
Increase in accrued expenses
and other liabilities 1,177,945 729,111
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Net cash used in operating activities (2,658,107) (1,031,731)
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of programming and cablecast rights (280,164) (1,696,722)
Purchases of property and other assets - (31,572)
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Net cash used in investing activities (280,164) (1,728,294)
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CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term obligations (1,316,714) (2,104,921)
Proceeds from notes payable - related parties 8,000,000 4,250,000
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Net cash provided by financing activities 6,683,286 2,145,079
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NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 3,745,015 (614,946)
CASH AND CASH EQUIVALENTS - BEGINNING 539,371 1,803,189
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CASH AND CASH EQUIVALENTS - ENDING $ 4,284,386 $ 1,188,243
=========== ===========
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See accompanying notes to the financial statements -5-
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The Nostalgia Network, Inc.
NOTES TO FINANCIAL STATEMENTS
1. The financial information included herein is submitted pursuant to the
requirements of Form 10-Q and does not include all disclosures required
by generally accepted accounting principles. It is suggested that these
unaudited financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998 filed with the
Securities and Exchange Commission on March 31, 1999, which are
incorporated herein by reference. The accompanying interim financial
statements reflect all adjustments (consisting of normal recurring
accruals only) which are, in the opinion of management, necessary for a
fair statement of the results for the interim periods presented. The
results of operations for interim periods are not necessarily indicative
of the results to be obtained for the entire year.
2. Certain reclassifications have been made to the financial statements for
the comparative period of the prior fiscal year for consistency with the
presentation for the current period.
3. Cash flow - cash equivalents include highly liquid debt instruments with
a maturity of three months or less.
4. On March 27, 1999, the Company issued two substitution and replacement
notes to Crown and Concept Communications, Inc. ("Concept") (together the
"Majority Stockholders") in the amount of $50,571,503 and $20,598,036,
respectively, at 7.75%, with the principal and unpaid interest due
January 1, 2000. These notes require minimum monthly interest payments
aggregating to $60,000 and replace previously issued notes in the
principal amounts of $47,810,006 and $19,217,867 plus $2,761,497 and
$1,380,169 in accrued and unpaid interest, respectively. On March 22,
1999, the Company issued a promissory note to Crown in the principal
amount of $3,500,000 at 7.75% due January 1, 2000. These notes are
secured by certain Security Agreements between the Majority Stockholders
and the Company, as amended.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. This Form 10-Q contains certain "forward-looking
statements" which represent expectations or beliefs of the Company, including,
but not limited to, statements concerning the Company's operations, performance,
financial condition, plans, growth and strategies. Any statements contained in
this Form 10-Q that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the generality of the foregoing,
words such as "may," "will," "expect," "anticipate," "intend," "could,"
"estimate," or "continue" or the negative or other variations thereof or
comparable terminology are intended to identify forward-looking statements.
These statements by their nature involve substantial risks and uncertainties,
including, but not limited to, those relating to development of the Company's
network, the impact of internal and external problems caused by the Year 2000
computer problem, and dependence on existing management; leverage and debt
service (including sensitivity to fluctuations in interest rates). Certain of
these risks and uncertainties are beyond the Company's control, and actual
results may differ materially depending on a variety of important factors,
including those described in this Form 10-Q.
For a discussion of the risks that may have an impact on the Company's results,
see the Company's Annual Report on Form 10-K for the year ended December 31,
1998, filed with the Securities and Exchange Commission on March 31, 1999.
Results of Operations
Total revenues decreased $83,690, or 5.9 % (from $1,423,326 to $1,339,636) for
the three months ended March 31, 1999 (the "Quarter") compared to the three
months ended March 31, 1998 (the "1998 Quarter"). The decline resulted
principally from decreases in affiliate revenue partially offset by increases in
advertising revenue.
Overall advertising sales revenues increased $27,273, or 3.6% (from $764,148 to
$791,421). Infomercial sales decreased $48,847, or 11.0% (from $444,125 to
$395,278). The Company believes that the infomercial market in general has been
soft, resulting in lower rates received for infomercial time. Conventional
advertising increased $76,120, or 23.8% (from $320,023 to $396,143). This was
primarily a result of increased national spot buys.
Affiliate revenues decreased by $110,963, or 16.8% (from $659,178 to $548,215)
primarily a result of acquiring new subscribers that have upfront zero fee
carriage arrangements for the first several years of their contract periods.
These arrangements provide for long term carriage for the Network with various
multiple system operator with the intent to generate higher revenue streams
from advertising in the future.
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Management firmly believes that the Company's niche, the nation's Boomer and
over audience, is a valuable market which currently is not being served by any
other network. Government statistics show that this demographic is the fastest
growing population segment and will account for nearly 30% of the population in
the year 2000. As delivery technology continues to change, management believes
the Company's best approach is to increase branding of the Network and build
consumer demand for its product. In 1999, the Company plans to continue its
efforts to develop new original programming specifically targeted to America's
Boomer and over audience and build upon the programming ideas developed in 1998.
Operating expenses, net of $280,164 in capitalized programming costs in the
Quarter compared to $1,696,719 in the 1998 Quarter, increased $317,317, or 6.3%
(from $5,054,452 to $5,371,769). This increase was primarily a result of an
increase of $351,478, or 19.9% (from $1,767,542 to $2,119,020) in programming
amortization, and an increase of $346,105, or 48.4% (from $715,470 to
$1,061,575) in finance, general and administrative costs, offset by decreases of
$304,436, or 23.5% (from $1,294,103 to $989,667) in sales and marketing costs,
and a decrease of $75,830, or 5.9% (from $1,277,337 to $1,201,507) in
programming, production and transmission costs. Salaries and wages decreased by
$33,298, or 8.0% (from $416,745 to $383,447). Travel and entertainment expenses
decreased by $48,656, or 49.3% (from $98,711 to $50,055). Both of these
decreases were primarily due to the departure of personnel from positions which
have not yet been replaced. Convention expenses decreased by $38,092, or 74.0%
(from $51,479 to $13,387). Advertising expenditures decreased by $176,802, or
92.8% (from $190,440 to $13,638). Both of these decreases also were due to the
Company's efforts to reduce marketing costs. Professional fees decreased by
$111,472 or 43.2% (from $257,857 to $146,385) primarily as a result of reduced
expenditures on the Network's affinity and new media efforts, as well as
bringing the Network's public relations operations in house. These decreases
were offset in part by increases in marketing allowance costs of $102,145, or
209.0% (from $48,886 to $151,031).
Programming, production and transmission costs, net of $280,164 in capitalized
programming costs in the Quarter compared to $1,696,719 in the 1998 Quarter,
decreased by $75,830, or 5.9% (from $1,277,337 to $1,201,507) primarily as
a result of higher programming costs, for programs completed and delivered in
the 1998 Quarter. Programming amortization costs increased by $351,478, or 19.9%
(from $1,767,542 to $2,119,020) primarily as a result of higher overall
accumulated costs for original programming incurred in prior years. The Company
expects to incur additional increases in future programming and studio
production costs as a consequence of upgrading the Network's programming and the
creation of new original programs. These additional future expenditures will
adversely impact the Company's results of operations in the short-term, but
management believes they are critical to the Company's long-term survival and
growth.
The Company continues its schedule of new and original productions in 1999,
including the following programs: GTV DanceSport, spotlights a rapidly growing
trend in America, ballroom
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and performance dancing which is slated to become a recognized Olympic sport;
More Money with the Dolans, staring Ken and Daria Dolan, the "first family of
finance," which provides an entertaining program on money issues; Flea Market
Movie, with collectibles aficionado, Christopher Kent, appraising viewer's attic
treasures during movie breaks; The Bull and the Bear, stock market reports by a
"Siskel and Ebert" type pair of hosts, Llewellyn King and Linda Gasparello; The
Real Me Autobiographies, true stories of famous people told in their own words;
and American Soldier, which features interviews with World War II veterans as
wraparounds to the dramatic series, Combat, Garrison's Gorillas and 12 O'clock
High.
New programs for 1999 include American Couples, hosted by Nancy Glass, an hour
long show which celebrates the family values, love, commitment and partnership
of famous couples; Heroes & Sheroes, profiling ordinary men and women who have
performed heroic tasks for the benefit of their fellow man; American Families
spotlights regular families discussing contemporary solutions to issues raised
in episodes of classic family programs, from teen dating to sibling rivalry; and
The Cookbook Show which features the Network's Flea Market Movie host,
Christopher Kent, who also is an accomplished chef, preparing dishes from famous
cookbooks.
Finance, general and administrative costs increased by $346,105, or 48.4% (from
$715,470 to $1,061,575). This increase primarily was a result of increases in
legal and professional fees of $68,870, or 89.4% (from $77,045 to $145,915),
increases in bad debt expenses of $72,000, or 70.6% (from $102,000 to $174,000),
and increases in consolidation and retention costs of $193,762, or 100% (from $0
to $193,762), resulting from the Company's decision in March, 1999 to more
closely align its sales and marketing activities by consolidating these efforts
at its headquarters in Washington, D.C.
As a result of decreased revenues, increased programming amortization costs,
increased finance, general and administration costs offset partially by
decreased programming, production, and transmission costs and decreased sales
and marketing costs, the Company's loss from operations increased $401,007, or
11.0% (from $3,631,126 to $4,032,133).
Other income (expense) increased $386,850, or 40.6% (from ($953,455) to
($1,340,305)) primarily as a result of interest on additional borrowings. As a
result of increased loss from operations and increased other expense, net loss
increased by $787,858, or 17.2% (from $4,584,581 to $5,372,439).
Liquidity and Capital Resources
Cash increased from $539,371 at December 31, 1998 to $4,284,386 at March 31,
1999, principally due to $8,000,000 in financing received in the Quarter, offset
by cash outlays to cover increased operating losses and repayments of certain
debts. Working capital increased from $1,224,708 at December 31, 1998 to
$5,989,663 at March 31, 1999, principally as a result of increased cash balances
of $3,745,015. Cablecast rights have decreased by $1,838,855, or 18.2%
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since year-end as a result of amortization of the Network's investment in its
primetime line-up, offset by acquisitions totaling $280,164. Total Liabilities
increased primarily due to $8,000,000 in additional financing.
Cash used in operating activities increased $1,626,376, or 157.6% (from
$1,031,731 to $2,658,107) for the Quarter compared to the 1998 Quarter,
principally as a result of decreases in accounts payable and increases in losses
from operations.
Cash used in investing activities decreased $1,448,130, or 83.8% (from
$1,728,294 to $280,164) principally due to a decrease in purchase of programming
and cablecast rights of $1,416,558.
Cash flows from financing activities increased $4,538,207, or 211.6% (from
$2,145,079 to $6,683,286) due principally to increased financing of $3,750,000,
or 88.2% (from $4,250,000 to $8,000,000) and decreased repayment of long-term
obligations of $788,207, or 37.5% (from $2,104,921 to $1,316,714).
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. Additionally, since January 1,
1999, the Majority Stockholders have provided $8,000,000 in debt financing to
the Company, and have committed to advance as needed an additional $7,000,000 in
debt financing during the balance of 1999. Management believes that these funds
will be sufficient to satisfy its operating needs for 1999. In connection with
the additional borrowings, the Company has entered into security agreements, as
amended, pledging substantially all the Company's assets as security for its
indebtedness to the Majority Stockholders.
The Company believes that, in order to survive in the highly competitive market
for cable television programming, the Company will need significant additional
investment over the next four to five years. Such additional investment is
necessary to improve programming and increase distribution, which the Company
anticipates ultimately will increase advertising revenues and result in
substantial long-term revenue increases.
The Company's Board of Directors has directed its Executive Committee and
management to study the question of whether the Company should enter into, and
the potential opportunities for, a strategic alliance, and to make
recommendations to the full Board of Directors. The Executive Committee and
management have been actively engaged in this pursuit. Because of the
unpredictable factors involved in the search for a strategic alliance, and the
dynamic changes taking place in the industry, there is considerable uncertainty
about the Company's future needs. There can be no assurance either that the
Company will be able to locate sufficient funding in excess of the funds
committed for 1999, or that it will be able to achieve a strategic alliance.
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Year 2000 Issues
The Year 2000 problem is the result of computer programs being written using two
digits rather than four to define the applicable year. As a result, those
programs have time-sensitive software that recognizes a date using "00" as the
year 1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions or engage in similar
normal business.
The Company has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the Year 2000 issue. Based upon
its review, the Company believes that all of its systems are Year 2000 compliant
with the exception of the Company's "traffic system," pursuant to which the
Network's signal is distributed to affiliates. The Company has begun to replace
the traffic system with one which is Year 2000 compliant and expects to have the
new system in place by the third quarter of 1999 at a cost not anticipated to
exceed $100,000.
The Company is in the process of contacting its significant suppliers and
affiliates that do not share information systems with the Company as to their
Year 2000 compliance. To date, the Company is not aware of any external agent
with a Year 2000 issue that would materially impact the Company's results of
operations, liquidity or capital resources. However, the Company has no means of
ensuring that external agents will be Year 2000 compliant. The inability of
external agents to complete their Year 2000 compliance in a timely fashion could
materially impact the Company. The effect of noncompliance by external agents is
not determinable. Possible Year 2000 related problems due to external agents
could include loss of electrical power and telephone service, and supply
shortages.
In the event the Company experiences difficulties with its systems or with
material external agents, the Company has contingency plans for certain critical
applications and is working on such plans for others. Contingency plans
generally consist of performing mission critical procedures manually or with
substitute systems which are Year 2000 compliant.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. None.
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PART II. OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS. None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. None.
ITEM 3. DEFAULT UPON SENIOR SECURITIES. None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None.
ITEM 5. OTHER INFORMATION. None
ITEM 6. EXHIBIT AND REPORT ON FORM 8-K.
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(a) Exhibits
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Exhibit
No. Description
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3.1 Certificate of Incorporation, as amended (filed as Exhibit 3.1 to the
Registrant's Report on Form 10-K for the Year Ended December 31, 1994,
and incorporated herein by reference thereto)
3.2 Amended and Restated Bylaws (filed as Exhibit 3.2 to the Registrant's
Report on Form 10-K for the Year Ended December 31, 1994, and
incorporated herein by reference thereto)
27 Financial Data Schedule as required by Item 601 (c) of Regulation S-K
</TABLE>
(b) Reports on Form 8-K
The Company filed a Form 8-K with the United States Securities and Exchange
Commission on April 5, 1999, as amended by a Form 8-K/A filed with the United
States Securities and Exchange Commission on April 12, 1999, to report a change
in the Company's certifying accountants.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 15, 1999
THE NOSTALGIA NETWORK, INC.
By: /s/SQuire D. Rushnell
-------------------------------------
SQuire D. Rushnell, President and
Chief Executive Officer
By: /s/ Diane C. Fuller
---------------------------
Diane C. Fuller, Treasurer
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 4,284,386
<SECURITIES> 0
<RECEIVABLES> 1,297,988
<ALLOWANCES> 330,000
<INVENTORY> 8,249,274
<CURRENT-ASSETS> 11,878,900
<PP&E> 3,224,972
<DEPRECIATION> 2,104,493
<TOTAL-ASSETS> 14,807,147
<CURRENT-LIABILITIES> 5,889,237
<BONDS> 75,330,341
0
6,500
<COMMON> 810,975
<OTHER-SE> (67,593,336)
<TOTAL-LIABILITY-AND-EQUITY> 14,807,146
<SALES> 0
<TOTAL-REVENUES> 1,339,636
<CGS> 0
<TOTAL-COSTS> 5,371,769
<OTHER-EXPENSES> 1,340,305
<LOSS-PROVISION> 174,000
<INTEREST-EXPENSE> 1,340,305
<INCOME-PRETAX> (5,372,438)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,372,438)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,372,438)
<EPS-PRIMARY> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
