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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, 1999
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
(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
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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 3, 2000 was approximately $518,070 based upon the last
reported price for the Company's Common Stock on such date. The Company had
20,275,370 shares of Common Stock and 3,250 shares of Preferred Stock
outstanding on March 3, 2000.
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FORWARD LOOKING STATEMENTS
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," "intend," "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.
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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 1999, 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. In 1998, as part of its branding
efforts, the Network adopted the name GoodLife TV Network 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 1,514,470 subscribers. At December 31, 1999, the Company had
9,232,523 subscribers, compared to 7,718,053 subscribers at December 31, 1998.
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.
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.
In October 1999, the Company announced that it had received and accepted an
offer from Crown Communications Corporation ("Crown") to enter into a cash
merger which, if consummated, would result in the elimination of the Company's
publicly-held shares of common stock and constitute a going-private transaction
within the meaning of Section 13(e)(3) of the Securities Exchange Act of 1934.
Crown and Concept Communications, Inc. ("Concept"), which is majority-owned by
Crown, in the aggregate are the beneficial owners of 70.3% of the Company's
issued and outstanding shares of common stock.
Upon receipt, Crown's offer was referred to and reviewed by a committee of
the Company's independent directors which recommended that the offer be
accepted. The Company's Board of Directors voted to accept Crown's offer and to
authorize the negotiation of definitive documentation for the merger.
Consummation of the merger remains contingent upon, among other things, the
approval of the Company's stockholders. Crown has indicated that it and its
affiliates will vote in favor of the merger.
In January 2000, Crown and Concept transferred their respective shares of
the Company's common stock and preferred stock to NNI Acquisition Corporation, a
Delaware corporation ("Acquisition"), which was formed to facilitate the merger.
Crown and Concept retain beneficial control of the transferred shares as
Acquisition is wholly-owned by Crown and Concept.
It is anticipated that following the merger, the business and operations of
the Company will be continued substantially as currently conducted for the
immediate future including continuing the Company's analysis of and efforts to
seek a strategic alliance. The Company has had contact 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. Crown and Concept
have informed the Company that they intend to reevaluate the business and
operations of the Company following the merger and take such actions with
respect to the future business and operations of the Company as they deem
appropriate. Although there are no definitive plans or agreements in place,
Crown and Concept may cause the Company to enter into joint venture or other
agreements with other business entities after the merger.
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, 1999 and Notes
thereto. See Part II, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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Financing for the Network has previously been provided by the Company's
majority stockholders, Concept and Crown. Crown loaned $15,000,000 to the
Company during 1999. See Part II, Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations." From January 1, 2000 through
March 20, 2000, the Company received an additional $3,750,000 in debt financing
from Crown, accruing interest at approximately 8.50 to 8.75%. Crown has
committed to provide an additional $11,250,000 in debt or equity financing to
the Company, to be advanced as needed during 2000. The Company believes that
these funds in addition to revenues from continuing operations will be
sufficient to satisfy its operating needs for 2000.
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 it's 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, 1999 Edition ("Kagan"), there are over 83 million basic cable
subscribers in the United States and the industry reaches approximately 83.0% of
all television households. Kagan projects that 87.0% of all households having at
least one television will have at least basic cable by 2001.
1. AFFILIATED CABLE SYSTEMS AND SUBSCRIBERS
The Network's programming is distributed by approximately 1,425 Affiliates,
from which the Network derives fees, typically based upon the number of monthly
subscribers in each Affiliate's system. On December 31, 1999, the Network had
9,232,523 subscribers, an increase of 19.6% from December 31, 1998, when the
Network had 7,718,053 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 1999, the
Network had revenues of $2,089,466 from Affiliate fees. Three multiple system
operator Affiliates accounted for approximately 18.0%, 16.0% and 10.0% of
Affiliate revenue in 1999.
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. Many of these Affiliates have declined to enter
into new contracts until their plans for channel expansion are completed. As a
result of intense competition among cable networks for this reduced number of
channels, the Company's per subscriber fees 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 1999,
the Company redirected its focus from national spot advertising to direct
response, and informercial advertising, and, accordingly, has reduced its
reliance on, and use of, Nielsen ratings. The Company derived revenues of
$3,288,663 from advertising in 1999.
4. PROGRAMMING
The Network has continued to expand and improve its original programming.
Following are descriptions of programs aired on GoodLife TV Network during 1999.
GTV 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.
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Heroes & Sheroes (Original Pilot)
Stories of the unheralded heroes in our communities. Share the stories of these
ordinary people who manage to do the extraordinary and transform the lives of
the people they touch.
American Couples (Original Pilot)
Hosted by esteemed television journalist Nancy Glass, American Couples is a one
hour long show which celebrates the family values, love, commitment and
partnership of famous couples. Find out how real-life couples have managed to
build happy and fulfilling marriages.
Cookbook Cooking with Christopher Kent (Original)
Watch the delightful Christopher Kent prepare a wide variety of dishes from
various cookbooks, as well as some favorites from his original recipes.
Cafe DuArt (Original)
Famed Broadway impressionist Louise DuArt stars in her own musical variety
series that takes place in a comedy cabaret setting. A cast of zany characters,
many of which are played by Ms. DuArt herself, frequent the cafe and the laughs
never stop.
The Real Me Autobiographies (Original)
Surrounded by family and friends, interesting guest hosts provide a unique
insight into their fascinating lives through their own stories told 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.
American Families (Original Elements began airing in January 2000)
The Adventures of Ozzie & Harriet and Make Room for Daddy are being telecast
each weekday evening under the umbrella title of American Families. Hosted by
Nancy Glass, this unique series juxtaposes members of contemporary families
against the classic TV families. See how today's parents and children deal with
age-old issues that Ozzie Nelson and Danny Thomas wrestled with.
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.
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
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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.
Acquired Programming
Three icons in classic family TV from the 1950's and 60's premiered on the
Network in 1999. Bonanza, The Adventures of Ozzie & Harriet, and Make Room for
Daddy entered living rooms each week as viewers watched the families grow up
and, using humor or wisdom, deal with many of the situations still encountered
today. The Bonanza series consist of 171 hours licensed from WorldVision
Enterprises until August 2001. The Adventures of Ozzie & Harriet and Make Room
for Daddy series each consist of 130 episodes licensed exclusively to the
Network until August 2002.
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.
Programming for the Visually Impaired
The Company has had a significant and mutually beneficial relationship with
Narrative Television Network ("NTN"). Found on the SAP channel, where available,
these narrative tracks of certain Network programming provide descriptive
narratives of the on-screen action to allow visually impaired viewers to better
understand and account for noises and actions they cannot see.
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
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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.
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. The end of upper tier rate regulation 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, 1999, the Company had a total of twenty-seven 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, D.C., 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, on a month-to-month basis at a
monthly rate of $16,900, approximately 5,100 square feet of office space and 900
square feet of storage space from Washington Television Center Limited
Partnership ("WTC"), a subsidiary of U.S. Property Development Corporation
("USPDC"), of which Mr. Dong Moon Joo, a director of the Company, is an officer.
See "Certain Relationships and Transactions."
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"). Mr. Christopher
Cates, a director of the Company, was an officer of AVI until January 26, 1999,
and Mr. Joo is an officer and Chairman of AVI. See "Certain Relationships and
Transactions."
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 occupied approximately 1,580 square feet at a monthly rate of $2,370
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 occupied approximately 1,980 square feet at a monthly rate of $2,413
under a lease that expired in July 1999. The Company sublet the Ft. Washington,
Pennsylvania office space for the remaining term of the lease in July 1999.
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 a nominal defendant for purposes of the derivative claims
asserted. Summary judgment has been entered dismissing all causes of action
against the Company, although causes of action against the other individual
defendants, including certain former directors of the Company, continue. The
Company is required to indemnify those former directors of the Company and to
pay their costs of defense.
The Marlin Entertainment Group, Ltd. v. The Nostalgia Network, Inc. and Jay
Garfinkel. On February 8, 2000, a complaint was filed in the United States
District Court for the Southern District of New York making claims against the
Company for breach of contract, interference with contractual relations,
business disparagement and injurious falsehood. The Company believes the
allegations of the complaint are without merit and intends to vigorously defend
all claims and file appropriate counterclaims for damages against the plaintiff.
The Company does not believe that this matter will have a material adverse
effect on the Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1999, 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 1999, 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 1999 and 1998, 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.
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<TABLE>
<CAPTION>
COMMON STOCK
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HIGH ASK LOW BID
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<S> <C> <C>
1999
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First Quarter $0.27 $0.01
Second Quarter 0.11 0.05
Third Quarter 0.10 0.05
Fourth Quarter 0.10 0.03
1998
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First Quarter 0.06 0.04
Second Quarter 0.05 0.03
Third Quarter 0.05 0.02
Fourth Quarter 0.04 0.01
</TABLE>
As of March 3, 2000, there were approximately 287 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>
1999 1998 1997 1996 1995
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<S> <C> <C> <C> <C> <C>
Number of Subscribers 9,232,523 7,718,000 7,060,000 7,694,000 8,905,000
Balance Sheet Data
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Total Assets $ 12,723,094 $ 12,979,711 $ 16,997,972 $ 17,486,702 $ 23,955,541
Long Term Obligations 88,551,527 66,664,879 45,989,547 28,202,711 22,881,635
Stockholders' Deficit (82,596,278) (61,403,423) (38,352,747) (19,464,221) (7,522,733)
Income Statement Data
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Affiliate Sales Revenue 2,089,466 2,530,714 2,579,376 3,850,745 4,205,324
Advertising Sales Revenue 3,288,663 2,965,896 4,474,597 5,652,938 5,812,663
Other Revenue 41,648 34,750 124,960 1,248,898
Total Operating Revenues 5,419,777 5,531,360 7,178,933 9,503,683 11,266,885
Operating Expenses 20,694,728 24,058,635 23,467,791 20,394,940 20,260,931
Loss From Operations (15,274,951) (18,527,275) (16,288,858) (10,891,257) (8,994,046)
Net Loss (21,192,925) (23,050,676) (18,888,526) (11,941,488) (9,476,367)
Net Loss Per Common Share -
Basic and Diluted (1.05) (1.14) (0.93) (0.59) (0.47)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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. Over the past few years, competition for subscribers among
television networks like the Company has increased dramatically. In part, this
has been the result of technological advances 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
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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
7,718,053 at December 31, 1998 to 9,232,523 at December 31, 1999, although the
subscriber base is still below 1993 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 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."
All financial amounts in this Item 7 have been rounded to the nearest
thousand for discussion purposes.
RESULTS OF OPERATIONS
Fiscal year ended December 31, 1999 compared to fiscal year ended December
31, 1998
Net loss in 1999 decreased $1,858,000, or 8.1% (from $23,051,000 to
$21,193,000). This decrease was due primarily to reduced expenses in sales and
marketing (a decrease of $4,027,000); decreased programming, production and
transmission expenses (a decrease of $728,000); offset in part by a reduction in
revenues (a reduction of $112,000); increased programming amortization expenses
(an increase of $982,000); increased finance, general and administration
expenses (an increase of $409,000) and increased interest expenses (an increase
of $1,405,000).
REVENUES:
Total revenues in 1999 decreased by $111,000, or 2.0% (from $5,531,000 to
$5,420,000). This decrease was primarily attributed to a decrease in Affiliate
revenues, offset in part by increases in Advertising revenue.
Affiliate revenues declined $442,000, or 17.5% (from $2,531,000 to
$2,089,000). 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. As a result of intense competition among cable
networks for this reduced number of channels, the Company's per subscriber fees
from Affiliates have declined and may continue to decline.
Advertising revenues increased $323,000, or 10.9% (from $2,966,000 to
$3,289,000), primarily as a result of increased rates associated with the
Company's national spot and direct response (short format commercial advertising
of two minutes or less in length) advertising. Revenues from national spot
advertising increased $188,000, or 63.1% (from $298,000 to $486,000) and is due
to increases in the average rate per spot. Revenues from direct response
increased $221,000, or 24.9% (from $886,000 to $1,107,000) and is due to
increases in the average rate per spot. Revenues from infomercials decreased
$777,000, or 43.6% (from $1,781,000 to $1,004,000), primarily due to the
Company's decision in July 1999 to shift from selling infomercial time during
the overnight block and begin selling nested or sponsored programs. Nested
programs combined all of the available time during the overnights and allows the
Company to sell it as a solid block of time. As a result, revenue generated from
nested programs amounted to $693,000 for the 1999 period. Other revenues
increased approximately $7,000, or 20.0% (from $35,000 to $42,000) and is due to
the sale of books
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and GTV DanceSport video tapes
OPERATING EXPENSES:
Total operating expenses decreased $3,364,000, or 14.0% (from $24,059,000
to $20,695,000). The decrease was due principally to decreased sales and
marketing expenses (a decrease of $4,027,000); decreased programming, production
and transmission expenses (a decrease of $728,000); offset in part by increased
programming amortization expenses (an increase of $982,000); increased finance,
general and administrative expenses (an increase of $409,000).
Programming expenses for 1999 decreased $728,000, or 12.9% (from $5,660,000
to $4,932,000). Programming costs, net of $2,403,000 in capitalized costs,
decreased by $959,000, or 46.9% (from $2,045,000 to $1,086,000) primarily as a
result of costs associated with new original programs. Transmission costs
increased by $301,000, or 9.8% (from $3,073,000 to $3,374,000) 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 $70,000, or
12.9% (from $542,000 to $472,000) primarily as a result of reduced Network
branding costs for the current year.
Programming amortization increased $982,000, or 12.7% (from $7,758,000 to
$8,740,000). The majority of this increase resulted from a shorter amortization
period for original programming, which comprises the bulk of capitalized costs
and for newly acquired series.
Sales and marketing expenses decreased by $4,027,000, or 54.6% (from
$7,374,000 to $3,347,000) primarily as a result of the Company's decision in
March 1999 to more closely align its sales and marketing activities by
consolidating these efforts at its headquarters in Washington, D.C. Salaries,
wages and benefits decreased by $564,000, or 32.9% (from $1,716,000 to
$1,152,000). Travel and entertainment decreased by $293,000, or 65.6% from
($447,000 to $154,000). Other employee costs decreased by $20,278, or 38.9%
(from $52,145 to $31,867). These decreases were primarily due to the departure
of personnel who have not been replaced. Convention expense decreased by
$1,231,000, or 93.0% (from $1,324,000 to $93,000). Advertising expenditures
decreased by $1,062,000, or 83.5% (from $1,271,000 to $209,000). Sales and
marketing materials decreased by $140,000, or 66.0% (from $212,000 to $72,000).
Premium expenditures decreased by $102,000, or 87.9% (from $116,000 to $14,000).
These decreases were also due to the Company's efforts to reduce marketing
costs. Professional fees decreased by $437,000, or 75.7% (from $577,000 to
$140,000) primarily as a result of reduced expenditures on the Network's
affinity and new media efforts, as well as bringing the Network's public
relations operations in house. These decreases were offset in part by an
increase in marketing allowance costs of $167,000, or 49.4% (from $338,000 to
$505,000).
Finance, general and administrative costs increased by $409,000, or 12.5%
(from $3,267,000 to $3,676,000). This increase was primarily a result of
increases in consolidation and retention costs of $661,000, or 100.0% and rent
expense of $15,000, or 6.7%. These increases were offset by decreases in
salaries and wages of $110,000, or 9.2% (from $1,192,000 to $1,082,000). Legal
and professional fees decreased by $21,000, or 4.3% (from $489,000 to $468,000).
Office expenses decreased by $53,000, or 30.6% (from $173,000 to $120,000).
As a result of decreased revenue ($112,000), increased programming
amortization costs ($982,000), increased finance, general and administrative
costs ($409,000), and increased interest expense ($1,405,000) which were offset
by decreases in programming, production and transmission costs ($728,000), and
decreased sales and marketing costs ($4,027,000) the Company's net loss
decreased $1,858,000, or 8.1% for 1999.
Other expense increased by $1,395,000, or 30.8% (from $4,523,000 to
$5,918,000) primarily as a result of interest on outstanding debt.
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).
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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 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 in part
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 producing 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). 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 and 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,
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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.
LIQUIDITY AND CAPITAL RESOURCES
Fiscal year ended December 31, 1999 compared to fiscal year ended December
31, 1998
Working capital increased $727,000 (59.3%) from $1,225,000 at December
31, 1998 to $1,952,000 at December 31, 1999. The increase is primarily a result
of a reduction in trade payables as a result of paying down existing debt.
Cash used in operating activities decreased $3,889,000, (33.2%) from
($11,724,000) to ($7,835,000) due to an increase in programming amortization and
accrued interest.
Cash used in investing activities decreased $1,647,000 (39.0%) from
($4,216,000) to ($2,569,000) due primarily to decreases in acquisition of
programming and cablecast rights of $1,665,000.
Cash provided by financing activities decreased $4,141,000 (28.2%) from
$14,680,000 to $10,539,000 due primarily to decreases in financing from Crown of
$4,000,000.
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, Crown and Concept have been the principal source of the
Company's capital. Crown and Concept have invested $2,300,000 and provided
$85,781,000 in financing since 1994, including $15,000,000 loaned by Crown to
the Company in 1999. Additionally, between January 1, 2000 and March 20, 2000,
Crown has provided $3,750,000 in debt financing to the Company, and has
committed to advance, as needed, an additional $11,250,000 in debt or equity
financing during the balance of the calendar year. The Company believes that
these funds will be sufficient to satisfy its operating needs for 2000. 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 Crown and Concept.
The Company continued to pursue identification of potential strategic
alliance candidates. 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. It is anticipated that following the merger, the business and operations
will be continued substantially as currently conducted for the immediate future.
Crown and Concept have informed the Company that they intend to re-evaluate the
business with respect to the future business and operations of the Company, as
they deem appropriate. Although there are no definitive
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plans or agreements in place, Crown and Concept intend to continue to seek
material transactions and/or relationships such as joint ventures, strategic
partnerships, mergers or other forms of business combinations with third parties
following the merger.
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, 1998 compared to fiscal year ended December
31, 1997
Working capital increased $1,039,000 (559.0%) 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 (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 (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 (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.
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 20, 2000, the Company had issued and outstanding promissory
notes to Concept and Crown in the aggregate principal amount of $21,783,608 and
$67,747,292, respectively, bearing interest of approximately 8.50% to 8.75% per
annum which are due and payable on January 1, 2001.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
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 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On April 1, 1999, BDO Seidman, LLP ("BDO"), the Company's certifying
accountant, notified the Company that it would decline to stand for re-election.
BDO's report on the financial statements for the past two years contained no
adverse opinion or disclaimer of opinion, nor was the report qualified or
modified as to uncertainty, audit scope, or accounting principles. During the
last two fiscal years and through the subsequent interim period, there were no
disagreements with BDO on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure. The Company
engaged Grant Thornton LLP as its certifying accountant as of April 2, 1999.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
CHRISTOPHER A. CATES, 46 DIRECTOR SINCE OCTOBER 1990
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Mr. Cates is currently President and Chief Executive Officer of
MediaComm, a teleproduction facility located in Charlotte, N.C. From February
1998 to February 1999, Mr. Cates served as Senior Vice President of Corporate
Development of AVI, an affiliate of the Company, which is engaged in the
production and recording of videotapes, the provision of post-production
services and related activities. Mr. Cates served as Vice President/General
Manager of AVI from July 1989 to January 1998. From March 1992 to January 1998,
he also served as President of Pyramid Video, Inc. ("PVI"), a subsidiary of
Concept, an affiliate of the Company, which is engaged in satellite transmission
services, the production and recording of videotapes, the provision of
post-production services and related activities. During 1999, AVI and its
affiliates had substantial dealings with the Company. See "Certain Relationships
and Related Transactions."
FLOYD CHRISTOFFERSON, 45 DIRECTOR SINCE JUNE 1995
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Mr. Christofferson has served as Vice President and General Manager of
News/Broadcast for Video Networks, Inc. since November 1999. From April 1997 to
October 1999, Mr. Christofferson served as President and Chief Executive Officer
of Potomac Television/Communications, Inc. ("Potomac"). From November 1994 to
April 1997, Mr. Christofferson served as President of Manhattan Center Studios
("Manhattan Center"), a multimedia group. From 1990 through 1994, he was a
senior partner and creative director of Delta Imaging, a computer graphics firm.
Potomac and Manhattan Center are affiliates of the Company. During 1999,
Potomac, Manhattan Center, and their affiliates had substantial dealings with
the Company. See "Certain Relationships and Related Transactions."
DIANNE M. FAURE, 43 DIRECTOR SINCE JUNE 1995
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Ms. Faure is an attorney in private practice and, since October 1989, has
worked in the areas of health care, insurance and contract law. From August 1988
to October 1989, she was an Attorney-Advisor specializing in Title VIII of the
Civil Rights Act at the United States Commission on Civil Rights in Washington,
D.C. From January 1988 to August 1988, she was Legal Counsel at the Coalition
for Religious Freedom, a nonprofit corporation located in Alexandria, Virginia.
From February 1986 to May 1987, she was Assistant General Counsel in the Office
of General Counsel at the Legal Services Corporation in Washington, D.C.,
specializing in administrative, regulatory and contract compliance law.
HIROSHI GOTO, 45 DIRECTOR SINCE JUNE 1998
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Mr. Goto has served as the budget director of The Washington Times
Corporation ("Washington Times") since August 1997. From September 1986 through
July, 1997, Mr. Goto served in various capacities at Washington Times, including
finance manager, assistant finance manager and internal auditor. Washington
Times is a subsidiary of News World Communications, Inc. ("NWC"), an affiliate
of the Company.
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DONG MOON JOO, 54 DIRECTOR SINCE OCTOBER 1992
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Mr. Joo has served as a director and President of Concept since April 1993.
Mr. Joo has been President of Washington Times and its parent company, NWC,
since September 1992. Those companies publish numerous newspapers and
periodicals, including The Washington Times, Insight, The World & I, The Middle
East Times and Noticias del Mundo. From April 1991 through February 1, 1998, Mr.
Joo served as President and a director of AVI, and as President of the corporate
general partner of WTC, which owns a multi-purpose building in Washington, D.C.,
including office space and television production facilities, where the Company
has its executive offices. Mr. Joo serves as Chairman and Chief Executive
Officer of AVI, director and President of Acquisition, an affiliate of the
Company, Crown Capital Corporation ("Capital"), an affiliate of the Company,
Chairman of the Board of Directors and President of Crown Communications
Corporation ("Crown"), an affiliate of the Company, and as a director of PVI
and Potomac. During 1999, Concept, Capital, Crown, AVI and WTC and their
affiliates had substantial transactions with the Company. See "Certain
Relationships and Related Transactions."
DR. S. ROBERT LICHTER, 51 DIRECTOR SINCE APRIL 1998
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Since 1985, Dr. Lichter has served as President of the Center for Media
and Public Affairs, a nonpartisan, nonprofit research organization that analyzes
how news and entertainment media treat social and political issues, and
Statistical Assessment Service, a nonprofit research organization. Dr. Lichter
is currently an adjunct professor of government at Georgetown University. He has
taught media and politics at Princeton University, and served as a senior
research fellow at Columbia University and served as a postdoctoral fellow in
politics and psychology at Yale University.
FREDERICK W. NEWTON, 42 DIRECTOR SINCE NOVEMBER 1997
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Since 1987, Mr. Newton has served as President of Corporate Recovery
Inc., which provides consulting services to area corporations, including
Capital, NWC, and certain of their affiliates. During 1999, Capital and its
affiliates had substantial transactions with the Company. See "Certain
Relationships and Related Transactions." Mr. Newton has served as President of
Stellar Printing Inc., since 1989, and as President of Freestate Publishing
Inc., which publishes a community newspaper, since 1993.
SQUIRE D. RUSHNELL, 61 DIRECTOR SINCE JUNE 1997
-----------------------------------------------------------------------------
Since June 1996, Mr. Rushnell has served as the Company's President and
Chief Executive Officer. From August 1995 to December 1995, Mr. Rushnell was
President and Co-Founder of Our Time Television, Inc. a cable television network
targeted to emerging baby boomers. From January 1990 to March 1996, Mr. Rushnell
served as President of Rushnell Communications and Publishing, Inc., producing
programming for broadcast networks and syndication. Earlier, Mr. Rushnell served
for over twenty years as a senior executive at the ABC Television Network.
AMBASSADOR PHILLIP SANCHEZ, 70 DIRECTOR SINCE SEPTEMBER 1994
-----------------------------------------------------------------------------
Ambassador Sanchez, Chairman of the Board of Directors, has served since
February 1987 as Vice President of NWC, which publishes numerous newspapers and
periodicals. Ambassador Sanchez currently is the Publisher of Noticias del
Mundo, a national Spanish-language daily newspaper, and Tiempos del Mundo, a
Spanish-language weekly newspaper published throughout the western hemisphere.
Ambassador Sanchez is the Chairman of the Board of Trustees of the National
Hispanic University (San Jose, California), and serves on the Board of Trustees
of the Educational Foundation of the Americas, and of the University of
Bridgeport (Bridgeport, Connecticut). NWC is an affiliate of the Company.
ROBERT J. WUSSLER, 63 DIRECTOR SINCE JANUARY 1995
-----------------------------------------------------------------------------
Mr. Wussler has served as Chairman of the Board of Directors and Chief
Executive Officer of U.S. Digital Communications, Inc., which specializes in
internet broadcasting services and satellite technology, since May 1998, and as
President and Chief Executive Officer of The Wussler Group, a worldwide
media-consulting group, since February 1992. From September 1989 to January
1992, Mr. Wussler served as President and Chief Executive Officer of COMSAT
Video Enterprises, a satellite delivered entertainment and information business.
Mr. Wussler is former President of CBS Television, CBS Sports and former Senior
Executive Vice President of Turner Broadcasting System, Inc. Mr. Wussler serves
as a director of Cafe USA, an advertiser supported television network broadcast
to food courts of major shopping malls throughout the United States. Mr. Wussler
also serves on the boards of directors of Ed Net, which specializes in
compressed audio and video technology, and Beechport, which specializes in arena
promotions.
16
<PAGE> 17
Executive Officers
SQUIRE D. RUSHNELL, 61, PRESIDENT AND CHIEF EXECUTIVE OFFICER
Mr. Rushnell has served as President and Chief Executive Officer of
the Company since June 1996. See "Directors and Executive Officers of the
Registrant - Directors."
WILLARD R. NICHOLS, 52, VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
Mr. Nichols served as General Counsel and Secretary from May 1997 to
June 1998. He has served as a Vice President of the Company since his election
by the Board of Directors to that position in June 1998. Prior to his service
with the Company, Mr. Nichols was an attorney in private practice engaged in
domestic and international telecommunications consulting. He also served for the
calendar year 1995 as Executive Vice President and Managing Director of UTAM,
Inc.
DIANE C. FULLER, 36, CHIEF FINANCIAL OFFICER AND TREASURER
Ms. Fuller has served as Treasurer of the Company since her election
to that position by the Board of Directors in March 1999. She has served as
Chief Financial Officer of the Company since December 1999. From July 1990 to
February 1999, Ms. Fuller served in various capacities in the Company, including
assistant controller.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The following table sets forth information concerning the annual and
long-term compensation for services in all capacities to the Company for the
years ended December 31, 1997, 1998 and 1999 of those persons serving as the
Company's chief executive officer or acting in a similar capacity, and other
executive officers of the Company whose compensation was in excess of $100,000.
No restricted stock awards or stock appreciation rights ("SARs") have been
granted at any time in prior years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------------------------------------------
OTHER ANNUAL ALL OTHER
Name and Principal Position YEAR SALARY($) BONUS ($) COMPENSATION($) COMPENSATION($)
- ----------------------------- --------- --------- ----------- --------------- --------------
<S> <C> <C> <C> <C> <C>
SQuire D. Rushnell, 1999 $247,821 $ 33,030 --- ---
President and Chief Executive Officer (1) 1998 225,063 50,000 --- ---
1997 205,923 37,500 --- ---
Willard R. Nichols, Vice President, General Counsel and 1999 122,294 28,710 --- ---
Secretary(2) 1998 103,085 9,100 --- ---
</TABLE>
- -----------------------
(1) The Company entered into an employment agreement with Mr. Rushnell dated
July 1, 1999. See "Employment Contracts and Termination of Employment and
Change-in-Control Arrangements."
(2) Mr. Nichols did not earn in excess of $100,000 from the Company prior to
1998.
STOCK OPTION GRANTS
17
<PAGE> 18
On May 13, 1996, the Company granted Mr. Rushnell options to
purchase 839,840 shares of Common Stock at an exercise price of $0.35 per share.
As of December 31, 1999, all of these shares have vested. No SARs, long-term
incentives or restricted stock were granted to any of the named executive
officers or any other Company employee in 1999.
STOCK OPTION EXERCISES
The following table summarizes information relating to stock option
exercises during 1999 and the number and value of unexercised stock options
previously granted to the executive officers named in the Summary Compensation
Table. As previously indicated, no SARs have been granted at any time to any of
the named executive officers or any other Company employee.
AGGREGATE OPTION EXERCISES IN 1999 AND
OPTION VALUES AS OF DECEMBER 31, 1999
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS AT OPTIONS AT
DECEMBER 31, 1999 DECEMBER 31, 1999(1)
--------------------- --------------------
SHARES
ACQUIRED
ON
NAME EXERCISE VALUE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------- -------------- ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
SQuire D. Rushnell 0 0 839,840 0 $0 $0
Willard R. Nichols 0 0 0 0 $0 $0
</TABLE>
- -----------------------
(1) Based on a stock price of $0.05, which was the average of the high asked
and low bid prices reported on December 31, 1999.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT
On July 1, 1999, the Company entered into a one year employment agreement
with Mr. Rushnell (the "1999 Agreement") which provided that Mr. Rushnell would
hold the offices of President and Chief Executive Officer and that the Company
would pay Mr. Rushnell an annual base salary of $270,000. The 1999 Agreement
replaces the previous employment agreement between the Company and Mr. Rushnell
(the "1996 Agreement"), which expired on May 12, 1999. The 1999 Agreement will
automatically renew for one year periods unless certain notification
requirements are met by either the Company or Mr. Rushnell. Mr. Rushnell's
annual base salary will increase by 20.0% for each renewal period. Under the
1999 Agreement, Mr. Rushnell is entitled to receive a benchmark bonus of up to
$80,000, payable quarterly, if the Company attains or exceeds its business plan.
Mr. Rushnell received a benchmark bonus of $33,030 for 1999. The benchmark bonus
increases to $100,000 for each renewal period. The 1999 Agreement also provides
for alternative benchmark bonuses under certain circumstances where some, but
not all, criteria applicable to the benchmark bonus have been met. The Company
also has provided Mr. Rushnell with a monthly stipend of $600 for obtaining and
maintaining an automobile. Mr. Rushnell is entitled to receive a severance
payment of $135,000 if the Company does not renew the 1999 Agreement.
Pursuant to the 1996 Agreement, Mr. Rushnell was granted options to acquire
839,840 shares at an exercise price of $0.35 per share. The options are
nonqualified stock options, and were granted outside the 1996 Stock Option Plan.
The options vest in four equal installments on February 12, 1997, November 12,
1997, August 12, 1998 and May 12, 1999. They expire on the earliest of (i) May
12, 2006; (ii) 90 days following termination of Mr. Rushnell's employment for
cause or resignation by Mr. Rushnell without good cause; and (iii) one year
following termination by reason of death or disability, termination without
cause, termination following a change in control, or resignation by Mr. Rushnell
for good reason. Vesting accelerates upon termination without cause, a change in
control or resignation by Mr. Rushnell for good reason. Upon a change in
control, Mr. Rushnell will be entitled to cancel his options and receive a
payment equal to the difference between the exercise price and the higher of the
current market price of the stock and the highest price paid to stockholders in
the transactions leading to the change in control. Additional options will be
granted on each vesting date sufficient to ensure that on such date, the options
that vest are sufficient to give Mr. Rushnell the right to acquire 1.0% of the
issued and outstanding Common Stock. The exercise price of the additional
options will be based on the average of the bid and asked prices of the stock
over the thirty trading days prior to the vesting date. Mr. Rushnell has
registration rights with respect to the resale of the shares of the Common Stock
to be acquired upon exercise of his options.
18
<PAGE> 19
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors determines the compensation of, and incentives for,
the Company's Chief Executive Officer. See Part III, Item 10, "Directors and
Executive Officers of the Registrant" and Item 13, "Certain Relationships and
Related Transactions" for a description of interlocks and insider participation.
COMPARATIVE STOCK PERFORMANCE
The following graph indicates the Company's cumulative total return to
holders of its Common Stock for the past five years, as compared to the
cumulative total return for the Standard & Poor's ("S&P") 500 Composite Stock
Index and the S&P Broadcast Media Index, on an annual basis. The comparison
assumes $100 was invested on December 31, 1994 in Common Stock and in each of
the foregoing indices and assumes reinvestment of dividends, if any. The stock
performance shown on the following graph is not necessarily indicative of future
performance.
TOTAL RETURN TO SHAREHOLDER'S
(DIVIDENDS REINVESTED MONTHLY)
INDEXED RETURNS
YEARS ENDING
<TABLE>
<CAPTION>
BASE
PERIOD
COMPANY/INDEX DEC 94 DEC95 DEC96 DEC97 DEC98 DEC99
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NOSTALGIA NETWORK INC 100 27.59 13.80 5.52 1.10 6.07
S&P 500 INDEX 100 137.58 169.17 225.60 290.08 351.12
BRDCAST(TV, RADIO, CABLE)-500 100 130.91 107.31 176.55 273.88 478.44
</TABLE>
REPORT OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION
The Company has no compensation committee or other committee of the Board
of Directors performing similar functions. Accordingly, the Board of Directors
determines the amount of compensation of, and incentives for, the Company's
Chief Executive Officer. The Chief Executive Officer determines the compensation
of, and incentives for, the Company's other executive officers. The Board of
Directors also administers the stock option plans of the Company.
The base salary, bonus and benefits payable for 1999 to Mr. Rushnell, the
Company's President and Chief Executive Officer, is fixed under an employment
agreement, which was approved by the Board of Directors. See "Employment
Contracts and Termination of Employment."
Stock options may be granted, at the direction of the Board of Directors,
under the Company's 1996 Incentive Stock Option Plan (the "Plan") to the
Company's executive officers, other employees, independent contractors and
agents. The purposes of the Plan is to attract and retain high-quality personnel
and strengthen the Company by providing incentives for its success. Under the
Plan, stock options are granted for terms not exceeding ten years, with an
exercise price equal to (or greater than) the market price of the Common Stock
on the date of grant, and typically are granted, subject to vesting, in
installments of share amounts over a three year period. In 1999, the Board of
Directors awarded options under the Plan to non-employee directors by formula
grants representing 3,000 shares per director, or 27,000 shares in the
aggregate, at an exercise price of $0.07 which will vest over a period of three
years.
PHILLIP SANCHEZ (Chairman) DONG MOON JOO
CHRISTOPHER A. CATES S. ROBERT LICHTER
FLOYD CHRISTOFFERSON FREDERICK W. NEWTON
DIANNE M. FAURE ROBERT J. WUSSLER
HIROSHI GOTO
COMPLIANCE WITH REPORTING REQUIREMENTS OF SECTION 16(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Pursuant to Section 16(a) of the Exchange Act, the Company's directors,
executive officers and any person holding 10.0% or more of its Common Stock are
required to report their beneficial ownership and any changes therein to the
United States Securities and Exchange Commission (the "Commission"). Specific
due dates for these reports have been established and the Company is required to
report herein any failure to file such reports by those due dates. Based solely
on review of the copies of such reports furnished to the Company or written
representations that no other reports were required, the Company believes that,
during 1999, its executive officers, directors and greater than 10.0% beneficial
owners complied with all applicable Section 16(a) filing requirements.
19
<PAGE> 20
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 31, 1999, the number of
shares of Common Stock and Preferred Stock beneficially owned by each of the
Company's executive officers and directors, by all executive officers and
directors as a group and by each person known by the Company to own beneficially
more than 5.0% of the outstanding shares of Common Stock or Preferred Stock.
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
------------ ---------------
PERCENT OF PERCENT OF
NUMBER OF OUTSTANDING NUMBER OF OUTSTANDING
NAME SHARES SHARES SHARES SHARES
------------------------------------------------ ------ ------ ------ ------
<S> <C> <C> <C> <C>
EXECUTIVE OFFICERS
SQuire D. Rushnell(1)......................... 839,840(2) 4.1% 0 *
---
Willard R. Nichols............................ 0 * 0 *
Diane C. Fuller............................... 6,000(2)
DIRECTORS
Christopher A. Cates.......................... 26,000(2) * 0 *
Floyd Christofferson.......................... 6,000(2) * 0 *
Dianne M. Faure............................... 6,000(2) * 0 *
Hiroshi Goto.................................. 1,000(2) * 0 *
Dong Moon Joo................................. 6,000(2) * 0 *
Dr. S. Robert Lichter......................... 1,000(2) * 0 *
Frederick W. Newton........................... 1,000(2) * 0 *
Phillip Sanchez............................... 5,000(2) * 0 *
Robert J. Wussler............................. 6,000(2) * 0 *
ALL DIRECTORS AND EXECUTIVE OFFICERS AS A
GROUP......................................... 903,840(2) 4.5% 0 0%
---
Concept Group(3).............................. 14,430,427(4) 71.2% 2,500 76.9%
---------- ----
Charles Potter................................ 75,000(5) * 750 23.1%
</TABLE>
- ----------
* Less than one percent.
(1) Mr. Rushnell also is a director of the Company.
(2) Consists entirely of shares of Common Stock subject to acquisition
pursuant to options.
(3) The Concept Group consists of Acquisition, Capital, Concept, and Crown,
which constitute a "group" within the meaning of Section 13(d)(3) of
the Exchange Act. Acquisition, Capital, Concept, and Crown have
informed the Company that they share voting and dispositive power with
respect to all shares as to which Acquisition is the owner.
(4) Includes 14,180,427 shares of Common Stock, and 250,000 shares of Common
Stock issuable upon conversion of 2,500 shares of Preferred Stock, all of
which are held of record by Acquisition.
(5) Includes 75,000 shares of Common Stock issuable upon conversion of 750
shares of Preferred Stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company had the following transactions directly or indirectly with
directors, executive officers and holders of more than 5.0% of the Company's
issued and outstanding stock since the beginning of 1999.
Concept and Crown. Since 1990, Crown and Concept have been the principal
source of the Company's capital. Crown and Concept have invested approximately
$2.3 million and provided approximately $85.8 million in financing since 1994,
including $15.0 million loaned by Crown to the Company in 1999. As of December
31, 1999, the Company was indebted to Concept and Crown in the aggregate
principal amount of $21,783,608 and $63,997,292, respectively, pursuant to
promissory notes bearing interest at the annual rate of approximately 8.5% and
which are secured by substantially all of the Company's assets and mature on
January 1, 2001.
Additionally, as of March 20, 2000, the Company had issued and
outstanding promissory notes to Crown in the aggregate principal amount of
$3,750,000, bearing interest of approximately 8.50% to 8.75% per annum, for
financing provided to the Company between January 1, 2000 and March 20, 2000.
The promissory notes are due and payable on January 1, 2001,
Mr. Joo is the President and a director of Concept and Crown (for which
he serves as chairman of the Board of Directors). Mr. Cates and Mr.
Christofferson were officers of Concept subsidiaries until January 26, 1999 and
October 27, 1999, respectively.
20
<PAGE> 21
AVI. The Company and AVI are parties to an agreement (the "AVI Agreement")
pursuant to which AVI provides to the Company certain exclusive television
production, post-production and master control/uplink services and equipment and
leases to the Company 4,300 square feet of office space in AVI's Alexandria,
Virginia production facilities at a monthly rate of $3,896. Under the terms of
the AVI Agreement, 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 to AVI. If the Company does not actually
purchase $50,000 of services in a month from AVI, the difference, up to an
aggregate maximum of $75,000, subject to certain limitations, may be used as a
credit against future fees. The net amount payable to AVI for these additional
services with respect to 1999 was approximately $1,126,000.
At December 31, 1999, the Company was indebted to AVI in the principal
amount of $305,000 and accrued interest of approximately $350,752 pursuant to a
promissory note bearing interest at the annual rate of 10.0% and which matures
on March 31, 2002 (the "AVI Note"). The AVI Note is convertible into Senior
Preferred Stock (which the Company currently is not authorized to issue).
Pursuant to a security agreement entered into between the Company and AVI at
the time of the execution of the AVI Note, the Company granted AVI a security
interest in (a) $150,000 in specified accounts receivable and certain other
accounts and contracts and the proceeds thereof; and (b) copies of certain
books and records. AVI agreed not to perfect its security interest with
respect to the AVI Note provided the Company was not in default thereof.
Mr. Cates was an officer of AVI until January 26, 1999. Mr. Joo is an
officer and Chairman of the Board of Directors of AVI.
WTC. The Company's executive offices are located at 650 Massachusetts
Avenue, N.W., Washington, D.C., where the Company leases approximately 5,100
square feet of space from WTC on a month-to-month basis at a monthly rate of
$16,900. All of the interest in WTC is owned by USPDC of which Mr. Joo is an
officer. WTC is an affiliate of AVI.
Manhattan Center. The Company utilizes the facilities of Manhattan Center
for both remote and on-site television production on an as needed basis. During
1999, the Company incurred approximately $148,529 for services rendered by
Manhattan Center Studios. Manhattan Center Studios is an affiliate of AVI.
PVI. The Company leases equipment from PVI, which is a majority-owned
subsidiary of Concept, at the monthly rate of $2,440 and expended approximately
$24,440 for the leased equipment during 1999. Mr. Joo is a director of PVI.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS
Reference is made to the listing on page F-1 for a list of all financial
statements and financial statement schedules filed as part of this report.
(b) REPORTS ON FORM 8-K
On April 5, 1999, the Company filed a Form 8-K with the Commission to
report a change in the Company's certifying accountant. See Part II, Item 9,
"Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure."
(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.
21
<PAGE> 22
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>
<CAPTION>
THE NOSTALGIA NETWORK, INC.
<S> <C> <C>
Date: March 30, 2000 By: /s/ SQUIRE D. RUSHNELL
---------------------------
SQuire D. Rushnell, President, Chief Executive Officer and Director
Date: March 30, 2000 By: /s/ DIANE C. FULLER
------------------------
Diane C. Fuller, Chief Financial Officer and Treasurer
</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 30, 2000
------------------------- --------------
Ambassador Phillip Sanchez, Director and Chairman of the Board
/s/ CHRISTOPHER A. CATES March 30, 2000
------------------------- --------------
Christopher A. Cates, Director
/s/ FLOYD CHRISTOFFERSON March 30, 2000
------------------------- --------------
Floyd Christofferson, Director
/s/ DIANNE M. FAURE March 30, 2000
------------------------ --------------
Dianne M. Faure, Director
/s/ HIROSHI GOTO March 30, 2000
------------------------ --------------
Hiroshi Goto, Director
/s/ DONG MOON JOO March 30, 2000
------------------------ --------------
Dong Moon Joo, Director
/s/ S. ROBERT LICHTER March 30, 2000
------------------------ --------------
S. Robert Lichter, Director
/s/ FREDERICK W. NEWTON March 30, 2000
------------------------ --------------
Frederick W. Newton, CPA, Director
/s/ SQUIRE D. RUSHNELL March 30, 2000
------------------------ --------------
SQuire D. Rushnell, Director
/s/ ROBERT J. WUSSLER March 30, 2000
------------------------ --------------
Robert J. Wussler, Director
</TABLE>
22
<PAGE> 23
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 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)
</TABLE>
23
<PAGE> 24
<TABLE>
<S> <C>
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)
10.15 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)
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
</TABLE>
24
<PAGE> 25
<TABLE>
<S> <C>
MAY 13, 1996, AND INCORPORATED HEREIN BY REFERENCE THERETO)
10.22* EMPLOYMENT AGREEMENT, DATED JULY 1, 1999, BETWEEN THE NOSTALGIA
NETWORK, INC. AND SQUIRE RUSHNELL
27 FINANCIAL DATA SCHEDULE AS REQUIRED BY ITEM 601 (c) OF
REGULATION S-K
</TABLE>
* MANAGEMENT CONTRACT OR COMPENSATORY PLAN, CONTRACT OR ARRANGEMENT.
25
<PAGE> 26
[GOODLIFE TV NETWORK LOGO]
THE NOSTALGIA NETWORK, INC.
FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
DECEMBER 31, 1999, 1998 AND 1997
F-1
<PAGE> 27
THE NOSTALGIA NETWORK, INC.
CONTENTS
PAGE
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-3 -4
BALANCE SHEETS F-5
STATEMENTS OF OPERATIONS F-6
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT F-7
STATEMENTS OF CASH FLOWS F-8
NOTES TO FINANCIAL STATEMENTS F-9 - 19
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON
SCHEDULE II F-20
SCHEDULE II F-21
F-2
<PAGE> 28
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS
THE NOSTALGIA NETWORK, INC.
We have audited the accompanying balance sheet of The Nostalgia Network, Inc.
(the "Company") as of December 31, 1999, and the related statements of
operations, changes in stockholders' deficit and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1999 financial statements referred to above present fairly,
in all material respects, the financial position of The Nostalgia Network, Inc.
at December 31, 1999, and the results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
GRANT THORNTON, LLP
VIENNA, VIRGINIA
MARCH 3, 2000 (EXCEPT FOR NOTES 1 AND 4 AS TO WHICH THE DATE IS MARCH 21, 2000)
F-3
<PAGE> 29
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To The Board of Directors and Stockholders
The Nostalgia Network, Inc.
We have audited the accompanying balance sheet of The Nostalgia Network,
Inc. (the "Company") as of December 31, 1998 and the related statements of
operations, changes in stockholders' deficit and cash flows for the years ended
December 31, 1998 and 1997. We have also audited Schedule II for the years ended
December 31, 1998 and 1997. 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 the results of its operations and cash flows for the
years then ended December 31, 1998 and 1997, in conformity with generally
accepted accounting principles. Also, in our opinion, Schedule II presents
fairly, in all materials respects, the information set forth therein for the
years ended December 31, 1998 and 1997.
/s/ BDO SEIDMAN, LLP
Washington DC
March 23, 1999
F-4
<PAGE> 30
THE NOSTALGIA NETWORK, INC.
BALANCE SHEETS
DECEMBER 31,
<TABLE>
<CAPTION>
1999 1998
------------------ -------------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 674,177 $ 539,371
Accounts receivable, less allowance of $161,000
and $302,000 for doubtful accounts 826,588 935,230
Prepaid expenses 114,096 168,362
Programming and cablecast rights 7,105,280 7,300,000
----------------- -----------------
TOTAL CURRENT ASSETS 8,720,141 8,942,963
Programming and cablecast rights, at cost - net 2,981,416 2,788,129
Property and equipment, at cost - net 972,107 1,191,879
Deposits 49,430 56,740
----------------- -----------------
TOTAL ASSETS $ 12,723,094 $ 12,979,711
================= =================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of programming
and cablecast fees $ 4,810,822 $ 5,068,000
Accounts payable - Trade 1,172,475 1,948,725
- Related parties 32,191 278,919
Accrued expenses and other liabilities 531,341 395,081
Unearned income 221,016 27,530
----------------- -----------------
TOTAL CURRENT LIABILITIES 6,767,845 7,718,255
----------------- -----------------
LONG-TERM OBLIGATIONS, LESS CURRENT MATURITIES:
Programming and cablecast fees 2,135,164 114,465
Notes payable to related parties 86,085,900 62,832,873
Accrued interest payable - Related parties 330,463 3,382,125
Other -- 335,416
----------------- -----------------
TOTAL LONG-TERM OBLIGATIONS 88,551,527 66,664,879
----------------- -----------------
TOTAL LIABILITIES 95,319,372 74,383,134
----------------- -----------------
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, 20,275,370 and 20,274,370 shares issued
in 1999 and 1990, respectively 811,015 810,975
Additional paid-in capital 30,213,584 30,213,554
Deficit (113,627,377) (92,434,452)
----------------- -----------------
TOTAL STOCKHOLDERS' DEFICIT (82,596,278) (61,403,423)
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 12,723,094 $ 12,979,711
================= =================
</TABLE>
The accompanying summary of accounting policies and notes are an integral part
of these financial statements.
F-5
<PAGE> 31
THE NOSTALGIA NETWORK, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ------------------ ------------------
<S> <C> <C> <C>
OPERATING REVENUES:
Affiliate revenues $ 2,089,466 $ 2,530,714 $ 2,579,376
Advertising revenues 3,288,663 2,965,896 4,474,597
Other 41,648 34,750 124,960
----------------- ----------------- -----------------
TOTAL OPERATING REVENUES 5,419,777 5,531,360 7,178,933
----------------- ----------------- -----------------
OPERATING EXPENSES:
Programming, production and transmission 4,931,769 5,659,937 5,524,078
Programming amortization 8,740,105 7,757,637 6,891,161
Sales and marketing 3,346,909 7,373,867 8,120,458
Finance, general and administrative 3,675,945 3,267,194 2,932,094
----------------- ----------------- -----------------
TOTAL OPERATING EXPENSES 20,694,728 24,058,635 23,467,791
----------------- ----------------- -----------------
LOSS FROM OPERATIONS (15,274,951) (18,527,275) (16,288,858)
OTHER (EXPENSE) INCOME:
Interest expense - related parties (5,986,480) (4,581,460) (2,689,000)
Other income 68,506 58,059 89,332
----------------- ----------------- -----------------
NET LOSS $ (21,192,925) $ (23,050,676) $ (18,888,526)
================= ================= =================
LOSS PER COMMON SHARE - BASIC AND DILUTED $ (1.05) $ (1.14) $ (0.93)
================= ================= =================
WEIGHTED AVERAGE SHARES OUTSTANDING 20,274,839 20,274,370 20,274,370
</TABLE>
The accompanying summary of accounting policies and notes are an integral part
of these financial statements.
F-6
<PAGE> 32
THE NOSTALGIA NETWORK, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
PREFERRED COMMON ADDITIONAL
STOCK STOCK PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1997 3,250 6,500 20,274,370 $ 810,975 $ 30,213,554 $ (50,495,250)
Net loss for the year - - - - - (18,888,526)
------ --------- ------------ ------------ --------------- -----------------
BALANCE AT DECEMBER 31, 1997 3,250 6,500 20,274,370 810,975 30,213,554 (69,383,776)
Net loss for the year - - - - - (23,050,676)
------ --------- ------------ ------------ --------------- -----------------
BALANCE AT DECEMBER 31, 1998 3,250 6,500 20,274,370 810,975 30,213,554 (92,434,452)
Common Stock Issued - - 1,000 40 30 -
Net loss for the year - - - - - (21,192,925
------ --------- ------------ ------------ --------------- -----------------
BALANCE AT DECEMBER 31, 1999 3,250 6,500 20,275,370 811,015 30,213,584 (113,627,377)
====== ===== ============ ======= ========== =============
<CAPTION>
TOTAL
STOCKHOLDERS'
DEFICIT
--------------------
<S> <C>
BALANCE AT JANUARY 1, 1997 $ (19,464,221)
Net loss for the year (18,888,526)
-----------------
BALANCE AT DECEMBER 31, 1997 (38,352,747)
Net loss for the year (23,050,676)
-----------------
BALANCE AT DECEMBER 31, 1998 (61,403,423)
Common Stock Issued 70
Net loss for the year (21,192,925)
-----------------
BALANCE AT DECEMBER 31, 1999 (82,596,278)
============
</TABLE>
The accompanying summary of accounting policies and notes are an integral part
of these financial statements.
F-7
<PAGE> 33
THE NOSTALGIA NETWORK, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1999 1998 1997
--------------- ----------------- ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (21,192,925) $ (23,050,676) $ (18,888,526)
Adjustments to reconcile net loss to net cash
Used in operating activities:
Depreciation 275,548 286,159 310,416
Programming amortization 8,740,105 7,757,637 6,891,161
Provision for losses on accounts receivable 522,554 534,000 102,000
Net change in operating assets and liabilities:
Increase in accounts receivable (413,912) (745,464) (119,132)
Decrease (increase) in prepaid expenses 53,590 (28,021) 5,657
Decrease (increase) in deposits 7,310 (4,000) (35,000)
(Decrease) increase in accounts payable (1,022,978) (93,989) 998,175
(Decrease) increase in accrued expenses
and other liabilities (199,155) (299,440) 121,155
Increase in accrued interest 5,201,364 3,921,296 1,978,058
Increase (decrease) in unearned income 193,486 (5,082) 0
-------------- ---------------- ----------------
NET CASH USED IN OPERATING ACTIVITIES (7,835,013) (11,727,580) (8,636,036)
-------------- ---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (55,100) (36,748) (267,294)
Acquisition of programming and cablecast rights (2,513,672) (4,179,120) (3,357,900)
-------------- ---------------- ----------------
NET CASH USED IN INVESTING ACTIVITIES (2,568,773) (4,215,868) (3,625,194)
-------------- ---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 15,000,000 19,000,000 19,500,000
Payments of long-term cablecast rights obligations (4,461,479) (4,320,370) (6,856,592)
Proceeds from issuance of common stock 70 0 0
-------------- ---------------- ----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 10,538,591 14,679,630 12,643,408
-------------- ---------------- ----------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 134,806 (1,263,818) 382,178
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 539,371 1,803,189 1,421,011
CASH AND CASH EQUIVALENTS - END OF YEAR $ 674,177 $ 539,371 $ 1,803,189
============== ================ ================
</TABLE>
The accompanying summary of accounting policies and notes are an integral part
of these financial statements.
F-8
<PAGE> 34
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. Fees
received in advance for services to be provided in the future are recorded as
unearned revenue.
The Company grants credit to cable systems and advertisers upon evaluation of
credit worthiness. Management periodically reviews customer account balances and
establishes reserves to state such amounts at their net realizable values.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over estimated useful lives ranging from
4-7 years. Leasehold improvements are amortized on a straight-line basis over
the shorter of the lease term or the related estimated useful lives of the
improvement.
Maintenance and repairs of property and equipment are charged to operations, and
major improvements extending the useful life are capitalized. Upon retirement,
sale or other disposition of property and equipment, the cost and accumulated
depreciation are eliminated from the accounts, and any gain or loss is included
in the 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. In the event a programming or cablecast right is
considered impaired, the carrying amount of such right is adjusted to its net
realizable value.
ADVERTISING COSTS
Advertising and promotional costs are charged to operating expenses as incurred
and amounted to $182,000, $1,279,000, and $2,828,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
F-9
<PAGE> 35
THE NOSTALGIA NETWORK, INC. NOTES TO FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK BASED COMPENSATION
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," encourages but does not require companies to record
stock-based employee compensation plans at their fair value. The Company has
elected to account for stock-based employee compensation using the
intrinsic-value method prescribed in Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation cost for employee stock options is measured as the
excess, if any, of the quoted market price of the Company's stock at the date of
grant over the exercise price an employee must pay to acquire the stock.
FAIR VALUE ON FINANCIAL INSTRUMENTS
The carrying amounts reflected in the balance sheets for cash, accounts
receivable, notes payable and accounts payable approximate fair value due to the
short maturities of these instruments.
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 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.
The net loss per common share--basic and diluted 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. Certain cash balances are in excess of insured amounts.
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
of sales, resulting primarily from providing free carriage to affiliates, and
increases in operating expenses, the Company is dependent on financing from
Crown Communications Corporation ("Crown")and Concept Communications, Inc.
("Concept")or other outside sources to fund operations.
USE OF ESTIMATES
In preparing financial statements in accordance with generally accepted
accounting principles, management is required to make estimates and assumptions
that effect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.
F-10
<PAGE> 36
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONCLUDED)
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS No. 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
investment by owners and distributions to owners. Among other disclosures, SFAS
No. 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 No. 130 during the first quarter
of 1998 and has no items of comprehensive income to report for the years ended
December 31, 1999 and 1998.
SEGMENT REPORTING
Statement of Financial Accounting Standards No 131 (SFAS 131), "Disclosure about
Segments of a Business Enterprise" requires companies to report information
about operating segments. SFAS 131 also requires disclosures regarding products
and services, geographic areas and major customers. The Company is engaged in
one line of business, the operation of GoodLife TV Network, and therefore
reports as one operating segment.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." In 1999, the
required implementation date of SFAS No. 133 was delayed to fiscal years
beginning after June 15, 2000. SFAS 133 requires that all derivative instruments
be recorded on the balance sheet at their fair value. Changes in the fair value
of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designed as part of a
hedge transaction and, if it is, the type of hedge transaction. The adoption of
SFAS 133 is not expected to have a significant effect on the Company's results
of operations or its financial position.
RECLASSIFICATIONS
Certain 1998 and 1997 amounts have been reclassified to conform to the current
presentation.
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.
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
F-11
<PAGE> 37
1. MANAGEMENT STATEMENT (CONCLUDED)
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
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 covers major dance competitions, including the national
championship in Miami. This exciting program showcases not only the champion in
each class, but also provides insight into the techniques and fine points of
competition. 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. Cookbook
Cooking with Christopher Kent, features the Network's Flea Market Movie host,
Christopher Kent, who also is an accomplished chef, preparing dishes from famous
cookbooks. 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. The Network, in searching for creative, new original
programming for prime time in the year 2000 produced a number of pilots. One of
these pilots is Heroes & Sheroes, which profile ordinary people who manage to do
the extraordinary and transform the lives of the people they touch. The other
pilot, American Couples, hosted by esteemed television journalist Nancy Glass,
is an hour-long show which celebrates the family values, love, commitment and
partnership of famous couples.
In addition to its new original programming, the Network continues to offer its
viewers classic off network television series. The Network currently airs,
Bonanza, The Love Boat, Make Room for Daddy and The Adventures of Ozzie and
Harriet. The Adventures of Ozzie & Harriet and Make Room for Daddy are being
telecast each weekday evening under the umbrella title of American Families.
Hosted by Nancy Glass, this unique series juxtaposes members of contemporary
families against the classic TV families; we see how today's parents and
children deal with age-old issues that Ozzie Nelson and Danny Thomas wrestled
with. In Flea Market Movie, 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.
Since 1990, Crown and Concept have been the principal source of the Company's
capital. Crown and Concept have invested $2,300,000 and provided $85,781,000 in
financing since 1994, including $15,000,000 loaned by Crown to the Company in
1999. Additionally, Crown has provided $3,750,000 in debt financing to the
Company since January 1, 2000 and also has committed to provide, as needed, an
additional $11,250,000 in debt or equity financing during the balance of the
calendar year. The Company believes that these funds will be sufficient to
satisfy its operating needs for 2000.
In October 1999, the Company announced that it had received and accepted an
offer from Crown to enter into a cash merger which, if consummated, would result
in the elimination of the Company's publicly-held shares of common stock and
constitute a going-private transaction within the meaning of Section 13(e)(3) of
the Securities Exchange Act of 1934. Crown and Concept, which is majority-owned
by Crown, in the aggregate are the beneficial owners of 70.3% of the Company's
issued and outstanding shares of common stock.
Upon receipt, Crown's offer was referred to and reviewed by a committee of the
Company's independent directors which recommended that the offer be accepted.
The Company's Board of Directors voted to accept Crown's offer and to authorize
the negotiation of definitive documentation for the merger. Consummation of the
merger remains contingent upon, among other things, the approval of the
Company's stockholders. Crown has indicated that it and its affiliates will vote
in favor of the merger.
The Company also continued in its analysis of, and efforts to seek, a strategic
alliance. The Company has had contact 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. It is anticipated that following
the merger, the business and operations of the Company will be continued
substantially as currently conducted for the immediate future. Crown and Concept
have informed the Company that they intend to reevaluate the business and
operations of the Company following the merger and take such actions with
respect to the future business and operations of the Company as they deem
appropriate. Although there are no definitive plans or agreements in place,
Crown and Concept may cause the Company to enter into joint venture or other
agreements with other business entities after the merger.
F-12
<PAGE> 38
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>
1999 1998
---------------- ---------------
<S> <C> <C> <C>
Transponder $ 1,427,968 $ 1,427,968 12 years
Machinery and equipment 1,450,011 1,397,333 5 to 7 years
Furniture and fixtures 289,460 299,890 5 to 7 years
Leasehold improvements 99,780 99,780 5 years
--------------- ---------------
3,267,219 3,224,971
Accumulated depreciation
and amortization (2,295,112) (2,033,092)
--------------- ---------------
$ 972,107 $ 1,191,879
=============== ===============
</TABLE>
Depreciation expense included in Finance, General and Administrative expenses
was approximately $276,000, $286,000 and $310,000 for 1999, 1998 and 1997,
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 included broadcast
licenses for films and specialty programming. Other programming and cablecast
rights include productions and post-production costs as well as costs to
duplicate and edit programs and interstitial materials for broadcasting.
<TABLE>
<CAPTION>
1999 1998
------------------ -----------------
<S> <C> <C>
Prime time series: $ 20,803,500 $ 14,578,500
Original programs 10,436,229 8,047,753
Music programs 1,551,207 1,537,095
Film library 1,266,667 1,266,667
Other 1,636,492 1,525,409
----------------- ----------------
35,694,095 26,955,424
Less accumulated amortization (25,607,399) (16,867,295)
----------------- ----------------
$ 10,086,696 $ 10,088,129
================= ================
Consisting of:
Current $ 7,105,280 $ 7,300,000
Long term 2,981,416 2,788,129
----------------- ----------------
$ 10,086,696 $ 10,088,129
----------------- ----------------
</TABLE>
Estimated future amortization of programming and cablecast rights and maturities
of related long-term obligations are approximately as follows:
<TABLE>
<CAPTION>
YEAR 2000 2001 2002
-------------------------------- -------------- ----------- ----------
<S> <C> <C> <C>
Amortization $ 7,105,280 $2,836,973 $144,443
Obligation maturities $ 4,810,822 $2,005,164 $130,000
</TABLE>
The Company acquired or produced the following rights and materials during the
years ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Prime time series $ 6,225,000 $ 255,000 $ 1,073,500
Original programs 2,388,476 4,162,100 3,532,600
Music programs 14,112 - 1,185,500
Other 111,083 592,000 254,700
Film rights - - -
-------------- -------------- -------------
$ 8,738,671 $ 5,009,100 $ 6,046,300
============== ============== =============
</TABLE>
F-13
<PAGE> 39
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
4. NOTES PAYABLE TO RELATED PARTIES
NOTES PAYABLE CONSISTS OF THE FOLLOWING:
<TABLE>
<CAPTION>
1999 1998
-------------------------------------
<S> <C> <C>
Notes payable to Crown Communications Corporation bearing interest at
8.50% per annum, compounded monthly, and minimum monthly interest payment
of $55,000 payable commencing on January 31, 2000 through December 31,
2000. The principal balance with remaining unpaid interest is due on
January 1, 2001. $ 63,997,292 $ --
Notes payable to Concept Communications, Inc. bearing interest at 8.50% per annum,
compounded monthly, and minimum monthly interest payment of $5,000 payable
commencing on January 31, 2000 through December 31, 2000. The principal balance
with remaining unpaid interest is due on January 1, 2001. 21,783,608 --
Notes payable to Concept Communication, 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. -- 19,217,867
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.
-- 43,310,006
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
--------------- -------------
$ 86,085,900 $ 62,832,873
--------------- -------------
</TABLE>
On December 30, 1999, the Company issued two substitution and replacement notes
to Crown and Concept Communications, Inc. ("Concept") in the amounts of
$63,997,292 and $21,783,608, respectively. These notes bear interest at 8.5% and
require aggregate minimum monthly interest payments of $60,000 with principal
and unpaid interest due on January 1, 2001. These notes replace all previously
issued notes plus unpaid interests as of December 30, 1999 and are
collateralized by substantially all of the Company's assets.
As of March 20, 2000, Crown made additional loans totaling $3,750,000 to the
Company bearing interest at 8.50% to 8.75%. Principal and unpaid interest on
these notes are due on January 1, 2001. These loans are also secured by
substantially all of the Company's assets.
5. STOCK OPTIONS
In 1987, the Company's Board of Directors adopted an Employee Stock Option Plan
(the "1987 Plan") which provided 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 has been replaced and no
further options may be granted under this Plan. A total of 12,000 options were
cancelled during 1998 reducing the total outstanding options from 45,000 at
December 31, 1997 to 33,500 at December 31, 1998 with option prices ranging from
$0.48 to $1.25 per share. There was no activity during 1999 under this Plan.
F-14
<PAGE> 40
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
5. STOCK OPTIONS (CONTINUED)
In 1990 the Company's Board of Directors adopted an Incentive and Non-qualified
Stock Option Plan (the "1990 Plan") which provides for discretionary grants to
employees, officers or directors of the Company. The 1990 Plan has been replaced
and no further option may be granted under this Plan. As of the years ended
December 31, 1999, 1998, and 1997, 175,000 options were outstanding at exercise
price of $0.48 to $1.57.
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 replaced 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 non-employee
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 laws 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>
Outstanding at January 1, 1998 1,053,166 48,000 $ 0.07 - 0.27
Granted (27,000) 27,000 0.07 - 0.27
Canceled 12,000 (12,000) 0.07 - 0.27
Expired from 1987 Plan 12,000
---------------------------------------------------
Outstanding at December 31, 1998 1,050,166 63,000 $ 0.07 - 0.27
Exercised (1,000) 0.07
Granted (27,000) 27,000 0.07
---------------------------------------------------
Outstanding at December 31, 1999 1,023,166 89,000 $ 0.07 - 0.27
========= ======== =============
Exercisable at December 31, 1999 39,000 $ 0.07 - 0.27
======== =============
</TABLE>
The exercise price of stock options for all plans at December 31, 1999 ranged
from $1.57 to $0.07 per share with a weighted exercise price and remaining
contractual life of $0.25 and 9 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 agreement, 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 25.0% 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. At December 31, 1999, 839,840 shares were vested.
The effects of SFAS 123 are not material to the financial statements for all
years presented.
On January 4, 2000, the Board of Directors approved an agreement and plan of
merger with Crown. Such transaction is subject to shareholder approval. Upon
consummation of this transaction, the Company will take necessary actions to
terminate all outstanding stock options.
F-15
<PAGE> 41
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
6. CAPITAL STRUCTURE
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 stockholders are entitled to preferential
rights on dividends. To date, no dividend have been declared or paid.
7. FEDERAL INCOME TAXES
The Company has incurred net operating losses since its inception for income tax
purposes. Accordingly, since realization of benefits from these losses is not
assured, tax benefits were not recorded for financial statement purposes.
At December 31, 1999, the Company has unused net operating loss carryforwards
which will be limited. In accordance with the Internal Revenue Code Section 382,
the amount of income that can be offset by net operating losses is limited due
to the change in ownership of the Company in 1993. The amount of the limitation
is approximately $1,700,000 per year for losses incurred prior to the change of
ownership. The net operating loss carryforwards prior to the application of the
limitations are as follows:
<TABLE>
<S> <C>
1999-2000 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
2018 22,482,000
2019 22,724,000
------------------------------------------------------
Total $ 110,939,000
</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 basis of assets and liabilities as measured by the
currently enacted tax rates. Deferred tax expense or benefit is the result of
the changes in deferred tax assets and liabilities.
Deferred income taxes arise from the difference between the financial statement
and income tax basis of assets and liabilities. Principal items comprising net
deferred tax assets as of December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
--------------------------------------
<S> <C> <C>
Current:
Allowance for doubtful accounts $ 61,000 $ 103,000
Accrued liabilities and other 75,000 81,000
----------------- -----------------
Total current deferred tax assets 136,000 184,000
----------------- -----------------
Long-Term:
Net operating loss carryforwards 42,157,000 29,993,000
Accumulated depreciation and amortization (450,000) (397,000)
----------------- -----------------
Total net long-term deferred tax assets 41,707,000 29,596,000
----------------- -----------------
Total net deferred tax assets 41,843,000 29,780,000
Valuation allowance (41,843,000) (29,780,000)
----------------- -----------------
Net deferred tax asset $ - $ -
================= =================
</TABLE>
Management believes that a valuation allowance is necessary due to uncertainty
regarding the timing and amount of future utilization
F-16
<PAGE> 42
of net operating loss carryforwards.
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
8. RELATED PARTY TRANSACTIONS
OFFICE LEASES
The Company had a long term lease agreement with an affiliate of Crown and
Concept. The lease agreement terminated as of November 30, 1999 and the parties
have not yet re-negotiated to extend the lease. Effective December 1999, the
Company is renting the office space on a month-to-month basis. Rental expense
under this lease was $215,000, $194,000 and $184,600 for the years ended
December 31, 1999, 1998 and 1997, respectively.
The Company leases office space from AVI on a month to month basis. Rent
expense under this lease for the years ended December 31, 1999, 1998, and 1997
was approximately $47,000.
PRODUCTION AND POST PRODUCTION SERVICES
During 1997, the Company renewed its agreement with AVI, an entity of which two
directors of the Company were officers and directors (including one serving as
Chairman) during 1999, for studio, production and post-production services.
Under the terms of the agreement, 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 flat fee of $50,000. If the Company
does not actually purchase $50,000 of services in a month, the differences can
be used as credits for future months when actual expenses exceed the $50,000.
Such credit can be applied within the next twelve consecutive months from the
month of its origination. The aggregate balance of the credits may not exceed
$75,000 at any time. This agreement also provides for master control and uplink
services for a flat rate of $43,000 per month. Services rendered to the Company
under this agreement amount to $1,126,000, $1,397,000 and $1,525,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.
9. COMMITMENTS AND CONTINGENCIES
LITIGATION
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.
On February 8, 2000, a lawsuit was filed in the United States District Court
for the Southern District of New York making claims against the Company for
breach of contract, interference with contractual relations and business
disparagement and injurious falsehood. The Company intends to vigorously defend
all claims and file appropriate counterclaims for damages against the plaintiff.
The outcome and the extent of potential liability are unknown at this time.
EMPLOYMENT AGREEMENTS
On July 1, 1999, the Company entered into an employment agreement with its
President for one year with an automatic renewal for one year unless terminated
by either party. The agreement provides for an annual salary of $270,000,
increasing at a rate of 20.0% for the renewal term. The agreement also provides
for an annual benchmark bonus of $80,000 ($100,000 in any renewal term), payable
quarterly upon meeting or exceeding certain budgetary goals. The agreement also
provides for alternative benchmark bonuses under certain circumstances where
some, but not all, criteria applicable to the benchmark bonus have been met.
F-17
<PAGE> 43
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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
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 12 years. Expense for satellite transponder space and
services was $2,404,800, for 1999, 1998 and 1997.
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. 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 the
leased premises.
Lease expense for premises and equipment for 1999, 1998 and 1997, which
consisted entirely of minimum rentals, was $274,000, $280,000 and $273,000,
respectively. Approximate minimum rental commitments under all non-cancelable
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>
2000 29,000 2,913,000 2,942,000
2001 29,000 2,892,000 2,921,000
2002 30,000 2,885,000 2,915,000
2003 21,000 2,885,000 2,906,000
2004 2,885,000 2,885,000
Thereafter - 10,426,000 10,426,000
------------ ---------- ----------
$ 109,000 24,886,000 24,995,000
============ ============ ===========
</TABLE>
RATING SERVICE CONTRACT
In 1995, the Company contracted with a service that provides ratings, reports,
analysis reports, demographic reports and other special reports. The agreement
covered a minimum period of 5 years and required a monthly base charge of
approximately $40,000. In November 1999, the Company renegotiated the service
agreement to receive partial services throughout the remaining contract term at
approximately $9,000 per month.
MAJOR CUSTOMERS
During 1999, 1998, and 1997, three major customers accounted for approximately
35.0%, 28.0%, and 10.0%, respectively, of total revenues.
10. STATEMENTS OF CASH FLOWS
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid during the year for:
Interest $ 720,000 $ 660,000 $ 635,000
Income taxes None None None
</TABLE>
F-18
<PAGE> 44
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
10. STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
FISCAL 1999
Programming acquisition totaling $6,225,000 were financed through vendor debt
obligation.
Interest accrued and payable to Concept and Crown in the amounts of $2,565,740
and $5,687,286, respectively, were re-capitalized into notes payable as part of
February 1, 1999, March 27, 1999 and December 30, 1999 re-financings of debt
owed to Crown and Concept.
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 re-capitalized into notes payable as part of
a March 31, 1998 re-financing of debt owed to Crown and Concept.
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
re-capitalized into a note payable as part of a March 31, 1997 refinancing of
debt owed to Crown and Concept.
F-19
<PAGE> 45
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE II
Board of Directors of The Nostalgia Network, Inc.
In connection with our audit of the financial statements of The Nostalgia
Network, Inc. in our report dated March 3, 2000, which is included in Form 10-K
for the year ended December 31, 1999, we have also audited Schedule II for the
year then ended. In our opinion, this schedule presents fairly, in all material
respects, the information required to be set forth therein.
/s/ GRANT THORNTON LLP
Vienna, Virginia
March 3, 2000
F-20
<PAGE> 46
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, 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
============== ============ ==== ============== ==============
Year ended December 31, 1999
Allowance for doubtful accounts receivable $ 302,000 $ 523,000 $ - $ 664,000 $ 161,000
============== ============ ==== ============== ==============
</TABLE>
(1) UNCOLLECTIBLE ACCOUNTS WRITTEN OFF.
F-21
<PAGE> 1
EXHIBIT 10.22
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (this "Agreement") made effective for all
purposes and in all respects as of the first day of July 1, 1999, by and between
(i) THE NOSTALGIA NETWORK, INC., a Delaware corporation (hereinafter referred to
as "Employer"), and (ii) SQUIRE RUSHNELL (hereinafter referred to as
"Employee").
WHEREAS, Employer desires to employ Employee, as its President and
Chief Executive Officer;
WHEREAS, Employee desires to be employed by Employer in the aforesaid
capacity; and
WHEREAS, Employer and Employee desire to set forth in writing the
terms and conditions of their agreements and understandings.
NOW, THEREFORE, in consideration of the foregoing, the mutual
promises herein contained, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto,
intending legally to be bound, hereby agree as follows:
1. TERM OF AGREEMENT
The term (the "Term") of employment under this Agreement shall be one (1)
year commencing on July 1, 1999 (the "Effective Date") and ending on June
30, 2000. This Agreement shall automatically renew for a one-year period
(a "Renewal Term") unless either party gives at least ninety-days (90)
written notice of non-renewal. As utilized herein "Term" shall refer to
the Term and any Renewal Term unless the context clearly indicates
otherwise.
2. DUTIES OF EMPLOYEE
A. Duties and Responsibilities: Subject to the provisions of this
Agreement Employer shall employ Employee and Employee shall serve
as Employer's President and Chief Executive Officer. Subject to
the terms and conditions set forth herein, Employee shall
discharge the obligations and responsibilities normally associated
with such office and shall perform such other duties and
responsibilities as the Board of Directors of Employer (the
"Board") or the Executive Committee of the Board (the "Executive
Committee") shall determine from time to time that are consistent
with this Agreement. Employee agrees to perform such duties
faithfully and to the best of his ability. Subject to such
direction as may be given by the Board which is not inconsistent
with this Agreement, all employees of Employer shall report to
Employee or his designee(s) and Employee shall report only to the
Board and the Executive Committee. Employee shall produce and/or
acquire programming, in compliance with the then applicable Board
approved twelve month annual operating budget for Employer (the
"Budget") and utilize his best efforts and reasonable business
judgment to cause such programming to fit Employer's niche of
values-based programming that appeals to the 49+ demographic
group. Employee shall use his best efforts and reasonable business
judgment to cause Employer's programming to achieve the equivalent
of a 0.6 Nielsen rating and to cause Employer's original
programming to constitute at least 25% of the Employer's prime
time (7 p.m. to 11 p.m.)
<PAGE> 2
programming line-up. Employee shall not be required to move out of
the Washington, D.C. metropolitan area in connection with the
performance of his duties and responsibilities under this
Agreement. Employee represents and warrants to Employer that he is
capable of performing the essential functions required by this
Agreement with or without reasonable accommodation.
B. Full-Time Efforts: Employee shall devote his full-time efforts to
his duties under this Agreement. Employee will not, directly or
indirectly, engage or participate in any activities which conflict
with the business of Employer, unless consented to in writing by
Employer.
C. Hiring of Management: Employee shall consult with and advise the
Board or the Executive Committee with respect to hiring of all
senior management personnel; provided, however, that the Board or
the Executive Committee shall have the authority to prohibit the
hiring of any prospective member of senior management proposed by
Employee. For purposes of this Agreement, "senior management"
shall include Employer's General Counsel, Chief Financial Officer,
Vice President of Programming and Production, Vice President of
Marketing and Affiliate Relations, Vice President of Affiliate
Relations, and all other such persons who serve in the capacity of
a Vice President of Employer.
3. COMPENSATION
As compensation for the services to be rendered to Employer by Employee
under this Agreement, Employee shall receive the following compensation:
A. Base Salary: Employee shall be paid a base salary ("Base Salary")
of Two Hundred Seventy Thousand Dollars ($270,000) per annum, to
be paid in accordance with Employer's standard policies,
increasing at a rate of 20% for each Renewal Term, if any.
B. Benchmark Bonus: In addition to the Base Salary, Employee shall be
entitled to receive a benchmark bonus (the "Benchmark Bonus") of
eighty thousand dollars ($80,000) (one hundred thousand dollars
($100,000) in any Renewal Term) if Employer satisfies all of the
following criteria during the Term or any Renewal Term (the
"Benchmark Bonus Criteria"):
(1) Achieves from July 1, 1999 through June 30, 2000 revenue
derived from the ordinary and customary business operations
of Employer and excluding the proceeds of any extraordinary
transactions, borrowings or equity or debt financings
("Revenue") of at least $2,776,684.50 plus Revenue in an
amount equal to, or greater than, the Revenue for the
Employer's first two fiscal quarters of 2000 (January 1,
2000 through June 30, 2000) provided for in the Budget for
the year 2000 (the "2000 Budget") (the "Revenue
Criterion"). Nothing in this Agreement shall restrict the
Board in establishing the 2000 Budget; provided that for
purposes of this Section 3B(1), the Revenue for the first
two fiscal quarters in the 2000 Budget shall be the greater
of the actual Revenue for the first two fiscal quarters in
the 2000 Budget or ten percent (10%) in excess of the
Revenue for the first two fiscal quarters in the Budget for
1999 (the "1999 Budget").
2
<PAGE> 3
(2) Incurs a loss from operations, excluding interest expense
(a "Loss"), from July 1, 1999 through June 30, 2000, not
greater than $8,277,651 plus the Loss, if any, projected in
the 2000 Budget for the first two fiscal quarters of 2000
(January 1, 2000 to June 30, 2000) (the "Loss Criterion").
Nothing in this Agreement shall restrict the Board in
establishing the 2000 Budget; provided that for purposes of
this Section 3(B)(2), the Loss for the first two fiscal
quarters in the 2000 Budget shall be the lesser of the
actual Loss for the first two fiscal quarters in 1999 or
ten percent (10%) in excess of the Loss for the first two
fiscal quarters in the 1999 Budget.
(3) Achieves during the period July 1, 1999 to June 30, 2000
a net gain of 750,000 subscribers based on Employer's
subscriber count as reported in Employer's monthly reports
to the Board to reflect Employer performance during the
Term and which shall be based on the requirements of a
subscriber to be counted by Nielsen ratings (the
"Subscriber Criterion").
The Revenue Criterion, Loss Criterion and Subscriber Criterion for any
Renewal Term shall be based upon the amounts set forth in the applicable
Budgets or otherwise established by the Board for the fiscal periods
occurring during any Renewal Term. All financial calculations, including,
but not limited to, of Revenue or Loss shall be based upon the internal
records of Employer which shall be maintained and recorded consistent
with past practice and, where applicable, in accordance with generally
accepted accounting principals.
C. Alternate Benchmark Bonus: If Employer achieves only one of the
Benchmark Bonus Criteria and at least ninety percent (90%) of the
other two Benchmark Bonus Criteria, then Employee shall be
entitled to an alternative Benchmark Bonus (the "Alternative
Benchmark Bonus") of $26,667 ($33,334 for any Renewal Term). If
Employer achieves any two of the Benchmark Bonus Criteria and at
least ninety percent (90%) of the other Benchmark Bonus Criteria,
Employee shall be entitled to an Alternative Benchmark Bonus of
$53,334.00 ($66,668 for any Renewal Term).
D. Revenue Bonus: If Employer exceeds the Revenue Criterion and at
least ninety percent (90%) of the each of the Loss Criterion and
the Subscriber Criterion, Employee shall receive ten percent (10%)
of all Revenue for the twelve months occurring during the Term or
any Renewal Term in excess of the Revenue Criterion subject to
reduction by ten cents for every subscriber below the Subscriber
Criterion and ten percent of the amount, if any, by which
Employer's actual Loss for the twelve months occurring during the
Term or any Renewal Term exceeds the Loss Criterion.
E. Subscriber Bonus: If Employer exceeds the Subscriber Criterion and
at least ninety percent (90%) of each of the Revenue Criterion and
Loss Criterion, Employee shall receive ten cents for every
subscriber net gained for the twelve months occurring during the
Term or any Renewal Term in excess of the Subscriber Criterion in
the ordinary course of Employer's business and excluding any
subscribers obtained by Employer through any extraordinary
transaction including, but not limited to, an acquisition, merger,
strategic partnership or similar transaction unless Employee was a
materially determinative cause of, or acted as a finder with
respect to, such transaction. Any Subscriber Bonus otherwise
3
<PAGE> 4
earned by Employee shall be reduced by ten percent of the amount,
if any, by which the Revenue Criterion exceeds the Revenue for the
twelve months occurring during the Term or any Renewal Term and
ten percent of the amount, if any, by which the Loss for the
twelve months occurring during the Term or any Renewal Term
exceeds the Loss Criterion.
F. Payment of Bonus: Any Bonus earned during the Term or any Renewal
Term shall be paid to Employee by August 15 following the
conclusion of the Term or any Renewal Term during which the Bonus
was earned. Employee may elect to receive refundable bonus
advances with respect to a Benchmark Bonus or Alternative
Benchmark Bonus (a "Bonus Advance") for each fiscal quarter
occurring within the Term or any Renewal Term if at the end of
such quarter the Employer determines that either a Benchmark Bonus
or Alternative Benchmark Bonus has been earned on a cumulative
annualized basis determined by dividing the applicable cumulative
year-to-date results of operations by the number of months
included therein multiplied by twelve (the "Annualized Results").
Employer shall pay to Employee a Bonus Advance of $17,778 if the
Annualized Results project a Benchmark Bonus or $8,889 if the
Annualized Results project a $53,334 Alternative Benchmark Bonus.
Any Bonus Advance shall be paid on October 30, January 30 or April
30 during the Term or any Renewal Term during which such Bonus
Advance is earned. The balance of any Benchmark Bonus or
Alternative Benchmark Bonus together with any Subscriber Bonus or
Revenue Bonus will be paid to Employee on August 15 following the
conclusion of the Term or any Renewal Term during which such bonus
was earned. In the event Employee receives a Bonus Advance with
respect to any Benchmark Bonus or Alternative Benchmark Bonus
which ultimately is determined not to have been earned by
Employee, Employer may deduct the amount of any such excess Bonus
Advance from any future payment due to Employee under this
Agreement or otherwise.
G. Health Insurance: Employer agrees to provide Employee with health
care insurance providing coverage equivalent to the health care
insurance Employee now holds.
H. Automobile: Employer shall pay to Employee Six Hundred Dollars
($600) per month for the purpose of leasing an automobile.
Employer shall be responsible for payment of all insurance and
maintenance and fuel for the automobile and provide Employee with
a parking space at its offices at 650 Massachusetts Avenue, N.W.,
Washington, D.C. at no expense to Employee.
I. Vacation: Employee shall be entitled to four (4) weeks of paid
vacation, plus normal company holidays and three (3) personal
days. Vacation time and personal days shall not accrue from year
to year, and unused vacation time and personal days shall be
forfeited as of the end of each Term. Employee shall receive no
compensation for unused or forfeited vacation or personal days.
Employee shall receive no compensation for any unused vacation or
personal days if Employee is terminated for cause or terminates
this Agreement without cause.
4
<PAGE> 5
J. Business Expenses: Employee shall be entitled to reimbursement by
Employer of customary and reasonable business expenses provided
that such expenses may not exceed the amount provided for such
expenses in the Budget or be inconsistent with Employer's expense
policies.
K. Life Insurance: Subject to Employee qualifying for coverage at
standard rates not to exceed $5,030.00 per year, Employer agrees
to purchase and maintain during the Term, a one-million dollar
($1,000,000.00) term life insurance policy insuring Employee's
life of which Employee's designee is the named beneficiary.
L. Disability Insurance: Subject to Employee qualifying for coverage
at standard rates, Employer agrees to purchase and maintain during
the Term, long-term disability insurance for the benefit of
Employee with rates not to exceed $630.00 per month. Employee
agrees to submit, from time to time, to any physical examinations
required to obtain or maintain such coverage or the life insurance
coverage described in Section 3K.
4. PROGRAM RATINGS: In order to demonstrate the value of Employer's
programming to cable operators and advertisers and to provide sound
evidence to investors that there is viewer demand for Employer's original
and acquired programming, Employee shall engage on behalf of Employer and
at Employer's expense, reputable researchers to rate Employer's original
and acquired prime time (7 p.m. to 11 p.m.) programming within six weeks
of the completion of new programs and/or pilots. Such researchers shall
provide indices recognized by cable operators and advertisers as a
reliable measure of Employer's audience appeal.
5. TERMINATION: Employee's employment hereunder may be terminated prior to
the expiration of any Term upon the occurrence of any of the following:
A. Termination for Cause: Employee's employment hereunder and all of
Employer's obligations hereunder (except as hereinafter provided)
may be terminated by Employer immediately for Cause (as
hereinafter defined) by giving written notice of such termination
to Employee. For purposes of this Agreement, "Cause" shall mean:
(i) Employee's willful misconduct, (ii) Employee's willful
disregard of lawful instructions of the Board or Executive
Committee which are consistent with Employee's position relating
to the business of Employer, (iii) Employee's material neglect of
duties or material failure to act, (iv) Employee's commission of
an act constituting fraud, embezzlement or a felony, (v)
Employee's abuse of alcohol or other drugs or controlled
substances, or conviction of a crime involving moral turpitude, or
(vi) Employee's material breach of this Agreement; provided,
however, that the failure of Employer to achieve any of the
Benchmark Bonus Criteria or earn any other bonus provided for in
this Agreement shall not constitute grounds for termination
provided Employee has devoted the requisite level of effort and
diligence in seeking to cause Employer to achieve such criteria.
Termination for Cause shall take effect immediately upon giving of
written notice to Employee unless Employer determines in its
reasonable discretion that the actions giving rise to the
termination are capable of cure, and Employee effects a cure
within 15 days of receipt of such notice. In the event of
termination for Cause, Employee will be entitled only to Base
Salary
5
<PAGE> 6
through the date of termination and not to any Benchmark Bonus,
Alternative Benchmark Bonus, Revenue Bonus or Subscriber Bonus
(except to the extent already earned, due and owing with respect
to a prior Renewal Term). Upon termination for Cause, Employee
will not be entitled to any other benefits described hereunder,
including, but not limited to, any Benchmark Bonus, Alternative
Benchmark Bonus, Revenue Bonus or Subscriber Bonus with respect to
the Term or any Renewal Term in which termination occurs.
B. Death and Disability: Except as otherwise provided in this Section
5B, this Agreement shall be terminated by, and upon, the death of
Employee and also may be terminated by Employer by giving written
notice of termination to Employee if Employee shall be rendered
incapable by any physical or mental illness or disability from
performing his essential functions under this Agreement for a
period in excess of sixty (60) consecutive or ninety (90)
non-consecutive days during the Term or any Renewal Term. Any
notice of termination by reason of disability hereunder must be
given while Employee is disabled. Upon death or disability,
Employee or his representative will be entitled to payment of any
earned portion of the Benchmark Bonus, Alternative Benchmark
Bonus, Revenue Bonus and/or Subscriber Bonus for the Term or any
Renewal Term in which termination occurs, calculated based upon
the internal records of Employer and prorated to the date of
termination and paid no later than 45 days after termination
pursuant to this Section 5B.
C. Termination by Employee for Good Reason: Employee shall have the
right to terminate this Agreement on 30 days written notice to
Employer if (i) the Board takes action that prevents Employee from
performing his duties as President and Chief Executive Officer and
such action continues for a period of 15 days or Employer
materially breaches this Agreement (unless such breach is cured
within the 15 day notice period, or if the breach is not capable
of cure within 15 days, unless Employer promptly commences and
diligently continues to effect a cure), or (ii) if, as a result of
a strategic alliance entered into by Employer, Employee ceases
effectively to have the authority to manage and conduct the
operations of Employer. Any termination pursuant to this Section
5C will entitle Employee to severance payments due pursuant to
Section 6 and for all other purposes of this Agreement shall be
deemed a termination of Employee's services by Employer without
Cause.
D. Resignation: If Employee voluntarily terminates this Agreement
(other than for good reason pursuant to Section 5C), he will be
entitled only to Base Salary through the date of termination and
any Benchmark Bonus, Alternative Benchmark Bonus, Revenue Bonus
and/or Subscriber Bonus earned with respect to a prior Renewal
Term but unpaid as of the date of termination. Employee shall have
no further right to any payment provided hereunder including but
not limited to Base Salary, Benchmark Bonus, Alternative Benchmark
Bonus, Revenue Bonus and/or Subscriber Bonus, benefits, and/or
severance pursuant to Section 6, from and after the date of
termination or with respect to the Term or any Renewal Term in
which such termination occurs.
6
<PAGE> 7
E. Payments Already Due: Any payments already due and payable at the
time of resignation or termination shall be paid at the later of
(i) resignation or termination, or (ii) when otherwise due
pursuant to this Agreement or as otherwise required by law.
6. SEVERANCE
Should Employer not renew this Agreement for a Renewal Term, Employer
shall pay Employee a total severance payment of One Hundred Thirty Five
Thousand Dollars ($135,000) payable in two payments of sixty seven
thousand five hundred dollar ($67,500) each. The first payment shall be
made upon termination of this Agreement and the second payment shall be
made on the sixtieth day following termination of this Agreement.
7. DIRECTOR/OFFICER LIABILITY
Employer shall indemnify Employee in connection with Employee's service
as an officer of Employer to the extent and in the manner provided in
Employer's Certificate of Incorporation and Bylaws as in effect from time
to time.
8. NO COMPETING EMPLOYMENT; SECRECY; INJUNCTIVE RELIEF
A. No Competing Employment: Upon termination of this Agreement due to
completion of the Term, Employee's voluntary resignation (other
than for good reason pursuant to Section 5C) or termination for
Cause and for six months thereafter (such period being referred to
hereinafter as the "Restricted Period"), Employee shall not,
without the prior written consent of the Board, directly or
indirectly, whether as owner, consultant, employee, partner,
venturer, agent, through stock ownership, investment of capital,
lending of money or property, rendering of services, or otherwise,
compete with Employer in the Business (as defined below), or
assist, become interested in, or be connected with, any
corporation, firm, partnership, joint venture, sole proprietorship
or other entity which so competes with the Business. For purposes
of this Agreement, "Business" shall mean any television
broadcasting, television cable or television network business that
specifically targets as its audience the 49+ age group.
B. Restriction on Passive Investments: Any other provision of this
Agreement to the contrary notwithstanding, Employee shall not make
a Passive Investment (as defined below) which results in Employee
beneficially owning, within the meaning of Section 13(d) of the
Securities Exchange Act of 1934, as amended, a greater than one
percent (1%) interest in any class of securities of any issuer
which has any class of securities listed on a national securities
exchange or quoted on any automated quotation system of the
National Association of Securities Dealers, Inc. (a "Public
Company") which engages in the Business, or maintain any equity
ownership in, or, act as a lender to, any other entity (which
shall include, without limitation, corporations, partnerships,
sole proprietorships, individuals and limited liability companies)
which engages in the Business without the prior written approval
of the Board. Nothing in this Section 8B shall be construed as
prohibiting Employee from making any Passive Investment in any
Public Company or other entity which does not engage in the
Business; provided, however, nothing contained in this Section 8B
shall be construed to permit Employee to undertake any investment
which would result in a violation of the provisions of
7
<PAGE> 8
Section 2B of this Agreement. For purposes of this Agreement, the
phrase "engage(s) in the Business" shall refer to the activities
of any Public Company or other entity and of any subsidiary,
affiliate or joint venturer thereof. For purposes of this
Agreement, a "Passive Investment" shall mean an investment in the
equity or debt securities of any business or entity which does not
require Employee to render any services in the operations or
affairs of such business or entity and which does not materially
adversely affect or interfere with the performance of Employee's
duties and obligations to Employer or any of its subsidiaries or
affiliates.
C. No Interference: During the Restricted Period Employee shall not,
whether for his own benefit or for the benefit of any other
individual, partnership, firm, corporation or other business
organization or entity (other than Employer), solicit, endeavor to
entice away from Employer or any of its affiliates or subsidiaries
or otherwise interfere with the relationship of Employer or any of
its affiliates or subsidiaries with any affiliate, customer,
supplier, cable operator, prospective strategic partner and/or
employee of Employer or any of its affiliates or subsidiaries or
any person employed by Employer or any of its affiliates or
subsidiaries.
D. Confidential Information: (1) Employee recognizes that his
services hereunder are special, unique and extraordinary and that,
by reason of his employment hereunder, he may acquire confidential
or proprietary information and trade secrets concerning the
operations of Employer. Such information includes, but is not
limited to, information in documentary, electronic, oral or any
other form concerning financial condition, programming, business
structure, plans, operations or strategies; original programming
ideas; business concepts; customer information; research plans or
results; litigation or administrative proceedings; information
regarding employees, agents, shareholders or affiliates; and lists
of cable operators and/or advertisers. Employee agrees that he
will not, except with the prior written consent of the Board, or
as may be required by law, directly or indirectly, disclose during
the Term, or any time thereafter any proprietary, secret or
confidential information that he has learned by reason of his
association with Employer or use any such information for any
purpose other than for the benefit of Employer.
(2) Employee acknowledges that he may become privy to confidential,
sensitive or valuable trade information about Employer's
directors, officers, agents, employees, affiliates and
shareholders and agrees that all such information shall be deemed
confidential. Employee agrees that he shall not at any time during
or following the Term or thereafter directly or indirectly divulge
or disclose for any purpose, such confidential information, omit
to do any act which shall damage Employer, its shareholders or
affiliates or make derogatory statements about Employer, or its
shareholders or affiliates. In the event that Employee is
terminated, resigns, plans to resign, or is considering resigning,
Employee shall not make statements about his departure or possible
departure from the Employer without the Board's prior written
approval.
E. Work Product: The Employee agrees that he shall have no
proprietary interest in the work product creative material,
processes, ideas and concepts developed by him during the course
of his employment with Employer and expressly assigns all rights
to copyrights, trademarks,
8
<PAGE> 9
contractual advantages and/or opportunities, patents, trade
secrets, or other proprietary interests or intellectual property
of any kind or nature to Employer except for those works described
on Exhibit A hereto. Employee agrees that, except with respect to
those works described on Exhibit A hereto, all programming ideas,
sales opportunities, and sales and marketing developments made and
created by Employee during his employment with Employer pursuant
to this Agreement or otherwise, are and shall be the sole and
complete property of Employer, that any and all such right, title
and interest including copyrights, trademarks and patents and
other proprietary interests therein or intellectual property of
any kind or nature shall belong to Employer, and that the other
provisions of this Agreement shall fully apply to all such
developments and works.
F. Injunctive Relief; Survival of Agreement: Employer shall be
entitled, in addition to any other rights or remedies it may have,
to seek an injunction enjoining or restraining Employee from any
violation or threatened violation of this Section 8 which shall
survive the termination of this Agreement.
9. TAX WITHHOLDING
Payments to Employee of all compensation contemplated under this
Agreement shall be subject to all applicable legal requirements with
respect to the withholding of taxes.
10. WAIVER
This Agreement may not be modified, amended or waived in any manner
except by an instrument in writing signed by the parties hereto. The
waiver by either party of compliance with any provision of this Agreement
by the other party shall not operate or be construed as a waiver of any
provision of this Agreement, or of any subsequent breach by such party of
a provision of this Agreement.
11. GOVERNING LAW
This Agreement shall at all times and in all respects be construed,
interpreted and governed by the laws of the District of Columbia.
12. SEVERABILITY
The provisions of this Agreement (including, but not limited to, the
provisions of Section 8 hereof) shall be deemed severable, and the
invalidity or unenforceability of any one or more of the provisions
hereof shall not affect the validity or enforceability of the other
provisions hereof. Employee agrees that the breach or alleged breach by
Employer of (i) any covenant contained in another agreement between
Employer and Employee or (ii) any obligation owed to Employee by
Employer, shall not affect the validity and enforceability of the
covenants and agreements of Employee set forth in Section 8.
13. ARBITRATION
Any controversy or claim arising out of or relating to this Agreement or
the breach of this Agreement which cannot be resolved by Employee and
Employer within thirty (30) days after one party delivers to the other
party written notice of such controversy or claim shall be submitted to
9
<PAGE> 10
arbitration in accordance with the rules and procedures of the American
Arbitration Association then in effect in the District of Columbia. A
single arbitrator shall conduct such arbitration. The determination of
the arbitrator shall be conclusive and binding on Employer and Employee.
Judgment may be entered on the arbitrator's award in any court having
jurisdiction. The parties agree to keep the fact of the arbitration and
all details relating thereto confidential, except as otherwise required
by law or as necessary to enforce or defend against the enforcement of
any award of the arbitrator.
14. NOTICES
Any notice required to be given hereunder shall be sufficient if in
writing, and sent by courier service (with proof of service), facsimile
transmission, hand delivery or certified or registered mail (return
receipt requested and first-class postage prepaid), to his residence in
the case of Employee (with a copy to Jordan Ringel, Esq., PAVIA HARCOURT,
600 Madison Avenue, New York, New York 10022), and to its principal
office in the case of Employer.
15. ENTIRE AGREEMENT
This Agreement contains the entire agreement and understanding by and
between Employer and Employee with respect to the matters set forth
herein referred to, and no representations, promises, agreements or
understandings, written or oral, not contained herein or therein shall be
of any force or effect.
IN WITNESS WHEREOF, Employer and Employee have duly executed this
Agreement as of the day and year first above written.
THE NOSTALGIA NETWORK, INC.,
A Delaware Corporation
By: /s/ DONG MOON JOO
---------------------------------
Dong Moon Joo
EMPLOYEE
/s/ SQUIRE RUSHNELL
---------------------------------
Squire Rushnell
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 674,177
<SECURITIES> 0
<RECEIVABLES> 987,588
<ALLOWANCES> 161,000
<INVENTORY> 10,086,696
<CURRENT-ASSETS> 8,720,141
<PP&E> 3,267,219
<DEPRECIATION> 2,295,112
<TOTAL-ASSETS> 12,723,094
<CURRENT-LIABILITIES> 6,767,845
<BONDS> 86,416,363
0
6,500
<COMMON> 811,015
<OTHER-SE> 83,413,793
<TOTAL-LIABILITY-AND-EQUITY> 12,723,094
<SALES> 0
<TOTAL-REVENUES> 5,419,777
<CGS> 0
<TOTAL-COSTS> 20,694,728
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 523,000
<INTEREST-EXPENSE> 5,986,480
<INCOME-PRETAX> (21,192,925)
<INCOME-TAX> 0
<INCOME-CONTINUING> (21,192,925)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,192,925)
<EPS-BASIC> (1.05)
<EPS-DILUTED> (1.05)
</TABLE>
