<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party Other than the Registrant [ ]
Check the appropriate Box:
<TABLE>
<S> <C>
[X] Preliminary Proxy Statement [ ] Confidential, for use of Commission only
[ ] Definitive Proxy Statement (as permitted by Rule 14a-6(e)(2))
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
THE NOSTALGIA NETWORK, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
CALCULATION OF FILING FEE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
AGGREGATE NUMBER OF
SECURITIES TO WHICH PER UNIT PRICE OR OTHER PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES TRANSACTION UNDERLYING VALUE OF AGGREGATE VALUE OF
TO WHICH FILING TRANSACTION APPLIES(1)(2) APPLIES(1) TRANSACTION(1) TRANSACTION(1) AMOUNT
- -------------------------------------------------------- ------------------- ------------------------- ------------------ -------
<S> <C> <C> <C> <C>
Common Stock............................................ 20,274,411 $0.07 $1,419,208.77 $283.85
Preferred Stock......................................... 3,250 $7.00 $ 22,750.00 $ 4.55
Total................................................... -- -- $1,441,958.77 $288.40
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the filing fee
pursuant to Rule 0-11 under the Securities Exchange Act of 1934, as amended.
(2) The fee was computed in accordance with Rule 0-11(c)(1)(i) based upon the
cash consideration to be paid to security holders.
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: $
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------------------------------------------------------------
(3) Filing Party:
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(4) Date Filed:
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<PAGE> 2
THE NOSTALGIA NETWORK, INC.
650 MASSACHUSETTS AVENUE, N.W.
WASHINGTON, D.C. 20001
------------------
NOTICE OF SPECIAL MEETING TO BE HELD ON
, 2000
------------------
To the Stockholders of
The Nostalgia Network, Inc.:
Notice is hereby given that a Special Meeting of Stockholders (the "Special
Meeting") of The Nostalgia Network, Inc., a Delaware corporation (the
"Company"), will be held on , 2000, 11:00 a.m., local time, at 650
Massachusetts Avenue, N.W., Washington, D.C., for the following purposes:
1. to approve the merger of NNI Acquisition Corporation, a Delaware
corporation ("Acquisition"), with and into the Company pursuant to an
Agreement and Plan of Merger dated as of January 11, 2000 (the "Merger
Agreement"), between the Company and Acquisition; and
2. to transact such other business as may properly come before the
Special Meeting or any adjournments or postponements thereof.
The proposed merger is more fully described in the accompanying Proxy
Statement and Appendices thereto which are part of this Notice.
The Company's Board of Directors has fixed the close of business on
February 11, 2000 as the record date (the "Record Date") for the determination
of stockholders entitled to notice of, and to vote at, the Special Meeting or
any adjournments or postponements thereof. Only stockholders of record on the
Record Date will be entitled to notice of, and to vote at, the Special Meeting
or any adjournments or postponements thereof. A list of stockholders of record
as of the Record Date will be available for inspection at the offices of the
Company at 650 Massachusetts Avenue, N.W., Washington, D.C. at least ten days
prior to the Special Meeting.
Pursuant to Section 262 of the Delaware General Corporation Law,
stockholders of the Company are entitled to appraisal rights in connection with
the proposed merger.
If you plan to attend the Special Meeting, please notify the undersigned so
that identification can be prepared for you. Whether or not you plan to attend
the Special Meeting, please execute, date and promptly return the enclosed
proxy. A return envelope is enclosed for your convenience and requires no
postage for mailing in the United States. If you attend the Special Meeting, you
may withdraw your proxy and vote in person.
By Order of the Board of Directors,
/s/ WILLARD R. NICHOLS
--------------------------------------
Vice President, General Counsel and
Secretary
, 2000
YOUR VOTE IS IMPORTANT. TO VOTE YOUR SHARES, PLEASE SIGN, DATE AND COMPLETE THE
ENCLOSED PROXY AND MAIL IT IN THE ENCLOSED RETURN ENVELOPE.
<PAGE> 3
THE NOSTALGIA NETWORK, INC.
650 MASSACHUSETTS AVENUE, N.W.
WASHINGTON, D.C. 20001
(202) 289-6633
SPECIAL MEETING OF STOCKHOLDERS
, 2000
PROXY STATEMENT
------------------
This Proxy Statement is being provided to stockholders of The Nostalgia
Network, Inc., a Delaware corporation (the "Company"), in connection with the
solicitation of proxies by the Company's Board of Directors (the "Board of
Directors") for use at a Special Meeting of Stockholders (the "Special Meeting")
to be held on , 2000 at 11:00 a.m., local time, at 650 Massachusetts
Avenue, N.W., Washington, D.C., and any adjournments or postponements thereof.
At the Special Meeting, common and preferred stockholders of record of the
Company as of the close of business on February 11, 2000 (the "Record Date")
will be asked to consider and vote upon a proposal (the "Merger Proposal") to
approve the merger of NNI Acquisition Corporation, a Delaware corporation
("Acquisition"), with and into the Company (the "Merger") pursuant to an
Agreement and Plan of Merger dated as of January 11, 2000 (the "Merger
Agreement"), between the Company and Acquisition. Acquisition is an affiliate of
the Company and is wholly-owned by Concept Communications, Inc., a Delaware
corporation ("Concept"), and Crown Communications Corporation, a Delaware
corporation ("Crown"). Concept is an affiliate of the Company and majority-owned
by Crown. Crown is an affiliate of the Company and a wholly-owned subsidiary of
Crown Capital Corporation, a Delaware corporation ("Capital," and collectively
with Crown, Concept and Acquisition, the "Concept Group"). The Concept Group is
the beneficial owner of 70.3% of the issued and outstanding shares of the
Company's common stock, presently par value $.04 per share and, pursuant to an
amendment to the Company's Certificate of Incorporation under the Merger
Agreement, to be $0.01 per share following the Merger (the "Common Stock") and
76.9% of the issued and outstanding shares of the Company's preferred stock, par
value $2.00 per share (the "Preferred Stock").
Upon consummation of the Merger, the Company will become wholly-owned by
Crown and Concept; the separate corporate existence of Acquisition will
terminate; each issued and outstanding share of Common Stock, other than shares
of Common Stock owned by Acquisition or for which appraisal rights have been
exercised, will be converted into the right to receive $0.07; each issued and
outstanding share of Preferred Stock, other than shares of Preferred Stock owned
by Acquisition or for which appraisal rights have been exercised, will be
converted into the right to receive $7.00; the issued and outstanding shares of
Common Stock and Preferred Stock owned by Acquisition will be cancelled; and
each issued and outstanding share of the common stock, par value $.01 per share
of Acquisition (the "Acquisition Common Stock") will be converted into one share
of Common Stock. The Merger constitutes a "going private" transaction pursuant
to Section 13(e) of the Securities Exchange Act of 1934 (the "Exchange Act") and
Exchange Act Rule 13e-3. Following the Merger, the Common Stock (all of which
will be owned by Crown and Concept) no longer will be publicly traded, and the
Company no longer will be required to file periodic and other reports with the
United States Securities and Exchange Commission (the "Commission") and will
formally terminate its reporting obligations under the Exchange Act.
PURSUANT TO THE DELAWARE GENERAL CORPORATION LAW (THE "DGCL"), STOCKHOLDERS
OF THE COMPANY ARE ENTITLED TO APPRAISAL RIGHTS IN CONNECTION WITH THE MERGER.
SEE "APPRAISAL RIGHTS."
NEITHER THE SECURITIES AND EXCHANGE COMMISSION, NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE PROPOSED MERGER, PASSED UPON THE
MERITS OR FAIRNESS OF THE TRANSACTION, OR PASSED UPON THE ADEQUACY OR ACCURACY
OF THE DISCLOSURE IN THIS PROXY STATEMENT, AND ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 4
Because the Merger involves affiliates of the Company, and a member of the
Board of Directors has a conflict of interest in connection therewith, the terms
of the Merger and the Merger Agreement were negotiated on behalf of the Company
by a special committee of the Board of Directors consisting entirely of
independent directors of the Company (the "Special Committee"). For a
description of these conflicts, see "Conflicts of Interest."
The Common Stock is listed for quotation on the NASDAQ OTC Bulletin Board
(the "Bulletin Board") under the symbol "NNET". On , 2000 the last
reported sale price for the Common Stock on the Bulletin Board was $ per
share.
All information concerning the Company contained in this Proxy Statement
has been furnished by the Company, and certain information concerning
Acquisition, Capital, Crown and Concept contained in this Proxy Statement has
been furnished by Acquisition, Capital, Crown or Concept, respectively. No
person is authorized to make any representation with respect to the matters
described in this Proxy Statement other than those contained herein, and if
given or made, must not be relied upon as having been authorized by the Company,
Acquisition, Capital, Crown, Concept or any other person.
------------------
THIS PROXY STATEMENT AND THE ACCOMPANYING PROXY CARD ARE FIRST BEING MAILED
OR DELIVERED TO THE STOCKHOLDERS OF THE COMPANY ON OR ABOUT , 2000.
------------------
THE DATE OF THIS PROXY STATEMENT IS , 2000.
2
<PAGE> 5
SUMMARY TERM SHEET
The following summarizes the most material terms of our proposed merger
with NNI Acquisition Corporation. This summary may not contain all the
information you should consider before voting on the proposed merger. You should
read the entire Proxy Statement and all of its Appendices before voting on the
proposed merger.
- Crown Communications Corporation and Concept Communications, Inc. propose
to purchase all of the shares of our Common Stock and Preferred Stock
except for those owned by NNI Acquisition Corporation which is
wholly-owned by Crown and Concept.
- Crown and Concept are offering $0.07 a share for the Common Stock and
$7.00 a share for the Preferred Stock.
- This is a "going-private" transaction. The shares of our Common Stock and
Preferred Stock owned by Acquisition will be cancelled and the shares of
Acquisition, all of which are owned by Crown and Concept, will be
converted into shares of our Common Stock.
- As a result of the merger, you no longer will have in interest in any of
our future earnings or growth, we no longer will be a public company, the
Common Stock will no longer be traded on the Nasdaq Bulletin Board, and
Crown and Concept will be our only stockholders.
- The merger has been considered by a Special Committee of our Board of
Directors consisting entirely of independent directors who are not our
officers or employees or officers, directors or employees of Acquisition,
Crown or Concept.
- The Special Committee retained an independent financial advisor to assist
it in considering the merger and which provided to the Special Committee
its written opinion that the terms of the merger are fair, from a
financial point of view, to our public stockholders.
- Based upon all of the factors it considered, including the written
fairness opinion of its financial advisor, the Special Committee
concluded that the merger is fair to, and in the best interests of, our
company and our stockholders and recommended to our Board of Directors
that the merger be approved.
- Based upon the recommendation of the Special Committee, our Board of
Directors, with an interested director not participating in any meetings
concerning, or voting on, the merger unanimously has approved the merger
as in the best interests of our company and our stockholders and
recommends that you approve the merger.
- Under Delaware corporate law, the merger must be approved by a majority
of all of our shares entitled to vote on the merger. Our certificate of
incorporation entitles each share of Preferred Stock to 100 votes on each
matter submitted to the holders of Common Stock and also to approve the
merger voting separately.
- Acquisition has informed the Company that it will vote all of its shares
of Common Stock and Preferred Stock "FOR" the Merger. Acquisition owns
enough shares of Common Stock and Preferred Stock that its vote "FOR" the
merger will be sufficient to ensure that the merger is approved.
- Delaware law entitles stockholders who do not vote for the merger and
fulfill certain other procedural requirements to a judicial appraisal of
their shares. These rights and procedures are explained in the Proxy
Statement.
- The merger will occur pursuant to written merger agreement which is
described in, and attached as Appendix A to, this Proxy Statement. The
merger agreement contains customary representations and warranties of the
parties and conditions to the obligations of the parties to complete the
merger. You should read the description of the merger agreement in this
Proxy Statement and the merger agreement carefully.
3
<PAGE> 6
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, pursuant to which it files reports and other information with the
Commission. Such reports and other information may be inspected and copied at
public reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
Regional Offices at 13th Floor, 7 World Trade Center, New York, New York 10048,
and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661, and copies may be obtained at prescribed rates from the Public Reference
Section of the Commission at its principal office in Washington, D.C. The
Commission also maintains an internet web site that contains periodic and other
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission, including the Company.
The address of the Commission's web site is http://www.sec.gov.
None of Acquisition, Capital, Concept or Crown is subject to the reporting
requirements of Section 13 or Section 15 of the Exchange Act.
FORWARD LOOKING STATEMENTS
This Proxy Statement 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 Proxy Statement 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.
4
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
AVAILABLE INFORMATION....................................... 4
SUMMARY..................................................... 7
COMPARATIVE PER SHARE MARKET INFORMATION.................... 12
THE SPECIAL MEETING......................................... 13
General................................................... 13
Matters to Be Considered.................................. 13
Recommendation of the Board of Directors.................. 13
Record Date; Shares Entitled to Vote; Quorum.............. 13
Proxies; Proxy Solicitation............................... 13
Vote Required............................................. 14
Effects of Abstentions and Broker Non-Votes............... 14
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL
OWNERS.................................................... 15
THE MERGER.................................................. 16
Background................................................ 16
Opinion of the Financial Advisor to the Special
Committee.............................................. 17
Reasons for the Merger; Recommendations of the Special
Committee and the Board of Directors................... 22
Conflicts of Interest..................................... 24
Regulatory Approval....................................... 24
Effect of the Merger on the Rights of Existing
Stockholders........................................... 24
Appraisal Rights.......................................... 25
Accounting Treatment...................................... 27
THE MERGER AGREEMENT........................................ 28
Terms of the Merger....................................... 28
Indemnification........................................... 28
Effective Time of the Merger.............................. 29
Representations and Warranties............................ 29
Covenants................................................. 29
Conditions to the Merger.................................. 30
Amendment; Waiver; Termination............................ 30
Expenses and Fees......................................... 31
FEDERAL INCOME TAX CONSIDERATIONS........................... 31
CERTAIN TRANSACTIONS AND RELATIONSHIPS...................... 33
THE CONCEPT GROUP........................................... 35
BUSINESS OF THE COMPANY..................................... 36
General................................................... 36
Description of Business................................... 36
Affiliated Cable Systems and Subscribers.................. 36
Advertising............................................... 37
Programming............................................... 37
Patents, Trademarks, Licenses............................. 39
Competition............................................... 39
Government Regulation..................................... 40
Employees................................................. 41
Properties................................................ 41
Legal Proceedings......................................... 41
SELECTED FINANCIAL DATA..................................... 42
</TABLE>
5
<PAGE> 8
<TABLE>
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PAGE
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<S> <C>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 43
General................................................... 00
Results of Operations..................................... 43
Liquidity and Capital Resources........................... 45
INDEPENDENT ACCOUNTANTS..................................... 51
OTHER MATTERS............................................... 51
ANNUAL REPORT AND FORM 10-K................................. 51
STOCKHOLDER PROPOSAL FOR 2000 ANNUAL MEETING................ 52
[INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............]
INDEX TO FINANCIAL STATEMENTS............................... F-1
MERGER AGREEMENT (AND ATTACHED EXHIBITS).................... A-1
FAIRNESS OPINION OF CHATSWORTH SECURITIES, LLC.............. B-1
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW......... C-1
</TABLE>
6
<PAGE> 9
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement. This summary does not purport to be complete and is
qualified in its entirety by, and is subject to, the more detailed information
incorporated by reference and contained elsewhere in this Proxy Statement and
the Appendices hereto. Stockholders are urged to read the Proxy Statement and
Appendices in their entirety before voting on the Merger Proposal described
herein.
THE SPECIAL MEETING
Date, Time and Place.......... The Special Meeting will be held on ,
2000 at 11:00 a.m., local time, at 650
Massachusetts Avenue, N.W., Washington, D.C.
See "The Special Meeting -- General."
Record Date................... Holders of record of Common Stock and Preferred
Stock as of the close of business on February
11, 2000, are entitled to notice of, and to
vote at, the Special Meeting. On that date,
20,274,411 shares of Common Stock and 3,250
shares of Preferred Stock were issued and
outstanding. Each share of Common Stock is
legally entitled to one vote on each matter to
be acted upon or which may properly come before
the Special Meeting. Pursuant to the Company's
Certificate of Incorporation (the "Certificate
of Incorporation"), the Preferred Stock is
entitled to be voted on any matter submitted to
a vote of the holders of Common Stock and each
share of Preferred Stock is entitled to 100
votes on each such matter. Pursuant to the
Certificate of Incorporation, the Preferred
Stock also is entitled to be voted separately
on the Merger Proposal. See "The Special
Meeting -- Record Date; Shares Entitled to
Vote."
Matters to be Considered...... At the Special Meeting, the stockholders of the
Company will be asked to consider and vote upon
(i) the Merger Proposal; and (ii) such other
business as may properly come before the
Special Meeting or any adjournments or
postponements thereof. See "The Special
Meeting -- Matters to be Considered."
Vote Required................. The DGCL requires the Company to submit the
Merger Proposal to its stockholders for
approval. As of the Record Date, 20,274,411
shares of Common Stock and 3,250 shares of
Preferred Stock were issued and outstanding. In
accordance with the DGCL, the standard for
approving the Merger Proposal is the
affirmative vote of a majority of outstanding
shares of capital stock entitled to be voted on
the Merger Proposal (including the Preferred
Stock voted with 100 votes for each share of
Preferred Stock). The vote of a majority of the
Preferred Stock, voting as a separate class,
also is required to approve the Merger
Proposal. Acquisition, which owns 14,180,427
shares of Common Stock and 2,500 shares of
Preferred Stock and which is not precluded by
the Merger Agreement from voting its shares of
Common Stock or Preferred Stock on the Merger
Proposal has informed the Company that it
intends to vote all of its shares of Common
Stock and Preferred Stock "FOR" the Merger
Proposal. Acquisition owns a sufficient number
of shares of Common Stock and Preferred Stock
to ensure approval of the Merger Proposal.
7
<PAGE> 10
REASONS FOR THE MERGER/SPECIAL FACTORS
Crown and Concept............. As the majority stockholders of the Company,
and source of substantially all of its working
capital, the Concept Group has decided to
pursue the Merger to protect more adequately
its investment in the Company. In reaching this
decision, the Concept Group considered the
substantial expense of maintaining the Company
as a publicly held entity including the ongoing
expense of compliance with reporting and other
Exchange Act obligations as compared to the
minor benefits of the extremely limited public
market for the Common Stock; the historical and
recent volume and trading market prices of the
Common Stock and the substantial premium which
will be paid to holders of Common Stock in
consideration of the Merger compared to the
prices at which the Common Stock traded prior
to the announcement of the Merger; the
financial condition, results of operations,
business and prospects of the Company,
including its aggregate net loss of
approximately $30.0 million since January 1,
1998; the enhanced likelihood of attracting a
strategic alliance as a privately held company;
and the Company's outstanding indebtedness to
Crown and Concept. See "The Merger -- Reasons
for the Merger."
Recommendations of the
Company's Special Committee
and the Board of
Directors................... Because the Merger is among affiliates, and a
member of the Company's Board of Directors has
a conflict of interest in connection therewith,
the terms of the Merger and the Merger
Agreement were negotiated on behalf of the
Company by the Special Committee which
consisted entirely of independent directors of
the Company who are not members of management
or employees of the Company, Acquisition,
Capital, Crown or Concept, or their affiliates.
The Special Committee is a standing committee
of the Board of Directors consisting of Robert
J. Wussler and S. Robert Lichter which
addresses matters involving potential conflicts
of interest among the Company, its officers,
directors and/or stockholders. The Special
Committee retained Chatsworth Securities, LLC
("Chatsworth") as its financial advisor and to
deliver a written opinion as to the fairness to
the Company's stockholders, from a financial
point of view, of the consideration to be paid
to the Company's stockholders in the Merger.
See "The Merger -- Opinion of the Financial
Advisor to the Special Committee." After
careful consideration, the Special Committee
has determined the Merger and the Merger
Agreement to be fair and in the best interests
of the Company and its stockholders and has
unanimously recommended to the Board of
Directors that the Merger and the Merger
Agreement be approved. The Board of Directors
(with an interested director not attending
meetings of the Board of Directors concerning,
or voting on, the Merger or the Merger
Agreement), after considering the
recommendation of the Special Committee, has
unanimously approved the Merger and the Merger
Agreement and recommends that the stockholders
of the Company approve the Merger and the
Merger Agreement.
8
<PAGE> 11
In concluding that the Merger is in the best
interests of the Company and its stockholders,
the Special Committee and the Board of
Directors considered the fairness opinion of
Chatsworth; the premium represented by the
consideration to be paid to the Company's
stockholders as compared to the historic price
of the Common Stock from January 1, 1998 to the
date of the announcement of the Merger; the
financial condition and results of operations
of the Company, including its aggregate
operating losses of approximately $30.0 million
since January 1, 1998; the inability of the
Company to raise equity and debt capital from
conventional sources and the Company's
resulting reliance on Crown and Concept to
provide working capital; and the lack of any
assurance that Crown or Concept would continue
to provide such working capital to the Company
under current circumstances. See "The
Merger -- Reasons for the Merger;
Recommendations of the Special Committee and
the Board of Directors."
Opinion of Financial
Advisor....................... Chatsworth has delivered to the Board of
Directors its written opinion, dated October
18, 1999, to the effect that, as of the date of
its opinion and subject to certain assumptions,
qualifications and limitations stated therein,
the consideration to be paid to the
stockholders of the Company in consideration of
the Merger is fair to the stockholders from a
financial point of view. On January 27, 2000,
Chatsworth reconfirmed its fairness opinion
based upon information as of December 31, 1999.
A copy of Chatsworth's October 18, 1999
opinion, which states its assumptions, matters
considered and limits of its review, is
attached to this Proxy Statement as Appendix B
and should be read in its entirety. See "The
Merger -- Opinion of the Financial Advisor to
the Special Committee."
Effects of the Merger......... As a result of the Merger, the Company will
become privately held and wholly-owned by Crown
and Concept, and the Company's stockholders no
longer will have an equity interest, or
participate, in any future earnings or growth
of the Company; the Common Stock no longer will
be publicly traded on the Bulletin Board or
otherwise; the Company no longer will be
subject to the periodic reporting and other
obligations of the Exchange Act; and the
Company will terminate its registration with
the Commission under the Exchange Act.
THE MERGER
NNI Acquisition Corporation... Acquisition is a Delaware corporation, an
affiliate of the Company and is wholly-owned by
Crown and Concept. Acquisition is the record
owner of 14,180,427 shares of Common Stock and
2,500 shares of Preferred Stock which are its
sole substantial assets. Acquisition was
incorporated for the purposes of owning such
shares of Common Stock and Preferred Stock and
to facilitate the Merger and has not conducted
any business or engaged in any other activity.
Upon consummation of the Merger, the separate
corporate existence of Acquisition will
terminate.
The Consideration............. At the effective time of the Merger, each
issued and outstanding share of Common Stock,
other than shares of Common Stock
9
<PAGE> 12
owned by Acquisition or for which appraisal
rights have been exercised, will be converted
into the right to receive $0.07; each issued
and outstanding share of Preferred Stock, other
than shares of Preferred Stock owned by
Acquisition or for which appraisal rights have
been exercised, will be converted into the
right to receive $7.00; the issued and
outstanding shares of Common Stock and
Preferred Stock owned by Acquisition will be
cancelled and the separate corporate existence
of Acquisition will terminate; and each share
of Acquisition Common Stock will be converted
into a share of Common Stock. See "The Merger
Agreement -- Terms of the Merger."
Effective Time of the
Merger........................ Promptly following the satisfaction or waiver
(where permissible) of the conditions of the
Merger, the Merger will be consummated and
become effective on the date and at the time
the required certificate of merger is filed
with the Secretary of State of Delaware (the
"Effective Time"). See "The Merger Agreement --
Effective Time of the Merger."
Conditions of the Merger...... The Merger is subject to the satisfaction or
waiver (where permissible) on or prior to the
closing date of certain conditions to closing
set forth in the Merger Agreement. See "The
Merger -- Conditions to the Merger."
Termination................... The Merger Agreement may be terminated at any
time prior to the Effective Time, whether
before or after approval of the Merger by the
Company's stockholders, by mutual written
consent of the Company and Acquisition, or by
either of the Company or Acquisition under
certain circumstances, including if (i) the
required vote of the Company's stockholders is
not obtained or (ii) the Effective Time has not
occurred on or before June 30, 2000. See "The
Merger Agreement -- Termination and
Abandonment."
Tax Treatment of the Merger... Stockholders will be taxed on receipt of the
$0.07 per share of Common Stock and/or $7.00
per share of Preferred Stock if, and to the
extent that, the amount received exceeds their
tax basis in the Common Stock and/or Preferred
Stock, respectively. Determining the tax
consequences of the Merger can be complicated
and stockholders should consult their tax
advisors to understand fully the tax effects of
the Merger. See "Federal Income Tax
Considerations -- Tax Treatment of the Merger."
Accounting Treatment.......... The Merger will be accounted for under the
purchase method of accounting in accordance
with generally accepted accounting principles
("GAAP"). See "The Merger -- Accounting
Treatment."
Business of the Company....... The Company has agreed that, prior to the
Effective Time or the earlier termination of
the Merger Agreement, except as permitted by
the Merger Agreement, it will pursue its
business in the ordinary course and will not
engage in certain extraordinary actions
specified in the Merger Agreement. See "The
Merger Agreement -- Covenants -- Business of
the Company."
Management of the Company
Following the Merger........ There will be no change in the Board of
Directors or the executive officers of the
Company as a result of the Merger. It is
anticipated
10
<PAGE> 13
that following the Merger, the business and
operations of the Company will be continued
substantially as currently conducted for the
immediate future. Following the Merger, Crown
and Concept intend to continue to evaluate the
business and operations of the Company and take
such actions they deem appropriate under the
circumstances then existing. Although there are
currently no definitive plans or agreements in
place, Crown and Concept will continue to seek
material strategic alliances for the Company in
the form of joint ventures, partnerships or
other business combinations following the
Merger.
Conflicts of Interests........ Dong Moon Joo, a member of the Board of
Directors of the Company, is a director and the
President of each of Acquisition, Capital,
Concept and Crown, including serving as
chairman of the Board of Directors of Crown,
and may have interests in connection with the
Merger that are in addition to, or conflict
with, those of the Company and its
stockholders. Because of his positions with
Acquisition, Capital, Concept and Crown, Mr.
Joo did not attend meetings of the Board of
Directors concerning, or vote on, the Merger or
the Merger Agreement. See "Conflicts of
Interest."
Regulatory Matters............ No material regulatory approval is required to
effect the Merger. See "The Merger --
Regulatory Matters."
Appraisal Rights.............. Holders of Common Stock and Preferred Stock are
entitled to appraisal rights under the DGCL.
The Merger Agreement provides that a condition
to the obligation of Acquisition to consummate
the Merger is that holders of not more than
five percent (5.0%) of the issued and
outstanding shares of Common Stock and
Preferred Stock, on an as converted basis,
shall have exercised appraisal rights. This
condition is subject to waiver by Acquisition.
See "The Merger -- Appraisal Rights" and
"Appendix C."
11
<PAGE> 14
COMPARATIVE PER SHARE MARKET INFORMATION
During 1999, the Common Stock was traded on the Bulletin Board. The
following table sets forth, for each quarter during 1999 and 1998, the high ask
and low bid quotations for the Common Stock 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.
<TABLE>
<CAPTION>
COMMON STOCK
-------------------
HIGH ASK LOW BID
-------- -------
<S> <C> <C>
1999
- ----
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
- ----
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 February 11, 2000, there were approximately record
holders 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 Stock or Preferred Stock in the
foreseeable future.
On October 20, 1999, the last full trading day prior to announcement of the
proposed Merger, the last reported sale price per share of Common Stock on the
Bulletin Board was $0.05. On , 2000 the last reported sale price
per share of Common Stock on the Bulletin Board was $ .
As of September 30, 1999, the book value per share of the Company was
($3.81).
12
<PAGE> 15
THE SPECIAL MEETING
GENERAL
This Proxy Statement is being furnished to holders of Common Stock and
Preferred Stock in connection with the solicitation of proxies by the Board of
Directors for use at the Special Meeting to be held on 2000,
11:00 a.m., local time, at 650 Massachusetts Avenue, N.W., Washington, D.C., and
at any adjournments or postponements thereof. This Proxy Statement, the attached
Notice of the Special Meeting and the accompanying proxy card are first being
mailed to stockholders of the Company on or about , 2000.
MATTERS TO BE CONSIDERED
At the Special Meeting, holders of record of Common Stock and Preferred
Stock on the Record Date will consider and vote upon (i) the Merger of
Acquisition with and into the Company pursuant to which the Company will become
wholly-owned by Crown and Concept; and (ii) such other business as may properly
come before the Special Meeting or any adjournments or postponements thereof.
RECOMMENDATION OF THE BOARD OF DIRECTORS
Upon the recommendation of the Special Committee, the Board of Directors
(with an interested director abstaining) has unanimously approved the Merger and
the Merger Agreement, having concluded that the Merger and the Merger Agreement
are fair to, and in the best interests of, the Company and its stockholders. The
Board of Directors (with Mr. Joo, the interested director abstaining)
unanimously recommends that stockholders of the Company vote "FOR" the Merger
Proposal. See "The Merger -- Reasons for the Merger; Recommendation of the
Special Committee and the Board of Directors."
RECORD DATE; SHARES ENTITLED TO VOTE; QUORUM
The Board of Directors has fixed the close of business on February 11, 2000
as the Record Date for determining the holders of shares of Common Stock and
Preferred Stock who are entitled to notice of, and to vote at, the Special
Meeting. As of the Record Date, 20,274,411 shares of Common Stock at 3,250
shares of Preferred Stock were issued and outstanding and held of record by
approximately stockholders. The holders of record on the Record
Date of shares of Common Stock are entitled to one vote per share of Common
Stock and the holders of record of shares of Preferred Stock are entitled to
vote with the Common Stock and to 100 votes for each share of Preferred Stock.
In addition to being entitled to be voted with the Common Stock, pursuant to the
Certificate of Incorporation, approval of the Merger requires the affirmative
vote of a majority of the issued and outstanding shares of Preferred Stock
voting separately as a class. The Company has determined that pursuant to the
DGCL and the Company's Bylaws, the presence of holders of shares representing a
majority of the outstanding shares of Common Stock and Preferred Stock entitled
to be voted, whether in person or by properly executed proxy, is necessary to
constitute a quorum for the transaction of business at the Special Meeting.
Under the DGCL, abstentions and "broker non-votes" (i.e., proxies from brokers
or nominees indicating that such persons have not received instructions from the
beneficial owner or other persons entitled to vote shares as to a matter with
respect to which the brokers or nominees do not have discretionary power to
vote) will be treated as present for purposes of determining the presence of a
quorum.
PROXIES; PROXY SOLICITATION
Shares of Common Stock represented by properly executed proxies received at
or prior to the Special Meeting that have not been revoked will be voted at the
Special Meeting in accordance with the instructions indicated on the proxies.
Shares of Common Stock represented by properly executed proxies for which no
instruction is given will be voted "FOR" the Merger Proposal. Stockholders are
requested to complete, sign, date and promptly return the enclosed proxy card in
the postage-prepaid envelope provided for this purpose to ensure that their
shares are voted.
13
<PAGE> 16
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of the Company, at or before the taking of the vote at the
Special Meeting, a written notice of revocation bearing a later date than the
proxy; (ii) executing a later dated proxy relating to the same shares of Common
Stock and delivering it to the Secretary of the Company before the taking of the
vote at the Special Meeting, or (iii) attending the Special Meeting and voting
in person (although attendance at the Special Meeting will not, in and of
itself, revoke a proxy). Any written revocation or subsequent proxy should be
sent so as to be delivered to The Nostalgia Network, Inc., 650 Massachusetts
Avenue, N.W. Washington, D.C. 20001, Attention: Corporate Secretary, or hand
delivered to the Secretary of the Company or his representative at or before the
taking of the vote at the Special Meeting.
If the Special Meeting is postponed or adjourned, at any subsequent
reconvening of the Special Meeting all proxies will be voted in the same manner
as such proxies would have been voted at the original convening of the Special
Meeting (except for any proxies that previously have been revoked or withdrawn
effectively), notwithstanding that they may have been effectively voted on the
same or any other matter at a previous meeting.
The Company will bear the cost of soliciting proxies from its stockholders.
VOTE REQUIRED
Under the DGCL, the Company is required to submit the Merger Proposal to
the stockholders for approval. In accordance with the DGCL, the standard for
approving the Merger Proposal is the affirmative vote of a majority of the
outstanding shares of capital stock entitled to be voted on the Merger Proposal
(including the Preferred Stock voted with 100 votes for each share of the
Preferred Stock). The affirmative vote of 10,297,206 shares of Common Stock and
Preferred Stock (with Preferred Stock having 100 votes per share) and of 1,626
shares of Preferred Stock voting separately as a class is required for approval
of the Merger Proposal. If the stockholders approve the Merger and the
transaction subsequently is challenged, the Company may be entitled under
Delaware law to assert stockholder approval as a defense. As of the Record Date
there are issued and outstanding 20,274,411 shares of Common Stock and 3,250
shares of Preferred Stock. Acquisition which is the record owner of 14,180,427
shares (70.0%) of the issued and outstanding shares of Common Stock and 2,500
shares (76.9%)of Preferred Stock has informed the Company that it intends to
vote all of its shares of Common Stock and Preferred Stock "FOR" the Merger
Proposal. The affirmative vote of the shares of Common Stock and Preferred Stock
owned by Acquisition will be sufficient to ensure approval of the Merger
Proposal.
EFFECTS OF ABSTENTIONS AND BROKER NON-VOTES
For purposes of determining approval of the Merger Proposal and any other
proposal to be presented at the Special Meeting, abstentions will have the same
legal effect as a vote "against" a matter presented at the meeting. Broker
non-votes will have the same effect as a vote "against" the Merger Proposal.
14
<PAGE> 17
SECURITY OWNERSHIP OF MANAGEMENT
AND CERTAIN BENEFICIAL OWNERS
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(2)........................ 840,840(2) 4.0% 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............................ 6,000(3) * 0 *
Robert J. Wussler.......................... 6,000(2) * 0 *
ALL DIRECTORS AND EXECUTIVE OFFICERS AS A
GROUP...................................... 905,840(2) 4.3% 0 0%
----
Concept Group(4)........................... 14,430,427(5) 70.3% 2,500 76.9%
---------- ----
Charles Potter............................. 75,000(6) * 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) Includes 5,000 shares subject to acquisition pursuant to options.
(4) The Concept Group consists of Acquisition, Concept, Crown and Capital,
which constitute a "group" within the meaning of Section 13(d)(3) of the
Exchange Act. Acquisition, Concept, Crown and Capital have informed the
Company that they share voting and dispositive power with respect to all
shares as to which Acquisition is the owner.
(5) 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.
(6) Includes 75,000 shares of Common Stock issuable upon conversion of 750
shares of Preferred Stock.
15
<PAGE> 18
THE MERGER
BACKGROUND
On June 28, 1999, the Concept Group, which then consisted of Crown, Concept
and Capital, informed the Company of its possible intention to seek a
transaction with the Company which would result in the Company becoming
wholly-owned by Crown and Concept.
In August 1999, prior to the receipt of the Merger Proposal, a
representative of Crown initiated preliminary discussions with a representative
of the Special Committee concerning the possible conversion to equity of the
Company's indebtedness to Crown and Concept or the acquisition of the Company.
The Special Committee met with the representative of Crown on September 8, 1999,
September 24, 1999 and October 7, 1999.
At a regular meeting of the Board of Directors on September 8, 1999, the
Special Committee reported to the Board of Directors concerning its discussions
with Crown. Based upon the report of the Special Committee, which included the
potential valuation range of any potential transaction, the Board of Directors
authorized the Special Committee to retain an independent financial advisor and
legal counsel. Pursuant to this authorization, the Special Committee retained
Chatsworth as its financial advisor to evaluate a possible going-private
transaction. The Special Committee retained Caplan, Buckner, Rohrbaugh &
Kostecka as its legal counsel.
On October 5, 1999, Chatsworth delivered to the Special Committee its
written analysis of a possible going-private transaction.
On October 8, 1999, Crown delivered to the Special Committee and the other
directors correspondence setting forth the basic terms of the Merger Proposal.
The Merger Proposal was referred to the Special Committee for further
consideration.
On October 13, 1999, the Special Committee determined that the Merger
Proposal was in the best interests of, and fair to, the Company and its
stockholders and recommended that the Board of Directors approve the Merger
Proposal and submit it to the stockholders for approval subject to receipt by
the Board of Directors of a written opinion from Chatsworth that the
consideration to be paid to the Company's stockholders in the Merger is fair to
the stockholders from a financial point of view.
As the Merger Proposal required approval by the Company by October 18,
1999, the Board of Directors met, with Mr. Joo not attending, to discuss the
Merger Proposal on October 14, 1999. Following this discussion, a vote on the
Merger Proposal was postponed due to the unavailability of several directors.
Due to the inability of the Board of Directors to meet again prior to the
deadline for approval of the Merger Proposal, the Company requested, and was
granted, an extension until October 21, 1999 to approve the Merger Proposal.
On October 18, 1999, Chatsworth delivered to the Special Committee its
written opinion that, subject to the various assumptions, qualifications and
limitation expressed therein, the consideration to be paid to the Company's
stockholders in the Merger is fair to the Company's stockholders from a
financial point of view.
On October 21, 1999, at a special meeting of the Board of Directors, the
Special Committee delivered to the Board of Directors its recommendation that
the Merger Proposal was fair to, and in the best interests of, the Company and
its stockholders. The Board of Directors determined that the Merger Proposal was
in the best interests of the Company and its stockholders and approved the
Merger Proposal subject to the negotiation of mutually satisfactory definitive
documentation. At this meeting the Board of Directors also requested Chatsworth
to supplement the analysis which it had delivered previously to the Special
Committee by identifying additional valuation methodologies which it had
utilized but not described. Mr. Joo did not attend this meeting of the Board of
Directors or vote on this matter.
16
<PAGE> 19
On October 21, 1999, the Company issued a press release announcing its
approval of the Merger Proposal.
On October 26, 1999, Chatsworth delivered to the Special Committee the
supplemental information with respect to its analyses which had been requested
by the Board of Directors.
On December 20, 1999, counsel to the Special Committee circulated an
initial draft of the proposed Merger Agreement. There ensued over the next
fifteen days a series of conference calls and negotiations followed by numerous
revisions and recirculations of drafts of the proposed Merger Agreement.
Subsequent to December 20, 1999 and prior to the meeting of the Board of
Directors on January 4, 2000, the Special Committee had multiple discussions
regarding the proposed Merger and the terms of the Merger Agreement. After an
extensive discussion and considering such factors as the fairness of the
Consideration from a financial point of view, and the terms of the Merger
Agreement, the Special Committee determined that the Merger Agreement is in the
best interests of the Company and its stockholders and recommended that the
Board of Directors approve the Merger Agreement.
On January 4, 2000, the Board of Directors met and determined that the
Merger would be in the best interests of the Company and its stockholders and is
on terms that are fair and reasonable to the Company and its stockholders and
approved the Merger Agreement. Mr. Joo did not attend this meeting of the Board
of Directors or vote on this matter.
The Merger Agreement was executed by the Company on January 7, 2000 and by
Acquisition on January 11, 2000.
On January 27, 2000, Chatsworth reconfirmed its fairness opinion to the
Board of Directors based upon financial information as of December 31, 1999.
Work on the Merger on behalf of the Company is being primarily performed by
the Company's General Counsel and Corporate Counsel with assistance from the
Company's finance department. Work on the Merger on behalf of The Concept Group
is being primarily performed by The Concept Group's General Counsel with
assistance from its finance department.
Daniels and Associates, L.P. ("Daniels") acted as financial advisor to the
Concept Group and negotiated with Chatsworth as to the value and terms of the
Merger and assisted and advised the Concept Group in its negotiations with the
Special Committee. Daniels will be compensated by Crown for its services.
The Concept Group is not aware of, and the Company did not receive, any
firm offers in the last two years for a merger or consolidation of the Company,
the sale or other transfer of all or any substantial part of the assets of the
Company or a purchase of the Company's securities that would enable a purchaser
of the securities to exercise control of the Company.
OPINION OF THE FINANCIAL ADVISOR TO THE SPECIAL COMMITTEE
Chatsworth is an investment banking firm which, among other things,
provides financial advisory services in connection with mergers and
acquisitions. Chatsworth was selected by the Special Committee based upon its
expertise and prior experience with Mr. Wussler. Chatsworth delivered its
written opinion to the Board of Directors on October 18, 1999 stating that the
consideration to be paid to the Company's stockholders in the Merger is fair
from a financial point of view to the Company's stockholders.
On January 27, 2000, Chatsworth reconfirmed its fairness opinion to the
Special Committee. The following summary of Chatsworth's opinion has been
revised with financial information as of December 31, 1999.
The full text of Chatsworth's written opinion is attached as Appendix B to
this Proxy Statement. Stockholders should read Chatsworth's opinion for a
discussion of assumptions made, matters considered and limitations of the review
undertaken by Chatsworth in rendering its opinion. The following summary of
Chatsworth's opinion is qualified in its entirety by reference to the full text
of the opinion attached as Appendix B to this Proxy Statement.
17
<PAGE> 20
No limitations were imposed by the Company on the scope of Chatsworth's
investigation or the procedures followed by Chatsworth in rendering its opinion.
Chatsworth's opinion is for the use and benefit of the Special Committee and
Board of Directors and was rendered to the Special Committee in connection with
its consideration of the Merger. Chatsworth's opinion is not intended to be, and
does not constitute, a recommendation to any stockholder as to how such
stockholder should vote with respect to the Merger. Chatsworth was not requested
to opine as to, and its opinion does not address, the Company's underlying
business decision to proceed with, or effect, the Merger.
In connection with the preparation and delivery of its opinion to the
Special Committee, Chatsworth performed a variety of financial and comparative
analyses which are summarized below. The preparation of a fairness opinion
involves various determinations as to the most appropriate and relevant methods
of financial and comparative analysis and the application of those methods to
the particular circumstances and, therefore, such an opinion is not readily
susceptible to summary description. In arriving at its opinion, Chatsworth did
not attribute any particular weight to any analysis or factor considered by it,
but rather, made qualitative judgments as to the significance and relevance of
each analysis and factor. Accordingly, Chatsworth's analyses must be considered
as a whole and considering any portion of such analyses and factors, without
considering all analyses and factors, could create a misleading or incomplete
view of the process underlying Chatsworth's opinion. In its analyses, Chatsworth
made numerous assumptions with respect to industry performance, general business
and economic conditions and other matters, many of which are beyond the control
of the Company. Any estimates or projections contained in Chatsworth's analyses
are not necessarily indicative of actual values or predictive of future results
or values, which may be significantly more or less favorable than as set forth
therein.
For purposes of its opinion Chatsworth:
(i) reviewed certain publicly available financial statements and other
information of the Company;
(ii) reviewed certain internal financial and operating data concerning
the Company prepared by management of the Company;
(iii) discussed the past and current operations and financial
condition and the prospects of the Company, including information relating
to certain strategic, financial and operational issues, with senior
management of the Company;
(iv) reviewed the reported prices and trading activity for the Common
Stock;
(v) compared the financial performance of the Company and prices and
trading activity of the Common Stock with that of certain other comparable
publicly-traded companies and their securities; and
(vi) performed such other analyses and considered such other factors
as it deemed appropriate.
Chatsworth assumed and relied upon, without independent verification, the
accuracy and completeness of the information provided to it for the purposes of
its opinion. With respect to the internal financial statements and other
financial and operating data, including forecasts, and discussions relating to
the strategic, financial and operational benefits anticipated from the Merger,
Chatsworth assumed that such materials were reasonably prepared on bases
reflecting the best currently available estimates and judgments of the prospects
of Crown and the Company. Chatsworth also has relied upon, without independent
verification, the assessment by management of Crown and the Company of the
strategic and other benefits expected to result from the Merger. Chatsworth has
not made any independent valuation or appraisal of the assets or liabilities of
Crown or the Company nor has it been furnished with any such appraisals.
Chatsworth's opinion is based on financial, economic, market and other
conditions as in effect on, and the information made available to it as of the
date of its opinion and its opinion is for the use and benefit of the Special
Committee and the Board of Directors. Chatsworth's opinion does not address the
merits of the underlying decision by Crown to engage in the Merger and does not
constitute a recommendation to any stockholder of the Company with respect to
the Merger Proposal.
The following is a summary of certain financial and comparative analyses
performed by Chatsworth and presented to the Special Committee and the Board of
Directors. Certain of the analyses include information
18
<PAGE> 21
presented in tabular format. In order to fully understand the financial analyses
used, the tables must be read together with the text of each summary. The tables
alone do not constitute a complete description of the financial analyses. The
methodologies used for the valuation were the following:
- Market Comparable Valuation Analysis
- Stock Price Trading History and Analysis
- Valuation per Subscriber Analysis
Market Comparable Valuation Analysis
Chatsworth analyzed audited financial statements, the Company's filings
with the Commission and financial and market information from comparable "Peer
Group" companies. The most commonly used valuation multiples are enterprise
value ("EV") relative to sales, operating cash flow (EBITDA), net income, book
value and total debt. Chatsworth's analysis shows that none of the Company's
ratios except "Enterprise Value/Subscribers" are comparable to similar companies
in the market. This is reflected in the low stock price and market
capitalization of the Company. Enterprise Value is defined as market
capitalization (current market price times the number of shares of common stock
outstanding) plus short and long term debt plus preferred stock less cash and
cash equivalents.
As the Company has negative EBITDA, net income and book value, ratio
analysis for these multiples was not considered meaningful by Chatsworth.
However, Chatsworth believes the following ratios provide a basis for comparison
with the Company's peer group.
EV/Sales: The Company's ratio of 17.6x is substantially
higher than the 4.2x for the peer group. This
reflects below average revenue given the
Company's level of debt.
Total Debt/EV: The Company's ratio of 1.0x versus .10x also
reflects a significantly greater level of debt
versus its current market capitalization.
EV/Subscribers: The Company's ratio of 10.4x is in line with
the peer group ratio of 10.1x (excluding
ValueVision*). This indicates that the Common
Stock is fairly valued at current levels and
relative to its peer group.
- ---------------
(*) ValueVision's stock price appreciated significantly after its announcements
concerning (1) ValueVision's agreement with IBM to implement ValueVision's
TV/Internet convergence strategy, (2) ValueVision's investment with General
Electric and NBC in Telocity to accelerate the use of high-speed Internet
access, and (3) ValueVision's investment with NBC in ROXY.com for
multifaceted agreements covering television and Internet programming and
marketing.
MARKET COMPARABLES(1)
(ALL FIGURES ARE IN MILLIONS, AND PER SHARE)
<TABLE>
<CAPTION>
RECENT ACQUISITIONS PUBLICLY TRADED
--------------------------------------------- ---------------------------------
BTV(2) SPZE(3) E!(4) CMT(4) TFN(4) SATH VVTV NNET(5)
------ ------- ----- ------ ------ ------ -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Price Per Share
(12/31/99).................. NA NA 9 15/16 57 5/16 0.055
52 Wk High.................. 63 1/16 7 3/32 30 1/8 62 0.25
52 Wk Low................... 38 3/4 4 1/2 6 5/8 6 1/2 0.02
Shares Outstanding
(millions)................ 10.1 3.4 30.4 37.4 20.3
Market Cap.................. $634.5 $ 94.1 $302.1 $2,143.5 $ 1.1
ST Debt + LT Debt........... $ 48.0 $ 12.3 $ 76.2 $ 0.2 $ 95.4
Cash & Equivalents.......... $ 9.8 $ 1.7 $ 22.5 $ 315.5 $ 0.6
Preferred Stock............. $ -- $ -- $ 1.1 $ 41.5 $ 0.0
Minority Interest........... $ -- $ -- $ -- $ -- $ --
Enterprise Value (EV)....... $672.8 $104.7 $356.8 $1,869.6 $ 96.0
Sales....................... $166.2 $ 30.9 $163.4 $ 253.5 $ 5.5
</TABLE>
19
<PAGE> 22
<TABLE>
<CAPTION>
RECENT ACQUISITIONS PUBLICLY TRADED
--------------------------------------------- ---------------------------------
BTV(2) SPZE(3) E!(4) CMT(4) TFN(4) SATH VVTV NNET(5)
------ ------- ----- ------ ------ ------ -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash Flow................... $ 47.7 $ 2.5 $ -- $ -- $ --
Book Value.................. $113.3 $ 13.2 $ 88.9 $ 366.9 ($82.5)
Subscribers (mm)............ 56.7 22.1 55.4 31.0 9.2
EV/Market Cap(6)............ 1.06x 1.11x 1.18x 0.87x 86.07x
EV/Sales(6)................. 4.05x 3.39x 2.18x 7.37x 17.58x
EV/Book Value(6)............ 5.94x 7.91x 4.01x 5.10x NA
Total Debt/EV............... 0.07x 0.12x 0.21x 0.00x 0.99x
Market Cap/Book Value....... 5.60x 7.11x 3.40x 5.84x NA
EV/Cash Flow(6)............. 14.11x 42.39x NA NA NA
Market Cap/Subscriber....... 11.2x 4.3x 5.5x 69.1x 0.1x
EV/SUBSCRIBERS(6)........... 11.9X 4.7X 13.0X 14.5X 9.5X 6.4X 60.3X 10.4X
</TABLE>
- ---------------
(1) BTV (Black Entertainment), SPZE (Spice), E! (Entertainment), CMT (Country
Music Television Channel), TFN (TV Food Network), SATH (Shop at Home),VVTV
(ValueVision), NNET (GoodLife).
(2) Acquired for $63 per share effective August 3, 1998.
(3) Acquired on March 16, 1999 for $105 million in cash, stock in Playboy Class
B and Directrix and assumption of debt. Approximate value is $27.8 per
share.
(4) Only "EV/Subscriber" is available as these companies were private at the
time of the Merger.
(5) Price per share is based on the average of the actual trading prices over
the prior 30 days.
(6) EV is Enterprise Value which is defined as market capitalization plus
preferred stock plus long and short term debt minus cash and cash
equivalents.
Stock Price Trading History and Analysis
The Common Stock volume and trading history was analyzed to determine
liquidity, the frequency of trading, the average size stock trade, the average
price for stock trades within the past twelve months and the premium represented
by the Merger consideration in relation to the current bid price.
Chatsworth concluded that the most significant activity during 1999
occurred on January 6, 7 and 8, 1999 as the apparent result of speculation by
day traders in response to the announcement that Crown was seeking a strategic
partner for the Company. The speculative trading activity that occurred in early
January 1999 has been excluded from Chatsworth's analysis since Chatsworth
concluded it does not reflect normal trading activity.
To conduct its analysis, Chatsworth developed a model showing the
cumulative trading volume for each respective price from $.01 to $.18 during the
12 month period ended December 31, 1999 to show whether an offer of $.07 per
share would represent a price higher than 83.0% of all normal stock trades
during the preceding year.
For the month of December 1999, the average closing price of the Common
Stock was $0.0476 per share. The cash price offered of $0.07 pursuant to the
Merger Proposal represents approximately a 50.0% premium over the average
closing price of $0.0476 per share of Common Stock.
20
<PAGE> 23
PRICE/VOLUME TABLE(1)
<TABLE>
<CAPTION>
PERCENT OF
PRICE VOLUME TOTAL VOLUME
- ----- ------- -------------------------
<S> <C> <C>
$0.010 228,400 9.6%
$0.015 214,000 18.6%
$0.020 75,000 21.8%
$0.030 205,500 30.5%
$0.035 258,400 41.4%
$0.050 326,900 55.1%
$0.055 239,000 65.2%
$0.060 301,300 77.9%
$0.065 33,200 79.3%
$0.070 87,400 83.0% PRICE FOR MERGER
- --------------------------------------------
$0.080 99,200 87.2%
$0.090 2,300 87.3%
$0.094 35,000 88.8%
$0.095 74,600 91.9%
$0.100 123,900 97.1%
$0.110 11,600 97.6%
$0.120 56,800 100.0%
$0.130 -- 100.0%
$0.180 -- 100.0%
</TABLE>
- ---------------
(1) Represents volume trading at each respective price during 1999 except the
volume which occurred during January 7, 1999 through January 11, 1999.
Valuation per Subscriber Analysis
The basis for comparison was the price paid per subscriber which is
calculated by dividing the value of the transaction by the number of
subscribers.
Comparable Transactions
The following sets forth certain merger and acquisition transactions for
basic cable networks:
<TABLE>
<CAPTION>
DATE NETWORK VALUE SUBS PER SUB
- -------- ------------------------------------- ------- ----- -------
($ MIL) (MIL) ($)
<S> <C> <C> <C> <C>
11/01/98 Odyssey Channel...................... 222 30 7.40
11/01/98 ZDTV................................. 162 9 18.00
12/01/98 Eye on People........................ 100 11 9.10
02/01/99 The Travel Channel................... 176 20 8.80
-----
</TABLE>
Weighted Average $8.20 (excluding ZDTV)
- ---------------
Source: Paul Kagan Associates, Inc.
Chatsworth does not consider ZDTV to be a comparable transaction and
excluded it from the calculation of the weighted average "Per Sub" valuation.
ZDTV is the Internet cable channel purchased by Ziff-Davis from Softbank. Paul
Allen's Vulcan Ventures also announced a $54.0 million investment for one-third
ownership simultaneous with the purchase by Ziff-Davis. Advertisers on ZDTV
include 3Com, America Online, Barnes & Noble, Canon, Charles Schwab, Comdisco,
Dell, Earthlink, Egghead, IBM, Intel, Hewlett Packard, Micron, Microsoft, NEC,
Packard Bell, PSI Net, Siebel Systems, Sprint, Sun Microsystems and ONSALE.
The weighted average value "Per Sub" for the above transactions, excluding
ZDTV, is $8.20. This includes the value of $8.80 per subscriber for The Travel
Channel transaction which closed on February 1, 1999. Chatsworth noted that
three separate equity investments in The Travel Channel which closed from June
1997 to September 1997 ranged from $1.43 to $3.75 "Per Sub". Chatsworth also
noted that while $8.20 was
21
<PAGE> 24
used for purposes of presenting a conservative valuation methodology, Chatsworth
does not believe that it represents the Company's true value per subscriber
which is lower for the following reasons:
- Only 60.0% of the Company's subscribers are full-time (see "The Company's
Subscribers");
- The Company does not have a high concentration of subscribers in urban
markets);
- The Company is not able to carry national advertising given the present
size and demographic profile of its subscriber base; and
- The Company's programming is not being carried by the highest profile
networks.
The Company's Subscribers
As of December 31, 1999, the Company had 9,232,523 total subscribers. For
purposes of Chatsworth's analysis, and in order to be conservative, full value
was attributed by Chatsworth to all subscribers, including C-Band, Local and
Part-Time subscribers.
Valuation Calculation
The Company's 9,232,523 total subscribers valued at an average of $8.20 per
subscriber gives an implied value for the Company of $75,706,689 based on the
valuation of the subscriber base as of December 31, 1999. The Company's
unaudited balance sheet as of December 31, 1999 shows Total Liabilities of
$95,415,207 and Total Assets of $12,872,273 for a net asset value of
($82,542,934). The valuation "Per Subscriber" of $75,706,689 less negative net
assets of ($82,542,934) gives a valuation for the Company of ($6,836,245) or
($0.33) per share of Common Stock.
Conclusion
On the basis of and subject to the foregoing, Chatsworth concluded that the
cash consideration of $0.07 per share to be paid to the Company stockholders in
the Merger (including the holders of Preferred Stock, the consideration for
which was determined on an as converted basis) is fair from a financial point of
view. On January 27, 2000, Chatsworth confirmed its fairness opinion to the
Board of Directors.
Pursuant to an August 27, 1999 engagement letter, the Company agreed to pay
Chatsworth for acting as financial advisor to the Special Committee a financial
advisory fee of $50,000, (which has been paid); to reimburse Chatsworth for all
reasonable expenses incurred as the Special Committee's financial advisor; and
to indemnify Chatsworth against certain liabilities relating to, or arising out
of, its engagement. Pursuant to a September 23, 1999 letter agreement, the
Company agreed to pay Chatsworth an additional $50,000 (which has been paid) for
its fairness opinion. The Company also has agreed to pay Chatsworth an
additional $25,000 for reconfirming its fairness opinion to the Special
Committee based on information as of December 31, 1999. Prior to acting as
financial advisor to the Special Committee, Chatsworth had not provided any
services to the Company, Acquisition, Capital, Crown or Concept.
REASONS FOR THE MERGER; RECOMMENDATIONS OF THE SPECIAL COMMITTEE AND THE BOARD
OF DIRECTORS
The Concept Group. As the majority stockholder of the Company, and also
the source of substantially all of the Company's working capital, the Concept
Group decided to pursue the Merger to protect more adequately its investment by
gaining full ownership of the Company. In reaching its decision, the Concept
Group considered the following factors:
(i) the substantial burden and expense of maintaining the Company as a
publicly-held entity, including the burden and expense of filing periodic
reports under the Exchange Act and compliance with the various rules and
regulations of the Commission as compared to the minor benefits of the
extremely limited public market for the Common Stock;
(ii) the financial condition, results of operations, business and
prospects of the Company, including its aggregate net loss of approximately
$30.0 million since January 1, 1998;
22
<PAGE> 25
(iii) the inability of the Company to raise equity and debt capital
from conventional sources and its ongoing dependence on the Concept Group
for working capital;
(iv) the historic and recent trading volume and market prices of the
Common Stock;
(v) the Company's outstanding indebtedness to the Concept Group,
which, if converted to equity to strengthen the Company's balance sheet,
would result in significant dilution to the Company's minority
stockholders;
(vi) the enhanced possibility of attracting a strategic alliance as a
privately-held company; and
(vii) the substantial premium represented by the Merger consideration
over the historical price for the Common Stock.
The Concept Group believes the Merger and consideration to be paid to the
Company's stockholders (other than Acquisition) is fair based upon the foregoing
reasons, the available alternatives to the Merger including the benefits and
risks to the Company's stockholders of the Company continuing to be publicly
held, and the advice of Daniels with respect to the fairness of the Merger. In
considering the above factors, the Concept Group did not assign relative weights
to any particular factor or determine that any factor was more significant than
another. Rather, the Concept Group viewed its position and recommendations as
being based on the totality of the information presented to and considered by
it.
Special Committee. In reaching its recommendation that the Board of
Directors approve the Merger, the Special Committee considered a number of
factors, including the following:
(i) the terms and conditions of the Merger Agreement, including the
consideration to be paid in the Merger;
(ii) historical and recent market prices of the Common Stock and the
premium represented by the consideration over the historical prices for the
Common Stock since January 1, 1998;
(iii) the financial condition and results of operations of the
Company, including an aggregate of approximately $30.0 million in operating
losses since January 1, 1998;
(iv) the debt structure of the Company and its effect on the Company's
ability to obtain additional capital;
(v) the inability of the Company to raise equity or debt capital from
conventional sources, the resulting reliance of the Company on Crown and
Concept to provide working capital necessary for continued operations and
the lack of any assurance that Crown and Concept will continue to provide
such capital under current circumstances;
(vi) alternatives to the Merger, including continuing to operate the
Company as a publicly traded company, the possible benefits and risks of
such alternatives and the timing and likelihood of increasing stockholder
value beyond the value of the consideration; and
(viii) the valuation analysis performed by Chatsworth and its written
opinion provided to the Special Committee on October 18, 1999, that, on
such date and subject to certain assumptions, qualifications and
limitations stated therein, the consideration to be paid in the Merger is
fair to the Company's stockholders from a financial point of view.
The Special Committee also considered certain factors which could, as a
result of the Merger, negatively affect the Company and its stockholders. These
factors included the following:
(i) loss of the Company's status as a publicly traded corporation and
the corresponding loss of a market for the Common Stock;
(ii) potential recognition of taxable income/gain to the stockholders
of the Company upon the consummation of the Merger and the payment of the
consideration; and
23
<PAGE> 26
(iii) that minority stockholders would not participate in any future
growth in the value of the Company, if any.
The Special Committee unanimously determined that, based upon all the
factors it considered, the Merger is fair to, and in the best interests of, the
Company and its stockholders. ACCORDINGLY, THE SPECIAL COMMITTEE UNANIMOUSLY
RECOMMENDED THAT THE BOARD OF DIRECTORS APPROVE THE MERGER.
Board of Directors. The Board of Directors (with an interested director
not attending Board of Directors meetings where the Merger was discussed or vote
on the proposed Merger) has determined that the Merger is fair to, and in the
best interests of, the Company's stockholders based on the analyses and
conclusions of the Special Committee (which were adopted by the Board of
Directors), and on the negotiations between the Company, as directed by the
Special Committee, and Acquisition, and on the Chatsworth opinion delivered to
the Special Committee. The Board of Directors did not quantify or otherwise
assign relative weights to the specific factors considered in reaching its
determination. The Board of Directors (with Mr. Joo, the interested director,
not attending Board of Directors meetings where the Merger was discussed or
voting on the proposed Merger or the Merger Agreement) has unanimously approved
the Merger and recommends that the Company's stockholders vote "FOR" approval of
the Merger.
CONFLICTS OF INTEREST
Mr. Dong Moon Joo, a Director of the Company, is the President and a
director of each of Acquisition, Capital, Concept and Crown (for which he serves
as chairman of the Board of Directors), and may have interests in connection
with the Merger that are in addition to, or conflict with, those of the Company
and its stockholders. Because of his positions with Acquisition, Capital,
Concept and Crown, and as a result of possible conflicts of interest, Mr. Joo
did not participate in meetings of the Board of Directors relating to, or vote
on, the Merger and the Merger Agreement. Acquisition, which is wholly-owned by
Crown and Concept, is the record owner of 14,180,427 shares of Common Stock and
2,500 shares of Preferred Stock. The Concept Group is the beneficial owner of
14,432,417 shares of Common Stock (including 250,000 shares of Common Stock
subject to acquisition upon conversion of 2,500 shares of Preferred Stock).
Concept is majority-owned by Crown. Crown is a wholly-owned subsidiary of
Capital. See "Security Ownership of Certain Beneficial Owners and Management"
and "Certain Transactions and Relationships."
REGULATORY APPROVAL
The Company and Acquisition are not aware of any material approval or other
action by any state, federal or foreign governmental agency that is required
prior to the consummation of the Merger in order to effect the Merger or of any
license or regulatory permit that is material to the businesses of the Company
or Acquisition which is likely to be adversely affected by the consummation of
the Merger.
EFFECT OF THE MERGER ON THE RIGHTS OF EXISTING STOCKHOLDERS
Holders of Common Stock, other than Acquisition and stockholders who have
exercised their appraisal rights, will receive $0.07 per share and holders of
Preferred Stock, other than Acquisition and stockholders who have exercised
their appraisal rights, will receive $7.00 per share. The shares of Common Stock
owned by Acquisition will be cancelled and each issued and outstanding share of
Acquisition Common Stock (all of which are owned by Crown and Concept) will be
converted into one share of Common Stock. As a result of the Merger, the Common
Stock no longer will be listed for quotation on the Bulletin Board; the Company
will become wholly-owned by Crown and Concept; the Company's other stockholders
no longer will have an equity interest or participate in any future earnings or
growth of the Company; and the Company no longer will be subject to registration
under the Exchange Act and will terminate its Exchange Act registration. The
termination of the Company's Exchange Act registration will relieve the Company
of its periodic and other Exchange Act reporting obligations and also will
relieve the Company's officers, directors and principal stockholders of certain
reporting and other obligations under the Exchange Act.
24
<PAGE> 27
APPRAISAL RIGHTS
If the Merger is consummated, stockholders who do not vote "FOR" the Merger
Proposal, who hold share of Common Stock or Preferred Stock of record on the
date of making a written demand for appraisal as described below and who
otherwise comply fully with Section 262 of the DGCL ("Section 262") will be
entitled to a judicial determination of the fair value of their shares of Common
Stock and Preferred Stock in accordance with the provisions of Section 262 and
to receive from the Company payment of such fair value in cash together with a
fair rate of interest, if any, as determined by such court. Stockholders who
properly perfect their appraisal rights will not be entitled to surrender their
shares of Common Stock and Preferred Stock for payment in the manner provided in
the Merger Agreement and described in this Proxy Statement. The Merger Agreement
provides that the obligation of Acquisition to consummate the Merger is
conditioned upon stockholders of the Company owning not more than five percent
(5.0%) of the issued and outstanding shares of Common Stock (which for purposes
of determining whether this condition has been satisfied includes 325,000 shares
of Common Stock issuable upon conversion of the Preferred Stock) exercising
appraisal rights. This condition may be waived by Acquisition.
Under Section 262, where a merger agreement is to be submitted for approval
and adoption at a meeting of stockholders, as in the case of the Special
Meeting, not less than 20 calendar days prior to the meeting, a constituent
corporation in the merger must notify each of the holders of its stock who was
such on the record date for the meeting that such appraisal rights are available
and include in each such notice, a copy of Section 262. This Proxy Statement
constitutes such notice to the holders of record of Common Stock and Preferred
Stock.
The following is a summary of the procedures to be followed under Section
262, the full text of which is attached as Appendix C to this Proxy Statement.
The summary does not purport to be a complete statement of, and is qualified in
its entirety by reference to, Section 262 and to any amendments to Section 262
after the date of this Proxy Statement. Failure to follow any Section 262
procedures may result in the loss of appraisal rights under Section 262.
Stockholders should assume that the Company will take no action to perfect any
appraisal rights of any stockholder. Any stockholder who desires to exercise
appraisal rights should review carefully Section 262 and is urged to consult a
legal advisor before electing or attempting to exercise appraisal rights.
Holders of record of shares of Common Stock or Preferred Stock who desire
to exercise appraisal rights must not vote in favor of the Merger Proposal and
must deliver a separate written demand for appraisal of such shares to the
Company prior to the taking of the vote on the Merger Proposal. A holder of
shares of Common Stock or Preferred Stock wishing to exercise appraisal rights
must hold of record such shares on the date the written demand for appraisal is
made and must continue to hold such shares through the Effective Time. The
demand for appraisal will be sufficient if it reasonably informs the Company of
the identity of the stockholder and that the stockholder intends to demand an
appraisal of the fair value of shares of Common Stock or Preferred Stock.
If the shares are owned of record in a fiduciary capacity, such as by a
trustee, guardian or custodian, the demand must be executed by or for the record
owner, and if the shares are owned of record by more than one person, as in a
joint tenancy or tenancy in common, the demand must be made by or for all owners
of record. An authorized agent, including an agent for one or more joint owners,
may execute the demand for appraisal for a holder of record provided the agent
identifies the record owner or owners and expressly discloses in such demand
that the agent is acting as agent for the record owner or owners of such shares.
A record holder, such as a broker, who holds shares of Common Stock or
Preferred Stock as a nominee for beneficial owners, some or all of whom desire
to demand appraisal, must exercise appraisal rights on behalf of such beneficial
owners with respect to the shares held for such beneficial owners. In such case,
the written demand for appraisal should set forth the number of shares covered
by such demand. Unless a demand for appraisal specifies a number of shares, the
demand will be presumed to be applicable to all shares outstanding in the name
of such record owner. If a stockholder holds shares of Common Stock or Preferred
Stock through a broker which in turn holds the shares through a central
securities depository nominee such as Cede & Co., a demand for appraisal of such
shares must be made by or on behalf of the depository nominee and must
25
<PAGE> 28
identify the depository nominee as record holder. BENEFICIAL OWNERS WHO ARE NOT
RECORD OWNERS AND WHO INTEND TO EXERCISE APPRAISAL RIGHTS SHOULD INSTRUCT THE
RECORD OWNER TO COMPLY STRICTLY WITH THE STATUTORY REQUIREMENTS WITH RESPECT TO
THE DELIVERY OF WRITTEN DEMAND FOR APPRAISAL. A DEMAND FOR APPRAISAL SUBMITTED
BY A BENEFICIAL OWNER WHO IS NOT THE RECORD OWNER WILL NOT BE HONORED.
A proxy or vote against the Merger Agreement will not constitute a demand
for appraisal. Stockholders should not expect to receive any additional notice
with respect to the deadline for demanding appraisal rights.
Any stockholder who elects to exercise appraisal rights must mail or
deliver the written demand for appraisal to The Nostalgia Network, Inc., 650
Massachusetts Avenue, N.W. Washington, D.C. 20001, Attention: Corporate
Secretary.
If the Merger is approved, then within ten days after the Effective Time,
the Company will provide notice of the Effective Time to all stockholders who
have complied with Section 262.
A stockholder may withdraw a demand for appraisal within 60 days after the
Effective Time of the Merger and accept the terms of the Merger. Thereafter, the
approval of the Company will be needed for such a withdrawal.
Within 120 days after the Effective Time (the "120-Day Period"), in
compliance with Section 262, any stockholder who has properly demanded an
appraisal and who has not withdrawn his or her demand as provided above (such
stockholders being referred to collectively as the "Dissenting Stockholders")
and the Company each has the right to file in the Delaware Court of Chancery
(the "Delaware Court") a petition (the "Petition"), with a copy served on the
Company in the case of a Petition filed by a Dissenting Stockholder, demanding a
determination of the fair value of the shares held by all Dissenting
Stockholders. If, within the 120-Day Period, no Petition shall have been filed
as provided above, all rights to appraisal will cease and all Dissenting
Stockholders who owned shares of Common Stock or Preferred Stock will become
entitled to receive for each share of Common Stock or Preferred Stock the
applicable consideration, as if such stockholder had initially voted to approve
and adopt the Merger Proposal. The Company is not obligated, and does not
currently intend, to file such a Petition.
Any Dissenting Stockholder is entitled, within the 120-Day Period and upon
written request to the Company, to receive from the Company a statement setting
forth (a) the aggregate number of shares of Common Stock or Preferred Stock
which have not voted to adopt and approve the Merger Proposal and with respect
to which demands for appraisal have been received and (b) the aggregate number
of Dissenting Stockholders. Such statement must be mailed (i) within ten days
after a written request therefor has been received by the Company, or (ii)
within ten days after the expiration of the period for delivery of demands, as
described above, whichever is later.
Upon the filing of a Petition, the Delaware Court may order a hearing and
that notice of the time and place fixed for the hearing on the Petition be
mailed to the Company and all Dissenting Stockholders. Notice will also be
published at least one week before the day of the hearing in a newspaper of
general circulation published in the City of Wilmington, Delaware or in another
publication deemed advisable by the Delaware Court. The costs relating to these
notices will be borne by the Company.
If a hearing on the Petition is held, the Delaware Court is empowered to
determine which Dissenting Stockholders have complied with the provisions of
Section 262 and are entitled to an appraisal of their shares. The Delaware Court
may require that Dissenting Stockholders submit their share certificates for
notation thereon of the pendency of the appraisal proceedings and the Delaware
Court may dismiss the proceedings as to any Dissenting Stockholder who does not
comply with such requirement.
The Delaware Court will appraise shares of Common Stock and Preferred Stock
owned by the Dissenting Stockholders, determining the fair value of such shares
exclusive of any element of value arising from the accomplishment or expectation
of the Merger. In determining the fair value, the Delaware Court is to take into
account all relevant factors. In WEINBERGER V. UOP, INC., the Delaware Supreme
Court discussed
26
<PAGE> 29
the factors that could be considered in determining fair value in an appraisal
proceeding, stating that "proof of value by any techniques or methods which are
generally considered acceptable in the financial community and otherwise
admissible in court" should be considered and that "[f]air" price obviously
requires consideration of all relevant factors involving the value of a company.
The Delaware Supreme Court has stated, that in making this determination of fair
value, the Delaware courts must consider market value, asset value, dividends,
earnings prospects, the nature of the enterprise and any other factors which
could be ascertained as of the date of the merger and which "throw any light on
future prospects of the merged corporation." The Delaware Supreme Court noted
that Section 262 provides that fair value is to be determined "exclusive of any
element of value arising from the accomplishment or expectation of the merger."
In CEDE & CO. V. TECHNICOLOR, INC., the Delaware Supreme Court stated that such
exclusion is a "narrow exclusion [that] does not encompass known elements of
value" but which applies only to the speculative elements of value arising from
such accomplishment or expectation. In WEINBERGER, the Delaware Supreme Court
held that "elements of future value, including the nature of the enterprise,
which are known or susceptible of proof as of the date of the merger and not the
product of speculation, may be considered."
Stockholders considering seeking appraisal should consider that the fair
value of their shares determined by the Delaware Court under Section 262 could
be more than, the same as, or less than the consideration payable pursuant to
the Merger Agreement. The Company does not anticipate offering more than the
consideration payable pursuant to the Merger Agreement to any Dissenting
Stockholder and reserves the right to assert in any appraisal proceedings, that,
for purposes of Section 262, the "fair value" of a share of Common Stock or
Preferred Stock is less than the consideration payable pursuant to the Merger
Agreement.
The Delaware Court may also (i) determine a fair rate of interest, if any,
to be paid to Dissenting Stockholders in addition to the fair value of the
shares, (ii) determine the costs of the proceeding and tax such costs against
the parties as the Delaware Court deems equitable (however, costs do not include
attorneys' and expert witnesses' fees), and (iii) upon application of a
Dissenting Stockholder, order all or a portion of the expenses incurred by any
Dissenting Stockholder in connection with the appraisal proceeding, including,
without limitation, reasonable attorney's fees and fees and expenses of experts,
to be charged pro rata against the value of all shares entitled to appraisal.
No appraisal proceedings in the Delaware Court will be dismissed as to any
Dissenting Stockholder without the approval of the Delaware Court, and this
approval may be conditioned upon terms which the Delaware Court deems just.
From and after the Effective Time, Dissenting Stockholders will not be
entitled to vote (or consent by written action) any shares subject to demand for
appraisal for any purpose and will not be entitled to receive payment of
dividends or other distributions payable to stockholders of record at a date
prior to the Effective Time.
Failure to take any required step in connection with appraisal rights may
result in the loss of such rights. Any stockholder who loses such rights will
only be entitled to receive the consideration.
ACCOUNTING TREATMENT
The Merger will be accounted for under the purchase method of accounting in
accordance with GAAP, whereby the value of the consideration paid in the Merger
will be allocated based upon the estimated fair values of the assets acquired
and liabilities assumed at the Effective Date.
Pro forma financial information has not been included in this proxy
solicitation because the stockholders, other than Acquisition, are receiving
cash consideration only and will not retain or receive a continuing interest in
the Company's business after the Merger.
27
<PAGE> 30
THE MERGER AGREEMENT
The following description of the Merger Agreement does not purport to be
complete and is qualified in its entirety by, and is subject to, the more
complete and detailed information set forth in the Merger Agreement, a copy of
which is attached as Appendix A to this Proxy Statement and incorporated herein
by reference.
TERMS OF THE MERGER
The Merger. Subject to the terms and conditions of the Merger Agreement,
Acquisition will merge with and into the Company which will result in the
Company becoming wholly-owned by Crown and Concept and the separate corporate
existence of Acquisition will cease. The Company will continue to exist
following the Merger and its internal corporate affairs will continue to be
governed by Delaware law. Crown and Concept, as the only stockholders of the
Company following the Merger, will have sole power and authority to control all
aspects of the internal corporate and business affairs of the Company following
the Merger. Acquisition is wholly-owned by Crown and Concept. Concept is
majority owned by Crown. Crown is a wholly-owned subsidiary of Capital.
Certificate of Incorporation and Bylaws. The Merger Agreement provides
that at the Effective Time and without any further action on the part of the
Company or Acquisition: (1) the Certificate of Incorporation will be amended and
restated substantially as set forth in Exhibit A to the Merger Agreement and,
from and after the Effective Time, the Certificate of Incorporation, as so
amended and restated, will be the Certificate of Incorporation of the Company;
and (2) the Bylaws of Acquisition, as in effect at the Effective Time, shall be
the Bylaws of the Company. Pursuant to the amendment to the Certificate of
Incorporation, among other things, the Company will have authorized 1,000 shares
of common stock, par value $.01 per share.
Conversion of Common Stock and Preferred Stock. At the Effective Time,
each issued and outstanding share of Common Stock, other than shares of Common
Stock owned by Acquisition or for which appraisal rights have been exercised,
will be converted into the right to receive $0.07; each issued and outstanding
share of Preferred Stock, other than shares of Preferred Stock owned by
Acquisition or for which appraisal rights have been exercised, will be converted
into the right to receive $7.00; the issued and outstanding shares of Common
Stock owned by Acquisition will be cancelled; and each share of Acquisition
Common Stock will be converted into a share of Common Stock.
Options. Prior to the Effective Time, the Company will take all steps
necessary to (a) terminate, to the extent permitted by the terms thereof, all
stock option plans without prejudice to the rights of the holders of options
thereunder and (b) will grant no additional options. The Company will use its
best efforts to take all actions necessary to cause each outstanding stock
option, whether or not exercisable or vested, to be cancelled, as of the
Effective Time and to obtain the consent of each holder of an option (whether or
not then exercisable) to the cancellation of the option. In exchange for the
cancellation of options, the Company may make payments to, or enter into other
agreements with, the option holders in consideration of the termination of the
options.
Directors and Officers. There will be no change to the directors and
executive officers of the Company as a result of the Merger, and each director
and executive officer of the Company will continue to serve in that capacity
until his or her successor has been duly elected or appointed and qualified or
until his or her earlier death, resignation or removal.
INDEMNIFICATION
From and after the Effective Time, the Company will continue to indemnify
each present and former officer, director, employee and agent of the Company
against any and all claims, losses, damages, liabilities, costs, judgments,
amounts paid in settlement and expenses (including reasonable attorneys' fees)
in connection with any threatened, pending or completed action, suit, claim,
proceeding or investigation arising out of, or pertaining to, any act or
omission prior to the Effective Time to full extent permitted under the
Company's Bylaws and Delaware law. The Company has agreed to use its best
efforts to provide to those officers and directors of the Company as of October
21, 1999 who also are officers or directors of the Company
28
<PAGE> 31
immediately following the Effective Time with officers' and directors' liability
insurance comparable to that maintained by the Company as of October 21, 1999,
subject only to certain limitations with respect to the cost of such insurance.
EFFECTIVE TIME OF THE MERGER
Promptly following the satisfaction or waiver (where permissible) of the
conditions to the Merger, the Merger will be consummated and become effective on
the date and at the time the required certificate of merger is filed with the
Secretary of State of Delaware. See "The Merger Agreement -- Merger-Effective
Time."
REPRESENTATIONS AND WARRANTIES
Representations and Warranties of Acquisition. The Merger Agreement
includes representations and warranties of Acquisition as to, among other
things, (i) the due authorization of the Merger Agreement and the transactions
contemplated thereby by the Board of Directors and the stockholders of
Acquisition, and the enforceability of the Merger Agreement; (ii) that
Acquisition has received commitments for the funding necessary to complete the
transactions contemplated by the Merger; and (iii) the accuracy of information
provided by Acquisition for use in this Proxy Statement.
Representations and Warranties of the Company. The Merger Agreement
includes representations and warranties of the Company as to, among other
things, (i) the due authorization and approval of the Merger Agreement and the
transactions contemplated thereby by the Board of Directors of the Company, and
the enforceability of the Merger Agreement subject to approval by the Company's
stockholders; (ii) the capitalization of the Company, the validity of the Common
Stock and Preferred Stock and the absence of any undisclosed options, warrants
or other similar rights with respect to the Common Stock or Preferred Stock;
(iii) the absence of any undisclosed material liabilities other than those
incurred in the ordinary course of the business of the Company consistent with
past practice and liabilities incurred in connection with the Merger; (iv) that
the execution or delivery of the Merger Agreement or the consummation of the
Merger will not violate the Certificate of Incorporation or Bylaws or result in
a breach of any material contract, agreement, order, law, rule or regulation to
which the Company is subject; and (v) the accuracy in all material respects of
this Proxy Statement, except for the information provided by Acquisition, and
the conformity of this Proxy Statement to the requirements of the Exchange Act
and the rules promulgated thereunder.
COVENANTS
The Merger Agreement contains a number of customary and
transaction-specific covenants, including the following:
Business of the Company. The Company has agreed, except as
contemplated by the Merger Agreement, from the date of the Merger Agreement
to the Effective Time, not to take any action that adversely affects its
ability to pursue its business in the ordinary course, to seek to preserve
its current business organization, to keep available the services of its
current officers and employees, and to use its best efforts to preserve its
relationships with customers, suppliers and others having business dealings
with it. The Company also has agreed that before the Effective Time, except
as expressly permitted by the Merger Agreement or by Acquisition, it will
not, among other things, (i) split, combine or reclassify any shares of its
capital stock, declare, pay or set aside for payment any dividend or other
distribution in respect of its capital stock or directly or indirectly
redeem, purchase or otherwise acquire any shares of its capital stock or
other securities; (ii) authorize for issuance, issue, sell, pledge, dispose
of or encumber, deliver or agree or commit to issue, sell, pledge or
deliver (whether through the issuance or granting of any options, warrants,
commitments, subscriptions, rights to purchase or otherwise) any stock of
any class of the Company or any securities convertible into or exercisable
or exchangeable for shares of stock of any class of the Company, other than
the issuance of shares pursuant to the exercise of options outstanding as
of the date hereof; (iii) except in the ordinary and usual course of
business and consistent with past practice, incur any material liability,
obligation or indebtedness, issue any debt securities or assume,
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guarantee, endorse or otherwise become responsible for, the obligations of
any other individual or entity; (iv) acquire any other business or make any
material investment; (v) change in any material respect its accounting
methods, principles or practices except as in accordance with GAAP,
consistently applied (vi) file for voluntary bankruptcy or become subject
to involuntary bankruptcy proceedings; (vii) take any action or course of
action inconsistent with any of the covenants and agreements contained in
the Merger Agreement; and (viii) take or agree to commit to take any action
that would make any representation or warranty of the Company in the Merger
Agreement inaccurate in any material respect at the Effective Time or omit
to take any action necessary to prevent any such representation or warranty
from being inaccurate in any material respect at such time.
Deposit of Funds. Not less than 10 days prior to the Special Meeting,
Acquisition will deposit or cause to be deposited with an agent retained for
purposes of facilitating the payment of the consideration in exchange for the
Common Stock and the Preferred Stock, immediately available funds in an amount
equal to $0.07 for each issued and outstanding share of Common Stock and $7.00
for each issued and outstanding share of Preferred Stock excluding shares of
Common Stock and Preferred Stock owned by Acquisition which will be cancelled.
If necessary, the funds to be paid to the holders of Common Stock and Preferred
Stock (other than Acquisition), together with all other funds necessary for
Acquisition to consummate the Merger, will be loaned to Acquisition by Crown.
Any funds loaned by Crown to Acquisition will be loaned to Crown by Atlantic
Video, Inc., a Delaware corporation ("AVI") and an affiliate of the Concept
Group. Any funds borrowed by Crown from AVI will be pursuant to a December 30,
1993 promissory note, as amended, which entitles Crown to borrow up to $96.0
million and bears interest at the annual rate of 6.0%. The Concept Group
understands that any funds loaned to it by AVI will be provided to AVI by One-Up
Enterprises, Inc., an affiliate, which will borrow the funds from Unification
Church International, Inc.
Best Efforts. Each of the Company and Acquisition have agreed to utilize
its best efforts to cause the Merger, and all transactions contemplated by the
Merger Agreement, to be consummated.
CONDITIONS TO THE MERGER
Conditions to Each Party's Obligations to Effect the Merger. The
respective obligations of the Company and Acquisition are subject to certain
conditions, including the following (which have been satisfied): (i) the Merger
shall have been duly approved by the Company's stockholders; and (ii) Chatsworth
shall have delivered to the Company its written opinion that the consideration
is fair to the Company's stockholders from a financial point of view.
Conditions to the Obligations of Acquisition. The obligations of
Acquisition to effect the Merger also are subject to satisfaction or waiver of
the following conditions, among others: (i) the accuracy and completeness in all
material respects of the representations and warranties of the Company in the
Merger Agreement; (ii) the performance by the Company in all material respects
of its obligations under the Merger Agreement which are required to be performed
at or prior to the Effective Time; and (iii) holders of not more than five
percent (5.0%) of Common Stock and Preferred Stock (calculated on an "as
converted" basis to Common Stock at the ratio of 100 shares of Common Stock for
each share of Preferred Stock) shall have exercised appraisal rights;
Acquisition may waive any of the foregoing or other such conditions to the
Merger.
Conditions to the Obligations of the Company. The obligation of the
Company to effect the Merger also is subject to satisfaction or waiver of the
following conditions: (i) the accuracy and completeness in all material respects
of the representations and warranties of Acquisition in the Merger Agreement;
and (ii) the performance by Acquisition in all material respects of its
obligations under the Merger Agreement which are required to be performed at or
prior to the Effective Time. The Company may waive either or both of the
foregoing conditions.
AMENDMENT; WAIVER; TERMINATION
Amendment. The Merger Agreement may be amended at any time by written
agreement of the Company and Acquisition (prior to the Effective Time), as
applicable. An amendment to the Merger Agreement subsequent to adoption by
stockholders of the Company may not alter or change the amount or
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kind of consideration to be received in exchange for, or on conversion of, the
Common Stock or Preferred Stock without the approval of the holders thereof.
Waiver. Either party to the Merger Agreement may extend the time for the
performance of any of the obligations or other acts of the other party thereto,
or waive compliance with any of the agreements or any condition to the
obligations thereunder of the other party thereto, to the extent that such
obligations, agreements and conditions are intended for its benefit.
Termination. The Merger may be abandoned and the Merger Agreement may be
terminated prior to the Effective Time, before or after approval by the
stockholders of the Company, by the mutual written consent of the Company and
Acquisition or by either party if (i) there has been a material failure by the
other party to perform any of its covenants, obligations, agreements or
conditions or the other party has breached any of the representations or
warranties of the Merger Agreement; (ii) there shall be in effect any permanent
injunction or action preventing the consummation of the Merger; or (iii) if the
Effective Time shall not have occurred by June 30, 2000.
Upon termination of the Merger Agreement pursuant to its terms, the Merger
Agreement shall become void and no longer be of any force and effect and there
shall be no liability of either party to the other party to the Merger
Agreement.
EXPENSES AND FEES
Each party will bear its own expenses incurred in connection with the
Merger. The Company will bear expenses arising out of or incurred in connection
with, the preparation of this Proxy Statement and the Special Meeting including
printing, mailing, solicitation, accounting and other fees and expenses related
thereto. The Company and the Concept Group estimate their respective expenses to
be incurred in connection with the Merger as follows:
<TABLE>
<S> <C>
The Company
Legal..................................................... $ 75,000
Accounting................................................ $ 6,000
Financial Advisors........................................ $135,000
Filing.................................................... $ 290
Transfer Agent............................................ $ 5,000
Printing.................................................. $ 30,000
The Concept Group
Legal..................................................... $200,000
Financial Advisors........................................ $125,000
Disbursement Agent........................................ $ 10,000
</TABLE>
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes material federal income tax
considerations from the Merger to the Company's and its stockholders. This
discussion does not address the tax consequences to Acquisition or its
stockholders arising from the Merger. This discussion is general in nature and
is not tax advice. No representations are made as to state, local or foreign tax
consequences to the Company or any stockholder of the Company resulting from the
Merger. Each stockholder should consult his or her own tax advisor of the
stockholder's unique tax position.
The exchange of Common Stock or Preferred Stock for cash by a stockholder
in the Merger will be a taxable transaction under the Internal Revenue Code of
1986, as amended (the "Code"). In general, a stockholder will recognize gain or
loss equal to the difference between the tax basis of his or her Common Stock or
Preferred Stock and the amount of cash received in exchange therefor. Such gain
or loss will be capital gain or loss if the Common Stock or Preferred Stock is a
capital asset in the hands of the stockholder and will be long-term gain or loss
if the stockholder has held the Common Stock or Preferred Stock for more
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than one year as of the Effective Time. These rules may not apply to
stockholders who acquired Common Stock or Preferred Stock pursuant to the
exercise of stock options or other compensation arrangements with the Company or
to stockholders who are not citizens or residents of the United States or who
are otherwise subject to special tax treatment under the Code.
The Company will not recognize gain or loss for federal income tax purposes
as a result of the Merger.
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CERTAIN TRANSACTIONS AND RELATIONSHIPS
The following are descriptions of certain transactions and relationships
between the Company and any of its affiliates and Acquisition, Capital, Crown
and Concept or their respective affiliates. See "The Merger -- Conflicts of
Interest."
Concept and Crown. Since 1990, Crown and Concept have been the principal
source of the Company's capital. Crown and Concept have invested approximately
$2.1 million and provided approximately $70.5 million in financing since 1994,
including $19.0 million loaned by Crown to the Company in 1998 and $12.0 million
loaned by Crown to the Company during the nine months ended September 30, 1999.
On March 27, 1999, the Company issued two substitution and replacement
notes to Crown and Concept in the amount of $50,571,503, and $20,598,036,
respectively, at an annual interest rate of 7.75%, with the principal and unpaid
interest due January 1, 2000. On March 22, 1999, and on June 9, 1999, the
Company issued two promissory notes to Crown in the principal amounts of $3.5
million and $2.0 million, respectively, at an annual interest rate of 7.75%,
each due January 1, 2000. On August 24, 1999, and on September 10, 1999, the
Company issued two promissory notes to Crown in the principal amounts of $1.0
million each, at annual interest rates of 8.00% and 8.25%, respectively, each
due January 1, 2000. As of December 30, 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 8.50% and which are secured by substantially all of
the Company's assets and mature on January 1, 2001.
Mr. Joo is the President and a director of each of Acquisition, Capital,
Concept and Crown (for which he serves as chairman of the Board of Directors).
Christopher A. Cates and Floyd Christofferson, directors of the Company, were
officers of Concept subsidiaries until January 26, 1999 and October 27, 1999,
respectively.
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 the nine months ended September 30, 1999 was
approximately $733,915.
At September 30, 1999, the Company was indebted to AVI in the principal
amount of $305,000 and accrued interest of approximately $330,400 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 director of AVI.
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 Washington Television Center Limited Partnership ("WTC") on a
month-to-month basis at a monthly rate of $16,900. All of the interest in WTC is
owned by U.S. Property Development Corporation of which Mr. Joo is an officer.
WTC is an affiliate of AVI.
The Company utilizes the facilities of Manhattan Center Studios for both
remote and on-site television production on an as needed basis. During the first
nine months of 1999, the Company incurred approximately $107,595 for services
rendered by Manhattan Center Studios. Manhattan Center Studios is an affiliate
of AVI.
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Pursuant to a letter agreement dated March 29, 1995 between Concept and the
Company that was signed in anticipation of a possible conversion of the
Company's indebtedness to Concept into equity, which debt conversion has not
occurred, as of the date hereof, the Company agreed to: sell at least 2,000
shares of Preferred Stock to Concept pursuant to the conversion; not to issue
additional shares of Preferred Stock until Concept and the Company reached
mutual agreement as to the price per share of the debt conversion; granted to
Concept the right of first refusal with regard to the sale of in excess of
500,000 shares of Common Stock or 500 shares of Preferred Stock in the
aggregate; and agreed to issue additional shares of Common Stock to Concept in
the event of future sales of capital stock by the Company to third parties at a
price per share less than that agreed upon by Concept and the Company for the
debt conversion.
The Company leases equipment from Pyramid Video, Inc. ("Pyramid"), which is
a majority-owned subsidiary of Concept, at the monthly rate of $2,440 and
expended approximately $17,080 for the leased equipment during the nine months
ended September 30, 1999. Mr. Joo is a director of Pyramid.
On January 7, 2000, Crown and Concept transferred to Acquisition all of
their respective shares of Common Stock and Preferred Stock in exchange for 1000
shares of the Acquisition Common Stock.
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THE CONCEPT GROUP
The Concept Group consists of Acquisition, Capital, Crown and Concept. The
following is a brief description of the business conducted by each of
Acquisition, Capital, Crown and Concept and identifies each of their respective
executive officers and directors.
Acquisition is a Delaware corporation formed to own the Common Stock and
Preferred Stock and to facilitate the Merger. Upon consummation of the Merger,
Acquisition will be merged with and into the Company and the Company will be
wholly-owned by Concept and Crown. The directors and executive officers of
Acquisition are Mr. Joo (President) and Werner Seubert (Vice President).
Concept has diverse interests in the communications and telecommunications
industries with ownership interests in firms principally involved in video
newsgathering and transmission services, corporate video communication and
program production and post-production. Messrs. Joo and Seubert and Max Hugel
are the directors of Concept, and Messrs. Joo and Seubert are the President and
Vice President, respectively, of Concept.
Crown owns a majority of the capital stock of Concept. Crown has diverse
interests in the communications and telecommunications industries through
operation of a satellite up-linking business and its majority ownership interest
in Concept. Mr. Joo, Theodore Agres, Robert Morton, Pauline Eby and Peter Gogan
are the directors of Crown, and Messrs. Joo (President) and Seubert (Vice
President) are the executive officers of Crown.
The sole stockholder of Crown is Capital. Capital is a Delaware non-stock
corporation, which indirectly owns interests in firms involved in the
communications and telecommunications industries through its ownership of Crown.
Mr. Joo, Neil A. Salonen, Thomas Ward, Anthony Guerra and Michael McDevitt are
the members of Capital. Mr. Joo, Keith Cooperrider and Mr. Gogan are the
directors of Capital. Messrs. Joo (President) and Seubert (Vice President) are
the executive officers of Capital.
The principal business address for Acquisition, Concept, Crown and Capital
is 650 Massachusetts Avenue, N.W., Washington, D.C. 20001 and the telephone
number is (202) 789-2124.
For the last five years, Mr. Joo also has been President of Concept and
President and Chief Executive Officer of The Washington Times Corporation (the
"Washington Times")and News World Communications, Inc. ("News World"). The
Washington Times and News World publish numerous newspapers and periodicals. Mr.
Joo's business address is 650 Massachusetts Avenue, N.W., Suite 200, Washington,
D.C. 20001.
Mr. Hugel is Chairman of the Board of Rockingham Venture, Inc.
("Rockingham"), which is engaged in the operation of a racetrack. The principal
offices of Rockingham are located at Rockingham Park Boulevard, P.O. Box 45,
Salem, New Hampshire 03079, which is Mr. Hugel's business address.
For the last five years, Mr. Seubert also has been Vice President and
Controller of AVI. AVI is engaged in the production and recording of videotapes,
the provision of postproduction services and related activities. Mr. Seubert's
business address is 650 Massachusetts Avenue, N.W., Suite 200, Washington, D.C.
20001.
Messrs. Morton, Gogan and Agres (for the last five years), and Ms. Eby (for
the last three years), also have been principally employed by the Washington
Times. For the two years prior to her employment with the Washington Times, Ms.
Eby was principally employed by AVI. The business address of each of the above
officers and the principal offices of the Washington Times is 3600 New York
Avenue, N.E., Washington, D.C. 20002. Mr. Morton serves as Assistant Managing
Editor, Mr. Gogan serves as Special Assistant to the President, Ms. Eby serves
as Executive Assistant to the President and Mr. Agres is the Deputy Managing
Editor of The Washington Times newspaper.
Mr. Salonen is President of International Cultural Foundation, which is a
nonprofit, tax-exempt foundation with the purpose of promoting academic,
scientific, religious and cultural exchange among the countries of the world.
The principal offices of International Cultural Foundation are located at 51
Monroe Street, Suite 1201, Rockville, Maryland 20850, which is Mr. Salonen's
business address.
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For the last five years, Messrs. Ward and Guerra have been principally
employed by the University of Bridgeport for which the address is 271 Park
Avenue, Bridgeport, Connecticut 06601. Mr. Ward serves as Special Assistant to
the President for New Initiatives, and Mr. Guerra serves as the Dean of College
Graduate and Undergraduate Studies.
For the last five years, Mr. McDevitt has been Director of Security at
Belvedere Estates, which operates a group of properties in Westchester County,
New York. The principal offices of Belvedere Estates are located at 723 South
Broadway, Tarrytown, New York 10591, which is the business address of Mr.
McDevitt.
For the last five years, Mr. Cooperrider has been principally employed as
Treasurer of the Washington Times. The business address of Mr. Cooperrider is
3600 New York Avenue, N.E., Washington, D.C. 20002.
To the knowledge of the Concept Group, during the last five years, none of
the Company, Acquisition, Concept, Crown, Capital, Ms. Eby and Messrs. Joo,
Hugel, Gogan, Seubert, Agres, Cooperrider, Morton, Salonen, Ward, Guerra and
McDevitt have been convicted in a criminal proceeding (excluding traffic
violations or similar misdemeanors) or has been a party to a civil proceeding of
a judicial or administrative body of competent jurisdiction and, as a result of
such proceeding, was or is subject to a judgment, decree or final order
enjoining future violations of, or prohibiting or mandating activities subject
to, Federal or state securities laws or finding any violation with respect to
such laws.
BUSINESS OF THE COMPANY
OVERVIEW
The Company operates a television programming service, GoodLife TV Network
(the "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 Boomers 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 a
wholly-owned subsidiary.
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.
AFFILIATED CABLE SYSTEMS AND SUBSCRIBERS
The Network's programming is distributed by approximately 1,410 Affiliates,
from which the Network derives fees, typically based upon the number of monthly
subscribers in each Affiliate's system. As of September 30, 1999, the Network
had 8,585,900 subscribers, an increase of 11.2% from December 31, 1998, when the
Network had 7,718,000 subscribers. As of December 31, 1999 the Network had
9,232,500 subscribers, an increase of 646,000 (7.5%) subscribers from September
30, 1999. 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. During the nine months ended September 30,
1999, the Network had revenues of approximately $1.5 million from Affiliate
fees. Two multiple system operator Affiliates accounted for approximately 20.0%
and 16.0% of Affiliate revenue for the nine months ended September 30, 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
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corresponding decrease in the number of channels available to independent
networks such as the Network. As a result of intense competition among cable
networks for this reduced number of channels, the Company's per subscriber fees
from Affiliates have declined and may continue to decline.
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. During
the nine months ended September 30, 1999, the Company derived revenues of
$2,398,361 from advertising.
PROGRAMMING
The Network has continued to expand and improve its original programming.
The following are descriptions of programs aired on the 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 champions in each class, but
also provides insight into the techniques and fine points of competition.
Cafe DuArt (Original)
Renowned impressionist/comedian Louise DuArt serves as the owner/hostess of
a New York cabaret club where a wide variety of famous guests interact with the
club's staff in comedic settings. Musical variety acts are intertwined in the
comedic setting to provide a well balanced source of entertainment.
The Real Me Autobiographies (Original)
Set in a casual atmosphere, The Real Me Autobiographies provides a unique
insight into the lives and significant influences of its guest hosts as they
tell their own stories in their own words.
American Couples (Original Pilot)
Hosted by Nancy Glass, American Couples is an hour long show which
celebrates the family values, love, commitment and partnership of famous
couples.
Heroes & Sheroes (Original Pilot)
Heroes & Sheroes profiles ordinary men and women who have performed heroic
tasks for the benefit of their fellow man.
American Families (Original Elements begin airing in January 2000)
American Families spotlighting regular families discussing contemporary
solutions to issues raised in episodes of classic family programs of Ozzie &
Harriet and Make Room for Daddy.
Cookbook Cooking with Christopher Kent (Original)
This program features the Network's Flea Market Movie host, Christopher
Kent, who also is an accomplished chef, preparing dishes from famous cookbooks.
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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 and how to get a good buy on a new car.
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 which were purchased by the Network.
Acquired Programming
Off-network series airing on the Network include The Love Boat and Bonanza.
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
the 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.
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.
The Company also continued its efforts to grow its subscriber base. At
September 30, 1999, the Company had 8,585,900 subscribers, compared to 7,718,000
subscribers at December 31, 1998. As of December 31, 1999 the Network had
9,232,500 subscribers, an increase of 646,000 (7.5%) subscribers from September
30, 1999. The Service Transmission Agreement between the Company and National
Digital Television Center
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providing for digital distribution of the Network's signal through the Headend
in the Sky program ("HITS") contributed significantly to the Company's increase
in subscribers.
The Company also continued in its analysis of, and efforts to seek, a
strategic alliance. The Company has 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 ventures or
other agreements with other business entities after the Merger.
In March 1999, to more closely align its sales and marketing activities,
the Company determined to consolidate these efforts at its headquarters in
Washington, D.C. and closed its Englewood, Colorado and Ft. Washington,
Pennsylvania offices, resulting in a reduction of its staffing levels by eleven
positions.
For a description of the revenue obtained by the Company from external
customers and the Company's loss and total assets, see the Company's audited
financial statements for the fiscal year ended December 31, 1998 and Notes
thereto and the Company's unaudited financial statements for the nine months
ended September 30, 1999 and the Notes thereto which are included in this Proxy
Statement.
Financing for the Network has previously been provided by Concept and
Crown. Crown loaned to the Company $12.0 million during the nine months ended
September 30, 1999 and $19.0 million in 1998.
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 ten years.
COMPETITION
There is intense competition among providers of programming via cable
television, direct broadcast satellite ("DBS") and other video delivery systems.
The Network competes with other programmers for access to limited channel space
on Affiliates and viewers; for advertising revenues with other cable networks,
broadcast television, radio and print media; and more generally, with various
other leisure-time activities such as home video, movies, 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 providers of these programming services are comprised of a group of
programming services or are affiliated with cable system operators or motion
picture studios, and may enjoy advantages that independent services, such as the
Network, do not. 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 both reduce competition for access to
channel space and increase 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 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
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<PAGE> 42
because it will receive fees based upon the number of subscribers to that
system. The Company pays 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 may have, in the short term, an adverse impact on the
Network's ability to gain carriage, the Company believes it is the most
appropriate way to maximize the value and impact of the Company's financial
resources. The Company also is actively engaged in efforts to review and
identify potential strategic alliance partners that could provide support to the
Company's efforts to increase its subscriber base.
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 1996 Act 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
(where the Network typically is carried) expired on March 31, 1999. Basic
service, which cable operators are required to offer to all subscribers, remains
subject to rate regulation in communities in which the cable system is not
subject to "effective competition." The institution of an alternative
multi-channel video distribution system by a telephone company serving
substantially the same area as the cable system is deemed to constitute
"effective competition" under the 1996 Act.
The 1996 Act does not alter the "must carry" and "retransmission consent"
requirements of the 1992 Act. These provisions, coupled with rate regulation,
have forced cable systems to increase the number of channels carrying broadcast
or broadcaster-affiliated channels, causing a corresponding decrease in the
number of channels available to satellite distributed networks such as the
Network. In the past, the Network has lost carriage on cable systems because the
system needed to reassign the channel used by the Network either to comply with
the 1992 Act's must carry provisions or to fulfill a contractual obligation to a
broadcaster arising out of the "retransmission consent" requirements of the 1992
Act. While the FCC relaxed its rate regulation rules in 1995 to encourage cable
company investment in additional channel capacity, the end of upper tier rate
regulations on March 31, 1999 may further encourage cable operators to invest in
new facilities that will accommodate additional programming.
The Company is unable to predict what effect, if any, these legislative and
regulatory changes will have on its operations or finances. In general, the
Company believes that the relaxation of rate regulation and the
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<PAGE> 43
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. 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.
EMPLOYEES
On September 30, 1999, the Company had a total of 26 full-time, non-union
employees. On March 2, 1999, the Company announced its determination to
consolidate the Network's sales and marketing staffs at its headquarters in
Washington, DC, resulting in a reduction of its staffing levels by eleven
positions. The Company has experienced no work stoppage, is not a party to any
collective bargaining agreements and believes that it enjoys good relations with
its current employees.
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 WTC, a subsidiary of U.S. Property Development
Corporation, of which Mr. 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 AVI. Mr. Cates was an officer of AVI until
January 26, 1999, and Mr. Joo is an officer and director of AVI. See "Certain
Relationships and Transactions."
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.
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<PAGE> 44
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>
NINE MONTHS NINE MONTHS
ENDED ENDED YEAR ENDED
------------ ------------ ----------------------------------------------------------------------
9/30/99 9/30/98 1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Subscribers.......... 8,585,900 7,344,519 7,718,000 7,060,000 7,694,000 8,905,000 8,927,000
BALANCE SHEET DATA
Total Assets......... $ 14,691,323 $ 15,474,477 $ 12,979,711 $ 16,997,972 $ 17,486,702 $23,955,541 $11,154,537
Long Term
Obligations........ 85,183,407 61,673,971 66,664,879 45,989,547 28,202,711 22,881,635 3,096,540
Stockholders' Equity
(Deficit).......... (77,262,888) (55,530,298) (61,403,423) (38,352,747) (19,464,221) (7,522,733) 1,953,634
INCOME STATEMENT DATA
Affiliate Sales
Revenue............ 1,681,827 1,972,421 2,530,714 2,579,376 3,850,745 4,205,324 5,014,547
Advertising Sales
Revenue............ 2,267,090 1,966,203 2,965,896 4,474,597 5,652,938 5,812,663 7,206,501
Other Revenue........ 35,465 34,750 124,960 1,248,898 231,052
Total Operating
Revenues........... 3,948,917 3,974,089 5,531,360 7,178,933 9,503,683 11,266,885 12,452,100
Operating Expenses... 15,428,429 17,940,815 24,058,635 23,467,791 20,394,940 20,260,931 16,425,169
Loss From
Operations......... (11,479,512) (13,966,726) (18,527,275) (16,288,858) (10,891,257) (8,994,046) (3,973,069)
Net Loss............. (15,859,535) (17,177,545) (23,050,676) (18,888,526) (11,941,488) (9,476,367) (4,231,177)
Net Loss Per Common
Share -- Basic and
Diluted............ (0.78) (0.85) (1.14) (0.93) (0.59) (0.47) (0.22)
</TABLE>
As of September 30, 1999, the book value per share of the Company was
($3.81).
The Company has not paid a dividend since its inception.
The ratio of earnings to fixed charges for the periods as required by the
fiscal years ending 1997 and 1998 and the period ended September 30, 1999 was
deficient. The fixed charges for these periods were:
1997 -- $2,599,668
1998 -- $4,523,401
For the nine months ended 9/30/99 -- $4,380,023
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<PAGE> 45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Nine months ended September 30, 1999
Total revenues decreased $25,172, or .6% (from $3,974,089 to $3,948,917)
for the nine months ended September 30, 1999 (the "1999 Period") as compared
with the nine months ended September 30, 1998 (the "1998 Period") and increased
$84,948, or 7.4% (from $1,154,078 to $1,239,026) for the three months ended
September 30, 1999 (the "1999 Quarter") as compared with the three months ended
September 30, 1998 (the "1998 Quarter"). The decline resulted principally from
Affiliate revenue decreases offset, in part, by increases in advertising
revenue.
Overall advertising revenue increased $265,422 or 13.3% (from $2,001,668 to
$2,267,090) for the 1999 Period and increased $155,120, or 26.5% (from $569,634
to $720,754) for the 1999 Quarter. Infomercial sales decreased $375,126, or
35.3% (from $1,061,310 to $686,184) for the 1999 Period and decreased $272,939,
or 96.1% (from $283,985 to $11,046) for the 1999 Quarter. The decrease in
infomercial revenue is due to the Company's decision to shift from selling
infomercial time during the overnight block to selling Nested Programs, which
combines all of the available time during the overnights and allows the Company
to sell it as a block of time which has been designated as Nested Programs.
Revenue from Nested Programs amounted to $331,499, for the 1999 Period and the
1999 Quarter. Conventional advertising increased $321,091 or 35.5% (from
$904,893 to $1,225,984) for the 1999 Period and increased $97,069, or 35.6%
(from $272,454 to $369,523) for the 1999 Quarter. This was primarily as a result
of increased national spot buys. Other revenue decreased by $12,042, or 34.0%
(from $35,465 to $23,423) for the 1999 Period and decreased by $4,509, or 34.2%
(from $13,195 to $8,686) for the 1999 Quarter.
Affiliate revenues decreased by $290,594, or 14.7% (from $1,972,421 to
$1,681,827) for the 1999 Period and decreased by $66,172, or 11.3% (from
$584,444 to $518,272) for the 1999 Quarter. This was primarily as a result of
the acquisition of new subscribers having upfront zero fee carriage arrangements
for the first several years of their contract periods. These arrangements
provide for long-term carriage for the Network with various multiple system
operators with the intent to generate higher revenue streams from advertising in
the future. Management firmly believes that the Company's niche, the nation's
Boomer and over audience, is a valuable market, which currently is not being
served by any other network. Government statistics show that this demographic is
the fastest growing population segment and will account for nearly 30.0% of the
population in the year 2000. As delivery technology continues to change,
management believes the Company's best approach is to increase branding of the
Network and build consumer demand for its product. For the remainder of 1999,
the Company plans to continue its efforts to develop new original programming
specifically targeted to America's Boomer and over audience and build upon the
programming ideas developed in 1998.
Operating expenses decreased $2,512,386, or 14.0% (from $17,940,815 to
$15,428,429) for the 1999 Period and decreased $1,054,379, or 17.6% (from
$6,001,707 to $4,947,328) for the 1999 Quarter. The decrease for the 1999 Period
was primarily a result of a decrease of $762,526, or 17.3% (from $4,405,975 to
$3,643,449) in programming, production and transmission costs, a decrease in
sales and marketing costs of $3,258,444, or 55.2% (from $5,904,085 to
$2,645,641), and offset, in part, by an increase in finance, general and
administrative costs of $358,492, or 15.8% (from $2,264,577 to $2,623,069). The
decrease for the 1999 Quarter was primarily the result of a decrease in
programming, production and transmission costs of $442,879, or 28.9% (from
$1,534,693 to $1,091,814), a decrease in sales and marketing costs of
$1,113,572, or 57.6% (from $1,934,913 to $821,341), and a decrease in finance,
general and administrative costs of $5,630 or .7% (from $764,591 to $758,961).
Programming, production and transmission costs decreased by $762,535, or
17.3% (from $4,405,984 to $3,643,449) for the 1999 Period and decreased by
$442,877, or 28.9% (from $1,534,691 to $1,091,814) for the 1999 Quarter. The
decrease is a result of a decrease in programming costs of $2,621,423, or 49.0%
(from $5,349,143 to $2,727,720) for the 1999 Period, and a decrease of $621,322
or 38.4% (from $1,618,067 to $996,745) for the 1999 Quarter, a decrease in
production and traffic costs of $52,903, or 12.9% (from
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<PAGE> 46
$408,996 to $356,093) for the 1999 Period, and a decrease of $38,253, or 26.2%
(from $146,171 to $107,918) for the 1999 Quarter. These decreases were offset in
part by an increase in transmission costs of $223,014, or 9.8% (from $2,284,703
to $2,507,717) for the 1999 Period, and an increase of $80,128, or 10.3% (from
$781,427 to $861,555) for the 1999 Quarter. Programming amortization costs
increased by $1,150,092 or 21.4% (from $5,366,178 to $6,516,270) for the 1999
Period and increased $507,698 or 28.7% (from $1,767,510 to $2,275,208) for the
1999 Quarter primarily as a result of changes in the Network's programming
lineup and programming contracts. The Company expects to incur additional
increases in future programming and studio production costs as a consequence of
the Network's programming initiatives and the creation of new original programs
which has continued in 1999. These additional future expenditures will adversely
impact the Company's results of operations in the short-term; however,
management believes they are critical to the Company's long-term survival and
growth.
Sales and marketing expenses decreased by $3,258,444, or 55.2% (from
$5,904,085 to $2,645,641) for the 1999 Period and decreased $1,113,572, or 57.6%
(from $1,934,913 to $821,341) for the 1999 Quarter. This decrease is a result of
the Company's decision in March 1999 to more closely align its sales and
marketing activities by consolidating these efforts at its headquarters in
Washington, D.C. Salaries and wages decreased by $355,706, or 27.6% (from
$1,289,594 to $933,888) for the 1999 Period and decreased by $234,149, or 48.6%
(from $481,768 to $247,619) for the 1999 Quarter. Travel and entertainment
expenses decreased by $243,507, or 66.2% (from $367,877 to $124,370) for the
1999 Period and decreased by $60,858, or 58.7% (from $103,744 to $42,886) for
the 1999 Quarter. Both of these decreases were primarily due to the departure of
personnel who have not been replaced. Convention expenses decreased by $957,441,
or 93.9% (from $1,019,463 to $62,022) for the 1999 Period and decreased by
$408,801, or 93.5% (from $437,252 to $28,451) for the 1999 Quarter. Advertising
expenditures decreased by $1,088,665, or 90.7% (from $1,200,059 to $111,394) for
the 1999 Period and decreased $92,709, or 71.4% (from $129,814 to $37,105) for
the 1999 Quarter. Sales and Marketing materials decreased by $117,804, or 80.1%
(from $147,105 to $29,301) for the 1999 Period and decreased by $61,530, or
85.7% (from $71,758 to $10,228) for the 1999 Quarter. Premium expenditures
decreased by $109,941, or 97.0%, (from $113,286 to $3,345) for the 1999 Period
and decreased by $15,124, or 100% (from $15,124 to $0) for the 1999 Quarter.
These decreases also were due to the Company's efforts to reduce marketing
costs. Professional fees decreased by $402,237, or 44.0% (from $914,028 to
$511,791) for the 1999 Period and decreased by $206,622, or 55.1% (from $374,991
to $168,369) for the 1999 Quarter primarily as a result of reduced expenditures
on the Network's affinity and new media efforts, as well as bringing the
Network's public relations operations in house. These decreases were offset in
part by an increase in marketing allowance costs of $138,429, 61.3% (from
$225,799 to $364,228) for the 1999 Period and an increase of $9,114, or 6.5%
(from $140,222 to $149,336) for the 1999 Quarter and an increase in Affiliate
events of $107,526, or 100.0% (from $0 to $107,526) for the 1999 Period and
$7,592, or 100.0% (from $0 to $7,592) for the 1999 Quarter.
Finance, general and administrative costs increased by $358,492, or 15.8%
(from $2,264,577 to $2,623,069) for the 1999 Period and decreased by $5,624, or
.7% (from $764,591 to $758,967 for the 1999 Quarter. This increase was primarily
a result of an increase in consolidation and retention costs by $359,518, or
100.0% (from $0 to $359,518) for the 1999 Period and an increase of $93,394, or
100.0% (from $0 to $93,394) for the 1999 Quarter. Bad debt expense increased by
$54,731, or 23.4% (from $234,000 to $288,731) for the 1999 Period and increased
by $6,731, or 22.4% (from $30,000 to $36,731) for the 1999 Quarter. These
increases were offset by decreases in salaries and wages of $51,286, or 5.9%
(from $865,213 to $813,927) for the 1999 Period and decreases of $21,594, or
6.9% (from $311,391 to $289,797) for the 1999 Quarter. Legal and professional
fees increased by $20,702, or 5.5% (from $376,421 to $397,123) for the 1999
Period and decreased by $94,837, or 64.4% (from $147,234 to $52,397) for the
1999 Quarter. Office expenses decreased by $48,063, or 36.3% (from $132,269 to
$84,206) for the 1999 Period and decreased by $13,783, or 33.3% (from $41,429 to
$27,646) for the 1999 Quarter.
As a result of decreased revenues ($25,172), increased programming
amortization costs ($1,150,092), and increased finance, general and
administrative costs ($358,492) which were offset by decreased programming,
production and transmission costs ($762,535), and decreased sales and marketing
costs ($3,258,444), the Company's loss from operations decreased $2,487,214, or
17.8% (from $13,966,726 to $11,479,512) for
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<PAGE> 47
the 1999 Period. As a result of increased revenues of ($84,948) and increased
programming amortization costs ($507,698) which were offset by decreased
programming, production and transmission costs ($442,877), decreased sales and
marketing costs ($1,113,572), and decreased finance, general and administrative
costs ($5,624), the Company's loss from operations decreased $1,139,327, or
23.5% (from $4,847,629 to $3,708,302) for the 1999 Quarter.
Other expenses increased $1,169,204 or 36.4% (from $3,210,819 to
$4,380,023) for the 1999 Period and increased $308,002, or 25.9% (from
$1,188,750 to $1,496,752) for the 1999 Quarter, primarily as a result of
interest on outstanding debt.
Liquidity and Capital Resources
Cash increased from $539,371 at December 31, 1998 to $614,103 at September
30, 1999, principally due to $12.0 million in financing received during the 1999
Period, offset by cash outlays to cover operating losses and repayments of
certain debts. Working capital increased from $1,224,708 at December 31, 1998 to
$3,083,738 at September 30, 1999, principally as a result of $12.0 million in
financing received, netted against purchases of programming and cablecast
rights, and cash outlays to cover operating losses and repayment of certain
debt. Cablecast rights have increased by $1,734,442, since December 31, 1998 as
a result of the Company's investment in its primetime line-up. Total liabilities
increased primarily due to $12.0 million in additional financing.
Cash used in operating activities decreased $1,759,642, or 23.1% (from
($7,613,735) to $(5,854,093)), for the 1999 Period compared to the 1998 Period,
principally as a result of decreases in accounts payable of $2,134,145, or
116.6% (from $1,829,878 to ($304,267)), offset in part by increases in
depreciation of $1,154,106, or 20.7% (from $5,580,937 to $6,735,043), and
increases in accrued expenses of $1,156,775, or 46.6% (from $2,484,144 to
$3,640,919), primarily as a result of interest on additional borrowings.
Cash used in investing activities decreased $1,981,628, or 44.0% (from
($4,500,423) to ($2,518,795)) principally due to a decrease in purchases of
programming and cablecast rights of $2,003,021, or 44.8% (from $4,466,858 to
$2,463,837).
Cash flows from financing activities decreased $2,892,405, or 25.5% (from
$11,340,025 to $8,447,620) due principally to decreases in financing of $3.0
million, or 20.0% (from $15.0 million to $12.0 million) and decreased repayment
of long-term obligations of $107,525, or 2.9% (from $3,659,975 to $3,552,450).
Since 1990, Crown and Concept have been the principal source of the
Company's capital. Crown and Concept have invested $2.3 million and provided
$70.5 million in financing since 1994, of which $12.0 million was provided
during the 1999 Period. Additionally, Crown and Concept have committed to
advance, as needed, an additional $3.0 million in debt financing for the
remainder of 1999. Management believes that these funds will be sufficient to
satisfy the Company's operating needs for 1999. In connection with the
additional borrowings, the Company has entered into security agreements, as
amended, pledging substantially all the Company's assets as security for its
indebtedness to Crown and Concept.
The Company's outstanding indebtedness to Crown and Concept in the amount
of $63,997,292 and $21,783,608, respectively, matures on January 1, 2001. The
Company does not possess sufficient capital to repay this amount when due and
does not possess the ability to raise the amount necessary to repay the
indebtedness from the conventional public or private debt and equity capital
markets. The Company intends to engage in discussions with Crown and Concept
with respect to the restructuring of this indebtedness. There can be no
assurance that the Company will be successful in its efforts to restructure this
indebtedness which is secured by substantially all of the Company's assets. If
the Company is unsuccessful in its efforts to restructure the indebtedness, its
failure to repay the indebtedness when due will constitute a default subjecting
the Company to a foreclosure on its assets which secure the indebtedness.
The Company believes that, in order to survive in the highly competitive
market for cable television programming, the Company will need significant
additional investment over the next four to five years. Such additional
investment is necessary to improve programming and increase distribution, which
the Company anticipates ultimately will increase advertising revenues and result
in substantial long-term revenue increases.
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<PAGE> 48
The Company's Board of Directors has directed its Executive Committee and
management to study the question of whether the Company should enter into, and
the potential opportunities for, a strategic alliance, and to make
recommendations to the full Board of Directors. The Executive Committee and
management have been actively engaged in this pursuit. Because of the
unpredictable factors involved in the search for a strategic alliance, and the
dynamic changes taking place in the industry, there is considerable uncertainty
about the Company's future needs. There can be no assurance either that the
Company will be able to locate sufficient funding in excess of the funds
committed for 1999, or that it will be able to achieve a strategic alliance. The
Company continues to evaluate strategic alliance alternatives and has had
preliminary discussions with a number of potential strategic partners. These
discussions are preliminary and no definitive proposals or targeted entities
have been identified. The Company will actively continue to pursue
identification of potential strategic alliance candidates. 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 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.
Fiscal year ended December 31, 1998 compared to fiscal year ended December 31,
1997
Net loss in 1998 increased $4,162,000, or 22.0% (from $18,889,000 to
$23,051,000). This increase was due principally to reduced revenues (a reduction
of $1,648,000); increased interest expenses (an increase of $1,924,000);
increased program amortization expenses (an increase of $867,000); increased
finance, general and administrative expenses (an increase of $335,000); and
increased programming, production and transmission expenses (an increase of
$136,000); offset by decreased sales and marketing expenses (a decrease of
$746,000).
Revenues:
Total revenues in 1998 decreased by $1,648,000, or 23.0% (from $7,179,000
to $5,531,000). This decrease was primarily attributed to advertising revenues.
Affiliate revenues declined $48,000, or 1.9% (from $2,579,000 to
$2,531,000), reflecting earlier losses of subscribers as a result of competition
for scarce channel capacity. Additionally, increased competition has put
downward pressure on the rates which the Company can charge its Affiliates.
While subscriber losses are immediately reflected in Affiliate revenue, the same
is not true for increases in subscribers as it is common for a new Affiliate to
receive a minimum of two years of free service as an incentive for commencing
carriage of a programming service. For these reasons, the Company expects future
increases in its subscriber base, if any, to result in less than fully
proportionate increases in Affiliate revenues.
Advertising revenues decreased $1,509,000, or 33.7% (from $4,475,000 to
$2,966,000), primarily as a result of decreased rates associated with the
Company's reduced subscriber base from past years. Revenues from infomercials
decreased approximately $1,182,000, or 39.9%, primarily due to a decrease in
average rate per half hour which was primarily the result of market pressures as
well as a 10.0% decrease from 1997 with respect to the amount of time devoted to
this format. Revenues from short-format commercial 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 72.0% (from $125,000 to $35,000) due to extraordinary
collections of previously written-off affiliate fees in the prior year.
46
<PAGE> 49
Operating Expenses:
Total operating expenses increased $592,000, or 2.5% (from $23,468,000 to
$24,060,000). The increase was due principally to increased program amortization
expenses (an increase of $867,000); increased finance, general and
administrative expenses (an increase of $335,000); and increased programming,
production and transmission expenses (an increase of $136,000); offset by
decreased sales and marketing expenses (a decrease of $746,000).
Programming expenses for 1998 increased $136,000, or 2.5% (from $5,524,000
to $5,660,000). Programming costs, net of $4,179,000 in capitalized costs,
increased by $68,000, or 3.4% (from $1,977,000 to $2,045,000) primarily as a
result of costs associated with new original programs. Transmission costs
increased by $216,000, or 7.6% (from $2,857,000 to $3,073,000) primarily as a
result of incurring HITS transport fees, which allow the Company to transmit its
signal digitally, as well as incurring higher master control and uplink charges
for the year. Program, production and traffic expenses decreased $149,000, or
21.6% (from $691,000 to $542,000) primarily as a result of reduced Network
branding costs for the current year.
Programming amortization increased $867,000, or 12.6% (from $6,891,000 to
$7,758,000). The majority of this increase results from a shorter amortization
period for original programming, which comprises the bulk of capitalized costs.
Sales and marketing expenses decreased by $746,000, or 9.2% (from
$8,120,000 to $7,374,000) primarily as a result of the following: Advertising
expenses decreased by $1,556,000, or 55.0% (from $2,827,000 to $1,271,000) as a
result of not incurring satellite, ad sale and special programming advertising
costs within the current year; conventions and national events increased by
$318,000, or 31.5% (from $1,009,000 to $1,327,000) as a result of increased
presence and activities at cable trade shows and other special events;
professional fees increased by $123,000, or 27.2% (from $452,000 to $575,000) as
a result of increased public relations efforts and increased consulting in
relation to satellite sales and affinity programs; program guide costs increased
by $97,000, or 43.5% (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 423.5% 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 $73,000, or 13.0% (from $562,000 to $489,000) principally as a result
of reduced consulting and legal fees. Other expenses decreased by $42,000, or
10.3% (from $406,000 to $364,000) primarily due to a reduction in directors'
fees, shareholders' expenses, repairs and maintenance expenses and dues and
subscriptions expenses. These were offset by increases in insurance expenses
that were related to increases in various policy coverages. Office expenses
decreased by $38,000, or 18.0% (from $211,000 to $173,000), primarily due to
lower general expenditures.
Net interest expense increased by $1,923,000, or 74.0% (from $2,600,000 to
$4,523,000) due to increased principal on the notes payable to Crown. Interest
expense is expected to increase in 1999 as a result of a full year's interest on
1998 borrowings as well as interest on additional borrowings anticipated in
1999.
Fiscal year ended December 31, 1997 compared to fiscal year ended December 31,
1996
Net loss in 1997 increased $6,948,000, or 58.2% (from $11,941,000 to
$18,889,000). This increase was due principally to reduced revenues (a reduction
of $2,325,000); increased sales and marketing expenses (an increase of
$3,610,000); increased interest expense (an increase of $1,549,000); and
increased programming, production and transmission expenses (an increase of
$65,000); offset by decreases in finance, general and administrative expenses (a
decrease of $311,000) and decreased programming amortization expense (a decrease
of $292,000).
47
<PAGE> 50
Revenues:
Total revenues in 1997 decreased by $2,325,000, or 24.5% (from $9,504,000
to $7,179,000). This decrease was primarily attributed to decreases in Affiliate
and advertising revenues.
Affiliate revenues declined $1,272,000, or 33.0%, (from $3,851,000 to
$2,579,000) reflecting a loss of subscribers as a result of competition for
scarce channel capacity. Additionally, increased competition has put downward
pressure on the rates which the Company can charge its Affiliates. While
subscriber losses are immediately reflected in Affiliate revenue, the same is
not true for increases in subscribers as it is common for a new Affiliate to
receive a minimum of two years of free service as an incentive for commencing
carriage of a programming service. For these reasons, the Company expects future
increases in its subscriber base, if any, to result in less than fully
proportionate increases in Affiliate revenues. The Company anticipates Affiliate
revenues for 1998 will continue to decline as it will reflect a full year of the
1997 subscriber losses and any additional subscriber losses, if any, in 1998.
Advertising sales decreased $1,178,000, or 20.8% (from $5,653,000 to
$4,475,000) primarily as a result of decreased rates associated with the
Company's reduced subscriber base. The Company anticipates advertising revenues
for 1998 will continue to decline as it will reflect a full year of the 1997
subscriber losses and any additional subscriber losses, if any, in 1998.
Revenues from infomercials decreased $845,000, or 22.2% primarily due to a
decrease in average rate per half hour as a result of lower subscriber numbers
and market pressures. Revenues from short-format commercial advertising (two
minutes or less in length) decreased by $333,000, or 18%, due to lower
subscriber numbers and market pressures. Other revenues increased $125,000, or
100% (from $0 to $125,000) as a result of collection of amounts previously
written off as uncollectible.
Operating Expenses:
Total operating expenses increased $3,073,000, or 15.0% (from $20,395,000
to $23,468,000). The increase was due principally to increased sales and
marketing expenses (an increase of $3,610,000); and increased programming,
production and transmission expenses (an increase of $65,000); offset by
decreases in finance, general and administrative expenses (a decrease of
$311,000) and decreased programming amortization expense (a decrease of
$292,000).
Programming, production and transmission expenses for 1997 increased
$65,000, or 1.2% (from $5,459,000 to $5,524,000). Programming costs, net of
$3,533,000 in capitalized costs, decreased by $146,000, or 6.9% (from $2,123,000
to $1,977,000) primarily as a result of costs associated with new original
programs. During 1997, the Network increased its original programming from two
hours a day to eight hours a day. Many of the new programs, such as Ballroom
DanceSport Competitions and Cafe DuArt, are long lived in nature and, as such,
their production costs were capitalized and are being amortized over the life of
the program, which is generally two years. Network branding costs increased
$178,000, or 178.0% (from $10,000 to $188,000) as a result of developing a new
on-air look in association with the Network's new name. Transmission costs
increased by $92,000, or 3.3% (from $2,765,000 to $2,857,000) as a result of
costs associated with scrambling the Network's signal. Programming costs are
expected to increase in 1998 as a result of the Network's plans to increase
production of new original programs. Transmission expenses are expected to
increase in 1998 as a result of charges associated with the Network's HITS feed
and anticipated improvements in the Network's master control operations. See
Part 1, Item 1, Section 4.
Programming amortization decreased $292,000, or 4.0% (from $7,183,000 to
$6,891,000). The majority of this decrease results from a different mix of
programs and related license fees for prime-time programming.
Sales and marketing expenses increased by $3,610,000, or 80.0% (from
$4,510,000 to $8,120,000). Advertising expenses increased by $2,317,000, or
454.3% (from $510,000 to $2,827,000) as a result of increased trade advertising,
increased consumer advertising and awareness campaigns, as well as combined
trade and consumer advertising to the satellite community in anticipation of the
planned signal scrambling in third quarter 1997. Conventions and national events
increased by $444,000, or 78.6% (from $565,000 to $1,009,000) as a result of
increased presence and activities at cable trade shows and other special events.
Employee related costs increased by $364,000, or 18.7% (from $1,943,000 to
$2,307,000) primarily as a result
48
<PAGE> 51
of additional advertising sales support staff, filling vacant affiliate sales
positions and increased travel and entertainment expenses. Professional fees
increased by $171,000, or 81.0% (from $211,000 to $382,000) as a result of
increased public relations efforts and increased consulting in relation to
satellite sales and affinity programs. Program guide costs increased by $68,000,
or 43.9% (from $155,000 to $223,000) as a result of redesigning the guides.
Sales and marketing expenses are expected to increase in 1998 as a result of the
Company's plans to increase consumer awareness advertising and other sales and
marketing initiatives.
Finance, general and administrative expenses decreased by $311,000, or 9.6%
(from $3,243,000 to $2,932,000). The decrease is primarily attributable to a
$341,000 or 75.8% decrease in bad debt expense (from $450,000 to $109,000) as a
result of improved credit and collections efforts. Professional fees decreased
by $194,000, or 26.8% (from $724,000 to $530,000) principally as a result of
reduced legal fees. Personnel costs decreased by $169,000, or 13.2% (from
$1,287,000 to $1,118,000) due to additional staff and costs in 1996 associated
with transition of the chief executive's office. Rent and lease costs increased
by $75,000, or 54.0% (from $139,000 to $214,000) as a result of restructuring
departmental charges. Litigation settlement income/expense increased by
$165,000, or 110.0% (from $150,000 income to $15,000 expense) as a result of
litigation settlements in each of the two years.
Interest expense increased by $1,550,000, or 147.6% (from $1,050,000 to
$2,600,000) due to interest on notes payable to the Majority Stockholders.
Interest expense is expected to increase in 1998 as a result of a full year's
interest on 1997 borrowings as well as interest on additional borrowings
anticipated in 1998.
Liquidity and Capital Resources
Fiscal year ended December 31, 1998 compared to fiscal year ended December 31,
1997
Working capital increased $1,039,000, or 558.6% (from $186,000 to
$1,225,000). The increase is primarily a result of increases in current portion
of programming rights, offset by increases in accounts payable.
Cash used in operating activities increased $3,123,000, or 36.3% (from
($8,601,000) to ($11,724,000)), due to an increased loss of $4,162,000, offset
by an increase in programming amortization and accrued interest.
Cash used in investing activities increased $560,000, or 15.3% (from
($3,660,000) to ($4,220,000)), due primarily to an increase in acquisition of
programming and cablecast rights of $821,000, offset by a decrease in the
acquisition of property and equipment of $231,000.
Cash provided by financing activities increased $2,037,000, or 16.1% (from
$12,643,000 to $14,680,000), due primarily to decreased payments on financing
for programming and other debt of $2,536,000, offset by a decrease in financing
by Crown of $500,000.
In light of the Company's recurring losses, management is actively
monitoring expenses and examining operating methods to increase efficiencies.
These measures may provide short term improvement, but do not address the more
critical long term growth needs for the Network. In order to grow, the Network
needs to increase its Affiliate base which, in turn, will increase the
subscriber base and should allow the Network to increase its advertising rates
as well as Affiliate revenues. To provide for necessary future growth,
management continued its focus on an aggressive Affiliate marketing campaign
including consumer awareness advertising and events, prominent presence at major
trade shows and new trade advertising.
Increased competition from networks with strong strategic alliances and
significant financial resources continue to significantly effect the Company's
ability to increase its subscriber base and, correspondingly, has reduced
revenues from Affiliates and advertising. This competition also has increased
the costs which the Company must pay for programming. The Company does not
anticipate significant improvement in the results of its operations until such
time as the number of its subscribers increases significantly.
Since 1990, Crown and Concept have been the principal source of the
Company's capital. Crown and Concept have invested $2,300,000 and provided
$58,500,000 in financing since 1994, including $19,000,000 loaned by Crown to
the Company in 1998. Additionally, between January 1, 1999 and March 23, 1999,
Crown
49
<PAGE> 52
has provided $8,000,000 in debt financing to the Company, and has committed to
advance, as needed, an additional $7,000,000 in debt financing during the
balance of the calendar year. The Company believes that these funds will be
sufficient to satisfy its operating needs for 1999. In connection with the
borrowings, the Company has entered into a security agreement pledging
substantially all the Company's assets as security for its indebtedness to Crown
and Concept.
The Company continues to evaluate strategic alliance alternatives and has
had preliminary discussions with a number of potential strategic partners. These
discussions are preliminary and no definitive proposals or targeted entities
have been identified. The Company will actively continue to pursue
identification of potential strategic alliance candidates. 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 of the Company will be
continued substantially as currently conducted for the immediate future. Crown
an 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 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, 1997 compared to fiscal year ended December
31, 1996
Working capital increased by $794,693, or 131.0% (from a deficit of
($608,569) to $186,124), primarily as a result of increases in current portion
of programming rights and cash, offset by increases in accounts payable.
Cash used in operating activities increased by $5,685,379, or 195.0% (from
($2,915,657) to ($8,601,036)), due to an increased loss of $6,947,038, and an
increase in gross reductions in accounts receivable of $1,032,094 due to
write-offs of bad debt and additional collection efforts. Offsetting these
amounts were an increase of $1,133,042 in long-term accrued interest expense; an
increase of $1,048,945 in accounts payable due to timing of payments and
increased expense volume; and a decrease of $417,000 in provision for losses on
accounts receivable as a result of reduced exposure to bad debts.
Cash used in investing activities increased by $3,286,375 or 879.1% (from
($373,819) to ($3,660,194)) for the years ended December 31, 1996 and 1997,
respective, due primarily to an increase in acquisition of programming and
cablecast rights of $3,151,910.
Cash provided by financing activities increased by $8,788,660 or 228.0%
(from $3,854,748 to $12,643,408), due to an increase in financing by the
Majority Stockholders of $9,500,000, offset by increased payments on financing
for programming and other debt of $711,340.
MATERIAL COMMITMENTS
The Company leases transponder space and related services on a satellite at
a base monthly rental of $205,400. The lease provides for greater back-up
protection than did the Company's previous leases in the event of satellite
failure. The lease terminates with the life of the satellite, which is expected
in the year 2006, and requires the Company to pay a launch protection fee of
$1,000,000 plus capitalized interest at 12.0% and other direct costs.
50
<PAGE> 53
As of March 23, 1999, the Company had issued and outstanding promissory
notes to Concept and Crown in the aggregate principal amount of $20,600,000 and
$50,572,000, respectively, bearing interest of approximately 7.75% per annum
which are due and payable on January 1, 2000.
INDEPENDENT ACCOUNTANTS
The consolidated financial statements and financial statement schedules of
the Company for each of the years in the three-year period ended December 31,
1998 included in this Proxy Statement have been audited by BDO Seidman, LLP.
As reported on the Company's Form 8-K, filed with the Commission on April
5, 1999, BDO Seidman, LLP notified the Company on April 1, 1999 that the
auditor-client relationship between the Company and BDO Seidman, LLP had
terminated and that it would decline to stand for re-election. BDO Seidman'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 Seidman on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure. The Company has engaged
Grant Thornton LLP as the Company's independent accountant as of April 2, 1999.
Grant Thornton LLP was ratified as the Company's independent accountants at the
Company's 1999 Annual Meeting of Stockholders.
OTHER MATTERS
The Board of Directors knows of no other business to be presented at the
Special Meeting. If other matters properly come before the meeting in accordance
with the Bylaws, the persons named as proxies will vote on them in accordance
with their best judgment.
ANNUAL REPORT AND FORM 10-K
The 1998 Annual Report to Stockholders containing the consolidated
financial statements of the Company for the year ended December 31, 1998 and the
Company's annual report on Form 10-K for the fiscal year ended December 31, 1998
as filed with the Commission without the accompanying exhibits has previously
been mailed to stockholders. A list of the Exhibits included in the Form 10-K
and the exhibits may be obtained by writing to investor relations, The Nostalgia
Network, Inc. 650 Massachusetts Avenue, N.W., Washington, D.C. 20001.
51
<PAGE> 54
STOCKHOLDER PROPOSALS FOR 2000 ANNUAL MEETING
The deadline for submission of stockholder proposals intended for inclusion
in the Company's proxy statement for the 2000 Annual Meeting of Stockholders
(the "2000 Annual Meeting") was December 31, 1999. Upon consummation of the
Merger, Crown and Concept will be the only stockholders of the Company and the
Company will terminate its Exchange Act registration.
You are urged to complete, date, sign and return your Proxy Card promptly
to make certain your shares will be voted at the Special Meeting, even if you
plan to attend the meeting in person. If you desire to vote your shares in
person at the meeting, your proxy may be revoked. For your convenience in
returning the Proxy Card, a pre-addressed and postage paid envelope has been
enclosed.
YOUR PROXY IS IMPORTANT
WHETHER YOU OWN FEW OR MANY SHARES
Please date, sign and mail the enclosed Proxy Card today.
By Order of the Board of Directors
/s/ WILLARD R. NICHOLS
--------------------------------------
Vice President, General Counsel and
Secretary
52
<PAGE> 55
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE NOSTALGIA NETWORK, INC.
Report of Independent Accountants........................... F-2
Balance Sheets as of December 31, 1998 and 1997............. F-3
Statements of Operations for the Years Ended December 31,
1998, 1997 and 1996....................................... F-4
Statements of Changes in Stockholders' Equity (Deficit) for
the Years Ended December 31, 1998, 1997 and 1996.......... F-5
Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996....................................... F-6
Notes to Financial Statements............................... F-7
Balance Sheet as of September 30, 1999 (unaudited).......... F-20
Statements of Operations for the Three Months Ended
September 30, 1999 and 1998 and for the Nine Months Ended
September 30, 1999 and 1998 (unaudited)................... F-21
Statements of Cash Flows for the Nine Months Ended September
30, 1999 and 1998 (unaudited)............................. F-22
Notes to Financial Statements............................... F-23
</TABLE>
F-1
<PAGE> 56
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
The Nostalgia Network, Inc.
We have audited the accompanying balance sheets of The Nostalgia Network,
Inc. (the "Company") as of December 31, 1998 and 1997 and the related statements
of operations, changes in stockholders' deficit and cash flows for each of the
three years in the period ended December 31, 1998. We have also audited Schedule
II for the years ended December 31, 1998, 1997 and 1996. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Nostalgia Network, Inc.
at December 31, 1998 and 1997, and the results of its operations and cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. Also, in our opinion, Schedule II
presents fairly, in all material respects, the information set forth therein for
the years ended December 31, 1998, 1997 and 1996.
BDO Seidman, LLP
Washington DC
March 23, 1999
F-2
<PAGE> 57
THE NOSTALGIA NETWORK, INC.
BALANCE SHEETS
DECEMBER 31,
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 539,371 $ 1,803,189
Accounts receivable, less allowance of $302,000 and
$467,000 for doubtful accounts......................... 935,230 723,766
Prepaid expenses.......................................... 168,362 140,341
Programming and cablecast rights.......................... 7,300,000 6,880,000
------------ ------------
Total current assets.............................. 8,942,963 9,547,296
Programming and cablecast rights, at cost -- net.......... 2,788,129 5,956,646
Property and equipment, at cost -- net.................... 1,191,879 1,441,290
Deposits.................................................. 56,740 52,740
------------ ------------
Total assets...................................... $ 12,979,711 $ 16,997,972
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of programming and cablecast fees...... $ 5,068,000 $ 6,334,000
Accounts payable -- Trade................................. 1,976,255 2,010,924
-- Related parties....................... 278,919 343,321
Accrued expenses and other liabilities.................... 395,081 672,927
------------ ------------
Total current liabilities......................... 7,718,255 9,361,172
------------ ------------
LONG-TERM OBLIGATIONS, LESS CURRENT MATURITIES:
Programming and cablecast fees............................ 114,465 2,338,835
Notes payable to related parties.......................... 62,832,873 41,417,194
Accrued interest payable -- Related parties............... 3,382,125 1,876,508
Other..................................................... 335,416 357,010
------------ ------------
Total long-term liabilities....................... 66,664,879 45,989,547
------------ ------------
Total liabilities................................. 74,383,134 55,350,719
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Preferred stock, convertible: $2 par value, 125,000 shares
authorized, 3,250 shares issued and outstanding........ 6,500 6,500
Common stock: $.04 par value, 30,000,000 shares
authorized, 20,274,371 shares issued and outstanding in
1998 and 1997.......................................... 810,975 810,975
Additional paid-in capital................................ 30,213,554 30,213,554
Deficit................................................... (92,434,452) (69,383,776)
------------ ------------
Total stockholders' deficit....................... (61,403,423) (38,352,747)
------------ ------------
Total liabilities and stockholders' deficit....... $ 12,979,711 $ 16,997,972
============ ============
</TABLE>
The accompanying summary of accounting policies and notes are an integral part
of these financial statements.
F-3
<PAGE> 58
THE NOSTALGIA NETWORK, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING REVENUES:
Affiliate revenues............................... $ 2,530,714 $ 2,579,376 $ 3,850,745
Advertising revenues........................... 2,965,896 4,474,597 5,652,938
Other.......................................... 34,750 124,960 --
------------ ------------ ------------
Total operating revenues............... 5,531,360 7,178,933 9,503,683
------------ ------------ ------------
OPERATING EXPENSES:
Programming, production and transmission....... 5,659,937 5,524,078 5,458,931
Programming amortization....................... 7,757,637 6,891,161 7,182,932
Sales and marketing............................ 7,373,867 8,120,458 4,510,056
Finance, general and administrative............ 3,267,194 2,932,094 3,243,021
------------ ------------ ------------
Total operating expenses............... 24,058,635 23,467,791 20,394,940
------------ ------------ ------------
Loss from operations................... (18,527,275) (16,288,858) (10,891,257)
INTEREST EXPENSE, NET:
Related parties................................ (4,581,460) (2,689,000) (1,141,000)
Others......................................... 58,059 89,332 90,769
------------ ------------ ------------
Net loss............................... $(23,050,676) $(18,888,526) $(11,941,488)
============ ============ ============
LOSS PER COMMON SHARE -- BASIC AND DILUTED....... $ (1.14) $ (0.93) $ (0.59)
============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING.............. 20,274,371 20,274,371 20,274,371
</TABLE>
The accompanying summary of accounting policies and notes are an integral part
of these financial statements.
F-4
<PAGE> 59
THE NOSTALGIA NETWORK, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
TOTAL
PREFERRED COMMON ADDITIONAL STOCKHOLDERS'
STOCK STOCK PAID-IN EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
--------- ------ ---------- -------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1995...................... 3,250 $6,500 20,274,371 $810,975 $30,213,554 $(38,553,762) $ (7,522,733)
Net loss for the year....... -- -- -- -- -- (11,941,488) (11,941,488)
----- ------ ---------- -------- ----------- ------------ ------------
BALANCE AT DECEMBER 31,
1996...................... 3,250 6,500 20,274,371 810,975 30,213,554 (50,495,250) (19,464,221)
Net loss for the year....... -- -- -- -- -- (18,888,526) (18,888,526)
----- ------ ---------- -------- ----------- ------------ ------------
BALANCE AT DECEMBER 31,
1997...................... 3,250 6,500 20,274,371 810,975 30,213,554 (69,383,776) (38,352,747)
Net loss for the year....... -- -- -- -- -- (23,050,676) (23,050,676)
----- ------ ---------- -------- ----------- ------------ ------------
BALANCE AT DECEMBER 31,
1998...................... 3,250 $6,500 20,274,371 $810,975 $30,213,554 $(92,434,452) $(61,403,423)
===== ====== ========== ======== =========== ============ ============
</TABLE>
The accompanying summary of accounting policies and notes are an integral part
of these financial statements.
F-5
<PAGE> 60
THE NOSTALGIA NETWORK, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................... $(23,050,676) $(18,888,526) $(11,941,488)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation................................ 286,159 310,416 294,270
Programming amortization.................... 7,757,637 6,891,161 7,182,931
Provision for losses on accounts
receivable................................ 534,000 102,000 450,000
Net change in operating assets and liabilities:
(Increase) decrease in accounts
receivable................................ (745,464) (119,132) 147,962
(Increase) decrease in prepaid expenses..... (28,021) 5,657 35,267
Increase (decrease) in accounts payable..... (99,071) 998,175 (50,770)
Increase (decrease) in accrued expenses and
other liabilities......................... (299,440) 121,155 (2,356)
Increase in accrued interest................ 3,921,296 1,978,058 968,527
------------ ------------ ------------
Net cash used in operating
activities........................... (11,723,580) (8,601,036) (2,915,657)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in deposits........................... (4,000) (35,000) (1,709)
Purchases of property and equipment............ (36,748) (267,294) (166,120)
Acquisition of programming and cablecast
rights...................................... (4,179,120) (3,357,900) (205,990)
------------ ------------ ------------
Net cash used in investing
activities........................... (4,219,868) (3,660,194) (373,819)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable.................... 19,000,000 19,500,000 10,000,000
Payments of long-term obligations.............. (4,320,370) (6,856,592) (6,145,252)
------------ ------------ ------------
Net cash provided by financing
activities........................... 14,679,630 12,643,408 3,854,748
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... (1,263,818) 382,178 565,272
CASH AND CASH EQUIVALENTS -- BEGINNING OF YEAR... 1,803,189 1,421,011 855,739
------------ ------------ ------------
CASH AND CASH EQUIVALENTS -- END OF YEAR......... $ 539,371 $ 1,803,189 $ 1,421,011
============ ============ ============
</TABLE>
The accompanying summary of accounting policies and notes are an integral part
of these financial statements.
F-6
<PAGE> 61
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Nostalgia Network, Inc. (the "Company") is engaged in the operation of
GoodLife TV Network (the "Network"), a television programming service offering a
variety of entertainment, lifestyle and informational programming to a target
audience of "Boomers and over" via satellite to cable television and alternative
broadcasting systems ("Affiliates") throughout the United States.
Significant accounting policies used by the Company are described below:
Revenue Recognition
Revenues from providing programming services to cable systems and sales to
advertisers are recognized on a monthly basis as the services are provided. The
Company grants credit to cable systems and advertisers throughout the United
States.
Property and Equipment
Depreciation and amortization are calculated based on estimated service
lives of depreciable assets by the straight-line method.
Leasehold improvements are amortized over the lives of the respective
leases or the service lives of the improvements, whichever is shorter.
Major repairs or replacements of property and equipment are capitalized.
Maintenance, repairs and minor replacements are charged to operations as
incurred.
When property or equipment are retired or otherwise disposed of, their cost
and related accumulated depreciation are removed from the accounts and any
resulting gain or loss is included in operations.
Programming and Cablecast Rights
Capitalized programming costs, film library and cablecast rights are
recorded at the lower of unamortized costs or estimated net realizable value.
Capitalized programming costs, film library and cablecast rights are amortized
using the straight-line method, which approximates the anticipated revenue
stream, over the estimated useful life or the lives of the rights agreements,
respectively, in accordance with SFAS No. 63 -- Financial Reporting by
Broadcasters as follows:
Programming costs -- 2 years
Film library -- 11 years
Cablecast rights -- contract period
Cablecast rights for programs to be amortized within the following year are
classified as current assets. The Company periodically evaluates its programming
and cablecast rights for possible changes in estimated useful life or the
possibility of impairment. If a programming or cablecast right is considered
potentially impaired, an analysis is performed consisting of a comparison of
future projected net cash flows to the carrying value of such asset. Any excess
carrying value over future projected net cash flows is written off due to
impairment.
Advertising Costs
Advertising and promotional costs are charged to operating expenses as
incurred and amounted to $1,279,000, $2,828,000, and $510,000 for the years
ended December 31, 1998, 1997, and 1996, respectively.
F-7
<PAGE> 62
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Earnings per Share
Earnings per share is based on the weighted average number of shares of
common stock and dilutive common stock equivalents outstanding. Basic earnings
per share includes no dilution and is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution of
securities that could share in the earnings of an entity. Basic and diluted
earnings per share are the same during all three years because the impact of
dilutive securities is anti-dilutive.
The net loss per common share -- basic is computed by dividing the net loss
for the period by the weighted average number of shares outstanding. Convertible
preferred stock, outstanding stock warrants and options are not included in the
diluted calculation because their effect would be anti-dilutive.
Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
The Company maintains its cash balances in First Union National Bank of
Washington and Correspondent Services Corporation in McLean, Virginia. Balances
at First Union National Bank are insured by the Federal Deposit Insurance
Corporation up to $100,000. Balances in First Union's overnight investment
account are insured by the SPIC up to $500,000. Balances at Correspondent
Services Corporation are insured up to $5,000,000 through a combination of
$500,000 SPIC insurance and an additional $4,500,000 insurance policy provided
by Aetna. Uninsured balances approximate $388,072, $1,654,000, and $660,000 at
December 31, 1998, 1997, and 1996, respectively.
Risks and Uncertainties
The Network competes with other programmers for access to limited channel
space and must also compete with other programmers for viewers. Based on the
decline in sales and increase in operating expenses, the Company is dependent on
financing from the Majority Stockholders or other outside sources in order to
fund operations.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make certain estimates and
assumptions particularly as it relates to the valuation of accounts receivable
and programming and cablecast rights and the disclosure of contingent assets and
liabilities. Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
method of presentation.
New Accounting Pronouncements
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), establishes standards for reporting and
display of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. Among other
disclosures, SFAS 130 requires that all items that are required to be recognized
under current accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
F-8
<PAGE> 63
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
other financial statements. The Company adopted SFAS 130 during the first
quarter of 1998 and has no items of comprehensive income to report.
Statement of Financial Accounting Standards (SFAS) 131, "Disclosure about
Segments of a Business Enterprise", establishes standards for the way that
public enterprises report information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public for
periods ending after December 15, 1997. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. SFAS 131 defines operating segments as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to allocate
resources and in assessing performance. The Company is engaged in one line of
business, the operation of GoodLife TV Network, and therefore reports as one
operating segment.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments"
("SFAS 133"). SFAS 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. SFAS 133 requires that an
entity recognized all derivatives as either assets or liabilities and measure
those instruments at fair market value. Under certain circumstances, a portion
of the derivative's gain or loss is initially reported as a component of other
comprehensive income and subsequently reclassified into income when the
transaction affects earnings. For a derivative not designated as a hedging
instrument, the gain or loss is recognized in income in the period of change.
Presently, the Company does not use derivative instruments either in hedging
activities or as investments. Accordingly, the Company believes that adoption of
SFAS 133 will have no impact on its financial position or results of operations.
1. MANAGEMENT STATEMENT
In light of the Company's recurring losses, management is actively
monitoring expenses and examining operating methods to increase efficiencies.
These measures are intended to address short term operating requirements, but do
not address the more critical long term growth needs for the Network. In order
to grow, the Network needs to increase its Affiliate base which, in turn, should
increase the subscriber base allowing the Network to increase its advertising
rates as well as Affiliate revenues.
Management has continued its efforts to further brand the Network as the
only network targeted to the ever growing Boomer and over audience, America's
fastest growing demographic. In June 1998, the Network began operating under the
"GoodLife TV Network" name. Management believes that this designation more
accurately captures and reflects the Network's mission and has been a
significant help in presenting the Network to potential customers. Management
also continued its aggressive Affiliate marketing campaign by having a prominent
presence at major trade shows and through trade advertising.
A critical component to the Network's growth is to continually brand and
improve the quality of programming and the Network's on air look. Original
programming is a key to such branding, as it allows the consumer to
differentiate the Network from other networks. The Network has continued to
produce new original programming reflecting the American culture and traditional
values of its Boomer and over audience. The Network reflects the "good life
state of mind" of its audience in its mix of entertainment and information
programs. GTV Ballroom DanceSport showcases the sport of ballroom dance
competitions, a dance form popular with past generations that has become all the
rage with today's generation. The Network provides insight and coverage of all
the major dance competitions across the United States. Cafe DuArt, features
impressionist/comedian Louise DuArt, providing cabaret music, comedy and a
humorous slice of life set in a New York cabaret club. The Real Me
Autobiographies, features prominent guests recounting their life's stories in
their own words, surrounded by friends and family. The Bull & The Bear provides
stock market reports by a "Siskel and Ebert-type" pair of hosts. More Money with
the Dolans starring Ken and Daria Dolan, the First Family of Finance, offers
practical financial advice for everyday Americans. TV Book Shop
F-9
<PAGE> 64
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
features author interviews and book picks of interest to the Network's audience.
Issues and Answers, a panel discussion show hosted by Ron Nessen, provides the
Network's audience with insight into the issues facing today's active adults.
This is America with Dennis Wholey is a weekly, hour long roundtable discussion
with six interesting and influential guests from the fields of entertainment,
politics and industry. Management continues to search for creative new
programming ideas targeted to the Boomer and over audience, and has several
pilots in development for 1999.
In addition to its new original programming, the Network continues to offer
its viewers classic off network television series. The Network currently airs
The Rockford Files, The Love Boat, and The Streets of San Francisco. The Network
has also revised its film series through the introduction of Flea Market Movie,
wherein short segments are added to commercial breaks where the Network's
collectibles aficionado, Christopher Kent, dispenses his wit and wisdom about
all sorts of collectable items. The GTV Variety Hour features classic variety
programs such as Tony Orlando and Dawn, Leslie Uggams, The Lennon Sisters and
others. American Soldier features interviews with veterans, focusing on their
wartime experiences, which are wrapped around three classic dramatic television
shows: Combat!, Twelve O'clock High and Garrison's Gorillas. These improvements
to the programming line up have resulted in tangible results where total day
ratings were a .2 and Monday to Sunday prime time ratings rose to a record .9 in
November.
Crown Communications Corporation ("Crown") has provided $8,000,000 in debt
financing to the Company since January 1, 1999 and also has committed to
provide, as needed, an additional $7,000,000 in debt financing during the
balance of the calendar year. The Company believes that these funds will be
sufficient to satisfy its operating needs for 1999.
The Executive Committee of the Board of Directors and management continue
to evaluate strategic alliance alternatives and have had preliminary discussions
with a number of potential strategic partners. These discussions are preliminary
and no definitive proposals or targeted entities have been identified. The
Executive Committee and management will continue to actively pursue identifying
potential strategic alliance candidates.
Because of the unpredictable factors involved in the search for a strategic
alliance and the dynamic changes taking place in the industry, there is
considerable uncertainty about what the Company's needs will be in future years.
There can be no assurance that the Company will be able to locate financing in
the amount required to execute its plans for future growth, or that it will be
able to achieve a strategic alliance.
2. PROPERTY AND EQUIPMENT
Major classifications of property and equipment and their respective
estimated service lives are summarized below:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C> <C>
Transponder................................. $ 1,427,968 $ 1,427,968 12 years
Machinery and equipment..................... 1,397,333 1,360,810 5 to 7 years
Furniture and fixtures...................... 299,890 299,663 5 to 7 years
Leasehold improvements...................... 99,780 99,780 5 years
----------- -----------
3,224,971 3,188,221
Accumulated depreciation and amortization... (2,033,092) (1,746,931)
----------- -----------
$ 1,191,879 $ 1,441,290
=========== ===========
</TABLE>
Depreciation expense included in Finance, General and Administrative
expenses was $286,000, $310,000, and $294,000, for 1998, 1997 and 1996,
respectively.
F-10
<PAGE> 65
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. PROGRAMMING AND CABLECAST RIGHTS
Prime time series consist of broadcast licenses for classic television
series and other programming acquired from various film studios or other
sources. Original programs consist of series or specials developed and produced
by the Network. Music programs include musical series or specials both those
produced by the Network and those acquired or licensed from third parties. The
film library consists of vintage feature films, interstitial material, and other
programming produced and/or owned by the Network. Film rights include broadcast
licenses for films and specialty programming. Other programming and cablecast
rights include production and post-production costs as well as costs to
duplicate and edit programs and interstitial materials for broadcasting.
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Prime time series........................................ $ 14,578,500 $14,323,500
Original programs........................................ 8,047,753 3,885,605
Music programs........................................... 1,537,095 1,537,095
Film library............................................. 1,266,667 1,266,667
Other.................................................... 1,525,409 933,436
------------ -----------
26,955,424 21,946,303
Less accumulated amortization............................ (16,867,295) (9,109,657)
------------ -----------
$ 10,088,129 $12,836,646
============ ===========
Consisting of:
Current................................................ $ 7,300,000 $ 6,880,000
Long term.............................................. 2,788,129 5,956,646
------------ -----------
$ 10,088,129 $12,836,646
============ ===========
</TABLE>
Estimated future amortization of programming and cablecast rights and
maturities of related long-term obligations are approximately as follows:
<TABLE>
<CAPTION>
YEAR 1999 2000 2001
- ---- ---------- ---------- -------
<S> <C> <C> <C>
Amortization..................................... $7,300,000 $2,406,700 $68,100
Obligation maturities............................ $5,068,000 $ 114,465
</TABLE>
The Company acquired or produced the following rights and materials during
the years ended December 31,
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- --------
<S> <C> <C> <C>
Prime time series............................... $ 255,000 $1,073,500 $ --
Original programs............................... 4,162,100 3,532,600 500,000
Music programs.................................. -- 1,185,500 312,000
Other........................................... 592,000 254,700 96,500
Film rights..................................... -- -- --
---------- ---------- --------
$5,009,100 $6,046,300 $908,500
========== ========== ========
</TABLE>
F-11
<PAGE> 66
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. NOTES PAYABLE TO RELATED PARTIES
Notes payable consists of the following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Notes payable to Concept Communications, Inc. bearing
interest approximating 7.75% per annum, due upon the
earlier of an equity investment of not less than the
amount of the Notes or January 1, 2000; however, Concept
has represented that the Notes will not be called prior to
January 1, 2000 unless replaced by an equity investment... $19,217,867 $18,112,194
Notes payable to Crown Communications Corporation bearing
interest approximating 7.75% per annum, due upon the
earlier of an equity investment of not less than the
amount of the Notes or January 1, 2000; however, Crown has
represented that the Notes will not be called prior to
January 1, 2000 unless replaced by an equity investment... $43,310,006 $23,000,000
Subordinated note payable to Atlantic Video in the
principal amount of $305,000, bearing interest at the rate
of 2.5% per quarter, compounded quarterly, with principal
and interest payable on March 31, 2002. The note agreement
contains certain restrictive covenants including
limitations on liens, disposition of collateral and
compliance with related contracts......................... 305,000 305,000
----------- -----------
$62,832,873 $41,417,194
=========== ===========
</TABLE>
Subsequent to December 31, 1998, Crown has loaned the Company an additional
$8,000,000 and extended the due dates on all related debt to January 1, 2000. In
addition, the Majority Stockholders have extended payments on the portion of
accrued interest until 2000. In connection with the additional borrowings and
extension of the due dates, the Company has entered into security agreements
covering substantially all the Company's assets in favor of the Majority
Stockholders. Current maturities of notes payable and long-term debt to related
parties is as follows:
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003
- ---- ----------- ---- -------- ----
<S> <C> <C> <C> <C>
$-- $62,527,873 $-- $305,000 $--
</TABLE>
F-12
<PAGE> 67
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. STOCK OPTIONS AND WARRANTS
On July 15, 1987, the Company's Board of Directors adopted an Employee
Stock Option Plan (the "1987 Plan") which provides for discretionary grants to
employees, officers or directors employed by the Company or its parent, as well
as other individuals who perform services for the Company. The 1987 Plan was
approved by the Company's shareholders on August 31, 1987. 325,000 shares of
stock have been reserved for issuance pursuant to the 1987 Plan. Data with
respect to stock options under the 1987 Plan are as follows:
<TABLE>
<CAPTION>
OPTIONS PRICE
OUTSTANDING PER SHARE
----------- -----------
<S> <C> <C>
Outstanding at January 1, 1997.............................. 45,500 $.48 - 1.25
Canceled.................................................... --
-------
Outstanding at December 31, 1997............................ 45,500 $.48 - 1.25
Canceled.................................................... --
Expired..................................................... (12,000) $1.25
-------
Outstanding at December 31, 1998............................ 33,500 $.48 - 1.25
=======
Exercisable at December 31, 1998............................ 33,500 $.48 - 1.25
=======
</TABLE>
On August 21, 1990, the Company's Board of Directors adopted an Incentive
and Nonqualified Stock Option Plan (the "1990 Plan") which provides for
discretionary grants to employees, officers and directors of the Company. The
1990 Plan was approved by the Company's shareholders on October 2, 1990.
1,000,000 shares of stock have been reserved for issuance pursuant to the 1990
Plan. Data with respect to stock options under the 1990 Plan are as follows:
<TABLE>
<CAPTION>
OPTIONS PRICE
OUTSTANDING PER SHARE
----------- -----------
<S> <C> <C>
Outstanding at January 1, 1997 175,000 $.48 - 1.57
Canceled.................................................... --
-------
Outstanding at December 31, 1997 175,000 $.48 - 1.57
Canceled.................................................... --
-------
Outstanding at December 31, 1998............................ 175,000 $.48 - 1.57
=======
Exercisable at December 31, 1998............................ 175,000 $.48 - 1.57
=======
</TABLE>
In November, 1995, the Company's Board of Directors authorized registration
of the Company's existing stock option plans and agreements under the Securities
Act of 1933 and the establishment of a new stock option plan (the "1996 Plan")
which will replace the two existing plans. This action did not result in any
additional shares being reserved for options.
The 1996 Plan provides for all remaining reserved shares under the 1987 and
1990 Plans to be transferred into the 1996 Plan as well as any subsequent
cancellations of any options currently outstanding in the 1987 and 1990 Plans.
Additionally, the 1996 Plan provides for annual "formula" grants to nonemployee
directors of 3,000 shares which vest over three years. The 1996 Plan was
approved to provide an option plan which
F-13
<PAGE> 68
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
conforms to current securities law and was adopted by shareholder approval at
the Company's 1996 Annual Meeting. Data with respect to stock options under the
1996 Plan are as follows:
<TABLE>
<CAPTION>
SHARES OPTIONS PRICE
RESERVED OUTSTANDING PER SHARE
--------- ----------- ------------
<S> <C> <C> <C>
Outstanding at January 1, 1997................. 1,006,166 30,000 $0.27
Granted........................................ (30,000) 30,000 $0.07
Canceled....................................... 9,000 (9,000) $0.27
--------- -------
Outstanding at December 31, 1997............... 979,166 51,000 $0.07 - 0.27
Granted........................................ (30,000) 30,000 $0.07
Canceled....................................... 12,000 (12,000) $0.07 - 0.27
--------- -------
Outstanding at December 31, 1998............... 961,166 69,000 $0.07 - 0.27
========= =======
Exercisable at December 31, 1998............... 19,000 $0.07 - 0.27
=======
</TABLE>
The exercise price of stock options at December 31, 1998 ranged from $1.57
to $0.07 per share with a weighted exercise price and remaining contractual life
of $0.74 and seven years, respectively.
On May 13, 1996, the Company entered into an agreement with SQuire Rushnell
to be employed as the Company's President and Chief Executive Officer. Under the
terms of the contract, the Company entered into a stock option agreement which
reserves 839,840 shares of common stock at an exercise price of $0.35, which was
equal to the fair market value at the date of grant. The shares vest at a rate
of 25% each nine months and the options expire at the earliest of (a) purchase
of all shares, (b) 90 days following termination of employment, or (c) May 12,
2006. The number of shares vesting in a given period can be accelerated and/or
additional options granted if the number of shares vesting is less than 1% of
the total shares of common stock outstanding on such date. At December 31, 1998,
629,880 shares were vested.
As of December 31, 1998, there were warrants outstanding to purchase
approximately 156,000 shares of the Company's common stock at prices ranging
from $1.25 to $4.80 per share for an average price of $2.31 per share. No
options or warrants were exercised during 1997 or 1998. The Warrants will expire
45 days after the filing of a post-effective amendment to the related
Registration Statement, as yet unfiled.
Total common shares reserved for issuance of subscribed stock, options,
warrants and conversion of preferred shares at December 31, 1998 were
approximately 2,287,500.
6. CAPITAL STOCK
Common Stock
On November 13, 1984, the Company completed a public offering of 12,500,000
units of stock at $.02 per unit (156,250 units at $1.60 adjusted for all
splits). Each unit originally consisted of one share of the Company's common
stock and one purchase warrant to purchase one share of common stock at $.06 per
share ($4.80 per share adjusted for all splits). The warrants are exercisable by
the holder commencing May 13, 1985 and will expire 45 days after the filing of a
post-effective amendment to the related Registration Statement, as yet unfiled.
Shares of common stock issued for other than cash have been assigned amounts
equivalent to the fair value of the assets received in exchange.
Preferred Stock
Each share of preferred stock is convertible into 100 shares of common
stock at the option of the holder thereof. Each preferred share is entitled to
vote as 100 shares of common stock. Preferred shareholders are entitled to
preferential rights on dividends. To date, no dividends have been declared or
paid.
F-14
<PAGE> 69
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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, 1998, the Company has unused net operating loss
carryforwards which will be limited. Internal Revenue Code Section 382 provides
that certain changes in ownership of the Company can limit the amount of income
that can be offset by net operating losses. The amount of the limitation is
approximately $1,700,000 per year. The net operating loss carryforwards prior to
the application of the limitations are as follows:
<TABLE>
<CAPTION>
AVAILABLE FOR CARRYFORWARD TO
YEAR ENDING DECEMBER 31,
- -----------------------------
<S> <C>
1998 - 2000..................................... $ 87,000
2001............................................ 1,323,000
2002............................................ 3,493,000
2003............................................ 1,725,000
2004............................................ 2,424,000
2005............................................ 3,630,000
2006............................................ 2,786,000
2007............................................ 2,803,000
2008............................................ 2,218,000
2009............................................ 3,719,000
2010............................................ 8,787,000
2011............................................ 13,094,000
2012............................................ 19,644,000
2013............................................ 22,482,000
-----------
Total........................................... $88,215,000
===========
</TABLE>
Under the asset and liability approach specified by Statement of Financial
Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes", deferred
tax assets and liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities as measured by the
currently enacted tax rates. Deferred tax expense or benefit is the result of
the changes in deferred tax assets and liabilities.
F-15
<PAGE> 70
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes arise from the difference between the financial
statement and income tax basis of assets and liabilities. Principal items
comprising net deferred tax assets as of December 31, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Current:
Allowance for doubtful accounts......................... $ 103,000 $ 159,000
Accrued liabilities and other......................... 81,000 75,000
------------ ------------
Total current deferred tax assets.................. 184,000 234,000
------------ ------------
Long-Term:
Net operating loss carryforwards...................... 29,993,000 22,349,000
Accumulated depreciation and amortization............. (397,000) (585,000)
------------ ------------
Total net long-term deferred tax assets............ 29,596,000 21,746,000
------------ ------------
Total net deferred tax assets...................... 29,780,000 21,998,000
Valuation allowance................................ (29,780,000) (21,998,000)
------------ ------------
Net deferred tax asset............................. $ -- $ --
============ ============
</TABLE>
Management believes that a valuation allowance is necessary due to
uncertainty regarding the timing and amount of future utilization of net
operating loss carryforwards.
8. RELATED PARTY TRANSACTIONS
Office Leases
The Company entered into a five year lease agreement commencing November,
1994, with an entity affiliated with the Company's Majority Stockholders. The
lease calls for base monthly rental payments of $12,537, plus 2% per year
escalation and pro-rata increases in operating expenses and real estate taxes.
The lease provides for three months rental abatement and a five year renewal
option at the then prevailing market rate. For financial reporting purposes, the
lease payments are being recognized on a straight-line basis over the initial
term of the lease. The Company was required to contribute $70,000 for above
building standard buildout items to be paid in 60 monthly installments of
$1,410, including 8% interest. Rental expense under this lease was $194,500,
$184,600, and $172,000, for the years ended December 31, 1998, 1997 and 1996,
respectively.
Production and Post Production Services
During 1990, the Company entered into an agreement with Atlantic Video,
Inc., an entity of which two directors of the Company were officers and
directors during 1998, for studio, production and post production services,
master control/uplink services and office space. Under the terms of the
agreement, which was renewed in August 1997, the Company is required to purchase
a minimum number of hours of such services during each year at specified rates.
The Company has agreed to pay a minimum monthly fee of $93,000. If the Company
does not actually purchase $93,000 of services in a month, the differences up to
a maximum of $75,000 for all months elapsed, subject to certain limitations, can
be used as credit for the fees in future months. Services rendered to the
Company under this agreement amounted to $1,397,000, $1,525,000, and $1,588,000,
for the years ended December 31, 1998, 1997 and 1996, respectively.
F-16
<PAGE> 71
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
Litigation
Roger M. Rosenberg, et al. v. Sam Oolie, et al. On or about September 29,
1989, an action was commenced in the Delaware Court of Chancery for New Castle
County. The Company is named as a nominal defendant for purposes of the
derivative claims asserted. However, the Company has no liability, and a summary
judgment has been entered dismissing all counts in which the Company had been
named, although counts against the other individual defendants continue. The
Company is required to indemnify the directors and to pay the cost of their
defense.
Employment Agreements
On May 13, 1996, the Company entered into a three year employment agreement
with SQuire Rushnell pursuant to which Mr. Rushnell serves as the Company's
President and Chief Executive Officer. The agreement provides for an annual
salary of $200,000 with annual merit increases of not less than 5% of the
immediately prior base salary and a $50,000 sign on bonus. Commencing in the
second year the agreement provides for annual benchmark bonuses of $50,000,
payable quarterly upon meeting or exceeding certain budgetary goals as well as
annual bonuses based upon reducing the Company's deficit.
Leases
Transponder
The Company leases satellite transponder space and services on a 24-hour
per day basis. In connection with the Company's satellite transponder, which
launched in March, 1994, a launch protection fee of $1,000,000 was paid and
interest costs of $284,000 were capitalized along with other costs to acquire
the transponder. The basic monthly rate is $205,400 for a term spanning the life
of the satellite, which is estimated to be twelve years. Expense for satellite
transponder space and services was $2,464,800, $2,464,800, and $2,464,800, for
1998, 1997 and 1996, respectively.
Office, Studio, and Equipment
The Company conducts operations from leased premises which include studio,
office, sales and storage facilities. The Company also leases certain production
and communication equipment including its transponder. Generally the leases
provide for renewal for various periods at stipulated rates. Some of the leases
provide that the Company pay taxes, maintenance, insurance and other occupancy
expenses applicable to leased premises.
Lease expense for premises and equipment for 1998, 1997 and 1996, which
consisted entirely of minimum rentals, was $280,000, $273,000, $234,000,
respectively. Approximate minimum rental commitments under all noncancellable
leases, including the transponder lease having terms in excess of a year are as
follows:
<TABLE>
<CAPTION>
FACILITY TRANSMISSION
YEAR ENDING DECEMBER 31, LEASES LEASES TOTAL
- ------------------------ -------- ------------ ---------
<S> <C> <C> <C>
1999.............................................. 166,000 3,111,000 3,277,000
2000.............................................. 29,000 2,885,000 2,914,000
2001.............................................. 29,000 2,885,000 2,914,000
2002.............................................. 30,000 2,885,000 2,915,000
2003.............................................. 21,000 2,885,000 2,906,000
Thereafter........................................ -- 5,350,000 5,350,000
</TABLE>
F-17
<PAGE> 72
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Rating Service Contract
The Company has contracted with a service that provides ratings reports,
analysis reports, demographic reports and other special reports. The agreement,
commencing September, 1995, covers a minimum period of five years, requires a
monthly base charge of approximately $30,000.
Major Customers
During 1998, two major customers accounted for 18% and 13% of Affiliate
revenues; during 1997, two major customers accounted for 20% and 12% of
Affiliate revenues; and during 1996, three major customer accounted for 17%, 15%
and 11% of Affiliate revenues, respectively. Advertising sales revenues from one
agency accounted for 36% of advertising revenues in 1998 and 10% of advertising
revenues in 1996.
10. STATEMENTS OF CASH FLOWS
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash paid during the year for:
Interest........................................... $660,000 $635,000 $166,213
Income taxes..................................... None None None
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Fiscal 1998
Programming acquisitions totaling $830,000 were financed through vendor
debt obligations.
Interest accrued and payable to Concept and Crown in the amounts of
$1,105,673 and $1,310,006, respectively, were recapitalized into notes payable
as part of a March 31, 1998 refinancing of debt owed to the Majority
Stockholders.
Fiscal 1997
Programming acquisitions totaling $2,659,000 were financed through vendor
debt obligations.
Interest accrued and payable to Concept in the amount of $1,612,194 was
recapitalized into a note payable as part of a March 31, 1997 refinancing of
debt owed to the Majority Stockholders.
Fiscal 1996
Programming acquisitions totaling $702,500 were financed through vendor
debt obligations.
F-18
<PAGE> 73
THE NOSTALGIA NETWORK, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS(1) YEAR
- ----------- ---------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996
Allowance for doubtful
accounts receivable.......... $2,258,000 $450,000 $-- $1,554,000 $1,154,000
========== ======== == ========== ==========
Year ended December 31, 1997
Allowance for doubtful
accounts receivable.......... $1,154,000 $102,000 $-- $ 789,000 $ 467,000
========== ======== == ========== ==========
Year ended December 31, 1998
Allowance for doubtful
accounts receivable.......... $ 467,000 $534,000 $-- $ 699,000 $ 302,000
========== ======== == ========== ==========
</TABLE>
- ---------------
(1) Uncollectible accounts written off.
F-19
<PAGE> 74
THE NOSTALGIA NETWORK, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEP. 30, 1999 DEC. 31, 1998
------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 614,103 $ 539,371
Accounts receivable, less allowance of $156,000 and
$302,000, respectively................................. 943,582 935,230
Prepaid expenses.......................................... 231,263 168,362
Cablecast rights.......................................... 8,065,594 7,300,000
------------- ------------
Total current assets.............................. 9,854,542 8,942,963
Programming and cablecast rights -- net..................... 3,756,977 2,788,129
Property and equipment -- net............................... 1,028,064 1,191,879
Other assets................................................ 51,740 56,740
------------- ------------
Total assets...................................... $ 14,691,323 $ 12,979,711
------------- ------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Current maturities of programming and cablecast fees...... $ 4,327,411 $ 5,085,827
Accounts payable.......................................... 1,950,907 2,255,174
Accrued expenses and other liabilities.................... 492,486 377,254
------------- ------------
Total current liabilities......................... 6,770,804 7,718,255
------------- ------------
LONG-TERM OBLIGATIONS, LESS CURRENT MATURITIES
Notes and interest payable -- related parties............. 81,970,561 66,214,998
Other..................................................... 348,308 335,416
Cablecast licenses and fees payable....................... 2,864,538 114,465
------------- ------------
Total long-term liabilities....................... 85,183,407 66,664,879
------------- ------------
Total liabilities................................. 91,954,211 74,383,134
------------- ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Preferred stock: $2 par value, 125,000 shares authorized,
3,250 issued and outstanding........................... 6,500 6,500
Common stock: $0.04 par value, 30,000,000 shares
authorized, 20,274,411 and 20,241,037 shares issued and
outstanding in 1999 and 1998........................... 811,015 810,975
Additional paid-in capital................................ 30,213,584 30,213,554
Deficit................................................... (108,293,987) (92,434,452)
------------- ------------
Total stockholders' deficit....................... (77,262,888) (61,403,423)
------------- ------------
Total liabilities and stockholders' deficit....... $ 14,691,323 $ 12,979,711
============= ============
</TABLE>
F-20
<PAGE> 75
THE NOSTALGIA NETWORK, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Affiliate revenue................. $ 518,272 $ 584,444 $ 1,681,827 $ 1,972,421
Advertising sales revenue......... 720,754 569,634 2,267,090 2,001,668
----------- ----------- ------------ ------------
Total operating
revenues................ 1,239,026 1,154,078 3,948,917 3,974,089
----------- ----------- ------------ ------------
OPERATING EXPENSES
Programming, production and
transmission................... 1,091,814 1,534,693 3,643,449 4,405,975
Programming amortization.......... 2,275,208 1,767,510 6,516,270 5,366,178
Sales and marketing............... 828,930 1,934,913 2,645,641 5,904,085
Finance, general and
administration................. 758,967 764,591 2,623,069 2,264,577
----------- ----------- ------------ ------------
Total operating
expenses................ 4,954,919 6,001,707 15,428,429 17,940,815
----------- ----------- ------------ ------------
LOSS FROM OPERATIONS................ (3,715,893) (4,847,629) (11,479,512) (13,966,726)
----------- ----------- ------------ ------------
OTHER INCOME AND (EXPENSE)
Interest and other -- net......... (1,496,752) (1,188,750) (4,380,023) (3,210,819)
----------- ----------- ------------ ------------
NET LOSS............................ $(5,212,645) $(6,036,379) $(15,859,535) $(17,177,545)
=========== =========== ============ ============
NET LOSS PER COMMON SHARE -- BASIC
AND DILUTED....................... $ (0.26) $ (0.30) $ (0.78) $ (0.85)
=========== =========== ============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING....................... 20,274,371 20,274,371 20,274,382 20,274,371
=========== =========== ============ ============
</TABLE>
F-21
<PAGE> 76
THE NOSTALGIA NETWORK, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................. $(15,859,535) $(17,177,545)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 6,735,043 5,580,937
Provision for losses on accounts receivable............ 288,731 234,000
Net change in operating assets and liabilities:
Increase in accounts receivable........................ (297,083) (444,552)
Increase in prepaid expenses & other assets............ (57,901) (120,597)
Increase (decrease) in accounts payable................ (304,268) 1,829,878
Increase in accrued expenses and other liabilities..... 3,640,919 2,484,144
------------ ------------
Net cash used in operating activities................ (5,854,094) (7,613,735)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of programming and cablecast rights............. (2,463,837) (4,466,858)
Purchases of property and other assets.................... (54,958) (33,565)
------------ ------------
Net cash used in investing activities................ (2,518,795) (4,500,423)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term obligations........................ (3,552,450) (3,659,975)
Proceeds from financing obtained from related parties..... 12,000,000 15,000,000
------------ ------------
Net cash provided by financing activities............ 8,447,550 11,340,025
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 74,661 (774,133)
CASH AND CASH EQUIVALENTS -- BEGINNING...................... 539,371 1,803,189
------------ ------------
CASH AND CASH EQUIVALENTS -- ENDING......................... $ 614,032 $ 1,029,056
============ ============
NONCASH INVESTING AND FINANCING ACTIVITIES:
Vendor financing of programming rights.................... $ 5,786,875 $ 743,750
============ ============
</TABLE>
F-22
<PAGE> 77
THE NOSTALGIA NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
1. The financial information included herein is submitted pursuant to the
requirements of Form 10-Q and does not include all disclosures required by
generally accepted accounting principles. These unaudited financial statements
should be read in conjunction with the financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 of The Nostalgia Network, Inc. (the "Company"), filed with The
Securities and Exchange Commission on March 31, 1999 and which are incorporated
herein by reference. The accompanying interim financial statements reflect all
adjustments (consisting of normal recurring accruals only) which are, in the
opinion of management, necessary for a fair statement of the results for the
interim periods presented. The results of operations for interim periods are not
necessarily indicative of the results to be obtained for the entire year.
2. Certain reclassifications have been made to the financial statements
for the comparative period of the prior fiscal year for consistency with the
presentation for the current period.
3. Cash and cash equivalents include highly liquid debt instruments with a
maturity of three months or less.
4. On March 27, 1999, the Company issued two substitution and replacement
notes to Crown Communications Corporation ("Crown") and Concept Communications,
Inc. ("Concept") (together, the "Majority Stockholders") in the amount of
$50,571,503 (which includes $4,500,000 of additional financing received in the
first quarter), and $20,598,036, respectively, at an interest rate of 7.75%,
with the principal and unpaid interest due January 1, 2000. These notes require
minimum monthly interest payments in the aggregate of $60,000 and replace
previously issued notes in the principal amounts of $47,810,006 and $19,217,867
plus $2,761,497 and $1,380,169 in accrued and unpaid interest, respectively. On
March 22, 1999, and on June 9, 1999, the Company issued two promissory notes to
Crown in the principal amounts of $3,500,000 and $2,000,000 respectively, at an
interest rate of 7.75%, each due January 1, 2000. On August 24, 1999, and on
September 10, 1999, the Company issued two promissory notes to Crown in the
principal amounts of $1,000,000 each, with interest rates of 8.00% and 8.25%,
respectively, each due January 1, 2000. These notes are secured by substantially
all of the Company's assets pursuant to certain Security Agreements between the
Majority Stockholders and the Company, as amended.
F-23
<PAGE> 78
AGREEMENT AND PLAN OF MERGER
<PAGE> 79
TABLE OF CONTENTS
ARTICLE I
MERGER
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1.1 The Merger............................................. 1
1.2 Surviving Corporation; Effects of the Merger........... 1
1.3 Effective Time......................................... 1
1.4 Certificate of Incorporation of the Surviving
Corporation............................................... 1
1.5 Bylaws of the Surviving Corporation.................... 1
1.6 Board of Directors and Officers of the Surviving
Corporation............................................... 1
1.7 Conversion of Shares................................... 2
1.8 Dissenting Shares...................................... 2
1.9 Payment for Shares..................................... 2
1.10 No Further Rights or Transfers......................... 3
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
2.1 Corporate Organization................................. 3
2.2 Authorization.......................................... 4
2.3 Capitalization of the Company.......................... 4
2.4 Certain Fees........................................... 4
2.5 SEC Filings............................................ 4
2.6 Consents and Approvals; No Violations.................. 4
2.7 No Undisclosed Material Liabilities.................... 5
2.8 Proxy Statement; Other Information..................... 5
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF NAC
3.1 Corporate Organization................................. 5
3.2 Authorization.......................................... 5
3.3 Commitments for the Financing.......................... 5
3.4 Consents and Approvals; No Violations.................. 5
3.5 Proxy Statement; Other Information..................... 6
ARTICLE IV
COVENANTS
4.1 Conduct of Business of the Company..................... 6
4.2 No Solicitation........................................ 8
4.3 Access to Information.................................. 8
4.4 Best Efforts........................................... 9
4.5 Public Announcements................................... 9
4.6 Supplemental Information............................... 9
4.7 Schedule 13E-3 and Proxy Material; Stockholders'
Meeting................................................... 9
4.8 Agreement to Defend and Indemnify...................... 10
4.9 Option Plans........................................... 10
4.10 Deposit of Funds....................................... 11
</TABLE>
i
<PAGE> 80
ARTICLE V
CONDITIONS TO THE MERGER
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
5.1 Conditions to Each Party's Obligation to Effect the
Merger...................................................... 11
5.2 Conditions to the Obligation of NAC to Effect the
Merger.................................................... 11
5.3 Conditions to the Obligations of the Company to Effect
the Merger................................................ 12
ARTICLE VI
CLOSING
6.1 Time and Place......................................... 12
6.2 Deliveries at the Closing.............................. 12
ARTICLE VII
TERMINATION AND ABANDONMENT
7.1 Termination............................................ 12
7.2 Procedure and Effect of Termination.................... 13
ARTICLE VIII
GENERAL PROVISIONS
8.1 Survival of Representations, Warranties, Covenants and
Agreements................................................ 13
8.2 Amendment, Modification and Waiver..................... 13
8.3 Waiver of Compliance; Consents......................... 13
8.4 Severability........................................... 13
8.5 Fees and Expenses...................................... 13
8.6 No Third Party Beneficiaries........................... 14
8.7 Additional Agreements.................................. 14
8.8 Notices................................................ 14
8.9 Governing Law.......................................... 14
8.10 Counterparts........................................... 14
8.11 Headings............................................... 15
8.12 Entire Agreement....................................... 15
</TABLE>
EXHIBIT A AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF THE NOSTALGIA
NETWORK, INC.
ii
<PAGE> 81
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), is made as of the
11th day of January, 2000 by and between (i) THE NOSTALGIA NETWORK, INC., a
Delaware corporation (the "Company"), and (ii) NNI ACQUISITION CORPORATION, a
Delaware corporation ("NAC").
WHEREAS, the Boards of Directors of the Company and NAC deem it advisable
and in the best interests of the stockholders of such corporations to effect the
merger of NAC with and into the Company (the "Merger"), to be consummated upon
the terms and conditions set forth in this Agreement and in accordance with the
applicable laws of the State of Delaware, whereby the outstanding shares of
Common Stock, Four Cents ($0.04) par value, of the Company (the "Common
Shares"), and the outstanding shares of Preferred Stock, Two Dollars ($2.00) par
value, of the Company (the "Preferred Shares"), other than Common Shares and
Preferred Shares held by NAC and other than Dissenting Shares (as defined in
Section 1.8 hereof), be converted upon the Merger into the right to receive cash
as provided in this Agreement.
NOW THEREFORE, the parties hereto agree as follows:
ARTICLE I
MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.3 hereof),
and subject to the terms and conditions of this Agreement and the General
Corporation Law of the State of Delaware (the "DGCL"), NAC shall be merged with
and into the Company, the separate corporate existence of NAC shall thereupon
cease, and the Company shall be the surviving corporation in the Merger
(sometimes hereinafter referred to as the "Surviving Corporation").
1.2 Surviving Corporation; Effects of the Merger. At the Effective Time,
the Surviving Corporation shall continue its corporate existence under the laws
of the State of Delaware. The Merger shall have the effects specified in Section
259 of the DGCL. The name of the Surviving Corporation shall be The Nostalgia
Network, Inc.
1.3 Effective Time. As soon as practicable following the Closing (as
defined in Section 6.1 hereof), the parties hereto shall effect the Merger by
filing with the Delaware Secretary of State a certificate of merger (the
"Certificate of Merger") in such form as is required by, and executed in
accordance with, the relevant provisions of the DGCL (the time of such filing
being herein referred to as the "Effective Time").
1.4 Certificate of Incorporation of the Surviving Corporation. At the
Effective Time and without any further action on the part of the Company or NAC,
the Certificate of Incorporation of the Company shall be amended and restated to
read substantially as set forth in Exhibit A to this Agreement. From and after
the Effective Time, the Certificate of Incorporation of the Company, as so
amended and restated, shall be the Certificate of Incorporation of the Surviving
Corporation, subject to the right of the Surviving Corporation to amend its
Certificate of Incorporation after the Merger in accordance with the DGCL.
1.5 Bylaws of the Surviving Corporation. At the Effective Time and without
any further action on the part of the Company or NAC, the Bylaws of NAC, as in
effect at the Effective Time, shall be the Bylaws of the Surviving Corporation.
1.6 Board of Directors and Officers of the Surviving Corporation. At the
Effective Time, the directors of the Company immediately prior to the Effective
Time shall be the directors of the Surviving Corporation, each of such directors
to hold office, subject to the applicable provisions of the Certificate of
Incorporation and Bylaws of the Surviving Corporation, until the next annual
shareholders' meeting of the Surviving Corporation and until their successors
shall be duly elected or appointed and qualified. The officers of the Company
immediately prior to the Effective Time shall be the officers of the Surviving
Corporation until their successors are duly elected or appointed and qualified.
A-1
<PAGE> 82
1.7 Conversion of Shares. At the Effective Time, by virtue of the Merger
and without any action on the part of the holders thereof:
(a) Each Common Share that is issued and outstanding immediately prior
to the Effective Time (other than Common Shares which are Dissenting Shares
as defined in Section 1.8 hereof, and any Common Shares which are held by
NAC or are held in the treasury of the Company) shall be converted into and
represent the right to receive Seven Cents ($0.07) (the "Common Stock
Merger Consideration"), in cash payable to the holder thereof, without
interest thereon, upon surrender of the certificate representing such
Common Share.
(b) Each Preferred Share that is issued and outstanding immediately
prior to the Effective Time (other than Preferred Shares which are
Dissenting Shares as defined in Section 1.8 hereof, and any Preferred
Shares which are held by NAC or are held in the treasury of the Company)
shall be converted into and represent the right to receive Seven Dollars
($7.00) (the "Preferred Stock Merger Consideration"), in cash payable to
the holder thereof, without interest thereon, upon surrender of the
certificate representing such Preferred Share.
(c) Each share of Common Share of NAC that is issued and outstanding
immediately prior to the Effective Time shall be converted into and
represent the right to receive one fully paid and non-assessable share of
Common Share, par value $0.01 per share, of the Surviving Corporation, and
such shares of Common Share of the Surviving Corporation shall constitute
the only issued shares of the Surviving Corporation.
(d) Each Common Share and Preferred Share owned by NAC, or held in the
treasury of the Company, immediately prior to the Effective Time shall be
cancelled and cease to exist at and after the Effective Time and no
consideration shall be paid with respect thereto.
1.8 Dissenting Shares. Notwithstanding the provisions of Section 1.7
hereof, or any other provision of this Agreement to the contrary, Common Shares
or Preferred Shares which are issued and outstanding immediately prior to the
Effective Time and which are held by stockholders who have not voted such Common
Shares or Preferred Shares in favor of the Merger and who shall have delivered a
written demand for appraisal of such Common Shares or Preferred Shares in the
manner provided in Section 262 of the DGCL (the "Dissenting Shares") shall not
be converted into the right to receive cash at or after the Effective Time,
unless and until the holder of such Dissenting Shares shall have failed to
perfect or shall have effectively withdrawn or lost such right to appraisal and
payment under the DGCL. If a holder of Dissenting Shares shall have so failed to
perfect or shall have effectively withdrawn or lost such right to appraisal and
payment, then, as of the Effective Time or the occurrence of such event,
whichever last occurs, such holder's Dissenting Shares shall automatically be
converted into and represent the right to receive cash, without any interest
thereon, as provided in Section 1.7(a) or 1.7(b) hereof, as the case may be.
1.9 Payment for Shares.
(a) Prior to the Effective Time, NAC shall deposit, or cause to be
deposited in trust for the benefit of the Company's stockholders, in immediately
available funds with a disbursing agent selected by NAC and reasonably
satisfactory to the Company (the "Exchange Agent"), an amount (the "Fund") equal
to the sum of (i) the product obtained by multiplying (A) the number of Common
Shares issued and outstanding immediately prior to the Effective Time (other
than Common Shares which are registered in the name of NAC or held in the
treasury of the Company and other than Common Shares which are Dissenting
Shares) as reflected on the stock transfer books of the Company immediately
prior to the Effective Time by (B) the Common Stock Merger Consideration plus
(ii) the product obtained by multiplying (A) the number of Preferred Shares
issued and outstanding immediately prior to the Effective Time (other than
Preferred Shares which are registered in the name of NAC or held in the treasury
of the Company and other than Preferred Shares which are Dissenting Shares) as
reflected on the stock transfer books of the Company immediately prior to the
Effective Time by (B) the Preferred Stock Merger Consideration. Out of the fund,
the Exchange Agent shall, pursuant to irrevocable instructions, make the
payments referred to in Sections 1.7(a) and 1.7(b) hereof.
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(b) As soon as practicable after the Effective Time, the Exchange Agent,
pursuant to irrevocable instructions, shall mail to each holder of record (other
than NAC) of a certificate or certificates which immediately prior to the
Effective Time represented issued and outstanding Common Shares or Preferred
Shares (the "Certificates"), a notice of effectiveness of the Merger, a form
letter of transmittal (the "Letter of Transmittal") for return to the Exchange
Agent, and instructions for use in effecting the surrender of the Certificates
and to receive cash for each of such holder's Common Shares and Preferred
Shares. The notice, Letter of Transmittal and instructions shall be in forms
reasonably approved by counsel to the Company. The Letter of Transmittal shall
specify that delivery shall be effected and risk of loss and title shall pass,
only upon proper delivery to and receipt of such Certificate or Certificates by
the Exchange Agent. The Exchange Agent, promptly following receipt of any such
Certificate or Certificates, together with the Letter of Transmittal, duly
executed, and any other items specified by the Letter of Transmittal, shall pay,
by check or draft, to the holders of Certificates an amount equal to the sum of
(i) the product obtained by multiplying (A) the number of Common Shares
represented by the Certificate or Certificates so surrendered by (B) Seven Cents
($0.07) plus (ii) the product obtained by multiplying (A) the number of
Preferred Shares represented by the Certificate or Certificates so surrendered
by (B) Seven Dollars ($7.00). No interest will be paid or accrued on the cash
payable upon the surrender of a Certificate or Certificates.
(c) Any portion of the Fund which remains unclaimed for six (6) months
after the Effective Time shall be paid to the Surviving Corporation upon demand,
subject to any applicable escheat and other similar laws. Any holders of
Certificates who have not theretofore complied with 1.9(b) hereof shall
thereafter look only to the Surviving Corporation for payment of their claim for
the consideration set forth in Section 1.7 hereof, without any interest thereon,
but shall have no greater rights against the Surviving Corporation than may be
accorded to general creditors of the Surviving Corporation under Delaware law.
1.10 No Further Rights or Transfers.
At and after the Effective Time of the Merger, (i) each holder of a
Certificate or Certificates that represented issued and outstanding Common
Shares or Preferred Shares immediately prior to the Effective Time shall cease
to have any rights as a stockholder of the Company, except for the right to
surrender his or her Certificate or Certificates in exchange for the payment
provided pursuant to Sections 1.7 and 1.9 hereof, or to perfect his or her right
to receive payment for his or her Common Shares or Preferred Shares pursuant to
Section 262 of the DGCL and Section 1.8 hereof, if such holder has validly
exercised and perfected and not withdrawn his or her right to receive payment
for his or her Common Shares or Preferred Shares, and (ii) no transfer of Common
Shares or Preferred Shares outstanding prior to the Effective Time shall be made
on the stock transfer books of the Surviving Corporation. If, after the
Effective Time, Certificates formerly representing Common Shares or Preferred
Shares are presented to the Surviving Corporation, they shall be cancelled and
exchanged for the consideration set forth in Section 1.7 hereof.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to NAC that:
2.1 Corporate Organization. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation, with all requisite power and authority to own, operate and lease
its properties and to carry on its business as now being conducted. To the best
knowledge of the executive officers of the Company, the Company is duly
qualified or licensed as a foreign corporation in good standing in each
jurisdiction in which the character of its properties or nature of its business
activities requires such qualification, except to the extent that the failure to
be so qualified or licensed would not have a material adverse effect upon the
business, operations or the financial condition, of the Company. There are no
corporations, limited liability companies, partnerships, joint venture
associations or other entities of which the Company, directly or indirectly,
owns or controls more than 10% of the voting securities or other voting
interests ("Subsidiary").
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2.2 Authorization. The Company has the necessary corporate power and
authority to enter into this Agreement. The execution and delivery of this
Agreement by the Company, the performance by the Company of its obligations
hereunder and the consummation by the Company of the transactions contemplated
hereby have been duly and validly authorized by the Company's Board of Directors
and no other corporate proceeding on the part of the Company is necessary to
authorize this Agreement or to consummate the transactions contemplated hereby
(other than the approval of this Agreement by the requisite vote of the
stockholders of the Company). This Agreement has been duly and validly executed
and delivered by the Company and, assuming the due authorization, execution and
delivery hereof by NAC, is a legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms.
2.3 Capitalization of the Company. As of the date hereof, the authorized
capital stock of the Company consists of thirty million (30,000,000) shares of
Common Stock, Four Cents ($0.04) par value, and one hundred twenty-five thousand
(125,000) shares of Preferred Stock, Two Dollars ($2.00) par value. As of the
date hereof, there are twenty million two hundred seventy-four thousand four
hundred eleven (20,274,411) Common Shares issued and outstanding and three
thousand two hundred fifty (3,250) Preferred Shares issued and outstanding. As
of the date hereof, there are no Common Shares or Preferred Shares held in the
Company's treasury. All of the outstanding Common Shares and Preferred Shares
have been validly issued, and are fully paid, nonassessable and free of
preemptive rights with no personal liability attaching to the ownership thereof.
As of the date hereof, two million (2,000,000) Common Shares and no Preferred
Shares are issuable upon exercise of options (the "Company Options") under stock
option plans of the Company (collectively, the "Option Plans"). A description of
the Option Plans and a list of all outstanding options, including the exercise
price and other terms thereof, is set forth on Disclosure Schedule 2.3 attached
hereto and made a part of hereof. Except as set forth above, as of the date
hereof, there are no outstanding options, warrants, subscriptions, conversion or
other rights, agreements or commitments obligating the Company to issue any
additional shares of the capital stock or any other securities convertible into,
exchangeable for, or evidencing the right to subscribe for any shares of the
capital stock of the Company.
2.4 Certain Fees. With the exception of a fee payable to Chatsworth
Securities LLC, which has acted as financial advisor to the Company's Board of
Directors (including its disinterested directors) pursuant to a letter agreement
which has been delivered to NAC, the Company has not employed any broker or
finder or incurred any liability for any financial advisory, brokerage or
finders' fees or commissions in connection with the transactions contemplated
hereby.
2.5 SEC Filings. To the best knowledge of the executive officers of the
Company, the Company has timely made all of its filings required by the
Securities and Exchange Commission (the "Commission"). All such filings are true
and complete in all material respects.
2.6 Consents and Approvals; No Violations.
(a) To the best knowledge of the executive officers of the Company, the
Company is not in violation of any applicable law, statute, order, rule or
regulation promulgated or judgment entered by any federal, state, local or
foreign court or governmental authority relating to or affecting the operation,
conduct or ownership of the property or business of the Company, which violation
or violations would have a material adverse effect on the business, operations
or financial condition of the Company.
(b) Except for (i) applicable requirements of the Securities Exchange Act
of 1934, as amended, and the rules and regulations thereunder (the "Exchange
Act"), (ii) the filing and recordation of the Certificate of Merger as required
by the DGCL and (iii) applicable requirements of state blue sky laws, no filing
or registration with, no notice to and no permit, authorization, consent or
approval of any public or governmental body or authority is necessary for the
consummation by the Company of the transactions contemplated by this Agreement
or to enable the Company to continue to conduct its business after the Effective
Time in a manner which is in all material respects consistent with that in which
they are presently conducted, except where the failure to make such filing or to
obtain such permit, authorization, consent or approval will not have a material
adverse effect on the business, operations or financial condition of the
Company. Neither the execution and delivery of this Agreement by the Company nor
the consummation by the Company of the transactions contemplated hereby nor
compliance by the Company with any of the provisions hereof will (i) conflict
with
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or result in any breach of any provision of the Certificate of Incorporation or
Bylaws of the Company, (ii) result in a violation or breach of, or constitute
(with or without due notice or lapse of time or both) a default (or give rise to
any right of termination, cancellation or acceleration) under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, license,
agreement or other instrument or obligation to which the Company is a party or
by which the Company or any of its properties or assets may be bound or (iii) to
the best knowledge of the executive officers of the Company, violate any order,
writ, injunction, decree, statute, rule or regulation applicable to the Company
or any of its properties or assets, excluding from the foregoing clauses (ii)
and (iii) violations, breaches or defaults which in the aggregate would not have
a material adverse effect on the business, operations or financial condition of
the Company.
2.7 No Undisclosed Material Liabilities. Except for intercompany loans
made by Crown Communications Corporation, a Delaware corporation, and except as
and to the extent set forth on the audited consolidated balance sheet of the
Company at December 31, 1998, including the notes thereto (the "Balance Sheet"),
the Company had, at December 31, 1998, no liabilities or obligations material to
the Company. Since the date of the Balance Sheet, the Company has not incurred
any liabilities material to the Company except (a) liabilities incurred in the
ordinary and usual course of business and consistent with past practice and (b)
liabilities incurred in connection with this Agreement and the transactions
contemplated herein.
2.8 Proxy Statement; Other Information. None of the information supplied
by the Company included in the letter to stockholders, notice of meeting, proxy
statement and form of proxy to be distributed to stockholders of the Company in
connection with the Merger (collectively, the "Proxy Statement") or any
schedules, including a Schedule 13E-3, required to be filed with the Commission
in connection therewith (the "Schedules"), will, as of the date the Proxy
Statement is first mailed to such stockholders, and on the date of the special
meeting of the Company's stockholders and the date of any adjournment thereof,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein not misleading. The Proxy Statement and Schedules will comply as to form
in all material respects with all applicable provisions of the Exchange Act.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF NAC
NAC hereby represents and warrants to the Company that:
3.1 Corporate Organization. NAC is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
all requisite corporate power and authority to own, operate and lease its
properties and to carry on its business as it is now being conducted.
3.2 Authorization. NAC has the necessary, corporate power and authority to
enter into this Agreement and to carry out its obligations hereunder. The
execution and delivery of this Agreement by NAC, the performance by NAC, its
obligations hereunder and the consummation by NAC of the transactions
contemplated hereby, have been duly and validly authorized by the Board of
Directors of NAC, and will have been duly and validly approved by the
stockholders of NAC prior to the Effective Time, and no other corporate
proceeding on the part of NAC is necessary for the execution and delivery of
this Agreement by NAC, the performance of its obligations hereunder and the
consummation by NAC of the transactions contemplated hereby. This Agreement has
been executed and delivered by NAC and, assuming the due authorization,
execution and delivery hereof by the Company, is a legal, valid and binding
obligation of NAC, enforceable against NAC in accordance with its terms.
3.3 Commitments for the Financing. NAC, or its respective associates or
affiliates, has heretofore received commitments to provide sufficient funds to
complete the transactions contemplated by this Agreement.
3.4 Consents and Approvals; No Violations.
(a) NAC is not in violation of any applicable law, statute, order, rule or
regulation promulgated or judgment entered by any federal, state, local or
foreign court or governmental authority relating to or affecting
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the operation, conduct or ownership of the property or business of NAC, which
violation or violations would have a material adverse effect on the business,
operations or financial condition of NAC.
(b) Except for applicable requirements of the Exchange Act, state blue sky
laws and the filing and recordation of the Certificate of Merger as required by
the DGCL, no filing or registration with, no notice to and no permit,
authorization, consent or approval of any public or governmental body or
authority is necessary for the consummation by NAC of the transactions
contemplated by this Agreement or to enable the Surviving Corporation to
continue to conduct its business after the Effective Time, except where the
failure to make such filing, or to obtain such permit, authorization, consent or
approval will not have a material adverse effect on the business, operations, or
financial condition of NAC. Neither the execution and delivery of this Agreement
by NAC nor the consummation by NAC of the transactions contemplated hereby nor
compliance by NAC with any of the provisions hereof will (i) conflict with or
result in any breach of any provision of the Certificate of Incorporation or
Bylaws of NAC, (ii) result in a violation or breach of, or constitute (with or
without due notice or lapse of time or both) a default (or give rise to any
right of termination, cancellation or acceleration) under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, license,
agreement or other instrument or obligation to which NAC is a party or by which
it or any of its properties or assets may be bound or (iii) to the best
knowledge of the executive officers of NAC, violate any order, writ, injunction,
decree, statute, rule or regulation applicable to NAC, excluding from the
foregoing clauses (ii) and (iii) violations, breaches or defaults which in the
aggregate would not have a material adverse effect on the business, operations
or financial condition of NAC.
3.5 Proxy Statement; Other Information. None of the information supplied
by NAC included in the Proxy Statement or any Schedule, or in any amendments or
supplements thereto, required to be filed with the Commission in connection
therewith, will, as of the date the Proxy Statement is first mailed to
stockholders of the Company, and on the date of the meeting of the Company's
stockholders and the date of any adjournment thereof, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein not
misleading. The Proxy Statement and Schedules will comply as to form in all
material respects with all applicable provisions of the Exchange Act.
ARTICLE IV
COVENANTS
4.1 Conduct of Business of the Company. Except as expressly contemplated
by this Agreement, including cancellation of Company Options in accordance with
Section 4.9(a) hereof, during the period from the date of this Agreement to the
Effective Time, the Company will conduct its operations only in, and the Company
shall not take any action except in, the ordinary and usual course of business
and consistent with prior practice, and the Company shall use its best efforts
to preserve substantially intact its business organization, goodwill, assets,
permits and licenses, to keep available the services of its current officers and
employees and to maintain satisfactory relationships with licensors, licensees,
suppliers, contractors, distributors, customers and others having business
relationships with it; to comply in all material respects with all laws,
statutes, ordinances, rules and regulations applicable to the Company; and,
prior to the Effective Time, the Company covenants and agrees that it will not,
without the prior consent of NAC:
(a) split, combine or reclassify any shares of its capital stock,
declare, pay or set aside for payment any dividend or other distribution in
respect of its capital stock, or directly or indirectly redeem, purchase or
otherwise acquire any shares of its capital stock or other securities;
(b) authorize for issuance, issue, sell, pledge, dispose of or
encumber, deliver or agree or commit to issue, sell, pledge or deliver
(whether through the issuance or granting of any options, warrants,
commitments, subscriptions, rights to purchase or otherwise) any stock of
any class of the Company or any securities convertible into or exercisable
or exchangeable for shares of stock of any class of the Company, other than
the issuance of shares pursuant to the exercise of Company Options
outstanding as of the date hereof;
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(c) except as set forth in Section 4.9 and except in the ordinary and
usual course of business and consistent with past practice, incur any
material liability or obligation, issue any debt securities or assume,
guarantee, endorse or otherwise as an accommodation become responsible for,
the obligations of any other individual or entity;
(d) except as set forth in Section 4.9, adopt or amend any bonus,
profit-sharing, compensation, stock option, pension, retirement, deferred
compensation, employment or other employee benefit plan, agreement, trust,
plan, fund or other arrangement (collectively, "Compensation Plans"), or
grant, or become obligated to grant, any general increase in the
compensation of officers or employees (including any such increase pursuant
to any Compensation Plan) or any increase in the compensation payable or to
become payable to any officer, institute any new employee benefit, welfare
program or Compensation Plan, make any change in any Compensation Plan or
other employee welfare or benefit arrangement or enter into any employment
or similar agreement or arrangement with any employee;
(e) acquire (by merger, consolidation or acquisition of stock or
assets) any corporation, partnership or other business organization or
division thereof or make any material investment, either by purchase of
stock or securities, contributions to capital, property transfer, or
purchase of any material amount of properties or assets of any other
individual or entity;
(f) amend the Certificate of Incorporation or Bylaws of the Company;
(g) except in the ordinary course of business, and except for
settlements made by insurers, enter into any compromise or settlement of
any litigation, proceeding or governmental investigation relating to the
Company or its properties;
(h) change in any material respect its accounting methods, principles
or practices except as in accordance with United States generally accepted
accounting principles, consistently applied ("GAAP");
(i) revalue any of its assets, including, without limitation, writing
off notes or accounts receivable, other than in the ordinary course of
business consistent with prior practice;
(j) create, incur, assume, maintain or permit to exist any lien,
pledge, mortgage, security interest, assessment, claim, lease, charge,
option, right of first refusal, imperfection of title, easement, transfer
restriction under any shareholder or similar agreement, encumbrance or any
other restriction or limitation of any kind whatsoever ("Encumbrances") on
any real, personal or mixed property, tangible or intangible, including
without limitation, any leased property ("Property") of the Company, other
than liens for federal, state or local taxes and assessments not yet
payable ("Permitted Encumbrances");
(k) create, incur or assume any indebtedness for borrowed money,
including obligations in respect of capital leases, or guarantee any
indebtedness for borrowed money or any other obligation of any individual,
corporation, partnership, limited liability company, firm, joint venture,
association, joint stock company, trust, unincorporated organization,
governmental or regulatory authority or other entity ("Person");
(l) pay or discharge any material claim, liability or Encumbrance
(whether absolute, accrued, contingent or otherwise), or waive any right,
other than in the ordinary course of business consistent with past practice
or pursuant to binding contractual obligations of the Company in existence
on the date hereof;
(m) hire any new employees, agents, independent contractors or
consultants, except for those earning less than Fifty Thousand Dollars
($50,000) per annum who are hired in the ordinary course of business
consistent with past practice and the then applicable Board of Directors',
approved budget;
(n) authorize or make any capital expenditure inconsistent with the
then applicable Board of Directors' approved budget;
(o) issue or agree to issue any shares of its capital stock or
securities exchangeable for or convertible into such capital stock;
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(p) become a party to any agreement, amend or terminate any other
agreement, contracts, leases, subleases, licenses, obligations, instruments
or other legally binding commitments, arrangements or undertakings of any
kind ("Contract"), other than in the ordinary course of business and
consistent with past practice and the then applicable Board of Directors'
approved budget;
(q) make any investments in noninvestment grade securities;
(r) make any loan, advance or capital contribution to or investment by
the Company in any Person, except in the ordinary course of business and
consistent with past practice;
(s) file for voluntary bankruptcy or become subject to involuntary
bankruptcy proceedings;
(t) consider or adopt a plan of complete or partial liquidation,
dissolution, rehabilitation, restructuring, recapitalization,
re-domestication or other reorganization;
(u) enter into any joint venture, partnership, managing general agency
or similar arrangement with any Person;
(v) take any action or course of action inconsistent with its
compliance with the covenants and agreements contained in this Agreement;
and
(w) take or agree to commit to take any action that would make any
representation or warranty of the Company contained herein inaccurate in
any material respect at the Effective Time or omit to take any action
necessary to prevent any such representation or warranty from being
inaccurate in any material respect at such time.
4.2 No Solicitation. The Company will not, and will use its best efforts
to ensure that its officers, directors, representatives or agents shall not,
directly or indirectly (i) solicit or initiate (including by way of furnishing
any non-public information concerning the Company's business, properties or
assets) negotiations with and (ii) subject to the exercise of their fiduciary
responsibilities on advice of counsel, participate in any negotiations leading
to any proposals or enter into any agreement with any corporation, partnership,
person or other entity or group (other than NAC) (the "Third Party") concerning
any tender offer, exchange offer, merger, consolidation, sale of substantial
assets or of a significant amount of assets, sale of securities, liquidation,
dissolution or similar transactions involving the Company (such proposals,
announcements or transactions being referred to herein as "Acquisition
Proposals"). The Company will promptly inform NAC of any inquiry (including the
terms thereof and the identity of the Third Party making such inquiry) which it
may receive in respect of an Acquisition Proposal and furnish to NAC a copy of
any such inquiry. Nothing contained herein shall be construed to prohibit the
Company from taking and disclosing to its stockholders a position contemplated
by Rule 14e-2(a)(2) or (3) promulgated under the Exchange Act or from making
such other disclosure to stockholders which, in the judgment of the Board of
Directors, on advice of counsel, may be required by law.
4.3 Access to Information.
(a) Between the date of this Agreement and the Effective Time, the Company
will give NAC and its authorized representatives access during normal business
hours to all personnel, offices and other facilities of the Company and to all
books and records of the Company and will permit NAC to make such inspections as
it may reasonably request and will cause its officers to furnish NAC with such
financial and operating data and other information with respect to the business
and properties of the Company as NAC may from time to time reasonably request.
(b) NAC will hold and will cause its representatives (and its affiliates)
to hold in strict confidence, unless compelled to disclose by judicial or
administrative process, or, in the opinion of its counsel, by other requirements
of law, all documents and information concerning the Company furnished to NAC
(or its affiliates) in connection with the transactions contemplated by this
Agreement (except to the extent that such information can be shown to have been
(i) known by NAC or its affiliates (other than affiliates who are directors,
officers or employees of the Company) prior to its disclosure to NAC or its
affiliates by the Company, (ii) in the public domain through no fault of NAC or
its affiliates or (iii) later lawfully acquired by
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NAC or its affiliates from other sources) and will not release or disclose such
information to any other person, except in connection with this Agreement on a
confidential basis to (A) its auditors, attorneys, financial advisors, other
consultants and advisors and (B) responsible financial institutions,
corporations, partnerships and individuals in connection with the Merger. If the
transactions contemplated by this Agreement are not consummated, such confidence
shall be maintained except to the extent such information can be shown to have
been (i) previously known by NAC or its affiliates (other than affiliates who
are directors, officers or employees of the Company) prior to its disclosure to
NAC or its affiliates by the Company, (ii) in the public domain through no fault
of NAC (or its affiliates) or (iii) later lawfully acquired by NAC (or its
affiliates) from other sources, and, if requested by the Company, NAC (or its
affiliates) will destroy or return to the Company all copies of written
information furnished by the Company to NAC or to NAC's affiliates, agents,
representatives or advisors. No investigation or access to information pursuant
to this Section 4.3 shall affect any representation or warranty made by the
Company.
4.4 Best Efforts. Upon the terms and subject to the conditions hereof, NAC
and the Company agree to use their respective best efforts to take, or cause to
be taken, all actions and to do, or cause to be done, all things necessary,
proper or advisable to consummate and make effective the transactions
contemplated by this Agreement, including providing information necessary for
inclusion in the Proxy Statement and Schedules, and shall use their respective
best efforts to obtain all waivers, permits, consents and approvals and to
effect all registrations, filings and notices with or to third parties or
governmental or public bodies or authorities which are in the opinion of NAC or
the Company necessary or desirable in connection with the transactions
contemplated by this Agreement, including, without limitation, filings to the
extent required under the Exchange Act. If at any time after the Effective Time
any further action is necessary or desirable to carry out the purposes of this
Agreement, the proper officers or directors of NAC, the Company and the
Surviving Corporation shall take such action.
4.5 Public Announcements. NAC and the Company will consult with each other
before issuing any press release or otherwise making any public statements with
respect to the Merger and shall not issue any such press release or make any
such public statement prior to such consultation, except as may be required by
law.
4.6 Supplemental Information. From time to time prior to the Effective
Time, each party hereto will promptly disclose in writing to the other any
matter hereafter arising which, if existing, occurring or known at the date of
this Agreement, would have been required to be disclosed to such other party.
4.7 Schedule 13E-3 and Proxy Material; Stockholders' Meeting. NAC and the
Company will prepare and file with the Commission the documents, Schedules and
amendments and supplements thereto required to be filed with respect to the
transactions contemplated by this Agreement. The Company, acting through its
Board of Directors, shall cause a meeting of its stockholders to be duly called,
give notice of, convene and hold such meeting as soon as practicable for the
purpose, inter alia, of approving this Agreement and all actions contemplated
hereby which require the approval of the Company's stockholders. The Company
will use its best efforts to obtain and furnish the information required to be
included by it in any required Proxy Statement and, after consultation with NAC,
respond promptly to any comments of the Commission relating to any preliminary
proxy material or regarding the transactions contemplated by this Agreement and
to cause the Proxy Statement relating to the transactions contemplated by this
Agreement to be mailed to its stockholders, all at the earliest practicable
time. Whenever any event occurs which should be set forth in an amendment or
supplement to the Proxy Statement, Schedules or any other filing required to be
made with the Commission, each party will promptly inform the other and
cooperate in filing with the Commission and/or mailing to stockholders such
amendment or supplement. The Proxy Statement, Schedules and all amendments and
supplements thereto shall comply with applicable law and be in form and
substance satisfactory to NAC and the Company. The Board of Directors of the
Company, subject to the exercise of its fiduciary obligations, shall include in
the Proxy Statement its recommendation that stockholders of the Company vote in
favor of the approval and adoption of the Agreement and take such further
actions as NAC may reasonably request in order to secure such approval and
adoption. NAC shall cause to be present for the purpose of obtaining a quorum
and shall vote, or cause to be voted, all of the Common Shares and Preferred
Shares then owned by NAC or its affiliates in favor of the Merger at any meeting
of the stockholders of the Company.
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4.8 Agreement to Defend and Indemnify.
(a) In the event any action, suit, proceeding or investigation relating to
the Merger, this Agreement or the transactions contemplated hereby or thereby is
commenced, whether before or after the Effective Time, the parties hereto agree
to cooperate and use their best efforts to defend against and respond thereto.
It is understood and agreed that the Company shall indemnify and hold harmless,
and, after the Effective Time, the Surviving Corporation shall indemnify and
hold harmless, each present and former director, officer, employee and agent of
the Company (the "Indemnified Parties") against losses, claims, damages,
liabilities, costs, expenses (including attorneys' fees), judgments and amounts
paid in settlement in connection with any threatened, pending or completed
action, suit, claim, proceeding or investigation arising out of or pertaining to
any action or omission occurring at or prior to the Effective Time (including,
without limitation, any which arise out of or relate to the transactions
contemplated by this Agreement) to the full extent permitted or required under
Delaware law and the Company's Bylaws (and the Company or the Surviving
Corporation, as the case may be, will advance expenses to each such person to
the full extent so permitted). Neither the Company, the Surviving Corporation
nor NAC shall be liable for any settlement effected by such Indemnified Party
(or group of Indemnified Parties) unless the Company, the Surviving Corporation
or NAC, respectively, have approved such settlement in writing. Any Indemnified
Party wishing to claim indemnification under this Section 4.8, upon learning of
any such claim, action, suit, proceeding or investigation, shall notify, in
writing, the Company or the Surviving Corporation and NAC thereof; provided,
however, that any failure to so notify the Company or the Surviving Corporation
and NAC shall not relieve the Company or the Surviving Corporation and NAC of
any obligation to indemnify such Indemnified Party or of any other obligation
imposed by this Section 4.8 unless and to the extent such failure to so notify
shall prejudice the position of the Company or the Surviving Corporation.
(b) From the date of this Agreement, the Company or the Surviving
Corporation, as the case may be, shall use its best efforts to provide officers'
and directors' liability insurance covering the Indemnified Parties who were
covered by the Company's officers' and directors' liability insurance on October
21, 1999 or who become officers or directors of the Company after such date and
prior to the Effective Time with respect to actions and omissions occurring
prior to the Effective Time upon terms no less favorable to the Indemnified
Parties than such insurance maintained in effect by the Company on October 21,
1999 in terms of coverage and amounts, subject to the availability of such
insurance at a cost not in excess of $82,000 per year, and if the amount of such
insurance available for $82,000 per year is less than the amount in effect as of
October 21, 1999, the amount of coverage provided will be the maximum amount
available for $82,000 per year. The Surviving Corporation shall advise the
Indemnified Parties at least annually as to the amount and coverage of such
insurance then in effect. Such officers' and directors' liability insurance
shall remain in full force and effect until the third anniversary of the
Effective Time.
(c) The covenants contained in this Section 4.8 shall survive the Closing,
shall continue without time limit and are intended to benefit the Company and
each of the Indemnified Parties. Subject to the requirements of the DGCL, the
Certificate of Incorporation and Bylaws of the Company and the Surviving
Corporation shall not be amended in a manner which adversely affects the rights
of the Indemnified Parties under this Section 4.8.
4.9 Option Plans. The Company shall take all steps necessary to (a)
terminate, to the extent permitted by the terms thereof, the Option Plans
immediately prior to the Effective Time, without prejudice to the rights of the
holders of Company Options and (b) grant no additional Company Options under the
Option Plans. Except as set forth below in this Section 4.9, the Company shall
use its best efforts to take all actions necessary as soon a practicable after
the date hereof (i) to cause each outstanding Company Option, whether or not
exercisable or vested, to be cancelled, as of the Effective Time and (ii) to
obtain the consent of each holder of a Company Option (whether or not then
exercisable) to the cancellation thereof, to take effect as of the Effective
Time. In exchange for the cancellation of each such Company Option, the Company
may pay in respect thereof an amount to be mutually agreed upon by NAC and the
holders of such Company Options or enter into other arrangements mutually
acceptable to NAC and the holders of such Company Options.
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<PAGE> 91
4.10 Deposit of Funds. Not less than ten days prior to the meeting of the
Company's stockholders at which this Agreement will be voted upon, NAC shall
cause to have deposited with a depository acceptable to the Company funds
sufficient to make the payments required by Section 1.9(a) hereof.
ARTICLE V
CONDITIONS TO THE MERGER
5.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party to this Agreement to consummate the Merger
shall be subject to the following conditions, which may not be waived:
(a) This Agreement and the Merger shall have been approved and adopted
by the requisite vote or consent, if any, of the stockholders of the
Company required by the Company's Certificate of Incorporation and the
DGCL;
(b) No order, statute, rule, regulation, executive order, stay,
decree, judgment or injunction shall have been enacted, entered, issued,
promulgated or enforced by any court or governmental authority which
prohibits or restricts the consummation of the Merger; and
(c) Chatsworth Securities LLC ("Chatsworth") shall have delivered to
the Company a written fairness opinion for inclusion in the Proxy
Statement, relating to the transactions contemplated by this Agreement.
5.2 Conditions to the Obligation of NAC to Effect the Merger. The
obligations of NAC to effect the merger shall be further subject to the
fulfillment at or prior to the Effective Time of the following conditions, any
one or more of which may be waived by NAC:
(a) The Company shall have performed and complied in all material
respects with the agreements and obligations contained in this Agreement
required to be performed and complied with by it at or prior to the
Effective Time;
(b) The representations and warranties of the Company contained in
this Agreement shall be true and correct as of the date hereof and shall be
deemed to have been made again at and as of the Effective Time and shall
then be true and correct in all material respects;
(c) All licenses, permits, consents or approvals of governmental
authorities or agencies necessary to consummate the Merger and to permit
the continuance of operations of the Company by the Surviving Corporation
thereafter shall have been received and shall be in full force and effect;
(d) The terms of the Merger shall have been approved by a majority of
the Company's disinterested directors;
(e) The terms of the Merger shall have been approved and recommended
by a majority of the Company's Board of Directors;
(f) The terms of the Merger shall have been approved by a majority of
Company's stockholders;
(g) Stockholders of the Company owning not more than five percent (5%)
of the Company's issued and outstanding shares (on an as converted basis)
shall have exercised dissenters' rights;
(h) The Company shall have obtained and provided NAC a written opinion
from Chatsworth that the terms of the Merger are fair to the Company's
stockholders; and
(i) The Company shall have obtained any and all regulatory approvals
for the consummation of the Merger, and there shall have been no
outstanding order of a court of competent jurisdiction enjoining the
consummation of the Merger.
A-11
<PAGE> 92
5.3 Conditions to the Obligations of the Company to Effect the Merger. The
obligations of the Company to effect the Merger shall be further subject to the
fulfillment at or prior to the Effective Time of the following conditions, any
one or more of which may be waived by the Company:
(a) NAC shall have performed and complied in all material respects
with the agreements and obligations contained in this Agreement required to
be performed and complied with by it at or prior to the Effective Time; and
(b) The representations and warranties of NAC contained in this
Agreement shall be true as of the date hereof, and shall be deemed to have
been made again at and as of the Effective Time and shall then be true and
correct in all material respects.
ARTICLE VI
CLOSING
6.1 Time and Place. Subject to the provisions of Articles V and VII
hereof, the closing (the "Closing") of the transactions contemplated hereby
shall take place at the offices of Tucker Flyer, 1615 L Street, N.W., Suite 400,
Washington, D.C. 20036, at 10:00 A.M., local time, as soon as practicable after
the meeting of stockholders referred to in Section 4.7 hereof (the "Closing
Date") or at such other place or at such other time as NAC and the Company may
mutually agree upon for the Closing to take place.
6.2 Deliveries at the Closing. At the Closing, the Company and NAC shall
cause the Certificate of Merger to be filed and recorded in accordance with the
applicable provisions of the DGCL and shall take any and all other lawful
actions necessary to cause the Merger to become effective.
ARTICLE VII
TERMINATION AND ABANDONMENT
7.1 Termination. This Agreement may be terminated and the Merger
contemplated hereby may be abandoned at any time prior to the Effective Time,
whether before or after approval of the Merger by the stockholders of the
Company:
(a) By mutual consent of the Boards of Directors of NAC and the
Company;
(b) If NAC and the Company shall mutually agree that there shall be
threatened, instituted or pending any action, proceeding or counterclaim by
or before any court of competent jurisdiction or governmental
administrative or regulatory agency or commission which, in the mutual
agreement of NAC and the Company, might permanently restrain, enjoin or
otherwise prohibit the transactions contemplated by this Agreement;
(c) By either NAC or the Company:
(i) If the Effective Time shall not have occurred by June 30, 2000;
(ii) If a court of competent jurisdiction or governmental,
regulatory or administrative agency or commission shall have issued an
order, decree or ruling or taken any other action which has not been
lifted (which order, decree or ruling the parties hereto shall use their
best efforts to lift), in each case permanently restraining, enjoining
or otherwise prohibiting the transactions contemplated by this
Agreement;
(iii) If there has been a material failure to perform or comply
with any of the covenants, obligations, agreements or conditions
required in this Agreement to be performed or complied with by the other
party and such nonperformance or noncompliance shall not have been cured
or eliminated promptly or by its nature cannot be cured or eliminated
promptly; or
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<PAGE> 93
(iv) By either party if the other shall have breached any of its
representations or warranties contained in this Agreement, which breach
(A) is incapable of being cured by the breaching party or (B) would give
rise to failure of the conditions set forth in Article V.
7.2 Procedure and Effect of Termination. In the event of termination and
abandonment of the Merger by the Company or NAC or both pursuant to Section 7.1
hereof, written notice thereof shall forthwith be given to the other and this
Agreement shall terminate and the Merger shall be abandoned, without further
action by any of the parties hereto. If this Agreement is terminated as provided
herein:
(a) Upon request therefor, each party will redeliver any and all
documents, work papers and other material of any other party relating to
the transactions contemplated hereby, whether obtained before or after the
execution hereof, to the party furnishing the same; and
(b) No party hereto shall have any liability or further obligation to
any other party to this Agreement except that the provisions of this
Section 7.2 and Sections 4.3(b) and 4.8 hereof, shall remain in full force
and effect.
ARTICLE VIII
GENERAL PROVISIONS
8.1 Survival of Representations, Warranties, Covenants and Agreements. The
respective representations, warranties, covenants and agreements of the parties
hereto, other than those contained in Sections 1.8, 1.9, 4.3(b) and 4.8 hereof,
shall not survive the Effective Time.
8.2 Amendment, Modification and Waiver. Subject to applicable law, this
Agreement may not be amended except by written agreement with the approval of
the Boards of Directors of NAC and the Company, before or after the meeting of
stockholders of the Company, at any time prior to the Effective Time with
respect to any of the terms contained herein, except that the price per Common
Share or Preferred Share to be paid pursuant to this Agreement to the holders of
Common Shares or Preferred Shares shall in no event be decreased and the form of
consideration to be received by the holders of such Common Shares or Preferred
Shares in the Merger shall in no event be altered without the approval of such
holders. The waiver of any term or condition in this Agreement shall only be
effective if in writing and shall not be construed as a waiver of any subsequent
breach or waiver of the same term or condition, or a waiver of any other term or
condition of this Agreement. Any failure or delay on the part of either party in
exercising any power or right hereunder shall not operate as a waiver thereof,
nor shall any single or partial exercise of any other right or power hereunder.
8.3 Waiver of Compliance; Consents. Any failure of NAC, on the one hand,
or the Company, on the other hand, to comply with any obligation, covenant,
agreement or condition herein may be waived in writing by the Company or NAC,
respectively, but such waiver or failure to insist upon strict compliance with
such obligation, covenant, agreement or condition shall not operate as a waiver
of, or estoppel with respect to, any subsequent or other failure. Whenever this
Agreement requires or permits consent by or on behalf of either party hereto,
such consent shall be given in writing in a manner consistent with the
requirements for a waiver of compliance as set forth in this Section 8.3.
8.4 Severability. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner adverse to
either party. Upon such determination that any term or other provision is
invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in a mutually acceptable manner in
order that the transactions contemplated hereby be consummated as originally
contemplated to the greatest extent possible.
8.5 Fees and Expenses. Whether or not the Merger is consummated, all costs
and expenses incurred in connection with the Merger, this Agreement and the
transactions contemplated hereby will be paid by the party incurring such
expenses.
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<PAGE> 94
8.6 No Third Party Beneficiaries. Except for the provisions of this
Agreement relating to Indemnified Parties, this Agreement shall be binding upon
and inure solely to the benefit of each party hereto and their permitted
successors, and nothing in this Agreement, express or implied, is intended to
confer upon any other person or entity any legal or equitable rights benefit or
remedy of any nature whatsoever under or by reason of this Agreement.
8.7 Additional Agreements. Subject to the terms and conditions herein
provided, each of the parties hereto agrees to use all reasonable efforts to
take, or cause to be taken, all action, and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement.
In case at any time after the Effective Time any further action is necessary or
desirable to carry out the purposes of this Agreement, the proper officers and
directors of each corporation which is a party to this Agreement shall take all
such necessary action.
8.8 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed duly given or made as of (i) the date delivered
personally against written receipt or (ii) five days after mailing if mailed by
registered or certified mail (return receipt requested); to the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice):
(a) if to NAC:
NNI Acquisition Corporation
c/o Crown Communications Corporation
650 Massachusetts Avenue, N.W.
Washington, DC 20001
Attn: President
Facsimile: (202) 408-8496
with a copy under separate cover to:
Arthur E. Cirulnick, Esquire
Venable, Baetjer, Howard & Civiletti, LLP
1615 L Street, N.W., Suite 400
Washington, D.C. 20036
Facsimile: (202) 429-3231
(b) if to the Company:
The Nostalgia Network, Inc.
650 Massachusetts Avenue, N.W.
Washington, D.C. 20001
Attn: President
Facsimile: (202) 289-6632
with a copy under separate cover to:
Robert Kostecka, Esquire
Caplan, Buckner, Rohrbaugh & Kostecka Chtd.
3 Bethesda Metro, Suite 430
Bethesda, MD 20814
Facsimile: (301) 718-8358
8.9 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware without regard to the conflict
of laws rules thereof.
8.10 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same agreement.
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<PAGE> 95
8.11 Headings. The article and section headings contained in this
Agreement are solely for the purpose of reference, are not part of the agreement
of the parties and shall not affect in any way the meaning or interpretation of
this Agreement.
8.12 Entire Agreement. This Agreement, including the exhibits hereto and
the documents and instruments referred to herein, constitutes the entire
agreement of the parties hereto in respect of the subject matter contained
herein. There are no agreements, restrictions, promises, representations,
warranties, covenants or undertakings, other than those expressly set forth or
referred to herein. This Agreement supersedes all prior agreements and
understandings between the parties with respect to such subject matter.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed as of the date first written above on its behalf by its duly
authorized officers.
The Nostalgia Network, Inc.
By: /s/ SQUIRE D. RUSHNELL
------------------------------------
Name: SQuire D. Rushnell
Title: President and Chief Executive
Officer
NNI ACQUISITION CORPORATION
By: /s/ DONG MOON JOO
------------------------------------
Name: Dong Moon Joo
Title: President
A-15
<PAGE> 96
EXHIBIT A
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF
THE NOSTALGIA NETWORK, INC.
The Nostalgia Network, Inc., a corporation existing under the laws of the
State of Delaware, hereby certifies as follows:
1. The name of the corporation is THE NOSTALGIA NETWORK, INC.
2. The original Certificate of Incorporation of this corporation was
filed with the Secretary of State of the State of Delaware on July 15,
1987. Certificate of Ownership and Merger was filed with the Secretary of
State of the State of Delaware on October 9, 1987 and Certificates of
Amendment of the Certificate of Incorporation of this corporation were
filed with the Secretary of State of the State of Delaware on October 25,
1990 and June 15, 1992.
3. This Restated Certificate of Incorporation restates and integrates
and further amends the provisions of the Certificate of Incorporation of
the Corporation (as previously amended) and has been adopted pursuant to
the provisions of Sections 242 and 245 of the General Corporation Law of
the State of Delaware.
4. The Certificate of Incorporation of the corporation is hereby
further amended and restated to read in its entirety as follows:
FIRST: The name of the corporation is THE NOSTALGIA NETWORK, INC.
SECOND: The name of the registered agent and the address of the
registered office of the Corporation in the State of Delaware is The
Corporation Trust Company, Corporation Trust Center, 1209 N. Orange
Street, Wilmington, Delaware 19801, County of New Castle.
THIRD: The purposes of the Corporation are to engage in, promote,
conduct and carry on any lawful acts or activities for which
corporations may be organized under the Delaware General Corporate Law
of the State of Delaware, as amended (the "DGCL").
FOURTH: The total number of shares of stock which the Corporation
shall have authority to issue is Ten Thousand (10,000) shares of Common
Stock, par value One Cent ($0.01) per share.
FIFTH: The Corporation is to have perpetual existence.
SIXTH: The private property or assets of the stockholders of the
Corporation shall not to any extent whatsoever be subject to the payment
of the debts of the Corporation.
SEVENTH: Elections of directors need not be by written ballot
unless otherwise provided in the Bylaws of the Corporation.
EIGHTH: The number of directors of the Corporation shall be such
number as from time to time shall be fixed by, or in the manner provided
in, the Bylaws of the Corporation. None of the directors need be a
stockholder or a resident of the State of Delaware.
NINTH: No director shall be personally liable to the Corporation
or its stockholders for monetary damages for any breach of fiduciary
duty by such director as a director. Notwithstanding the foregoing
sentence, a director shall be liable to the extent provided by
applicable law (i) for breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of
law, (iii) pursuant to Section 174 of the DGCL or (iv) for any
transaction from which the director derived an improper personal
benefit. All references in this paragraph to a director shall also be
deemed to refer to any other person who, pursuant to a provision of the
certificate of incorporation in accordance with Section 141 subsection
(a) of the DGCL, exercises or performs any of the powers or duties
otherwise conferred or imposed upon the board of directors by the DGCL.
No amendment
<PAGE> 97
to or repeal of this Article NINTH shall apply to or have any effect on
the liability or alleged liability of any director of the Corporation
for or with respect to any acts or omissions of such director occurring
prior to such amendment.
TENTH: In furtherance and not in limitation of the rights, powers,
privileges and discretionary authority granted or conferred by DGCL or
other statutes or laws of the State of Delaware, the Board of Directors
is expressly authorized:
A. To make, amend, alter or repeal the Bylaws of the
Corporation;
B. To authorize and cause to be executed mortgages and liens
upon the real and personal property of the Corporation;
C. To set apart out of any funds of the Corporation available
for dividends, a reserve or reserves for any proper purpose and to
reduce any such reserve in the manner in which it was created; and
D. To adopt from time to time Bylaw provisions with respect to
indemnification of directors, officers, employees, agents and other
persons as it shall deem expedient and in the best interests of the
Corporation and to the extent permitted by law.
ELEVENTH: The books of the Corporation may be kept (subject to any
provision contained in the statutes) outside the State of Delaware at
such place or places as may be designated from time to time by the Board
of Directors or in the Bylaws of the Corporation.
TWELFTH: The Corporation reserves the right to amend, alter,
change or repeal any provisions herein contained, in the manner now or
hereafter prescribed by statute, and all rights, powers, privileges and
discretionary authority granted or conferred herein upon stockholders or
directors are granted subject to this reservation.
5. This Amended and Restated Certificate of Incorporation has been
duly approved and adopted by the Board of Directors of this Corporation.
6. This Amended and Restated Certificate of Incorporation has been
duly adopted of the stockholders of the Corporation in accordance with the
provisions of Sections 228, 242 and 245 of the DGCL.
IN WITNESS WHEREOF, the Corporation has caused this Amended and Restated
Certificate of Incorporation to be signed and executed in its corporate name by
SQuire D. Rushnell, its President and CEO, and affirmed and acknowledged by
Willard R. Nichols, its Secretary, this day of , .
THE NOSTALGIA NETWORK, INC.
By:
------------------------------------
Name: SQuire D. Rushnell
Its: President and CEO
ATTEST:
- ---------------------------------------------------------
Willard R. Nichols, Secretary
2
<PAGE> 98
THE NOSTALGIA NETWORK, INC.
1996 STOCK OPTION PLAN
(AS ADOPTED JUNE 5, 1996)
<PAGE> 99
THE NOSTALGIA NETWORK, INC.
1996 STOCK OPTION PLAN
1. PURPOSE AND EFFECT ON FORMER PLANS.
The purpose of this Plan is to strengthen The Nostalgia Network, Inc. (the
"Company"), by providing an incentive to its employees, officers, and directors
and thereby encouraging them to devote their abilities and industry to the
success of the Company's business enterprise. It is intended that this purpose
be achieved by extending to employees, officers, and directors of the Company
and its Subsidiaries an added long-term incentive for high levels of performance
and unusual efforts through the grant of Incentive Stock Options and
Nonqualified Stock Options. After the Effective Date of this Plan, no further
awards shall be made under The Nostalgia Network, Inc. 1987 Stock Option Plan or
The Nostalgia Network, Inc. Incentive and Nonqualified Stock Option Plan (1990)
(collectively, the "Former Plans"). Each award outstanding under a Former Plan
as of the Effective Date of this Plan shall remain outstanding and continue to
be subject to the terms of the Former Plan and the award agreement under which
such award was granted. Each Share that is available for the granting of new
awards under either of the Former Plans as of the Effective Date of this Plan
and each Share that is the subject of an award under either of the Former Plans
but is not issued prior to the time that such award expires or otherwise
terminates shall, after the Effective Date of this Plan, not be available for
the granting of awards under either of the Former Plans, but shall instead be
available for the granting of Options under this Plan.
2. DEFINITIONS.
For purposes of the Plan:
2.1 "Adjusted Fair Market Value" means, in the event of a Change in
Control, the greater of (i) the highest price per Share paid to holders of the
Shares in any transaction (or series of transactions) constituting or resulting
in a Change in Control or (ii) the highest Fair Market Value of a Share during
the ninety (90) day period ending on the date of a Change in Control.
2.2 "Agreement" means the written agreement between the Company and an
Optionee evidencing the grant of an Option.
2.3 "Board" means the Board of Directors of the Company.
2.4 "Cause" means:
(a) for purposes of Section 6.4, the commission of an act of fraud or
intentional misrepresentation or an act of embezzlement, misappropriation
or conversion of assets or opportunities of the Company or any Subsidiary,
and
(b) for all other purposes, unless otherwise defined in the Agreement
evidencing a particular Option, an Eligible Individual's (i) intentional
failure to perform reasonably assigned duties, (ii) dishonesty or willful
misconduct in the performance of duties, (iii) involvement in a transaction
in connection with the performance of duties to the Company or any of its
Subsidiaries thereof which transaction is adverse to the interests of the
Company or any of its Subsidiaries and which is engaged in for personal
profit or (iv) willful violation of any law, rule or regulation in
connection with the performance of duties (other than traffic violations or
similar offenses).
2.5 "Change in Capitalization" means any increase or reduction in the
number of Shares, or any change (including, but not limited to, a change in
value) in the Shares or exchange of Shares for a different number or kind of
shares or other securities of the Company, by reason of a reclassification,
recapitalization, merger, consolidation, reorganization, spin-off, split-up,
issuance of warrants or rights or debentures, stock dividend, stock split or
reverse stock split, cash dividend, property dividend, combination or exchange
of shares, repurchase of shares, change in corporate structure or otherwise.
<PAGE> 100
2.6 A "Change in Control" shall mean the occurrence during the term of the
Plan of:
(a) An acquisition (other than directly from the Company) of any
voting securities of the Company (the "Voting Securities") by any "Person"
(as the term person is used for purposes of Section 13(d) or 14(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) (other
than Concept Communications Corp. or any of its affiliates, collectively,
"Concept"), immediately after which such Person has "Beneficial Ownership"
(within the meaning of Rule 13d-3 promulgated under the Exchange Act) of
(i) thirty percent (30%) or more of the combined voting power of the
Company's then outstanding Voting Securities and (ii) a number of Voting
Securities greater than the aggregate number of Voting Securities then
Beneficially Owned by Concept; provided, however, in determining whether a
Change in Control has occurred, Voting Securities which are acquired in a
"Non-Control Acquisition" (as hereinafter defined) shall not constitute an
acquisition which would cause a Change in Control. A "Non-Control
Acquisition" shall mean an acquisition by (i) an employee benefit plan (or
a trust forming a part thereof) maintained by (A) the Company or (B) any
corporation or other Person of which a majority of its voting power or its
voting equity securities or equity interest is owned, directly or
indirectly, by the Company (for purposes of this definition, a
"Subsidiary") (ii) the Company or its Subsidiaries, or (iii) any Person in
connection with a "Non-Control Transaction" (as hereinafter defined);
(b) The individuals who, as of June 5, 1996 are members of the Board
(the "Incumbent Board"), cease for any reason to constitute at least a
majority of the members of the Board; provided, however, that if the
election, or nomination for election by the Company's common stockholders,
of any new director was approved by a vote of at least a majority of the
Incumbent Board, such new director shall, for purposes of this Plan, be
considered as a member of the Incumbent Board; provided further, however,
that no individual shall be considered a member of the Incumbent Board if
such individual initially assumed office as a result of either an actual or
threatened "Election Contest" (as described in Rule 14a-l 1 promulgated
under the Exchange Act) or other actual or threatened solicitation of
proxies or consents by or on behalf of a Person other than the Board (a
"Proxy Contest") including by reason of any agreement intended to avoid or
settle any Election Contest or Proxy Contest; or
(c) Approval by stockholders of the Company of:
(i) A merger, consolidation or reorganization involving the
Company, unless such merger, consolidation or reorganization is a
"Non-Control Transaction." A "Non-Control Transaction" shall mean a
merger, consolidation or reorganization of the Company where:
(A) the stockholders of the Company, immediately before such
merger, consolidation or reorganization, own directly or indirectly
immediately following such merger, consolidation or reorganization,
at least seventy percent (70%) of the combined voting power of the
outstanding voting securities of the corporation resulting from such
merger or consolidation or reorganization (the "Surviving
Corporation") in substantially the same proportion as their ownership
of the Voting Securities immediately before such merger,
consolidation or reorganization,
(B) the individuals who were members of the Incumbent Board
immediately prior to the execution of the agreement providing for
such merger, consolidation or reorganization constitute at least a
majority of the members of the board of directors of the Surviving
Corporation, or a corporation beneficially directly or indirectly
owning a majority of the Voting Securities of the Surviving
Corporation, and
(C) no Person other than (i) the Company, (ii) any Subsidiary,
(iii) any employee benefit plan (or any trust forming a part thereof)
maintained by the Company, the Surviving Corporation, or any
Subsidiary, or (iv) any Person who, immediately prior to such merger,
consolidation or reorganization had Beneficial Ownership of thirty
percent (30%) or more of the then outstanding Voting Securities), has
Beneficial Ownership of thirty percent (30%) or more of the combined
voting power of the Surviving Corporation's then outstanding voting
securities.
(ii) A complete liquidation or dissolution of the Company; or
2
<PAGE> 101
(iii) An agreement for the sale or other disposition of all or
substantially all of the assets of the Company to any Person (other than
a transfer to a Subsidiary).
Notwithstanding the foregoing, a Change in Control shall not be deemed to
occur solely because any Person (the "Subject Person") acquired Beneficial
Ownership of more than the permitted amount of the then outstanding Voting
Securities as a result of the acquisition of Voting Securities by the Company
which, by reducing the number of Voting Securities then outstanding, increases
the proportional number of shares Beneficially Owned by the Subject Persons,
provided that if a Change in Control would occur (but for the operation of this
sentence) as a result of the acquisition of Voting Securities by the Company,
and after such share acquisition by the Company, the Subject Person becomes the
Beneficial Owner of any additional Voting Securities which increases the
percentage of the then outstanding Voting Securities Beneficially Owned by the
Subject Person, then a Change in Control shall occur.
2.7 "Code" means the Internal Revenue Code of 1986, as amended.
2.8 "Committee" means a committee, as described in Section 3.1, appointed
by the Board to administer the Plan and to perform the functions set forth
herein.
2.9 "Company" means The Nostalgia Network, Inc.
2.10 "Director Option" means an Option granted pursuant to Section 6.
2.11 "Disability" means a physical or mental infirmity which impairs the
Optionee's ability to perform substantially his or her duties for a period of
one hundred eighty (180) consecutive days.
2.12 "Disinterested Director" means a director of the Company who is
"disinterested" within the meaning of Rule 16b-3 under the Exchange Act.
2.13 "Effective Date" means the effective date of the Plan as determined
by the Board pursuant to Section 19.
2.14 "Eligible Individual" means any director (other than a Nonemployee
Director), officer or employee of the Company or a Subsidiary, or any consultant
or advisor who is receiving cash compensation from the Company or a Subsidiary,
designated by the Committee as eligible to receive Options subject to the
conditions set forth herein.
2.15 "Employee Option" means an Option granted pursuant to Section 5.
2.16 "Exchange Act" means the Securities Exchange Act of 1934, as amended.
2.17 "Fair Market Value" on any date means the average of the high and low
sales prices of the Shares on such date on the principal national securities
exchange on which such Shares are listed or admitted to trading, or, if such
Shares are not so listed or admitted to trading, the arithmetic mean of the per
Share highest bid price and per Share lowest asked price on such date as quoted
on the National Association of Securities Dealers Automated Quotation System or
such other market in which such prices are regularly quoted, or, if there have
been no published bid or asked quotations with respect to Shares on such date,
the Fair Market Value shall be the value established by the Board in good faith
and, in the case of an Incentive Stock Option, in accordance with Section 422 of
the Code.
2.18 "Former Plans" means The Nostalgia Network, Inc. 1987 Stock Option
Plan and The Nostalgia Network, Inc. Incentive and Nonqualified Stock Option
Plan (1990), collectively.
2.19 "Incentive Stock Option" means an Option satisfying the requirements
of Section 422 of the Code and designated by the Committee as an Incentive Stock
Option.
2.20 "Nonemployee Director" means a director of the Company who is not an
employee of the Company or any Subsidiary.
2.21 "Nonqualified Stock Option" means an Option which is not an Incentive
Stock Option.
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2.22 "Option" means a Nonqualified Stock Option, an Incentive Stock
Option, a Director Option, or any or all of them.
2.23 "Optionee" means a person to whom an Option has been granted under
the Plan.
2.24 "Parent" means any corporation which is a parent corporation (within
the meaning of Section 424(e) of the Code) with respect to the Company.
2.25 "Plan" means The Nostalgia Network, Inc. 1995 Stock Option Plan.
2.26 "Pooling Transaction" means an acquisition of the Company in a
transaction which is intended to be treated as a "pooling of interests" under
generally accepted accounting principles.
2.27 "Shares" means the common stock, par value $.04 per share of the
Company.
2.28 "Subsidiary" means any corporation which is a subsidiary corporation
(within the meaning of Section 424(f) of the Code) with respect to the Company.
2.29 "Successor Corporation" means a corporation, or a parent or
subsidiary thereof within the meaning of Section 424(a) of the Code, which
issues or assumes a stock option in a transaction to which Section 424(a) of the
Code applies.
2.30 "Ten-Percent Stockholder" means an Eligible Individual, who, at the
time an Incentive Stock Option is to be granted to him or her, owns (within the
meaning of Section 422(b)(6) of the Code) stock possessing more than ten percent
(10%) of the total combined voting power of all classes of stock of the Company,
or of a Parent or a Subsidiary.
3. ADMINISTRATION.
3.1 The Plan shall be administered by the Committee which shall hold
meetings at such times as may be necessary for the proper administration of the
Plan. The Committee shall keep minutes of its meetings. A quorum shall consist
of a majority of the members of the Committee and a majority of a quorum may
authorize any action. Any decision or determination reduced to writing and
signed by a majority of all of the members of the Committee shall be as fully
effective as if made by a majority vote at a meeting duly called and held. The
Committee shall consist of at least two (2) directors of the Company each of
whom shall be a Disinterested Director. No member of the Committee shall be
liable for any action, failure to act, determination or interpretation made in
good faith with respect to this Plan or any transaction hereunder, except for
liability arising from his or her own willful misfeasance, gross negligence or
reckless disregard of his or her duties. The Company hereby agrees to indemnify
each member of the Committee for all costs and expenses and, to the extent
permitted by applicable law, any liability incurred in connection with defending
against, responding to, negotiating for the settlement of or otherwise dealing
with any claim, cause of action or dispute of any kind arising in connection
with any actions in administering this Plan or in authorizing or denying
authorization to any transaction hereunder.
3.2 Subject to the express terms and conditions set forth herein, the
Committee shall have the power from time to time to:
(a) determine those Eligible Individuals to whom Employee Options
shall be granted under the Plan and the number of such Employee Options to
be granted and to prescribe the terms and conditions (which need not be
identical) of each such Employee Option, including the purchase price per
Share subject to each Employee Option, and make any amendment or
modification to any Option Agreement consistent with the terms of the Plan;
(b) to construe and interpret the Plan and the Options granted
hereunder and to establish, amend and revoke rules and regulations for the
administration of the Plan, including, but not limited to, correcting any
defect or supplying any omission, or reconciling any inconsistency in the
Plan or in any Agreement, in the manner and to the extent it shall deem
necessary or advisable so that the Plan complies with applicable law
including Rule 16b-3 under the Exchange Act and the Code to the extent
applicable, and otherwise to make the Plan fully effective. All decisions
and determinations by the
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Committee in the exercise of this power shall be final, binding and
conclusive upon the Company, its Subsidiaries, the Optionees, and all other
persons having any interest therein;
(c) to determine the duration and purposes for leaves of absence which
may be granted to an Optionee on an individual basis without constituting a
termination of employment or service for purposes of the Plan;
(d) to exercise its discretion with respect to the powers and rights
granted to it as set forth in the Plan; and
(e) generally, to exercise such powers and to perform such acts as are
deemed necessary or advisable to promote the best interests of the Company
with respect to the Plan.
4. Stock Subject to the Plan.
4.1 The maximum number of Shares that may be made the subject of Options
granted under this Plan is the aggregate number of Shares that would have been
available for new awards under the Former Plans after the Effective Date of this
Plan (but for the prospective termination of the Former Plans), including the
Shares that were available for new grants under each of the Former Plans as of
the Effective Date of this Plan and the Shares that are subject to awards
granted under either of the Former Plans which Shares are not issued prior to
the expiration or other termination of such awards (including Shares subject to
awards that expire or terminate after the expiration of the term of a Former
Plan). Upon a Change in Capitalization the maximum number of Shares shall be
adjusted in number and kind pursuant to Section 9. The Company shall reserve for
the purposes of the Plan, out of its authorized but unissued Shares or out of
Shares held in the Company's treasury, or partly out of each, such number of
Shares as shall be determined by the Board.
4.2 Upon the granting of an Option, the number of Shares available under
Section 4.1 for the granting of further Options shall be reduced by the number
of Shares subject to such Option.
4.3 Whenever any outstanding Option or portion thereof expires, is
canceled or is otherwise terminated for any reason without having been exercised
or payment having been made in respect of the entire Option (including any
outstanding Options under either of the Former Plans), the Shares allocable to
the expired, canceled or otherwise terminated portion of the Option may again be
the subject of Options granted hereunder.
4.4 Notwithstanding anything contained in this Section 4, the number of
Shares available for Options at any time under the Plan shall be reduced to such
lesser amount as may be required pursuant to the methods of calculation
necessary so that the exemptions provided pursuant to Rule 16b-3 under the
Exchange Act will continue to be available for transactions involving all
current and future Options. In addition, during the period that any Options
remain outstanding under the Plan, the Committee may make good faith adjustments
with respect to the number of Shares attributable to such Options for purposes
of calculating the maximum number of Shares available for the granting of future
Options under the Plan, provided that following such adjustments the exemptions
provided pursuant to Rule 16b-3 under the Exchange Act will continue to be
available for transactions involving all current and future Options.
5. Option Grants for Eligible Individuals.
5.1 Authority of Committee. Subject to the provisions of the Plan, the
Committee shall have full and final authority to select those Eligible
Individuals who will receive Employee Options, the terms and conditions of which
shall be set forth in an Agreement.
5.2 Purchase Price. The purchase price or the manner in which the
purchase price is to be determined for Shares under each Employee Option shall
be determined by the Committee and set forth in the Agreement; provided,
however, that the purchase price per Share under each Incentive Stock Option
shall not be less than 100% of the Fair Market Value of a Share on the date the
Incentive Stock Option is granted (110% in the case of an Incentive Stock Option
granted to a Ten-Percent Stockholder).
5.3 Maximum Duration. Employee Options granted hereunder shall be for
such term as the Committee shall determine, provided that an Incentive Stock
Option shall not be exercisable after the
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expiration of ten (10) years from the date it is granted (five (5) years in the
case of an Incentive Stock Option granted to a Ten-Percent Stockholder) and a
Nonqualified Stock Option shall not be exercisable after the expiration of ten
(10) years from the date it is granted. The Committee may, subsequent to the
granting of any Employee Option, extend the term thereof but in no event shall
the term as so extended exceed the maximum term provided for in the preceding
sentence.
5.4 Vesting. Subject to Section 7.4, each Employee Option shall become
exercisable in such installments (which need not be equal) and at such times as
may be designated by the Committee and set forth in the Agreement. To the extent
not exercised, installments shall accumulate and be exercisable, in whole or in
part, at any time after becoming exercisable, but not later than the date the
Employee Option expires. The Committee may accelerate the exerciseability of any
Employee Option or portion thereof at any time.
5.5 Modification. No modification of an Employee Option shall adversely
alter or impair any rights or obligations under the Employee Option without the
Optionee's consent.
6. Option Grants for Nonemployee Directors.
6.1 Grant. Director Options shall be granted to each Nonemployee Director
on the first business day of August of each year that the Plan is in effect.
Each Director Option granted shall be in respect of 3,000 Shares. Such Options
shall be evidenced by an Agreement containing such other terms and conditions
not inconsistent with the provisions of this Plan as determined by the Board;
provided, however, that such terms shall not vary the price, amount or timing of
Director Options provided under this Section 6, including provisions dealing
with vesting, forfeiture and termination of such Director Options.
6.2 Purchase Price. The purchase price for Shares under each Director
Option shall be equal to 100% of the Fair Market Value of such Shares on the
date immediately preceding the date of grant.
6.3 Vesting. Subject to Sections 6.4 and 7.4, each Director Option shall
become exercisable with respect to 33 1/3% of the Shares subject thereto
effective as of each of the first, second, and third anniversaries of the grant
date; provided, however, that the Optionee continues to serve as a Director as
of such dates. If an Optionee ceases to serve as a Director for any reason, the
Optionee shall have no rights with respect to that portion of a Director Option
which has not then vested pursuant to the preceding sentence and the Optionee
shall automatically forfeit that portion of the Director Option which remains
unvested.
6.4 Duration. Each Director Option shall terminate on the date which is
the tenth anniversary of the grant date, unless terminated earlier as follows:
(a) If an Optionee's service as a Director terminates for any reason
other than Disability, death or Cause, the Optionee may for a period of
three (3) months after such termination exercise his or her Option to the
extent, and only to the extent, that such Option or portion thereof was
vested and exercisable as of the date the Optionee's service as a Director
terminated, after which time the Option shall automatically terminate in
full.
(b) If an Optionee's service as a Director terminates by reason of the
Optionee's resignation or removal from the Board due to Disability, the
Optionee may, for a period of one (1) year after such termination, exercise
his or her Option to the extent, and only to the extent, that such Option
or portion thereof was vested and exercisable, as of the date the
Optionee's service as Director terminated, after which time the Option
shall automatically terminate in full.
(c) If an Optionee's service as a Director terminates for Cause, the
Option granted to the Optionee hereunder shall immediately terminate in
full and no rights thereunder may be exercised.
(d) If an Optionee dies while a Director or within three (3) months
after termination of service as a Director as described in clause (a) of
this Section 6.4 or within twelve (12) months after termination of service
as a Director as described in clause (b) of this Section 6.4, the Option
granted to the Optionee may be exercised at any time within twelve (12)
months after the Optionee's death by the person or persons to whom such
rights under the Option shall pass by will, or by the laws of descent or
distribution,
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after which time the Option shall terminate in full; provided, however,
that an Option may be exercised to the extent, and only to the extent, that
the Option or portion thereof was exercisable on the date of death or
earlier termination of the Optionee's services as a Director.
6.5 Limitations on Amendment. The provisions in this Section 6 shall not
be amended more than once every six months, other than to comport with changes
in the Code or the rules and regulations thereunder.
7. TERMS AND CONDITIONS APPLICABLE TO ALL OPTIONS.
7.1 Non-Transferability. No Option granted hereunder shall be
transferable by the Optionee to whom granted except by will or the laws of
descent and distribution, and an Option may be exercised during the lifetime of
such Optionee only by the Optionee or his or her guardian or legal
representative. The terms of such Option shall be final, binding and conclusive
upon the beneficiaries, executors, administrators, heirs and successors of the
Optionee.
7.2 Method of Exercise. The exercise of an Option shall be made only by a
written notice delivered in person or by mail to the Secretary of the Company at
the Company's principal executive office, specifying the number of shares to be
purchased and accompanied by payment therefor and otherwise in accordance with
the Agreement pursuant to which the Option was granted. The purchase price for
any Shares purchased pursuant to the exercise of an Option shall be paid in full
in cash upon such exercise. Notwithstanding the foregoing, the Committee shall
have discretion to determine at the time of grant of each Employee Option or at
any later date (up to and including the date of exercise) that the form of
payment acceptable in respect of the exercise of such Employee Option may
consist of either of the following (or any combination thereof): (i) cash or
(ii) the transfer of Shares to the Company upon such terms and conditions as
determined by the Committee. Any Shares transferred to the Company as payment of
the purchase price under an Option shall be valued at their Fair Market Value on
the day preceding the date of exercise of such Option. In addition, both
Employee Options and Director Options may be exercised through a registered
broker-dealer pursuant to such cashless exercise procedures (other than Share
withholding) which are, from time to time, deemed acceptable by the Committee.
The Optionee shall deliver the Agreement evidencing the Option to the Secretary
of the Company who shall endorse thereon a notation of such exercise and return
such Agreement to the Optionee. No fractional Shares (or cash in lieu thereof)
shall be issued upon exercise of an Option and the number of Shares that may be
purchased upon exercise shall be rounded to the nearest number of whole Shares.
7.3 Rights of Optionees. No Optionee shall be deemed for any purpose to
be the owner of any Shares subject to any Option unless and until (i) the Option
shall have been exercised pursuant to the terms thereof, (ii) the Company shall
have issued and delivered Shares to the Optionee and (iii) the Optionee's name
shall have been entered as a stockholder of record on the books of the Company.
Thereupon, the Optionee shall have full voting, dividend, and other ownership
rights with respect to such Shares, subject to such terms and conditions as may
be set forth in the applicable Agreement.
7.4 Effect of Change in Control. In the event of a Change in Control, all
Options outstanding on the date of such Change in Control shall become
immediately and fully exercisable. In addition, to the extent set forth in an
Agreement evidencing the grant of an Employee Option, an Optionee will be
permitted to surrender for cancellation within sixty (60) days after such Change
in Control any Employee Option or portion of an Employee Option to the extent
not yet exercised and the Optionee will be entitled to receive a cash payment in
an amount equal to the excess, if any, of (x) (A) in the case of a Nonqualified
Stock Option, the greater of (1) the Fair Market Value, on the date preceding
the date of surrender, of the Shares subject to the Employee Option or portion
thereof surrendered or (2) the Adjusted Fair Market Value of the Shares subject
to the Employee Option or portion thereof surrendered or (B) in the case of an
Incentive Stock Option, the Fair Market Value, on the date preceding the date of
surrender, of the Shares subject to the Employee Option or portion thereof
surrendered, over (y) the aggregate purchase price for such Shares under the
Employee Option or portion thereof surrendered; provided, however, that in the
case of an Employee Option granted within six (6) months prior to the Change in
Control to any Optionee who may be subject to liability under Section 16(b) of
the Exchange Act, such Optionee shall be entitled to surrender for cancellation
his or her Employee Option during the sixty (60) day period commencing upon the
expiration of six (6) months from the date of grant of any such Employee Option.
In the event an Optionee's employment
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with, or service as a Director of, the Company is terminated by the Company
following a Change in Control each Option held by the Optionee that was
exercisable as of the date of termination of the Optionee's employment or
service shall remain exercisable for a period ending not before the earlier of
the first anniversary of the termination of the Optionee's employment or service
or the expiration of the stated term of the Option.
8. EFFECT OF A TERMINATION OF EMPLOYMENT.
The Agreement evidencing the grant of each Option shall set forth the terms
and conditions applicable to such Option upon a termination or change in the
status of the employment of the Optionee by the Company, a Subsidiary or a
Division (including a termination or change by reason of the sale of a
Subsidiary or a Division), which, except for Director Options, shall be as the
Committee may, in its discretion, determine at the time the Option is granted or
thereafter.
9. ADJUSTMENT UPON CHANGES IN CAPITALIZATION.
9.1 In the event of a Change in Capitalization, the Committee shall
conclusively determine the appropriate adjustments, if any, to the (i) maximum
number and class of Shares or other stock or securities with respect to which
Options may be granted under the Plan, (ii) maximum number and class of Shares
or other stock or securities with respect to which Options may be granted to any
Eligible Individual during the term of the Plan, (iii) the number and class of
Shares or other stock or securities which are subject to outstanding Options
granted under the Plan and the purchase price therefor, if applicable, and (iv)
the number and class of Shares or other securities in respect of which Director
Options are to be granted under Section 6.
9.2 Any such adjustment in the Shares or other stock or securities subject
to outstanding Incentive Stock Options (including any adjustments in the
purchase price) shall be made in such manner as not to constitute a modification
as defined by Section 424(h)(3) of the Code and only to the extent otherwise
permitted by Sections 422 and 424 of the Code.
9.3 If, by reason of a Change in Capitalization, or an Optionee shall be
entitled to exercise an Option with respect to new, additional or different
shares of stock or securities, such new, additional or different shares shall
thereupon be subject to all of the conditions, restrictions and performance
criteria which were applicable to the Shares subject to the Option prior to such
Change in Capitalization.
10. EFFECT OF CERTAIN TRANSACTIONS. Subject to Sections 7.4 or as
otherwise provided in an Agreement, in the event of (i) the liquidation or
dissolution of the Company or (ii) a merger or consolidation of the Company (a
"Transaction"), the Plan and the Options issued hereunder shall continue in
effect in accordance with their respective terms, except that following a
Transaction each Optionee shall be entitled to receive in respect of each Share
subject to any outstanding Options, as the case may be, upon exercise of any
such Option, the same number and kind of stock, securities, cash, property, or
other consideration that each holder of a Share was entitled to receive in the
Transaction in respect of a Share; provided, however, that such stock,
securities, cash, property, or other consideration shall remain subject to all
of the conditions, restrictions and performance criteria which were applicable
to the Options prior to such Transaction.
11. INTERPRETATION.
11.1 The Plan is intended to comply with Rule 16b-3 promulgated under the
Exchange Act and the Committee shall interpret and administer the provisions of
the Plan or any Agreement in a manner consistent therewith. Any provisions
inconsistent with such Rule shall be inoperative and shall not affect the
validity of the Plan.
11.2 The Director Options described in Section 6 are intended to qualify
as formula awards under Rule 16b-3 promulgated under the Exchange Act (thereby
preserving the disinterested status of Nonemployee Directors receiving such
awards) and the Committee shall interpret and administer the provisions of the
Plan or any Agreement in a manner consistent therewith. Any provisions
inconsistent with the foregoing intent shall be inoperative and shall not affect
the validity of the Plan.
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12. POOLING TRANSACTIONS.
Notwithstanding anything contained in the Plan or any Agreement to the
contrary, in the event of a Change in Control which is also intended to
constitute a Pooling Transaction, the Committee shall take such actions, if any,
which are specifically recommended by an independent accounting firm retained by
the Company to the extent reasonably necessary in order to assure that the
Pooling Transaction will qualify as such, including but not limited to (i)
deferring the vesting, exercise, payment or settlement with respect to any
Option, (ii) providing that the payment or settlement in respect of any Option
be made in the form of cash, Shares or securities of a successor or acquirer of
the Company, or a combination of the foregoing and (iii) providing for the
extension of the term of any Option to the extent necessary to accommodate the
foregoing, but not beyond the maximum term permitted for any Option.
13. TERMINATION AND AMENDMENT OF THE PLAN.
The Plan shall terminate on the day preceding the tenth anniversary of the
date of its adoption by the Board and no Option may be granted thereafter.
Subject to Section 6.5, the Board may sooner terminate the Plan and the Board
may at any time and from time to time amend, modify or suspend the Plan;
provided, however, that:
(a) No such amendment, modification, suspension or termination shall
impair or adversely alter any Options theretofore granted under the Plan,
except with the consent of the Optionee, nor shall any amendment,
modification, suspension or termination deprive any Optionee of any Shares
which he or she may have acquired through or as a result of the Plan; and
(b) To the extent necessary under Section 16(b) of the Exchange Act
and the rules and regulations promulgated thereunder or other applicable
law, no amendment shall be effective unless approved by the stockholders of
the Company in accordance with applicable law and regulations.
14. NON-EXCLUSIVITY OF THE PLAN.
The adoption of the Plan by the Board shall not be construed as amending,
modifying or rescinding any previously approved incentive arrangement or as
creating any limitations on the power of the Board to adopt such other incentive
arrangements as it may deem desirable, including, without limitation, the
granting of stock options otherwise than under the Plan, and such arrangements
may be either applicable generally or only in specific cases.
15. LIMITATION OF LIABILITY.
As illustrative of the limitations of liability of the Company, but not
intended to be exhaustive thereof, nothing in the Plan shall be construed to:
(i) give any person any right to be granted an Option other than at
the sole discretion of the Committee (except to the extent provided in
Section 6 hereof);
(ii) give any person any rights whatsoever with respect to Shares
except as specifically provided in the Plan;
(iii) limit in any way the right of the Company to terminate the
employment of any person at any time; or
(iv) be evidence of any agreement or understanding, expressed or
implied, that the Company will employ any person at any particular rate of
compensation or for any particular period of time.
16. REGULATIONS AND OTHER APPROVALS; GOVERNING LAW.
16.1 Except as to matters of federal law, this Plan and the rights of all
persons claiming hereunder shall be construed and determined in accordance with
the laws of the State of Delaware without giving effect to conflicts of laws
principles thereof.
16.2 The obligation of the Company to sell or deliver Shares with respect
to Options granted under the Plan shall be subject to all applicable laws, rules
and regulations, including all applicable federal and state
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securities laws, and the obtaining of all such approvals by governmental
agencies as may be deemed necessary or appropriate by the Committee.
16.3 The Board may make such changes as may be necessary or appropriate to
comply with the rules and regulations of any government authority, or to obtain
for Eligible Individuals granted Incentive Stock Options the tax benefits under
the applicable provisions of the Code and regulations promulgated thereunder.
16.4 Each Option is subject to the requirement that, if at any time the
Committee determines, in its discretion, that the listing, registration or
qualification of Shares issuable pursuant to the Plan is required by any
securities exchange or under any state or federal law, or the consent or
approval of any governmental regulatory body is necessary or desirable as a
condition of, or in connection with, the grant of an Option or the issuance of
Shares, no Options shall be granted or payment made or Shares issued, in whole
or in part, unless listing, registration, qualification, consent or approval has
been effected or obtained free of any conditions as acceptable to the Committee.
16.5 Notwithstanding anything contained in the Plan or any Agreement to
the contrary, in the event that the disposition of Shares acquired pursuant to
the Plan is not covered by a then current registration statement under the
Securities Act of 1933, as amended (the "Securities Act"), and is not otherwise
exempt from such registration, such Shares shall be restricted against transfer
to the extent required by the Securities Act and Rule 144 or other regulations
thereunder. The Committee may require any individual receiving Shares pursuant
to an Option granted under the Plan, as a condition precedent to receipt of such
Shares, to represent and warrant to the Company in writing that the Shares
acquired by such individual are acquired without a view to any distribution
thereof and will not be sold or transferred other than pursuant to an effective
registration thereof under said Act or pursuant to an exemption applicable under
the Securities Act or the rules and regulations promulgated thereunder. The
certificates evidencing any of such Shares shall be appropriately legended to
reflect their status as restricted securities as aforesaid.
17. MULTIPLE AGREEMENTS.
The terms of each Option may differ from other Options granted under the
Plan at the same time, or at some other time. The Committee may also grant more
than one Option to a given Eligible Individual during the term of the Plan,
either in addition to, or in substitution for, one or more Options previously
granted to that Eligible Individual.
18. WITHHOLDING OF TAXES.
18.1 At such times as an Optionee recognizes taxable income in connection
with the receipt of Shares or cash hereunder (a "Taxable Event"), the Optionee
shall pay to the Company an amount equal to the federal, state and local income
taxes and other amounts as may be required by law to be withheld by the Company
in connection with the Taxable Event (the "Withholding Taxes") prior to the
issuance, or release from escrow, of such Shares or the payment of such cash.
The Company shall have the right to deduct from any payment of cash to an
Optionee an amount equal to the Withholding Taxes in satisfaction of the
obligation to pay Withholding Taxes. In satisfaction of the obligation to pay
Withholding Taxes to the Company, the Optionee may make a written election (the
"Tax Election"), which may be accepted or rejected in the discretion of the
Committee to have withheld a portion of the Shares then issuable to him or her
having an aggregate Fair Market Value, on the date preceding the date of such
issuance, equal to the Withholding Taxes, provided that in respect of an
Optionee who may be subject to liability under Section 16(b) of the Exchange Act
either: (i) (A) the Tax Election is made at least six (6) months prior to the
date of the Taxable Event and (B) the Tax Election is irrevocable with respect
to all Taxable Events of a similar nature occurring prior to the expiration of
six (6) months following a revocation of the Tax Election; or (ii) (A) the
Optionee makes the Tax Election at least six (6) months after the date the
Option was granted, (B) the Option is exercised during the ten (10) day period
beginning on the third business day and ending on the twelfth business day
following the release for publication of the Company's quarterly or annual
statement of sales and earnings (a "Window Period") and (C) the Tax Election is
made during the Window Period in which the related Option is exercised or prior
to such Window Period and subsequent to the immediately preceding Window Period.
Notwithstanding the foregoing, the Committee may, by the adoption of rules or
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otherwise, (i) modify the provisions of this Section 18.1 (other than as regards
Director Options) or impose such other restrictions or limitations on Tax
Elections as may be necessary to ensure that the Tax Elections will be exempt
transactions under Section 16(b) of the Exchange Act, and (ii) permit Tax
Elections to be made at such other times and subject to such other conditions as
the Committee determines will constitute exempt transactions under Section 16(b)
of the Exchange Act.
18.2 If an Optionee makes a disposition, within the meaning of Section
424(c) of the Code and regulations promulgated thereunder, of any Share or
Shares issued to such Optionee pursuant to the exercise of an Incentive Stock
Option within the two-year period commencing on the day after the date of the
grant or within the one-year period commencing on the day after the date of
transfer of such Share or Shares to the Optionee pursuant to such exercise, the
Optionee shall, within ten (10) days of such disposition, notify the Company
thereof, by delivery of written notice to the Company at its principal executive
office.
19. EFFECTIVE DATE
The effective date of the Plan shall be as determined by the Board, subject
only to the approval by the affirmative vote of the holders of a majority of the
securities of the Company present, or represented, and entitled to vote at a
meeting of stockholders duly held in accordance with the applicable laws of the
State of Delaware within twelve (12) months of the adoption of the Plan by the
Board.
THE NOSTALGIA NETWORK, INC.
STOCK OPTION AGREEMENT
This Stock Option Agreement (this "Agreement") is made as of the
day of , 1998, by and between The Nostalgia Network,
Inc. (the "Company"), a Delaware corporation, and, , a member of
the Company's Board of Directors (the "Director").
W I T N E S S E T H:
A. The Board of Directors of the Company (the "Board") has adopted The
Nostalgia Network, Inc. 1996 Stock Option Plan (the "Plan") for the purpose of
providing an incentive to selected directors, officers and employees of the
Company and encouraging them to devote their abilities and industries to the
success of the Company. Unless otherwise defined herein, capitalized terms shall
have the same meaning as in the Plan.
B. The Plan provides for the grant of an option to Director as provided
herein.
NOW, THEREFORE, it is hereby agreed as follows:
1. GRANT OF OPTION. Subject to and upon the terms, conditions and
restrictions set forth in this Agreement and the Plan, a copy of which is
attached hereto, the Company hereby grants to Director, as of the Grant Date, an
option (the "Option") to purchase up to 3,000 shares (the "Shares") of the
common stock, par value $.04 per share, of the Company from time to time during
the Option Term (as defined in Section 3 hereof) at the Exercise Price provided
for herein.
2. EXERCISE PRICE. The price at which Director shall be entitled to
purchase Shares upon the exercise of this Option shall be $ per share.
3. OPTION TERM. The term of the Option (the "Option Term") shall commence
on (the "Grant Date") and, unless earlier terminated in
accordance with the terms of the Plan or this Agreement, shall terminate at 5:00
p.m., Washington, D.C. time, on (the "Expiration Date"). Upon the
Expiration Date or earlier termination of this Option as provided herein, the
Option shall expire, cease to be exercisable and be of no further force or
effect except as may be expressly provided herein.
4. OPTION NONTRANSFERABLE. Neither this Agreement nor Director's rights
hereunder shall be transferable nor assignable by Director other than by will or
by the laws of descent and distribution, and the Option may be exercised, during
Director's lifetime, only by Director.
11
<PAGE> 110
5. EXERCISE. Unless otherwise provided in this Agreement or the Plan, the
Option shall entitle Director to purchase in whole at any time or in part from
time to time, 1,000 of the Shares beginning on , an additional
1,000 of the Shares beginning on and an additional 1,000 of the
Shares beginning on . Each such right of purchase shall be
cumulative and shall continue, unless sooner exercised or terminated as herein
provided, during the remainder of the Option Term. Exercisable installments may
be exercised in whole or in part and, to the extent not exercised, shall be
exercisable at any time on or before the Expiration Date or earlier termination
of the Option Term. This Option shall be subject in all respects to the Plan.
6. TERMINATION. The Option shall terminate prior to the Expiration Date as
follows:
(a) If the Director ceases to be a member of the Board (a
"Termination") and the Termination is for any reason other than Disability,
death or Cause, the Director may, for a period of three (3) months after
the Termination, exercise the Option provided, and only to the extent that,
the Option or portion thereof is vested and exercisable as of the date of
the Termination after which time the Option shall terminate in full.
(b) If the Termination is by resignation or removal due to Disability,
the Director may, for a period of one (1) year after the Termination,
exercise the Option provided, and only to the extent that, the Option or
portion thereof is vested and exercisable, as of the date of the
Termination, after which time the Option shall terminate in full.
(c) If the Termination is for Cause, the Option shall terminate
immediately in full.
(d) If Termination is the result of death while a Director or within
three (3) months after Termination other than for Disability or Cause or
within twelve (12) months after Termination by reason of the Director's
resignation or removal from the Board due to Disability, the Option may be
exercised at any time within twelve (12) months after the Director's death
by Director's legal representative provided, and only to the extent that,
the Option or portion thereof is vested and exercisable on the date of
Termination.
7. MANNER OF EXERCISE.
To exercise this Option with respect to all or any part of the Shares for
which this Option is then exercisable, Director must take the following actions
(in addition to any specified in the Plan):
(a) Provide the Secretary of the Company with ten (10) days written
notice of such exercise, by providing to the Company a fully completed and
executed Option Exercise Form a copy of which is attached hereto;
(b) Furnish to the Company appropriate documentation that the person
exercising the Option, if other than Director, has the right to exercise
this Option on behalf of and for Director;
(c) If requested, deliver to the Company a signed statement, in a form
satisfactory to the Company, confirming that each of the representations,
warranties, acknowledgments and agreements contained in paragraph 15 hereof
is true as to Director as of the date of exercise;
(d) Furnish to the Company such additional agreements, undertakings,
documents or information as the Company or its counsel may reasonably
request.
8. LIABILITY OF COMPANY. The inability of the Company to obtain approval,
after the Company exercises its reasonable efforts to obtain such approval, from
any regulatory body having authority deemed by the Company to be necessary to
the lawful issuance and sale of any Shares pursuant to this Option shall relieve
the Company of any liability in respect of its failure to deliver and sell the
Shares as to which such approval shall not have been obtained.
9. SUCCESSORS AND ASSIGNS. Subject to the terms of the Plan, the
provisions of this Agreement shall inure to the benefit of, and be binding upon,
the successors, administrators, heirs, devisees, legal representatives and
assigns of Director, and the successors and assigns of the Company.
12
<PAGE> 111
10. CONSTRUCTION. This Agreement and this Option are made and granted
pursuant to the Plan and are in all respects limited by and subject to the
express terms and provisions of the Plan.
11. GOVERNING LAW. The interpretation, performance and enforcement of
this Agreement shall be governed by the laws of the State of Delaware.
12. STOCKHOLDER RIGHTS. Neither the Director, nor any person who succeeds
to the Option by will or by the laws of descent and distribution, shall have any
rights of a stockholder of the Company with respect to any Shares to be
delivered upon exercise of the Option unless, and only to the extent that, the
Option shall have been duly and lawfully exercised in accordance with all
requirements for exercise of the Option pursuant to its terms, this Agreement
and/or the Plan.
13. NOTICES. Except as otherwise provided herein, all notices to the
Company shall be addressed to the Secretary of the Company at the principal
office of the Company, and all notices to Director shall be addressed to
Director at the address of Director on file with the Company or its
Subsidiaries, or to such other address as either party may designate to the
other in writing. A notice shall be deemed to be given if and when enclosed in a
properly addressed sealed envelope deposited, first class postage prepaid, with
the United States Postal Service. In lieu of giving notice by mail, written
notices under this Agreement may be given by personal delivery to Director or to
the Secretary of the Company (as the case may be) or by facsimile at the last
known facsimile number designated by either party. Notices given by facsimile
shall be deemed given upon receipt of facsimile confirmation.
14. SEVERABILITY. In the event any provision of this Agreement (or any
part thereof) is, or is for any reason adjudged to be, void, unlawful,
unenforceable or invalid, then disregarding such provision or provisions (or any
void, unlawful, unenforceable or invalid part thereof), the remaining provisions
hereof shall be valid and be carried into full force and effect.
15. REPRESENTATIONS AND WARRANTIES OF DIRECTOR.
Director hereby represents, warrants and acknowledges to the Company as
follows:
(a) As of the Grant Date, Director does not own, directly or
indirectly, more than ten percent (10%) of the total combined voting power
or value of all classes of voting stock of the Company.
(b) Director will acquire and hold the Shares purchased on exercise of
this Option for his or her own account and not with the view to the resale
or distribution thereof, except for resales or distributions in accordance
with federal and state securities laws, and that Director will not directly
or indirectly transfer all, any portion of, or any interest in, any Shares
acquired pursuant to the exercise of this Option (or solicit an offer to
transfer all or any portion thereof), except pursuant to either (i) an
effective and current registration statement (a "Registration Statement")
under the Securities Act of 1933, as amended (the "Act"), or (ii) an
applicable exemption from the registration requirements of the Act the
availability of which exemption shall, at the option of the Company, be
confirmed by an opinion of counsel for the Director in form and substance
satisfactory to the Company and its counsel.
(c) Director acknowledges that (i) this Option may not be exercised
unless the Shares are the subject of a Registration Statement or an
exemption from registration under the Act is available; (ii) the Shares
must be held indefinitely unless registered or an exemption from
registration is available under the Act and any applicable state securities
laws; (iii) the Company is under no obligation to register the Shares or to
comply with any exemption from registration, including those portions of
Rule 144 under the Act ("Rule 144") to be complied with by the transferor
of the Shares; (iv) if Rule 144 is available for sales of the Shares (and
there is no assurance that Director will be able to sell under Rule 144),
such sales in reliance upon Rule 144 may be made only after the Shares have
been held for the requisite holding period and may also be subject to the
volume limitations of Rule 144; and (v) Director must continue to bear the
economic risk of an investment in the Shares for an indefinite period of
time after the exercise of this Option.
13
<PAGE> 112
(d) Director acknowledges that all certificates representing shares
transferred pursuant to this Agreement, unless subject to a Registration
Statement, will bear the following restrictive legend:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and may not be
transferred or hypothecated without prior registration under said Act or
any exemption therefrom established to the satisfaction of the issuer."
(e) Director acknowledges that if counsel advises the Company that
registration of the Shares under the Act or that listing of the Shares on
any exchange is required prior to delivery thereof, the Company shall not
be required to deliver the Shares unless and until the Company is advised
by its counsel that registration and/or listing has been completed and is
effective. Director understands that the Company is under no obligation to
effectuate such registration or listing and may issue stop transfer
instructions to its transfer agent with respect to the Shares delivered
upon exercise of this Option.
17. MISCELLANEOUS. This Agreement contains the entire agreement of the
parties relating to the subject matter hereof, subject to the provisions of the
Plan. Any prior agreements, promises, understandings, representations or
warranties relating to the subject matter hereof are of no force or effect.
Paragraph headings in this Agreement are for convenience and are not a part of
the agreement of the parties, and shall not be used in the construction hereof.
Whenever the context of this Agreement requires, references to the singular
shall be deemed to include the plural and the plural the singular, and the
masculine the feminine, and the feminine the masculine.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed in
duplicate on its behalf by its duly authorized officer and Director has also
executed this Agreement in duplicate, all as of the day and year first above
written.
THE NOSTALGIA NETWORK, INC.
By:
--------------------------------------
Its
--------------------------------------
DIRECTOR
--------------------------------------
14
<PAGE> 113
THE NOSTALGIA NETWORK, INC.
1996, 1990, 1987 STOCK OPTION PLANS
<TABLE>
<CAPTION>
VESTING OPTIONS OPTIONS
STATUS OF DATE OF EXPIRATION EXERCISE PERIOD OPTIONS EXPIRED OR CURRENTLY
RECIPIENT EMPLOY. GRANT DATE SHARES PRICE (YEARS) EXERCISED CANCELLED OUTSTANDING
- --------- --------- -------- ---------- ------- -------- ------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Employee A............. A 08/16/95 8/16/2005 15,000 $1.00 3 15,000
Employee A............. A 10/08/92 2,000 $1.57 3 0 0 2,000
Employee A............. A 09/13/90 1,000 $0.63 3 0 0 1,000
Employee B............. A 08/16/95 8/16/2005 29,000 $1.00 3 29,000
Employee B............. A 10/08/92 4,000 $1.57 3 0 0 4,000
Employee B............. A 09/13/90 1,000 $0.63 3 0 0 1,000
Employee C............. A 08/16/95 8/16/2005 29,000 $1.00 3 29,000
Employee C............. A 10/08/92 10,000 $1.57 3 0 0 10,000
Employee C............. A 09/13/90 30,000 $0.63 3 0 0 30,000
Employee C............. A 09/23/88 12,000 $1.25 3 0 12,000 0
Employee D............. A 08/16/95 8/16/2005 4,000 $1.00 3 4,000
Employee D............. A 10/08/92 1,000 $1.57 3 0 0 1,000
Employee D............. A 09/04/91 500 $0.48 3 0 0 500
Employee D............. A 09/13/90 500 $0.63 3 0 0 500
Employee E............. A 08/16/95 8/16/2005 4,000 $1.00 3 4,000
Employee F............. 08/16/95 8/16/2005 29,000 $1.00 3 29,000
(deceased)
-------
172,000
=======
</TABLE>
<PAGE> 114
THE NOSTALGIA NETWORK, INC.
DIRECTORS' STOCK OPTIONS SCHEDULE
<TABLE>
<CAPTION>
PRIOR PLAN 8/1/96 8/1/97 8/3/98 8/2/99
----------------- ------------------ ----------------- ----------------- -----------------
VESTED UNVESTED VESTED UNVESTED VESTED UNVESTED VESTED UNVESTED VESTED UNVESTED
------ -------- ------- -------- ------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Christopher Cates......... 20,000 -- 3,000 2,000 1,000 1,000 2,000 -- 3,000
Floyd Christofferson...... -- -- 3,000 2,000 1,000 1,000 2,000 -- 3,000
Diane M. Faure............ -- -- 3,000 2,000 1,000 1,000 2,000 -- 3,000
Dong Moon Joo............. -- -- 3,000 2,000 1,000 1,000 2,000 -- 3,000
Hiroshi Goto.............. -- -- -- -- -- -- 1,000 2,000 -- 3,000
Dr. S. Robert Lichter..... -- -- -- -- -- -- 1,000 2,000 -- 3,000
Frederick W. Newton....... -- -- -- -- -- -- 1,000 2,000 -- 3,000
Phillip Sanchez -- -- 2,000 2,000 1,000 1,000 2,000 -- 3,000
(Chrman)................
Robert J. Wussler......... -- -- 3,000 2,000 1,000 1,000 2,000 -- 3,000
SQuire D. Rushnell Stk
Option Agreement
As of 5-13-96........... 629,880 209,960
<CAPTION>
TOTAL
VESTED
-------
<S> <C>
Christopher Cates......... 26,000
Floyd Christofferson...... 6,000
Diane M. Faure............ 6,000
Dong Moon Joo............. 6,000
Hiroshi Goto.............. 1,000
Dr. S. Robert Lichter..... 1,000
Frederick W. Newton....... 1,000
Phillip Sanchez 5,000
(Chrman)................
Robert J. Wussler......... 6,000
SQuire D. Rushnell Stk
Option Agreement
As of 5-13-96........... 629,880
</TABLE>
<PAGE> 115
CHATSWORTH SECURITIES LLC
October 18, 1999
The 144 Committee
The Nostalgia Network, Inc.
650 Massachusetts Avenue, NW
Washington, D.C. 20001
Gentlemen:
We understand that Crown Communications Corporation ("Crown"), a Delaware
corporation, desires to enter into a merger transaction with The Nostalgia
Network, Inc. ("Nostalgia"), a Delaware corporation, pursuant to which Nostalgia
and a subsidiary of Crown will merge (the "Merger"). As part of the Merger, all
of the stockholders of Nostalgia will receive cash for their shares of Nostalgia
Common Stock at a price of $0.07 per share (including the holders of shares of
Nostalgia's Preferred Stock, who will receive consideration for their shares on
an as converted Basis). Upon consummation of the Merger, Crown and its
affiliates will be the sole stockholders of Nostalgia, and Nostalgia shall cease
to be an SEC reporting company.
You have asked for our opinion as to whether the offer price for the Merger
is fair from a financial point of view to the minority holders of shares of
Nostalgia.
For purposes of the opinion set forth herein, we have:
(i) reviewed certain publicly available financial statements and other
information of Nostalgia;
(ii) reviewed certain internal financial and operating data concerning
Nostalgia prepared by the management of Nostalgia;
(iii) discussed the past and current operations and financial condition and
the prospects of Nostalgia, including information relating to certain
strategic, financial and operational issues, with senior executives
of Nostalgia;
(iv) reviewed the reported prices and trading activity for the Nostalgia
Common Stock;
(v) compared the financial performance of Nostalgia and prices and trading
activity of Nostalgia Common Stock with that of certain other
comparable publicly-traded companies and their securities;
(vi) performed such other analyses and considered such other factors as we
have deemed appropriate.
We have assumed and relied upon, without independent verification, the
accuracy and completeness of the information received by us for the purposes of
this opinion. With respect to the internal financial statements and other
financial and operating data, including forecasts, and discussions relating to
the strategic, financial and operational benefits anticipated from the Merger,
we have assumed that they have been reasonably prepared on bases reflecting the
best currently available estimates and judgments of the prospects of Crown and
Nostalgia. We have also relied upon, without independent verification, the
assessment by the management of Crown and Nostalgia of the strategic and other
benefits expected to result from the Merger. We have not made any independent
valuation or appraisal of the assets or liabilities of Crown or Nostalgia nor
have we been furnished with any such appraisals. Our opinion is necessarily
based on financial, economic, market and other conditions as in effect on, and
the information made available to us as of, the date hereof. This opinion is for
the use and benefit of The 144 Committee and the Board of Directors of The
Nostalgia Network, Inc. Our opinion does not address the merits of the
underlying decision by Crown to engage in the Merger and does not constitute a
recommendation to any stockholder of Nostalgia.
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<PAGE> 116
On the basis of and subject to the foregoing, we are of the opinion that,
as of the date hereof, the cash offer price to all shareholders of Nostalgia for
their shares of Nostalgia Common Stock at a price of $0.07 per share (including
the holders of shares of Nostalgia's Preferred Stock, who will receive
consideration for their shares on an as converted basis) is fair from a
financial point of view to the holders of Nostalgia Common Stock.
Very truly yours,
CHATSWORTH SECURITIES LLC
/s/ CHATSWORTH SECURITIES LLC
B-2
<PAGE> 117
SEC. 262. APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to sec. 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec. 251(other than a merger effected pursuant to sec.
251(g) of this title), sec. 252, sec. 254, sec. 257, sec. 258, sec. 263 or sec.
264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of sec. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
sec.sec. 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a
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<PAGE> 118
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsection (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of
such stockholder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must
do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to sec. 228
or sec. 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the
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<PAGE> 119
effective date of the merger or consolidation, any stockholder shall have the
right to withdraw such stockholder's demand for appraisal and to accept the
terms offered upon the merger or consolidation. Within 120 days after the
effective date of the merger or consolidation, any stockholder who has complied
with the requirements of subsections (a) and (d) hereof, upon written request,
shall be entitled to receive from the corporation surviving the merger or
resulting from the consolidation a statement setting forth the aggregate number
of shares not voted in favor of the merger or consolidation and with respect to
which demands for appraisal have been received and the aggregate number of
holders of such shares. Such written statement shall be mailed to the
stockholder within 10 days after such stockholder's written request for such a
statement is received by the surviving or resulting corporation or within 10
days after expiration of the period for delivery of demands for appraisal under
subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
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<PAGE> 120
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
(8 Del. C. 1953, sec. 262; 56 Del. Laws, c. 50; 56 Del. Laws, c. 186, sec. 24;
57 Del. Laws, c. 148, sec.sec. 27-29; 59 Del. Laws, c. 106, sec. 12; 60 Del.
Laws, c. 371, sec.sec. 3-12; 63 Del. Laws, c. 25, sec. 14; 63 Del. Laws, c. 152,
sec.sec. 1, 2; 64 Del. Laws, c. 112, sec.sec. 46-54; 66 Del. Laws, c. 136,
sec.sec. 30-32; 66 Del. Laws, c. 352, sec. 9; 67 Del. Laws, c. 376, sec.sec. 19,
20; 68 Del. Laws, c. 337, sec.sec. 3, 4; 69 Del. Laws, c. 61, sec. 10; 69 Del.
Laws, c. 262, sec.sec. 1-9; 70 Del. Laws, c. 79, sec. 16; 70 Del. Laws, c. 186,
sec. 1; 70 Del. Laws, c. 299, sec.sec. 2, 3; 70 Del. Laws, c. 349, sec. 22; 71
Del. Laws, c. 120, sec. 15; 71 Del. Laws, c. 339, sec.sec. 49-52.)
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<PAGE> 121
THE NOSTALGIA NETWORK, INC.
[ARROW] Tear at Perforation [ARROW]
The Special Meeting of Stockholders of The Nostalgia Network, Inc. will be
held , at 11:00 a.m., at
1. MERGER OF NNI ACQUISITION CORPORATION WITH AND INTO THE NOSTALGIA
NETWORK, INC.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
The undersigned hereby acknowledges receipt of a Notice
of Special Meeting of Stockholders of The Nostalgia
Network, Inc. called for , 2000, and a Proxy
Statement for the Meeting prior to the signing of this
proxy.
Dated: , 2000
-----------------------
-----------------------------
-----------------------------
Please sign exactly as your
name(s) appear(s) on this
proxy. When signing in a
representative capacity,
please give title.
PLEASE MARK, SIGN, DATE AND PROMPTLY RETURN THIS PROXY CARD
USING THE ENCLOSED ENVELOPE.
<PAGE> 122
THE NOSTALGIA NETWORK, INC.
650 Massachusetts Avenue, N.W.
Washington, D.C. 20001 PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF THE NOSTALGIA NETWORK, INC. FOR USE ONLY AT THE SPECIAL
MEETING OF STOCKHOLDERS TO BE HELD ON , 2000 AND ANY
ADJOURNMENT THEREOF.
The undersigned, being a stockholder of THE NOSTALGIA
NETWORK, INC. ("NOSTALGIA"), hereby authorizes
and , and each of them, as
proxies, with the full power of substitution, to represent
the undersigned at the Special Meeting of Stockholders of
Nostalgia to be held at
on ,
2000 at 11:00 a.m., local time, and at any adjournments or
postponements thereof, and at the meeting to act with
respect to all votes that the undersigned would be entitled
to cast, if then personally present, as appears on the
reverse side of this proxy.
In their discretion, the proxies are authorized to vote
with respect to matters incident to the conduct of the
meeting and upon such other matters as may properly come
before the meeting. This proxy may be revoked at any time
before it is exercised.
Shares of the Common Stock of Nostalgia will be voted
as specified. If no specification is made, shares will be
voted FOR the matters set forth on the reverse side and IN
ACCORDANCE WITH THE DISCRETION OF THE PROXIES as to any
other matter which may properly come before the Meeting.
