Registration of Securities Issued in a Business-Combination Transaction — Form S-4
Filing Table of Contents
Document/Exhibit Description Pages Size
1: S-4 Registration of Securities Issued in a 148 806K
Business-Combination Transaction
2: EX-1.1 Placement Agreement 27 117K
3: EX-3.1 Amended & Restated Certificate of Incorporation 39 131K
4: EX-3.2 Tvn Entertainment Corp. Bylaws 26 104K
5: EX-4.1 Securityholder Agreement Dated 8/29/1997 34 127K
6: EX-4.2 Amendment to Securityholders Agreement 3 19K
7: EX-4.3 Indenture - Tvn Entertainment Corp & Bank of Ny 104 454K
8: EX-4.4 Warrant Agreement-Tvn Entertainment & Bank of Ny 68 232K
9: EX-4.5 Warrant Registration Rights Agreement 15 60K
10: EX-4.7 Notes Registration Rights Agreement 22 94K
11: EX-5.1 Wilson Sonsini Goodrich & Rosati Opinion 3 22K
12: EX-10.1 Transponder Lease Agmt. - Galaxy Iii R 45 175K
21: EX-10.10 Employment Agreement - Arthur Fields 8 42K
22: EX-10.11 Employment Agreement - Michael Wex 6 34K
23: EX-10.12 Severance Agreement - John C. McWilliams 1 12K
24: EX-10.13 Employment Agreement - David Sears 4 22K
25: EX-10.14 Memorandum of Understanding 8 36K
13: EX-10.2 Galaxy Iii R Transponder Service Agreement 17 65K
14: EX-10.3 Transponder Lease Agreement - Galaxy Ix 32 136K
15: EX-10.4 Galaxy Ix Transponder Service Agreement 16 62K
16: EX-10.5 1996 Stock Option Plan - Tvn Entertainment Corp. 28 110K
17: EX-10.6 Service & License Agreement - Hits and Tvn 17 70K
18: EX-10.7 Csg Master Subscriber Mgmt Systems Agmt 28 143K
19: EX-10.8 Employment Agreement - Stuart Z. Levin 8 44K
20: EX-10.9 Employment Agreement - Jim Ramo 12 59K
26: EX-21.1 Subsidiaries of the Registrant 1 9K
27: EX-23.1 Consent of Pricewaterhousecoopers LLP 1 10K
28: EX-25.1 Statement of Eligibility of Trustee 4 25K
29: EX-27.1 Financial Data Schedule 2 12K
30: EX-99.1 Form of Letter of Transmittal 13 63K
31: EX-99.2 Form of Notice of Guaranteed Delivery 4 19K
32: EX-99.3 Form of Exchange Agent Agreement 9 38K
S-4 — Registration of Securities Issued in a Business-Combination Transaction
Document Table of Contents
| Page | (sequential) | | | | (alphabetic) | Top |
|---|
| | |
- Alternative Formats (Word, et al.)
- Additional Information
- Applicable High-Yield Discount Obligations
- Arthur Fields
- Book-entry Transfer
- Business
- Calculation of Registration Fee
- Capitalization
- Capitalized leases
- C-Band Home Satellite Dish Business
- Certain Definitions
- Certain Transactions and Related Party Transactions
- Certain United States Federal Income Tax Considerations
- Certificated Old Notes
- Commission Reports and Reports to Holders
- Common Stock
- Competition
- Conditions
- Consequences of Failure to Exchange
- Consequences of Failure to Exchange Your Old Notes for New Notes
- Consolidated Statements of Cash Flows for the Three Years Ended March 31, 1999
- Consolidated Statements of Operations for the Three Years Ended March 31, 1999
- Consolidated Statements of Stockholders' Deficit for the Three Years Ended March 31, 1999
- Consolidation, Merger and Sale of Assets
- Cost of revenue
- Covenants
- David Sears
- Defeasance
- Depreciation and amortization
- Description of Capital Stock
- Description of Certain Indebtedness
- Description of the New Notes
- Description of the Old Notes
- Dividend Policy
- Employees
- ESPN GamePlan
- Events of Default
- Exchange Agent
- Exchange Offer, The
- Executive Officers and Directors
- Exhibits and Financial Statement Schedules
- Experts
- Extraordinary gain
- Fees and Expenses
- Form of New Notes
- General and administrative
- Goodwill amortization
- Guaranteed Delivery Procedures
- Indemnification of Directors and Officers
- Intellectual Property and Proprietary Rights
- Interest expense
- James B. Ramo
- Legal Matters
- Limitation on Asset Sales
- Limitation on Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
- Limitation on Indebtedness
- Limitation on Issuances of Guarantees by Restricted Subsidiaries
- Limitation on Liens
- Limitation on Restricted Payments
- Limitation on Sale and Leaseback Transactions
- Limitation on the Issuance and Sale of Capital Stock of Restricted Subsidiaries
- Limitation on Transactions with Stockholders and Affiliates
- Management
- Management's Discussion and Analysis of Financial Condition and Results of Operations
- Marketing and Sales
- Modification and Waiver
- Net loss applicable to common stockholders
- New Notes, The
- Optional Redemption
- Option Grants in Last Fiscal Year
- Our business plan contemplates that a substantial portion of future revenues will be generated by businesses new to us
- Our historical financial information is of limited relevance to our future business
- Our success depends to a significant degree upon our ability to attract and retain, qualified management, sales, operations, marketing and technological personnel
- Plan of Distribution
- Preferred Stock
- Principal Stockholders
- Procedures Applicable to All Holders
- Procedures For Tendering
- Products, Markets and Customers
- Programming
- Ranking
- Redemption
- Registration Rights
- Report of Independent Accountants
- Repurchase of Old Notes upon a Change of Control
- Revenue
- Risk Factors
- Security
- Selected Historical Financial Data
- Selling
- Special Note Regarding Forward-Looking Statements
- Stuart Z. Levin
- Summary
- Summary Consolidated Financial Data
- Tax Treatment of the Ownership and Disposition of New Notes by Non-U.S. Holders
- Technology and Operations
- Terms of the Exchange Offer
- The Exchange Offer
- The New Notes
- Transfer Taxes
- Tvn
- Undertaking
- Use of Proceeds
- Warrants
- We anticipate that our existing capital and cash from operations will be adequate to satisfy our capital requirements for the next 12 months
- We are highly leveraged
- We have incurred net losses in every fiscal year since inception
- We operate in highly competitive markets and face intense competition from existing and potential competitors
- 1996 Stock Option Plan
|
| 1 | 1st Page - Filing Submission
|
| " | Stuart Z. Levin
|
| " | Calculation of Registration Fee
|
| 2 | Tvn
|
| 3 | Special Note Regarding Forward-Looking Statements
|
| 4 | Summary
|
| 6 | The Exchange Offer
|
| 9 | Procedures For Tendering
|
| 13 | Risk Factors
|
| 14 | Summary Consolidated Financial Data
|
| 16 | Consequences of Failure to Exchange Your Old Notes for New Notes
|
| 17 | We are highly leveraged
|
| " | Our business plan contemplates that a substantial portion of future revenues will be generated by businesses new to us
|
| 20 | We have incurred net losses in every fiscal year since inception
|
| " | Our historical financial information is of limited relevance to our future business
|
| 22 | We operate in highly competitive markets and face intense competition from existing and potential competitors
|
| 27 | We anticipate that our existing capital and cash from operations will be adequate to satisfy our capital requirements for the next 12 months
|
| " | Our success depends to a significant degree upon our ability to attract and retain, qualified management, sales, operations, marketing and technological personnel
|
| 31 | Use of Proceeds
|
| 32 | Dividend Policy
|
| " | Capitalization
|
| 33 | Selected Historical Financial Data
|
| 35 | Management's Discussion and Analysis of Financial Condition and Results of Operations
|
| 36 | Revenue
|
| 37 | Cost of revenue
|
| " | Selling
|
| 38 | General and administrative
|
| " | Depreciation and amortization
|
| " | Goodwill amortization
|
| 40 | Extraordinary gain
|
| 41 | Interest expense
|
| 44 | Business
|
| 49 | Products, Markets and Customers
|
| 53 | Programming
|
| 54 | ESPN GamePlan
|
| " | Marketing and Sales
|
| 55 | Technology and Operations
|
| 56 | C-Band Home Satellite Dish Business
|
| 57 | Competition
|
| 58 | Intellectual Property and Proprietary Rights
|
| " | Employees
|
| 59 | Management
|
| " | Executive Officers and Directors
|
| 63 | Option Grants in Last Fiscal Year
|
| 64 | 1996 Stock Option Plan
|
| 66 | Certain Transactions and Related Party Transactions
|
| 67 | James B. Ramo
|
| 68 | Arthur Fields
|
| " | David Sears
|
| 69 | Principal Stockholders
|
| 70 | Description of Certain Indebtedness
|
| 72 | Consequences of Failure to Exchange
|
| " | Terms of the Exchange Offer
|
| 73 | Certificated Old Notes
|
| 74 | Procedures Applicable to All Holders
|
| 76 | Guaranteed Delivery Procedures
|
| " | Book-entry Transfer
|
| 77 | Conditions
|
| 78 | Exchange Agent
|
| " | Fees and Expenses
|
| " | Transfer Taxes
|
| 79 | Description of the Old Notes
|
| " | Optional Redemption
|
| 80 | Security
|
| 81 | Registration Rights
|
| " | Ranking
|
| " | Certain Definitions
|
| 94 | Covenants
|
| " | Limitation on Indebtedness
|
| 96 | Limitation on Restricted Payments
|
| 99 | Limitation on Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
|
| 100 | Limitation on the Issuance and Sale of Capital Stock of Restricted Subsidiaries
|
| " | Limitation on Issuances of Guarantees by Restricted Subsidiaries
|
| 101 | Limitation on Transactions with Stockholders and Affiliates
|
| " | Limitation on Liens
|
| 102 | Limitation on Sale and Leaseback Transactions
|
| " | Limitation on Asset Sales
|
| 103 | Repurchase of Old Notes upon a Change of Control
|
| " | Commission Reports and Reports to Holders
|
| " | Events of Default
|
| 105 | Consolidation, Merger and Sale of Assets
|
| 106 | Defeasance
|
| 107 | Modification and Waiver
|
| 109 | Description of the New Notes
|
| " | Form of New Notes
|
| 110 | Description of Capital Stock
|
| " | Common Stock
|
| " | Preferred Stock
|
| 111 | Redemption
|
| 115 | Certain United States Federal Income Tax Considerations
|
| " | The New Notes
|
| 117 | Applicable High-Yield Discount Obligations
|
| 118 | Tax Treatment of the Ownership and Disposition of New Notes by Non-U.S. Holders
|
| 120 | Plan of Distribution
|
| " | Legal Matters
|
| " | Experts
|
| 121 | Additional Information
|
| 123 | Report of Independent Accountants
|
| 125 | Consolidated Statements of Operations for the Three Years Ended March 31, 1999
|
| 126 | Consolidated Statements of Stockholders' Deficit for the Three Years Ended March 31, 1999
|
| 127 | Consolidated Statements of Cash Flows for the Three Years Ended March 31, 1999
|
| 132 | Net loss applicable to common stockholders
|
| 137 | Capitalized leases
|
| 139 | Warrants
|
| 143 | Item 20. Indemnification of Directors and Officers
|
| " | Item 21. Exhibits and Financial Statement Schedules
|
| 144 | Item 22. Undertaking
|
As filed with the Securities and Exchange Commission on May 20, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------
Note Exchange Offer
on
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
TVN ENTERTAINMENT CORPORATION
(Exact name of Registrant as specified in its charter)
--------------
[Enlarge/Download Table]
Delaware 4841 95-4138203
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
2901 West Alameda Avenue, Seventh Floor
Burbank, California 91505
(818) 526-5000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
--------------
Stuart Z. Levin
Chief Executive Officer
TVN Entertainment Corporation
2901 West Alameda Avenue, Seventh Floor
Burbank, California 91505
(818) 526-5000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------
Copies to:
Robert P. Latta, Esq.
Roger E. George, Esq.
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, CA 94304
(650) 493-9300
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
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If any of the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance
with General Instruction G. check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
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CALCULATION OF REGISTRATION FEE
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Title of Each Class of Proposed Maximum Proposed Maximum
Securities to be Amount to be Offering price Aggregate Amount of
Registered Registered Per Unit(1) Offering Price(1) Registration Fee
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14% Senior Notes due
2008.................. $200,000,000 60% $120,000,000 $33,360
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(1) Estimated solely for the purpose of calculating the registration fee.
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as the Securities
Exchange Commission, acting pursuant to said Section 8(a), may determine.
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Subject to Completion, Dated May 20, 1999
STRICTLY CONFIDENTIAL
TVN
ENTERTAINMENT CORPORATION
Offer to Exchange
14% SENIOR NOTES DUE 2008, SERIES A (UNREGISTERED)
FOR 14% SENIOR NOTES DUE 2008, SERIES B (REGISTERED)
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME ON [JULY 29], 1999, UNLESS EXTENDED.
----------------
MATERIAL TERMS OF THE EXCHANGE OFFER
. Expires at 5:00 p.m., New York City time, on [July 29,] 1999, unless
extended.
. The only conditions to completing the exchange offer are that the exchange
offer not violate applicable law or any applicable interpretation of the
staff of the Securities and Exchange Commission and no injunction, order or
decree has been issued which would prohibit, prevent or materially impair
our ability to proceed with the exchange offer.
. All unregistered notes that are validly tendered and not validly withdrawn
will be exchanged.
. Tenders of unregistered notes may be withdrawn at any time prior to the
expiration of the exchange offer.
. The terms of the registered notes to be issued in the exchange offer are
substantially identical to the unregistered notes that we issued on July 29,
1998, except for certain transfer restrictions, registration rights and
additional interest.
. We will not receive any proceeds from the exchange offer.
. If you fail to tender your unregistered notes while the exchange offer is
open, you will continue to hold unregistered securities and your ability to
transfer them could be adversely affected.
----------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The date of this prospectus is , 1999
TABLE OF CONTENTS
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Page
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Special Note Regarding Forward-Looking Statements........................ i
Summary.................................................................. 1
Summary Consolidated Financial Data...................................... 11
Risk Factors............................................................. 13
Use of Proceeds.......................................................... 28
Dividend Policy.......................................................... 29
Capitalization........................................................... 29
Selected Historical Financial Data....................................... 30
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 32
Business................................................................. 41
Management............................................................... 56
Certain Transactions and Related Party Transactions...................... 63
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Page
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Principal Stockholders..................................................... 66
Description of Certain Indebtedness........................................ 67
The Exchange Offer......................................................... 68
Description of the Old Notes............................................... 76
Description of the New Notes............................................... 106
Form of New Notes.......................................................... 106
Description of Capital Stock............................................... 107
Certain United States Federal Income Tax Considerations.................... 112
Plan of Distribution....................................................... 117
Legal Matters.............................................................. 117
Experts.................................................................... 117
Additional Information..................................................... 118
Index to Financial Statements.............................................. F-1
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We are a Delaware corporation. Our principal executive offices are located
at 2901 West Alameda Avenue, Seventh Floor, Burbank, California 91505, and our
telephone number is (818) 526-5000. In this prospectus, "TVN," "we," "us," and
"our" refer to TVN Entertainment Corporation, unless the context otherwise
requires.
You should rely only on the information incorporated by reference or
provided in this prospectus. We have authorized no one to provide you with
different information. We are not making an offer of these securities in any
state where the offer is not permitted. You should not assume that the
information in this prospectus or the prospectus supplement is accurate as of
any date other than the date on the front of the document.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business," and elsewhere in this prospectus constitute forward-
looking statements. These statements involve known and unknown risks,
uncertainties, and other factors that may cause our or our industry's results,
levels of activity, performance, or achievements to be materially different
from any future results, levels of activity, performance, or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, those listed under "Risk Factors" and elsewhere in this
prospectus.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," or "continue" or the negative of such
terms or other comparable terminology.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, events, levels
of activity, performance, or achievements. We do not assume responsibility for
the accuracy and completeness of the forward-looking statements. We do not
intend to update any of the forward-looking statements after the date of this
prospectus to conform them to actual results.
----------------
TVN(R), TVN Digital Cable Television, TVN DCTV, TVN Digital Entertainment,
TVN Marquee Mix, DCTV and variations using one or the other of these names are
trademarks of and are used by TVN Entertainment Corporation. This prospectus
also makes reference to trade names and trademarks of other companies.
i
SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus, including "Risk Factors" beginning on
page 13, carefully.
TVN Entertainment Corporation
Our company provides the only fully interoperable, turnkey, end-to-end
digital solution that enables virtually any cable system to deliver a wide
variety of new digital television programming and services to subscribers over
existing cable infrastructure. In response to increasing consumer demand for
additional entertainment programming and services, the cable industry has begun
a large scale conversion from analog to digital transmission, facilitated by
recent advances in digital compression and encryption technology. In late 1997,
we launched TVN Digital Cable Television, also known as our DCTV Service. This
"one-stop" digital cable solution combines a digital delivery system with
programming content and support services to enable cable operators to expand
the channel capacity of their existing bandwidth and generate new sources of
revenue without the need to rewire or significantly upgrade their existing
analog cable systems.
The TVN Digital Solution
Our digital solution offers two types of service: (i) DCTV Service targeted
at smaller and medium size cable systems and (ii) PPV Feeds Service targeted at
larger cable systems.
DCTV Service
Our turnkey solution combines a digital delivery system with programming
content and support services to enable cable operators to expand the channel
capacity of their existing bandwidth and generate new sources of revenue
without undertaking a substantial and expensive upgrade of their cable plant.
DCTV Service can expand the number of video channels delivered by a typical
smaller cable system from 60 analog video channels to over 100 combined digital
and analog channels for digital subscribers. Many operators also gain the
ability to remotely address set-top boxes for the first time.
We believe our turnkey solution provides an attractive offering for cable
subscribers. The incremental price to the subscriber for DCTV Service is
determined by the cable operator and is generally $10.99 per month. Pay-per-
view, or PPV, movies typically cost $3.99 each and PPV events are priced
individually. A typical DCTV Service digital tier includes:
. 32 digital channels of near-video-on-demand, or NVOD, movies and PPV
events;
. a channel showing previews of currently offered films and coming
attractions;
. adult programming;
. 40 CD quality digital music channels from DMX;
. the TV Guide interactive on-screen program guide which displays
comprehensive program listings (including each system's analog channels
and local broadcasts) and provides parental control;
. new digital basic and/or multiplexed premium channels;
. additional information, data and text services; and
. continued access to the system's analog cable and local channels.
1
We believe our turnkey solution is particularly attractive to smaller and
medium size cable systems, including smaller, non-clustered systems of multi-
system operators, or MSOs, which may lack the scale, funding, technical or
administrative resources to economically implement a digital tier on their own.
Turnkey support services provided for the cable operator include:
. automated ordering and authorization;
. customer service and billing;
. engineering and marketing support;
. studio licensing and fee administration; and
. the installation of digital head-end equipment.
The typical $10.99 monthly fee charged by the cable operator to subscribers
for the digital tier of programming generally more than covers the monthly DCTV
Service fee paid to us by the cable operator and the amortized cost of the
digital set-top box. PPV revenues generated from our NVOD movies and PPV events
are shared by us and the cable operator based on a percentage of the PPV
revenue. We believe that cable operators can achieve a meaningful increase in
revenue and earn an attractive return on investment by providing DCTV Service.
PPV Feeds Service
Our PPV Feeds Service transmits to cable systems the same digital NVOD
movies and PPV events included in DCTV Service. PPV Feeds Service allows cable
systems to receive content from a single source of distribution and avoid the
significant capital investment otherwise required for automated playback,
storage, scheduling and delivery of PPV programming. Cable operators receiving
PPV Feeds Service also benefit from our expertise in selecting and scheduling
PPV programming to maximize buy rates, based on our experience in delivering
PPV movies and events to the C-Band HSD market since 1991. We receive from the
cable operator a percentage of the revenue generated by cable subscribers'
purchases of TVN PPV movies and events. Our PPV Feeds Service is a highly
attractive opportunity because it generates recurring revenue and cash flow at
little incremental cost.
In addition, we also transmit three digital channels of PPV hit movies and
events that cable operators can receive in digital format at the system head-
end and then convert to analog format for delivery to their addressable
subscribers, known as our Marquee Mix Service. This service provides a
replacement for the PPV programming offered by Request Television, which ceased
operations on June 30, 1998. This service also preserves analog channels for
PPV that can be used in the future by cable operators to implement DCTV Service
or PPV Feeds Service. For Marquee Mix Service, we receive from the cable
operator a percentage of the revenue generated by cable subscribers' purchases
of TVN PPV movies and events.
Recent Cable Operator Affiliations
Following the completion of comprehensive operational testing and marketing
trials in late 1997, we formally launched our digital cable programming and
services. As of May 15, 1999, we have entered into agreements with or have
received commitments from 63 cable operators for DCTV Service, 5 cable
operators for PPV Feeds Service and 17 cable operators for Marquee Mix Service,
as listed below. In addition, we are in active negotiations with cable
operators whose systems serve 650,000 subscribers, approximately 365,000 for
DCTV Service, and approximately 285,000 for PPV Feeds Service.
2
THE EXCHANGE OFFER
On July 29, 1998, we issued in a private placement $200 million in aggregate
principal amount of our 14% Senior Notes due 2008 (the "Old Notes"). We entered
into a registration rights agreement with the initial purchaser (the "Initial
Purchaser") of the Old Notes in which we agreed to deliver to you this
prospectus and to complete an offer to exchange the Old Notes for registered
notes on or prior to July 29, 1999. Completing this exchange offer (the
"Exchange Offer") will satisfy our obligations under the registration right
agreement. We are offering to exchange your Old Notes in the Exchange Offer for
registered notes with substantially identical terms (the "New Notes"). We
believe that the New Notes may be resold by you without compliance with the
registration and prospectus delivery requirements of the Securities Act of
1933, subject to certain limited conditions. You should read the discussion
under the headings "The Exchange Offer" and "Description of the New Notes" for
further information regarding the New Notes.
SUMMARY OF THE TERMS OF THE EXCHANGE OFFER
The Exchange Offer relates to the exchange of up to $200 million aggregate
principal amount of Old Notes for an equal aggregate principal amount of
registered notes. On July 29, 1998, we issued and sold $200 million in
aggregate principal amount of the Old Notes in a private placement. The form
and terms of the New Notes are substantially the same as the form and terms of
the Old Notes, except that the New Notes will have been registered under the
Securities Act of 1933 and will not bear legends restricting their transfer. We
issued the Old Notes under an indenture which grants you certain rights (the
"Indenture"). The New Notes also will be issued under that indenture and you
will have the same rights under the indenture as the holders of the Old Notes.
See "Description of the New Notes." References to the "Notes" apply to both the
Old Notes and New Notes.
[Download Table]
Registration Rights Agreement.... You are entitled under the Registration
Rights Agreement to exchange your
unregistered notes for registered notes
with substantially identical terms. We are
offering to exchange your unregistered Old
Notes for registered New Notes with
substantially the same terms in the
Exchange Offer. The Exchange Offer is
intended to satisfy our obligations under
the registration rights agreement. After
the Exchange Offer is completed, you will
no longer be entitled to any exchange or
registration rights with respect to your
Old Notes.
The Registration Rights Agreement requires
us to file a registration statement for a
continuous offering in accordance with Rule
415 under the Securities Act for your
benefit if you would not receive freely
tradeable registered notes in the Exchange
Offer or you are ineligible to participate
in the Exchange Offer and indicate that you
wish to have your Old Notes registered
under the Securities Act. See "The Exchange
Offer--Procedures For Tendering."
The Exchange Offer............... We are offering to exchange $1,000
principal amount of New Notes, our Series B
14% Senior Notes due 2008 which have been
registered under the Securities Act for
each $1,000 principal amount of Old Notes,
our 14% Senior Notes due 2008 which were
issued on July 29, 1998 in a private
placement. In order to be exchanged, an Old
Note must be properly tendered and
accepted. All Old Notes that are validly
tendered and not validly withdrawn will be
exchanged for New Notes.
3
[Download Table]
As of this date, there are $200 million
aggregate principal amount of Old Notes
outstanding.
We will issue the New Notes promptly after
the expiration of the Exchange Offer.
Resales of the Registered Notes.. We believe that the New Notes may be
offered for resale, resold and otherwise
transferred by you without compliance with
the registration and prospectus delivery
provisions of the Securities Act if you
meet the following conditions:
(1) The New Notes to be acquired by you in
the Exchange Offer are acquired by you
in the ordinary course of your
business;
(2) you are not engaging in and do not
intend to engage in a distribution of
the New Notes;
(3) you do not have an arrangement or
understanding with any person to
participate in the distribution of the
registered notes; and
(4) you are not an "affiliate" of ours, as
that term is defined in Rule 405 under
the Securities Act.
If you do not meet the above conditions,
you may incur liability under the
Securities Act if you transfer any New Note
without delivering a prospectus meeting the
requirements of the Securities Act. We do
not assume or indemnify you against that
liability.
Each broker-dealer that receives New Notes
in the Exchange Offer for its own account
in exchange for Old Notes which were
acquired by that broker-dealer as a result
of market-making activities or other
trading activities must acknowledge that it
will deliver a prospectus meeting the
requirements of the Securities Act in
connection with any resales of the
registered notes. A broker-dealer may use
this prospectus for an offer to resell or
to otherwise transfer these registered
notes.
Expiration Date.................. The Exchange Offer will expire at 5:00
p.m., New York City time, on [July 29],
1999, unless we decide to extend the
Exchange Offer. We do not intend to extend
the Exchange Offer, although we reserve the
right to do so.
Conditions to the Exchange
Offer........................... The only conditions to completing the
Exchange Offer are that the Exchange Offer
not violate applicable law or any
applicable interpretation of the staff of
the Securities and Exchange Commission and
no injunction, order or decree has been
issued which would prohibit, prevent or
materially impair our ability to proceed
with the Exchange Offer. See "The Exchange
Offer--Conditions."
4
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Procedures for Tendering Old
Notes Held in the Form of Book-
Entry Interests................. The Old Notes were issued as global
securities in fully registered form without
coupons. Beneficial interests in the Old
Notes which are held by direct or indirect
participants in The Depository Trust
Company ("DTC") through certificateless
depositary interests are shown on, and
transfers of the notes can be made only
through, records maintained in book-entry
form by DTC with respect to its
participants.
If you are a holder of an Old Note held in
the form of a book-entry interest and you
wish to tender your Old Note for exchange
pursuant to the Exchange Offer, you must
transmit to The Bank of New York, as
exchange agent, on or prior to the
expiration of the Exchange Offer, either:
. a written or facsimile copy of a properly
completed and executed letter of
transmittal and all other required
documents to the address set forth on the
cover page of the letter of transmittal;
or
. a computer-generated message transmitted
by means of DTC's Automated Tender Offer
Program system and forming a part of a
confirmation of book-entry transfer of
which you acknowledge and agree to be
bound by the terms of the letter of
transmittal.
The exchange agent must also receive on or
prior to the expiration of the Exchange
Offer either:
. a timely confirmation of book-entry
transfer of your Old Notes into the
exchange agent's account at DTC, in
accordance with the procedure for book-
entry transfers described in this
prospectus under the heading "The
Exchange Offer--Book-entry Transfer;" or
. the documents necessary for compliance
with the guaranteed delivery procedures
described below.
A letter of transmittal accompanies this
prospectus. By executing the letter of
transmittal or delivering a computer-
generated message through DTC's Automated
Tender Offer Program system, you will
represent to us that, among other things:
(1) the New Notes to be acquired by you in
the Exchange Offer are being acquired
in the ordinary course of your
business;
(2) you are not engaging in and do not
intend to engage in a distribution of
the New Notes;
(3) you do not have an arrangement or
understanding with any person to
participate in the distribution of the
New Notes; and
(4) you are not an "affiliate" of ours, as
that term is defined in Rule 405 under
the Securities Act.
5
[Download Table]
Procedures for Tendering
Certificated Old Notes.......... If you are a holder of book-entry interests
in the Old Notes, you are entitled to
receive, in limited circumstances, in
exchange for your book-entry interests,
certificated New Notes which are in equal
principal amounts to your book-entry
interests. See "Description of the New
Notes--Form of New Notes." No certificated
Old Notes are issued and outstanding as of
the date of this prospectus. If you acquire
certificated Old Notes prior to the
expiration of the Exchange Offer, you must
tender your certificated Old Notes in
accordance with the procedures described in
this prospectus under the heading "The
Exchange Offer--Procedures for Tendering--
Certificated Old Notes."
Special Procedures for Beneficial
Owner........................... If you are the beneficial owner of Old
Notes and they are registered in the name
of a broker, dealer, commercial bank, trust
company or other nominee, and you wish to
tender your Old Notes, you should promptly
contact the person in whose name your Old
Notes are registered and instruct that
person to tender on your behalf. If you
wish to tender on your own behalf, you
must, prior to completing and executing the
letter of transmittal and delivering your
Old Notes, either make appropriate
arrangements to register ownership of the
Old Notes in your name or obtain a properly
completed bond power from the person in
whose name your Old Notes are registered.
The transfer of registered ownership may
take considerable time. See "The Exchange
Offer--Procedures for Tendering--Procedures
Applicable to All Holders."
Guaranteed Delivery Procedures... If you wish to tender your Old Notes and:
(1) they are not immediately available;
(2) time will not permit your Old Notes or
other required documents to reach the
exchange agent before the expiration of
the Exchange Offer; or
(3) you cannot complete the procedure for
book-entry transfer on a timely basis;
you may tender your Old Notes in accordance
with the guaranteed delivery procedures set
forth in "The Exchange Offer--Procedures
for Tendering--Guaranteed Delivery
Procedures."
Acceptance of Old Notes and
Delivery of Registered Notes.... Except under the circumstances described
above under "Conditions to the Exchange
Offer," we will accept for exchange any and
all Old Notes which are properly tendered
in the Exchange Offer prior to 5:00 p.m.,
New York City time, on the expiration date.
The New Notes to be issued to you in the
Exchange Offer will be delivered promptly
following the expiration date. See "The
Exchange Offer--Terms of the Exchange
Offer."
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Withdrawal....................... You may withdraw the tender of your Old
Notes at any time prior to 5:00 p.m., New
York City time, on the expiration date. We
will return to you any Old Notes not
accepted for exchange for any reason
without expense to you as promptly as we
can after the expiration or termination of
the Exchange Offer.
Exchange Agent................... The Bank of New York is serving as the
exchange agent in connection with the
Exchange Offer.
Consequences of Failure to
Exchange........................ If you do not participate in the Exchange
Offer, upon completion of the Exchange
Offer, the liquidity of the market for your
Old Notes could be adversely affected. If
the liquidity of the market for your Old
Notes is adversely affected, you may be
unable to sell or transfer your Old Notes
and the value of your Old Notes may
decline. See "Risk Factors--Consequences of
Failure to Exchange Your Old Notes for New
Notes."
Federal Income Tax Consequences.. The exchange of the Old Notes will not be a
taxable event for federal income tax
purposes. See "Certain United States
Federal Income Tax Considerations."
7
SUMMARY OF THE TERMS OF THE NEW NOTES
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The New Notes.................... $200 million principal amount of 14% Senior
Notes due 2008, Series B.
Maturity......................... August 1, 2008.
Interest......................... The New Notes will pay interest in cash at
the rate of 14% per annum, payable on
February 1 and August 1 of each year,
commencing February 1, 2000.
Security......................... We have purchased and pledged to The Bank
of New York, as trustee (the "Trustee")
under the Indenture governing the Old
Notes, as security for your benefit of the
holders of the Notes, a portfolio of U.S.
government securities (the "Pledged
Securities") in an amount expected to be
sufficient to provide for payment in full
of the first six scheduled interest
payments on the Notes. A portion of the
Pledged Securities will have been used to
make the first two interest payments on the
Old Notes. We believe that the remaining
amount of the Pledged Securities will be
sufficient to make the first four interest
payments on the New Notes. Except for the
Pledged Securities, the New Notes will be
unsecured. See "Description of the Old
Notes--Security."
Optional Redemption.............. At our option, we may redeem any or all of
New Notes, at any time on or after August
1, 2003, for a redemption price initially
equal to 108% of their principal amount,
plus any accrued and unpaid interest. The
redemption price will decrease by equal
amounts each year to 100% of the principal
amount of the Notes, plus any accrued and
unpaid interest on and after August 1,
2006.
In addition, at any time prior to August 1,
2001, we may redeem New Notes representing
up to 35% of the aggregate principal amount
of the New Notes at 114% of the principal
amount thereof on the date of redemption
with the net proceeds of one or more Public
Equity Offerings (as defined); provided
-- that New Notes representing at least
$130.0 million aggregate principal
amount remain outstanding after each
such redemption and
-- notice of such redemption is mailed
within 60 days after the consummation of
the related Public Equity Offering.
See "Description of the Old Notes--Optional
Redemption."
8
[Download Table]
Change of Control................ Upon a Change of Control, you will have the
right to require us to make an offer to
repurchase the New Notes at a purchase
price equal to 101% of their principal
amount, plus any accrued and unpaid
interest. There can be no assurance that we
will have sufficient funds available at the
time of any Change of Control to repurchase
the Notes. We cannot otherwise redeem the
Notes. See "Description of the New Notes--
Repurchase of Notes upon a Change of
Control."
Ranking.......................... The New Notes will be our unsubordinated,
unsecured (except to the extent described
under "--Security" above) indebtedness,
will rank equally in priority of payment
with all of our other existing and future
unsubordinated indebtedness and will be
senior in right of payment to all of our
future subordinated indebtedness. As of
March 31, 1999, we had $298.2 million of
indebtedness outstanding, including the
Notes. The Notes will be effectively
subordinated to all of our secured
indebtedness and all of our subsidiaries'
existing and future liabilities, including
trade payables and subordinated debt. As of
March 31, 1999, $92.7 million of our
indebtedness was secured indebtedness. We
and our subsidiaries may incur substantial
additional indebtedness, including secured
indebtedness, under the terms of the
Indenture. See "Risk Factors--We are highly
leveraged."
Certain Covenants................ The Indenture contains certain covenants
for your benefit as holders of the Notes
which will, among other things, restrict
our ability and the ability of our
Restricted Subsidiaries (as defined
herein):
. to incur or guarantee additional
indebtedness, create liens, or engage in
sale-leaseback transactions;
. to pay dividends or make distributions in
respect of our capital stock, redeem
capital stock, make investments or
certain other restricted payments;
. to sell assets;
. to issue or sell stock of Restricted
Subsidiaries;
. to enter into transactions with
stockholders or affiliates; or
. to merge, consolidate, or dispose of
substantially all of our assets.
These covenant limitations are subject to
significant qualifications and exceptions.
See "Description of the Old Notes--
Covenants."
9
[Download Table]
Form of New Notes................ The New Notes will be represented by one
permanent global Note in definitive, fully
registered form, to be deposited with The
Bank of New York, as the Trustee (the
"Trustee") under the Indenture, as
custodian for, and registered in the name
of, a nominee of DTC. Any New Notes sold in
offshore transactions in reliance on
Regulation S under the Securities Act will
be represented by one permanent global Note
in definitive, fully registered form
deposited with the Trustee as custodian
for, and registered in the name of, a
nominee of DTC for the accounts of Morgan
Guaranty Trust Company of New York,
Brussels office, as operator of Euroclear
and Cedel Bank. See "The Exchange Offer--
Book-entry Transfers."
Use of Proceeds.................. We will not receive any proceeds from the
Exchange Offer.
RISK FACTORS
For a discussion of certain factors that should be considered by holders in
evaluating the Exchange Offer. See "Risk Factors" beginning on page 13.
10
SUMMARY CONSOLIDATED FINANCIAL DATA
The following Summary Consolidated Financial Data should be read in
conjunction with our financial statements and related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein. The historical consolidated financial
information does not reflect the significant changes in our financial results
that will occur as a result of the late 1997 launch of our digital cable
programming and services business. A substantial portion of our revenues to
date have been generated by our C-Band HSD business. Our historical expenses
have been generated by the C-Band HSD business but have also included
substantial operating expenses, lease payments and capital investments to
develop our digital cable programming and services business, which was launched
in late 1997 and has generated only modest revenues to date.
[Download Table]
Year Ended March 31,
-----------------------------------------------
1995 1996 1997 1998 1999
------- -------- -------- -------- --------
(in thousands, except per share data)
Statement of Operations Data:
Revenue...................... $35,073 $ 33,001 $ 33,380 $ 30,545 $ 39,812
Operating expenses:
Cost of revenue(1)......... 29,300 28,767 18,812 20,426 31,775
Selling.................... 9,076 8,612 5,998 7,067 14,302
General and
administrative............ 3,424 3,937 5,061 5,619 8,520
Depreciation and
amortization(1)........... 425 1,384 10,534 11,984 12,253
Goodwill amortization...... (803) (803) (803) (100) 199
------- -------- -------- -------- --------
Total operating expenses..... 41,422 41,897 39,602 44,996 67,049
------- -------- -------- -------- --------
Loss from operations......... (6,349) (8,896) (6,222) (14,451) (27,237)
Interest expense............. 1,407 2,248 13,908 15,163 34,195
Interest income.............. (6) (15) (63) (223) (6,472)
Other (income) and expense... 25 (10) 54 471 (84)
------- -------- -------- -------- --------
Loss before extraordinary
gain........................ (7,775) (11,119) (20,121) (29,862) (54,876)
Extraordinary gain........... -- -- 2,454 -- 1,113
------- -------- -------- -------- --------
Net loss..................... $(7,775) $(11,119) $(17,667) $(29,862) $(53,763)
======= ======== ======== ======== ========
Other Data:
EBITDA(2).................... $(6,728) $ (8,316) $ 3,509 $ (2,567) $(14,785)
Capital expenditures(3)...... 444 342 182 308 2,620
Ratio of earnings to fixed
charges(4).................. -- -- -- -- --
[Download Table]
March 31, 1999
--------------
(in thousands)
Balance Sheet Data:
Cash and cash equivalents........................................ $ 84,343
Restricted cash and investments.................................. 67,121
Property and equipment, net...................................... 84,997
Total assets..................................................... 254,725
Total debt:
Senior Notes due 2008(5)....................................... 186,798
Notes payable(6)............................................... 15,666
Capitalized leases............................................. 95,703
Series B redeemable preferred stock.............................. 53,047
Total stockholders' deficit(5)................................... (127,176)
11
--------
(1) Until February 1996, transponder costs were incurred pursuant to operating
leases and were reported as cost of revenue. Since then, such lease
agreements have met the criteria for capitalization and the related costs
have been recognized as depreciation and interest expense.
(2) EBITDA consists of loss before extraordinary gain, depreciation,
amortization, net interest expense and other (income) and expense. EBITDA
is provided because it is a measure commonly used in the media industry. It
is not intended to represent cash flows or results of operations in
accordance with GAAP for the periods indicated.
(3) Capital expenditures exclude acquisitions financed through notes payable
and capitalized leases of $70.5 million, $45.3 million and $175,000 in
fiscal 1996, fiscal 1997 and fiscal 1998, respectively.
(4) In calculating the ratio of earnings to fixed charges, "earnings" consist
of net loss before fixed charges. Fixed charges consist of interest
expense, including such portion of rental expense that is attributed to
interest. Our earnings were insufficient to cover fixed charges for these
periods. The amount of the deficiencies were $7.8 million, $11.1 million,
$20.1 million, $29.9 million and $54.9 million for each of the five years
in the period ended March 31, 1999.
(5) Senior Notes due 2008 and total stockholders' deficit reflect the value
ascribed to the warrants issued in connection with the Old Notes (the
"Warrants") which results in additional debt discount that will be
amortized as interest expense using the effective interest method over the
period that the Notes are outstanding.
(6) Notes Payable does not include Contingent Notes Payable totaling
approximately $28.7 million. Interest on the Contingent Notes Payable
accrues at a rate of prime plus 1%. We may renegotiate the terms of the
Contingent Notes Payable to incorporate a defined maturity and payment
schedule. In conjunction with such renegotiation, we may restructure or
repay all or a portion of the Contingent Notes Payable. In the event that
we are unable to agree on a defined maturity and payment schedule, the
timing of the repayment of the Contingent Notes Payable will remain
uncertain and subject to events outside our control. See "Description of
Certain Indebtedness."
12
RISK FACTORS
An investment in the New Notes involves a high degree of risk. In addition
to the other information contained in this prospectus, prospective investors
should carefully consider the following factors in evaluating an investment in
the New Notes offered hereby. No investor should participate in the Exchange
Offer unless such investor can afford a complete loss of the investment. In
addition, this Prospectus includes "forward-looking" statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act; provided, however, that the safe harbor provisions of Section 27A and
Section 21E are not applicable to any "forward looking" statements made in
connection with the initial issuance of New Notes pursuant to this prospectus,
although such provisions are applicable to such statements made in connection
with resales of New Notes. Although the Company believes that its plans,
intentions and expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such plans, intentions or
expectations will be achieved. Actual results will differ from such plans,
intentions and expectations, and such differences may be material. Important
factors that could cause actual results to differ materially from the Company's
forward-looking statements are set forth below and elsewhere in this
prospectus. All forward-looking statements attributable to the Company or
persons acting on its behalf are expressly qualified in their entirety by the
cautionary statements set forth herein. The Company disclaims any obligation to
update information contained in any forward-looking statement.
Consequences of Failure to Exchange Your Old Notes for New Notes
The Old Notes have not been registered under the Securities Act or any state
securities laws. When the Exchange Offer has been completed, we will have no
further obligation to register the Old Notes. Thereafter, if you have not
tendered your Old Notes in the Exchange Offer, even if you are an "affiliate"
(as that term is defined in Rule 405 of the Securities Act) of the Company and
cannot tender your Old Notes in the Exchange Offer, you will continue to hold
restricted securities. You may not offer to sell or otherwise transfer your Old
Notes unless the sale complies with the registration requirements of the
Securities Act and any other applicable securities laws, or unless there is an
exemption from the securities laws for your sale. In addition, to sell your Old
Notes, you must comply with certain other conditions and restrictions,
including our and the Trustee's right in certain cases to require you to
deliver opinions of counsel, certifications and other information prior to any
such transfer. If you do not exchange your Old Notes in the Exchange Offer, the
Old Notes will continue to bear a legend reflecting such restrictions on
transfer. In addition, once the Exchange Offer has been completed, you will not
be entitled to have your Old Notes exchanged for registered notes or registered
under the Securities Act or to any similar rights under the Registration Rights
Agreement (except for the Initial Purchaser in certain circumstances). We do
not intend to register under the Securities Act any Old Notes which remain
outstanding after the Exchange Offer is completed (except for the Initial
Purchaser in certain circumstances).
When the Exchange Offer is completed, the liquidity of any trading market
for Old Notes which remain outstanding after the Exchange Offer could be
adversely affected. If the liquidity of the trading market for the Old Notes is
adversely affected, you may be unable to sell or transfer your Old Notes and
the value of your Old Notes may decline.
The New Notes and any Old Notes which remain outstanding after consummation
of the Exchange Offer will vote together as a single class for purposes of
determining whether holders of the requisite percentage in outstanding
principal amount thereof have taken certain actions or exercised certain rights
under the Indenture.
The Registration Rights Agreement provides that the interest rate on the Old
Notes will increase by 0.50% per annum unless the Exchange Offer is completed
or a shelf registration statement is declared effective by July 29, 1999. See
"Description of the Old Notes--Registration Rights." When the Exchange Offer is
completed, neither the Old Notes nor the New Notes will be entitled to any such
additional interest.
13
We are highly leveraged
The Indenture permits us and our Subsidiaries to incur substantial
additional indebtedness subject to certain restrictions. See "Description of
the Old Notes--Certain Covenants." As of March 31, 1999, we had outstanding
indebtedness of approximately $298.2 million and a stockholders' deficit of
approximately $127.2 million. We cannot be certain that our operations will
generate sufficient cash flows to pay our obligations, including our
obligations on the New Notes. Earnings were inadequate to cover fixed charges
by the amount of $54.9 million for the year ended March 31, 1999. The degree to
which we are leveraged could have important consequences to the holders of the
New Notes, including, but not limited to, the following: (i) our ability to
obtain additional financing or refinancing in the future for working capital,
capital expenditures, service development and enhancement, acquisitions,
general corporate purposes or other purposes may be materially limited or
impaired; (ii) our cash flow, if any, may be unavailable for our business as a
substantial portion of our cash flow must be dedicated to the payment of
principal and interest on our indebtedness, including the New Notes; (iii) the
terms of future permitted indebtedness may limit our ability to redeem the New
Notes in the event of a Change of Control; and (iv) our high degree of leverage
may make us more vulnerable to economic downturns, may limit our ability to
withstand competitive pressures and may reduce our flexibility in responding to
changing business and economic conditions.
We expect that we will continue to generate substantial operating losses and
negative cash flow for at least the next several years. Our ability to make
scheduled payments on our debt (including the New Notes) will depend upon,
among other things:
. our ability to achieve significant and sustained growth in cash flow;
. the rate of and successful commercial deployment of our digital cable
programming and services;
. the market acceptance, subscriber demand, rate of utilization and pricing
for our digital cable programming and services;
. our future operating performance; and
. our ability to complete additional financings.
Each of these factors is, to a large extent, subject to economic, financial,
competitive and other factors, many of which are beyond our control. We cannot
be certain that we will be successful in developing and maintaining a level of
cash flow from operations and financings sufficient to permit us to pay the
principal, premium, if any, and interest on our indebtedness, including the New
Notes. If we are unable to generate sufficient cash flow from operations and
financings to service our indebtedness, including the New Notes, we may have to
reduce or delay the deployment of our digital cable programming and services or
restructure or refinance our indebtedness. We cannot be certain that any of
these actions or any additional debt or equity financings could be effected on
satisfactory terms, if at all, in light of our high leverage, or that they
would yield sufficient proceeds to service and repay our indebtedness,
including the New Notes. Any failure by us to satisfy our obligations with
respect to the New Notes at maturity or prior thereto would constitute a
default under the Indenture and could cause a default under agreements
governing our other indebtedness. In the event of such default, the holders of
such indebtedness would have enforcement rights, including the right to
accelerate such debt and the right to commence an involuntary bankruptcy
proceeding against us. Absent successful commercial introduction of our service
on a broad scale and significant growth of our cash flow, we will not be able
to service or repay our indebtedness, including the New Notes.
Our business plan contemplates that a substantial portion of future revenues
will be generated by businesses new to us
Our efforts have historically focused on providing national satellite PPV
and related services to C-Band HSD owners. However, beginning in late 1997, we
have been devoting an increasing percentage of our personnel and financial
resources, and intend to devote substantially more resources, to the continued
development and integration of digital programming, transactional services and
delivery systems, home
14
shopping, and electronic commerce products and services. Our digital cable
programming and services were launched in late 1997 and have generated only
modest revenues to date. We believe that our future ability to service our
indebtedness and to achieve profitability is dependent upon our success in
generating substantial revenues from our digital cable programming and
services. We expect to continue experiencing negative operating margins and
EBITDA while our DCTV Service and PPV Feeds Service are being marketed to cable
systems and their subscribers. We expect to realize improved operating margins
and EBITDA only as:
. the number of cable systems offering DCTV Service and the number of cable
systems offering PPV Feeds Service increases so as to increase the
numbers of homes passed by our digital programming and services;
. the number of subscribers to DCTV Service increases;
. the buy rates of our PPV movies and events increase; and
. revenues are generated from our home shopping and electronic commerce
products and services.
The continued roll out of our digital cable programming and services
requires significant operating expenditures, in particular selling expenses, a
large portion of which will be expended before any revenue is generated. We
have experienced and expect to continue experiencing, negative cash flows and
significant losses while we continue to market our digital cable television
programming and services and until we can establish a customer base of cable
operators and their subscribers that will generate revenue sufficient to cover
our costs. We cannot be certain that we will be able to successfully roll out
our digital cable programming and services or establish such a customer base,
or that we will generate significant revenues from our home shopping or
electronic commerce products and services. If we fail to adequately address any
of these risks, it could result in a material adverse effect on our business,
financial condition and results of operations.
This business plan will also result in significant changes in our financial
performance. The financial information contained herein, including our audited
financial statements, is presented on a historical basis and, therefore,
reflects only the first year's results of our DCTV Service and PPV Feeds
Service operations. See "--Our historical financial information is of limited
relevance to our future business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Our future growth will depend on the successful introduction and market
acceptance by cable operators and their subscribers of our turnkey DCTV Service
and PPV Feeds Service
These services will need to find acceptance not only in markets we currently
serve, but in new and newly evolving markets. We have expended and will
continue to expend substantial sums for our sales and marketing efforts to
promote cable operator and subscriber awareness of our digital cable
programming and services. The digital cable television market is new and
rapidly evolving. Therefore, it is difficult to predict the rate at which this
market will grow, if at all. If the market fails to grow, or grows more slowly
than anticipated, our business, financial condition and results of operations
will be materially adversely affected. Even if the market does grow, we cannot
be certain that our digital cable programming and services will realize market
acceptance or will meet the technical or other requirements of cable operators
or their subscribers. The failure of DCTV Service or PPV Feeds Service to gain
market acceptance would have a material adverse effect on our business,
financial condition and results of operations.
Our marketing efforts to date with regard to our digital programming and
services have involved identification and characterization of specific cable
system market segments that we believe will be the most receptive to our
digital programming and services. We cannot be certain that we have correctly
identified such markets or that our DCTV Service or PPV Feeds Services will
adequately address the needs of such markets. Broad commercialization of our
digital cable programming and services will require us to overcome significant
market development hurdles, many of which may not currently be foreseen. See
"Business--Products, Markets and Customers."
15
The market for electronic delivery of home television entertainment is
characterized by rapidly changing technology
Our future success and ability to remain competitive will depend in
significant part upon the technological quality of our products and processes
relative to those of our competitors, and our ability to both develop new and
enhanced products and services and to introduce such products and services at
competitive prices in a timely and cost effective fashion. Our development
efforts have been focused on the design and integration of resources,
technologies and systems, and testing and implementation of our digital cable
programming and services. We cannot be certain that our technological
development will remain competitive or not be outpaced by other advances.
We rely substantially on third party vendors for the continued development
of these technologies and we cannot be certain that such vendors will be able
to develop such technologies in a manner that meets our needs and those of our
customers and subscribers. The failure to implement these technologies or to
obtain licenses on favorable economic terms from other vendors, individually or
in combination, could have a material adverse effect on our prospects for
future growth. We cannot be certain that we will be successful in selecting,
developing and implementing new products or services, or in enhancing our
existing products and services on a timely basis or at all or that such
products will achieve market acceptance. Moreover, the introduction of services
embodying new technologies or programming can render existing services or
programming obsolete or unmarketable. We cannot be certain that we will be
successful in identifying, developing, contracting for the manufacture, and
marketing of product enhancements or new services or programming that are
responsive to technological change, that we will not experience difficulties
that could delay or prevent the successful development, introduction and
marketing of these products or services or that our new products and product
enhancements will adequately meet the challenges of emerging technologies, the
requirements of the marketplace and achieve market acceptance. Delays in
commercial availability of new products and services and enhancements to
existing products and services may result in customer dissatisfaction and delay
or loss of revenue. If we are unable, for technological or other reasons, to
develop and introduce new products and services or enhancements of existing
products and services in a timely manner, or if new versions of existing
products do not achieve a significant degree of market acceptance, there could
be a material adverse effect on our business, financial condition and results
of operations. See "Business--Technology and Operations."
Our success will depend in large part on our ability to sign long-term
affiliation agreements with cable operators to deploy DCTV Service and PPV
Feeds Service
To date, we have entered into affiliation agreements with only 85 cable
operators. Our ability to obtain additional long-term affiliation agreements
will depend upon, among other things, the successful commercial deployment of
our DCTV Service and PPV Feeds Service pursuant to our initial affiliation
agreements and our ability to demonstrate that our digital cable programming
and services are reliable and more attractive to cable operators and their
subscribers than alternative services. We cannot be certain that we will be
able to enter into definitive agreements with additional cable operators or
that the ongoing economic viability of DCTV Service or PPV Feeds Service will
be successfully demonstrated.
We do not set the prices charged by cable operators to their subscribers for
DCTV Service or for PPV movies and events. The level at which such prices are
set may adversely affect subscriber penetration and/or PPV buy rates.
Therefore, we cannot be certain that we will be able to achieve projected rates
of return. The market for digital cable television programming and services is
new, and our digital cable service is only one possible means available to
cable operators for providing PPV movies and events in the home. Although we
believe that our DCTV Service offers a comprehensive and economically viable
digital cable solution, we cannot be certain that we will be successful in
obtaining a sufficient number of cable operators who are willing:
. to be early adopters of new technology rather than waiting for widespread
industry implementation;
. to risk subscriber dissatisfaction if the removal of existing analog
channels is required to accommodate new digital channels that will only
be available to digital subscribers and not to the system's entire
subscriber base;
16
. to bear the costs of purchasing new digital set-top boxes and installing
and supporting required head-end receiving equipment; or
. to sign and remain party to long-term affiliation agreements with us for
our digital cable programming and services, including an arrangement to
share revenue from PPV movie and event buys.
Our failure to enter into or to sustain additional long-term affiliation
agreements with cable operators and/or their lack of acceptance of digital
cable programming and services would have a material adverse effect on our
business, financial condition and results of operations, as well as our ability
to achieve sufficient cash flow to service our indebtedness, including the New
Notes. See "Business--Products, Markets and Customers."
Selling and installing DCTV Service requires lengthy sales and implementation
cycles
The decision by a cable operator to deploy DCTV Service is often viewed as
an important and strategic decision that generally requires us to engage in a
lengthy sales cycle (typically between three and six months) to provide a
significant level of explanation to prospective cable operators regarding the
use and benefits of our digital cable programming and services to such
operators and their respective subscribers. Additionally, the sales cycle can
be delayed by the size of the transaction and prospective implementation costs
including the purchasing, installing and maintaining new digital set-top boxes,
installing and supporting required digital head-end equipment, as well as the
potential complexity of financing or other arrangements. The cable operator's
implementation of DCTV Service involves a significant commitment of resources
over an extended period of time which may lead prospective operators to defer
indefinitely the decision to implement DCTV Service or to delay such
implementation despite having agreed to do so. For these and other reasons, the
sales and customer implementation cycles are subject to significant delays over
which we have little or no control. Delay in the sale or implementation of even
a limited number of DCTV Service installations could have a material adverse
effect on our business, financial condition and results of operations. See
"Business--Products, Markets and Customers" and "--Marketing and Sales."
We have incurred net losses in every fiscal year since inception
We experienced net losses of $17.7 million, $29.9 million and $53.8 million
in fiscal 1997, fiscal 1998 and fiscal 1999, respectively. These net losses are
attributable to the significant costs incurred to develop and implement our
business plan and to develop, install and integrate our digital programming and
services. We expect that net losses will continue and increase for the
foreseeable future as we plan to continue to incur substantial sales and
marketing expenses to build our customer base of cable operators and
substantial capitalized lease payments for our satellite transponders. We have
not achieved profitability on a quarterly or annual basis, and we anticipate
that we will continue to incur net losses for at least the next several years.
We also expect to continue to incur significant product development and
administrative expenses. We cannot be certain that any of our business
strategies will be successful or that significant revenues or profitability
will ever be achieved or, if they are achieved, that they can be consistently
sustained or increased on a quarterly or annual basis in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and notes thereto included elsewhere
in this Offering Memorandum.
Our historical financial information is of limited relevance to our future
business
The historical financial information included herein for the fiscal years
ending 1995 to 1998 primarily reflects our C-Band HSD business. The historical
financial information for the fiscal year ended 1999 does not fully reflect the
many significant changes in our financial results that will occur as a result
of the ongoing roll out of our digital cable programming and services nor the
changes that will occur in our funding and operations in connection with such
roll out. The continued roll out of our digital cable programming and services
require significant operating expenditures, particularly selling expenses, a
large portion of which are expended before any revenue is generated. We have
experienced, and expect to continue experiencing, negative cash flows and
significant losses while we continue to market our digital cable programming
and services to establish a
17
sufficient revenue generating customer base of cable operators, their
subscribers and other customers. We cannot be certain that we will be able to
successfully roll out our digital cable programming and services or establish
such a customer base. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Our operating results may fluctuate significantly in the future as a result of
a variety of factors, many of which are outside our control
These factors include:
. demand for our digital cable programming and services, including our DCTV
Service and PPV Feeds Service;
. the availability for PPV distribution of popular movie titles and special
events;
. lengthy sales cycles;
. changes in the growth rate of digital cable subscribers and their PPV
buying patterns;
. cable operators' expenditures and other costs relating to the expansion
and penetration of their respective digital cable offerings;
. the market for in-home entertainment services;
. the evolution of alternative in-home entertainment systems;
. seasonal trends in home entertainment;
. introduction of new products or services by us or our competitors;
. delays in the introduction or enhancement of products and services by us
or our competitors;
. changes in our pricing policies or those of our competitors;
. our ability to anticipate and effectively adapt to developing trends;
. markets and rapidly changing technologies;
. the mix of products and services sold and the distribution channels for
those products and services;
. general economic conditions; and
. specific economic conditions in the cable television and related
industries.
Additionally, as a strategic response to a changing competitive environment,
we may elect from time to time to make pricing, service, marketing or
acquisition decisions that could have a material adverse effect on any of our
quarterly financial results.
We expect that a significant portion of our future revenues will be
generated from long-term affiliation agreements with cable operators. We
recognize revenues under our cable operator agreements only when our DCTV
Service or PPV Feeds Service is successfully integrated and operating and
subscriber billing commences. Accordingly, the recognition of revenues will lag
the announcement of a new cable operator affiliation agreement by at least the
time necessary to install the service and to achieve meaningful subscriber
penetration and/or PPV buy rates. We expect that the number and timing of such
affiliation agreements and the effect of anticipated lagging revenues, all of
which are difficult to forecast, may cause material fluctuations in our
operating results, particularly on a quarterly basis. We expect that revenues
from our DCTV Service and PPV Feeds Service will also be difficult to forecast
because our sales cycle, from initial evaluation to final affiliation
agreement, is expected to vary substantially from customer to customer.
Accordingly, the cancellation or deferral of even a small number of affiliation
agreements could have a material adverse effect on our quarterly financial
performance.
18
We plan to significantly increase our operating expenses to expand our sales
and marketing operations, broaden our cable support services, develop new
distribution channels, fund greater levels of research and development and
establish additional strategic alliances. Because our operating expenses are
based on anticipated revenue trends, a delay in generating or recognizing
revenue from a limited number of affiliation agreements could cause significant
variations in operating results from quarter to quarter and could result in
further operating losses. Moreover, because our expense levels are based, in
part, on management's expectations regarding future revenue, if revenue is
below expectations in any quarter, the adverse effect may be magnified by our
inability to adjust spending in a timely manner to compensate for any such
revenue shortfall. The extent to which such expenses are not subsequently
followed by increased revenues could have a material adverse effect on our
business, financial condition and results of operations. As a result of these
and other factors, we believe that period to period comparisons of our
operating results may not be meaningful and should not be relied upon as an
indication of future performance. Due to all of the foregoing factors, it is
likely that in one or more future quarters, our operating results may be below
the expectations of analysts and investors. See "--Our business plan
contemplates that a substantial portion of future revenues will be generated by
businesses new to us" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
We operate in highly competitive markets and face intense competition from
existing and potential competitors
Our competitors include a broad range of companies engaged in communications
and home entertainment, including DBS operators and programming providers,
coaxial and wireless cable operators, broadcast television networks, home video
companies featuring VHS, DIVX and DVD technologies, as well as companies
developing new in-home entertainment technologies, such as the video-on-demand
service being marketed by DIVA. We expect to compete primarily against other
providers of digital PPV programming, including cable and satellite
programmers.
We compete with companies offering digital programming direct-to-the-home
via various DBS systems. DBS offers consumers the appeal of significantly
expanded channel capacity, features such as an interactive on- screen program
guide, digital pictures without the "noise" often seen in analog video, CD
quality digital music channels and many channels of movies and sports available
on a PPV basis. Several well capitalized DBS companies pose a substantial
threat to cable operators. DirecTV, owned by Hughes Electronics, was the first
all-digital DBS company and as of April, 1999 had in excess of 4.7 million
subscribers to its DBS service according to DBS Digest, an industry
publication. Two other high power DBS companies are currently in operation:
EchoStar, which markets its digital television service under the "Dish Network"
brand name and USSB, whose DBS programming service operates in tandem with
DirecTV (which has agreed to acquire USSB) offering premium subscription
programming such as multiplexed HBO and SHOWTIME channels. A medium power DBS
service, PrimeStar, is also being acquired by DirecTV. Currently, local
programming is generally unavailable through DBS; however, pending legislation
would facilitate the ability of DBS companies to include local broadcasts in
their digital programming services.
We expect to encounter a number of challenges in competing with MSOs that
generally have large installed subscriber bases and significant investments in,
and access to, competitive programming sources. In addition, these MSOs have
the financial and technological resources to create their own digital tier of
services, including NVOD movies. We also face the risk that the current trend
of industry consolidation will continue with the result that smaller and medium
size cable operators that might otherwise become our customers will be acquired
by such MSOs. Currently, the only available alternative for cable operators
that wish to offer digital services similar to those provided by DBS is a
satellite transmitted digital programming delivery service called "Head-End-In-
The-Sky" or "HITS," owned and utilized by TCI to deliver digital programming to
its own cable systems, and now offered to other cable operators as well. HITS
transmits digitally compressed programming feeds to cable operators that have
the technical and transactional infrastructure to deliver their own tier of
digital programming and services to their subscribers. TCI charges fees to
cable operators for access to HITS programming, including PPV programming.
Certain telephone companies have announced
19
initiatives and have made significant investments to become digital television
providers. We cannot be certain that we will be able to compete effectively
against HITS, telephone companies or other companies that provide digital cable
television programming and services. Moreover, we cannot be certain that MSOs
developing their own digital tiers of programming will not offer such services
to our target markets.
Our competitors generally have substantially greater financial, technical,
marketing and other resources, and have larger installed customer bases than we
do. We cannot be certain that we will be able to compete successfully against
our current and future competitors based on these and other factors. We expect
that an increasingly competitive environment may also result in price
reductions that could reduce unit profit margins and cause loss of market
share, all of which would have a material adverse effect on our business,
financial condition and results of operations. Moreover, the market for in-home
entertainment has become increasingly concentrated in recent years as a result
of acquisitions and strategic alliances, which may permit our competitors to
devote significantly greater resources to the development and marketing of new
competitive products and services. We expect that competition will increase
substantially as a result of these and other industry consolidations and
alliances, as well as the emergence of new competitors. We cannot be certain
that we will be able to compete successfully with new or existing competitors
or that competitive pressures we face will not materially and adversely affect
our business, financial condition and results of operations. See "Business--
Competition."
We are dependent on programming providers
We are dependent on all the major and many independent movie studios to
provide us with hit movies that appeal to mass audiences. Our current PPV movie
programming is obtained through course-of-dealing studio arrangements without
specific renewal provisions. We have relationships with the Playboy
Entertainment Group, supplier of the Spice PPV adult movie service and the
Playboy Channel that we distribute, ESPN, for our ESPN GamePlan college
football subscription and pay-per-day-programming packages, and Guthy-Renker,
creator of direct response television "infomercials" which sell various
products direct to the customer, including self-improvement tapes and home
exercise equipment. We cannot be certain that any of such agreements will be
renewed or will not be canceled, that we would be able to obtain or develop
substitute programming or that such substitute programming would be comparable
in quality or profitability to our existing programming. The cancellation or
nonrenewal of any such agreement could have a material adverse effect on our
business, financial condition and results of operations. Our ability to succeed
in the digital cable television market will depend on our ability to continue
obtaining desirable programming and successfully market it to cable operators
and their subscribers at competitive prices. See "Business--Programming."
The loss of even a limited number of our satellite transponders, and our G-9
transponders in particular, could have a material adverse effect on our
business, financial condition and results of operations
We transmit our programming content via transponders leased on two PanAmSat
C-Band satellites, Galaxy IIIR or G-3 and Galaxy IX or G-9, both of which have
desirable geostationary orbital positions with transmission coverage of the
continental United States. Our transponder leases, which provide attractive
financial terms for us, both expire in 2006, prior to the expiration of each
satellite's expected useful life. We cannot be certain that we will be able to
obtain replacement transponder capacity on terms acceptable to us or at all.
Our failure to maintain sufficient, well located, economically attractive
transponder capacity would have a material adverse effect on our business,
financial condition and results of operations. If either satellite was
destroyed or became inoperable prior to the expiration of our lease, we would
need to obtain replacement satellite transponder capacity. Although we expect
that we would be able to obtain such replacement capacity, we cannot be certain
that such replacement capacity will be available when required or, if
available, that it will be on terms acceptable to us. The satellites now used
by us are also subject to the risks of all geostationary satellites, including
damage or destruction by space debris, military actions or acts of war, anti-
satellite devices, electrostatic storms, solar flares, loss of location or
other extraterrestrial events. In addition, satellite transponders may
malfunction or become inoperative in the ordinary course as a result of faulty
operation or latent faults in design or construction. We currently lease 15
transponders, ten on G-3 transmitting analog format programming and five on G-9
transmitting digital format programming. Although we have the benefit of
20
certain limited warranties on the transponders and carry business interruption
and in-orbit insurance, such warranties and insurance coverage will not be
sufficient to reimburse us for our losses if we are unable to continue
transmitting via satellite, or are only able to transmit with fewer than 15
transponders.
We rely on PanAmSat's satellites for transmission of all our programming.
Our relationship with PanAmSat is important to us and our business, and our
dependence on PanAmSat entails a number of significant risks. Our business,
financial condition and results of operations would be materially adversely
affected if PanAmSat were unable for any reason to satisfy our satellite
delivery commitments, or if any of these transmissions failed to satisfy our
quality requirements. In the event that we were unable to continue to use our
PanAmSat satellite capacity or obtain comparable replacement satellite capacity
via PanAmSat, we would have to identify, qualify and transition deliveries to
an acceptable alternative satellite transmission vendor. This identification,
qualification and transition process could take six months or longer, and we
cannot be certain that an alternative satellite transmission vendor would be
available to us or be in a position to satisfy our delivery requirements on a
timely and cost effective basis. See "Business--Technology and Operations."
We depend on technology and services provided by third parties
We are dependent on GI for the continued development and standardization of
the analog and interoperable digital compression and encryption technologies,
access control services and equipment we use. Our relationship with GI includes
not only the use of DCII Technology and encoding equipment to digitally
compress and encrypt our programming, but also includes GI's manufacture and
supply of DCII head-end equipment and set-top decoder boxes that are material
to the successful deployment of our DCTV Service. Our business, financial
condition and results of operations would be materially adversely affected if
GI were unable for any reason to meet our DCTV Service deployment strategy,
development schedule or delivery commitments with respect to either head-end
equipment or digital set-top boxes. If we are unable to continue to obtain and
use the DCII Technology, we would have to identify, qualify and transition
compression and encryption to an acceptable alternative vendor. This
identification, qualification and transition process could take six months or
longer, and we cannot be certain that an alternative vendor would be available
to us or be in a position to satisfy our delivery requirements on a timely and
cost effective basis.
Our DCTV Service has been designed around DCII Technology and head-end and
set-top box equipment designed and built by GI. A substantial number of cable
operators have standardized their analog operations on equipment manufactured
by Scientific Atlanta, Inc., known as SA. SA has recently introduced set-top
boxes and head-end digital cable equipment that are compatible with DCII
Technology but use SA access control. SA has yet to produce such equipment in
large volumes. A delay in the supply and deployment of GI compatible equipment
manufactured by SA, or a failure by SA to supply such equipment in sufficient
quantities or on a cost effective basis could have a material adverse effect on
our sales to the large number of SA affiliated cable operators.
We currently depend on GI to provide us with conditional access services for
the remote national authorization and deauthorization of digital set-top boxes.
We have no written agreement with GI for the provision of such services. We
have licensed on a long-term basis the conditional access technology from HITS
for our use in implementing our own conditional access facility. If we were
unable to continue to receive conditional access services from GI on acceptable
terms, our only alternative would be to implement our own facility. We have not
currently undertaken to implement such facility. Such implementation would take
six months or longer and would require us to incur substantial expense. We
cannot be certain that such implementation could be completed in a timely
manner or on a cost effective basis. Currently, there is no alternative vendor
offering such services. Our business, financial condition and results of
operations would be materially adversely affected if we were unable to cost
effectively obtain digital set-top box authorization services from GI, provide
such services our self or obtain them from an alternative source. See
"Business--Products, Markets and Customers" and "--Technology and Operations."
21
Our business is dependent on our ability to deliver programming to our cable
operator customers and their subscribers within the time periods advertised
Our failure to do so, whether or not within our control, could result in
dissatisfied subscribers and in lost orders for services which we could have
otherwise sold. We cannot be certain that dissatisfied cable operators or
subscribers would continue to subscribe to Company digital cable programming
and services in the event of a significant occurrence of failed deliveries,
which would have a material adverse effect on our business, financial condition
and results of operations. Although we maintain insurance against business
interruption, we cannot be certain that such insurance will be adequate to
protect us from significant loss in these circumstances, or that a major
catastrophe (such as an earthquake or other natural disaster) would not result
in a prolonged interruption of our business. In particular, the Operations
Center is located in the Los Angeles area, which has in the past and will in
the future experience significant, destructive seismic activity that could
damage or destroy the Operations Center. In addition, our ability to make
deliveries to subscribers within the time periods advertised depends on a
number of factors, some of which are outside of our control, including
equipment or software failure, interruption in services by satellite and uplink
service providers, and our inability to provide programming to cable
subscribers due to service outages experienced by cable systems that comprise
our distribution network. The result of our failure to make timely delivery of
programming and/or services, for whatever reason, could be that dissatisfied
subscribers would refuse to order future programming and/or services through
us, which would have a material adverse effect on our business, financial
condition and results of operations. See "--The loss of even a limited number
of our satellite transponders, and our G-9 transponders in particular, could
have a material adverse effect on our business, financial condition and results
of operations" and "Business--Technology and Operations."
Our technical infrastructure features in-house production, storage,
compression, encoding and access control capabilities, and other outsourced
services supervised by Company personnel. Programming originates from a
playback facility located at our Operations Center and is then uplinked to our
transponders from an immediately adjacent uplink facility. These playback,
production and uplink facilities were, and continue to be, custom built and
operated to our specifications by 4MC, a video post-production and facilities
service and management company, which owns and operates those facilities for
our use under renewable service agreements. The playback and production
facilities are dedicated to us, while the uplink facility is used by 4MC for us
and for other 4MC clients, such as Playboy and television program syndicators.
Our business, financial condition and results of operations would be materially
adversely affected if 4MC were unable for any reason to meet our production and
transmission development schedule or delivery commitments or if any uplink
transmissions failed to satisfy our quality requirements. If we are unable to
continue relying on 4MC's operational expertise and technology, we would have
to identify, qualify and transition such operations to an acceptable
alternative vendor or perform such operations ourself. This identification,
qualification and transition process could take six months or longer, and we
cannot be certain that we could perform these services or that an alternative
vendor would be available to us or be in a position to satisfy our requirements
on a timely and cost effective basis. See "Business--Technology and
Operations."
We rely on third party vendors to provide certain of the transactional services
we sell to cable operators
We contract with CSG to provide customer billing and subscriber management
services. Certain customer response calls are outsourced to TicketMaster
Corporation, which maintains regional call centers with extensive switching and
live operator capabilities. These systems and resources are part of the
transactional services that we offer with our turnkey DCTV Service. Our
business, financial condition and results of operations would be materially
adversely affected if these systems and technological resources were
unavailable for any reason to meet our transactional service commitments,
service management requirements or customer service quality requirements. If we
are unable to continue using these systems and technological resources, we
would have to identify, qualify and transition such operations to an acceptable
alternative vendor or arrange for in-house operations. This identification,
qualification and transition process could take six months or longer, and we
cannot be certain that we could perform such functions or that an alternative
vendor would be available to us or be in a position to satisfy our requirements
on a timely and cost effective basis. See "Business--Products, Markets and
Customers" and "--Technology and Operations."
22
We face the risk of piracy of our signals
While our VCII+ analog encryption and DCII digital encryption systems have
been designed by GI to minimize the risk of signal piracy, our revenues could
be adversely affected if signal piracy were to become widespread. The GI
encryption system that we use is based on the concept of renewable security
through the use of set-top decoder cards, which can be changed periodically to
thwart commercial piracy efforts. In addition, electronic countermeasures can
be transmitted over the link at any time in an effort to counter certain types
of piracy. However, we cannot be certain that this encryption technology,
electronic countermeasures and other efforts designed to prevent signal piracy
will be effective. Moreover, we cannot be certain that future technological
developments will not render our anti-piracy features less effective or
completely useless. Any significant piracy of our programming could have a
material adverse effect on our business, operating results and financial
condition and results of operations. See "Business--Technology and Operations."
We rely on a combination of trade secret, copyright and trademark laws,
confidentiality and nondisclosure agreements and other such arrangements to
protect our proprietary rights and confidential information
We consider our proprietary software interfaces, scheduling system, ANI
ordering system, trademarks, logos, copyrights, know-how, advertising, and
promotion design and artwork to be of substantial value and importance to our
business. Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy or obtain and use information that we regard as
proprietary. We cannot be certain that the steps taken by us to protect our
proprietary information will prevent misappropriation of such information and
such protection may not preclude competitors from developing confusingly
similar brand names or promotional materials, technology, or developing
products and services similar to ours. In addition, the laws of some foreign
countries do not protect our proprietary rights to the same extent as do the
laws of the United States. While we believe that our proprietary software,
trademarks, copyrights, advertising and promotion design and artwork do not
infringe upon the proprietary rights of third parties, we cannot be certain
that we will not receive future communications from third parties asserting
that our software, systems, trademarks, copyrights, advertising and promotion
design and artwork infringe, or may infringe, on the proprietary rights of
third parties. Any such claims, with or without merit, could be time consuming,
require us to enter into royalty arrangements or result in costly litigation
and diversion of management personnel. We cannot be certain that any necessary
licenses can be obtained or that, if obtainable, can be obtained on terms
acceptable to us. In the event of a successful claim of infringement against us
and our failure or inability to license the infringed or similar proprietary
information, our business, financial condition and results of operations could
be materially adversely affected. See "Business--Intellectual Property and
Proprietary Rights."
Rapid growth of our new digital cable programming and services could place a
significant strain on our managerial, operational and financial resources and
on our internal systems and controls
We cannot be certain that we would have adequate resources, be able to
develop our systems, controls or procedures effectively, or on a timely basis
manage such relationships to accommodate and manage such growth. Our financial
and management controls, reporting systems and procedures are constrained by
limited resources. Although some new controls, systems and procedures have been
implemented, our growth, if any, will depend on our ability to continue to
implement and improve operational, financial and management information and
control systems on a timely basis, together with maintaining effective cost
controls, and any failure to do so would have a material adverse effect on our
business, financial condition and results of operations. Further, we will be
required to manage multiple relationships with various customers and other
third parties. We cannot be certain that our systems, procedures or controls
will be adequate to support our operations or that our management will be able
to successfully offer our services and implement our business plan. We intend
to hire a significant number of additional sales, support, marketing,
operations and research and development personnel in 1999 and beyond.
Competition for such personnel is intense, and we cannot be certain that we
will be able to attract, assimilate, train or retain additional highly
qualified personnel in the future. If we are unable to hire and retain such
personnel, particularly those in key positions, our business,
23
financial condition and results of operations may be materially adversely
affected. Our future success also depends in significant part upon the
continued service of our executive officers and other key sales, marketing and
support personnel. In addition, our products and technologies are complex and
we are substantially dependent upon the continued service of our existing
engineering personnel, and especially our founders. Our inability to
effectively manage future growth, if any, would have a material adverse effect
on our business, financial condition and results of operations. See "--Our
success depends to a significant degree upon our ability to attract and retain,
qualified management, sales, operations, marketing and technological
personnel," "Business--Employees" and "Management."
We anticipate that our existing capital and cash from operations will be
adequate to satisfy our capital requirements for the next 12 months
We have Contingent Notes Payable totaling approximately $28.7 million. We
may renegotiate the terms of the Contingent Notes Payable to incorporate a
defined maturity and payment schedule. In conjunction with such renegotiation,
we may restructure or repay all or a portion of the Contingent Notes Payable.
In the event that we are unable to agree on a defined maturity and payment
schedule, the timing of the repayment of the Contingent Notes Payable will
remain uncertain and subject to events outside of our control. In the event
that we were to repay the Contingent Notes Payable in full, we believe that our
existing working capital following such redemption would be sufficient to fund
our operations for at least the next 12 months. There can be no assurance,
however, that we will not require additional capital sooner than currently
anticipated. In addition, we are unable to predict the precise amount of future
capital that we will require and we cannot be certain that additional financing
will be available to us on acceptable terms or at all. The inability to obtain
required financing would have a material adverse effect on our business,
financial condition and results of operations. Consequently, we could be
required to significantly reduce or suspend our operations, seek a merger
partner, sell the business, seek additional financing or sell additional
securities on terms that are highly dilutive to our stockholders. See "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Description of Certain Indebtedness."
Our success depends to a significant degree upon our ability to attract and
retain, qualified management, sales, operations, marketing and technological
personnel
In particular, our success depends on the continued contributions of Stuart
Z. Levin, our Chairman and Chief Executive Officer, James B. Ramo, our
President and Chief Operating Officer, and other senior level sales,
operations, production, financial and legal officers. The competition for
qualified personnel with skills in our industry is intense and the loss of any
such persons, as well as the failure to recruit additional key personnel in a
timely manner, could adversely affect us. We cannot be certain that we will be
able to continue to attract and retain qualified personnel for the development
of our business. We maintain key man life insurance on the lives of the
Chairman and President, but not on the lives of our other key personnel. Our
failure to continue to attract and retain key personnel could have a material
adverse effect on our business, financial conditions and results of operations.
See "Management--Executive Officers and Directors."
A substantial portion of our revenues to date have been generated by PPV fees
paid by subscribers of our satellite transmitted analog programming for the C-
Band HSD market
Our revenues from such business declined in fiscal 1996, in fiscal 1998, in
fiscal 1999 and are expected to decline in the first quarter of fiscal 2000.
The C-Band HSD market faces severe competition from competing forms of content
delivery, including digital content transmitted via DBS, and has experienced no
growth over the past four years. As a result, we cannot be certain that we can
continue to generate sustained revenues from the HSD market. See "Business--C-
Band Home Satellite Dish Business."
We may face difficulties as a result of acquisitions of companies, products or
technologies
We have made and intend to continue to make investments in complementary
companies, products and/or technologies. If we buy a company, we could have
difficulty in integrating that company's personnel and
24
operations. In addition, the key personnel of the acquired company may decide
not to work for us. If we make other types of acquisitions, we could have
difficulty in assimilating the acquired technology or products into our
operations. These difficulties could disrupt our ongoing business, distract our
management and employees and increase our expenses. Furthermore, we may have to
incur debt or other liabilities or issue equity securities to pay for any
future acquisitions, the issuance of which could be dilutive to our existing
stockholders.
Software that is not Year 2000 compliant may interpret January 1, 2000 as
January 1, 1900
We recognize the need to ensure that our operations, products and services
will not be adversely impacted by Year 2000 software failures. We have
established procedures for evaluating and managing the risks and costs
associated with this problem and believe that our internal computer systems,
including our accounting, sales and technical support automation systems, are
currently Year 2000 compliant. However, there can be no guarantee that our
systems or the systems of other companies on which our systems and operations
rely will be able to handle all Year 2000 problems.
In addition, although we believe that our network operations are Year 2000
compliant, we cannot be certain that our computer systems contain all necessary
date code changes. Furthermore, many of our cable operator customers and
vendors maintain their operations on systems that may be impacted by Year 2000
complications. Our failure or any failure by our cable operator customers and
vendors to ensure that their systems are Year 2000 compliant could be
detrimental to our ability to offer our products and services, which in turn
could have a material adverse effect on our business, financial condition and
results of operations.
Morgan Stanley Dean Witter has significant influence over us
PGI II and its affiliates own 89.3% of the Series B Preferred Stock, which
ownership represents 54.8% of our outstanding voting capital stock on an as-
converted basis or 43.7% of the voting capital stock on an as-converted,
diluted basis including currently outstanding options and warrants exercisable
for voting capital stock before giving effect to the Offering. The general
partner of PGI II and Morgan Stanley are both wholly owned subsidiaries of
Morgan Stanley Dean Witter, and two of our directors are employees of Morgan
Stanley. As a result of these relationships, PGI II, Morgan Stanley Dean Witter
and its affiliates have, and will continue to have, significant influence over
our management policies and our corporate affairs. See "Certain Transactions
and Related Party Transactions," "Principal Stockholders" and "Description of
Capital Stock."
Certain decisions concerning our operations or financial structure may
present conflicts of interest between the owners of capital stock and the
holders of the New Notes. For example, if we encounter financial difficulties,
or are unable to pay our debts as they mature, the interests of the holders of
capital stock might conflict with those of the holders of the New Notes. In
addition, the holders of capital stock may have an interest in pursuing
acquisitions, divestitures, financings or other transactions that, in their
judgment, could enhance their equity investment, even though such transactions
might involve risks to the holders of the New Notes.
Our Certificate of Incorporation requires us, upon demand, to redeem all of our
outstanding shares of Series B Preferred Stock in August 2002
Our Certificate of Incorporation requires us, upon demand, to redeem all of
our outstanding shares of Series B Preferred Stock in August 2002, the
Mandatory Redemption Date, for $54.4 million, unless such shares of
Series B Preferred Stock have previously been converted into our Common Stock
at the option of the holders thereof, or automatically converted upon our
initial public offering. Notwithstanding this requirement in the Certificate of
Incorporation, however, the terms of the Notes will significantly limit such a
redemption by us for cash, but will permit us to redeem the Series B Preferred
Stock with the proceeds of an equity financing. If we fail to redeem the Series
B Preferred Stock, we would continue to be in breach under our Certificate of
Incorporation from the Redemption Date until the date of any such refinancing.
Although such breach has been excluded from the cross default provisions of the
New Notes, it may trigger default provisions in other financial instruments to
which we may then be a party. We cannot be certain that holders of Series B
Preferred Stock will not take legal action against us in an attempt to enforce
their redemption right, demand that we renegotiate
25
the terms of the Series B Preferred Stock or sell additional equity to finance
the redemption. Although such actions may not directly have an adverse effect
on the New Notes, they may have an adverse effect on us and a dilutive effect
on the interests of our equity holders. A substantial majority of our Series
B Preferred Stock is held by PGI II. See "Certain Transactions and Related
Party Transactions" and "Description of Capital Stock--Preferred Stock--
Redemption."
Sales by existing shareholders could depress the future market price of our
Common Stock
Future sales of shares of our Common Stock by our existing stockholders
under Rule 144 of the Securities Act or through the exercise of registration
rights or the issuance of shares of our Common Stock upon the exercise of
options or warrants could materially adversely affect the market price of
shares of our Common Stock and could materially impair our future ability to
raise capital through an offering of equity securities. No predictions can be
made as to the effect, if any, that market sales of such shares or the
availability of such shares for future sale will have on the market price of
shares of our Common Stock prevailing from time to time.
The Notes are subject to original issue discount and high-yield discount
obligation tax rules
The Notes will be treated as issued with original issue discount for U.S.
federal income tax purposes, so that holders of the Notes generally will be
required to include amounts in gross income for U.S. federal income tax
purposes in advance of receipt of the cash payments to which the income is
attributable. Furthermore, the Notes may be subject to the high yield discount
obligation rules, which will defer and may, in part, eliminate our ability to
deduct for U.S. federal income tax purposes the original issue discount
attributable to the Notes. Accordingly, our after-tax cash flow might be less
than if the original issue discount on the Notes was deductible when it
accrued. See "Certain United States Federal Income Tax Considerations" for a
more detailed discussion of the U.S. federal income tax consequences for us and
the beneficial owners of the Notes resulting from their purchase, ownership and
disposition of the Notes.
If a bankruptcy case were commenced by or against us under the Bankruptcy
Code of 1978, as amended (the "Bankruptcy Code"), after the issuance of the
Notes, the claim of a Note holder with respect to the principal amount thereof
may be limited to an amount equal to the sum of (i) the initial offering price
and (ii) that portion of the original issue discount that is not deemed to
constitute "unmatured interest" for purposes of the Bankruptcy Code. Any
original issue discount that was not amortized as of the date of any such
bankruptcy filing would constitute "unmatured interest."
Fraudulent Conveyance Risks
Under applicable provisions of the federal bankruptcy law or comparable
provisions of state fraudulent transfer law, if, at the time we issued the old
notes or made any payment in respect of the new notes, either:
(1) we received less than reasonably equivalent value or fair
consideration for such issuance; and
. we were insolvent or were rendered insolvent by such issuance; or
. were engaged or about to engage in a business or transaction for
which our assets constituted unreasonably small capital; or
. intended to incur, or believed that we would incur, debts beyond our
ability to pay our debts as they matured; or
(2) we issued the new notes or made any payment thereunder with intent to
hinder, defraud or delay any of our creditors.
then our obligations under some or all of the new notes could be voided or held
to be unenforceable by a court or could be subordinated to claims of other
creditors, or the new note holders could be required to return payments already
received.
26
In particular, if we caused a subsidiary to pay a dividend in order to
enable us to make payments in respect of the new notes, and such transfer were
deemed a fraudulent transfer, the holders of the new notes could be required to
return the payment.
The measure of insolvency for purposes of these fraudulent transfer laws
will vary depending upon the law applied in any proceeding to determine whether
a fraudulent transfer has occurred. Generally, however, we would be considered
insolvent if:
. the sum of our debts, including contingent liabilities, was greater than
all of our assets at a fair valuation; or
. we had unreasonably small capital to conduct our business; or
. the present fair salable value of our assets were less than the amount
that would be required to pay the probable liability on our existing
debts, including contingent liabilities, as they become absolute and
mature.
We believe that we will not be insolvent at the time of or as a result of
the issuance of the new notes, that we will not engage in a business or
transaction for which its remaining assets constitute unreasonably small
capital and that we did not and do not intend to incur or believe that we will
incur debts beyond our ability to pay such debts as they mature. e cannot
assure you that a court passing on such questions would agree with our
analysis.
Under certain circumstances, our subsidiaries will be required to guarantee
our obligations under the indenture and the new notes. If any subsidiary enters
into such a guarantee and bankruptcy or insolvency proceedings are initiated by
or against that subsidiary within 90 days (or, possibly, one year) after that
subsidiary issued a guarantee or that subsidiary incurred obligations under its
guarantee in anticipation of insolvency, then all or a portion of the guarantee
could be avoided as a preferential transfer under federal bankruptcy or
applicable state law. In addition, a court could require holders of the new
noters to return all payments made within any such 90 day (or, possibly, one
year) period as preferential transfer.
Applicable bankruptcy law is likely to impair the trustee's right to foreclose
upon the pledged securities
The right of the trustee under the indenture and the pledge agreement
relating to the new notes to foreclose upon and sell the pledged securities
upon the occurrence of an event of default on the new notes is likely to be
significantly impaired by applicable bankruptcy law if a bankruptcy or
reorganization case were to be commenced by or against us or one of our
subsidiaries. Under applicable bankruptcy law, secured creditors such as the
holders of the new notes are prohibited from foreclosing upon or disposing of a
debtor's property without prior bankruptcy court approval.
Consequences to Non-Tendering Holders of Old Notes.
Upon consummation of the Exchange Offer, the Company will have no further
obligation to register the Old Notes. Thereafter, any Holder of Old Notes who
does not tender its Old Notes in the Exchange Offer, including any Holder which
is an "affiliate" (as that term is defined in Rule 405 of the Securities Act)
of the Company which cannot tender its Old Notes in the Exchange Offer, will
continue to hold restricted securities which may not be offered, sold or other
wise transferred, pledged or hypothecated except pursuant to Rule 144 and Rule
144A under the Securities Act or pursuant to any other exemption from
registration under the Securities Act relating to the disposition of
securities, provided that an opinion of counsel is furnished to the Company
that such an exemption is available. These restrictions may limit the trading
market and price for the Old Notes.
Absence of a Public Market for the New Notes and No Assurance of Active Trading
Market
We are offering the New Notes to the Holders of the Old Notes. Prior to this
Exchange Offer, there was no existing trading market for the Old Notes and
there were no existing New Notes. We do not intend to apply for listing of the
New Notes on any securities exchange or on the Nasdaq National Market. Although
the New Notes will be eligible for trading in the PORTAL Market, the New Notes
may trade at a discount from their
27
initial offering price, depending upon prevailing interest rates, the market
for similar securities, our performance and other factors. Prior to the
issuance of the Old Notes, the Initial Purchaser advised us that it intended to
make a market in the Old Notes following the issuance thereof; however, the
Initial Purchaser is not obligated to do so and any such market-making
activities may be discontinued at any time without notice. Therefore, there can
be no assurance that an active market for the New Notes will develop. In
addition, the market price of the Old Notes has significantly fluctuated since
their original issuance, and we anticipate that the market for the New Notes
may similarly fluctuate. See "Description of the Old Notes--Registration
Rights" and "Description of the Old Notes--Plan of Distribution."
The form and terms of the New Notes are substantially identical to the form
and terms of the Old Notes, except that the New Notes:
. will be registered under the Securities Act;
. will not provide for registration rights;
. will not provide for payment of additional interest upon failure to
register or exchange the Old Notes, which terminates upon completion of
the Exchange Offer; and
. will not bear legends containing transfer restrictions.
The New Notes will be issued solely in exchange for an equal principal
amount of Old Notes. As of the date hereof, $200 million aggregate principal
amount of Old Notes is outstanding.
USE OF PROCEEDS
This Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement. The Company will not
receive any cash proceeds from the issuance of the New Notes offered in the
Exchange Offer. In consideration for issuing the New Notes as contemplated in
this prospectus, the Company will receive in exchange Old Notes in like
principal amount at maturity, the form and terms of which are the same in all
material respects as the form and terms of the New Notes except that the New
Notes (i) will have been registered under the Securities Act and therefore will
not be subject to certain restrictions on transfer applicable to the Old Notes
and (ii) will not be entitled to certain registration or other rights under the
Registration Rights Agreement, including the provision in the Registration
Rights Agreement for additional interest of up to 0.5% per annum upon failure
by the Company to consummate the Exchange Offer. The Old Notes surrendered in
exchange for New Notes will be retired and cancelled and cannot be reissued.
Accordingly, issuance of the New Notes will not result in any increase in the
indebtedness of the Company.
The net proceeds to us from the issuance of the Old Notes and Warrants were
approximately $193.3 million, after deducting the selling discounts and
commissions and estimated expenses. Approximately $76.7 million of the net
proceeds were used to purchase the Pledged Securities in an amount expected to
be sufficient to provide for payment in full of the first six scheduled
interest payments on the Notes. See "Description of the Old Notes--Security."
We expect to use the remaining net proceeds to fund operating expenses in
connection with the roll out and expansion of our DCTV Service and PPV Feeds
Service, for acquisitions as permitted by the Indenture, for working capital
and other general corporate purposes. We have Contingent Notes Payable totaling
approximately $28.7 million. We may renegotiate the terms of the Contingent
Notes Payable to incorporate a defined maturity and payment schedule. In
conjunction with such renegotiation, we may restructure or repay all or a
portion of the Contingent Notes Payable. Any such repayment may be financed
with a portion of the net proceeds. In the event that we are unable to
negotiate a defined maturity and payment schedule, the timing of repayment of
the Contingent Notes Payable will remain uncertain and subject to events
outside our control. See "Description of Certain Indebtedness."
Because of the number and variability of factors that will determine our use
of the net proceeds from the issuance of the Old Notes and Warrants, management
will retain a significant amount of discretion over the application of such net
proceeds. Pending the use of such net proceeds as described above, we intend to
invest such funds in short-term, interest bearing, investment grade securities
to the extent permitted by the Indenture.
28
See "Risk Factors--We are highly leveraged," "--We have incurred net losses in
every fiscal year since inception," "--We anticipate that our existing capital
and cash from operations will be adequate to satisfy our capital requirements
for the next 12 months," "Description of Certain Indebtedness" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DIVIDEND POLICY
We have not paid any dividends since our inception and do not intend to pay
cash dividends on our capital stock in the foreseeable future. We anticipate
that we will retain all future earnings, if any, for use in our operations and
expansion of the business. In addition, the terms of the Indenture will
restrict our ability to pay dividends on, or make distributions in respect of,
our capital stock. See "Description of the Notes--Certain Covenants."
CAPITALIZATION
The following table sets forth our total cash and cash equivalents and
capitalization as of March 31, 1999. This table should be read in conjunction
with the financial statements and related notes thereto included elsewhere in
this prospectus.
[Download Table]
March 31, 1999
----------------------
(dollars in thousands)
Cash and cash equivalents............................... $ 84,343
Restricted cash and investments(1)...................... 67,121
=========
Short-term debt:
Current portion of capitalized leases................. 7,444
Current portion of notes payable...................... 8,228
---------
Total short-term debt............................... 15,672
---------
Long-term debt:
Capitalized leases.................................... 88,259
Notes payable......................................... 7,439
Senior notes due 2008(2).............................. 186,798
Contingent notes payable(3)........................... --
---------
Total long-term debt................................ 282,496
Series B redeemable preferred stock, $.001 par value;
12,648,107 shares authorized; 12,154,771 shares issued
and outstanding........................................ 53,047
---------
Stockholders' deficit:
Series A preferred stock, $.001 par value; 7,600,000
shares authorized; 7,499,900 shares issued and
outstanding.......................................... 8
Common stock, $.001 par value; 40,000,000 shares
authorized; 152,517 shares issued and outstanding.... --
Additional paid-in capital(2)......................... 22,747
Accumulated deficit................................... (149,931)
---------
Total stockholders' deficit......................... (127,176)
---------
Total capitalization................................ $ 224,039
=========
--------
(1) Reflects the remaining portion of the net proceeds from the issuance of the
Old Notes and Warrants used to purchase Pledged Securities to secure the
first six scheduled interest payments on the Notes. See "Description of the
Old Notes--Security."
(2) Senior Notes due 2008 and total stockholders' deficit reflect the value
ascribed to the Warrants of $14,144,812 which results in additional debt
discount that will be amortized as interest expense using the effective
interest method over the period that the Notes are outstanding. See "Use of
Proceeds."
(3) We have Contingent Notes Payable totaling approximately $28.7 million.
Interest on such notes accrues at a rate of prime plus 1%. We may
renegotiate the terms of the Contingent Notes Payable to incorporate a
defined maturity and payment schedule. In conjunction with such
renegotiation, we may restructure or repay all or a portion of the
Contingent Notes Payable. Any such repayment may be financed with a portion
of the net proceeds from the Offering. In the event that we are unable to
agree on a defined maturity and payment schedule, the timing of the
repayment of the Contingent Notes Payable will remain uncertain and subject
to events outside our control. See "Description of Certain Indebtedness."
29
SELECTED HISTORICAL FINANCIAL DATA
The following selected historical financial data of TVN Entertainment
Corporation as of March 31, 1998 and 1999 and for each of the three years in
the period ended March 31, 1999 have been derived from the TVN Entertainment
Corporation financial statements and notes thereto that have been audited by
PricewaterhouseCoopers LLP, independent accountants, whose report thereon is
included elsewhere in this prospectus. The following selected historical
financial data as of March 31, 1995, 1996 and 1997 and for each of the two
years in the period ended March 31, 1996 have been derived from the audited
TVN Entertainment Corporation financial statements not included herein. The
following data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
financial statements and the notes thereto and the other financial information
included elsewhere in this prospectus. The historical financial information
does not reflect the significant changes in our financial results that will
occur as a result of the ongoing rollout of our digital cable programming and
services business. A substantial portion of our revenues to date have been
generated by our C-Band HSD business. Our historical expenses have been
generated by the C-Band HSD business but have also included substantial
operating expenses, lease payments and capital investments to develop our
digital cable programming and services business, which was launched in late
1997.
[Download Table]
Year Ended March 31,
-------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- ---------
(in thousands, except per share data)
Statement of Operations
Data:
Revenue..................... $ 35,073 $ 33,001 $ 33,380 $ 30,545 $ 39,812
Operating expenses:
Cost of revenue(1)......... 29,300 28,767 18,812 20,426 31,775
Selling.................... 9,076 8,612 5,998 7,067 14,302
General and
administrative............ 3,424 3,937 5,061 5,619 8,520
Depreciation and
amortization(1)........... 425 1,384 10,534 11,984 12,253
Goodwill amortization...... (803) (803) (803) (100) 199
-------- -------- -------- -------- ---------
Total operating expenses.... 41,422 41,897 39,602 44,996 67,049
-------- -------- -------- -------- ---------
Loss from operations........ (6,349) (8,896) (6,222) (14,451) (27,237)
Interest expense............ 1,407 2,248 13,908 15,163 34,195
Interest income............. (6) (15) (63) (223) (6,472)
Other (income) and expense.. 25 (10) 54 471 (84)
-------- -------- -------- -------- ---------
Loss before extraordinary
gain....................... (7,775) (11,119) (20,121) (29,862) (54,876)
Extraordinary gain.......... -- -- 2,454 -- 1,113
-------- -------- -------- -------- ---------
Net loss.................... $ (7,775) $(11,119) $(17,667) $(29,862) $ (53,763)
======== ======== ======== ======== =========
Per Share Data:
Net loss per share
applicable to common
stockholders............... $ (11) $ (17) $ (6,001) $ (272) $ (355)
Weighted average common
shares..................... 729,180 663,443 2,944 110,237 152,517
Other Data:
EBITDA(2)................... $ (6,728) $ (8,316) $ 3,509 $ (2,567) $ (14,785)
Capital expenditures(3)..... 444 342 182 308 2,620
Ratio of earnings to fixed
charges(4)................. -- -- -- -- --
Balance Sheet Data:
Cash and cash equivalents... $ 421 $ 355 $ 765 $ 16,798 $ 84,343
Restricted cash............. -- -- -- 1,833 1,903
Restricted investments...... -- -- -- -- 65,218
Property and equipment,
net........................ 894 70,359 105,271 93,769 84,997
Total assets................ 5,321 74,637 109,072 116,740 254,725
Total debt:
Senior notes due 2008...... -- -- -- -- 186,798
Notes payable (5).......... 18,844 23,406 33,506 32,287 15,666
Capitalized leases......... -- 68,688 105,316 100,859 95,703
Series B redeemable
preferred stock............ -- -- -- 52,616 53,047
Total stockholders'
deficit.................... (28,414) (39,533) (57,187) (87,165) (127,176)
30
--------
(1) Until February 1996, transponder costs were incurred pursuant to operating
leases and were reported as cost of revenue. Since then, such lease
agreements have met the criteria for capitalization and the related costs
have been recognized as depreciation and interest expense.
(2) EBITDA consists of loss before extraordinary gain, depreciation,
amortization, net interest expense and other (income) expense. EBITDA is
provided because it is a measure commonly used in the media industry. It is
not intended to represent cash flows or results of operations in accordance
with GAAP for the periods indicated.
(3) Capital expenditures exclude acquisitions financed through notes payable
and capitalized leases of $70.5 million, $45.3 million and $175,000 in
fiscal 1996, fiscal 1997 and fiscal 1998, respectively.
(4) In calculating the ratio of earnings to fixed charges, "earnings" consist
of net loss before fixed charges. Fixed charges consist of interest
expense, including such portion of rental expense that is attributed to
interest. Our earnings were insufficient to cover fixed charges for these
periods. The amount of the deficiencies were $7.8 million, $11.1 million,
$20.1 million, $29.9 million and $54.9 million for each of the five years
in the period ended March 31, 1999.
(5) Notes Payable does not include Contingent Notes Payable totaling
approximately $28.7 million. Interest on the Contingent Notes Payable
accrues at a rate of prime plus 1%. We may renegotiate the terms of the
Contingent Notes Payable following the completion of the exchange of the
Old Notes for New Notes to incorporate a defined maturity and payment
schedule. In conjunction with such renegotiation, we may restructure or
repay all or a portion of the Contingent Notes Payable. In the event that
we are unable to agree on a defined maturity and payment schedule, the
timing of the repayment of the Contingent Notes Payable will remain
uncertain and subject to events outside our control. See "Description of
Certain Indebtedness."
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and the related notes thereto included elsewhere in this prospectus.
This discussion contains forward-looking statements the accuracy of which
involves risks and uncertainties. Our actual results could differ materially
from those anticipated in the forward-looking statements for many reasons
including, but not limited to, those discussed in "Risk Factors" and elsewhere
in this prospectus. We disclaim any obligation to update information contained
in any forward-looking statement. See "Special Note Regarding Forward-Looking
Statements."
Overview
We provide the only fully interoperable, turnkey, end-to-end digital
solution that enables virtually any cable system to deliver a wide variety of
new digital programming and services to subscribers over existing cable
infrastructure. This one-stop digital cable solution combines a digital
delivery system with programming content and support services to enable cable
operators to expand the channel capacity of their existing bandwidth and
generate new sources of revenue without the need to rewire or upgrade their
existing analog cable systems. Our DCTV Service enables cable operators to
substantially enhance the variety and quality of programming choices through a
more efficient use of their cable bandwidth by utilizing industry technology
that compresses eight or more digital channels onto one analog channel. This
allows cable operators to supplement their analog programming with a new
digital tier providing NVOD movies and PPV events, CD quality digital music, an
interactive on-screen program guide, additional basic and/or premium channels,
and information, data and text services. Our turnkey implementation services
include automated ordering and authorization, customer service and billing,
engineering and marketing support, studio licensing and fee administration and
the installation of digital head-end equipment. We also serve larger cable
systems that do not require a turnkey solution with our PPV Feeds Service that
delivers digital satellite feeds of NVOD movies and PPV events. Our long-
standing relationships with key content providers, including all the major and
leading independent film studios and sports, special event and adult content
distributors, allow us to provide a broad range of popular programming. We
launched our digital cable programming and services business in late 1997.
Our efforts have historically focused on providing national satellite PPV
and related services to C-Band HSD owners. A substantial majority of our
revenues to date have been generated by PPV fees paid by our C-Band
subscribers. During the fiscal year ended March 31, 1999, over 260,000 HSD
customers purchased PPV programming from us using their home telephone or
remote control. During 1997, GI announced the introduction of its new "4DTV"
technology and receivers, a digital/analog replacement for existing analog
C-Band receivers. Although we expected a significant portion of the existing C-
band base to continue using the larger dish and to access the new digital
channels with a 4DTV receiver, the deployment of 4DTV receivers has been slower
than projected by GI. GI plans to deploy a lower cost version of the 4DTV
receiver, which it expects will increase 4DTV penetration rates when those
receivers become available. As 4DTV penetration rates increase, and as we
transition our HSD business from analog to digital, we expect to convert nine
of our transponders on G-3 from analog to digital over a two-year period, which
will enable each transponder to carry eight or more digital channels of
programming for a total of 72 or more channels. We currently anticipate that
additional revenues will be generated by providing uplink and transponder
services to other programmers with these additional digital channels.
In January 1999, we acquired substantially all of the assets of Panda
Shopping Network, or PSN, a live televised home shopping network. Upon closing,
we placed those assets into TVN Shopping, Inc., or TSI, our wholly owned
subsidiary. We currently market on PSN modern and vintage watches, modern and
estate jewelry, gemstones and precious metal coins and are the exclusive United
States distributor of Perrelet Swiss watches. We purchase unused broadcast time
or "remnant time" from local and national broadcasters, cable networks and
cable operators to distribute the PSN service.
32
Our business plan contemplates that a substantial portion of future revenues
will be generated by our digital cable programming and services business which
includes the turnkey DCTV Service and the PPV Feeds Service. Our digital cable
programming and services were launched in late 1997 and have generated only
modest revenues to date. We believe that our future ability to service our
indebtedness and to achieve profitability is dependent upon our success in
generating substantial revenues from our digital cable programming and services
business. We expect to continue experiencing negative operating margins and
EBITDA while our DCTV Service and PPV Feeds Service are being marketed to cable
systems and their subscribers. We expect to realize improved operating margins
and EBITDA only as (i) the number of cable operators offering DCTV Service and
the number of larger cable operators offering PPV Feeds Service increases; (ii)
the number of subscribers to DCTV Service increases; and (iii) the buy rates of
PPV movies and events increase. The continued roll out of our digital cable
programming and services requires significant operating expenditures, in
particular selling expenses, a large portion of which will be expended before
any revenue is generated. We have experienced and expect to continue
experiencing negative operating cash flows and significant losses while we
continue to market our digital cable television services and until we can
establish a customer base of cable operators and their subscribers that will
generate revenue sufficient to cover our costs.
Revenue
A substantial portion of revenues to date have been generated by our C-Band
HSD business and have included programming revenues paid by subscribers to us
for PPV movies and events and other operating revenues, which are generated by
subscriber sign-up fees, the sale of subscriptions for third party programming
packages and the sale of uplink and transponder service. Our business plan
contemplates that a substantial portion of future revenues will be generated by
our digital cable programming and services which include DCTV Service and PPV
Feeds Service, as well as by our home shopping and electronic commerce products
and services.
Revenues from our digital cable programming and services are directly
related to the number of subscribers in cable systems offering either our DCTV
Service or PPV Feeds Service. Revenues are expected to be primarily derived
from monthly fees per digital tier subscriber charged to cable operators for
DCTV Services and from the sale of PPV programming to DCTV Service subscribers
and subscribers in cable systems offering the PPV Feeds Service.
DCTV Service subscriber revenue consists of a monthly fee charged per
digital subscriber to the cable operator. A portion of this fee may be rebated
to the cable operator based on achieving certain subscriber penetration rates
or for the cable system operator agreeing to carry a greater number of channels
of our PPV offerings. PPV revenues are derived from orders by DCTV Service
subscribers for PPV programming. We remit a percentage of the PPV revenue to
the cable operator and the content provider. PPV orders are generally paid for
by credit card with revenue being recognized once the programming is viewed.
Revenue from the PPV Feeds Service is based on a percentage of the cable
operators' gross revenue generated by the purchase of TVN PPV movies and events
by their subscribers. Cable operators provide us with monthly reports detailing
PPV purchases by their subscribers for the prior month and remit our share of
the revenue with such report.
We expect to realize revenue from both our turnkey DCTV Service and our PPV
Feeds Service pursuant to long-term affiliation agreements with cable
operators. We recognize revenues under our cable operator agreements only when
our DCTV Service or PPV Feeds Service is successfully integrated and operating
and customer billing commences. Accordingly, the recognition of revenues will
lag the announcement of a new cable operator affiliation agreement by at least
the time necessary to install the service (generally 90 days) and to achieve
meaningful penetration and/or PPV buy rates. Revenues are expected to increase
as our current and
33
future cable operator customers successfully deploy DCTV Service and PPV Feeds
Service and achieve higher subscriber penetration rates.
Merchandising revenue is generated primarily by sales of merchandise to
television viewers and is related to the number of subscribers in cable systems
and viewers in television broadcast areas who receive our home shopping
service. Consumers generally pay for merchandise orders by credit card with
revenue being recognized upon shipment of the goods.
In addition to revenues from DCTV Service and PPV Feeds Service, we
currently anticipate that additional revenues will be generated by providing
uplink and transponder services via the G-3 satellite transponders that we
intend to convert from analog to digital over a two year transition period.
Operating Expenses
Operating expenses consist of Cost of Revenue; Selling; General and
Administrative; Depreciation and Amortization; and Goodwill Amortization
expenses. Our historical expenses have been generated by the C-Band HSD
business but have also included substantial operating expenses, lease payments
and capital investments to develop our digital cable programming and services
business, which was launched in the third quarter of fiscal 1998.
Cost of Revenue. Cost of revenue for the DCTV Service and PPV Feeds Service
primarily consists of program license fees, payments to cable operators, uplink
and playback service fees, per-subscriber authorization fees for set-top box
access control, communications charges related to orders for PPV movies and
events by subscribers, and salaries and related expenses of engineering and
field operations personnel. License fees for PPV programming are payable to
content providers under the terms of our license agreements and generally vary
between 30% and 55% of revenue depending on the type of content. Payments to
cable operators represent the percentage of PPV revenue shared with DCTV
Service affiliates and vary by individual agreement. Uplink and playback
services are purchased from an outside vendor pursuant to an agreement that
provides for a flat monthly fee. With respect to set-top box authorization, a
fee to maintain access control per set-top box is payable to the licensor of
the operative software pursuant to its license agreement with us. The majority
of cost of revenue for the DCTV Service and PPV Feeds Service will vary
directly with revenues (i) as subscriber PPV buy rates increase thereby causing
us to incur program license fees and access control charges related to orders
for PPV movies and events; (ii) as we are required to hire additional
engineering and field operations personnel in connection with the growth of our
digital cable programming and services business; and (iii) according to the mix
of services provided and their respective costs.
Cost of revenue for the home shopping service primarily consist of the cost
of goods sold, fulfillment costs and the cost of airtime purchased from cable
operators, cable networks and broadcast networks. The cost of goods sold are
generally between 50% and 60% of the retail price charged. Fulfillment costs
include packaging and shipping costs. The cost of airtime varies by hour,
averaging approximately $0.07 per subscriber per hour. The majority of cost of
revenue for the home shopping service will vary directly with revenue (i) as we
increase airtime purchases to achieve greater distribution, (ii) as more
consumers purchase our products, and (iii) according to the mix of product and
airtime and their respective costs.
Selling. Selling expenses for DCTV Service and PPV Feeds Service consist of
customer acquisition costs, billing expenses, customer service expenses, and
salaries and related expenses of our marketing personnel. Customer acquisition
costs include expenses associated with our marketing campaign to cable systems,
co-op advertising and marketing efforts with affiliated cable systems, rebates
to cable operators based on the achievement of penetration milestones and
advertising. These expenses are required to acquire new customers and related
revenues but are discretionary and therefore can be increased or decreased by
management in accordance with the anticipated growth in new business and
revenue. We expect to incur significant customer acquisition costs as we market
our turnkey DCTV Service and PPV Feeds Service.
34
Implementing our DCTV Service requires cable operators to acquire digital
head-end and set-top box equipment. The new digital receiving equipment
required at each head-end to receive DCTV Service costs the operator
approximately $50,000. For systems serving in excess of 5,000 subscribers, TVN
generally agrees to make monthly financing payments to the operator which
approximate the operator's monthly financing payments on 80% of the digital
head-end equipment cost for so long as the affiliation agreement remains in
effect.
Billing expenses consist of subscriber maintenance fees and remittance
processing fees and vary directly with revenue. Customer service expenses
consist of payroll for call center representatives and telephone charges for
customer calls. To the extent that our subscriber base increases or decreases,
the required costs to support such subscribers would correspondingly change. We
expect to continue to incur significant customer service expenses to support
our current and future subscribers.
Selling expenses for the home shopping service consist of customer service
expenses and remittance processing costs and generally vary directly with
revenue.
General and Administrative. General and administrative expenses consist of
executive and administrative staff compensation, office expenses and
professional fees. General and administrative expenses cover a broad range of
the costs of our operations including corporate functions such as
administration, finance, legal, human resources and facilities. We anticipate
needing additional office facilities in order to support the expected growth in
demand for our services from cable operators and subscribers. We anticipate
that we can locate and acquire such additional space when and as it is needed
although we cannot be certain that such space can be acquired on terms
acceptable to us.
Depreciation and Amortization. Depreciation and amortization expenses
consist of depreciation on our capitalized transponder leases and depreciation
on equipment necessary for our digital services and are fixed with respect to
revenue. Generally, depreciation is calculated using the straight-line method
over the useful lives of the associated asset, which range from 5 to 10 years.
Goodwill Amortization. Goodwill amortization includes the amortization of
negative goodwill generated by the acquisition of our company from our
predecessor limited partnership. As of March 31, 1998, all negative goodwill
had been fully amortized. Goodwill amortization also includes the amortization
of goodwill generated by our acquisition of the assets of PSN. We have
Contingent Notes Payable totaling approximately $28.7 million. The Contingent
Notes Payable do not have a defined maturity or repayment schedule. The
resolution of this contingency and the recognition of the related liability is
anticipated to generate approximately $28.7 million in goodwill and result in
annual amortization expenses recognized over the estimated life of the goodwill
to be determined at such time.
Interest Income and Expense. Interest income will continue to be earned by
us from investing the proceeds from the issuance of equity and debt securities
until such proceeds are needed to fund the operating expenditures, in
particular selling expenses, of our business in connection with the continued
roll out of our digital cable programming and services business. Interest
income is expected to be highly variable over time. Interest expense will
consist primarily of interest accruing under the notes, capitalized leases and
other outstanding indebtedness.
Income Taxes and Net Operating Loss Carryforwards
As a result of projected operating losses and the potential inability to
recognize a benefit for deferred income tax assets, we do not foresee recording
a provision for income tax expense in the near term.
As of March 31, 1999, we had federal and state net operating loss
carryforwards ("NOLs") of approximately $141 million and $57 million,
respectively, which expire at various times in varying amounts
35
beginning in the years 2004 and 2000, respectively. However, due to the
provisions of Section 382, Section 1502 and certain other provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), the utilization of a
portion of the NOLs may be limited. In addition, we are also subject to certain
state income tax provisions which may also limit the utilization of NOLs for
state income tax purposes.
Section 382 of the Code provides annual restrictions on the use of NOLs, as
well as other tax attributes, following significant changes in ownership of a
corporation's stock, as defined in the Code. Investors are cautioned that
future events beyond our control could reduce or eliminate our ability to
utilize the tax benefits of our NOLs. Future ownership changes under Section
382 could further restrict the use of the NOLs. In addition, the Section 382
limitation could reduce available NOLs to zero if we fail to satisfy the
continuity of business enterprise requirement for the two-year period following
an ownership change.
Results of Operations
The table below sets forth for the periods indicated certain data regarding
expenses expressed as a percentage of total revenues:
[Download Table]
Year Ended March 31,
-------------------------
1997 1998 1999
------ ------ -------
Revenue................... 100.0 % 100.0 % 100.0 %
Operating expenses:
Cost of revenue......... 56.4 66.9 79.8
Selling................. 18.0 23.1 35.9
General and
administrative......... 15.2 18.4 21.4
Depreciation and
amortization........... 31.6 39.2 30.8
Goodwill amortization... (2.4) (0.3) .5
------ ------ -------
Total operating expenses.. 118.6 147.3 168.4
------ ------ -------
Loss from operations...... (18.6) (47.3) (68.4)
Interest expense.......... 41.7 49.6 85.9
Interest income........... (0.2) (0.7) (16.3)
Other (income) and
expense.................. 0.2 1.5 (.2)
------ ------ -------
Loss before extraordinary
gain..................... (60.3) (97.8) (137.8)
Extraordinary gain........ 7.4 0.0 2.8
------ ------ -------
Net loss.................. (52.9)% (97.8)% (135.0)%
====== ====== =======
Fiscal Year Ended March 31, 1999 Compared with Fiscal Year Ended March 31,
1998
Revenue. Total revenue increased $9.3 million, or 30.3%, to $39.8 million in
the fiscal year ended March 31, 1999 from $30.5 million in the fiscal year
ended March 31, 1998. The increase in total revenue was primarily attributable
to $10.3 million in revenues generated in fiscal 1999 by the Marquee Mix
Service, $3.1 million in revenues generated by PSN and $1.2 million generated
by the sale of transponder time to third parties. The Marquee Mix Service had
not launched and PSN had not been acquired prior to the end of fiscal 1998. The
increase was offset by a $5.2 million decrease in PPV programming revenue and
programming package revenues generated by our HSD subscribers. The decrease is
primarily attributable to a decline in the number of active HSD subscribers.
Operating Expenses
Cost of Revenue. Cost of revenue increased $11.3 million, or 55.6%, to $31.8
million in fiscal 1999 from $20.4 million in fiscal 1998 and, as a percentage
of revenue, increased to 79.8% in fiscal 1999 from 66.9% in fiscal 1998. The
increase as a percentage of revenue is primarily due to an $8.8 million
increase in studio license fees generated by our Marquee Mix Service and $2.6
million in costs incurred by PSN, both of which commenced in fiscal 1999. The
increase was also due to increases in the cost of uplink
36
and playback services and additional operations payroll resulting from the
launch of our digital cable programming and services, partially offset by a
decrease resulting from non-recurring transponder costs incurred in fiscal
1998.
Selling. Selling expenses increased $7.2 million, or 102.4%, to $14.3
million in fiscal 1999 from $7.1 million in fiscal 1998 and, as a percentage of
revenue, increased to 35.9% in fiscal 1999 from 23.1% in fiscal 1998. The
increase as a percentage of revenue is primarily due to an increase in
advertising agency fees, trade advertising, on-air marketing costs, and sales
department payroll, all associated with the roll out of our digital cable
programming and services.
General and Administrative. General and administrative expenses increased
$2.9 million, or 51.6%, to $8.5 million in fiscal 1999 from $5.6 million in
fiscal 1998 and, as a percentage of revenue, increased to 21.4% in fiscal 1999
from 18.4% in fiscal 1998. The increase as a percentage of revenue is primarily
due to additional payroll costs associated with the infrastructure required to
support our digital cable programming and services, costs incurred by PSN and
to a non-recurring period of free rent in fiscal 1998.
Depreciation and Amortization. Depreciation and amortization increased
$268,000 or 2.2%, to $12.3 million in fiscal 1999 from $12.0 million in fiscal
1998. The increase reflects depreciation expense recognized on assets acquired
in fiscal 1999.
Goodwill Amortization. We recognized approximately $200,000 in goodwill
amortization associated with the acquisition of PSN in fiscal 1999. Negative
goodwill arising from the acquisition of our company from our predecessor
limited partnership was fully amortized in fiscal 1998.
Interest Expense and Interest Income. Interest expense increased $19.0
million, or 125.5%, to $34.2 million in fiscal 1999 from $15.2 million in
fiscal 1998. The increase reflects interest expense recognized on the Notes
that were issued during fiscal 1999. Interest income increased to $6.5 million
in fiscal 1999 from $223,000 in fiscal 1998. The increase reflects interest
earned on the invested proceeds from the Notes.
Provision for Income Taxes. As a result of net losses and our inability to
recognize a benefit for our deferred income tax assets, we did not record a
provision for income taxes in fiscal 1999 or fiscal 1998.
Extraordinary Gain. During fiscal 1999, $1.1 million of our obligation for
transponder service was forgiven upon the early extinguishment of an $8.1
million note payable previously due December 31, 1998. No extraordinary items
were recognized by us in fiscal 1998.
Fiscal Year Ended March 31, 1998 Compared with Fiscal Year Ended March 31,
1997
Revenue. Total revenues, which consist of programming and other operating
revenues, decreased $2.9 million, or 8.5%, to $30.5 million in fiscal 1998 from
$33.4 million in fiscal 1997. Programming revenues decreased $1.5 million to
$18.9 million in 1998 from $20.4 million in 1997, which was primarily
attributable to a decrease in the number of active HSD subscribers during
fiscal 1998. Other operating revenues decreased $1.4 million to $11.6 million
in fiscal 1998 from $13.0 million in fiscal 1997 and was primarily attributable
to a decline in one-time subscription fees, merchandising and third party
package revenue offset by a slight increase in the revenue generated by the
sale of uplink and transponder service.
Operating Expenses
Cost of Revenue. Cost of revenue increased $1.6 million or 8.6%, to $20.4
million in fiscal 1998 from $18.8 million in fiscal 1997 and, as a percentage
of revenue, increased to 66.9% for fiscal 1998 from 56.4% in fiscal 1997. The
increase as a percentage of revenue is primarily attributable to an increase in
the cost of uplink and playback services and the amortization of prepaid access
control fees resulting from the launch of our digital cable programming and
services. These increases were partially offset by a decrease in transponder
costs resulting from the termination in fiscal 1998 of certain transponder
leases that were not renewed.
37
Selling. Selling expenses increased $1.1 million, or 17.8%, to $7.1 million
in fiscal 1998 from $6.0 million in fiscal 1997 and, as a percentage of
revenue, increased to 23.1% in fiscal 1998 from 18.0% in fiscal 1997. The
increase as a percentage of revenue is primarily due to an increase in
advertising agency fees and sales department payroll associated with the launch
of our digital cable programming and services as well as an increase in on-air
production costs and a marketing promotion, both targeted toward the HSD
subscriber base. These increases were partially offset by a decrease in bad
debt expense.
General and Administrative. General and administrative expenses increased
$558,000, or 11.0%, to $5.6 million in fiscal 1998 from $5.1 million in fiscal
1997 and, as a percentage of revenue, increased to 18.4% in 1998 from 15.2% in
fiscal 1997. The increase as a percentage of revenue is primarily due to an
increase in payroll costs necessary to accommodate the staffing requirements of
our digital cable programming and services.
Depreciation and Amortization. Depreciation and amortization increased $1.5
million, or 13.8%, to $12.0 million in fiscal 1998 from $10.5 million in fiscal
1997. The increase reflects a full year's depreciation of the G-9 transponders
in fiscal 1998 compared to only nine months' depreciation in 1997; G-9 was
capitalized in July 1996.
Goodwill Amortization. Negative goodwill amortization decreased $703,000, or
87.6% to $100,000 in fiscal 1998 from $803,000 in fiscal 1997. The decrease is
due to the amortization during fiscal 1998 of the remaining negative goodwill
balance over a two month period compared to a full year's amortization of
negative goodwill in fiscal 1997.
Interest Expense. Interest expense increased $1.3 million, or 9.0%, to $15.2
million in fiscal 1998 from $13.9 million in fiscal 1997. The increase reflects
the recognition of twelve months interest on the G-9 transponder lease in
fiscal 1998 compared to only nine months of interest in fiscal 1997; G-9 was
capitalized in July 1996. The increase was also attributable to the accrual of
twelve months of interest in fiscal 1998 on additional indebtedness that was
incurred incrementally over the last six months of fiscal 1997. Interest income
increased $160,000 or 254%, to $223,000 in fiscal 1998 from $63,000 in fiscal
1997.
Provision for Income Taxes. As a result of operating losses and our
inability to recognize a benefit for our deferred income tax assets, we did not
record a provision for income taxes in fiscal 1998 and fiscal 1997.
Extraordinary Gain. During fiscal 1997, a portion of our obligation for
consumer phone charges and transaction processing service was forgiven in
consideration for our agreement to terminate the original service contract. No
extraordinary gains were realized by us in fiscal 1998.
Liquidity and Capital Resources
Our growth has been funded through a combination of equity, debt and lease
financing. As of March 31, 1999, we had current assets of $117.3 million,
including $84.3 million of cash and cash equivalents and current liabilities of
$46.4 million, resulting in working capital of $70.9 million. We invest excess
funds in short-term, interest bearing investment grade securities until such
funds are needed to fund the capital expenditure and operating needs of our
business.
We believe that our future ability to service our indebtedness and to
achieve profitability will be dependent upon our ability to generate
substantial revenues from our digital cable programming and services and home
shopping services. We expect to continue to experience negative operating
margins and EBITDA while our DCTV Service and PPV Feeds Service are being
marketed to cable operators and their subscribers. The continued roll out of
our digital cable programming and services requires significant operating
expenditures, in particular selling expenses, a large portion of which will be
expended before any revenue is generated. We have experienced and expect to
continue to experience, negative cash flows and significant losses while we
continue to market our digital cable programming and services and establish a
sufficient revenue generating customer base of cable operators and their
subscribers. We cannot be certain that we will be able to successfully roll out
our digital cable television service or establish such a customer base. See
"Risk Factors--We are highly leveraged."
38
Our cash on hand and amounts expected to be available through vendor
financing arrangements will provide sufficient funds necessary for us to expand
our DCTV Service and PPV Feeds Service as currently planned and to fund our
operating deficits for at least the next 12 months. We have Contingent Notes
Payable totaling approximately $28.7 million. The Contingent Notes Payable do
not have a defined maturity or repayment schedule. These obligations are
payable only from Available Cash Flow, as defined in the Restated Limited
Partnership Agreement dated March 7, 1991. These Contingent Notes Payable have
not been recorded as a liability in accordance with Accounting Principles Board
Opinion No. 16, "Business Combinations," because they represent contingent
consideration related to the acquisition of net assets and the outcome of the
contingency is not determinable beyond a reasonable doubt. We may renegotiate
the terms of the Contingent Notes Payable following the completion of the
exchange of the Old Notes for New Notes to incorporate a defined maturity and
payment schedule. In conjunction with such renegotiation, we may restructure or
repay all or a portion of the Contingent Notes Payable. In the event that we
are unable to agree on a defined maturity and payment schedule, the timing of
the repayment of the Contingent Notes Payable will remain uncertain and subject
to events outside our control. We will record these notes payable as
liabilities and recognize related goodwill when the contingency is resolved.
See "Risk Factors--We have incurred net losses in every fiscal year since
inception" and "Risk Factors--We anticipate that our existing capital and cash
from operations will be adequate to satisfy our capital requirements for the
next 12 months" and "Description of Certain Indebtedness."
Cash Provided By/Used For Operating Activities
Our operating activities used $2.9 million, $28.1 million and $35.4 million
in fiscal 1997, fiscal 1998 and fiscal 1999, respectively. Cash used for
operations is primarily due to net losses of $17.7 million, $29.9 million and
$53.8 million in fiscal 1997, fiscal 1998 and fiscal 1999, respectively and
increases in accounts receivable, which are partially offset by non-cash
expenses, such as depreciation and amortization, and other changes in working
capital items such as accounts payable, accrued liabilities and accrued
interest. We expect to continue to generate negative cash flow from operating
activities while we accelerate the marketing and deployment of our DCTV Service
and PPV Feeds Service. Consequently, we do not anticipate that cash provided by
operations will be sufficient to fund such marketing and deployment and other
costs of operations in the near term.
Cash Used For Investing Activities
Cash used for investing activities was $169,000, $308,000 and $68.3 million
in fiscal 1997, fiscal 1998 and fiscal 1999, respectively. Cash used for
investing activities in fiscal 1999 consists primarily of investments in
marketable securities and the proceeds of such investments to secure the first
six interest payments on the Notes. Our capital expenditures (including assets
acquired under capitalized leases and through the issuance of debt) were $45.5
million, $482,000 and $2.6 million for fiscal 1997, fiscal 1998 and fiscal
1999, respectively. We expect to incur approximately $4.5 million in capital
expenditures in fiscal 2000.
Cash Provided By/Used For Financing Activities
Cash provided by financing activities was $3.5 million, $44.4 million and
$171.3 million in fiscal 1997, fiscal 1998 and fiscal 1999, respectively. Cash
provided by financing activities includes the proceeds of equity financings and
debt arrangements that we entered into. During fiscal 1997, we received $8.0
million in proceeds from debt financings from a vendor and certain of our
stockholders. During fiscal 1998, we received $45.0 million in proceeds from an
equity financing made by PGI II, an affiliate of the Placement Agent, and
$4.5 million in proceeds from debt financings from a vendor and certain of our
stockholders. During fiscal 1999, we received $193.3 million in net proceeds
from the sale of the Notes and Warrants. We are required to make payments on
notes payable and capitalized leases of $26.8 million, $21.1 million, and
$22.0 million during fiscal 2000, fiscal 2001 and fiscal 2002, respectively,
and $89.9 million thereafter.
Year 2000 Compliance
Many computer systems and software and electronic products are coded to
accept only two-digit entries in the date code field. These code fields will
need to accept four digit entries to distinguish 21st century dates
39
from 20th century dates. As a result, computer systems and software ("IT
Systems") and other property and equipment not directly associated with
information and billing systems ("Non-IT Systems"), such as phones, and other
office equipment used by many companies, including us, may need to be upgraded,
repaired or replaced to comply with such "Year 2000" requirements.
We have conducted an internal review of most of our internal corporate
headquarters IT Systems, including finance and operations. We have contacted
most of the vendors of our internal corporate headquarters IT Systems to
determine potential exposure to Year 2000 issues and have obtained letters from
most of such vendors assuring that they will be Year 2000 compliant by the Year
2000. Although we have determined that most of our principal internal corporate
headquarters IT Systems are Year 2000 compliant, we have also determined that
certain other such internal systems, including our accounting software, are not
Year 2000 compliant. We have purchased accounting software that is Year 2000
compliant and expect that our conversion to that software will be complete by
July 1, 1999. We are in the process of upgrading other and/or replacing such
internal systems to ensure their compliance by the Year 2000.
The Company has appointed personnel to oversee Year 2000 issues. These
employees are reviewing all IT Systems and Non-IT Systems that have not
previously been determined to be Year 2000 compliant and will attempt to
identify and implement solutions to ensure such compliance. To date, we have
not incurred significant incremental costs to remediate our Year 2000 issues as
the majority our efforts have involved an allocation of internal resources,
primarily existing personnel and the upgrade of systems and equipment made in
the ordinary course of business. We presently estimate that the total
additional cost for external resources will be immaterial. We derived these
estimates by utilizing numerous assumptions, including the assumption that we
have already identified our most significant Year 2000 issues and that the Year
2000 compliance plans of our third-party suppliers and cable operator
affiliates which currently deploy our DCTV Service, PPV Feeds Service and home
shopping services will be completed in a timely manner without cost to us.
However, these assumptions may not be accurate, and actual results could differ
materially from those anticipated.
We have been informed by key suppliers and cable operator affiliates that
currently deploy our DCTV Service, PPV Feeds Service or home shopping service
that such suppliers and cable operator affiliates are currently, or will be
Year 2000 compliant by the Year 2000. Our uplink and playback services
provider, 4MC, is investing in a state of the art facility that will be Year
2000 compliant. It expects to complete the buildout of this facility by
November 1999. Our transponder service provider, PanAmSat Corporation has
provided us with its Year 2000 compliance representation. Our provider of
digital compression and encryption technology has also provided us with
multiple statements with respect to Year 2000 compliance. We are commencing
independent testing to verify the progress and validate the representations of
our key suppliers and plan to hire additional personnel in June 1999 that will
be dedicated to this task. We have been informed that the companies that
perform billing services for certain of our cable operator affiliates may not
be fully Year 2000 compliant. We understand that these companies have devoted
resources to becoming Year 2000 compliant.
Any failure of these third parties to timely achieve Year 2000 compliance
could have a material adverse effect on our operating results, financial
condition and our ability to achieve sufficient cash flow to service our
indebtedness, including the New Notes.We could be affected through disruptions
in the operation of the enterprises with which we interact or from general
widespread problems or an economic crisis resulting from noncompliant Year 2000
systems. Despite our efforts to address the Year 2000 effect on our internal
systems and business operations, such effect could result in a material
disruption of our business or have a material adverse effect on our business,
operating results and financial condition and our ability to achieve sufficient
cash flow to service our indebtedness, including the New Notes. Should certain
of our internal or external systems fail to be Year 2000 compliant, we believe
that other third party suppliers who are Year 2000 compliant will be able to
replicate such systems. However, there can be no assurance that such suppliers
will be available to provide such services in a timely manner or that they will
be able to do so on terms acceptable to us.
40
BUSINESS
TVN Entertainment Corporation
Our company provides the only fully interoperable, turnkey, end-to-end
digital solution that enables virtually any cable system to deliver a wide
variety of new digital television programming and services to subscribers over
existing cable infrastructure. In response to increasing consumer demand for
additional entertainment programming and services, the cable industry has begun
a large scale conversion from analog to digital transmission, facilitated by
recent advances in digital compression and encryption technology. In late 1997,
we launched TVN Digital Cable Television, also known as our DCTV Service. This
"one-stop" digital cable solution combines a digital delivery system with
programming content and support services to enable cable operators to expand
the channel capacity of their existing bandwidth and generate new sources of
revenue without the need to rewire or significantly upgrade their existing
analog cable systems.
Our DCTV Service enables cable operators to substantially enhance the
variety and quality of programming choices through a more efficient use of
their cable bandwidth by utilizing recent industry technology that compresses
eight or more digital channels onto one analog channel. This allows cable
operators to supplement their analog programming with:
. a new digital tier providing near-video-on-demand, or NVOD, movies and
pay-per-view, or PPV, events;
. CD quality digital music;
. an interactive on-screen program guide;
. additional basic and/or premium channels; and
. information, data and text services.
Our long-standing relationships with key content providers, including all
the major and leading independent film studios and sports, special event and
adult content distributors, allow us to provide a broad range of popular
programming. Our turnkey implementation services include:
. automated ordering and authorization;
. customer service and billing;
. engineering and marketing support;
. studio licensing and fee administration; and
. the installation of digital head-end equipment.
We believe our turnkey digital solution is particularly attractive to
smaller and medium size cable systems, including smaller, non-clustered systems
of multiple system operators, or MSOs, which may lack the scale, funding,
technical or administrative resources to economically implement a digital tier
on their own. These cable systems currently serve approximately one-third of
the estimated 65 million cable television subscribers. We also serve larger
cable systems that do not require a turnkey solution by delivering our digital
satellite feeds of NVOD movies and PPV events, know as our PPV Feeds Service.
We transmit programming via 15 transponders on two well located PanAmSat
satellites. We lease fourteen of these transponders on a long-term basis.
Digital technology adds several important advantages to analog cable
systems, including:
. increased channel capacity;
. high quality video and audio signals; and
. remote authorization of subscribers for encrypted programming, known as
"addressability".
41
Demand for the breadth and quality of digital programming has fueled the
dramatic growth of the direct broadcast satellite, or DBS, industry. DBS has
been the principal vehicle available to consumers who want access to these
digital services. We believe that, given a choice, most home television viewers
will choose to receive PPV and other enhanced digital services via cable rather
than DBS because digital cable offers several key advantages including:
. digital television without the need for consumers to incur the up-front
costs of purchasing and installing satellite dish equipment;
. a broadband distribution path for a variety of future interactive
applications, such as high-speed Internet connectivity; and
. local broadcast television stations currently unavailable through DBS.
Technology advances in the cable industry have made digital transmission
possible over cable's existing analog infrastructure without requiring time
consuming and expensive upgrades to the cable plant. By 1997, General
Instrument, or GI, a leading cable equipment manufacturer, working with
CableLabs, a research and development entity funded by a consortium of cable
operators, including industry leader TCI, had successfully developed new
digital compression and encryption technology, known as DCII Technology, and
related equipment that enables cable operators to expand the channel capacity
of their existing bandwidth and add digital programming. TCI is at the
forefront in implementing DCII Technology and has installed digital equipment
in many of their owned and affiliated systems. Our one-stop DCTV Service allows
smaller and medium size cable systems to implement this digital cable approach.
Our company was founded in 1987 by current Chairman and Chief Executive
Officer, Stuart Z. Levin, to provide satellite delivered PPV movies and events
to owners of large (six to ten-foot) C-Band home satellite dishes, or HSDs. As
of March 31, 1999, we maintained a database of over 800,000 HSD subscribers,
more than 260,000 of whom purchased programming from us during the fiscal year
ended March 31, 1999. In fiscal 1998, we received a $45 million equity
investment from Princes Gate Investors II, L.P. and certain of its affiliates,
known collectively as PGI II, an affiliate of Morgan Stanley. In fiscal 1998,
we also and hired our current President and Chief Operating Officer, James B.
Ramo, formerly Executive Vice President of DirecTV, the leading provider of DBS
services, to implement our digital cable strategy.
The TVN Digital Solution
Our digital solution offers two types of service: (i) DCTV Service targeted
at smaller and medium size cable systems and (ii) PPV Feeds Service targeted at
larger cable systems.
DCTV Service
Our turnkey solution combines a digital delivery system with programming
content and support services to enable cable operators to expand the channel
capacity of their existing bandwidth and generate new sources of revenue
without undertaking a substantial and expensive upgrade of their cable plant.
DCTV Service can expand the number of video channels delivered by a typical
smaller cable system from 60 analog video channels to over 100 combined digital
and analog channels for digital subscribers. Many operators also gain the
ability to remotely address set-top boxes for the first time.
We believe our turnkey solution provides an attractive offering for cable
subscribers. The incremental price to the subscriber for DCTV Service is
determined by the cable operator and is generally $10.99 per month. PPV movies
typically cost $3.99 each and PPV events are priced individually. A typical
DCTV Service digital tier includes:
. 32 digital channels of NVOD movies and PPV events;
. a channel showing previews of currently offered films and coming
attractions;
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.adult programming;
. 40 CD quality digital music channels from DMX;
. the TV Guide interactive on-screen program guide which displays
comprehensive program listings (including each system's analog channels
and local broadcasts) and provides parental control;
. new digital basic and/or multiplexed premium channels;
. additional information, data and text services; and
. continued access to the system's analog cable and local channels.
We believe our turnkey solution is particularly attractive to smaller and
medium size cable systems, including smaller, non-clustered systems of MSOs,
which may lack the scale, funding, technical or administrative resources to
economically implement a digital tier on their own. Turnkey support services
provided for the cable operator include:
. automated ordering and authorization;
. customer service and billing;
. engineering and marketing support;
. studio licensing and fee administration; and
. the installation of digital head-end equipment.
The typical $10.99 monthly fee charged by the cable operator to subscribers
for the digital tier of programming generally more than covers the monthly DCTV
Service fee paid to us by the cable operator and the amortized cost of the
digital set-top box. PPV revenues generated from our NVOD movies and PPV events
are shared by us and the cable operator based on a percentage of the PPV
revenue. We believe that cable operators can achieve a meaningful increase in
revenue and earn an attractive return on investment by providing DCTV Service.
PPV Feeds Service
Our PPV Feeds Service transmits to cable systems the same digital NVOD
movies and PPV events included in DCTV Service. PPV Feeds Service allows cable
systems to receive content from a single source of distribution and avoid the
significant capital investment otherwise required for automated playback,
storage, scheduling and delivery of PPV programming. Cable operators receiving
PPV Feeds Service also benefit from our expertise in selecting and scheduling
PPV programming to maximize buy rates, based on our experience in delivering
PPV movies and events to the C-Band HSD market since 1991. We receive from the
cable operator a percentage of the revenue generated by cable subscribers'
purchases of TVN PPV movies and events. Our PPV Feeds Service is a highly
attractive opportunity because it generates recurring revenue and cash flow at
little incremental cost.
In addition, we also transmit three digital channels of PPV hit movies and
events that cable operators can receive in digital format at the system head-
end and then convert to analog format for delivery to their addressable
subscribers, known as our Marquee Mix Service. This service provides a
replacement for the PPV programming offered by Request Television, which ceased
operations on June 30, 1998. This service also preserves analog channels for
PPV that can be used in the future by cable operators to implement DCTV Service
or PPV Feeds Service. For Marquee Mix Service, we receive from the cable
operator a percentage of the revenue generated by cable subscribers' purchases
of TVN PPV movies and events.
Recent Cable Operator Affiliations
Following the completion of comprehensive operational testing and marketing
trials in late 1997, we formally launched our digital cable programming and
services. As of May 15, 1999, we have entered into
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agreements with or have received commitments from 63 cable operators for DCTV
Service, 5 cable operators for PPV Feeds Service and 17 cable operators for
Marquee Mix Service, as summarized below. In addition, we are in active
negotiations with 42 cable operators whose systems serve over 650,000
subscribers, approximately 365,000 for DCTV Service and approximately 285,000
for PPV Feeds Service.
DCTV Service
Currently, our DCTV Service is offered by:
. Five cable operator affiliates with systems serving over 20,000
subscribers, for an aggregate of 168,500 subscribers with access to DCTV
Service, including 38,000 in Comcast's Huntsville, Alabama system,
34,000 in various CableAmerica systems, and 93,000 in various WEHCO
systems;
. Twelve cable operator affiliates with systems serving 10,000 to 20,000
subscribers for an aggregate of 164,500 subscribers with access to DCTV
Service; and
. Forty-five cable operator affiliates with systems serving fewer than
10,000 subscribers, for an aggregate of 125,000 subscribers with access
to DCTV Service.
PPV Feeds Service
Currently, our PPV Feeds Service is offered by:
. Jones Cable, an affiliate with systems serving over 90,000 subscribers;
and
. Four cable operator affiliates with systems serving fewer than 20,000
subscribers, for an aggregate of 13,000 subscribers with access to PPV
Feeds Service
Marquee Mix Service
Currently, our Marquee Mix Service is offered by:
. Three cable operator affiliates with systems serving over 20,000
subscribers, for an aggregate of 2.3 million subscribers with access to
Marquee Mix Service, including 2.2 million Cablevision systems
subscribers;
. Two cable operator affiliates with systems serving 10,000 to 20,000
subscribers, for an aggregate of 37,000 subscribers with access to
Marquee Mix Service, and
. Twelve cable operator affiliates with systems serving fewer than 10,000
subscribers, for an aggregate of 21,900 subscribers with access to
Marquee Mix Service.
We have recently created a customized digital tier of programming for
certain Comcast cable systems that carry Viewer's Choice PPV movie service. Our
customized tier includes PPV movies and events differentiated from those
offered by Viewer's Choice, as well as the Spice and Playboy Channels. Comcast
will offer this customized digital tier of programming in seven of its systems
that serve an aggregate of 1.8 million subscribers who will have access to this
tier of service.
Our Digital Cable Strategy
Our strategy is to be the leading independent provider of digital PPV
programming and services to cable operators. Our digital cable strategy
includes the following key elements:
Expand Cable Operator Base to Maximize Potential Digital Subscribers. To
capitalize on being first to market with an economically viable comprehensive
digital cable solution, our strategy is to enter into long-term affiliation
agreements with cable operators to maximize the number of subscribers who have
access to our digital cable programming and services. Our digital solution
offers cable operators additional revenue sources at modest incremental cost
and substantially enhanced programming and services with which to attract and
retain subscribers who might otherwise seek alternative sources of digital
programming.
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Drive Subscriber Penetration by Providing Superior and Convenient
Service. Our strategy is to maximize subscriber penetration by delivering
conveniently accessed, superior digital services such as NVOD hit movies and
PPV events, CD quality digital music and information, data and text services.
By using our digital NVOD service, cable subscribers can avoid trips to a video
rental store, the risk that popular movie rentals are unavailable, late return
fees and tape rewind charges. Our digital NVOD service also provides customers
with flexibility in selecting from a wide range of popular movies and start
times and other entertainment offerings versus traditional analog PPV services.
Additional advantages for consumers include an on-screen programming and
navigational guide with parental control, all accessed by a universal remote
control. The high quality digital pictures and CD quality digital sound provide
a significantly enhanced viewing experience.
Maximize PPV Buy Rates. Based on our experience in providing PPV to the C-
Band HSD market since 1991, we select movie titles and events and schedule them
to maximize PPV buy rates. We have learned that the convenience of optimally
scheduled start times and automated telephone number identification ordering,
known as ANI, or impulse PPV ordering, known as IPPV (i.e. ordering via the
set-top remote) can significantly increase PPV buy rates. Our NVOD schedule
offers 32 channels of PPV movies with hit titles conveniently starting
approximately every 30 minutes. The combination of NVOD with ANI or IPPV
ordering allows PPV to be an impulse buy which increases buy rates. Industry
data indicates that NVOD programming is capturing a growing share of the home
video rental market. We believe that, on average, cable operators offering our
NVOD digital programming have the potential to generate PPV buy rates
comparable to those of DirecTV, which approximate two buys per subscriber per
month. Our newly developed VOD service is expected to increase PPV buy rates.
We are currently conducting an initial field trial of our VOD service in one of
our smaller affiliate's system.
Capitalize on Long-Standing Relationships with Content Providers. We have
long-standing relationships with all the major and leading independent film
studios and key sports, special event and adult programming distributors. We
believe that our proven national distribution channel makes us a very
attractive customer for content providers. We believe that the breadth and
quality of our PPV programming are valuable to cable operators because together
they can lead to growth in penetration and buy rates.
Expand PPV Feeds Service. We are one of only two companies offering
satellite delivered digital feeds of NVOD hit movies and PPV events to cable
operators. We market our PPV Feeds Service to larger cable systems that do not
require turnkey services but can benefit from our single source distribution of
PPV content. Our PPV Feeds Service allows cable systems to avoid the
significant capital investment required for playback, storage, scheduling and
delivery of digital PPV programming. The PPV Feeds Service generates a highly
attractive and recurring cash flow stream at little incremental cost to us. For
this service, we receive a percentage of the operators' gross PPV revenues from
subscribers.
Leverage Core Competencies into New Internet and Interactive Services. Our
strategy is to remain at the forefront of implementing the newest technologies
and systems that enable the delivery of digital programming and services to
cable systems. Our digital delivery system can also be enhanced to provide
additional programming and interactive services via the Internet as they become
technologically feasible and economically attractive. These services may
include:
. high speed Internet connectivity;
. IT telephone and ISP services;
. in-home shopping, banking and other consumer oriented and informational
services; and
. high definition television, or HDTV.
For example, we have entered into an agreement with Citibank to jointly
develop an interface for the delivery of home banking, electronic commerce and
transactional services over our digital cable platform to the set-top box.
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Products, Markets and Customers
DCTV Service
Our DCTV Service combines a digital delivery system with programming content
and support services to enable cable operators to offer a new digital tier to
their subscribers. DCTV Service provides cable operators with:
Content. A typical DCTV Service digital tier includes:
. 32 digital channels of NVOD movies and PPV events;
. a channel showing previews of currently offered films and coming
attractions;
. adult programming;
. 40 CD quality digital music channels from DMX(R);
. the TV Guide interactive on-screen program guide which displays
comprehensive program listings (including local broadcasts) and provides
parental control for all channels available on the system;
. new digital basic and/or multiplexed premium channels;
. additional information, data and text services; and
. continued access to the system's analog cable and local channels.
Automated Ordering and Authorization. We manage automated ordering and
authorization required to process large volumes of PPV orders.Such
authorization, known as conditional access, is the process by which
subscribers' set-top boxes are remotely authorized to descramble our encrypted
PPV movie or event programming for at least one full showing and are then
deauthorized upon program completion. Cable operators desiring to implement
their own conditional access system face substantial capital and operating
expense. The head-end equipment necessary to provide local conditional access
typically costs such cable operators $150,000 and requires ongoing support and
maintenance.
Customer Service. Our customer service facilities allow cable operators to
meet the customer service demands that accompany the increased capabilities of
DCTV Service. Subscriber orders for NVOD movies and PPV events are handled
electronically through either ANI or IPPV ordering. Cable subscriber inquiries
are handled by call centers that we operate. HSD subscriber inquiries are
handled by TicketMaster.
Billing, Reporting and Subscriber Management. The billing, reporting and
subscriber management system we use was developed by CSG and has been enhanced
in conjunction with us specifically to support DCTV Service. We currently bill
for most PPV orders via subscribers' authorized credit cards which reduces
billing costs and substantially reduces bad debt. For cable operators that wish
to provide PPV service for subscribers who do not have or do not wish to use a
credit card, we will bill the subscriber for PPV orders via a separate PPV
bill. We can also deliver PPV billing data to each cable operator that wishes
to include this information on the regular monthly bill sent to subscribers.
The billing software provides detailed management and marketing reports which
we believe are valuable to our cable operator customers.
Engineering Support. An important aspect of our DCTV Service is our
commitment to facilitate the rapid implementation of our digital service. We
are generally able to have our DCTV Service operational in a cable system
within 90 days. We arrange for the delivery, testing and installation of
preconfigured digital head-end equipment. Either TVN or subcontractor personnel
complete and test the installation and remain on site until the digital
equipment is fully operational.
Marketing. We assist cable operators in creating programming packages and
related advertising and marketing campaigns in order to maximize penetration,
buy rates and profits from DCTV Service. Working with the Friedland, Jacobs
Agency, we have developed a complete "Go Digital" campaign to provide cable
operator customers with a complete package of marketing materials designed to
drive subscriber penetration. In addition, we contribute to cooperative
advertising and marketing of DCTV Service.
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Studio Licensing and Fee Administration. We have long-standing relationships
with all the major and leading independent film studios and key sports, special
events and adult programming distributors. We believe that these relationships
are essential to obtaining the popular programming that drives subscriber
demand for our digital PPV movies and events. In addition, we provide a single
source of digital programming for cable operators. Our experience in providing
PPV movies and events to the C-Band HSD market since 1991 provides valuable
expertise in selecting and scheduling PPV programming to maximize buy rates. We
believe that the breadth and quality of our PPV programming are valuable to
cable operators because together they can lead to growth in penetration and buy
rates.
Arrangement of Financing. Implementing our DCTV Service requires cable
operators to acquire digital head-end equipment and set-top boxes. To
facilitate the purchase or lease of this equipment, we have an arrangement with
a financing entity that offers lease financing to our cable operator customers.
Financial Benefits of DCTV Service to Cable Operators
We require the cable operator to agree to a multi-year commitment to offer
our DCTV Service. During the term of the agreement, the cable operator pays us
a monthly fee per digital subscriber based on achieving certain subscriber
penetration rates and/or for the cable operator agreeing to carry a greater
number of channels of our PPV offerings. For cable operators that do not
require the full range of turnkey services, we offer these services on an "a la
carte" basis, the fees for which are determined on an individual basis
according to the services provided. Revenues from PPV movie and event
programming are shared among content providers, the cable operator and us.
To receive DCTV Service, a cable subscriber must have a DCII set-top box
which costs the cable operator approximately $300. We utilize GI's DCII
encryption/compression protocols, the accepted digital standard in the cable
industry. The monthly charge paid by subscribers for the digital tier is
generally more than sufficient to cover the cable operator's amortized cost of
DCII set-top boxes over the term of a five year TVN affiliation agreement. The
new digital equipment required at each head-end to receive DCTV Service costs
the cable operator approximately $50,000. For systems serving in excess of
5,000 subscribers, we generally agree for so long as the affiliation agreement
remains in effect to make monthly payments to the operator which approximate
the cable operator's monthly financing payments on 80% of the cost of such
digital head-end equipment. We assume no obligation, however, to third-party
financing entities.
Strategic Benefits of DCTV Service to Cable Operators
Rapid Upgrade. DCTV Service enables cable operators to rapidly upgrade their
systems to offer NVOD movies, PPV events and other digital programming. DCTV
Service provides a broad range of digital services that can be managed,
delivered, billed and analyzed by us for the cable operator and content
providers. We believe that our digital delivery system also serves as a low
cost platform for a wide range of new digital and interactive services for the
consumer, such as in-home shopping, banking and bill paying.
Neutrality. We are the only independent provider of digital cable television
programming and services. We believe that many cable operators prefer to work
with an independent service provider.
Flexibility. For MSOs and other cable operators, DCTV Service provides a
customized and scalable solution. For instance, MSOs can implement DCTV Service
on a discrete number of non-clustered systems as well as selecting from a range
of support levels depending on the needs and sizes of different systems. Our
turnkey DCTV Service offers the most comprehensive support and services. Cable
operators that desire to manage certain DCTV Service functions for themselves
can select from our turnkey services on an a la carte basis. For cable
operators seeking only a single source of satellite transmitted digital PPV
programming, we offer our PPV Feeds Service.
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Interoperability. Our digital delivery system is interoperable with
programmers and set-top boxes using industry standard DCII encryption and
compression protocols. Based on tests performed by CableLabs, our digital
transmission system will work in more than 95% of the existing cable systems
without significant upgrade to the cable plant, apart from installing the
required head-end equipment and deploying digital set-top boxes.
Benefits of DCTV Service to Cable Subscribers
The incremental price to the subscriber for the DCTV Service is determined
by the cable operator and is typically $10.99 per month. PPV movies typically
cost $3.99 each and PPV events are priced according to each local market. DCTV
Service provides NVOD capability, the primary attribute of which is that PPV
movies have multiple start times, at brief intervals. Automated ordering of TVN
PPV films utilizes either our existing ANI capabilities or IPPV technology
built into DCII set-top boxes. Movie start times are a function of how many
channels are dedicated to telecasting a particular movie and the running time
of that movie. For instance, if a hit movie is telecast in digital format on
four channels, it can start every 30 minutes on one of those channels.
Currently, our analog signal movies start approximately every two hours. The
bigger the anticipated demand for a particular PPV film, the more digital
channels that will be devoted to that film, especially during the opening week.
The convenience and attractiveness of NVOD movies for digital tier subscribers
is demonstrated in part by industry experience indicating a typical 5 times
improvement in PPV buy rates versus traditional analog PPV. One of the NVOD
features expected for a future generation DCII box is a "virtual pause"
function, which allows the customer to push a button for a brief delay in the
movie, which can then be restarted at a point just prior to the scene at which
the pause occurred. Another anticipated feature is one button VCR recording by
which the set-top box will automatically turn on a subscriber's VCR and record
programming previously selected by the subscriber using the on-screen
navigational guide. Finally, our DCTV Service protects subscribers against
technological obsolescence in that digital cable set-top boxes remain the
property of the cable operator and can be redeployed within the cable system as
new technologies become available, rather than requiring the consumer to
purchase and then replace expensive in-home equipment such as DBS satellite
systems or other hardware.
PPV Feeds Service
Our PPV Feeds Service transmits to larger cable systems the same digital
NVOD movies and PPV events included in DCTV Service. PPV Feeds Service allows
cable systems to receive content from a single source of distribution and avoid
the significant capital investment otherwise required for playback, storage,
scheduling and delivery of PPV programming. Cable operators receiving PPV Feeds
Service also benefit from our expertise in selecting and scheduling PPV
programming to maximize buy rates, based on our experience in delivering PPV
movies and events to the C-Band HSD market since 1991. We receive from the
cable operator a percentage of the gross revenue generated by cable
subscribers' purchases of TVN PPV movies and events. Our PPV Feeds Service is a
highly attractive opportunity because it generates recurring revenue and cash
flow at little incremental cost. The cable operator is responsible for
distributing, authorizing and billing our subscribers for the PPV content. On a
monthly basis, the cable operator provides us with a report of gross PPV
revenue and remits the portion payable to us. The PPV Feeds Service also helps
us establish relationships with the largest MSOs and demonstrate the earning
potential of our digital PPV content. Such relationships provide an opportunity
for us to offer our turnkey DCTV Service to the smaller, non-clustered systems
of these MSOs.
In mid-1998, we introduced our Marquee Mix Service offering three digital
channels of PPV hit movies and events that cable operators can receive in
digital format at the system head-end and then convert to analog format for
delivery to their addressable subscribers. This service provides a replacement
for Request Television's PPV service and preserves analog channels for PPV that
can be used in the future by cable operators to implement DCTV Service or PPV
Feeds Service. We receive from the cable operator a percentage of the gross
revenue generated by cable subscribers' purchases of TVN PPV movies and events.
Cablevision Systems deploys our Marquee Mix Service in cable systems serving
approximately 2.2 million subscribers. We
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have recently created a customized tier of digital programming for certain
Comcast systems which carry Viewer's Choice PPV programming. Our customized
digital tier includes hit PPV movies and events which supplement those offered
by Viewer's Choice, as well as the Playboy and Spice Channels. Comcast will
offer this customized digital tier of programming in seven of its systems
serving an aggregate of 1.8 million subscribers.
Home Shopping Services
In January 1999, we acquired substantially all of the assets of the Panda
Shopping Network, or PSN, as part of our strategy to use our infrastructure and
digital delivery system to offer home shopping programming. PSN is a live, on-
air home shopping channel specializing in merchandise such as jewelry, watches
and precious metal collectibles. PSN is currently distributed through cable
operators, DBS, broadcast networks and low-power television to more than
25,000,000 homes during certain hours.
Video-on-Demand Service
In conjunction with a manufacturer of specialty digital servers, we have
developed a video-on-demand, or VOD, service for cable operators whose systems
have hybrid fiber/coaxial cable that enables two-way communications from the
set-top box. There are currently 19,000,000 homes passed by systems equipped
with hybrid fiber/coaxial cable. VOD offers cable subscribers the ability to
start, pause, rewind and fast forward movies on demand. We will offer our VOD
services to cable operators who agree to install a digital server at their
head-end that stores and delivers our PPV content. We will provide such
content, and facilitate the installation and financing of such digital servers
for cable operators. We are currently conducting an initial field trial of our
VOD service in one of our smaller affiliate's systems.
Future Products and Services
Electronic Commerce Services via Our Digital Cable Platform and the
Internet. We believe that we can leverage our home shopping services through
their existing means of distribution and across our digital cable platform to
drive viewer traffic to a multi-featured Internet site that we intend to
develop to offer a wide range of consumer oriented electronic commerce
services, including home banking and finance, customized delivery of digital
music and healthcare information and consulting. As part of our development
effort, we have entered into an agreement with Citibank to jointly develop an
interface for the delivery of home banking, electronic commerce and
transactional services over our digital cable platform to set-top boxes with
cable modems. We have also formed a new venture, Chromazone LLC, in which we
own a 50% interest, to develop and license e-commerce engine software and
related interactive applications. Chromazone will be performing consulting and
software development services for us and Citibank to create Internet portal
sites and integrate them to effect consumer transactions via the internet and
our digital cable platform. We have also signed a memorandum of understanding
to purchase a majority interest in New Media Network, or NMN, which is a new
company formed to distribute downloadable digital music and other entertainment
products at retail locations and via the internet.
Premium Interactive Digital Services. We believe that our digital delivery
system can be enhanced to provide additional digital programming and
interactive services as they become technologically feasible and economically
attractive. These services may include high speed Internet connectivity, IP
telephony, interactive services and HDTV. We plan to enter into an arrangement
with an established Internet service provider to offer DCTV subscribers high
speed Internet access and IP telephony services over our digital cable platform
to set-top boxes equipped with cable modems.
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Cable Channel Uplink Services. As we transition our HSD business from analog
to digital, we expect to convert nine of our G-3 transponders from analog to
digital over a two year transition period. We believe that there will continue
to be substantial opportunities to use the infrastructure created for our
digital cable service to provide playback, storage, encryption, conditional
access and uplink services for new and planned digital cable channels, similar
to the services we provide for ESPN, Playboy and Guthy-Renker. New channels
have experienced great difficulty obtaining carriage on cable systems in the
analog environment, due to bandwidth constraints. Using digital compression, we
can uplink six to ten channels on one of our G-3 transponders, depending on the
compression ratio required to deliver clear pictures. We anticipate that we
will charge a monthly fee for our digital uplink services as we do now for
certain programmers, and may in certain circumstances negotiate a revenue
sharing relationship or obtain an ownership interest in the channel.
High Definition Television. To take advantage of our infrastructure for
satellite delivered digital HDTV programming, we plan to create a digital HDTV
movie library using HDTV encoding and video server equipment. Our satellite
telecast infrastructure can cost effectively be used to deliver HDTV service,
initially to our HSD customer base and later via cable as well. We believe that
current C-Band HSD owners are the most likely "early adopters" of new video
technology and will be among the first purchasers of expensive HDTV equipment.
Programming
PPV Movies
We license our PPV movies from all the major and leading independent film
studios. Since 1991, we have obtained our programming through course-of-dealing
arrangements without specific renewal provisions. To maximize the viewing
audience for their films, the studios have generally not granted exclusive PPV
rights to movies in the U.S. market. Major Hollywood movies are usually
released simultaneously to all participants in the PPV market, typically 45 to
55 days after they are released to the home video market, and approximately six
months before they are released to premium pay subscription movie programmers
such as HBO and SHOWTIME.
The typical movie license fee arrangement entitles the film studio to
receive 50% of PPV revenues from major films, and 40% to 50% from less popular
films, without minimum guarantees. Some studios have experimented with earlier
PPV release windows for certain movies in return for minimum buy rate
guarantees from PPV programmers. In general, these guarantees have been well
below the buy rates that we have typically experienced in the HSD market,
enabling us to take advantage of the early window opportunity with minimal
risk. If movies were released to the PPV market concurrently with or closer to
home video market release, we believe that PPV buy rates would increase
substantially. Although movie studios receive a much higher percentage of PPV
revenues than from home video revenues, we anticipate that so long as the home
video rental market remains a substantially larger source of revenue to the
studios than the PPV market, movies will continue to be released first to the
home video rental market and shortly thereafter to the PPV market.
We select our movie programming based on a variety of factors, the most
important of which is box office gross revenue, followed by the availability of
other film releases in the PPV window, potential appeal to our subscriber base
and the desired mix of content airing on our channels at any given time.
Sports and Special Events
We obtain nonexclusive rights to telecast special events such as
championship boxing and wrestling matches, live concerts, martial arts matches,
rodeos and other sports and entertainment events. We enjoy strong relationships
with all the major boxing and wrestling promoters, and promoters of other
sports events, major live concerts and specialty programming.
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ESPN GamePlan
In 1996 we entered into a multi-year agreement with ESPN to telecast
nationally via satellite a package of out-of-market regular season college
football games under the name "ESPN GamePlan." ESPN GamePlan offers more than
100 major college football games each season, with up to 10 each Saturday from
all the major college athletic conferences. On Saturday afternoons during the
college football season, our G-3 transponders are used to telecast the best
college football games as selected by ESPN, for a season subscription or
ordered on a pay-per-day, or PPD, basis.
We retransmit ESPN GamePlan and also perform required uplink, encryption and
authorization services for a per season fee payable to us by ESPN. Beginning in
fall 1999, we will uplink and distribute a digital version of ESPN GamePlan to
the cable market and 4DTV receiver owners, for which we will receive
transponder service fees from ESPN and a share of subscription and PPD
revenues.
Playboy and Spice Channels
The Spice Channel was formerly called AdulTVision, which we distributed to
our HSD subscribers. Spice features non-rated adult movie content created by
the Playboy Entertainment Group. Spice is available on a PPD basis in analog
signal format transmitted from one of our G-3 transponders for $6.99, or on a
monthly or quarterly subscription basis. We are the exclusive distributor of
the Spice Channel in the C-Band HSD market, for which we receive a substantial
share of the subscription and PPD revenues. We also uplink and distribute to
the cable market and 4DTV receiver owners a digitized version of Spice and the
Playboy Channel, for which we receive transponder service fees and a
substantial share of the subscription and PPD revenues.
Guthy-Renker
We have a long-standing relationship with Guthy-Renker Corporation, or GRC,
to transmit a home shopping "infomercials" created by GRC, the leading company
engaged in direct response "infomercial" home shopping. We are responsible for
playback and uplink of this channel, which is telecast in analog and digital
format. For our services, we receive a monthly fee.
The National Football League
Since 1994, we have maintained a close working relationship with the NFL to
provide NFL Sunday Ticket programming solely to the C-Band HSD market. We
provide the NFL with the use of up to ten of our transponders on the G-3
satellite for our NFL Sunday Ticket subscription package, which provides
subscribers access to a package of all the regular season Sunday afternoon NFL
games for a per season price of approximately $159. Our G-3 transponders are
uniquely attractive to the NFL because they are contiguously located (i.e.,
consecutively numbered) on a single, well positioned satellite, enabling
subscribers to use their satellite remote control to easily click from one NFL
game to another. We preempt our programming during the hours covered by the NFL
agreement. In addition to payments for transponder use during the NFL season
and distribution fees earned from subscription sales, we benefit from
promotional commercials inserted during NFL games for our films airing at the
conclusion of the NFL game telecasts.
Marketing and Sales
Marketing to Cable Operators
Our marketing efforts have been focused on highlighting the financial and
operational advantages to cable operators of installing our digital cable
solution. To date, our marketing efforts have largely consisted of
participation in industry conferences and trade shows, trade advertising and
direct contacts with cable operators. To assist in marketing our digital cable
programming and services, we have created a database of cable systems
throughout the United States that details the number of subscribers per head-
end, type of billing system used, current hardware vendor, channel capacity and
addressability. This data is supplemented with available
51
knowledge of the cable operator's strategic goals and competitive issues to
formulate a proposal as to how our digital cable services best meet the needs
of a particular cable operator or MSO. Such a proposal draws from the spectrum
of our services, ranging from our turnkey DCTV Service for smaller and non-
clustered MSO cable systems to our PPV Feeds Service for larger systems.
Marketing to Cable Subscribers
As part of DCTV Service, we offer a complete marketing package for cable
operators to assist them in developing an effective marketing campaign for
promoting the digital tier to their subscribers. In our experience, a direct
mail campaign alone can generate subscriptions for DCTV Service from 5% of the
system's subscriber base. We have developed a comprehensive marketing plan
using all media for the most effective and rapid subscriber penetration. The
marketing plan includes a demographic and competitive analysis, with specific
marketing recommendations for type of media and duration.
We also assist cable operators in tailoring programming packages and
advertising and marketing campaigns in order to increase penetration and buy
rates and maximize profits from DCTV Service. We consult with many of our cable
operator affiliates on the design, marketing and introduction of digital
programming packages for subscribers. Our goal is to obtain a 12% DCTV Service
penetration rate and a 200% PPV buy rate (two buys per subscriber per month)
from cable subscribers within twelve months of launch. Our "Go Digital"
campaign, developed with the Friedland, Jacobs Agency, promotes DCTV Service
through creative 30 and 60 second video spots on existing analog cable
channels, with direct marketing materials targeted at subscribers most likely
to sign up for the digital tier and become frequent buyers of our PPV movie and
event offerings. After launch of DCTV Service, our branded print ads, many of
which highlight specific, popular PPV movies and events, are designed to
increase subscriber penetration and PPV buy rates. We may also contribute to
cooperative advertising and marketing.
Cable operators who sign up for DCTV Service receive our Launch Marketing
Kit, which includes:
. Newspaper advertisements (customizable, camera-ready ad slicks);
. Customizable 30 and 60 second cross-channel video spots;
. Customizable direct response materials;
. Telemarketing scripts;
. Subscriber channel line-up cards;
. Radio scripts, message on-hold scripts, Weather Channel crawl scripts and
billing messages;
. Monthly programming promotions;
. Press releases; and
. Customer leave-behinds introducing DCTV Service.
Technology and Operations
Network Operations
We have developed a sophisticated analog and digital technical
infrastructure comprising in-house production, playback, storage, compression,
encoding, access control and uplink capabilities. Programming originates from a
playback facility located at our Operations Center, which is then uplinked from
an immediately adjacent facility. Our analog playback, production and uplink
facilities were custom built to our specifications by 4MC. Similar facilities
to be dedicated to our digital programming are currently under construction by
4MC. 4MC operates these facilities for us. The playback and production
facilities are dedicated to us, while the uplink facility is used for us and
other 4MC clients such as the Playboy Channel and syndicated television
distributors. We own and operate the encryption and compression equipment.
52
Our Operations Center maintains backup power and redundant equipment on
site. We have uninterrupted power supply from commercial batteries sufficient
for 20 minutes of operation in the event of a total power failure, and a diesel
powered generator sufficient for continuous operation thereafter. We have never
gone "off-air" due to a power malfunction or interruption, having maintained
continuous uninterrupted service even during the 1994 Los Angeles earthquake,
when the backup power supply system was utilized until local power was
restored.
Studio provided film masters are digitally processed, then stored in a
digital server for automated playback at multiple start times, which minimizes
the number and cost of playback units and personnel required to transmit NVOD
service. Our proprietary automated scheduling software allows each movie to be
shown as desired, and schedules all previews, promotions and interstitial
material (which plays at the end of a movie until our next start time).
ANI and IPPV ordering of PPV movies and events is also fully automated. We
utilize GI's conditional access service which interfaces with our software and
systems, including ANI and IPPV ordering and billing. ANI orders are placed by
the customer calling one of our sequential toll-free 800 numbers specific to
that showing. IPPV orders are placed by the customer using a remote control. In
either case, within approximately four seconds of placing an order, the movie
is descrambled by that customer's set-top box and begins playing on the
customer's television screen. The customer receives the remainder of the
current showing plus the next complete showing.
Satellite Transponder Usage
We transmit our programming content via transponders leased on two PanAmSat
C-Band satellites, G-3 and G-9, both of which have desirable geostationary
orbital positions with transmission coverage of the continental United States.
Our transponder leases, which provide us with attractive financial terms, both
expire in 2006, prior to the expiration of each satellite's expected useful
life. Currently, we transmit our digital PPV programming from five G-9
transponders, transmit our analog PPV programming from six G-3 transponders and
provide transponder capacity to third parties on four G-3 transponders. Our
leased transponders are protected in that we are entitled to replacement
satellite space if G-3 or G-9 is rendered incapable of transmitting our
signals. Cable operators receive our digital signals from G-9 via commercial C-
Band dishes installed at each head-end. Each of our five transponders on G-9
delivers multiple digital channels currently at an eight-to-one ratio or
greater, depending on the degree of signal compression. The compressed signals
are then transcoded and processed at each head-end by DCII Integrated Receiver
Transcoders, or IRTs, modulators and related digital equipment and then
transmitted via the existing cable infrastructure to each subscriber's DCII
compatible set-top box. As we transition our HSD business from analog to
digital, we expect to convert nine of the transponders on G-3 from analog to
digital over a two-year transition period, which will enable each transponder
to carry eight or more digital channels of programming for a total of 72 or
more channels.
Strategic Relationship with General Instrument
We have a long-standing cooperative business relationship with GI. A full
complement of GI digital encoders is installed at our Operations Center which
digitally compress and encrypt our PPV programming. GI provides set-top
authorization services for us and with favorable terms for the IRTs, modulators
and related head-end hardware and GI set-top boxes acquired by cable operators
entering into affiliation agreements with us.
C-Band Home Satellite Dish Business
Our company operates the only satellite transmitted, direct-to-home, multi-
channel PPV movie and event analog signal programming service for the C-Band
HSD market. Marketed as "TVN Satellite Theaters," the service creates a home
cineplex for HSD owners by programming a different movie on multiple analog
channels with continuous showings 24-hours a day. We currently telecast five
channels from G-3 showing PPV movies and events, one PPD channel showing Spice,
one preview channel during the day that is used for
53
additional showings of PPV movies during the night, two home shopping channels
for which we provide uplink services and one channel subleased to a third
party.
There are an estimated 1.8 million HSD owners equipped with the secure
encryption standard used by the home satellite industry. As of March 31, 1999,
there were approximately 800,000 subscribers authorized to order PPV
programming from us using their home telephone or remote control (via the HSD
receiver's built-in VIDEOpal ordering system), more than 260,000 of whom
purchased programming from us during the fiscal year ended March 31, 1999. The
installed base of C-Band customers has been relatively static over the past two
years. With the advent of high-powered Ku-band DBS, the C-Band HSD market has
not grown due to the smaller dish size and digital features offered by DBS. We
believe, however, that the existing HSD customer base will continue to
represent a viable market for our PPV programming in the near term.
GI has introduced its new 4DTV technology and receivers, designed to serve
as a digital/analog replacement for existing analog C-Band receivers. The 4DTV
receiver allows C-Band HSD owners to receive:
. unencrypted analog and digital signals;
. analog signals encrypted in VideoCipher II Plus; and
. digitally compressed signals encrypted in DCII Technology.
C-Band HSD owners equipped with 4DTV Units are able to receive more
programming than that offered by DBS, due to the much larger channel variety
available in analog and digital C-Band. We expect a portion of the existing C-
band HSD base to acquire 4DTV receivers to access the new digital channels.
We are the sole provider of PPV movies licensed from all the major and
leading independent studios for both the analog C-Band HSD market and the C-
Band HSD market served by 4DTV digital receivers.
Competition
We operate in highly competitive markets and face intense competition from
existing and potential competitors. Our competitors include a broad range of
companies engaged in communications and home entertainment, including DBS
operators and programming providers, coaxial and wireless cable operators,
broadcast television networks, home video companies featuring VHS, DIVX and DVD
technologies, as well as companies developing new in-home entertainment
technologies, such as the VOD service being marketed by DIVA. We expect to
compete primarily against other providers of digital PPV programming, including
cable and satellite programmers. We compete on the basis of, among other
things, the breadth and quality, price, performance and convenience of our
programming and services.
We compete with companies offering digital programming direct-to-the-home
via various DBS systems. DBS offers consumers the appeal of significantly
expanded channel capacity, features such as an interactive on-screen program
guide, digital pictures without the "noise" often seen in analog video, CD
quality digital music channels and many channels of movies and sports available
on a PPV basis. Several well capitalized DBS companies pose a substantial
threat to cable operators. DirecTV, owned by Hughes Electronics, was the first
all-digital DBS company and as of April 1999 had in excess of 4.7 million
subscribers to its DBS service, according to DBS Digest, an industry
publication. Two other high power DBS companies are currently in operation:
EchoStar, which markets its digital television service under the "Dish Network"
brand name and USSB, whose DBS programming service operates in tandem with
DirecTV (which has agreed to acquire USSB) offering premium subscription
programming such as multiplexed HBO and SHOWTIME channels. A medium power DBS
service, PrimeStar, is also being acquired by DirecTV. Currently, local
programming is generally unavailable through DBS; however, pending legislation
will facilitate the ability of DBS companies to include local broadcasts in
their digital programming services.
We expect to encounter a number of challenges in competing with MSOs that
generally have large installed subscriber bases and significant investments in,
and access to, competitive programming sources. In addition, these MSOs have
the financial and technological resources to create their own digital tier of
services,
54
including NVOD movies. We also face the risk that the current trend of industry
consolidation will continue with the result that smaller and medium size cable
operators that might otherwise become our customers will be acquired by such
MSOs. Currently, the only available alternative for cable operators that wish
to offer digital services similar to those provided by DBS is HITS, owned and
utilized by TCI to deliver digital programming to its own cable systems, and
now offered to other cable operators as well. HITS transmits digitally
compressed programming feeds to cable operators that have the technical and
transactional infrastructure to deliver their own tier of digital programming
and services to their subscribers. TCI charges fees to cable operators for
access to HITS programming, including PPV programming. Certain telephone
companies have announced initiatives and have made significant investments to
become digital television providers. See "Risk Factors--We operate in highly
competitive markets and face intense competition from existing and potential
competitors."
Intellectual Property and Proprietary Rights
We consider our proprietary software interfaces, scheduling system, ANI
ordering system, trademarks, logos, copyrights, know-how, advertising, and
promotion design and artwork to be of substantial value and importance to our
business. We rely on a combination of trade secret, copyright and trademark
laws, confidentiality and nondisclosure agreements and other such arrangements
to protect our proprietary rights and confidential information. Our success
will depend in part on our ability to maintain copyright protection for our
proprietary information, to preserve our trade secrets and confidential
information and to operate without infringing the proprietary rights of third
parties. See "Risk Factors--We rely on a combination of trade secret, copyright
and trademark laws, confidentiality and nondisclosure agreements and other such
arrangements to protect our proprietary rights and confidential information."
Employees
As of March 31, 1999, we had 115 employees, including 18 in sales and
marketing, 80 in operations and 17 in finance, legal and administration. None
of our employees are currently represented by a labor union. We believe that
our relationship with our employees is good.
Properties
Our facilities are located in Burbank, California, where we currently lease
approximately 10,000 square feet. The term of this lease runs through July
2003. We are currently negotiating a sub-lease for approximately 14,000 square
feet at the same facility.
We anticipate that we will need additional facilities in order to support
the expected growth in demand for our services from cable operators and
subscribers. We anticipate that we can locate and acquire such additional space
when and as it is needed, although we cannot be certain that such space can be
acquired on terms acceptable to us.
Legal Proceedings
We are not a party to any litigation at the present time.
55
MANAGEMENT
Executive Officers and Directors
Our executive officers and directors and their ages as of March 31, 1999 are
as follows:
[Download Table]
Name Age Position
---- --- --------
Stuart Z. Levin............. 51 Chairman of the Board of Directors and Chief
Executive Officer
James B. Ramo............... 52 President, Chief Operating Officer and
Director
Arthur Fields............... 61 Senior Executive Vice President, General
Counsel, Chief Administrative Officer,
Director and Secretary
Linda Blazy................. 44 Senior Vice President, Satellite Marketing
Leo I. Bluestein, Ph.D...... 62 Chief Technical Officer
Anthony Ciesniewski......... 54 Vice President, Network Operations &
Engineering
Richard Colletto............ 46 Vice President, Programming
John McWilliams............. 36 Senior Vice President, Finance
Gregory Pasetta............. 33 Senior Vice President
Stephen C. Rockabrand....... 49 Senior Vice President
David Sears................. 43 Senior Vice President, Affiliate Sales and
Marketing
Dom Stasi................... 56 Vice President, Technology Development
Michael Wex................. 45 Senior Vice President, Shopping Services
S. Robert Levine, M.D....... 44 Director
Stephen R. Munger........... 41 Director
Martin A. Pasetta........... 66 Director
David R. Powers............. 31 Director
Michael J. Ritter........... 58 Director
Jerome H. Turk.............. 55 Director
Stuart Z. Levin founded TVN in 1987 and served as President and Chief
Executive Officer from then to September 1997. In September 1997, Mr. Levin
became Chairman of the Board of Directors and Chief Executive Officer. Prior to
joining TVN, Mr. Levin founded and operated Domesticom Corporation, a company
that delivered satellite-fed pay television and pay per view programming to
hotels and apartment complexes from 1980 to 1984. In 1984, Mr. Levin began work
on the initial plan for TVN.
James B. Ramo joined TVN in September 1997 as our President and Chief
Operating Officer. From May 1993 to September 1997, Mr. Ramo served as
Executive Vice President of DirecTV, a direct broadcast satellite service that
is a unit of Hughes Electronics Corporation. From May 1990 to May 1993, Mr.
Ramo was Senior Vice President of DirecTV. From May 1986 to May 1990, Mr. Ramo
was a Vice President of Hughes Communications, Inc. Prior to joining Hughes
Communications, Mr. Ramo was Regional Vice President of Times Mirror Cable
Television, and concurrently served as President of Long Beach Cablevision Co.
of Long Beach, California. Mr. Ramo received a B.A. in Economics from the
University of California, Berkeley and an M.Sc. in Economics from the London
School of Economics.
Arthur Fields, a co-founder of TVN, joined us in January 1989 as Senior
Executive Vice President, General Counsel and Chief Administrative Officer.
Prior to joining TVN, Mr. Fields was a partner at the law firm of Ervin, Cohen
& Jessup in Beverly Hills, California. Mr. Fields received a B.S. in Pharmacy
from Columbia University and a J.D. from Loyola Law School.
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Linda Blazy joined TVN in 1991 as our Vice President, Marketing, Sales &
Creative Services. From November 1995 to September 1997, Ms. Blazy served as
our Senior Vice President, Marketing, Sales & Creative Services. In September
1997, Ms. Blazy became our Senior Vice President, Consumer Marketing and in
March 1999 became our Senior Vice President, Satellite Marketing. Prior to
joining TVN in 1991, Ms. Blazy held a number of marketing and management
positions in the home video industry. Ms. Blazy received a B.S. in Marketing
from Arizona State University.
Anthony Ciesniewski joined TVN in August 1998 as Vice President, Network
Operations & Engineering. He oversees all aspects of our Digital Network
Operations Center, including day-to-day staff management and the implementation
of such technical functions as compression, encryption, access control,
automated ordering and transactional services. Mr. Ciesniewski joined TVN from
Kelly Broadcasting Co. in Sacramento, where he had been Director of Engineering
since August 1996. From September 1997 through March 1998, he was Consulting
Engineer for Ziff-Davis Publishing, where he designed their digital cable
television broadcast facility in San Francisco. From March 1986 through August
1996 he was Vice President, Engineering & Operations for Fox Tape, a division
of 20th Century Fox. Mr. Ciesniewski won a 1994 Emmy Award for Technical
Team/Studio for "NFL on Fox." He belongs to the Society of Broadcast Engineers,
the Academy of Television Arts & Sciences, and the Society of Motion Picture
and Television Engineers.
Leo I. Bluestein joined TVN on a full-time basis in April 1996 as our Chief
Technical Officer. From April 1989 to April 1996, Dr. Bluestein was a
consultant to us and a number of other companies in the areas of encryption and
conditional access technology. Dr. Bluestein was a Vice President with
responsibilities in the Government Systems and VideoCipher divisions of M/A-Com
Linkabit, Inc., a subsidiary of M/A Com, Inc., a diversified electronics
company, and was a director of the Advanced Technology Group at Oak Industries,
Inc., a pay television product company. Dr. Bluestein received a B.S. in
Electrical Engineering from the College of the City of New York, and an M.S. in
Electrical Engineering and a Ph.D. in Electrical Engineering from Columbia
University.
Rick Colletto joined TVN in January 1998 as our Vice President, Programming
and is responsible for overseeing the programming and scheduling of our digital
and analog channels. Prior to joining TVN, Mr. Colletto was Director, Video-On-
Demand for Time Warner, Inc.'s Full Service Network in Orlando, Florida from
May 1994 to December 1997. Mr. Colletto served as Marketing Director of Oceanic
Cable, a Hawaiian affiliate of Time Warner from December 1992 to May 1994. Mr.
Colletto received a B.A. in Communications from the University of Hawaii.
John McWilliams joined TVN in December 1994 as our Controller and was named
Vice President, Finance in November 1995. In August 1998, Mr. McWilliams was
named Senior Vice President, Finance and is responsible for our accounting,
financial reporting and financial planning systems, overseeing risk management
and administering our employee benefit plans. Mr. McWilliams was an independent
consultant from July 1993 to December 1994. From September 1992 to July 1993,
Mr. McWilliams was the Controller for Action Pay-Per-View, a national PPV
network. Mr. McWilliams received a B.S. in Accounting from the University of
Tennessee, Knoxville, and was certified as a public accountant in California in
1990.
Gregory Pasetta joined TVN as a Producer in June 1990 and was promoted to
Executive Producer in November 1991. From November 1992 to November 1995, Mr.
Pasetta served as our Vice President, Production. Mr. Pasetta was named Senior
Vice President, Operations & Production in November 1995. In September 1998,
Mr. Pasetta was named Senior Vice President. In that capacity, Mr. Pasetta is
responsible for oversight and direction of new business development. Prior to
joining TVN, Mr. Pasetta worked in live television production and direction.
Mr. Pasetta received a B.A. in Communication Arts from Loyola Marymount
University.
Stephen C. Rockabrand joined TVN in January 1996 as our Senior Vice
President, Programming and New Business Development and in January 1998 became
our Senior Vice President, New Business Development. In September 1998, Mr.
Rockabrand was named Senior Vice President for live and special event
programming. From 1990 to January 1996, Mr. Rockabrand served as Vice
President, Pay Television, Ancillary Markets and New Technologies at Paramount
Pictures Corporation, a motion picture and television studio.
57
David Sears joined TVN in December 1997 as our Senior Vice President,
Affiliate Sales and Marketing and is responsible for cable affiliate
distribution, marketing, account maintenance and trade advertising of our
digital cable services. From December 1996 to December 1997, Mr. Sears served
as Senior Vice President, Sales & Affiliate Relations at Request Television, a
national pay-per-view cable programming service. From October 1994 to December
1996, Mr. Sears was Vice President, Western Division, Affiliate Sales for
Playboy Television. From February 1990 to October 1994, Mr. Sears was Vice
President, Sales and Affiliate Relations at Action Pay-Per-View, a national PPV
network and its successor Black Entertainment Television, a cable television
network, where he was responsible for marketing Action Pay-Per-View, Black
Entertainment Network and BET On Jazz. Mr. Sears received a B.A. in Journalism
from Memphis State University.
Dom Stasi joined TVN in December 1998 as Vice President, Technology
Development and is responsible for developing video and data applications for
use in video-on-demand and interactive systems. Prior to joining TVN, Mr. Stasi
spent seven years as an engineering executive with TCI and its Liberty Media
program networks. From July 1997 to October 1998, Mr. Stasi was Vice President,
Engineering and Operations for Your Choice TV. From October 1994 to July 1997,
Mr. Stasi served as Vice President, Network Video Services for the Technology
Ventures division, and from June 1993 to October 1994, Mr. Stasi was Vice
President, Technology and Operations for Request TV. Mr. Stasi holds an
engineering degree from the State University of New York, and is a member of
the NCTA Engineering Committee, the Society of Cable Telecommunications
Engineers, and the Society of Motion Picture and Television Engineers.
Michael Wex joined TVN in February 1999 as Senior Vice President of TVN and
President & Chief Operating Officer of the wholly owned TVN Shopping, Inc.
subsidiary. Previously, Mr. Wex was President and CEO of GRTV Network from 1995
through September 1998. From January 1994 through August 1995, he was a member
of the start-up management team and consultant to S: The Shopping Network, an
interactive home shopping channel launched by Fingerhut. Mr. Wex has won
several Cable ACE awards and two Emmy Award nominations. He has a Masters
Certificate in International Interactive Communications from New York
University and a Bachelor of Arts in Communications from Goddard College.
S. Robert Levine, M.D. has been a member of TVN's Board of Directors since
October 1990. In March of 1983, Dr. Levine established the Cardiac Health and
Rehabilitation Program at New York's Mount Sinai Medical Center, and served as
our Director until October 1986. In November 1996, Dr. Levine was named
Chairman of the Progressive Policy Institute's "Health Priorities Project." Dr.
Levine is a member of the National Institute of Health's National Institute of
Diabetes, Digestive and Kidney Diseases Advisory Council, and serves as
Chairman of Government Relations and member of the Executive Committee and
International Board of the Juvenile Diabetes Foundation. Dr. Levine is also a
member of the Board of Directors of DayOne Life Management, Inc. Dr. Levine
received a B.S. in Human Development and Nutrition from Cornell University in
1975, and an M.D., summa cum laude, from the Loyola-Stritch School of Medicine
in 1979.
Stephen R. Munger has been a member of TVN's Board of Directors since
December 1997. Mr. Munger is a Managing Director, Mergers, Acquisitions and
Restructuring Department of Morgan Stanley and is Head of its Private
Investment Department. Mr. Munger joined Morgan Stanley in 1988 and served in
various capacities prior to being named Managing Director in 1993. Mr. Munger
is also a member of the Board of Directors of Wright Medical Technology, Inc.,
EconoPhone, Inc., and ImpSat Corporation. Mr. Munger received a B.A. in
Government from Dartmouth College and an M.B.A. from The Wharton School.
Martin A. Pasetta has been a member of TVN's Board of Directors since
October 1988. Mr. Pasetta retired from a 42 year career as a director and
producer of television specials and programs, including 17 years directing the
Academy Awards from 1972 to 1989. Mr. Pasetta produced and directed Inaugural
Galas for Presidents Carter and Reagan, in addition to the first U.S. satellite
television entertainment broadcast. Mr. Pasetta received an Honorary Doctorate
in Fine Arts from the University of Santa Clara.
58
David R. Powers has been a member of our Board of Directors since September
1997. In December 1996, Mr. Powers became a Vice President in the Private
Investment Department of Morgan Stanley. From May 1994 to December 1996, Mr.
Powers was an Associate in the Private Investment Department. From August 1992
to May 1994 Mr. Powers was an Associate in the Mergers, Acquisitions and
Restructuring Department and has served in various capacities at Morgan Stanley
since 1989. Mr. Powers received a B.A. in Mathematics and Economics from
Amherst College.
Michael J. Ritter joined our Board of Directors in May 1998. Mr. Ritter has
been retired since 1995. From 1991 until 1995, Mr. Ritter served as President
and Chief Operating Officer of Continental Cablevision, Inc. Mr. Ritter served
as a director of Continental Cablevision, Inc. from 1991 until 1996. Mr. Ritter
received a B.S. in Business from California State University, San Jose, and a
J.D. from the University of the Pacific, McGeorge School of Law.
Jerome H. Turk joined TVN's Board of Directors in October 1998. Mr. Turk has
been retired since January 1997. From November 1994 to December 1996, Mr. Turk
was a member of the Board of Directors of Fitzgeralds Gaming Corporation, most
recently as Chairman of the Board. From September 1985 to October 1988, Mr.
Turk worked for Oppenheimer & Co., most recently as a Managing Director. Mr.
Turk received a B.B.A. from Adelphi University and a J.D. from Brooklyn Law
School. Mr. Turk is a certified public accountant and a member of the bar in
the State of New York.
Director Compensation
Members of our Board of Directors do not receive compensation for their
service as directors.
59
Executive Compensation
Summary of Cash and Certain Other Compensation
The following table sets forth information concerning the compensation
received for services rendered to us during fiscal 1999 by our Chief Executive
Officer and our four next most highly compensated executive officers whose
total compensation in fiscal 1999 equaled or exceeded $100,000 ("Named
Executive Officers"):
Summary Compensation Table
[Download Table]
Long-Term
Compensation
Awards
------------
Annual Compensation Number of
--------------------------------- Securities
Other Annual Underlying
Name and Principal Positions Year Salary Bonus Compensation(1) Options(2)
---------------------------- ---- -------- -------- --------------- ------------
Stuart Z. Levin............. 1999 $474,577 $250,000 $41,509 --
Chairman and Chief
Executive Officer
James B. Ramo............... 1999 464,701 250,000 32,813 --
President and Chief
Operating Officer
Arthur Fields............... 1999 371,970 125,000 85,978 --
Senior Executive Vice
President, General Counsel,
Chief Administrative
Officer and Secretary
Gregory Pasetta............. 1999 187,115 35,000 -- --
Senior Vice President
David Sears................. 1999 175,000 45,000 -- 50,000
Senior Vice President,
Affiliate Sales & Marketing
--------
(1) Represents car allowance and employer paid premiums for life insurance
policies.
(2) These shares are subject to stock options granted under the 1996 Stock
Option Plan. See Table entitled "Option Grants in Last Fiscal Year" for an
explanation of the vesting provisions of such stock options.
The following table sets forth certain information for the fiscal year ended
March 31, 1999 with respect to options granted to the Named Executive Officers.
Option Grants in Last Fiscal Year
[Enlarge/Download Table]
Individual Grants
------------------------------------------
Potential Realizable Value
% of at Assumed Annual Rates
Total Options of Stock Price Appreciation
Granted to Exercise for Option Term(1)
Options Employees in Price Per Expiration ----------------------------
Name Granted Fiscal Year Share Date 5% 10%
---- ------- ------------- --------- ---------- ------------- --------------
Stuart Z. Levin......... -- -- -- -- -- --
James B. Ramo........... -- -- -- -- -- --
Arthur Fields........... -- -- -- -- -- --
Gregory Pasetta......... -- -- -- -- -- --
David Sears............. 50,000 55.6% $3.28 5/26/2008 267,139 425,374
--------
(1) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. The assumed
5% and 10% rates of stock price appreciation are mandated by the Rules of
the Securities and Exchange Commission and do not represent our estimate or
projection of
60
future Common Stock price. Actual gains, if any, on stock option exercises
are dependent on our future financial performance, overall conditions and
the option holder's continued employment through the vesting period and
option term. This table does not take into account any appreciation in the
fair market value of the Common Stock from the date of grant to the date of
this prospectus, other than the columns reflecting assumed rates of
appreciation of 5% and 10%.
The following table sets forth certain information with respect to the
number and value of stock options held by each Named Executive Officer as of
March 31, 1999.
Aggregate Option Exercises in Fiscal 1999 and Option Values as of March 31,
1999
[Enlarge/Download Table]
Number of Securities Value of Unexercised
Number Underlying Unexercised In-the-Money Options
of Shares Options at March 31, 1999 at March 31, 1999(2)
Acquired Value ------------------------- -------------------------
Name on Exercise Realized($)(1) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------------- ----------- ------------- ----------- -------------
Stuart Z. Levin......... -- -- 604,179 287,528 $6,451,168 $2,988,829
James B. Ramo........... -- -- 179,933 419,842 1,844,313 4,303,381
Arthur Fields........... -- -- 358,333 41,667 1,934,280 447,920
Gregory Pasetta......... -- -- 100,000 0 1,075,000 0
David Sears............. -- -- 12,500 37,500 96,500 289,500
--------
(1) "Value Realized" is calculated on the basis of the fair market value of
the Common Stock on the date of exercise minus the exercise price, despite
the fact that none of such shares have been sold.
(2) Based upon the fair market value of $11.00 per share as of the fiscal year
end minus the exercise price.
Benefit Plans
1996 Stock Option Plan. Our 1996 Stock Option Plan (the "1996 Option Plan")
was adopted by the Board of Directors and approved by the stockholders in
January 1996. In August 1997, the Board and the stockholders approved an
increase in the number of shares reserved under the 1996 Option Plan by
600,000 shares for a total of 3,000,000 shares of Common Stock. In April 1999,
the Board approved the reservation of an additional 993,899 shares under the
1996 Option Plan, subject to stockholder approval. The 1996 Option Plan
provides for grants of incentive stock options to our employees (including
officers and employee directors) and nonstatutory stock options to our
employees, directors and consultants. The purpose of the 1996 Option Plan is
to attract and retain the best available personnel and to encourage stock
ownership by our employees, officers and consultants in order to give them a
greater personal stake in our success. The 1996 Option Plan is administered by
the Board of Directors, which determines optionees and the terms of options
granted, including the exercise price, number of shares subject to the option
and the exercisability thereof.
As of March 31, 1999, 52,417 shares of Common Stock had been issued upon
the exercise of options granted under 1996 Option Plan, options to purchase
2,681,482 shares of Common Stock at a weighted average exercise price of $0.52
per share were outstanding and 266,101 shares remained available for future
grant.
The term of an option granted under the 1996 Option Plan is stated in the
option agreement. The terms of options granted under the 1996 Option Plan
generally may not exceed ten years, and in the case of an incentive option or
nonstatutory option granted to an optionee who, at the time of grant, owns
stock representing more than 10% of our outstanding capital stock, the term of
such option may not exceed five years. Options granted under the 1996 Option
Plan generally vest and become exercisable as set forth in the option
agreement. In general, no option may be transferred by the optionee other than
by will or the laws of descent or distribution, and each option may be
exercised, during the lifetime of the optionee, only by such optionee. An
optionee whose relationship with us or any related corporation ceases for any
reason (other than by death or permanent and total disability) may exercise
options in the 90 day period following such cessation, unless such options
terminate or expire sooner (or for nonstatutory options, later), by their
terms, but only to the extent the option
61
had vested on such date of cessation. In the event of death or total and
permanent disability, the option may be exercised in the twelve month period
following the date of death or total and permanent disability unless such
options terminate or expire sooner (or for nonstatutory options, later), but
only to the extent the option had vested on the date of death or disability.
In the event we merge with or into another corporation, all outstanding
options may either be assumed or an equivalent option may be substituted by the
surviving entity or, if such options are not assumed or substituted, such
options shall become exercisable as to all of the shares subject to the
options, including shares as to which they would not otherwise be exercisable.
In the event that options become exercisable in lieu of assumption or
substitution, the Board of Directors shall notify optionees that all options
shall be fully exercisable for a period of 15 days, after which such options
shall terminate.
The Board of Directors determines the exercise price of options granted
under the 1996 Option Plan at the time of grant, provided that the exercise
price of all incentive stock options must be at least equal to the fair market
value of the shares on the date of grant. With respect to any participant who
owns stock possessing more than 10% of the voting rights of our outstanding
capital stock, the exercise price of any incentive stock option or any
nonstatutory stock option granted must equal at least 110% of the fair market
value on the grant date. The consideration for exercising any incentive stock
option or any nonstatutory stock option may consist of cash, check, promissory
note, delivery of already-owned shares of our Common Stock subject to certain
conditions, a reduction in the amount of any Company liability to an optionee
or any combination of the foregoing methods of payment or such other
consideration or method of payment to the extent permitted under applicable
law. No incentive stock options may be granted to a participant, which, when
aggregated with all other incentive stock options granted to such participant,
would have an aggregate fair market value in excess of $100,000 becoming
exercisable in any calendar year. The 1996 Option Plan will terminate in
January 2006, unless sooner terminated by the Board of Directors.
Limitation of Liability and Indemnification Matters
As permitted by the Delaware General Corporation Law, we have included in
our Certificate of Incorporation a provision to eliminate the personal
liability of our directors for monetary damages for breach or alleged breach of
their fiduciary duties as directors, subject to certain exceptions. In
addition, our Bylaws provide that we are required to indemnify our officers and
directors under certain circumstances, including those circumstances in which
indemnification would otherwise be discretionary, and we are required to
advance expenses to our officers and directors as incurred in connection with
proceedings against them for which they may be indemnified. We believe that our
charter provisions are necessary to attract and retain qualified persons as
directors and officers. Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers or persons
controlling us pursuant to the foregoing provisions, we have been informed
that, in the opinion of the Commission, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable. At
present, we are not aware of any pending or threatened litigation or proceeding
involving any of our directors, officers, employees or agents in which
indemnification would be required or permitted.
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CERTAIN TRANSACTIONS AND RELATED PARTY TRANSACTIONS
Related Party Transactions
In May 1992, we assumed the obligations of the limited partnership that was
our predecessor in interest including specific obligations to repay funds
advanced to it by certain stockholders including Stuart Z. Levin, our Chairman
and Chief Executive Officer, and S. Robert Levine, M.D., a member of our Board
of Directors. Accordingly, we have Contingent Notes Payable to (i) Stuart Z.
Levin, in the amount of $52,703, including principal and interest accrued
through March 31, 1999; and (ii) S. Robert Levine in the amount of $944,329
including principal and interest accrued through March 31, 1999. See
"Description of Certain Indebtedness."
During the period from fiscal 1993 to fiscal 1999, we have made a series of
advances to Stuart Z. Levin, our Chairman and Chief Executive Officer, and Mr.
Levin has from time to time made periodic repayments toward such advances. As
of March 31, 1999, the outstanding amount of such advances, net of repayments,
aggregated $143,000. Such advances are payable to us upon demand and do not
bear interest.
In February 1996, we effected a recapitalization pursuant to which each of
the 729,180 shares of then outstanding Common Stock was exchanged for
10.5948568 shares of Series A Preferred Stock. Prior to the recapitalization,
the only outstanding capital stock was Common Stock. The recapitalization and
related exchange of Common Stock for Preferred Stock was not a financing
transaction and did not generate any proceeds to us.
During the period from June 1996 through November 1996, we issued and sold
convertible promissory notes in the aggregate principal amount of $5.5 million
(the "Convertible Notes") to Storie Partners, L.P., which owns greater than 4%
of our voting securities, and to certain other investors. The Convertible Notes
accrued simple interest at the annual rate of 10% and were convertible upon the
consummation of a qualified equity financing occurring on or before December
31, 1998 (the "Financing") into shares of capital stock issued in connection
with the Financing. The Convertible Notes were accompanied by warrants
exercisable for the purchase of an aggregate of 500,002 shares of our capital
stock issued in connection with the Financing (the "Debt Financing Warrants").
In August 1997, we entered into an agreement (the "Securities Purchase
Agreement") with PGI II and the holders of the Convertible Notes to issue and
sell an aggregate of 5,714,442 shares of Series B-1 Preferred Stock for $2.6249
per share, 1,290,767 shares of Series B-2 Preferred Stock for $5.8105 per share
and warrants exercisable for the purchase of 500,002 shares of Series B-2
Preferred Stock at a per share price of $5.8105 (the "Series B-2 Warrants"),
2,285,727 shares of Series B-3 Preferred Stock for $6.5625 per share and
1,428,584 shares of Series B-4 Preferred Stock for $10.4999 per share.
Pursuant to the terms of the Securities Purchase Agreement, PGI II was
obligated to purchase all the shares of Series B-1 Preferred Stock and was
granted an option to purchase all of the shares of Series B-3 Preferred Stock
exercisable on or before February 28, 1998 and all of the shares of Series B-4
Preferred Stock exercisable on or before August 29, 1998. In December 1997, we
and PGI II amended the terms of the Securities Purchase Agreement to provide
that PGI II's options to purchase such shares in February 1998 and August 1998
would become absolute obligations in December 1997 and February 1998,
respectively, in consideration for our agreement to issue and sell a greater
number of shares of Series B-3 Preferred Stock and Series B-4 Preferred Stock
at a lower price per share for each such series. Specifically, the December
1997 amendment to the Securities Purchase Agreement obligated PGI II to
purchase 2,857,169 shares of Series B-4 Preferred Stock for $5.25 per share on
or before December 31, 1997 and to purchase 2,285,727 shares of Series B-3
Preferred Stock for $6.5625 per share on or before February 15, 1998. Such
purchases were subsequently consummated by PGI II. PGI II and its affiliates
own more than 5% of our voting securities. Two of our directors, Messrs. Munger
and Powers, are employees of Morgan Stanley, an affiliate of PGI II.
The 1,290,767 shares of Series B-2 Preferred Stock and the Series B-2
Warrants were issued to the holders of the Convertible Notes and Financing
Warrants. In consideration therefor, all of the Convertible Notes, including
all
63
outstanding principal, were canceled and the Debt Financing Warrants were
exchanged for the Series B-2 Warrants. As a result, 946,563 shares of Series B-
2 Preferred Stock and Series B-2 Warrants exercisable for the purchase of
366,668 shares of Series B-2 Preferred Stock were acquired by Storie Partners,
L.P. On December 31, 1998, Series B-2 Warrants exercisable for 493,336 shares
of Series B-2 Preferred Stock expired unexercised in accordance with their
terms. Series B-2 Warrants exercisable for 6,666 shares of Series B-2 Preferred
Stock were exercised prior to December 31, 1998.
Employment Agreements
Stuart Z. Levin. In August 1997, Stuart Z. Levin, our Chairman of the Board
and Chief Executive Officer entered into an employment agreement with us
pursuant to which he is to receive a base salary of $450,000 for the period
September 1, 1997 through August 31, 1998, $475,000 for the period September 1,
1998 through August 31, 1999, and $500,000 for the period September 1, 1999
through August 31, 2000. The agreement provides for a bonus of $250,000 for the
fiscal year ended March 31, 1998, and for a bonus of $125,000 to $250,000 for
the fiscal years ended March 31, 1999 and March 31, 2000. The agreement is
renewable for one additional two-year period at a base salary no less than 110%
of Mr. Levin's base salary for the immediately preceding year and with a
minimum annual bonus of not less than $250,000. In connection with the
employment agreement, we also granted Mr. Levin an option to purchase 291,707
shares of Common Stock with an exercise price of $0.75 per share, which vests
20% at the end of the first year and monthly thereafter over the following four
years. The term of the option is ten years and the vesting of the option is
contingent upon Mr. Levin's continued employment with us.
If we desire to terminate Mr. Levin's employment involuntarily without
cause, we are obligated to pay Mr. Levin his base salary for the shorter of (i)
two years from the date of termination, or (ii) until the agreement terminates
on September 1, 2000. In the event of such termination, we are also obligated
to pay Mr. Levin a minimum annual bonus of $125,000 for the fiscal year in
which such termination occurs.
James B. Ramo. In August 1997, James B. Ramo, our President and Chief
Operating Officer, entered into an employment agreement with us pursuant to
which he is to receive a base salary of $450,000 for the period September 15,
1997 through September 14, 1998, $475,000 for the period September 15, 1998
through September 14, 1999, and $500,000 for the period September 15, 1999
through September 14, 2000. The agreement provides for a bonus of $250,000 for
the fiscal year ended March 31, 1998, and for a bonus of $125,000 to $250,000
for the fiscal years ended March 31, 1999 and March 31, 2000. Upon commencement
of his employment in September 1997, we paid Mr. Ramo a one-time bonus of
$500,000. The agreement is renewable for one additional two-year period at a
base salary no less than 110% of Mr. Ramo's base salary for the immediately
preceding year and with a minimum annual bonus of not less than $250,000. We
also granted Mr. Ramo an option to purchase 263,316 shares of Common Stock with
an exercise price of $0.75 per share which option vests 20% at the end of Mr.
Ramo's first year of employment and ratably thereafter on a monthly basis over
the following four years. Under the term of the employment agreement, we
granted Mr. Ramo a second option to purchase 336,459 shares of Common Stock
with an exercise price of $0.75 per share, which vests in full upon the
completion of the initial term of his employment agreement on September 15,
2000. The term of both options is ten years and the vesting of the options is
contingent upon Mr. Ramo's continued employment with us on the date of vesting.
Under the terms of the employment agreement, we granted Mr. Ramo the right,
exercisable upon the three year anniversary of the employment agreement, to
require us to cancel all or a portion of Mr. Ramo's option to purchase up to
336,459 shares of Common Stock in return for the cash payment to Mr. Ramo of up
to $2.3 million (the "Put Right"). The Put Right may only be exercised by
Mr. Ramo if he has not voluntarily terminated his employment or been terminated
involuntarily for cause prior to such three year anniversary. The Put Right may
not be exercised if prior to such anniversary we have either (i) been acquired
at a per share valuation of at least $7.59, (ii) consummated an initial public
offering at a per share price of at least $7.59, or (iii) arranged a private
resale transaction in which Mr. Ramo has the opportunity to sell at least
336,459 shares of Common Stock at a per share price of at least $7.59. We have
placed $1.8 million in an interest bearing escrow account to secure our
obligations in connection with the Put Right.
64
If we desire to terminate Mr. Ramo's employment involuntarily without cause,
we are obligated to pay Mr. Ramo his base salary for the shorter of (i) two
years from the date of termination, or (ii) until the employment agreement
terminates on September 15, 2000. In addition, in the event of such
termination, (i) we are also obligated to pay Mr. Ramo a minimum annual bonus
of $125,000 for the fiscal year in which such termination occurs and (ii) Mr.
Ramo's option to purchase 336,459 shares of Common Stock shall become 100%
vested.
Arthur Fields. In August 1997, Arthur Fields, our Senior Executive Vice
President, General Counsel and Chief Administrative Officer entered into an
employment agreement with us pursuant to which he is to receive a base salary
of $350,000 for the period September 1, 1997 through August 31, 1998, $375,000
for the period September 1, 1998 through August 31, 1999, and $400,000 for the
period September 1, 1999 through August 31, 2000. The agreement provides for a
bonus of $125,000 for the fiscal year ended March 31, 1998, and for a bonus of
$62,500 to $125,000 for the fiscal years ended March 31, 1999 and March 31,
2000. The agreement is renewable for one additional two-year period at a base
salary no less than 110% of Mr. Fields' base salary for the immediately
preceding year and with a minimum annual bonus not less than $125,000.
If we desire to terminate Mr. Fields' employment involuntarily without
cause, we are obligated to pay Mr. Fields his base salary for the shorter of
(i) two years from the date of termination, or (ii) until the agreement
terminates on September 15, 2000. In the event of such termination, we are also
obligated to pay Mr. Fields a minimum annual bonus of $62,500 for the fiscal
year in which such termination occurs.
Michael Wex. In February 1999, Michael Wex, our Senior Vice President and
President and Chief Operating Officer of our wholly owned subsidiary, TVN
Shopping, Inc., or TSI, entered into an employment agreement with us pursuant
to which he is to receive a base annual salary of $225,000, $236,250, $248,063,
$260,466 and $273,489 for the twelve month periods ending March 31, 2000, 2001,
2002, 2003 and 2004, respectively. The agreement provides for an annual bonus,
payable in cash or TSI stock, of no less than $100,000 per fiscal year and up
to 150% of his then current annual salary subject to achieving certain
milestones as determined by us. The agreement is renewable for one additional
two-year period. In April 1999, we granted Mr. Wex an option to purchase
100,000 shares of Common Stock with an exercise price of $11.00 per share which
option vests 20% at the end of Mr. Wex's first year of employment and ratably
thereafter on a monthly basis over the following four years.
John McWilliams. In January 1996, John McWilliams, our Senior Vice
President, Finance, entered into a severance agreement with us pursuant to
which he is entitled to receive severance Benefits in the form of salary
continuation for six months at his then current salary in the event his
employment is terminated by us for convenience. Mr. McWilliams' current annual
salary is $150,000.
David Sears. In November 1997, David Sears, our Senior Vice President,
Affiliate Sales and Marketing, entered into an employment agreement with us
pursuant to which he is to receive a base annual salary of $170,000. The
agreement provides for a bonus of $45,000 for the fiscal year ended March 31,
1998 and an annual bonus equal to one-half of Mr. Sears' annual salary if we
attain certain sales milestones during each fiscal year. Upon commencement of
his employment in November 1997, we paid Mr. Sears a one-time bonus of $25,000.
In May 1998, we also granted Mr. Sears an option to purchase 50,000 shares of
Common Stock with an exercise price of $3.28 per share which option vests 20%
at the end of Mr. Sears' first year of employment and ratably thereafter on a
monthly basis over the following four years.
We believe that all of the transactions set forth above were made on terms
no less favorable than would be obtained for similar services provided to
unrelated third parties. Any future transactions between we and our executive
officers directors and their affiliates will be on terms no less favorable to
us than can be obtained from unaffiliated third parties, and any material
transactions with such persons will be approved by a majority of the
disinterested members of our Board of Directors.
65
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our capital stock as of March 31, 1999, as adjusted to give effect
to the transactions contemplated in this prospectus, (i) by each of our
directors and each of the Named Executive Officers, (ii) by all directors and
executive officers as a group, and (iii) by each person who is known by us to
own beneficially more than 5% of our Common Stock on an as-converted basis.
[Download Table]
Number of Number of Percent
Shares of Shares of Ownership
Common Preferred of Voting
Beneficial Owner Stock Stock Stock(1)
---------------- --------- ---------- ---------
Entities affiliated with Princes Gate
Investors II, L.P.(2)........................ -- 10,857,338 54.8%
1585 Broadway
New York, New York 10036
Storie Partners, L.P.......................... -- 946,563 4.8
1 Bush Street, Suite 1350
San Francisco, California 94104
Stuart Z. Levin(3)............................ 730,669 938,398 8.4
James B. Ramo(4).............................. 199,925 -- 1.0
Arthur Fields(5).............................. 366,667 397,307 3.9
Gregory Pasetta(6)............................ 100,000 -- *
David Sears(7)................................ 14,167 -- *
S. Robert Levine, M.D......................... -- 3,332,835 16.8
Stephen R. Munger(2).......................... -- 10,857,338 54.8
Martin A. Pasetta(8).......................... -- 352,883 1.8
David R. Powers(2)............................ -- 10,857,338 54.8
Melvin Rosen.................................. -- 1,165,413 5.9
Jerome H. Turk................................ -- 172,102 *
All directors and executive officers as a
group (24 persons)(9)........................ 1,738,928 16,050,863 89.8
--------
* Less than 1%.
(1) Applicable percentage of ownership is based on 152,517 shares of Common
Stock and 19,654,671 shares of Preferred Stock outstanding as of March 31,
1999, together with applicable options and warrants for each stockholder.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. Except as indicated in the footnotes to
this table and pursuant to applicable community property laws, the
stockholder named in the table has sole voting and investment power with
respect to the shares set forth opposite such stockholder's name. Shares of
Common Stock or Preferred Stock subject to options or warrants that are
presently exercisable or exercisable within 60 days of March 31, 1999, are
deemed to be beneficially owned by the person holding such options for the
purpose of computing the percentage of ownership of such person but are not
treated as outstanding for the purpose of computing the percentage of any
other person.
(2) Includes an aggregate of 8,797,318 shares of Series B-1, B-3 and B-4
Preferred Stock held by Princes Gate Investors II, L.P., an aggregate of
592,812 shares of Series B-1, B-3 and B-4 Preferred Stock held by Acorn
Partnership II, L.P., an aggregate of 586,883 shares of Series B-1, B-3 and
B-4 Preferred Stock held by PGI Investments Limited, an aggregate of
293,442 shares of Series B-1, B-4 and B-4 Preferred Stock held by Gregor
von Opel and an aggregate of 586,883 shares of Series B-1, B-3 and B-4
Preferred Stock held by Investor Investments AB. Mr. Munger and Mr. Powers,
both of whom are directors of TVN and are also employees of Morgan Stanley,
an affiliate of Princes Gate Investors II, L.P. Each disclaims beneficial
ownership of the shares held by these funds.
(3) Includes 266,196 shares of Series A Preferred Stock held by Mr. Levin's
former wife over which Mr. Levin exercises voting power but as to which Mr.
Levin disclaims beneficial ownership. Includes
66
630,569 shares of Common Stock which may be acquired upon exercise of stock
options which are presently exercisable or will become exercisable within 60
days of March 31, 1999.
(4) Includes 199,925 shares of Common Stock which may be acquired upon exercise
of stock options which are presently exercisable or will become exercisable
within 60 days of March 31, 1999.
(5) Includes 397,307 shares of Series A Preferred Stock held by the Arthur and
Soni Fields Family Trust over which Mr. Fields may be deemed to have voting
and investment power. Includes 366,667 shares of Common Stock which may be
acquired upon exercise of stock options which are presently exercisable or
will become exercisable within 60 days of March 31, 1999.
(6) Includes 100,000 shares of Common Stock which may be acquired upon exercise
of stock options which are presently exercisable or will become exercisable
within 60 days of March 31, 1999.
(7) Includes 14,167 shares of Common Stock which may be acquired upon exercise
of stock options which are presently exercisable or will become exercisable
within 60 days of March 31, 1999.
(8) Includes 352,883 shares of Series A Preferred Stock held by the Pasetta
Family Trust over which Mr. Pasetta may be deemed to have voting and
investment power.
(9) Includes 1,638,828 shares of Common Stock which may be acquired upon
exercise of stock options which are presently exercisable or will become
exercisable within 60 days of March 31, 1999.
DESCRIPTION OF CERTAIN INDEBTEDNESS
On March 16, 1991, we entered into a limited partnership, TVN Entertainment,
L.P. (the "Partnership"), with MCA Satellite Services, Inc. and Centurion
Broadcast, Inc. (the "Studios") as the general partners and we as the sole
limited partner. Under the limited partnership agreement, the Studios agreed to
(i) make a combined capital contribution of $10.0 million to the Partnership
and (ii) to loan up to an additional $20.0 million, of which approximately
$16.5 million was loaned to the Partnership. Upon the dissolution of the
Partnership by mutual agreement on May 15, 1992, we acquired the Studios'
interests in the Partnership, received all Partnership assets and assumed
certain liabilities of the Partnership, including notes payable (the
"Contingent Notes Payable") to the Studios and certain of our stockholders. The
Contingent Notes Payable to such stockholders, including Stuart Z. Levin, our
Chairman and Chief Executive Officer, and S. Robert Levine, M.D., a director
and owner of more than 5% of our voting securities, arose from funds advanced
to us by such stockholders. In connection with the dissolution of the
Partnership, such obligations were required to be repaid only on a pari passu
basis with the obligations owing to the Studios. As of March 31, 1999, the
aggregate amounts of principal and interest under the Contingent Notes Payable
to the Studios and certain of our stockholders will be $26.8 million and $1.9
million, respectively (including $10.3 million and $795,000 of accrued interest
on such Contingent Notes Payable, respectively). Interest on the Contingent
Notes Payable accrues at the prime rate plus 1% and the Contingent Notes
Payable do not have a specified maturity date or repayment schedule. According
to the Restated Limited Partnership Agreement dated March 7, 1991, we are
required to repay these obligations out of "Available Cash Flow" as such term
is defined in the agreement. Since the date of such Restated Limited
Partnership Agreement, we have experienced negative cash flows from operations
and do not believe that we have generated Available Cash Flow that would
require us to repay the Contingent Notes Payable. In addition, the Contingent
Notes Payable have not been recorded as a liability in accordance with
Accounting Principles Board Opinion No. 16, "Business Combinations," because
they represent contingent consideration related to the acquisition of net
assets and the outcome of the contingency is not determinable beyond a
reasonable doubt. We may renegotiate the terms of the Contingent Notes Payable
to incorporate a defined maturity and payment schedule. In connection with such
renegotiation, we may restructure or repay all or a portion of the Contingent
Notes Payable. In the event that we are unable to agree on a defined maturity
and payment schedule, the timing of the repayment of the Contingent Notes
Payable will remain uncertain and subject to events outside our control. We
will record these Contingent Notes Payable as liabilities and recognize related
goodwill when the payment contingency is resolved.
67
THE EXCHANGE OFFER
Purpose and Effect
We issued the Old Notes on July 29, 1998 in a private placement. In
connection with this issuance, we entered into the Indenture and the
registration rights agreement. These agreements require that we file a
registration statement under the Securities Act for the New Notes, the
registered notes to be issued in the Exchange Offer and, upon the effectiveness
of the registration statement, offer to you the opportunity to exchange your
Old Notes for a like principal amount of New Notes. The New Notes will be
issued without a restrictive legend and, except as set forth below, may be
reoffered and resold by you without registration under the Securities Act.
After we complete the Exchange Offer, our obligations with respect to the
registration of the Old Notes will terminate, except as provided in the last
paragraph of this section. A copy of the Indenture and the registration rights
agreement have been filed as exhibits to the registration statement of which
this prospectus is a part. As a result of the filing and the effectiveness of
the registration statement, assuming we complete the Exchange Offer by July 29,
1999, no prospective increases in the interest rate on the Old Notes upon
failure to register the Old Notes will occur.
Based on an interpretation by the staff of the Commission set forth in no-
action letters issued to third parties, if you are not our "affiliate" within
the meaning of Rule 405 under the Securities Act or a broker-dealer referred to
in the next paragraph, we believe that New Notes to be issued to you in the
Exchange Offer may be offered for resale, resold and otherwise transferred by
you, without compliance with the registration and prospectus delivery
provisions of the Securities Act. This interpretation, however, is based on
your representation to us that:
(1) the New Notes to be issued to you in the Exchange Offer are acquired in
the ordinary course of your business;
(2) you are not engaging in and do not intend to engage in a distribution
of the New Notes to be issued to you in the Exchange Offer; and
(3) you have no arrangement or understanding with any person to participate
in the distribution of the New Notes to be issued to you in the
Exchange Offer.
If you tender in the Exchange Offer for the purpose of participating in a
distribution of the New Notes to be issued to you in the Exchange Offer, you
cannot rely on this interpretation by the staff of the Commission. Under those
circumstances, you must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction. Each broker-dealer that receives New Notes in the Exchange Offer
for its own account in exchange for Old Notes that were acquired by the broker-
dealer as a result of market-making activities or other trading activities,
must acknowledge that it will deliver a prospectus meeting the requirements of
the Securities Act in connection with any resales of those New Notes. See "Plan
of Distribution."
If you will not receive freely tradeable registered notes in the Exchange
Offer or are not eligible to participate in the Exchange Offer, you can elect,
by indicating on the letter of transmittal and providing certain additional
necessary information, to have your Old Notes registered in a "shelf"
registration statement on an appropriate form pursuant to Rule 415 under the
Securities Act. In the event that we are obligated to file a shelf registration
statement, we will be required to keep the shelf registration statement
effective for a period of two years or such shorter period that will terminate
when all of the Old Notes covered by the shelf registration statement have been
sold pursuant to the shelf registration statement. Other than as set forth in
this paragraph, you will not have the right to require us to register your Old
Notes under the Securities Act. See "--Procedures For Tendering."
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Consequences of Failure to Exchange
After we complete the Exchange Offer, if you have not tendered your Old
Notes, you will not have any further registration rights, except as set forth
above. Your Old Notes will continue to be subject to certain restrictions on
transfer. Therefore, the liquidity of the market for your Old Notes could be
adversely affected upon completion of the Exchange Offer if you do not
participate in the Exchange Offer. If the liquidity of the trading market for
the Old Notes is adversely affected, you may be unable to sell or transfer your
Old Notes and the value of your Old Notes may decline.
Terms of the Exchange Offer
upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, we will accept any and all Old Notes validly
tendered and not withdrawn prior to 5:00 p.m., New York City time, on the
expiration date. We will issue $1,000 principal amount of New Notes in exchange
for each $1,000 principal amount of Old Notes accepted in the Exchange Offer.
You may tender some or all of your Old Notes in the Exchange Offer. However,
Old Notes may be tendered only in integral multiples of $1,000 in principal
amount.
The form and terms of the New Notes are substantially the same as the form
and terms of the Old Notes, except that the New Notes to be issued in the
Exchange Offer will have been registered under the Securities Act and will not
bear legends restricting their transfer. The New Notes will be issued pursuant
to, and entitled to the benefits of, the Indenture. The Indenture also governs
the Old Notes. The New Notes and the Old Notes will be deemed one issue of
notes under the Indenture.
As of the date of this prospectus, $200 million aggregate principal amount
of the Old Notes were outstanding. This prospectus, together with the letter of
transmittal, is being sent to all registered holders of Old Notes as of June
15, 1999 and to others believed to have beneficial interests in the Old Notes.
You do not have any appraisal or dissenters, rights in connection with the
Exchange Offer under the General Corporation Law of the State of Delaware or
the Indenture. We intend to conduct the Exchange Offer in accordance with the
applicable requirements of the Exchange Act and the rules and regulations of
the Commission promulgated under the Exchange Act.
We will be deemed to have accepted validly tendered Old Notes when, as, and
if we have given oral or written notice of our acceptance to the exchange
agent. The exchange agent will act as our agent for the tendering holders for
the purpose of receiving the New Notes from us. If we do not accept any
tendered notes because of an invalid tender, the occurrence of certain other
events set forth in this prospectus or otherwise, we will return certificates
for any unaccepted Old Notes without expense to the tendering holder as
promptly as practicable after the expiration date.
You will not be required to pay brokerage commissions or fees or, except as
set forth below under "--Transfer Taxes," transfer taxes with respect to the
exchange of your Old Notes in the Exchange Offer. We will pay all charges and
expenses, other than certain applicable taxes, in connection with the Exchange
Offer. See "--Fees and Expenses" below.
Expiration Date; Amendments
The Exchange Offer will expire at 5:00 p.m., New York City time, on [July
29,] 1999, unless we determine, in our sole discretion, to extend the Exchange
Offer. If we extend the Exchange Offer, it will expire at the later date and
time to which it is extended. We do not intend to extend the Exchange Offer,
although we reserve the right to do so.. If we extend the Exchange Offer, we
will give oral or written notice of the extension to the exchange agent and
give each registered holder notice by means of a press release or other public
announcement of any extension prior to 9:00 a.m., New York City time, on the
next business day after the scheduled expiration date.
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We also reserve the right, in our sole discretion,
(1) to delay accepting any Old Notes or, if any of the conditions set forth
below under "--Conditions" have not been satisfied or waived, to
terminate the Exchange Offer or
(2) to amend the terms of the Exchange Offer in any manner, by giving oral
or written notice of such delay or termination to the exchange agent,
and by complying with Rule 14e-l(d) under the Exchange Act to the
extent that rule applies.
We acknowledge and undertake to comply with the provisions of Rule 14e-l(c)
under the Exchange Act, which requires us to pay the consideration offered, or
return the Old Notes surrendered for exchange, promptly after the termination
or withdrawal of the Exchange Offer. We will notify you as promptly as we can
of any extension, termination or amendment.
Procedures For Tendering
Book-entry Interests
The Old Notes were issued as global securities in fully registered form
without interest coupons. Beneficial interests in the global securities, held
by direct or indirect participants in DTC, are shown on, and transfers of these
interests are effected only through, records maintained in book-entry form by
DTC with respect to its participants.
If you hold your Old Notes in the form of book-entry interests and you wish
to tender your Old Notes for exchange pursuant to the Exchange Offer, you must
transmit to the exchange agent on or prior to the expiration date either:
(1) a written or facsimile copy of a properly completed and duly executed
letter of transmittal, including all other documents required by such
letter of transmittal, to the exchange agent at the address set forth
on the cover page of the letter of transmittal; or
(2) a computer-generated message transmitted by means of DTC's Automated
Tender Offer Program system and received by the exchange agent and
forming a part of a confirmation of book-entry transfer, in which you
acknowledge and agree to be bound by the terms of the letter of
transmittal.
In addition, in order to deliver Old Notes held in the form of book-entry
interests:
(A) a timely confirmation of book-entry transfer of your Old Notes into the
exchange agent's account at DTC pursuant to the procedure for book-
entry transfers described below under "--Book-entry Transfer" must be
received by the exchange agent prior to the expiration date; or
(B) you must comply with the guaranteed delivery procedures described
below.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT YOUR ELECTION AND RISK.
INSTEAD OF DELIVERY BY MAIL, WE RECOMMEND THAT YOU USE AN OVERNIGHT OR HAND
DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE
DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. YOU SHOULD NOT SEND
THE LETTER OF TRANSMITTAL OR OLD NOTES TO US. YOU MAY REQUEST YOUR BROKER,
DEALER, COMMERCIAL BANK, TRUST COMPANY, OR NOMINEE TO EFFECT THE ABOVE
TRANSACTIONS FOR YOU.
Certificated Old Notes
Only registered holders of certificated Old Notes may tender those Old Notes
in the Exchange Offer. If your Old Notes are certificated notes and you wish to
tender your Old Notes for exchange pursuant to the
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Exchange Offer, you must transmit to the exchange agent on or prior to the
expiration date, a written or facsimile copy of a properly completed and duly
executed letter of transmittal, including all other required documents, to the
address set forth below under "--Exchange Agent." In addition, in order to
validly tender your certificated Old Notes:
(1) the certificates representing your old notes must be received by the
exchange agent prior to the expiration date; or
(2) you must comply with the guaranteed delivery procedures described
below.
Procedures Applicable to All Holders
If you tender an Old Note and you do not withdraw the tender prior to the
expiration date, you will have made an agreement with us in accordance with the
terms and subject to the conditions set forth in this prospectus and in the
letter of transmittal.
If your Old Notes are registered in the name of a broker, dealer, commercial
bank, trust company or other nominee and you wish to tender your Old Notes, you
should contact the registered holder promptly and instruct the registered
holder to tender on your behalf. If you wish to tender on your own behalf, you
must, prior to completing and executing the letter of transmittal and
delivering your Old Notes, either make appropriate arrangements to register
ownership of the Old Notes in your name or obtain a properly completed bond
power from the registered holder. The transfer of registered ownership may take
considerable time.
Signatures on a letter of transmittal or a notice of withdrawal must be
guaranteed by an eligible institution unless:
(A) Old Notes tendered in the Exchange Offer are tendered either
(1) by a registered holder who has not completed the box entitled
"Special Registration instructions" or "Special Delivery
Instructions" on the letter of transmittal or
(2) for the account of an eligible institution; and
(B) the box entitled "Special Registration instructions" on the letter of
transmittal has not been completed.
If signatures on a letter of transmittal or a notice of withdrawal are
required to be guaranteed, the guarantee must be by a financial institution,
which includes most banks, savings and loan associations and brokerage houses,
that is a participant in the Securities Transfer Agents medallion Program, the
New York Stock Exchange medallion Program or the Stock Exchanges medallion
Program.
If the letter of transmittal is signed by a person other than you, your Old
Notes must be endorsed or accompanied by a properly completed bond power and
signed by you as your name appears on those Old Notes.
If the letter of transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations, or others acting in a fiduciary or representative capacity, those
persons should so indicate when signing. Unless we waive this requirement, in
this instance you must submit with the letter of transmittal proper evidence
satisfactory to us of their authority to act on your behalf.
We will determine, in our sole discretion, all questions regarding the
validity, form, eligibility, including time of receipt, acceptance and
withdrawal of tendered Old Notes. This determination will be final and binding.
We reserve the absolute right to reject any and all Old Notes not properly
tendered or any Old Notes our acceptance of which would, in the opinion of our
counsel, be unlawful. We also reserve the right to waive any
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defects, irregularities or conditions of tender as to particular Old Notes, our
interpretation of the terms and conditions of the Exchange Offer, including the
instructions in the letter of transmittal, will be final and binding on all
parties.
You must cure any defects or irregularities in connection with tenders of
your Old Notes within the time period we will determine unless we waive that
defect or irregularity. Although we intend to notify you of defects or
irregularities with respect to your tender of Old Notes, neither we, the
exchange agent nor any other person will incur any liability for failure to
give this notification. Your tender will not be deemed to have been made and
your notes will be returned to you if:
(1) you improperly tender your Old Notes;
(2) you have not cured any defects or irregularities in your tender; and
(3) we have not waived those defects, irregularities or improper tender.
In any such case, the exchange agent will return your Old Notes, unless
otherwise provided in the letter of transmittal, as soon as practicable
following the expiration of the Exchange Offer.
In addition, we reserve the right in our sole discretion to:
(1) purchase or make offers for, or offer registered notes for, any Old
Notes that remain outstanding subsequent to the expiration of the
Exchange Offer;
(2) terminate the Exchange Offer; and
(3) to the extent permitted by applicable law, purchase Old Notes or any
other notes in the open market, in privately negotiated transactions or
otherwise.
The terms of any of these purchases or offers could differ from the terms of
the Exchange Offer.
By tendering, you will represent to us that, among other things:
(1) the New Notes to be acquired by you in the Exchange Offer are being
acquired in the ordinary course of your business;
(2) you are not engaging in and do not intend to engage in a distribution
of the New Notes to be acquired by you in the Exchange Offer;
(3) you do not have an arrangement or understanding with any person to
participate in the distribution of the New Notes to be acquired by you
in the Exchange Offer; and
(4) you are not our "affiliate," as defined under Rule 405 of the
Securities Act.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange in the Exchange Offer will be made only after timely receipt by the
exchange agent of certificates for your Old Notes or a timely book-entry
confirmation of your Old Notes into the exchange agent's account at DTC, a
properly completed and duly executed letter of transmittal, or a computer-
generated message instead of the letter of transmittal, and all other required
documents, if any tendered Old Notes are not accepted for any reason set forth
in the terms and conditions of the Exchange Offer or if Old Notes are submitted
for a greater principal amount than you desire to exchange, the unaccepted or
non-exchanged Old Notes (or Old Notes in substitution therefor) will be
returned without expense to you, or, in the case of Old Notes tendered by book-
entry transfer into the exchange agent's account at DTC pursuant to the book-
entry transfer procedures described below, the non-exchanged Old Notes will be
credited to your account maintained with DTC, as promptly as practicable after
the expiration or termination of the Exchange Offer.
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Guaranteed Delivery Procedures
If you desire to tender your old notes and your old notes are not
immediately available or one of the situations described in the immediately
preceding paragraph occurs, you may tender if:
(1) you tender through an eligible financial institution;
(2) on or prior to 5:00 p.m., New York City time, on the expiration date,
the exchange agent receives from an eligible institution, a written or
facsimile copy of a properly completed and duly executed letter of
transmittal and notice of guaranteed delivery, substantially in the
form provided by us; and
(3) the certificates for all certificated Old Notes, in proper form for
transfer, or a book-entry confirmation, and all other documents
required by the letter of transmittal, are received by the exchange
agent within three NYSE trading days after the date of execution of the
notice of guaranteed delivery.
The notice of guaranteed delivery may be sent by facsimile transmission,
mail or hand delivery. The notice of guaranteed delivery must set forth:
(1) your name and address;
(2) the principal amount of Old Notes you are tendering; and
(3) a statement that your tender is being made by the notice of guaranteed
delivery and that you guarantee that within three New York Stock
Exchange trading days after the execution of the notice of guaranteed
delivery, the eligible institution will deliver the following documents
to the exchange agent:
(A) the certificates for all certificated Old Notes being tendered, in
proper form for transfer or a book-entry confirmation of tender;
(B) a written or facsimile copy of the letter of transmittal, or a
book-entry confirmation instead of the letter of transmittal; and
(C) any other documents required by the letter of transmittal.
Book-entry Transfer
The exchange agent will establish an account with respect to the book-entry
interests at DTC for purposes of the Exchange Offer promptly after the date of
this prospectus. You must deliver your book-entry interest by book-entry
transfer to the account maintained by the exchange agent at DTC. Any financial
institution that is a participant in DTC19 systems may make book-entry delivery
of book-entry interests by causing DTC to transfer the book-entry interests
into the exchange agent's account at DTC in accordance with DTC's procedures
for transfer.
If one of the following situations occur:
(1) you cannot deliver a book-entry confirmation of book-entry delivery of
your book-entry interests into the exchange agent's account at DTC; or
(2) you cannot deliver all other documents required by the letter of
transmittal to the exchange agent prior to the expiration date,
then you must tender your book-entry interests according to the guaranteed
delivery procedures discussed above.
Withdrawal Rights
You may withdraw tenders of your Old Notes at any time prior to 5:00 p.m.,
New York City time, on the expiration date.
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For your withdrawal to be effective, the exchange agent must receive a
written or facsimile transmission notice of withdrawal at its address set forth
below under "--Exchange Agent" prior to 5:00 p.m., New York City time, on the
expiration date.
The notice of withdrawal must:
(1) state your name;
(2) identify the specific Old Notes to be withdrawn, including the
certificate number or numbers and the principal amount of withdrawn Old
Notes;
(3) be signed by you in the same manner as you signed the letter of
transmittal when you tendered your Old Notes, including any required
signature guarantees or be accompanied by documents of transfer
sufficient for the exchange agent to register the transfer of the Old
Notes into your name; and
(4) specify the name in which the Old Notes are to be registered, if
different from yours.
We will determine all questions regarding the validity, form, and
eligibility, including time of receipt, of withdrawal notices, our
determination will be final and binding on all parties. Any Old Notes withdrawn
will be deemed not to have been validly tendered for exchange for purposes of
the Exchange Offer. Any Old Notes which have been tendered for exchange but
which are not exchanged for any reason will be returned to you without cost as
soon as practicable after withdrawal, rejection of tender, or termination of
the Exchange Offer. Properly withdrawn Old Notes may be retendered by following
one of the procedures described under "--Procedures For Tendering" above at any
time on or prior to 5:00 p.m., New York City time, on the expiration date.
Conditions
Notwithstanding any other provision of the exchange offer and subject to our
obligations under the registration rights agreement, we will not be required to
accept for exchange, or to issue New Notes in exchange for, any Old Notes and
may terminate or amend the exchange offer, if at any time before the acceptance
of any Old Notes for exchange any of the following events shall occur:
(1) any injunction, order or decree shall have been issued by any court or
any governmental agency that would prohibit, prevent or otherwise
materially impair our ability to proceed with the exchange offer; or
(2) the Exchange Offer shall violate any applicable law or any applicable
interpretation of the staff of the Commission.
These conditions are for our sole benefit and we may assert them regardless
of the circumstances giving rise to any condition, subject to applicable law.
We also may waive in whole or in part at any time and from time to time any
particular condition in our sole discretion. If we waive a condition, we may be
required in order to comply with applicable securities laws, to extend the
expiration date of the exchange offer. Our failure at any time to exercise any
of the foregoing rights will not be deemed a waiver of these rights and these
rights will be deemed ongoing rights which may be asserted at any time and from
time to time.
In addition, we will not accept for exchange any Old Notes tendered, and no
New Notes will be issued in exchange for any of those Old Notes, if at the time
the Old Notes are tendered any stop order shall be threatened by the Commission
or be in effect with respect to the registration statement of which this
prospectus is a part or the qualification of the Indenture under the Trust
Indenture Act of 1939.
The Exchange Offer is not conditioned on any minimum principal amount of Old
Notes being tendered for exchange.
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Exchange Agent
We have appointed The Bank of New York as exchange agent for the exchange
offer. Questions, requests for assistance and requests for additional copies of
the prospectus, the letter of transmittal and other related documents should be
directed to the exchange agent addressed as follows:
By Registered or Certified mail, by Hand or by overnight Courier:
The Bank of New York
101 Barclay Street-7E
Corporate Trust Services Window
Ground Floor
New York, New York 10286
Attn: Reorganization Section
[Download Table]
By Facsimile: By Telephone:
(212) 571-3080 (212) 815-5942
The exchange agent also acts as trustee under the Indenture.
Fees and Expenses
We will not pay brokers, dealers, or others soliciting acceptances of the
Exchange Offer. The principal solicitation is being made by mail. Additional
solicitations, however, may be made in person or by telephone by our officers
and employees.
We will pay the cash expenses to be incurred in connection with the Exchange
Offer. These are estimated in the aggregate to be approximately $ which
includes fees and expenses of the exchange agent, accounting, legal, printing
and related fees and expenses.
Transfer Taxes
You will not be obligated to pay any transfer taxes in connection with a
tender of your Old Notes for exchange unless you instruct us to register New
Notes in the name of, or request that Old Notes not tendered or not accepted in
the Exchange Offer be returned to, a person other than the registered tendering
holder, in which event the registered tendering holder will be responsible for
the payment of any applicable transfer tax.
Accounting Treatment
We will not recognize any gain or loss for accounting purposes upon the
consummation of the Exchange Offer, we will amortize the expense of the
Exchange Offer over the term of the New Notes under generally accepted
accounting principles.
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DESCRIPTION OF THE OLD NOTES
We issued Old Notes under an Indenture between our company, as issuer, and
The Bank of New York, as trustee (the "Trustee"). The following summary of
certain provisions of the Indenture is not be complete. For a complete
statement of the terms, we refer you to the Indenture. We will provide you a
copy of the Indenture upon request. Certain provisions of the Indenture are
made a part thereof by the Trust Indenture Act of 1939, as amended. Definitions
or particular terms in the Indenture supplement this summary. For definitions
of certain capitalized terms used in the following summary, see "--Certain
Definitions" below.
General
The Old Notes are unsecured (except to the extent described under "--
Security" below) unsubordinated obligations of our company, initially limited
to $200 million aggregate principal amount, and will mature on August 1, 2008.
Interest on the Old Notes accrues at the rate of 14% per annum and is payable
semiannually in arrears (to holders of record at the close of business on
January 15 or July 15 immediately preceding the Interest Payment Date) on
February 1 and August 1 of each year commencing February 1, 1999. Interest is
computed on the basis of a 360-day year of twelve 30-day months.
If by the date that is one year after the Closing Date, our company has not
consummated the Exchange Offer or any other registered Exchange Offer for the
Old Notes or caused a shelf registration statement with respect to resales of
the Old Notes to be declared effective, interest on the Old Notes (in addition
to interest otherwise accruing on the Old Notes) will accrue at the rate of
0.5% per annum and be payable in cash semiannually in arrears on February 1 and
August 1 of each year, commencing February 1, 2000, until the consummation of a
registered Exchange Offer or the effectiveness of a shelf registration
statement. See "--Registration Rights" below.
Principal of, premium, if any, and interest on the Old Notes is payable and
the Old Notes may be exchanged or transferred at the office or agency of our
company in the Borough of Manhattan, the City of New York (which initially will
be the corporate trust office of the Trustee at 101 Barclay Street, 21 West,
New York, New York 10286; Attention: Corporate Trust Trustee Administration);
provided that, at our option, payment of interest may be made by check mailed
to the holders at their addresses as they appear in the security register
maintained by the Trustee.
The Old Notes were issued only in fully registered form, without coupons, in
denominations of $1,000 of principal amount and any integral multiple thereof.
See "The Exchange Offer--Book-entry Transfer." No service charge will be made
for any registration of transfer or exchange of Old Notes, but we may require
payment of a sum sufficient to cover any transfer tax or other similar
governmental charge payable in connection therewith.
Subject to the covenants described below under "--Covenants" and applicable
law, we may issue additional Notes under the Indenture. Any Old Notes which
remain outstanding, the New Note, offered hereby, and any additional New Notes
subsequently issued would be treated as a single class for all purposes under
the Indenture.
Optional Redemption
We may redeem the Old Notes, at our option, in whole or in part, at any time
or from time to time, on or after August 1, 2003 and prior to maturity, upon
not less than 30 nor more than 60 days' prior notice mailed by first class mail
to each holder's last address as it appears in the Security Register, at the
following Redemption Prices (expressed in percentages of principal amount),
plus accrued and unpaid interest, if any, to the Redemption Date (subject to
the right of holders of record on the relevant Regular Record Date that is on
or
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prior to the Redemption Date to receive interest due on an Interest Payment
Date), if redeemed during the 12-month period commencing August 1, of the years
set forth below:
[Download Table]
Year Percentage
---- ----------
2003.......................................................... 108.000%
2004.......................................................... 105.333
2005.......................................................... 102.667
2006 and thereafter........................................... 100.000
In addition, at any time prior to August 1, 2001, we may use proceeds of one
or more Public Equity Offerings following which there is a Public Market to
redeem up to 35% of the principal amount of the Old Notes with the at any time
or from time to time in part, at a Redemption Price (expressed as a percentage
of principal amount thereof) of 114%; provided that
. Old Notes representing at least $130.0 million aggregate principal
amount remain outstanding after each such redemption and
. notice of such redemption is mailed within 60 days after the
consummation of the related Public Equity Offering.
In the case of any partial redemption, the Trustee will select Old Notes for
redemption in compliance with the requirements of the principal national
securities exchange, if any, on which the Old Notes are listed or, if the Old
Notes are not listed on a national securities exchange, on a pro rata basis, by
lot or by such other method as the Trustee in its sole discretion shall deem to
be fair and appropriate; provided that no Note of $1,000 in principal amount or
less shall be redeemed in part. If any Note is to be redeemed in part only, the
notice of redemption relating to such Note shall state the portion of the
principal amount thereof to be redeemed. A new Note in principal amount equal
to the principal amount of the unredeemed portion thereof will be issued in the
name of the holder thereof upon cancellation of the original Note.
Sinking Fund
There are no sinking fund payments for the Old Notes.
Security
Pursuant to the Indenture, on the Closing Date, we purchased and pledged to
the Trustee as security for the benefit of the holders of the Old Notes,
Pledged Securities in an amount then expected to be sufficient to provide for
payment in full of the first six scheduled interest payments on the Old Notes
when due. We used approximately $76.7 million of the net proceeds of issuance
of the Old Notes to acquire the Pledged Securities and currently anticipates
that the remaining Amount of Pledged Securities will be sufficient to make the
first four interest payments on the New Notes.
The Pledged Securities have been pledged by us to the Trustee for your
benefit as holders of the Notes pursuant to the Pledge Agreement. The Trustee
has agreed to hold the Pledged Securities in the Pledge Account. The Pledge
Agreement provides that, immediately prior to an Interest Payment Date, we may
either deposit with the Trustee from funds otherwise available to us cash in an
amount sufficient to pay all or a part of the interest scheduled to be paid on
such date or we may notify the Trustee that it does not intend to make such a
deposit. Upon receipt of such deposit or notice, the Trustee is required to
release from the Pledge Account, if and to the extent necessary, proceeds
sufficient to pay the interest then due on the Old Notes. A failure by us to
pay any of the first six scheduled interest payments on the Notes, on the
corresponding Interest Payment Dates will constitute an immediate Event of
Default under the Indenture, with no cure or grace period. The Pledged
Securities and the Pledge Account will also provide partial security for the
repayment of principal, premium and interest on the Old Notes.
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The Pledge Agreement will provide that, upon payment by us of the first six
scheduled interest payments on the Notes, all of the remaining Pledged
Securities, if any, will be released as collateral and the Notes will
thereafter be unsecured.
Registration Rights
We have agreed with the Placement Agent, for your benefit as holder of the
Notes, to use our best efforts, at our cost, to file and cause to become
effective a registration statement with respect to a registered offer (the
"Exchange Offer") to exchange the Old Notes for an issue of unsubordinated
notes of our company (the "New Notes") with terms identical to the Old Notes
(except that the New Notes will not bear legends restricting the transfer
thereof or provide for registration rights or additional interest). Upon such
registration statement being declared effective, our company shall offer the
New Notes in return for surrender of the Old Notes. When the Exchange Offer is
completed, we will have no further obligation to register or exchange Old
Notes.
Ranking
The Indebtedness evidenced by the Old Notes ranks equally in priority of
payment with all future unsubordinated indebtedness of our company and senior
in right of payment to all existing and future subordinated indebtedness of our
company. As of March 31, 1999, we had $298.2 million of indebtedness
outstanding including the Old Notes. In addition, all existing and future
liabilities (including trade payables and indebtedness, including any
subordinated indebtedness) of our subsidiaries and all of our secured
indebtedness will be effectively senior to the Old Notes. We and our
subsidiaries may incur substantial additional Indebtedness, including secured
Indebtedness, under the Indenture.
Certain Definitions
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indenture. Reference is made to the
Indenture for the definition of any other capitalized term used herein for
which no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary or assumed in connection with an
Asset Acquisition by a Restricted Subsidiary and not Incurred in connection
with, or in anticipation of, such Person becoming a Restricted Subsidiary or
such Asset Acquisition; provided that Indebtedness of such Person which is
redeemed, defeased, retired or otherwise repaid at the time of or immediately
after consummation of the transactions by which such Person becomes a
Restricted Subsidiary or such Asset Acquisition shall not be Acquired
Indebtedness.
"Adjusted Consolidated Net Income" means, for any period, the aggregate net
income (or loss) of the Company and its Restricted Subsidiaries for such period
determined in conformity with GAAP; provided that the following items shall be
excluded in computing Adjusted Consolidated Net Income (without duplication):
.the net income of any Person that is not a Restricted Subsidiary,
except to the extent of the amount of dividends or other distributions
actually paid to the Company or any of its Restricted Subsidiaries by
such Person during such period;
. solely for the purposes of calculating the amount of Restricted
Payments that may be made pursuant to clause (C) of the first
paragraph of the "Limitation on Restricted Payments" covenant
described below (and in such case, except to the extent includable
pursuant to clause (i) above), the net income (or loss) of any Person
accrued prior to the date it becomes a Restricted Subsidiary, or is
merged into or consolidated with the Company or any of its Restricted
Subsidiaries or all or substantially all of the property and assets
of such Person are acquired by our company or any of its Restricted
Subsidiaries;
78
. the net income of an) Restricted Subsidiary to the extent that the
declaration or payment of dividends or similar distributions by such
Restricted Subsidiary of such net income is not at the time permitted
by the operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to such Restricted Subsidiary, except to the
extent that such net income could be paid to our company or a
Restricted Subsidiary to loans, advances, intercompany transfers,
principal repayments or otherwise;
. any gains or losses (on an after-tax basis) attributable to Asset
Sales;
. except for purposes of calculating the amount of Restricted Payments
that may be made pursuant to clause (C) of the first paragraph of the
"Limitation on Restricted Payments" covenant described below, any
amount paid or accrued as dividends on Preferred Stock of our company
or any Restricted Subsidiary owned by Persons other than our company
and any of its Restricted Subsidiaries; and
. without duplication of clause (iv) above, all extraordinary gains and
extraordinary losses.
"Adjusted Consolidated Net Tangible Assets" means the total amount of assets
of our company and its Restricted Subsidiaries (less applicable depreciation,
amortization and other valuation reserves), except to the extent resulting from
write-ups of capital assets (excluding write-ups in connection with accounting
for acquisitions in conformity with GAAP), after deducting therefrom (i) all
current liabilities of our company and its Restricted Subsidiaries (excluding
intercompany items) and (ii) all goodwill, trade names, trademarks, patents,
unamortized debt discount and expense and other like intangibles, all as set
forth on the most recent quarterly or annual consolidated balance sheet of our
company and its Restricted Subsidiaries, prepared in conformity with GAAP and
filed with the Commission or provided to the Trustee pursuant to the
"Commission Reports and Reports to Holders" covenant.
"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Asset Acquisition" means (i) an Investment by our company or any of its
Restricted Subsidiaries in any other Person pursuant to which such Person shall
become a Restricted Subsidiary or shall be merged into or consolidated with our
company or any of its Restricted Subsidiaries; provided that such Person's
primary business is related, ancillary or complementary to the businesses of
our company and its Restricted Subsidiaries on the date of such Investment or
(ii) an acquisition by our company or any of its Restricted Subsidiaries of the
property and assets of any Person other than our company or any of its
Restricted Subsidiaries that constitute substantially all of such Person or of
a division or line of business of such Person; provided that the property and
assets acquired are related, ancillary or complementary to the businesses of
our company and its Restricted Subsidiaries on the date of such acquisition.
"Asset Disposition" means the sale or other disposition by our company or
any of its Restricted Subsidiaries (other than to our company or another
Restricted Subsidiary) of (i) all or substantially all of the Capital Stock of
any Restricted Subsidiary or (ii) all or substantially all of the assets that
constitute a division or line of business of our company or any of its
Restricted Subsidiaries.
"Asset Sale" means any sale, transfer or other disposition (including by way
of merger or consolidation) in one transaction or a series of related
transactions by our company or any of its Restricted Subsidiaries to any Person
other than our company or any of its Restricted Subsidiaries of
. all or any of the Capital Stock of any Restricted Subsidiary,
79
.all or substantially all of the property and assets of an operating
unit or business of our company or any of its Restricted Subsidiaries,
or
. any other property and assets (other than the Capital Stock or other
Investment in an Unrestricted Subsidiary) of our company or any of
its Restricted Subsidiaries outside the ordinary course of business
of our company or such Restricted Subsidiary and, in each case that
is not governed by the provisions of the Indenture applicable to
mergers, consolidations and sales of all or substantially all of the
assets of our company; provided that "Asset Sale" shall not include
(a) sales or other dispositions of inventory, receivables and other
current assets, (b) sales or other dispositions of assets for
consideration at least equal to the fair market value of the assets
sold or disposed of, to the extent that the consideration received
would constitute property or assets of the kinds described in clause
(i) (B) of the "Limitation on Asset Sales" covenant, (c) sales,
transfers or other dispositions of assets constituting Restricted
Payments permitted to be made under the "Limitation on Restricted
Payments" covenant, (d) transfers consisting of granting of Liens
permitted under the "Limitation on Liens" covenant and dispositions
of such assets in accordance with such Liens or (e) Sale and
Leaseback Transactions permitted under the "Limitation on Sale and
Leaseback Transactions" and "Limitation on Indebtedness" covenants.
"Attributable Debt" means, with respect to an operating lease included in
any Sale and Leaseback Transaction at the time of determination, the present
value (discounted at the interest rate implicit in the lease or, if not known,
at our company's incremental borrowing rate) of the obligations of the lessee
of the property subject to such lease for rental payments during the remaining
term of the lease included in such transaction, including any period for which
such lease has been extended or may, at the option of the lessor, be extended,
or until the earliest date on which the lessee may terminate such lease without
penalty or upon payment of penalty (in which case the rental payments shall
include such penalty), after excluding from such rental payments all amounts
required to be paid on account of maintenance and repairs, insurance, taxes,
assessments, water, utilities and similar charges.
"Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (i) the sum of the products of (a)
the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment by (ii) the sum of all such principal payments.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in the equity of such Person, whether outstanding on the
Closing Date or issued thereafter, including, without limitation, all Common
Stock and Preferred Stock.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present
value of the rental obligations of such Person as lessee, in conformity with
GAAP, is required to be capitalized on the balance sheet of such Person.
"Capitalized Lease Obligations" means the discounted present value of the
rental obligations under a Capitalized Lease.
"Change of Control" means such time as
. (a) prior to the occurrence of a Public Market, a -person- or "group"
(within the meaning of Sections 13(d) and 14 (d)(2) of the Exchange
Act) becomes the ultimate "beneficial owner" (as defined in Rule 13d-
3 under the Exchange Act) of Voting Stock representing a greater
percentage of the total voting power of the Voting Stock of our
company, on a fully diluted basis, than is held by the Existing
Stockholders on such date and (b) after the occurrence of a Public
Market, a "person" or "group" (within the meaning of Sections 13(d)
and 14(d)(2) of the Exchange Act) becomes the ultimate "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act) of
80
more than 35% of the total voting power of the Voting Stock of our
company on a fully diluted basis, and such ownership is greater than
the percentage of the total voting power of the Voting Stock of our
company, on a fully diluted basis, than is held by the Existing
Stockholders on such date; or
. individuals who on the Closing Date constitute the Board of Directors
(together with any new directors whose election by the Board of
Directors or whose nomination by the Board of Directors for election
by our company's stockholders was approved by a vote of at least two-
thirds of the members of the Board of Directors then in office who
either were members of the Board of Directors on the Closing Date or
whose election or nomination for election was previously so approved)
cease for any reason to constitute a majority of the members of the
Board of Directors then in office.
"Closing Date" means the date on which the Old Notes are originally issued
under the Indenture.
"Collateral Agent" means the securities intermediary with which the Pledged
Account is maintained, initially the Trustee.
"Consolidated EBITDA" means, for any period, Adjusted Consolidated Net
Income for such period plus, to the extent such amount was deducted in
calculating such Adjusted Consolidated Net Income:
. Consolidated Interest Expense;
. income taxes (other than income taxes (either positive or negative)
attributable to extraordinary, and non-recurring gains or losses or
sales of assets);
. depreciation expense;
. amortization expense; and
. all other non-cash items reducing Adjusted Consolidated Net Income
(other than items that will require cash payments and for which an
accrual or reserve is, or is required by GAAP to be, made), less all
non-cash items increasing Adjusted Consolidated Net Income, all as
determined on a consolidated basis for our company and its Restricted
Subsidiaries in conformity with GAAP, provided that, if any
Restricted Subsidiary is not a Wholly Owned Restricted Subsidiary,
Consolidated EBITDA shall be reduced (to the extent not otherwise
reduced in the calculation of Adjusted Consolidated Net Income) by an
amount equal to (A) the amount of the Adjusted Consolidated Net
Income attributable to such Restricted Subsidiary multiplied by (B)
the percentage ownership interest in the income of such Restricted
Subsidiary not owned on the last day of such period by our company or
any of its Restricted Subsidiaries.
"Consolidated Interest Expense" means, for any period, the aggregate amount
of interest in respect of Indebtedness (including, without limitation,
amortization of original issue discount on any Indebtedness and the interest
portion of any deferred payment obligation, calculated in accordance with the
effective interest method of accounting; all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing; the net costs associated with Interest Rate Agreements; and interest
expenses actually paid during such period in respect of Indebtedness that is
Guaranteed or secured by our company or any of its Restricted Subsidiaries) and
all but the principal component of rentals in respect of Capitalized Lease
Obligations paid, accrued or scheduled to be paid or to be accrued by our
company and its Restricted Subsidiaries during such period; excluding, however,
(i) any amount of such interest of any Restricted Subsidiary if the net income
of such Restricted Subsidiary is excluded in the calculation of Adjusted
Consolidated Net Income pursuant to clause (iii) of the definition thereof (but
only in the same proportion as the net income of such Restricted Subsidiary is
excluded from the calculation of Adjusted Consolidated Net Income pursuant to
clause (iii) of the definition thereof) and (ii) any premiums, fees and
expenses (and any amortization thereof) payable in connection with the offering
of the Old Notes, all as determined on a consolidated basis (without taking
into account Unrestricted Subsidiaries) in conformity with GAAP.
81
"Consolidated Leverage Ratio" means, on any Transaction Date, the ratio of
. the aggregate amount of Indebtedness of our company and its
Restricted Subsidiaries on a consolidated basis outstanding on such
Transaction Date (provided that, if any Restricted Subsidiary is not
a Wholly-Owned Restricted Subsidiary, such Indebtedness of such
Restricted Subsidiary shall be reduced by an amount equal to (I) the
amount of the Indebtedness attributable to such Restricted Subsidiary
multiplied by (II) the percentage ownership interest in the income of
such Restricted Subsidiary not owned on such Transaction Date by our
company or any of its Restricted Subsidiaries) to
. the aggregate amount of Consolidated EBITDA for the then most recent
fiscal quarter for which financial statements of our company have
been filed with the Commission or provided to the Trustee pursuant to
the "Commission Reports and Reports to Holders" covenant described
below (such fiscal quarter period being the "Quarter") multiplied by
four, provided that, in making the foregoing calculation, (A) pro
forma effect shall be given to any Indebtedness to be Incurred or
repaid on the Transaction Date; (B) pro forma effect shall be given
to Asset Dispositions and Asset Acquisitions (including giving pro
forma effect to the application of proceeds of any Asset Disposition)
that occur from the beginning of the Quarter through the Transaction
Date (the "Reference Period"), as if they had occurred and such
proceeds had been applied on the first day of such Reference Period;
and (C) pro forma effect shall be given to asset dispositions and
asset acquisitions (including giving pro forma effect to the
application of proceeds of any asset disposition) that have been made
by any Person that has become a Restricted Subsidiary or has been
merged with or into our company or any Restricted Subsidiary during
such Reference Period and that would have constituted Asset
Dispositions or Asset Acquisitions had such transactions occurred
when such Person was a Restricted Subsidiary as if such asset
dispositions or asset acquisitions were Asset Dispositions or Asset
Acquisitions that occurred on the first day of such Reference Period;
provided that to the extent that clause (B) or (C) of this sentence
requires that pro forma effect be given to an Asset Acquisition or
Asset Disposition, such pro forma calculation shall be based upon the
full fiscal quarter immediately preceding the Transaction Date of the
Person, or division or line of business of the Person, that is
acquired or disposed of for which financial information is available.
"Consolidated Net Worth" means, at any date of determination, stockholders'
equity as set forth on the most recently available quarterly or annual
consolidated balance sheet of our company and its Restricted Subsidiaries
(which shall be as of a date not more than 90 days prior to the date of such
computation, and which shall not take into account Unrestricted Subsidiaries),
less any amounts attributable to Disqualified Stock or any equity security
convertible into or exchangeable for Indebtedness, the cost of treasury stock
and the principal amount of any promissory notes receivable from the sale of
the Capital Stock of our company or any of' its Restricted Subsidiaries, each
item to be determined in conformity with GAAP (excluding the effects of foreign
currency exchange adjustments under Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 52).
"Currency Agreement" means any foreign exchange contract, currency swap
agreement, currency option or other similar agreement or arrangement.
"Debt Securities" means any Indebtedness (including any Guarantee) issued in
connection with a public offering (whether or not underwritten) or a private
placement (provided such private placement is underwritten for resale pursuant
to Rule 144A, Regulation S or other exemption from registration under the
Securities Act or sold on an agency basis by a broker-dealer or one of its
Affiliates to 10 or more beneficial holders); it being understood that "Debt
Securities" shall not include commercial bank borrowings or similar borrowings,
recourse transfers of financial assets, capital leases, Attributable Debt
arising from Sale and Leaseback Transactions, issuances of Disqualified Stock
to the extent permitted to be Incurred (treating the Disqualified Stock as if
it were Indebtedness for this purpose) under the "Limitation on Indebtedness"
covenant or other
82
types of borrowings incurred in a manner not customarily viewed as a
"securities offering" or Guarantees in respect of the foregoing.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means any class or series of Capital Stock of any
Person that by its terms or otherwise is (i) required to be redeemed prior to
the Stated Maturity of the Old Notes, (ii) redeemable at the option of the
holder of such class or series of Capital Stock at any time prior to the Stated
Maturity of the Old Notes or (iii) convertible into or exchangeable for Capital
Stock referred to in clause (i) or (ii) above or Indebtedness having a
scheduled maturity prior to the Stated Maturity of the Old Notes, provided that
any Capital Stock that would not constitute Disqualified Stock but for
provisions thereof giving holders thereof the right to require such Person to
repurchase or redeem such Capital Stock upon the occurrence of an "asset sale"
or "change of control" occurring prior to the Stated Maturity of the Old Notes
shall not constitute Disqualified Stock if the "asset sale" or "change of
control" provisions applicable to such Capital Stock are no more favorable to
the holders of such Capital Stock than the provisions contained in "Limitation
on Asset Sales" and "Repurchase of Old Notes upon a Change of Control"
covenants described below and such Capital Stock specifically provides that
such Person will not repurchase or redeem any such stock pursuant to such
provision prior to the Company's repurchase of such Old Notes as are required
to be repurchased pursuant to the "Limitation on Asset Sales" and "Repurchase
of Old Notes upon a Change of Control" covenants described below.
"Existing Stockholders" means Princes Gate Investors II, L.P. and its
Affiliates, Stuart Z. Levin and S. Robert Levine.
"fair market value" means the price that would be paid in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined in
good faith by the Board of Directors, whose determination shall be conclusive
if evidenced by a resolution of the Board of Directors; provided that for
purposes of the eighth item of the second paragraph of the "Limitation on
Indebtedness" covenant, (x) the fair market value of any security registered
under the Exchange Act shall be the average of the closing prices, regular way,
of such security for the 20 consecutive trading days immediately preceding the
sale of Capital Stock and (y) in the event the aggregate fair market value of
any other property (other than cash or cash equivalents) received by the
Company exceeds $10 million, the fair market value of such property shall be
determined by a nationally recognized investment banking firm and set forth in
their written opinion a copy of which shall be delivered to the Trustee.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Closing Date, including, without limitation,
those set forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and statements
and pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations contained or referred to in
the Indenture shall be computed in conformity with GAAP applied on a consistent
basis, except that calculations made for purposes of determining compliance
with the terms of the covenants and with other provisions of the Indenture
shall be made without giving effect to (i) the amortization of any expenses
incurred in connection with the offering of the Old Notes and (ii) except as
otherwise provided, the amortization of any amounts required or permitted by
Accounting Principles Board Opinion Nos. 16 and 17.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and,
without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such Person (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness of
such other Person (whether arising by virtue of partnership arrangements, or by
agreements to keep-well, to purchase assets, goods, securities or services
83
(unless such purchase arrangements are on arm's-length terms and are entered
into in the ordinary course of business), to take-or-pay, or to maintain
financial statement conditions or otherwise) or (ii) entered into for purposes
of assuring in any other manner the obligee of such Indebtedness of me payment
thereof or to protect such obligee against loss in respect thereof (in whole or
in part), provided that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including an "Incurrence" of Acquired Indebtedness, provided that neither the
accrual of interest nor the accretion of original issue discount shall be
considered an Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication);
. all indebtedness of such Person for borrowed money;
. all obligations of such Person evidenced by bonds, debentures, notes
or other similar instruments;
. all obligations of such Person in respect of letters of credit or
other similar instruments (including reimbursement obligations with
respect thereto);
. all obligations of such Person to pay the deferred and unpaid
purchase price of property or services, which purchase price is due
more than six months after the date of placing such property in
service or taking delivery and title thereto or the completion of
such services, except Trade Payables;
. all Capitalized Lease Obligations of such Person;
. all Attributable Debt of such Person with respect to any Sale and
Leaseback Transaction to which such Person is a lessee;
. the maximum fixed redemption or repurchase price of Disqualified
Stock of such Person at the date of determination;
. all Indebtedness of other Persons secured by a Lien on any asset of
such Person, whether or not such Indebtedness is assumed by such
Person; provided that the amount of such Indebtedness shall be the
lesser of (A) the fair market value of such asset at such date of
determination and (B) the amount of such Indebtedness;
. all Indebtedness of other Persons Guaranteed by such Person to the
extent such Indebtedness is Guaranteed by such Person; and
. to the extent not otherwise included in this definition, net
obligations of such Person under Currency Agreements and Interest
Rate Agreements. For purposes of the preceding sentence, the maximum
fixed repurchase price of any Disqualified Stock that does not have a
fixed repurchase price shall be calculated in accordance with the
terms of such Disqualified Stock as if such Disqualified Stock were
repurchased on any date on which Indebtedness shall be required to be
determined pursuant to the Indenture; provided that if such
Disqualified Stock is not then permitted to be repurchased, the
repurchase price shall be the book value of such Disqualified Stock.
The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as
described above and, with respect to contingent obligations, the
maximum liability upon the occurrence of the contingency giving rise
to the obligation; provided that (A) the amount outstanding at any
time of any Indebtedness issued with original issue discount is the
face amount of such Indebtedness less the remaining unamortized
portion of the original issue discount of such Indebtedness at the
time of its issuance as determined in conformity with GAAP, (B) money
borrowed and set aside at the time of the Incurrence of any
Indebtedness in order to prefund the payment of the interest on such
Indebtedness shall not be deemed to be
84
"Indebtedness" and (C) Indebtedness shall not include any liability for
federal, state, local or other taxes.
"Interest Rate Agreement" means interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement, option or future contract or other similar
agreement or arrangement.
"Investment" in any Person means any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee
or similar arrangement; but excluding (x) advances to customers (including
distributors) in the ordinary course of business that are, in conformity with
GAAP, recorded as accounts receivable on the balance sheet of our company or
its Restricted Subsidiaries and (y) advances to suppliers in the ordinary
course of business that are, in conformity with GAAP, recorded as prepaid
expenses on the balance sheet of our company or its Restricted Subsidiaries)
or capital contribution to (by means of any transfer of cash or other property
to others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, bonds, notes,
debentures or other similar instruments issued by, such Person and shall
include:
. the designation of a Restricted Subsidiary as an Unrestricted
Subsidiary; and
. the fair market value of the Capital Stock (or any other Investment),
held by our company or any of its Restricted Subsidiaries, of (or in)
any Person that has ceased to be a Restricted Subsidiary, including
without limitation, by reason of any transaction permitted by clause
(iii) of the "Limitation on the Issuance and Sale of Capital Stock of
Restricted Subsidiaries" covenant; provided that the fair market value
of the Investment remaining in any Person that has ceased to be a
Restricted Subsidiary shall not exceed the aggregate amount of
Investments previously made in such Person valued at the time such
Investments were made less the net reduction of such Investments. For
purposes of the definition of "Unrestricted Subsidiary," and the
"Limitation on Restricted Payments" covenant described below,
--"Investment" shall include the fair market value of the assets (net
of liabilities (other than liabilities to the Company or any of its
Restricted Subsidiaries)) of any Restricted Subsidiary at the time
that such Restricted Subsidiary is designated an Unrestricted
Subsidiary,
--the fair market value of the assets (net of liabilities (other than
liabilities to our company or any, of its Restricted Subsidiaries))
of any Unrestricted Subsidiary at the time that such Unrestricted
Subsidiary is designated a Restricted Subsidiary shall be considered
a reduction in outstanding Investments and (iii) any property
transferred to or from an Unrestricted Subsidiary shall be valued at
its fair market value at the time of such transfer.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including, without limitation, any conditional sale or
other title retention agreement or lease in the nature thereof or any
agreement to give any security interest).
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means, (a) with respect to any Asset Sale, the proceeds
of such Asset Sale in the form of cash or cash equivalents, including payments
in respect of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the form of
cash or cash equivalents (except to the extent such obligations are financed
or sold with recourse to our company or any Restricted Subsidiary) and
proceeds from the conversion of other property received when converted to cash
or cash equivalents, net of:
. brokerage commissions and other fees and expenses (including fees and
expenses of counsel, accountants and investment bankers and other
professionals) related to such Asset Sale,
85
. provisions for all taxes (whether or not such taxes will actually be
paid or are payable) as a result of such Asset Sale without regard to
the consolidated results of operations of our company and its
Restricted Subsidiaries, taken as a whole;
. payments made to repay Indebtedness or any other obligation
outstanding at the time of such Asset Sale that either (A) is secured
by a Lien on the property or assets sold or (B) is required to be
paid as a result of such sale; and
. appropriate amounts to be provided by our company or any Restricted
Subsidiary as a reserve against any liabilities associated with such
Asset Sale, including, without limitation, pension and other post-
employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations
associated with such Asset Sale, all as determined in conformity with
GAAP and (b) with respect to any issuance or sale of Capital Stock,
the proceeds of such issuance or sale in the form of cash or cash
equivalents, including payments in respect of deferred payment
obligations (to the extent corresponding to the principal, but not
interest, component thereof) when received in the form of cash or
cash equivalents (except to the extent such obligations are financed
or sold with recourse to our company or any Restricted Subsidiary)
and proceeds from the conversion of other property received when
converted to cash or cash equivalents, net of attorney's fees,
accountants' fees, underwriters' or placement agents' fees, discounts
or commissions and brokerage, consultant and other fees incurred in
connection with such issuance or sale and net of taxes paid or
payable as a result thereof.
"Offer to Purchase" means an offer to purchase Notes by our company from the
holders commenced by mailing a notice to the Trustee and each holder stating:
. the covenant pursuant to which the offer is being made and that all
Old Notes validly tendered in accordance with the terms of the Offer
to Purchase will be accepted for payment on a pro rata basis;
. the purchase price and the date of purchase (which shall be a
Business Day no earlier than 30 days nor later than 60 days from the
date such notice is mailed) (the "Payment Date");
. that any Note not tendered will continue to accrue interest pursuant
to its terms;
. that, unless our company defaults in the payment of the purchase
price, any Note accepted for payment pursuant to the Offer to
Purchase shall cease to accrue interest on and after the Payment
Date;
. that holders electing to have a Note purchased pursuant to the Offer
to Purchase will be required to deliver the Note, together with the
form entitled "Option of the Holder to Elect Purchase" on the reverse
side of the Note completed, to the Paying Agent at the address
specified in the notice no later than the close of business on the
Business Day immediately preceding the Payment Date;
. that holders will be entitled to withdraw their election if the
Paying Agent receives, not later than the close of business on the
third Business Day immediately preceding the Payment Date, a
telegram, facsimile transmission or letter setting forth the name of
such holder, the principal amount of Old Notes delivered for purchase
and a statement that such holder is withdrawing its election to have
such Old Notes purchased; and
. that holders whose Old Notes are being purchased only in part will be
issued new Old Notes equal in principal amount to the principal
amount of the unpurchased portion of the Old Notes surrendered;
provided that each Note purchased and each new Note issued shall be
in a principal amount of $1,000 or integral multiples thereof. On or
prior to the Payment Date, the Company shall (i) accept for payment
on a pro rata basis Old Notes or portions thereof tendered pursuant
to an Offer to Purchase; (ii) deposit with the Paying Agent money
sufficient to pay the purchase price of all Old Notes or portions
thereof so accepted; and (iii) deliver, or cause to be delivered, to
the Trustee all Old Notes or portions thereof so accepted together
with an Officers' Certificate
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specifying the Old Notes or portions thereof accepted for payment by
our company. The Paying Agent shall promptly mail to the holders of
Old Notes so accepted payment each in an amount equal to the purchase
price, and the Trustee shall promptly authenticate and mail to such
holder a new Note equal in principal amount to any unpurchased portion
of the Note surrendered; provided that each Note purchased and each
new Note issued shall be in a principal amount of $1,000 or integral
multiples thereof. Our company will publicly announce the results of
an Offer to Purchase as soon as practicable after the Payment Date.
The Trustee shall act as the Paying Agent for an Offer to Purchase.
Our company will comply with Rule 14e-1 under the Exchange Act and any
other securities laws and regulations thereunder to the extent such
laws and regulations are applicable, in the event that our company is
required to repurchase Old Notes pursuant to an Offer to Purchase.
"Permitted Investment" means (i) an Investment in our company or a
Restricted Subsidiary or a Person which will, upon the making of such
Investment, become a Restricted Subsidiary or be merged or consolidated with or
into or transfer or convey all or substantially all its assets to, our company
or a Restricted Subsidiary; provided that such Person's primary business is
related, ancillary or complementary to the businesses of our company and its
Restricted Subsidiaries on the date of such Investment; (ii) Temporary Cash
Investments; (iii) payroll, travel, relocation and similar advances to cover
matters that are expected at the time of such advances ultimately to be treated
as expenses in accordance with GAAP; (iv) loans or advances to employees made
in the ordinary course of business that do not in the aggregate exceed $1.0
million at any time outstanding; (v) Investments in Unrestricted Subsidiaries
in an aggregate amount not to exceed $10.0 million; provided each such
Unrestricted Subsidiary's primary business is related, ancillary or
complementary to the businesses of our company and its Restricted Subsidiaries
on the dates of such Investments; and (vi) Investments received in satisfaction
of judgments or as part of or in connection with the bankruptcy, winding up or
liquidation of a Person, except if such Investment is received in consideration
for an Investment made in such Person in connection with or in anticipation of
such bankruptcy, winding up or liquidation.
"Permitted Liens" means
. Liens for taxes, assessments, governmental charges or claims that are
being contested in good faith by appropriate legal proceedings
promptly instituted and diligently conducted and for which a reserve
or other appropriate provision, if any, as shall be required in
conformity with GAAP shall have been made;
. statutory and common law Liens of landlords and carriers,
warehousemen, mechanics, suppliers, materialmen, repairmen or other
similar Liens arising in the ordinary course of business and with
respect to amounts not yet delinquent or being contested in good
faith by appropriate legal proceedings promptly instituted and
diligently conducted and for which a reserve or other appropriate
provision, if any, as shall be required in conformity with GAAP shall
have been made;
. Liens incurred or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and
other types of social security;
. Liens incurred or deposits made to secure the performance of tenders,
bids, leases, statutory or regulatory obligations, bankers' acceptances,
surety and appeal bonds, government contracts, performance and return-of-
money bonds and other obligations of a similar nature incurred in the
ordinary course of business (exclusive of obligations for the payment of
borrowed money);
. easements, rights-of-way, municipal and zoning ordinances and similar
charges, encumbrances, title defects or other irregularities that do
not materially interfere with the ordinary course of business of the
Company or any of its Restricted Subsidiaries;
. Liens (including extensions and renewals thereof) upon real or
personal property acquired after the Closing Date; provided that (a)
such Lien is created solely for the purpose of securing Indebtedness
Incurred, in accordance with the "Limitation on Indebtedness"
covenant described below, to
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finance the cost (including, without limitation, the cost of design,
development, construction, acquisition, transportation, installation,
improvement or integration) of the real or personal property subject
thereto and such Lien is created prior to, at the time of or within
six months after the later of the acquisition, the completion of
construction or the commencement of full operation of such property,
(b) the principal amount of the Indebtedness secured by such Lien does
not exceed 100% of such cost and (c) any such Lien shall not extend to
or cover any property other than such item of property and any
improvements on such property and any proceeds (including insurance
proceeds) and products thereof and attachments and accessions thereto;
. leases or subleases granted to others that do not materially
interfere with the ordinary course of business of our company and its
Restricted Subsidiaries, taken as a whole;
. Liens encumbering property or assets under construction arising from
progress or partial payments by a customer of our company or its
Restricted Subsidiaries relating to such property or assets;
. any interest or title of a lessor in the property subject to any
Capitalized Lease or operating lease;
. Liens arising from filing Uniform Commercial Code financing
statements regarding leases or other Uniform Commercial Code
financing statements for precautionary purposes relating to
arrangements not constituting Indebtedness;
. Liens on property of, or on shares of Capital Stock or Indebtedness
of, any Person existing at the time such Person becomes, or becomes a
part of, any Restricted Subsidiary; provided that such Liens do not
extend to or cover any property or assets of our company or any
Restricted Subsidiary other than the property or assets acquired and
any proceeds (including insurance proceeds) and products thereof and
attachments and accessions thereto;
. Liens in favor of our company or any Restricted Subsidiary;
. Liens arising from the rendering of a final judgment or order against
our company or any Restricted Subsidiary that does not give rise to
an Event of Default;
. Liens securing reimbursement obligations with respect to letters of
credit that encumber documents and other property relating to such
letters of credit and the products and proceeds thereof;
. Liens in favor of customs and revenue authorities arising as a matter
of law to secure payment of customs duties in connection with the
importation of goods;
. Liens encumbering customary initial deposits and margin deposits, and
other Liens that are within the general parameters customary in the
industry and incurred in the ordinary course of business, in each
case, securing Indebtedness under Interest Rate Agreements and
Currency Agreements and forward contracts, options, future contracts,
futures options or similar agreements or arrangements designed solely
to protect our company or any of its Restricted Subsidiaries from
fluctuations in interest rates, currencies or the price of
commodities;
. Liens arising out of conditional sale, title retention, consignment
or similar arrangements for the sale of goods entered into by our
company or any of its Restricted Subsidiaries in the ordinary course
of business in accordance with the past practices of the Company and
is Restricted Subsidiaries prior to the Closing Date;
. Liens on or sales of receivables;
. any interest or title of licensor in the property subject to a
license;
. Liens in favor of the Trustee arising under the Indenture;
. Liens on the Capital Stock of Unrestricted Subsidiaries; and
. Liens that secure Indebtedness with an aggregate principal amount not
in excess of $10 million at any time outstanding.
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"Pledge Agreement" means the Collateral Pledge and Security Agreement dated
as of the Closing Date, by and among our company, the Trustee and the
Collateral Agent, governing the pledge of the Pledged Securities and the
disbursement of funds from the Pledged Account as such agreement may be
amended, restated, supplemented or otherwise modified from time to time.
"Pledge Account" means an account established and maintained with the
Trustee for the deposit of the Pledged Securities pursuant to the terms of the
Pledge Agreement.
"Public Equity Offering" means an underwritten primary public offering of
Common Stock of our company pursuant to an effective registration statement
under the Securities Act.
A "Public Market" shall be deemed to exist if (i) a Public Equity Offering
has been consummated and (ii) at least 15% of the total issued and outstanding
Common Stock of our company has been distributed by means of an effective
registration statement under the Securities Act or sales pursuant to Rule 144
under the Securities Act.
"Restricted Subsidiary" means any Subsidiary of our company other than an
Unrestricted Subsidiary.
"Sale and Leaseback Transaction" means any direct or indirect arrangement
pursuant to which our company or any of its Restricted Subsidiaries sells or
transfers any of its assets or properties (whether owned on the Closing Date or
acquired thereafter) and then or thereafter leases such assets or properties or
any part thereof or any other assets or properties which our company, or its
Restricted Subsidiaries, intends to use for substantially the same purpose or
purposes as the assets or properties sold or transferred.
"Significant Subsidiary" means, at any date of determination, any Restricted
Subsidiary that, together with its Subsidiaries, (i) for the most recent fiscal
year of our company, accounted for more than 10% of the consolidated revenues
of our company and its Restricted Subsidiaries or (ii) as of the end of such
fiscal year, was the owner of more than 10% of the consolidated assets of our
company and its Restricted Subsidiaries, all as set forth on the most recently
available consolidated financial statements of our company for such fiscal
year.
"Specified Date" means any Redemption Date, any Payment Date for an Offer to
Purchase or any date on which the Old Notes first become due and payable after
an Event of Default.
"S&P" means Standard & Poor's Ratings Services, a division of The McGraw-
Hill Companies, Inc, and its successors.
"Stated Maturity" means (i) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final
installment of principal of such debt security is due and payable and (ii) with
respect to any scheduled installment of principal of or interest on any debt
security, the date specified in such debt security as the fixed date on which
such installment is due and payable.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the voting power
of the outstanding Voting Stock is owned, directly or indirectly, by such
Person and one or more other Subsidiaries of such Person, (ii) any limited
partnership of which such Person is a general partner or (iii) any other Person
over which any combination of such Person and its other Subsidiaries, directly
or indirectly, has the power, by contract or otherwise, to direct or cause the
direction of policies, management and affairs generally.
"Temporary Cash Investment" means any of the following:
. direct obligations of the United States of America or any agency
thereof or obligations fully and unconditionally guaranteed by the
United States of America or any agency thereof,
89
. time deposit accounts, certificates of deposit and money market
deposits maturing within 360 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws
of the United States of America, any state thereof or any foreign
country recognized by the United States of America, and which bank or
trust company has capital, surplus and undivided profits aggregating
in excess of $50.0 million (or the foreign currency equivalent
thereof) and has outstanding debt which is rated "A" (or an
equivalent rating) or higher by at least one nationally recognized
statistical rating organization (as defined in Rule 436 under the
Securities Act) or any money-market fund sponsored by a registered
broker dealer or mutual fund distributor,
. repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in the first item above
entered into with a bank meeting the qualifications described in the
second item above,
. commercial paper, maturing not more than 270 days after the date of
acquisition, issued by a corporation (other than an Affiliate of our
company) organized and in existence under the laws of the United
States of America, any state thereof or any foreign country
recognized by the United States of America with a rating at the time
as of which any investment therein is made of "P-1" (or higher)
according to Moody's or "A-1" (or higher) according to S&P,
. auction-rate preferred stocks of any corporation maturing not later
than 45 days after the acquisition thereof, with a rating at the time
of acquisition of not less than "AAA" according to S&P or "Aaa"
according to Moody's,
. corporate debt obligations maturing within 12 months after the date
of acquisition, with a rating on the date of acquisition not less
than "AAA" or "A-1" according to S&P or "Aaa" or "P-l" according to
Moody's,
. securities with maturities of one year or less from the date of
acquisition issued or fully and unconditionally guaranteed by any
state, commonwealth or territory of the United States of America, or
by any political subdivision or taxing authority thereof, and rated
at least "A" by S&P or Moody's, and
. mutual funds required to invest at least 90% of their funds in
investments of the types described in the first and second items
above.
"Trade Payables" means, with respect to any Person, any accounts payable or
any other indebtedness or monetary obligation to trade creditors created,
assumed or Guaranteed by such Person or any of its Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods or
services.
"Transaction Date" means, with respect to the Incurrence of any Indebtedness
by our company or any of its Restricted Subsidiaries, the date such
Indebtedness is to be Incurred and, with respect to any Restricted Payment, the
date such Restricted Payment is to be made.
"Unrestricted Subsidiary" means (i) any Subsidiary of our company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below; and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Restricted
Subsidiary (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary owns any
Capital Stock of, or owns or holds any Lien (other than a Permitted Lien) on
any property of, our company or any Restricted Subsidiary, provided that (A)
any Guarantee by the Company or any Restricted Subsidiary of any Indebtedness
of the Subsidiary being so designated shall be deemed an "Incurrence" of such
Indebtedness and an "Investment" by our company or such Restricted Subsidiary
(or both, it applicable) at the time of such designation; (B) either (I) the
Subsidiary to be so designated has total assets of $1,000 or less or (II) if
such Subsidiary has assets greater than $1,000, such designation would be
permitted under the "Limitation on Restricted Payments" covenant described
below and (C) if applicable, the Incurrence of Indebtedness and the Investment
referred to in clause (A) of this proviso would be permitted
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under the "Limitation on Indebtedness" and "Limitation on Restricted Payments"
covenants described below. The Board of Directors may designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided that (i) no
Default or Event of Default shall have occurred and be continuing at the time
of or after giving effect to such designation and (ii) all Liens and
Indebtedness of such Unrestricted Subsidiary outstanding immediately after such
designation would, if Incurred at such time, have been permitted to be Incurred
(and shall be deemed to have been Incurred) for all purposes of the Indenture.
Any such designation by the Board of Directors shall be evidenced to the
Trustee by promptly filing with the Trustee a copy of the resolution of the
Board of Directors giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
provisions.
"U.S. Government Obligations" means securities that are (i) direct
obligations of the United States of America for the payment of which the full
faith and credit of the United States of America is pledged or (ii) obligations
of a Person controlled or supervised by and acting as an agency or
instrumentality of the United States of America, the payment of which is
unconditionally guaranteed as a full faith and credit obligation by the United
States of America, which, in either case, are not callable or redeemable at the
option of the issuer thereof at any time prior to the Stated Maturity of the
Old Notes, and shall also include a depository receipt issued by a bank or
trust company as custodian with respect to any such U.S. Government Obligation
or a specific payment of interest on or principal of any such U.S. Government
Obligation held by such custodian for the account of the holder of a depository
receipt; provided that (except as required by law) such custodian is not
authorized to make any deduction from the amount payable to the holder of such
depository receipt from any amount received by the custodian in respect of the
U.S. Government Obligation or the specific payment of interest on or principal
of the U.S. Government Obligation.
"Voting Stock" means with respect to any Person, Capital Stock of any class
or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
"Wholly Owned" means, with respect to any Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such Subsidiary (other
than any director's qualifying shares or Investments by foreign nationals
mandated by applicable law) by such Person or one or more Wholly Owned
Subsidiaries of such Person.
Covenants
Limitation on Indebtedness
(a) We will not, and will not permit any of our Restricted Subsidiaries to,
Incur any Indebtedness (other than the Old Notes and Indebtedness existing on
the Closing Date); provided that we may Incur Indebtedness, and any Restricted
Subsidiary may Incur Acquired Indebtedness, if, after giving effect to the
Incurrence of such Indebtedness and the receipt and application of the proceeds
therefrom, the Consolidated Leverage Ratio would be greater than zero and less
than 6:1.
Notwithstanding the foregoing, we and any Restricted Subsidiary (except as
specified below) may Incur each and all of the following:
. Indebtedness (including any Indebtedness under one or more revolving
credit or working capital facilities) of the Company in an aggregate
principal amount outstanding at any time not to exceed the greater of
(A) the sum of (I) 80% of the consolidated book value of the accounts
receivable of our company and its Restricted Subsidiaries and (II)
60% of the consolidated book value of the inventory of the Company
and its Restricted Subsidiaries in each case as determined from the
financial statement of our company for the then most recent fiscal
quarter which has been filed with the Commission or provided to the
Trustee pursuant to the "Commission Reports and Reports to Holders"
covenant described below and (B) $25.0 million;
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. Indebtedness owed (A) to our company evidenced by a promissory note
or (B) to any Restricted Subsidiary; provided that any event which
results in any such Restricted Subsidiary ceasing to be a Restricted
Subsidiary or any subsequent transfer of such Indebtedness (other
than to our company or another Restricted Subsidiary) shall be
deemed, in each case, to constitute an Incurrence of such
Indebtedness not permitted by this item;
. Indebtedness issued in exchange for, or the net proceeds of which are
used to refinance or refund, then outstanding Indebtedness (other
than Indebtedness Incurred under the first, second, fourth, sixth,
ninth or tenth clause of this paragraph) and any refinancings thereof
in a principal amount not to exceed the principal amount so
refinanced or refunded (plus premiums, accrued interest, fees and
expenses) unless the Incurrence of such excess is otherwise permitted
by this covenant; provided that Indebtedness the proceeds of which
are used to refinance or refund the Old Notes or Indebtedness that is
pari passu with, or subordinated in right of payment to, the Old
Notes shall only be permitted under this clause (iii) if (A) in case
the Old Notes are refinanced in part or the Indebtedness to be
refinanced is pari passu with the Old Notes, such new Indebtedness,
by its terms or by the terms of any agreement or instrument pursuant
to which such new Indebtedness is outstanding, is expressly, made
pari passu with, or subordinate in right of payment to, the remaining
Old Notes, (B) in case the Indebtedness to be refinanced is
subordinated in right of payment to the Old Notes, such new
Indebtedness, by its terms or by the terms of any agreement or
instrument pursuant to which such new Indebtedness is issued or
remains outstanding, is expressly made subordinate in right of
payment to the Old Notes at least to the extent that the Indebtedness
to be refinanced is subordinated to the Old Notes and (C) such new
Indebtedness, determined as of the date of Incurrence of such new
Indebtedness, does not mature prior to the Stated Maturity of the
Indebtedness to be refinanced or refunded, and the Average Life of
such new Indebtedness is at least equal to the remaining Average Life
of the Indebtedness to be refinanced or refunded; and provided
further that in no event may Indebtedness of our company, be
refinanced by means of any Indebtedness of any Restricted Subsidiary,
pursuant to this item;
. Indebtedness (A) in respect of performance; surety or appeal bonds
provided in the ordinary course of business; (B) under Currency
Agreements and Interest Rate Agreements, provided that such
agreements (a) are designed solely to protect our company or its
Restricted Subsidiaries against fluctuations in foreign currency
exchange rates or interest rates and (b) do not increase the
Indebtedness of the obligor outstanding at any time other than as a
result of fluctuations in foreign currency exchange rates or interest
rates or by reason of fees, indemnities and compensation payable
thereunder; and (C) arising from agreements providing for
indemnification, adjustment of purchase price or similar obligations,
or from Guarantees or letters of credit, surety bonds or performance
bonds securing any obligations of our company or any of its
Restricted Subsidiaries pursuant to such agreements, in any case
Incurred in connection with the disposition of any business, assets
or Restricted Subsidiary (other than Guarantees of Indebtedness
Incurred by any Person acquiring all or any portion of such business,
assets or Restricted Subsidiary for the purpose of financing such
acquisition), in a principal amount not to exceed the gross proceeds
actually received by our company or any Restricted Subsidiary in
connection with such disposition;
. Indebtedness of our company or any Restricted Subsidiary, to the
extent the net proceeds thereof are promptly (A) used to purchase Old
Notes tendered in an Offer to Purchase made as a result of a Change
in Control or (B) deposited to defease the Old Notes as described
below under "Defeasance";
. Guarantees of the Old Notes and Guarantees of Indebtedness of our
company by any Restricted Subsidiary, provided the Guarantee of such
Indebtedness is permitted by and made in accordance with the
"Limitation on Issuance of Guarantees by Restricted Subsidiaries"
covenant described below;
. Indebtedness Incurred to finance the cost (including the cost of
design, development, acquisition, construction, installation,
improvement, transportation or integration) to acquire equipment,
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inventory or network assets (including acquisitions by way of
Capitalized Lease and acquisitions of the Capital Stock of a Person
that becomes a Restricted Subsidiary to the extent of the fair market
value of the equipment, inventory or network assets so acquired) by the
Company or a Restricted Subsidiary after the Closing Date;
. Indebtedness of our company not to exceed, at any one time
outstanding, two times the sum of (A) the Net Cash Proceeds received
by our company after the Closing Date from the issuance and sale of
its Capital Stock (other than Disqualified Stock) to a Person that is
not a Restricted Subsidiary of our company, to the extent such Net
Cash Proceeds have not been used pursuant to clause (C)(2) of the
first paragraph or the third, fourth, sixth or seventh clause of the
second paragraph of the "Limitation on Restricted Payments" covenant
described below to make a Restricted Payment and (B) 80% of the fair
market value of property (other than cash and cash equivalents)
received by the Company after the Closing Date from the sale of its
Capital Stock (other than Disqualified Stock) to a Person that is not
a Restricted Subsidiary of the Company, to the extent such sale of
Capital Stock has not been used pursuant to the third, fourth, sixth
or seventh clause of the second paragraph of the "Limitation on
Restricted Payments" covenant described below to make a Restricted
Payment: provided that such Indebtedness does not mature prior to the
Stated Maturity of the Old Notes and has an Average Life longer than
the Old Notes;
. Indebtedness of our company, in an aggregate principal amount
outstanding at any time not to exceed $1.0 million. Incurred in
connection with the repurchase of shares of Capital Stock of the
Company, options on any such shares or related stock appreciation
rights held by employees, former employees, directors or former
directors (or their estates or beneficiaries under their estates),
upon death, disability, retirement or termination of employment;
provided that such Indebtedness, by its terms, (A) is expressly made
subordinate in right of payment to the Old Notes, and (B) provides
that no payments of principal (including by way of sinking fund,
mandatory redemption or otherwise (including defeasance)), may be made
while any of the Old Notes are outstanding; and
. Indebtedness of our company (in addition to Indebtedness permitted
under the preceding clauses in an aggregate principal amount
outstanding at any time not to exceed $55.0 million, less any amount
of such Indebtedness permanently repaid as provided under the
"Limitation on Asset Sales" covenant described below.
(b) Notwithstanding any other provision of this "Limitation on
Indebtedness" covenant, the maximum amount of Indebtedness that our company or
a Restricted Subsidiary may Incur pursuant to this "Limitation on
Indebtedness" covenant shall not be deemed to be exceeded, with respect to any
outstanding Indebtedness due solely to the result of fluctuations in the
exchange rates of currencies.
(c) For purposes of determining any particular amount of Indebtedness under
this "Limitation on Indebtedness" covenant, (1) Guarantees, Liens or
obligations with respect to letters of credit supporting Indebtedness
otherwise included in the determination of such particular amount shall not be
included and (2) any Liens granted pursuant to the equal and ratable
provisions referred to in the "Limitation on Liens" covenant described below
shall not be treated as Indebtedness. For purposes of determining compliance
with this "Limitation on Indebtedness" covenant, in the event that an item of
Indebtedness meets the criteria of more than one of the types of Indebtedness
described in the above clauses, our company, in its sole discretion, shall
classify and may, from time to time, reclassify, such item of Indebtedness and
only be required to include the amount and type of such Indebtedness in one of
such clauses.
Limitation on Restricted Payments
Our company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly,
. declare or pay any dividend or make any distribution on or with
respect to its Capital Stock (other than (x) dividends or
distributions payable solely in shares of its Capital Stock (other
than Disqualified Stock) or in options, warrants or other rights to
acquire shares of such Capital Stock
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and (y) pro rata dividends or distributions on Common Stock of
Restricted Subsidiaries held by minority stockholders) held by Persons
other than our company or any of its Restricted Subsidiaries,
. purchase, redeem, retire or otherwise acquire for value any shares of
Capital Stock of (A) our company or an Unrestricted Subsidiary
(including options, warrants or other rights to acquire such shares
of Capital Stock) held by any Person or (B) a Restricted Subsidiary
(including options, warrants or other rights to acquire such shares
of Capital Stock) held by any Affiliate of our company (other than a
Wholly Owned Restricted Subsidiary) or any holder (or any Affiliate
of such holder) of 5% or more of the Capital Stock of our company,
. make any voluntary or optional principal payment, or voluntary or
optional redemption, repurchase, defeasance, or other acquisition or
retirement for value, of Indebtedness of our company that is
subordinated in right of payment to the Old Notes, or
. make any Investment, other than a Permitted Investment, in any Person
(such payments or any other actions described in clauses (i) through (iv)
above being collectively "Restricted Payments") if, at the time of, and
after giving effect to, the proposed Restricted Payment: (A) a Default or
Event of Default shall have occurred and be continuing, (B) our company
could not Incur at least $1.00 of Indebtedness under the first paragraph
of the "Limitation on Indebtedness" covenant or (C) the aggregate amount
of all Restricted Payments (the amount, if other than in cash, to be
determined in good faith by the Board of Directors, whose determination
shall be conclusive and evidenced by a resolution of the Board of
Directors) made after the Closing Date shall exceed the sum of (1) the
aggregate amount of the Consolidated EBITDA (or, if Consolidated EBITDA is
negative, minus the amount by which Consolidated EBITDA is less than zero)
less 1.5 times Consolidated Interest Expense, in each case accrued on a
cumulative basis during the period (taken as one accounting period)
beginning on the first day of the fiscal quarter immediately following the
Closing Date and ending on the last day of the last fiscal quarter
preceding the Transaction Date for which reports have been filed with the
Commission or provided to the Trustee pursuant to the "Commission Reports
and Reports to Holders" covenant plus (2) the aggregate Net Cash Proceeds
received by our company after the Closing Date from the issuance and sale
permitted by the Indenture of its Capital Stock (other than Disqualified
Stock) to a Person who is not a Restricted Subsidiary of our company,
including an issuance or sale permitted by the Indenture of Indebtedness
of our company for cash subsequent to the Closing Date upon the conversion
of such Indebtedness into Capital Stock (other than Disqualified Stock) of
our company, or from the issuance to a Person who is not a Restricted
Subsidiary of our company of any options, warrants or other rights to
acquire Capital Stock of our company (in each case, exclusive of any
Disqualified Stock or any options, warrants or other rights that are
redeemable at the option of the holder, or are required to be redeemed,
prior to the Stated Maturity of the Old Notes), in each case except to the
extent such Net Cash Proceeds are used to Incur Indebtedness pursuant to
clause (viii) of the second paragraph under the "Limitation on
Indebtedness" covenant plus (3) an amount equal to the net reduction in
Investments (other than reductions in Permitted Investments) in any Person
resulting from payments of interest on Indebtedness, dividends,
distributions, repayments of loans or advances, or other transfers of
assets, in each case to our company or any Restricted Subsidiary or from
the Net Cash Proceeds from the sale of any such Investment (except, in
each case, to the extent any such payment or proceeds are included in the
calculation of Adjusted Consolidated Net Income), or from redesignations
of Unrestricted Subsidiaries as Restricted Subsidiaries (valued in each
case as provided in the definition of "Investments"), not to exceed, in
each case, the amount of Investments previously made by our company or any
Restricted Subsidiary in such Person or Unrestricted Subsidiary.
The foregoing provision shall not be violated by reason of:
. the payment of any dividend within 60 days after the date of
declaration thereof if, at said date of declaration, such payment
would comply with the foregoing paragraph;
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. the redemption, repurchase, defeasance or other acquisition or
retirement for value of Indebtedness that is subordinated in right of
payment to the Old Notes, including premium, if any, and accrued and
unpaid interest, with the proceeds of, or in exchange for,
Indebtedness Incurred under clause (iii) of the second paragraph of
part (a) of the "Limitation on Indebtedness" covenant;
. the repurchase, redemption or other acquisition of Capital Stock of
our company or an Unrestricted Subsidiary (or options, warrants or
other rights to acquire such Capital Stock) in exchange for, or out
of the proceeds of, a substantially concurrent offering of, shares of
Capital Stock (other than Disqualified Stock) of the Company (or
options, warrants or other rights to acquire such Capital Stock);
. the making of any principal payment or the repurchase, redemption,
retirement, defeasance or other acquisition for value of Indebtedness
of our company which is subordinated in right of payment to the Old
Notes in exchange for, or out of the proceeds of a substantially
concurrent offering of shares of the Capital Stock (other than
Disqualified Stock) of our company (or options, warrants or other
rights to acquire such Capital Stock);
. payments or distributions to dissenting stockholders pursuant to
applicable law, pursuant to or in connection with a consolidation,
merger or transfer of assets that complies with the provisions of the
Indenture applicable to mergers, consolidations and transfers of all
or substantially all of the property and assets of our company;
. Investments in any Person the primary business of which is related,
ancillary or complementary to the business of our company and its
Restricted Subsidiaries on the date of such Investments, provided
that the aggregate amount of Investments made pursuant to this clause
(vi) does not exceed the sum of (x) $30.0 million plus (y) the amount
of Net Cash Proceeds received by our company after the Closing Date
from the sale of its Capital Stock (other than Disqualified Stock) to
a Person who is not a Restricted Subsidiary of the Company, except to
the extent such Net Cash Proceeds are used to Incur Indebtedness
pursuant to the eighth clause under the "Limitation on Indebtedness"
covenant or to make Restricted Payments pursuant to clause (C)(2) of
the first paragraph, or the third or fourth clause of this paragraph,
of this "Limitation on Restricted Payments" covenant, plus (z) the
net reduction in Investments made pursuant to this clause
(vi) resulting from distributions on or repayments of such
Investments or from the Net Cash Proceeds from the sale of any such
Investment (except in each case to the extent any such payment or
proceeds is included in the calculation of Consolidated EBITDA) or
from such Person becoming a Restricted Subsidiary (valued in each
case as provided in the definition of "Investments"); provided that
the net reduction in any Investment shall not exceed the amount of
such Investment;
. Investments acquired in exchange for Capital Stock (other than
Disqualified Stock) of our company;
. the declaration or payment of dividends on the Common Stock of the
Company following a Public Equity Offering of such Common Stock of up
to 6.0% per annum of the Net Cash Proceeds received by our company in
such Public Equity Offering; (ix) repurchases of Warrants pursuant to
a Repurchase Offer; (x) any purchase of any fractional share of
Common Stock of our company in connection with an exercise of the
Warrants; or
. repurchases of Capital Stock of our company from employees, former
employees, directors, former directors, consultants or former
consultants of our company (or their estates or beneficiaries under
their estates) upon their death, disability, retirement, or
termination of employment; provided that the aggregate amount of such
repurchases shall not exceed $1.0 million in any calendar year or
$5.0 million in the aggregate; provided that, except in the case of
clauses (i) and (iii), no Default or Event of Default shall have
occurred and be continuing or occur as a consequence of the actions
or payments set forth therein.
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Each Restricted Payment permitted pursuant to the preceding paragraph (other
than the Restricted Payment referred to in clause (ii) thereof, an exchange of
Capital Stock for Capital Stock or Indebtedness referred to in clause (iii) or
(iv) thereof and an Investment referred to in clause (vi) thereof), and the Net
Cash Proceeds from any issuance of Capital Stock referred to in clauses (iii)
and (iv) thereof, shall be included in calculating whether the condition of
clause (C) of the first paragraph of this "Limitation on Restricted Payments"
covenant have been met with respect to any subsequent Restricted Payments. In
the event the proceeds of an issuance of Capital Stock of the Company are used
for the redemption, repurchase or other acquisition of the Old Notes, or
Indebtedness that is pari passu with the Old Notes, then the Net Cash Proceeds
of such issuance shall be included in clause (C) of the first paragraph of this
"Limitation on Restricted Payments" covenant only to the extent such proceeds
are not used for such redemption, repurchase or other acquisition of
Indebtedness.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries
The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions permitted by
applicable law on any Capital Stock of such Restricted Subsidiary owned by our
company or any other Restricted Subsidiary, (ii) pay any Indebtedness owed to
our company or any other Restricted Subsidiary, (iii) make loans or advances to
our company or any other Restricted Subsidiary or (iv) transfer any of its
property or assets to our company or any other Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions:
. existing on the Closing Date in the Indenture or any other agreements
in effect on the Closing Date, and any extensions, refinancings,
renewals or replacements of such agreements, provided that the
encumbrances and restrictions in any such extensions, refinancings,
renewals or replacements are no less favorable in any material
respect to the holders than those encumbrances or restrictions that
are then in effect and that are being extended, refinanced, renewed
or replaced;
. existing under or by reason of applicable law;
. existing with respect to any Person or the property or assets of such
Person acquired by our company or any Restricted Subsidiary, existing
at the time of such acquisition and not incurred in contemplation
thereof, which encumbrances or restrictions are not applicable to any
Person or the property or assets of any Person other than such Person
or the property or assets of such Person so acquired, and any
extensions, refinancings, renewals or replacements of agreements of
such Person existing at the time of such acquisition; provided, that
the encumbrances and restrictions in any such extensions,
refinancings, renewals or replacements do not extend to any Person or
the property or assets of any Person other than such Person or the
property and assets of such Person so acquired;
. in the case of the fourth clause of the first paragraph of this
"Limitation on Dividend and Other Payment Restrictions Affecting
Restricted Subsidiaries" covenant, (A) that restrict in a customary
manner the subletting, assignment or transfer of any property or
asset that is subject to a lease, license, conveyance or contract or
similar property or asset, (B) existing by virtue of any transfer of,
agreement to transfer, option or right with respect to, or Lien on,
any property or assets of our company or any Restricted Subsidiary
not otherwise prohibited by the Indenture or (C) arising or agreed to
in the ordinary course of business, not relating to any Indebtedness,
and that do not, individually or in the aggregate, detract from the
value of property or assets of the Company or any Restricted
Subsidiary in any manner material to our company or any Restricted
Subsidiary;
. with respect to a Restricted Subsidiary and imposed pursuant to an
agreement that has been entered into for the sale or disposition of
all or substantially all of the Capital Stock of, or property and
assets of, such Restricted Subsidiary; or
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. contained in the terms of any Indebtedness or any agreement pursuant
to which such Indebtedness was issued if (A) the encumbrance or
restriction is not materially more disadvantageous to the holders of
the Old Notes than is customary in comparable financings (as
determined by our company) and (B) our company determines that any
such encumbrance or restriction is not reasonably expected to
materially affect our company's ability to make principal or interest
payments on the Old Notes. Nothing contained in this "Limitation on
Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries" covenant shall prevent our company or any Restricted
Subsidiary from (1) creating, incurring, assuming or suffering to
exist any Liens otherwise permitted in the "Limitation on Liens"
covenant or (2) restricting the sale or other disposition of property
or assets of the Company or any of its Restricted Subsidiaries that
secure Indebtedness of our company or any of its Restricted
Subsidiaries.
Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries
Our company will not sell, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue or sell, any shares of Capital Stock of a
Restricted Subsidiary (including options, warrants or other rights to purchase
shares of such Capital Stock) except (i) to our company or a Wholly Owned
Restricted Subsidiary; (ii) issuances of director's qualifying shares or sales
to foreign nationals of shares of Capital Stock of foreign Restricted
Subsidiaries, to the extent required by applicable law; (iii) if, immediately
after giving effect to such issuance or sale, such Restricted Subsidiary would
no longer constitute a Restricted Subsidiary and any Investment in such Person
remaining after giving effect to such issuance or sale would have been
permitted to be made under the "'Limitation on Restricted Payments" covenant if
made on the date of such issuance or sale; (iv) issuances or sales of Common
Stock of a Restricted Subsidiary; provided that the Company or such Restricted
Subsidiary applies the Net Cash Proceeds, if any, of any such sale in
accordance with clause (A) or (B) of the "Limitation on Asset Sales" covenant
described below or (v) issuances or sales of Disqualified Stock if the
"Limitation on Indebtedness" covenant would permit the Disqualified Stock to be
issued or sold (treating the Disqualified Stock as Indebtedness for such
purpose).
Limitation on Issuances of Guarantees by Restricted Subsidiaries
Our company will not permit any Restricted Subsidiary to (x) directly or
indirectly Guarantee any Indebtedness of our company which is pari passu with
or subordinate in right of payment to the Old Notes ("Guaranteed Indebtedness")
or (y) issue any Debt Securities (other than Indebtedness Incurred pursuant to
the fifth clause of the "Limitation on Indebtedness" covenant), unless (i) such
Restricted Subsidiary simultaneously executes and delivers a supplemental
indenture to the Indenture providing for a Guarantee (a "Subsidiary Guarantee")
of payment of the Old Notes by such Restricted Subsidiary and (ii) such
Restricted Subsidiary waives and will not in any manner whatsoever claim or
take the benefit or advantage of, any rights of reimbursement, indemnity or
subrogation or any other rights against our company or any other Restricted
Subsidiary as a result of any payment by such Restricted Subsidiary under its
Subsidiary Guarantee; provided that this paragraph shall not be applicable to
any Guarantee of any Restricted Subsidiary that existed at the time such Person
became a Restricted Subsidiary and was not Incurred in connection with, or in
contemplation of, such Person becoming a Restricted Subsidiary. If the
Guaranteed Indebtedness is (A) pari passu with the Old Notes, then the
Guarantee of such Guaranteed Indebtedness shall be pari passu with, or
subordinated to, the Subsidiary Guarantee or (B) subordinated to the Old Notes,
then the Guarantee of such Guaranteed Indebtedness shall be subordinated to the
Subsidiary Guarantee at least to the extent that the Guaranteed Indebtedness is
subordinated to the Old Notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary may provide by its terms that it shall be automatically and
unconditionally released and discharged upon (i) any sale, exchange or
transfer, to any Person not an Affiliate of our company, of all of our
company's and each Restricted Subsidiary's Capital Stock in, or all or
substantially all the assets of, such Restricted Subsidiary (which sale,
exchange or transfer is not prohibited by the Indenture) or (ii) the release or
discharge of the Guarantee which
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resulted in the creation of such Subsidiary Guarantee, except a discharge or
release by or as a result of payment under such Guarantee.
Limitation on Transactions with Stockholders and Affiliates
We will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, enter into, renew or extend any transaction (including, without
limitation, the purchase, sale, lease or exchange of property or assets, or the
rendering of any service) with any holder (or any Affiliate of such holder) of
5.0% or more of any class of Capital Stock of our company or with any Affiliate
of our company or any Restricted Subsidiary, except upon fair and reasonable
terms no less favorable to our company or such Restricted Subsidiary than could
be obtained, at the time of such transaction or, if such transaction is
pursuant to a written agreement, at the time of the execution of the agreement
providing therefor, in a comparable arm's-length transaction with a Person that
is not such a holder or an Affiliate.
The foregoing limitation does not limit, and shall not apply to
. transactions (A) approved by a majority of the disinterested members
of the Board of Directors or (B) for which the Company or a
Restricted Subsidiary delivers to the Trustee a written opinion of a
nationally recognized investment banking firm (including, without
limitation, the Placement Agent and its Affiliates) stating that the
transaction is fair to our company or such Restricted Subsidiary from
a financial point of view;
. any transaction solely between our company and any of its Wholly
Owned Restricted Subsidiaries or solely between Wholly Owned
Restricted Subsidiaries;
. the payment of reasonable and customary regular fees to directors of
our company who are not employees of our company;
. any payments or other transactions pursuant to any tax-sharing
agreement between our company and any other Person with which our
company files a consolidated tax return or with which our company is
part of a consolidated group for tax purposes;
. transactions between our company or any of its Restricted
Subsidiaries and a non-Wholly Owned Restricted Subsidiary or an
Unrestricted Subsidiary on a cost, rather than fair market value,
basis, or on other terms of the kind customarily employed to allocate
charges among members of a consolidated group of entities, in any
such case that are fair and reasonable to our company or such
Restricted Subsidiary; provided that the aggregate fair market value
of the consideration subject to such transactions does not exceed
$1.0 million in any calendar year;
. payment of fees to the Placement Agent or its Affiliates for
financial, advisory, consulting or investment banking services that
the Board of Directors deems to be advisable or appropriate
(including, without limitation, the payment of any underwriting
discounts or commissions or placement agency fees in connection with
the issuance and sale of securities); or
. any Restricted Payments not prohibited by the "Limitation on
Restricted Payments" covenant. Notwithstanding the foregoing, any
transaction or series of related transactions covered by the first
paragraph of this "Limitation on Transactions with Stockholders and
Affiliates" covenant and not covered by the second and third items of
this paragraph, (a) the aggregate amount of which exceeds $5.0
million in value, must be approved or determined to be fair in the
manner provided for in subclause (A) or (B) of the first item above
and (b) the aggregate amount of which exceeds $10.0 million in value,
must be determined to be fair in the manner provided for in clause
(i)(B) above.
Limitation on Liens
We will not, and will not permit any Restricted Subsidiary to, create,
incur, assume or suffer to exist any Lien on any of its assets or properties of
any character, or any shares of Capital Stock or Indebtedness
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of any Restricted Subsidiary, without making effective provision for all of the
Old Notes and all other amounts due under the Indenture to be directly secured
equally and ratably with (or, if the obligation or liability to be secured by
such Lien is subordinated in right of payment to the Old Notes, prior to) the
obligation or liability secured by such Lien.
The foregoing limitation does not apply to (i) Liens existing on the Closing
Date; (ii) Liens granted after the Closing Date on any assets or Capital Stock
of our company or its Restricted Subsidiaries created in favor of the holders;
(iii) Liens with respect to the assets of a Restricted Subsidiary granted by
such Restricted Subsidiary to our company or a Wholly Owned Restricted
Subsidiary to secure Indebtedness owing to our company or such other Restricted
Subsidiary; (iv) Liens securing Indebtedness which is Incurred to refinance
secured Indebtedness which is permitted to be Incurred under the third clause
of the second paragraph of the "Limitation on Indebtedness" covenant; provided
that such Liens do not extend to or cover any property or assets of our company
or any Restricted Subsidiary other than the property or assets securing the
Indebtedness being refinanced; (v) Liens on the Capital Stock of, or any
property or assets of, a Restricted Subsidiary securing Indebtedness of such
Restricted Subsidiary permitted under the "Limitation on Indebtedness"
covenant; (vi) Liens securing (A) obligations under revolving credit, working
capital or similar facilities Incurred under clause (i), or (B) Indebtedness
Incurred under the seventh clause of the second paragraph of the "Limitation on
Indebtedness" covenant; or (vii) Permitted Liens.
Limitation on Sale and Leaseback Transactions
We will not, and will not permit any Restricted Subsidiary to, enter into
any Sale and Leaseback Transaction.
The foregoing restriction does not apply to any Sale and Leaseback
Transaction if (i) the lease is for a period, including renewal rights, of not
in excess of three years; (ii) the lease secures or relates to industrial
revenue or pollution control bonds; (iii) the transaction is solely between our
company and any Wholly Owned Restricted Subsidiary or solely between Wholly
Owned Restricted Subsidiaries; or (iv) our company or such Restricted
Subsidiary, within 12 months after the sale or transfer of any assets or
properties is completed, applies an amount not less than the net proceeds
received from such sale in accordance with clause (A) or (B) of the first
paragraph of the "Limitation on Asset Sales" covenant described below.
Limitation on Asset Sales
The Company will not, and will not permit any Restricted Subsidiary to,
consummate any Asset Sale, unless (i) the consideration received by our company
or such Restricted Subsidiary is at least equal to the fair market value of the
assets sold or disposed of and (ii) at least 75% of the consideration received
consists of any combination of cash or Temporary Cash Investments or the
assumption of unsubordinated Indebtedness of our company or Indebtedness of any
Restricted Subsidiary, provided that our company or such Restricted Subsidiary
is irrevocably and unconditionally released from all liability under such
Indebtedness. In the event and to the extent that the Net Cash Proceeds
received by our company or any of its Restricted Subsidiaries from one or more
Asset Sales occurring on or after the Closing Date in any period of 12
consecutive months exceed 10% of Adjusted Consolidated Net Tangible Assets
(determined as of the date closest to the commencement of such 12-month period
for which a consolidated balance sheet of the Company and its Subsidiaries has
been filed with the Commission or provided to the Trustee pursuant to the
"Commission Reports and Reports to Holders" covenant), then our company shall
or shall cause the relevant Restricted Subsidiary to (i) within 12 months after
the date Net Cash Proceeds so received exceed 10% of Adjusted Consolidated Net
Tangible Assets (A) apply an amount equal to such excess Net Cash Proceeds to
permanently repay unsubordinated Indebtedness of the Company, or any Restricted
Subsidiary providing a Subsidiary Guarantee pursuant to the "Limitation on
Issuances of Guarantees by Restricted Subsidiaries" covenant described above or
Indebtedness of any other Restricted Subsidiary, in each case owing to a Person
other than our company or any of its Restricted Subsidiaries or (B) invest an
equal amount, or the amount not so applied pursuant to clause (A) (or enter
into a definitive agreement committing to so invest within 12 months after the
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date of such agreement), in property or assets (other than current assets) of a
nature or type or that are used in a business (or in a Person having property
and assets of a nature or type, or engaged in a business) similar or related to
the nature or type of the property and assets of, or the business of, and its
Restricted Subsidiaries existing on the date of such investment and (ii) apply
(no later than the end of the 12-month period referred to in clause (i)) such
excess Net Cash Proceeds (to the extent not applied (or committed to be
applied) pursuant to clause (i)) as provided in the following paragraph of this
"Limitation on Asset Sales" covenant. The amount of such excess Net Cash
Proceeds required to be applied (or to be committed to be applied) during such
12-month period as set forth in clause (i) of the preceding sentence and not
applied as so required by the end of such period shall constitute "Excess
Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to
this "Limitation on Asset Sales" covenant totals at least $5.0 million, our
company must commence, not later than the fifteenth Business Day of such month,
and consummate an Offer to Purchase from the holders on a pro rata basis an
aggregate principal amount of Old Notes equal to the Excess Proceeds on such
date, at a purchase price equal to 100% of the principal amount of the Old
Notes on the relevant Payment Date, plus, in each case, accrued interest, if
any, to the Payment Date.
Repurchase of Old Notes upon a Change of Control
Our company must commence, within 30 days of the occurrence of a Change of
Control, and thereafter consummate an Offer to Purchase for all Old Notes then
outstanding, at a purchase price equal to 101% of the principal amount thereof
on the relevant Payment Date, plus accrued interest, if any, to the Payment
Date.
There can be no assurance that our company will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of Old Notes) required by the foregoing covenant (as
well as may be contained in other securities of our company which might be
outstanding at the time). The above covenant requiring our company to
repurchase the Old Notes will, unless consents are obtained, require our
company to repay all indebtedness then outstanding which by its terms would
prohibit such Note repurchase, either prior to or concurrently with such Note
repurchase.
Commission Reports and Reports to Holders
At all times from and after the earlier of (i) the date of the commencement
of an Exchange Offer or the effectiveness of the Shelf Registration Statement
(the "Registration") and (ii) the date that is one year after the Closing Date,
in either case, whether or not the Company is then required to file reports
with the Commission, our company shall file with the Commission all such
reports and other information as it would be required to file with the
Commission by Sections 13(a) or 15(d) under the Exchange Act if it were subject
thereto. Our company shall supply the Trustee and each holder or shall supply
to the Trustee for forwarding to each such holder, without cost to such holder,
copies of such reports and other information. At all times prior to the earlier
of the date of the Registration and the date that is one year after the Closing
Date, our company shall supply the Trustee and each holder or shall supply to
the Trustee for forwarding to each such holder, without cost to such holder,
quarterly and annual reports substantially equivalent to those which would be
required by the Exchange Act. In addition, at all times prior to the sale of
the Old Notes pursuant to an effective registration statement, upon the request
of any holder or any prospective purchaser of the Old Notes designated by a
holder, the Company shall supply to such holder or such prospective purchaser
the information required under Rule 144A under the Securities Act.
Events of Default
The following events are defined as "Events of Default" in the Indenture:
(a) default in the payment of principal of (or premium, if any, on) any Note
when the same becomes due and payable at maturity, upon acceleration,
redemption or otherwise; (b) default in the payment of interest on any Note
when the same becomes due and payable, and such default continues for a period
of 30 days or a failure by our company to
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make any of the first six scheduled interest payments on the Old Notes on the
applicable Interest Payment Date; (c) default in the performance or breach of
the provisions of the Indenture applicable to mergers, consolidations and
transfers of all or substantially all of the assets of our company or the
failure to make or consummate an Offer to Purchase in accordance with the
"Limitation on Asset Sales" or "Repurchase of Notes upon a Change of Control"
covenant; (d) our company defaults in the performance of or breaches any other
covenant or agreement of our company in the Indenture or under the Old Notes
(other than a default specified in clause (a), (b) or (c) above) and such
default or breach continues for a period of 30 consecutive days after written
notice by the Trustee or the holders of 25% or more in aggregate principal
amount of the Old Notes; (e) there occurs with respect to any issue or issues
of Indebtedness of our company or any Significant Subsidiary having an
outstanding principal amount of $10.0 million or more in the aggregate for all
such issues of all such Persons, whether such Indebtedness now exists or shall
hereafter be created, (I) an event of default that has caused the holder
thereof to declare such Indebtedness to be due and payable prior to its Stated
Maturity and such Indebtedness has not been discharged in full or such
acceleration has not been rescinded or annulled within 30 days of such
acceleration and/or (II) the failure to make a principal payment at the final
(but not any interim) fixed maturity and such defaulted payment shall not have
been made, waived or extended within 30 days of such payment default; (f) any
final judgment or order (not covered by insurance) for the payment of money in
excess of $10.0 million in the aggregate for all such final judgments or orders
against all such Persons (treating any deductibles, self-insurance or retention
as not so covered) shall be rendered against our company or any Significant
Subsidiary and shall not be paid or discharged, and there shall be any period
of 30 consecutive days following entry of the final judgment or order that
causes the aggregate amount for all such final judgments or orders outstanding
and not paid or discharged against all such Persons to exceed $10.0 million
during which a stay of enforcement of such final judgment or order by reason of
a pending appeal or otherwise, shall not be in effect; (g) a court having
jurisdiction in the premises enters a decree or order for (A) relief in respect
of our company or any Significant Subsidiary in an involuntary case under any
applicable bankruptcy, insolvency or other similar law now or hereafter in
effect, (B) appointment of a receiver, liquidator, assignee, custodian,
trustee, sequestrator or similar official of our company or any Significant
Subsidiary or for all or substantially all of the property, and assets of our
company or any Significant Subsidiary or (C) the winding up or liquidation of
the affairs of our company or any Significant Subsidiary and, in each case,
such decree or order shall remain unstayed and in effect for a period of 60
consecutive days; (h) our company or any Significant Subsidiary (A) commences a
voluntary case under any applicable bankruptcy, insolvency or other similar law
now or hereafter in effect, or consents to the entry of an order for relief in
an involuntary case under any such law, (B) consents to the appointment of or
taking possession by a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of our company or any Significant Subsidiary
or for all or substantially all of the property and assets of our company or
any Significant Subsidiary or (C) effects any general assignment for the
benefit of creditors or (i) the Pledge Agreement shall cease to be in full
force and effect or to be enforceable in accordance with its terms, except as
provided therein.
If an Event of Default (other than an Event of Default specified in clause
(g) or (h) above that occurs with respect to our company) occurs and is
continuing under the Indenture, the Trustee or the holders of at least 25% in
aggregate principal amount of the Old Notes then outstanding, by written notice
to our company (and to the Trustee if such notice is given by the holders),
may, and the Trustee at the request of such holders shall, declare the
aggregate principal amount of, premium, if any, and accrued interest on the Old
Notes to be immediately due and payable. Upon a declaration of acceleration,
such principal amount, premium, if any, and accrued interest shall be
immediately due and payable. In the event of a declaration of acceleration
because an Event of Default set forth in clause (e) above has occurred and is
continuing, such declaration of acceleration shall be automatically rescinded
and annulled if the event of default triggering such Event of Default pursuant
to clause (e) shall be remedied or cured by our company or the relevant
Significant Subsidiary or waived by the holders of the relevant Indebtedness
within 60 days after the declaration of acceleration with respect thereto. If
an Event of Default specified in clause (g) or (h) above occurs with respect to
our company, the principal amount of, premium, if any, and accrued interest on
the Old Notes then outstanding shall ipso facto become and be immediately due
and payable without any declaration or other act on the part of the Trustee or
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any holder. The holders of at least a majority in aggregate principal amount of
the outstanding Old Notes, by written notice to our company and to the Trustee,
may waive all past defaults and rescind and annul a declaration of acceleration
and its consequences if (i) all existing Events of Default, other than the
nonpayment of the principal amount of, premium, if any, and interest on the Old
Notes that have become due solely by such declaration of acceleration, have
been cured or waived and (ii) the rescission would not conflict with any
judgment or decree of a court of competent jurisdiction. For information as to
the waiver of defaults, see "--Modification and Waiver" below.
The holders of at least a majority in aggregate principal amount of the
outstanding Old Notes may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. However, the Trustee may refuse to follow any
direction that conflicts with law or the Indenture, that may involve the
Trustee in personal liability, or that the Trustee determines in good faith may
be unduly prejudicial to the rights of holders of Old Notes not joining in the
giving of such direction and may take any other action it deems proper that is
not inconsistent with any such direction received from holders of Old Notes. A
holder may not pursue any remedy with respect to the Indenture or the Old Notes
unless: (i) the holder gives the Trustee written notice of a continuing Event
of Default; (ii) the holders of at least 25% in aggregate principal amount of
outstanding Old Notes make a written request to the Trustee to pursue the
remedy; (iii) such holder or holders offer the Trustee indemnity satisfactory
to the Trustee against any costs, liability or expense; (iv) the Trustee does
not comply with the request within 60 days after receipt of the request and the
offer of indemnity; and (v) during such 60-day period, the holders of a
majority in aggregate principal amount of the outstanding Old Notes do not give
the Trustee a direction that is inconsistent with the request. However, such
limitations do not apply to the right of any holder of a Note to receive
payment of the principal amount of, premium, if any, or interest on, such Note
or to bring suit for the enforcement of any such payment, on or after the due
date expressed in the Old Notes, which right shall not be impaired or affected
without the consent of such holder.
The Indenture requires certain officers of our company to certify, on or
before a date not more than 90 days after the end of each fiscal year, that a
review has been conducted of the activities of our company and its Restricted
Subsidiaries and our company's and its Restricted Subsidiaries' performance
under the Indenture and that our company has fulfilled all obligations
thereunder, or, if there has been a default in the fulfillment of any such
obligation, specifying each such default and the nature and status thereof. Our
company will also be obligated to notify the Trustee of any default or defaults
in the performance of any covenants or agreements under the Indenture.
Consolidation, Merger and Sale of Assets
Our company will not consolidate with, merge with or into, or sell, convey,
transfer, lease or otherwise dispose of all or substantially all of its
property and assets (as an entirety or substantially an entirety in one
transaction or a series of related transactions) to, any Person or permit any
Person to merge with or into our company unless:
. our company shall be the continuing Person, or the Person (if other
than our company) formed by such consolidation or into which our
company is merged or that acquired or leased such property, and
assets of our company shall be a corporation organized and validly
existing under the laws of the United States of America or any
jurisdiction thereof and shall expressly assume, by a supplemental
indenture, executed and delivered to the Trustee, all of the
obligations of our company on all of the Old Notes and under the
Indenture;
. immediately after giving effect to such transaction, no Default or
Event of Default shall have occurred and be continuing;
. immediately after giving effect to such transaction on a pro forma
basis, our company or any Person becoming the successor obligor of
the Old Notes (including any Person which would, after giving effect
to the merger or consolidation, properly classify our company as a
subsidiary in
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accordance with GAAP, and which expressly guarantees the obligations of
our company under the Old Notes through a supplemental indenture) shall
have a Consolidated Net Worth equal to or greater than 90% of the
Consolidated Net Worth of our company immediately prior to such
transaction;
. immediately after giving effect to such transaction on a pro forma
basis, our company, or any Person becoming the successor obligor of
the Old Notes (including any Person which would, after giving effect
to the merger or consolidation, properly classify our company as a
subsidiary in accordance with GAAP, and which expressly guarantees the
obligations of our company under the Old Notes through a supplemental
indenture) as the case may be, shall have a Consolidated Leverage
Ratio not greater than 110% of the Consolidated Leverage Ratio of our
company immediately prior to the transaction, provided, however, that
the fourth item shall not apply to a consolidation or merger with or
into a Wholly Owned Restricted Subsidiary with a positive net worth;
and
. our company delivers to the Trustee an Officers' Certificate
(attaching the arithmetic computations to demonstrate compliance with
the third and fourth items above) and an Opinion of Counsel, in each
case stating that such consolidation, merger or transfer and such
supplemental indenture comply with this provision and that all
conditions precedent provided for herein relating to such transaction
have been complied with; provided, however, that the third and fourth
items above do not apply if, in the good faith determination of the
Board of Directors of our company, whose determination shall be
evidenced by a resolution of the Board of Directors, the principal
purpose of such transaction is to change the state of incorporation of
the Company; provided further that, in connection with any such merger
or consolidation, no consideration (other than Capital Stock (other
than Disqualified Stock) in the surviving Person or our company) shall
be issued or distributed to the stockholders of our company; and
provided further that any such transaction shall not have as one of
its purposes the evasion of the foregoing limitations.
Defeasance
Defeasance and Discharge. The Indenture provides that our company will be
deemed to have paid and will be discharged from any and all obligations in
respect of the Old Notes on the 123rd day after the deposit referred to below,
and the provisions of the Indenture will no longer be in effect with respect
to the Old Notes (except for, among other matters, certain obligations to
register the transfer or exchange of the Old Notes, to replace stolen, lost or
mutilated Old Notes, to maintain paying agencies and to hold monies for
payment in trust) if, among other things, (A) our company has deposited with
the Trustee, in trust, money and/or U.S. Government Obligations that through
the payment of interest and principal in respect thereof in accordance with
their terms will provide money in an amount sufficient to pay the principal
of, premium, if any, and accrued interest on the Old Notes on the Stated
Maturity of such payments in accordance with the terms of the Indenture and
the Old Notes, (B) our company has delivered to the Trustee:
. either (x) an Opinion of Counsel to the effect that holders will not
recognize income, gain or loss for federal income tax purposes as a
result of our company's exercise of its option under this "Defeasance"
provision and will be subject to federal income tax on the same amount
and in the same manner and at the same times as would have been the
case if such deposit, defeasance and discharge had not occurred, which
Opinion of Counsel must be based upon (and accompanied by a copy of) a
ruling of the Internal Revenue Service to the same effect unless there
has been a change in applicable federal income tax law after the
Closing Date such that a ruling is no longer required or (y) a ruling
directed to the Trustee received from the Internal Revenue Service to
the same effect as the aforementioned Opinion of Counsel; and
. an Opinion of Counsel to the effect that the creation of the
defeasance trust does not violate the Investment Company Act of 1940
and after the passage of 123 days following the deposit (assuming that
none of the holders of the Old Notes are insiders of our company
within the
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meaning of Section 101(31) of the United States Bankruptcy Code) the
trust fund will not be subject to the effect of Section 547 of the
United States Bankruptcy Code or Section 15 of the New York Debtor and
Creditor Law, (C) immediately after giving effect to such deposit on a
pro forma basis, no Event of Default, or event that after the giving
of notice or lapse of time or both would become an Event of Default,
shall have occurred and be continuing on the date of such deposit or
during the period ending on the 123rd day after the date of such
deposit, and such deposit shall not result in a breach or violation
of, or constitute a default under, any other agreement or instrument
to which our company or any of its Subsidiaries is a party or by which
our company or any of its Subsidiaries is bound and (D) if at such
time the Old Notes are listed on a national securities exchange, our
company has delivered to the Trustee an Opinion of Counsel to the
effect that the Old Notes will not be delisted as a result of such
deposit, defeasance and discharge.
Defeasance of Certain Covenants and Certain Events of Default. The Indenture
further provides that the provisions of the Indenture will no longer be in
effect with respect to the third and fourth clauses under "Consolidation,
Merger and Sale of Assets" and all the covenants described herein under
"Covenants," clause (c) under "Events of Default" with respect to such the
third and fourth items under "Consolidation, Merger and Sale of Assets," clause
(d) under "Events of Default" with respect to such other covenants and clauses
(e) and (f) under "Events of Default" shall be deemed not to be Events of
Default upon, among other things, the deposit with the Trustee, in trust, of
money and/or U.S. Government Obligations that through the payment of interest
and principal in respect thereof in accordance with their terms will provide
money in an amount sufficient to pay the principal of, premium, if any, and
accrued interest on the Old Notes on the Stated Maturity of such payments in
accordance with the terms of the Indenture and the Old Notes, the satisfaction
of the provisions described in clauses (B)(ii), (C) and (D) of the preceding
paragraph and the delivery by our company to the Trustee of an Opinion of
Counsel to the effect that, among other things, the holders will not recognize
income, gain or loss for federal income tax purposes as a result of such
deposit and defeasance of certain covenants and Events of Default and will be
subject to federal income tax on the same amount and in the same manner and at
the same times as would have been the case if such deposit and defeasance had
not occurred.
Defeasance and Certain Other Events of Default. In the event our company
exercises its option to omit compliance with certain covenants and provisions
of the Indenture with respect to the Old Notes as described in the immediately
preceding paragraph and the Old Notes are declared due and payable because of
the occurrence of an Event of Default that remains applicable, the amount of
money and/or U.S. Government Obligations on deposit with the Trustee will be
sufficient to pay amounts due on the Old Notes at the time of their Stated
Maturity but may not be sufficient to pay amounts due on the Old Notes at the
time of the acceleration resulting from such Event of Default. However, our
company will remain liable for such payments.
Modification and Waiver
Modifications and amendments of the Indenture may be made by our company and
the Trustee with the consent of the holders of not less than a majority in
aggregate principal amount of the outstanding Old Notes; provided, however,
that no such modification or amendment may, without the consent of each holder
affected thereby, (i) change the Stated Maturity of the principal of, or any
installment of interest on, any Note, (ii) reduce the principal amount of, or
premium, if any, or interest on, any Note, (iii) change the place or currency
of payment of principal of, or premium, if any, or interest on, any Note, (iv)
impair the right to institute suit for the enforcement of any payment on or
after the Stated Maturity (or, in the case of a redemption, on or after the
Redemption Date) of any Note, (v) reduce the above-stated percentage of
outstanding Old Notes the consent of whose holders is necessary to modify or
amend the Indenture, (vi) waive a default in the payment of principal of,
premium, if any, or interest on the Old Notes or (vii) reduce the percentage or
aggregate principal amount of outstanding Old Notes the consent of whose
holders is necessary for waiver of compliance with certain provisions of the
Indenture or for waiver of certain defaults.
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No Personal Liability of Incorporators, Stockholders, Officers, Directors, or
Employees
The Indenture provides that no recourse for the payment of the principal of,
premium, if any, or interest on any of the Old Notes or for any claim based
thereon or otherwise in respect thereof, and no recourse under or upon any
obligation, covenant or agreement of our company in the Indenture, or in any of
the Old Notes or because of the creation of any Indebtedness represented
thereby, shall be had against any incorporator, stockholder, officer, director,
employee or controlling person of our company or of any successor Person
thereof. Each holder, by accepting the Old Notes, waives and releases all such
liability.
Concerning the Trustee
The Indenture provides that, except during the continuance of a Default, the
Trustee will not be liable, except for the performance of such duties as are
specifically set forth in such Indenture. If an Event of Default has occurred
and is continuing, the Trustee will use the same degree of care and skill in
its exercise of the rights and powers vested in it under the Indenture as a
prudent person would exercise under the circumstances in the conduct of such
person's own affairs.
The Indenture and provisions of the Trust Indenture Act of 1939, as amended,
incorporated by reference therein contain limitations on the rights of the
Trustee, should it become a creditor of our company, to obtain payment of
claims in certain cases or to realize on certain property received by it in
respect of any such claims, as security or otherwise. The Trustee is permitted
to engage in other transactions; provided, however, that if it acquires any
conflicting interest, it must eliminate such conflict or resign.
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DESCRIPTION OF THE NEW NOTES
The terms of the New Notes will be identical in all material respects to
those of the Old Notes, except that the New Notes (i) will have been registered
under the Securities Act and therefore will not be subject to certain
restrictions on transfer applicable to the Old Notes and (ii) will not be
entitled to certain registration rights under the Registration Rights
Agreement, including the provision for Additional Interest of up to 0.5% on the
Old Notes. Holders of Old Notes should review the information set forth under
"Summary--Certain Consequences of a Failure to Exchange Old Notes" and "--Terms
of New Notes."
FORM OF NEW NOTES
The certificates representing the New Notes will be issued in fully
registered form, without coupons. Except as described in the next paragraph,
the New Notes will be deposited with, or on behalf of, DTC, and registered in
the name of Cede & Co., as DTC's nominee in the form of a global note. Holders
of the New Notes will own book-entry interests in the global note evidenced by
records maintained by DTC.
Book-entry interests may be exchanged for certificated notes of like tenor
and equal aggregate principal amount, if:
(1) DTC notifies us that it is unwilling or unable to continue as
depositary or we determine that DTC is unable to continue as
depositary and we fail to appoint a successor depositary within 90
days;
(2) we provide for the exchange pursuant to the terms of the Indenture;
or
(3) we determine that the book-entry interests will no longer be
represented by global notes and we execute and deliver to the
Trustee instructions to that effect.
As of the date of this prospectus, no certificated notes are issued and
outstanding.
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DESCRIPTION OF CAPITAL STOCK
The following summary of the terms of our capital stock does not purport to
be complete and is qualified in our entirety by reference to the actual terms
of the capital stock contained in our Amended and Restated Certificate of
Incorporation.
Our Certificate of Incorporation, as amended to date (the "Certificate of
Incorporation") authorizes the issuance of 40,000,000 shares of Common Stock,
$.001 par value per share, and 20,248,107 shares of Preferred Stock, $.001 par
value per share. The following series of Preferred Stock have been designated
in the Certificate of Incorporation: Series A Preferred Stock (the "Series A
Preferred"), Series B-1 Preferred Stock (the "Series B-1 Preferred"), Series B-
2 Preferred (the "Series B-2 Preferred"), Series B-3 Preferred Stock (the
"Series B-3 Preferred") and Series B-4 Preferred (the "Series B-4 Preferred").
The Series B-1 Preferred, Series B-2 Preferred, Series B-3 Preferred and the
Series B-4 Preferred are collectively referred to herein as the "Series B
Preferred." As of March 31, 1999, there were four holders of record of Common
Stock and twenty-four holders of record of Preferred Stock. The following table
sets forth, with respect to each series of Preferred Stock and the Common Stock
as of March 31, 1999, the number of shares designated, the number of shares
outstanding, the number of shares subject to outstanding options and warrants
and our total fully diluted capitalization:
[Download Table]
Common Stock
Outstanding
Shares on a
Issuable Diluted, As
Authorized Outstanding Under Options Converted
Class/Series Shares Shares and Warrants Basis(2)
------------ ---------- ----------- ------------- ------------
Preferred Stock
Series A Preferred...... 7,600,000 7,499,900 -- 7,499,900
Series B-1 Preferred.... 5,714,442 5,714,442 -- 5,714,442
Series B-2 Preferred.... 1,790,769 1,297,433 -- 1,297,433
Series B-3 Preferred.... 2,285,727 2,285,727 -- 2,285,727
Series B-4 Preferred.... 2,857,169 2,857,169 -- 2,857,169
---------- ---------- --------- ----------
Total Preferred Stock... 20,248,107 19,654,671 -- 19,654,671
Common Stock............ 40,000,000 152,517 2,881,482(1) 3,033,999
---------- ---------- --------- ----------
Total Common and
Preferred Stock........ 60,248,107 19,807,188 2,881,482 22,688,670
========== ========== ========= ==========
--------
(1) Includes warrants to purchase 200,000 shares of Common Stock at an exercise
price of $8.49, 2,681,482 shares issuable in connection with options
granted under the 1996 Stock Option Plan with a weighted average exercise
price of $0.52 per share but excludes 266,101 shares issuable in connection
with options available for future grant under the 1996 Stock Option Plan.
(2) All shares of Preferred Stock are currently convertible into Common Stock
on a one-for-one basis.
Common Stock
The holders of our Common Stock are entitled to receive dividends when and
if declared by the Board of Directors, provided that no dividend or
distribution may be declared or paid on any shares of Common Stock unless all
dividend preferences of the Preferred Stock have been declared and set aside or
paid. Upon a liquidation, dissolution, merger or sale of substantially all of
our assets, all assets remaining after the payment of liabilities and the
liquidation preferences of any outstanding shares of Preferred Stock will be
distributed ratably among the holders of Common Stock based upon the number of
shares of Common Stock then held by each holder. The holders of our Common
Stock are entitled to one vote for each share held of record on all matters
submitted to a vote of stockholders. Our Common Stock has no preemptive or
other subscription rights, and there are no redemption or sinking fund
provisions applicable to the Common Stock. All outstanding shares of our Common
Stock are fully paid and non-assessable.
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As of March 31, 1999, there were 152,517 shares of Common Stock outstanding
held by four stockholders of record. As of March 31, 1999, options to purchase
an aggregate of 2,681,482 shares of Common Stock were also outstanding. See
"Management--1996 Stock Option Plan."
Preferred Stock
Dividends. The holders of Series B Preferred are entitled to receive
dividends when, as and if dividends are declared by the Board of Directors out
of funds legally available for the payment of dividends on each outstanding
share of Common Stock or Series A Preferred Stock in an amount equal to the
dividends paid on each share of the Common Stock or Series A Preferred Stock
multiplied by a fraction equal to the Liquidation Preference of each share of
Series B Preferred Stock, divided by the liquidation preference of the Series A
Preferred or Common Stock (assumed to be $.001), as the case may be. Dividends
on the Series B Preferred Stock are not cumulative. The holders of the Series A
Preferred Stock are entitled to dividends at the rate of $0.25 per annum per
share, payable prior and in preference to any payment of any dividend on the
Common Stock, when and as declared by the Board of Directors. Dividends on the
Series A Preferred are not cumulative. Dividends must be paid in order of
preference to the Series B Preferred (on a pari passu basis), to the Series A
Preferred and Common Stock.
Liquidation. A Liquidation event is defined as any voluntary or involuntary
liquidation, dissolution or winding up of the corporation. The sale, lease,
conveyance, exchange or transfer of all or substantially all of our property or
assets or a merger or consolidation of the corporation are not Liquidation
events with respect to the Series B Preferred. Payments made pursuant to a
Liquidation must be made in full to each series of Preferred Stock in the
following order of preference: Series B-1 Preferred, Series B-2 Preferred,
Series B-3 Preferred and Series B-4 Preferred (on a pari passu basis) and then
the Series A Preferred. Thereafter, any remaining assets shall be distributed
ratably among the holders of Common Stock.
Redemption. The Series B Preferred Stock is subject to mandatory redemption
on August 29, 2002 or, at the option of the holder, upon a change in control of
our company. A change in control with respect to redemption means such time as
a person or group becomes the beneficial owner (as defined in Rule 13d-3 under
the Securities Exchange Act of 1934, as amended) of our capital stock having
voting power that is more than the voting power of the Series B Preferred Stock
on that date. There are no sinking fund provisions applicable to the Preferred
Stock. The Series A Preferred Stock is not redeemable.
Conversion. The Preferred Stock is convertible by the holder at any time
into Common Stock at the rate of our initial conversion price divided by the
conversion price then in effect. The initial conversion prices of the Series A
Preferred, Series B-1 Preferred, Series B-2 Preferred, Series B-3 Preferred and
Series B-4 Preferred are $2.50, $2.7343, $5.8105, $6.8359 and $5.4687 per
share, respectively. The conversion price of the Preferred Stock is subject to
adjustment for stock splour, stock dividends, consolidations, combinations,
reclassifications and other like events. The conversion prices of the Series B-
1 Preferred, Series B-2 Preferred, Series B-3 Preferred and Series B-4
Preferred Stock may also be subject to adjustment for certain dilutive issues
of stock at a price per share below the applicable conversion price of such
respective series of Preferred Stock, based on the weighted average dilution to
such series. The Series A Preferred and Series B Preferred are automatically
convertible into Common Stock in the event of the closing of a registered
public offering of Common Stock with aggregate gross proceeds of at least $7.5
million in the case of the Series A Preferred and $25 million in the case of
the Series B Preferred.
Voting. The holders of Preferred Stock are entitled to notice of any
stockholders' meeting in accordance with our Bylaws and are entitled to vote
together with the holders of Common Stock as a class. The holders of Preferred
Stock are entitled to the number of votes equal to the number of shares of
Common Stock into which such shares are convertible.
Other Restrictive Covenants. The Certificate of Incorporation provides that
so long as shares of the Series B Preferred are outstanding, we may not (i)
declare or pay any dividend on any other class or series of
108
shares of our capital stock or (ii) purchase or redeem shares of our capital
stock, except the repurchase of Common Stock from employees in an amount less
than $250,000. Further, our Certificate of Incorporation provides that, without
the approval of the directors elected by the holders of the Series B-1
Preferred Stock, Series B-3 Preferred Stock and Series B-4 Preferred Stock (the
"PGI Stock"), we may not create, authorize or issue any securities or
reclassify any shares of capital stock into any securities that rank senior to
or on a parity with the Series B Preferred Stock with respect to dividends or
upon our liquidation or dissolution. Without the approval of holders of at
least a majority of the shares of PGI Stock then outstanding, we may not amend,
modify or appeal the terms of the Series B Preferred Stock in our Certificate
of Incorporation.
Board Representation Rights. In any election of directors, the Certificate
of Incorporation provides that the holders of the Series B-1 Preferred, Series
B-3 Preferred and B-4 Preferred are entitled to elect one director as long as
any such shares are outstanding. If the Series B-1 Preferred, Series B-3
Preferred and Series B-3 Preferred outstanding have an aggregate Liquidation
Preference of at least $7.5 million, $15.0 million or $30.0 million, the
holders of such shares leave the right to elect two directors, three directors
and four directors, respectively. All other directors will be elected by the
holders of the Preferred Stock and Common Stock voting together as one class on
an as-converted basis.
In the event of a Special Trigger Event (as defined below) when any PGI
Stock is outstanding, the number of directors constituting the Board of
Directors shall be immediately adjusted to permit the holders of a majority of
the shares of PGI Stock then outstanding to immediately appoint a majority of
the directors. Such rights shall continue until such time as all Special
Trigger Events shall be cured and no longer of any force or effect. A "Special
Trigger Event" shall be deemed to occur if (i) we have not, prior to August 29,
2000, completed an initial public offering generating gross proceeds to us in
excess of $25 million; (ii) we are in default with a creditor or trade partner
with respect to a liability or obligation of at least $50,000 for thirty days;
(iii) we breach any covenant or agreement contained in the Certificate of
Incorporation or the operative agreements pursuant to which the Series B
Preferred Stock were issued; or (iv) we becomes the subject of a voluntary or
involuntary bankruptcy, insolvency or similar proceeding.
Registration Rights. Pursuant to the Securityholders' Agreement dated as of
August 29, 1997, between us and the holders of Series B Preferred Stock
(collectively, the "Series B Holders"), the Series B Holders are entitled to
certain rights with respect to the registration of the Common Stock issuable
upon conversion of their shares ("Registrable Securities") under the Securities
Act. If we propose to register any of our securities under the Securities Act,
the Series B Holders are entitled to notice of such proposed registration and
the opportunity to include shares of Registrable Securities therein; provided,
however, that we and the underwriter of any such offering have the right to
limit or completely exclude shares proposed to be registered. At any time, if
Series B Holders holding at least 20% of the Registrable Securities which
constitutes at least 1% of our then outstanding Common Stock request that we
file a registration statement for the sale of shares having an anticipated sale
price of at least $10.0 million, we are required to use our best efforts to
cause such shares to be registered, subject to certain conditions and
limitations. Series B Holders are limited to one such demand registration in
any six month period. In the event of any limitation by the underwriter, the
number of securities that may be included in such registration will be
allocated on a pro rata basis. Further, the Series B Holders may require us to
register all or a portion of their Registrable Securities pursuant to Rule 415
promulgated under the Securities Act, provided that the request is made by the
holders of at least 20% of the Registrable Securities and subject to certain
other conditions and limitations.
Other Rights. Any holder of at least 150,000 shares of the Series B
Preferred Stock is entitled to certain annual and quarterly financial
information from us and also has certain rights of access and inspection. The
information rights terminate upon the earlier of (i) a registered public
offering of our Common Stock, or (ii) an acquisition of our company where the
surviving corporation is subject to the reporting requirements of the Exchange
Act.
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Transfer Agent and Registrar
The Transfer Agent and Registrar for our Common Stock and Preferred Stock is
Wilson Sonsini Goodrich & Rosati, P.C.
Delaware Law and Certain Charter Provisions
Certain Provisions of the Certificate of Incorporation and Bylaws. Our
Certificate of Incorporation provides for cumulative voting for the election of
directors. Cumulative voting provides that each share of stock normally having
one vote is entitled to a number of votes equal to the number of directors to
be elected. A stockholder may then cast all such votes for a single candidate
or may allocate them among as many candidates as the stockholder may choose. In
the absence of cumulative voting, the holders of a majority of the shares
present or represented at a meeting in which directors are to be elected would
have the power to elect all the directors to be elected at such meeting, and no
person could be elected without the support of holders of a majority of the
shares present or represent at such meeting. Section 141 of the Delaware
General Corporation Law provides that a director elected by cumulative voting
generally may not be removed without cause if the number of votes cast against
removal would be sufficient to elect such director under cumulative voting.
Under Delaware law, a special meeting of stockholders may be called by the
Board of Directors or by any other person authorized to do so in the
Certificate of Incorporation or the Bylaws. Our Bylaws authorize the Board of
Directors, the Chairman of the Board or the President (or any Vice President in
the Chairman's or President's absence) or stockholders holding in the aggregate
a majority of our outstanding shares to call a special meeting of stockholders.
Under Delaware law and our Bylaws, stockholders may execute an action by
written consent in lieu of a stockholder meeting. Delaware law permits a
corporation to eliminate such actions by written consent. Elimination of
written consents of stockholders may lengthen the amount of time required to
take stockholder actions since certain actions by written consent are not
subject to the minimum notice requirement of a stockholders' meeting. The
elimination of stockholders' written consents, however, deters hostile takeover
attempts. Without the availability of stockholder's actions by written consent,
a holder or group of holders controlling a majority in interest of our capital
stock would not be able to amend our Bylaws or remove directors pursuant to a
stockholder's written consent. Any such holder or group of holders would have
to call a stockholders' meeting and wait until the notice periods determined by
the Board of Directors pursuant to our Bylaws prior to taking any such action.
Certain Provisions of Delaware Law
We are subject to Section 203 of the Delaware General Corporation Law
("Section 203"), a provision that, in general, prohibits a publicly held
Delaware corporation from engaging in various "business combination"
transactions with any "interested stockholder" for a period of three years
after the date of the transaction in which the person became an "interested
stockholder," unless (i) prior to such date, the Board of Directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder, (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned by (a) persons who are directors and also
officers and (b) employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer, or (iii) on or subsequent
to such date the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders by the affirmative
vote of at least 66 2/3% of the outstanding voting stock which is not owned by
the interested stockholder. Section 203 defines business combination to
include: (i) any merger or consolidation involving the corporation and the
interested stockholder; (ii) any sale, transfer, pledge or other disposition
involving the interested stockholder of 10% or more of the assets of the
corporation;
110
(iii) subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation to the
interested stockholder; (iv) any transaction involving the corporation that has
the effect of increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested stockholder; or
(v) the receipt of the interested stockholder of the benefit of any loans,
advances guarantees, pledges or other financial Benefits provided by or through
the corporation. In general, Section 203 defines an interested stockholder as
an entity or person who, together with affiliates and associates, beneficially
owns (or within three years did beneficially own) 15% or more of a
corporation's voting stock. The statute could prohibit or delay mergers or
other takeover or change in control attempts with respect to us and,
accordingly, may discourage attempts to acquire us.
111
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a general summary of the material U.S. federal
income tax considerations resulting from the Exchange Offer and to the
ownership of the New Notes. The discussion of the federal income tax
consequences set forth below is based upon the Internal Revenue Code of 1986,
as amended (the "Code"), and judicial decisions and administrative
interpretations thereunder, as of the date hereof, and such authorities may be
repealed, revoked or modified so as to result in federal income tax
consequences different from those discussed below. There can be no assurance
that the Internal Revenue Service (the "IRS") will not successfully challenge
one or more of the tax consequences described herein, and the Company has not
obtained, nor does it intend to obtain, a ruling from the IRS or an opinion of
counsel with respect to the U.S. federal income tax consequences of acquiring
or holding New Notes. The discussion below pertains only to U.S. Holders,
except as described below under the caption "Tax Treatment of the Ownership and
Disposition of New Notes by Non-U.S. Holders." As used herein, a U.S. Holder
means (i) citizens or residents (within the meaning of Section 7701 (b) of the
Code) of the U.S. (ii) corporations, partnerships or other entities created in
or under the laws of the U.S. or any political subdivision thereof, (iii)
estates the income of which is subject to U.S. federal income taxation
regardless of its source, (iv) trusts subject to the primary supervision of a
court within the U.S. and the control of a U.S. person as described in Section
7701 (a)(30) of the Code, and (v) any other person whose income or gain from
the New Notes is effectively connected with the conduct of a U.S. trade or
business. In addition, the discussion relies upon the description provided to
the Company by the DTC, Euroclear and Cedel of their depository procedures and
the procedures of their participants and Indirect Participants in maintaining a
book entry system reflecting the beneficial ownership of the New Notes.
This discussion does not purport to deal with all aspects of U.S. federal
income taxation that may be relevant to a particular Holder in light of the
Holder's circumstances (for example, persons subject to the alternative minimum
tax provisions of the Code). Also, it is not intended to be wholly applicable
to all categories of investors, some of which (such as dealers in securities,
banks, insurance companies, tax-exempt organizations, and persons holding New
Notes as part of a hedging or conversion transaction or straddle or persons
deemed to sell New Notes under the constructive sale provisions of the Code)
may be subject to special rules. The discussion below is premised upon the
assumption that the New Notes and Old Notes are held (or would be held if
acquired) as capital assets within the meaning of Section 1221 of the Code and
constitute indebtedness for tax purposes. This summary does not discuss the tax
considerations applicable to subsequent purchasers. The discussion also does
not discuss any aspect of state, local or foreign law.
EACH HOLDER TENDERING OLD NOTES OR PROSPECTIVE PURCHASERS OF NEW NOTES ARE
STRONGLY URGED TO CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO ITS PARTICULAR
TAX SITUATION INCLUDING THE TAX EFFECTS OF ANY STATE, LOCAL, FOREIGN, OR OTHER
TAX LAWS AND POSSIBLE CHANGES IN THE TAX LAWS.
Exchange of Notes
The exchange of Old Notes for New Notes pursuant to the Exchange Offer
should not be a taxable exchange for U.S. federal income tax purposes.
Accordingly, a Holder should have the same adjusted issue price, adjusted basis
and holding period in the New Notes as it had in the Old Notes immediately
before the exchange.
The New Notes
Original Issue Discount
The New Notes will be treated as issued with original issue discount
("OID"), which each Holder will be required to include in its gross income as
described below. Except as provided below in the section entitled "Applicable
High-Yield Discount Obligations," a Holder must include OID (to the extent
there is not offsetting acquisition or bond premium) in income as ordinary
interest income as it accrues on the basis of a
112
constant yield to maturity. Generally, OID must be included in income in
advance of the receipt of cash representing such income.
The amount of OID with respect to a New Note will be equal to the excess of
the stated redemption price at maturity over the issue price of the Old Note
exchanged for such New Note. The stated redemption price at maturity of a New
Note will equal the sum of all payments other than any "qualified stated
interest" payments. Qualified stated interest is stated interest that is
unconditionally payable in cash or in property (other than debt instruments of
the issuer) at least annually at a single fixed rate. Because interest on the
New Notes will not be payable prior to August 1, 2003, none of the payments on
the New Notes will constitute qualified stated interest. Accordingly, all
payments on the New Notes will be treated as part of their stated redemption
price at maturity.
Because the Old Notes were issued as part of an investment unit, the issue
price of each investment unit was allocated between the Old Note and the
warrant constituting an investment unit based on their relative fair market
values on the issue date. Although the Company's allocation is not binding on
the IRS, a holder of a unit must use the Company's allocation unless the holder
discloses on its federal income tax return for the year in which the unit was
acquired that it plans to use an allocation that is inconsistent with the
Company's allocation.
A Holder must include in gross income, for all days during its taxable year
in which it holds such New Note, the sum of the "daily portions" of original
issue discount. The "daily portions" are determined by allocating to each day
in an "accrual period" (generally the period between interest payments or
compounding dates) a pro rata portion of the original issue discount that
accrued during such accrual period. The amount of original issue discount that
will accrue during an accrual period is the product of the "adjusted issue
price" of the New Note at the beginning of the accrual period and its yield to
maturity (determined on the basis of compounding at the end of each accrual
period and properly adjusted for the length of the particular accrual period).
The adjusted issue price of a New Note is the sum of the issue price of an Old
Note, plus prior accruals of original issue discount, reduced by the total
payments made with respect to such New Note in all prior periods and on the
first day of the current accrual period. Each payment on a New Note will be
treated as a payment of original issue discount to the extent that original
issue discount has accrued as of the date such payment is due and has not been
allocated to prior payments, and any excess will be treated as a payment of
principal.
There are several circumstances under which the Company could make a payment
on a New Note that would affect the yield to maturity of a New Note, including
the redemption or repurchase of a New Note (as described under "Description of
the Old Notes"). According to Treasury Regulations, the possibility of a change
in the yield will not be treated as affecting the amount of interest income
(including original issue discount) recognized by a holder (or the timing of
such recognition) if the likelihood of the change, as of the date the debt
obligations are issued, is remote. The Company intends to report on the basis
that the likelihood of any change in the yield on the New Notes is remote.
The Company is required to furnish certain information to the IRS, and will
furnish annually to record Holders of a New Note, information with respect to
original issue discount accruing during the calendar year. That information
will be based upon the adjusted issue price of the New Note as if the Holder
were the original Holder of the New Note.
Election to Treat All Interest as Original Issue Discount
A Holder may elect to treat all "interest" on any New Note as original issue
discount and calculate the amount includable in gross income under the method
described above. For this purpose, "interest" includes stated and unstated
interest, original issue discount, acquisition discount, market discount and de
minimis market discount, as adjusted by any acquisition premium. The election
is to be made for the taxable year in which the Holder acquired the note and
may not be revoked without the consent of the IRS.
113
Acquisition Premium
To the extent a Holder had acquisition premium with respect to an Old Note,
the Holder generally will have acquisition premium with respect to a New Note.
A Holder will reduce the original issue discount otherwise includable for each
accrual period by an amount equal to the product of (i) the amount of such
original issue discount otherwise includable for such period, and (ii) a
fraction, the numerator of which is the acquisition premium and the denominator
of which is the excess of the amounts payable on the New Note after the
purchase date over the adjusted issue price.
Sale, Exchange or Retirement of the New Notes
Upon the sale, exchange or retirement of a New Note, the Holder generally
will recognize gain or loss equal to the difference between the amount realized
on the sale, exchange or retirement (which does not include any amount
attributable to accrued but unpaid interest including market discount) and the
Holder's adjusted tax basis in the New Note. A Holder's adjusted tax basis in
the New Note will equal the Holder's cost for the Old Note exchanged therefor
or the Holder's cost for the New Note itself increased by any original issue
discount included in income by such Holder with respect to such New Note and
decreased by any payments received thereon other than qualified stated
interest.
Gain or loss realized on the sale, exchange or retirement of a New Note will
be capital, and will be long-term if at the time of sale, exchange or
retirement the New Note has been held for more than one year (including the
holding period of the Old Note exchanged therefor by the Holder). The maximum
rate of tax on long-term capital gains on most capital assets held by an
individual for more than one year is 20%. The deductibility of capital losses
is subject to limitations.
Market Discount
As described above, any gain or loss on a disposition of a New Note would
generally be capital gain or loss. However, a subsequent purchaser of a New
Note who did not acquire the New Note (or an Old Note exchanged for a New Note)
at its original issue, and who acquires such New Note (or such Old Note, as the
case may be) at a price that is less than the adjusted issue price (as
determined under the original issue discount rules described above), may be
required to treat the New Note as a "market discount bond". Any recognized gain
on a disposition of the New Note would then be treated as ordinary income to
the extent that it does not exceed the "accrued market discount" on the New
Note which has not previously been included in income.
In general, any market discount will be considered to accrue ratably during
the period from the date of acquisition to the maturity date of the New Note.
In addition, there are rules deferring the deduction of all or part of the
interest expense on indebtedness incurred or continued to purchase or carry
such bond, and permitting a Holder to elect to include accrued market discount
in income on a current basis.
Applicable High-Yield Discount Obligations
The New Notes will be subject to the "applicable high yield discount
obligation" provisions of the Code. Because the yield of the New Notes is at
least five percentage points above the applicable federal rate and the New
Notes are issued with "significant original issue discount," otherwise
deductible interest and original issue discount will not be deductible with
respect thereto until such interest is actually paid. In addition, because the
yield of the New Notes is more than six percentage points above the applicable
federal rate, (i) a portion of such interest corresponding to the yield in
excess of six percentage points above the applicable federal rate will not be
deductible by the Company at any time, and (ii) a corporate Holder may be
entitled to treat the portion of the interest that is not deductible by the
Company as a dividend for purposes of qualifying for the dividends received
deduction provided for by the Code, subject to applicable limitations. In such
event, corporate Holders should consult with their own tax advisors as to the
applicability of the dividends received deduction and the relevant exceptions.
114
Tax Treatment of the Ownership and Disposition of New Notes by Non-U.S. Holders
The following discussion is a general summary of certain U.S. federal income
and estate tax considerations of the ownership and disposition of New Notes by
Non-U.S. Holders. As used herein, a Non-U.S. Holder means any Holder other than
a U.S. Holder.
Withholding Tax on Payments of Principal and Interest on New Notes
The payment of principal and interest on a New Note to a Non-U.S. Holder
will not be subject to U.S. federal withholding tax pursuant to the "portfolio
interest exception," provided that (i) the Non-U.S. Holder does not actually or
constructively own 10% or more of the total voting power of all voting stock of
the Company and is not a controlled foreign corporation that is related to the
Company within the meaning of the Code and (ii) the beneficial owner of the New
Notes certifies to the Company or its agent, under penalties of perjury, that
it is not a U.S. Holder and provides its name and address on U.S. Treasury Form
W-8 (or a suitable substitute form) or a securities clearing organization, bank
or other financial institution that holds customers' securities in the ordinary
course of its trade or business (a "financial institution") and holds the New
Notes certifies under penalties of perjury that such a Form W-8 (or suitable
substitute form) has been received from the beneficial owner by it or by a
financial institution between it and the beneficial owner and furnishes the
payor with a copy thereof. Treasury Regulations that will be effective January
1, 2001 (the "Withholding Regulations") provide alternative methods for
satisfying the certification requirement described in (ii) above. The
Withholding Regulations will generally require, in the case of New Notes held
by a foreign partnership, that the certificate described in (ii) above be
provided by the partners rather that by the foreign partnership, and that the
partnership provide certain information including a U.S. tax identification
number. Holders of Notes should consult their top advisors concerning the
possible application of the Withholding Regulations to any payments made on or
with respect to the Notes.
Gain on Disposition of the Notes
Non-U.S. Holders generally will not be subject to U.S. federal income tax on
gain realized on the sale, exchange or redemption of New Notes, unless in the
case of an individual Non-U.S. Holder (i) such Holder is present in the U.S.
for 183 days or more in the year of such sale, exchange or redemption and
certain other conditions are met, or (ii) such Holder is a former citizen or
resident of the United States subject to certain rules relating to that status.
Federal Estate Tax
New Notes held by an individual who is not a citizen or resident of the
United States for federal estate tax purposes at the time of his or her death
will not be subject to U.S. federal estate tax if the interest on the New Notes
qualifies for the portfolio interest exemption under the rules described above.
Information Reporting and Backup Withholding
In general, information reporting requirements will apply to payments of
principal and interest on a New Note and payments on the proceeds of the sale
of a New Note to certain noncorporate U.S. Holders, and a 31% backup
withholding tax may apply to such payments if the Holder (i) fails to furnish
or certify its correct taxpayer identification number to the payor in the
manner required, (ii) is notified by the IRS that it has failed to report
payments of interest and dividends properly, or (iii) under certain
circumstances, fails to certify that it has not been notified by the IRS that
it is subject to backup withholding for failure to report interest and dividend
payments. Certain Holders (including, among others, all corporations) are not
subject to the backup withholding and reporting requirements.
The Company must report annually to the IRS and to each Non-U.S. Holder any
interest that is subject to withholding, or that is exempt from U.S.
withholding tax pursuant to a tax treaty, or interest that is exempt
115
from U.S. tax under the portfolio interest exception. Copies of these
information returns may also be made available under the provisions of a
specific treaty or agreement to the tax authorities of the country in which the
Non-U.S. Holder resides.
The backup withholding and additional information reporting requirements
also apply to non-corporate Non-U.S. Holders. Treasury Regulations, however,
provide that backup withholding and additional information reporting will not
apply to payments of principal on the New Notes by the Company to a Non-U.S.
Holder if the Holder certifies as to its Non-U.S. status under penalties of
perjury or otherwise establishes an exemption (provided that neither the
Company nor its Paying Agent has actual knowledge that the Holder is a U.S.
person or that the conditions of any other exception are not, in fact,
satisfied).
The payment of portfolio interest and of the proceeds from the disposition
of New Notes to or through the U.S. office of any broker, U.S. or foreign, will
be subject to information reporting and possible backup withholding unless the
owner certifies as to its Non-U.S. Holder status under penalty of perjury or
otherwise establishes an exemption, provided that the broker does not have
actual knowledge that the Holder is a U.S. person or that the conditions of any
other exemption are not, in fact, satisfied. The payment of portfolio interest
and of the proceeds from the disposition of a New Note to or through a non-U.S.
office of a broker that is either a U.S. person or a "U.S. related person" will
be subject to information reporting (but currently not backup withholding)
unless the broker has documentary evidence in the files that the owner is a
Non-U.S. Holder and the broker has no knowledge to the contrary. Backup
withholding and information reporting will not apply to payments made through
foreign offices of a broker that is not a U.S. person or a U.S. related person
(absent actual knowledge that the payee is U.S. person). For purposes of this
paragraph, a "U.S. related person" is (i) a "controlled foreign corporation"
for U.S. federal income tax purposes, or (ii) a foreign person 50% or more of
whose gross income from all sources for the three-year period ending with the
close of its taxable year preceding the payment (or for such part of the period
that the broker has been in existence) is effectively connected with the
conduct of a U.S. trade or business. Effective for payments after December 31,
2000 the Withholding Regulations expand the number of foreign intermediaries
that are potentially subject to information reporting, modify certain of the
documentation requirements and provide certain presumptions under which a Non-
U.S. Holder will be subject to backup withholding and information reporting
unless the Non-U.S. Holder provides a certification as to its Non-U.S. Holder
status. Holders of the New Notes should consuslt their tax advisors concerning
the application of the Withholding Regulations to their particular situations.
Any amounts withheld under the backup withholding rules from a payment to a
U.S. or Non-U.S. Holder will be allowed as a refund or a credit against such
Holder's U.S. federal income tax liability, provided that the requisite
procedures are followed.
116
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes in the exchange offer for its own
account must acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resales of such
notes. We reserve the right in our sole discretion to purchase or make offers
for, or to offer New Notes for, any Old Notes or any other notes that remain
outstanding subsequent to the expiration of the exchange offer pursuant to this
prospectus or otherwise and, to the extent permitted by applicable law,
purchase Old Notes or any other notes in the open market, in privately
negotiated transaction or otherwise. This prospsectus or otherwise and, to the
extent permitted by applicable law, purchase Old Notes or any other notes in
the open market, in privately negotiated transactions or otherwise. This
prospectus, as it may be amended or supplemented from time to time, may be used
by all persons subject to the Prospectus delivery requirements of the
Securities Act, including broker-dealers in connection with resales of New
Notes received in the exchange offer, where such notes were acquired as a
result of market-making activities or other trading activities and may be used
by us to purchase any notes outstanding after expiration of the exchange offer.
We have agreed that, for a period of 180 days after the expiration of the
exchange offer, it will make this prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale.
We will not receive any proceeds from any sale of New Notes by broker-
dealers. New Notes received by broker-dealers in the exchange offer for their
own account may be sold from time to time in one or more transactions in the
over-the-counter market, in negotiated transactions, through the writing of
options on the New Notes or a combination of such methods of resale, at market
prices prevailing at the time of resale, at prices related to such prevailing
market prices or negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissons or concessions from any such broker-dealer and/or the
purchasers of any such New Notes. Any broker-dealer that resells New Notes
received by it in the Exchange Offer for its own account and any broker or
dealer that participates in a distribution of any such New Notes may be deemed
to be an "underwriter" within the meaning of the Securities Act and any profit
on any such resale of such New Notes and any commissions or concessions
received by any such Persons may be deemed to be underwriting compensation
under the Securities Act. The letter of transmittal states that, by
acknowledging that it will deliver and by delivering a prospectus meeting the
requirements of the Securities Act, a broker-dealer will not be deemed to admit
that it is an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after the expiration of the Exchange Offer, we will
promptly send additional copies of this Prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests such documents
in the letter of transmittal. We have agreed to pay all expenses incident to
the Exchange Offer, other than commissions or concessions of any brokers or
dealers.
LEGAL MATTERS
The validity of the New Notes offered hereby will be passed upon for us by
special bond counsel Irell & Manella, LLP, Los Angeles, California.
EXPERTS
The consolidated financial statements of TVN Entertainment Corporation and
subsidiaries as of March 31, 1998 and 1999 and for each of the three years in
the period ended March 31, 1999 included in this prospectus have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
117
ADDITIONAL INFORMATION
A registration statement on Form S-4 with respect to the New Notes offered
hereby (together with all amendments, exhibits and schedules thereto, the
"Registration Statement") has been filed with the Commission under the
Securities Act. This prospectus does not contain all of the information
contained in such Registration Statement, certain portions of which have been
omitted pursuant to the rules and regulations of the Commission. For further
information with respect to TVN and the New Notes offered hereby, reference is
made to the Registration Statement. Statements contained in this prospectus
regarding the contents of any contract or any other documents are not
necessarily complete and, in each instance, reference is hereby made to the
copy of such contract or document filed as an exhibit to the Registration
Statement. The Registration Statement may be inspected without charge at the
Securities and Exchange Commission's principal office in Washington, D.C., and
copies of all or any part thereof may be obtained from the Public Reference
Section, Securities and Exchange Commission, Washington, D.C. 20549, upon
payment of the prescribed fees.
118
TVN ENTERTAINMENT CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
[Download Table]
Page
----
Report of Independent Accountants......................................... F-2
Financial Statements:
Consolidated Balance Sheets as of March 31, 1998 and 1999............... F-3
Consolidated Statements of Operations for the Three Years Ended March
31, 1999............................................................... F-4
Consolidated Statements of Stockholders' Deficit for the Three Years
Ended March 31, 1999................................................... F-5
Consolidated Statements of Cash Flows for the Three Years Ended March
31, 1999............................................................... F-6
Notes to Consolidated Financial Statements.............................. F-8
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
TVN Entertainment Corporation:
In our opinion, the accompanying balance sheets and the related statements of
operations, of stockholders' deficit and of cash flows present fairly, in all
material respects, the financial position of TVN Entertainment Corporation and
subsidiaries (the "Company") at March 31, 1998 and 1999 and the results of
their operations and their cash flows for each of the three years in the period
ended March 31, 1999 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Los Angeles, California
May 12, 1999
F-2
TVN ENTERTAINMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
as of March 31, 1998 and March 31, 1999
[Download Table]
1998 1999
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents............................ $ 16,797,856 $ 84,343,386
Restricted short-term investments.................... -- 25,908,619
Trade and other accounts receivable, less allowance
for doubtful accounts of $159,475 and $426,662 at
March 31, 1998 and March 31, 1999, respectively..... 2,699,230 5,614,571
Inventory............................................ -- 807,251
Prepaid expenses and other current assets............ 1,501,764 656,251
------------ ------------
Total current assets............................... 20,998,850 117,330,078
Restricted cash........................................ 1,833,203 1,903,302
Restricted investments................................. -- 39,308,808
Property and equipment, net............................ 93,769,406 84,997,429
Goodwill, net.......................................... -- 4,584,446
Other assets, net...................................... 138,782 6,600,907
------------ ------------
Total assets....................................... $116,740,241 $254,724,970
============ ============
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable..................................... $ 2,038,886 $ 4,496,324
Accrued liabilities.................................. 3,790,225 9,444,939
License fees payable................................. 6,899,711 8,320,933
Deferred revenue and advances........................ 1,520,638 1,140,273
Accrued interest..................................... 3,893,563 7,284,257
Current portion of capitalized leases................ 5,583,011 7,443,612
Current portion of notes payable..................... 23,187,232 8,227,534
------------ ------------
Total current liabilities.......................... 46,913,266 46,357,872
Capitalized leases..................................... 95,276,373 88,258,995
Notes payable.......................................... 9,099,892 7,438,721
Senior notes due 2008.................................. -- 186,798,175
------------ ------------
Total liabilities.................................. 151,289,531 328,853,763
Commitments and contingencies..........................
Series B redeemable convertible preferred stock;
liquidation value: $54,413,732........................ 52,615,586 53,047,313
Stockholders' deficit:
Series A convertible preferred stock, liquidation
value: $18,749,750; 7,600,000 shares authorized;
7,499,900 shares issued and outstanding at March 31,
1998 and March 31, 1999............................. 7,500 7,500
Common stock, $.001 par value, 40,000,000 shares
authorized; 152,517 shares issued and outstanding at
March 31, 1998 and March 31, 1999................... 153 153
Additional paid-in-capital........................... 8,995,254 22,747,071
Accumulated deficit.................................. (96,167,783) (149,930,830)
------------ ------------
Total stockholders' deficit........................ (87,164,876) (127,176,106)
------------ ------------
Total liabilities & stockholders' deficit.......... $116,740,241 $254,724,970
============ ============
The accompanying notes are an integral part of the financial statements.
F-3
TVN ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Years Ended March 31, 1999
[Download Table]
1997 1998 1999
------------ ------------ ------------
Revenue............................. $ 33,379,943 $ 30,544,909 $ 39,811,828
Operating expenses:
Cost of revenue................... 18,810,852 20,426,049 31,775,248
Selling........................... 5,998,117 7,066,546 14,301,858
General and administrative........ 5,061,464 5,619,035 8,519,858
Depreciation and amortization..... 10,534,094 11,984,277 12,252,437
Goodwill amortization............. (802,560) (100,320) 199,323
------------ ------------ ------------
Total operating expenses............ 39,601,967 44,995,587 67,048,724
------------ ------------ ------------
Loss from operations................ (6,222,024) (14,450,678) (27,236,896)
Interest expense.................... 13,907,952 15,163,123 34,194,980
Interest income..................... (62,825) (222,508) (6,472,425)
Other (income) and expense.......... 53,779 471,157 (83,501)
------------ ------------ ------------
Loss before extraordinary gain...... (20,120,930) (29,862,450) (54,875,950)
Extraordinary gain.................. 2,454,381 -- 1,112,903
------------ ------------ ------------
Net loss............................ (17,666,549) (29,862,450) (53,763,047)
Accretion of Series B redeemable
convertible preferred stock........ -- (115,527) (392,995)
------------ ------------ ------------
Net loss applicable to common
stockholders....................... $(17,666,549) $(29,977,977) $(54,156,042)
============ ============ ============
Basic and diluted net loss per share
applicable to common stockholders:
Net loss applicable to common
stockholders before extraordinary
gain............................... $ (6,835) $ (272) $ (362)
Extraordinary gain.................. 834 -- 7
------------ ------------ ------------
Net loss applicable to common
stockholders....................... $ (6,001) $ (272) $ (355)
============ ============ ============
Weighted average shares............. 2,944 110,237 152,517
============ ============ ============
The accompanying notes are an integral part of the financial statements.
F-4
TVN ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
For the Three Years Ended March 31, 1999
[Enlarge/Download Table]
Series A
Convertible
Preferred Stock Common Stock Additional
------------------ ------------------ Paid-in Accumulated
Outstanding Amount Outstanding Amount Capital Deficit Total
----------- ------ ----------- ------ ----------- ------------- -------------
Balance as of March 31,
1996................... 7,599,900 $7,600 100 $ -- $ 9,097,729 $ (48,638,784) $ (39,533,455)
Exercise of stock
options................ -- -- 50,417 51 12,554 -- 12,605
Net loss................ -- -- -- -- -- (17,666,549) (17,666,549)
--------- ------ ------- ---- ----------- ------------- -------------
Balance as of March 31,
1997................... 7,599,900 7,600 50,517 51 9,110,283 (66,305,333) (57,187,399)
Conversion of preferred
stock.................. (100,000) (100) 100,000 100 -- -- --
Exercise of stock
options................ -- -- 2,000 2 498 -- 500
Accretion of Series B
redeemable convertible
preferred stock........ -- -- -- -- (115,527) -- (115,527)
Net loss................ -- -- -- -- -- (29,862,450) (29,862,450)
--------- ------ ------- ---- ----------- ------------- -------------
Balance as of March 31,
1998................... 7,499,900 7,500 152,517 153 8,995,254 (96,167,783) (87,164,876)
Accretion of Series B
redeemable convertible
preferred stock........ -- -- -- -- (392,995) -- (392,995)
Issuance of warrants in
connection with senior
notes.................. -- -- -- -- 14,144,812 -- 14,144,812
Net loss................ -- -- -- -- -- (53,763,047) (53,763,047)
--------- ------ ------- ---- ----------- ------------- -------------
Balance as of March 31,
1999................... 7,499,900 $7,500 152,517 $153 $22,747,071 $(149,930,830) $(127,176,106)
========= ====== ======= ==== =========== ============= =============
The accompanying notes are an integral part of the financial statements.
F-5
TVN ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Years Ended March 31, 1999
[Download Table]
1997 1998 1999
------------ ------------ ------------
Cash flows from operating activities:
Net loss............................. $(17,666,549) $(29,862,450) $(53,763,047)
Adjustments to reconcile net loss to
net cash used for operating
activities:
Depreciation and amortization...... 10,534,094 11,984,277 12,252,997
Goodwill amortization.............. (802,560) (100,320) 199,324
Provision for doubtful accounts.... 850,646 120,102 752,662
Debt forgiveness................... (2,454,381) -- (1,112,903)
Gain on sale of asset.............. (22,259) -- --
Amortization of discount on senior
notes............................. -- -- 942,987
Amortization of debt issuance
costs............................. -- -- 446,499
Change in assets and liabilities,
net of acquisition:
Restricted cash................... -- (1,833,203) (70,099)
Accounts receivable............... (7,813) (425,121) (4,455,675)
Inventory......................... -- -- (422,430)
Prepaid expenses and other current
assets........................... (325,869) (1,034,276) 1,065,771
Other assets...................... 29,550 35,153 (197,212)
Accounts payable.................. 2,811,942 (514,966) (605,885)
Accrued liabilities............... 1,717,263 490,910 5,112,266
License fees payable.............. (1,366,368) (4,278,634) 1,421,222
Deferred revenue and advances..... 2,317,366 (3,762,979) (380,365)
Accrued interest.................. 1,448,309 1,090,018 3,390,694
------------ ------------ ------------
Net cash used for operating
activities.......................... (2,936,629) (28,091,489) (35,423,194)
Cash flows from investing activities:
Purchases of property and
equipment......................... (181,932) (307,841) (2,620,364)
Disposals of property and
equipment......................... 13,009 -- --
Purchases of restricted
investments....................... -- -- (76,745,180)
Proceeds from maturities of
restricted investments............ -- -- 11,527,753
Acquisition of Panda Shopping
Network, net of cash acquired..... -- -- (484,955)
------------ ------------ ------------
Net cash used for investing
activities.......................... (168,923) (307,841) (68,322,746)
Cash flows from financing activities:
Net proceeds from issuance of
preferred stock................... -- 45,000,059 38,732
Additions to notes payable......... 8,000,000 4,500,000 --
Repayments of capitalized leases... (3,473,377) (4,456,553) (5,607,739)
Repayments of notes payable........ (1,023,523) (611,667) (16,428,112)
Exercise of stock options.......... 12,605 500 --
Net proceeds from issuance of
senior notes...................... -- -- 193,288,589
------------ ------------ ------------
Net cash provided by financing
activities.......................... 3,515,705 44,432,339 171,291,470
------------ ------------ ------------
Net increase in cash and cash
equivalents......................... 410,153 16,033,009 67,545,530
Cash and cash equivalents at the
beginning of year................... 354,694 764,847 16,797,856
------------ ------------ ------------
Cash and cash equivalents at the end
of year............................. $ 764,847 $ 16,797,856 $ 84,343,386
============ ============ ============
The accompanying notes are an integral part of the financial statements.
F-6
TVN ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Years Ended March 31, 1999
Supplemental disclosures of cash flow information:
[Download Table]
1997 1998 1999
----------- ----------- -----------
Cash paid during the year for:
Interest................................. $12,331,476 $14,172,886 $30,012,234
Supplemental schedule of noncash investing and financing activities:
During 1997, the Company incurred a capital lease obligation of $40,101,074
for property and equipment (see note 10).
During 1997 and 1998, the Company incurred notes payable of $5,212,723 and
$174,553, respectively for property and equipment (see note 7).
Additions to notes payable in 1998 include $1,884,445 previously classified
as trade accounts payable and $333,444 previously classified as accrued
interest (see note 7).
During 1998, the Company converted notes payable of $7,500,000 to Series B
Redeemable Convertible Preferred Stock (see note 11).
During 1999, the Company completed a private placement of 200,000 Units,
each of which consists of one 14% Senior Note (the "Notes") due 2008 and one
warrant to purchase initially 10.777 shares of the Company's common stock. The
warrants were recorded at a value of $14,144,812 and were deducted from the
face value of the Notes (see note 8).
Additions to other assets in 1999 include $6,711,411 of capitalized closing
costs deducted from the proceeds related to the private placement of the Notes
(see note 8).
During 1999, the Company assumed $3.4 million in net liabilities and forgave
$948,000 in trade receivables in connection with an acquisition (see note 5).
F-7
TVN ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Business
TVN Entertainment Corporation (the "Company") owns and operates a national,
satellite transmitted, multi-channel, pay-per-view television programming
network, providing analog and digital entertainment programming to C-band
satellite dish owners and to cable system operators and their subscribers. The
Company's analog service currently consists of nine channels of programming,
featuring five encrypted pay-per-view channels, one unencrypted promotional
channel and three channels utilized for third party programming. The Company's
digital service currently consists of thirty-two encrypted pay-per-view
channels, one unencrypted promotional channel, forty digital music channels, an
interactive on-screen programming guide and complementary transactional
services including billing, collection, customer service, remittance processing
and studio license fee administration. Analog and digital subscribers order
movies and events for a pay-per-view fee, using either an automatic number
identification (ANI) phone ordering system or an electronic impulse store and
forward ordering system.
The Company also owns and operates a national, satellite transmitted, home
shopping television network, providing an analog and digital home shopping
service to subscribers of cable operators and cable networks and viewers of
broadcast networks (see note 5). The Company's home shopping service primarily
sells collectibles.
The Company was a development stage enterprise from its incorporation in
1987 until March 5, 1991. On March 6, 1991 the Company entered into a limited
partnership, TVN Entertainment L. P. (the "Partnership"), comprised of itself
as a limited partner and two general partners. The Partnership was an operating
entity and was accounted for on the equity basis during the period from March
6, 1991 to May 15, 1992.
On May 15, 1992, the Company acquired the general partners' interests in the
Partnership, which was dissolved pursuant to a partnership dissolution
agreement which provided that the Company receive all partnership assets and
assume certain liabilities as of the dissolution date for an effective purchase
price of $1. These liabilities include notes payable to the former general
partners and certain Company stockholders totaling $16,502,539 and $1,080,000,
respectively. Interest accrues on these obligations at prime plus 1% and
totaled $10,313,437 and $795,152, respectively at March 31, 1999. Repayment of
these loans and related accrued interest (collectively the "Contingent Debt")
will be made on a pari passu basis out of available cash flow, as defined in
the Restated Limited Partnership Agreement dated March 7, 1991. The dissolution
agreement provides that the Company will not make any distributions or pay any
dividends in respect of its capital stock or other equity interests prior to
the payment in full to TVN's former general partners and will not subordinate
these obligations to other debt.
Because payment of these liabilities is dependent upon available cash flow,
this debt represents contingent consideration related to the acquisition of net
assets. The Company has had negative operating cash flows and payment of these
liabilities does not appear to be probable at this time. Accordingly, these
amounts have not been recorded as a liability in accordance with Accounting
Principles Board Opinion No. 16, "Business Combinations", because the outcome
of the contingency is not determinable beyond a reasonable doubt. The Company
will record these liabilities and related goodwill when the contingency is
resolved.
The acquisition of the former general partners' interests is accounted for
under the purchase method of accounting. The purchase method required the
recognition of negative goodwill of $4,012,803 which was amortized on a
straight line basis over a five year period.
2. Summary of Significant Accounting Policies
Basis of Presentation
Since inception, the Company has incurred operating losses. In addition,
although the Company has working capital of approximately $70,972,000, it has a
total stockholders' deficit of approximately $127,176,000 at March 31, 1999.
Management intends to fund future losses, if any, through the offering of
F-8
TVN ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
additional debt and/or equity securities and ultimately, through the attainment
of positive operating cash flows.
The Company plans to attain positive operating cash flows with the rollout
of TVN Digital Cable Television, a comprehensive package of turn-key digital
services. This package offers cable operators digitally compressed programming
and related interactive, transactional and management services, including
national 800# ANI ordering, billing, collection, studio license fee
administration and complete marketing and management reports.
The ability of the Company to ultimately achieve positive operating cash
flows is uncertain. The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern and do not include
any adjustments that might result from the outcome of this uncertainty.
Consolidation
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. All intercompany balances and transactions
have been eliminated in consolidation.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash, Cash Equivalents and Restricted Cash
The Company considers all highly liquid temporary investments (money market,
certificates of deposit, commercial paper and government issued securities)
with original maturities of three months or less to be cash equivalents.
Restricted cash consists of amounts held in escrow to fund certain of the
Company's obligations under an employment agreement (see note 12).
Restricted short-term and long-term investments
Restricted short-term and long-term investments consist of marketable
securities (see note 4) held in custody to fund the next five scheduled
interest payments on the Notes due 2008 (see note 8). The marketable securities
consist principally of federal agency notes with original maturity dates
greater than three months. All marketable securities are classified as held to
maturity securities under the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" and are stated at amortized cost plus accrued interest.
Concentration of Credit Risk
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and trade receivables.
The Company's cash is deposited in major financial institutions, thereby
limiting credit risk. However, the Company's deposits with a single financial
institution as of the respective balance sheet dates exceed the maximum amount
of $100,000 insured by the FDIC.
F-9
TVN ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's trade accounts receivable are routinely assessed for
collectability from its pay-per-view subscribers. As a consequence,
concentration of credit risk is limited.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, short and long-term
investments, accounts receivable, accounts payable, and accrued expenses,
approximate fair values because of the short maturities of these instruments.
As a result of uncertainties surrounding the Company's financial condition,
including its ability to borrow at commercially reasonable rates, estimation of
the fair value of the Company's long-term debt instruments is not practicable.
Inventory
Inventory is stated at the lower of cost (using first-in, first-out method)
or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization is
recorded using the straight-line method over the useful lives, estimated at
between five and seven years for office furniture and equipment, seven years
for digital equipment, and ten years for assets under capitalized leases. Upon
retirement or other disposal, the asset cost and related accumulated
depreciation and amortization are removed from the accounts and the net amount,
less any proceeds, is charged or credited to operations. Repairs and
maintenance are charged to operations when incurred. The carrying value of
property and equipment is periodically reviewed by management, and impairment
losses, if any, are recognized when the expected nondiscounted future operating
cash flows derived from such assets are less than their carrying value.
Goodwill
Goodwill is the excess of the purchase price over the fair value of assets
acquired in connection with the acquisition of Panda Shopping Network ("PSN").
The Company amortizes goodwill on a straight-line basis over the estimated
period of benefit, currently five years. On an annual basis the Company reviews
the recoverability of goodwill based primarily upon cash flow forecasts. The
Company has not recognized any impairment losses as of March 31, 1999.
Revenue Recognition
Programming revenues are recognized when subscribers view movies and events.
Sign-up revenues are recorded when customers are enrolled as subscribers by the
Company or its agents. Merchandising revenues are recognized when products are
shipped, at which point reserves are established for estimated returns. Revenue
received from subscription sales, advances against merchandising revenue and
amounts received from other programmers for uplink/playback and transponder
services is deferred and recognized as earned.
License fees payable to producers are accrued on the basis of the
contractual license terms and are charged to expense as the related revenues
are recorded.
Research and Development
Research and development costs are expensed as incurred and totaled
$1,172,000 during the year ended March 31, 1999. Expenses were not significant
for each of the years ended March 31, 1997 and 1998.
F-10
TVN ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Advertising
The Company reports the cost of all advertising as expenses in the period in
which those costs are incurred. The Company shares portions of certain
distributors' advertising expenses through co-op advertising arrangements.
Advertising expense was $495,890, $848,585 and $1,380,412 for the years
ended March 31, 1997, 1998 and 1999, respectively.
Stock-based Compensation
The Company grants incentive stock options for a fixed number of common
shares to employees, with an exercise price equal to or greater than the fair
value of the shares at the date of grant. The Company has elected to measure
compensation expense related to employee stock options in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", and has provided the additional required disclosures as if the fair
value based method of accounting, as defined by SFAS No. 123, "Accounting for
Stock-Based Compensation", had been applied.
Net Loss Applicable to Common Stockholders
Basic and diluted net loss applicable to common stockholders is computed
using the weighted average number of shares of common stock outstanding. Common
equivalent shares related to stock options, warrants and preferred stock are
excluded from the computation when their effect is antidilutive.
Income Taxes
Income tax expense, if any, represents the taxes payable for the year and
the changes during the year in deferred tax assets and liabilities. Deferred
income taxes are determined based on the difference between the financial
reporting and tax bases of assets and liabilities using enacted rates in effect
during the year in which the differences are expected to reverse. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized.
Reclassifications
Certain reclassifications have been made to the prior year financial
statements to conform to the 1999 presentation.
Comprehensive Income
Effective April 1, 1998, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. To date, the Company has not had any
transactions that are required to be reported in comprehensive income.
Segments
Effective April 1, 1998, the Company adopted the provisions of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 establishes standards for the way
F-11
TVN ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
companies report information about operating segments in annual financial
statements. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. The Company has
determined that it does not have any separately reportable business segments as
of March 31, 1999. The Company will continue to evaluate its operations to
determine the existence of reportable business segments in the future.
3. Concentrations of Business Risk
The Company leases its transponders from one supplier under the terms of two
ten year capital leases (see note 10). Although there are a limited number of
transponders available for the Company's use in the event of default by this
supplier, management believes that other suppliers could provide similar
transponder service. A change in suppliers, however, could result in less
favorable terms for the service and/or could cause a delay in distribution,
either of which would have an adverse affect on the Company's financial
condition, results of operations and cash flows.
The Company receives uplink and playback service from one supplier under the
terms of a five year service agreement. While several other suppliers could
provide similar service, an abrupt termination of this service could result in
less favorable terms for the service and/or could cause a delay in
distribution, either of which would have an adverse affect on the Company's
financial condition, results of operations and cash flows.
The Company receives transaction processing service from one supplier under
the terms of a long term service agreement (see note 10). While several other
suppliers could provide similar service, an abrupt termination of this service
could result in a billing delay which would have an adverse affect on the
Company's financial condition, results of operations and cash flows.
4. Investments
Investments are comprised primarily of U.S. Treasury securities with
maturities of up to 3 years and are stated at amortized cost plus accrued
interest. Securities classified on the balance sheet as restricted short-term
and long-term investments have been placed in escrow to fund the next five
scheduled interest payments on the Notes (see note 8) and are invested in
compliance with the Company's bond indenture which restricts the type, quality
and maturity of these investments.
5. Acquisition
On January 18, 1999, the Company acquired certain assets of PSN, a 24 hour
home shopping video network, for aggregate consideration of $500,000 in cash,
the forgiveness of $948,000 in trade accounts receivable and the assumption of
$3.4 million in net liabilities. The acquisition has been accounted for as a
purchase. The excess of purchase consideration over net tangible assets
acquired of approximately $4.8 million has been allocated to goodwill which is
being amortized on a straight-line basis over 5 years.
F-12
TVN ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following summarized unaudited pro forma financial information assumes
the PSN acquisition occurred at the beginning of each period:
[Download Table]
March 31,
--------------------------
1998 1999
------------ ------------
Revenue............................................ $ 44,690,101 $ 50,980,891
Net loss applicable to common stockholders......... $(32,797,819) $(57,556,541)
Basic and diluted net loss per share applicable to
common stockholders:
Net loss applicable to common stockholders......... $ (298) $ (377)
Weighted average shares ........................... 110,237 152,517
6. Property and Equipment
Property and equipment at March 31, consist of the following:
1998 1999
------------ ------------
Equipment.......................................... $ 8,573,360 $ 11,405,466
Assets under capitalized leases.................... 110,607,862 111,051,931
Office furniture and fixtures...................... 167,268 371,950
------------ ------------
Total.............................................. 119,348,490 122,829,347
Less, accumulated depreciation including capital
lease amortization of $22,000,380 and $33,061,167
at March 31, 1998 and 1999, respectively.......... (25,579,084) (37,831,918)
------------ ------------
$ 93,769,406 $ 84,997,429
============ ============
F-13
TVN ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Notes Payable
Notes payable at March 31, consist of the following:
[Download Table]
1998 1999
----------- -----------
Notes payable collateralized by equipment with
a net book value of $3,371,466 at March 31,
1999. Principal and interest at 10% payable in
eighty four equal installments beginning June
1, 1997....................................... $ 6,261,024 $ 5,456,483
Notes payable, collateralized by a right to use
the Company's customer list on a limited
basis. Principal and accrued interest at 10%
was due but unpaid on March 31, 1999.......... 5,000,000 5,000,000
Refinanced trade payable. Principal and
interest at 10% payable monthly in sixty equal
installments beginning March 31, 1998......... 4,658,154 4,289,626
Notes payable. Principal and accrued interest
averaging 7.84% payable in the first quarter
of fiscal 2000................................ -- 920,146
Refinanced trade payable. Principal and
interest at 5% payable in $50,000 monthly
installments through November 1, 1998 with the
unpaid balance payable December 31, 1998...... 8,251,278 --
Debt agreement with former general partners,
unsecured. Principal and interest at 8%
payable in $50,000 monthly installments
through December 15, 1998 with the unpaid
balance payable December 31, 1998............. 6,416,668 --
Note payable, unsecured. Interest payable at a
variable rate not to exceed 10%. Accrued and
unpaid interest payments due December 31, 1996
and 1997, with the unpaid principal and
interest payable December 31, 1998............ 1,700,000 --
----------- -----------
Total notes payable............................ $32,287,124 $15,666,255
Current portion of notes payable............... (23,187,232) (8,227,534)
----------- -----------
Total long term notes payable.................. $ 9,099,892 $ 7,438,721
=========== ===========
The note payable for $5,456,483 represents a refinancing of the purchase of
one video scrambling system and the original financing to purchase five digital
encoding systems and related equipment.
The notes payable for $5,000,000 represent a cash financing for the Company
and will become immediately due and payable in the event that the Company
raises any equity capital or receives any cash infusion outside the ordinary
course of business.
The refinanced trade payables for $4,289,626 represent the Company's
obligations for uplink, playback and other services rendered through August 19,
1997. To the extent that any portion of this obligation is unpaid at the time
of an initial public offering (IPO) by the Company, it shall either be paid in
full upon the closing of an IPO of the Company's stock in excess of $50 million
or converted to equity at a price equal to the IPO price, concurrently with and
as part of such IPO.
The notes payable totalling $920,146 represent bank financing for the
Company to fund operations that were assumed upon acquisition of the assets of
PSN (see note 5).
F-14
TVN ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The refinanced trade payable for $8,251,278 represented the unpaid portion
of the Company's obligation for the use of eleven satellite transponders
through February 1996. In August 1998, the Company realized an extraordinary
gain of $1.1 million upon the early extinguishment of this note previously due
December 31, 1998 (see note 9).
The note payable for $1,700,000 represented the unpaid portion of the
Company's obligation for consumer phone charges and transaction processing
services rendered through August 31, 1996. A portion of the obligation was
forgiven upon execution of the note. The principal and accrued interest were
paid in full during the fiscal year ended March 31, 1999.
The weighted average interest rate on notes payable was 8.37%, 8.32% and
9.87% for the years ended March 31, 1997, 1998 and 1999, respectively.
Maturities of the Company's notes payable at March 31, are as follows:
[Download Table]
2001........................................................... $ 1,835,168
2002........................................................... 2,027,334
2003........................................................... 2,140,650
2004........................................................... 1,220,137
Thereafter..................................................... 215,432
-----------
$ 7,438,721
===========
8. Senior Notes due 2008
In July 1998, the Company completed a private placement of 200,000 Units at
a price of $1,000 per unit, each of which consists of one 14% Senior Note (the
"Notes") due 2008 and one warrant to purchase initially 10.777 shares of the
Company's common stock, $0.001 par value, at an exercise price of $0.01 per
share, subject to adjustment. Interest on the Notes accrues at the rate of 14%
per annum and is payable semiannually in arrears on February 1 and August 1
each year, commencing February 1, 1999.
The Notes are not collateralized except to the extent of the first six
scheduled interest payments (see note 2) and rank equally in right of payment
with all existing and future unsubordinated indebtedness and senior in right of
payment to all existing and future subordinated indebtedness of the Company.
The Indenture contains certain convenants including limitations on future
indebtedness, payments of dividends and other distributions, liens,
transactions with affiliates, mergers and acquisitions, sales of assets and
conditions of borrowing.
The Notes are redeemable at the option of the Company, in whole or in part,
at any time on or after August 1, 2003, at redemption prices defined by the
Indenture, plus accrued and unpaid interest. In addition, at any time prior to
August 1, 2001, the Company may redeem up to 35% of the aggregate principal
amount of the Notes, with the net proceeds of one or more public equity
offerings at 114% of the principal amount thereof plus accrued interest.
The Company estimated the fair value of the warrants at $14,144,812 which
was recorded as a discount to the face amount of the Notes and is being
amortized as additional interest expense using the effective interest method
over the term of the Notes. The warrants may be exercised at any time
commencing July 1999 and prior to the maturity date of the Notes.
9. Extraordinary Gain
During 1997, a portion of the Company's obligation for consumer phone
charges and transaction processing service was forgiven in consideration of the
Company's agreement to terminate the original service contract.
F-15
TVN ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During 1999, a portion of the Company's obligation for the use of
transponder service through February 1996 was forgiven upon the early
extinguishment of the remaining debt.
10. Commitments and Contingencies
Capitalized Leases
In October 1994, the Company entered into a noncancelable capital lease
agreement for eight primary C-Band transponders and one reserve C-Band
transponder commencing February 1996, at escalating rates throughout its term.
The future minimum lease payments are discounted using an interest rate of 12%
over the ten year lease term.
In November 1995, the Company entered into a noncancelable capital lease
agreement for five primary C-Band transponders commencing July 1996, at
escalating rates throughout its term. The future minimum lease payments are
discounted using an interest rate of 12% over the ten year lease term.
In January 1999, the Company assumed certain noncancelable lease obligations
for operating equipment and software upon acquiring the assets of PSN (see note
5).
The future minimum lease payments at March 31, are as follows:
[Download Table]
2000.......................................................... $18,541,734
2001.......................................................... 19,221,797
2002.......................................................... 19,929,634
2003.......................................................... 20,761,067
2004.......................................................... 21,592,500
Thereafter.................................................... 43,937,500
-----------
Total minimum obligations..................................... 143,984,232
Less interest................................................. (48,281,625)
-----------
Present value of minimum obligations.......................... 95,702,607
Less current portion.......................................... (7,443,612)
-----------
Long-term obligations at March 31, 1999....................... $88,258,995
===========
Operating Leases
Rent expense was $6,001,319, $6,987,364 and $6,858,333 for the years ended
March 31, 1997, 1998 and 1999, respectively.
Office
The Company leases its Burbank headquarters under an operating lease that
expired August 1, 1998. The Company has the option to extend the lease for an
additional five years on the same terms and conditions, except that the base
rent for the option period shall be fair rental or as mutually agreed upon by
the lessor and the Company, provided the Company is not in default on the
existing lease. The Company has exercised its option to extend the lease and is
in negotiations with its landlord regarding the amount of the base rent.
Commitments
In June 1997, the Company entered into an agreement to obtain certain
services and a license for digital set-top authorizations of cable affiliate
subscribers. Fees for such services are calculated on a monthly basis at
varying rates throughout the seven year term. The minimum license fee during
the remaining term of the agreement is $1,200,000 per year, payable in advance
on or before the first day of each such license term year.
F-16
TVN ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In June 1997, the Company entered into an agreement to obtain transaction
processing and print and mail services. The minimum fee for these services
aggregates approximately $1,600,000, payable monthly over the remaining 39
months of the agreement.
The Company's minimum commitments and contingencies under its employment
agreements aggregated approximately $4,200,000 and $3,800,000, respectively at
March 31, 1999. The Company has set aside restricted cash totaling
approximately $1,900,000 as of March 31, 1999 to meet a portion of these
commitments, and is required to do so through September 2002 unless the
contingency is eliminated prior to that date.
Contingencies
See note 1 for a discussion of the Contingent Debt.
11. Redeemable Convertible Preferred Stock
At March 31, 1999, the Company had authorized 12,648,107 shares of Series B
Redeemable Convertible Preferred Stock with a par value of $.001 per share,
12,154,771 of which are issued and outstanding. The Series B Preferred was
issued in four subseries, with original liquidation preferences equal to:
$2.7343 per share for the 5,714,442 shares of Series B1 Preferred; $5.8105 per
share for the 1,297,433 shares of Series B2 Preferred; $6.8359 per share for
the 2,285,727 shares of Series B3 Preferred; and $5.4687 per share for
2,857,169 shares of Series B4 Preferred.
The Series B Preferred is a senior security and shall rank, with respect to
dividends and distribution upon the liquidation, dissolution or winding-up of
the Company, senior to all classes or series of Common Stock and any other
Capital Stock of the Company, including, without limitation, any series of
Preferred Stock hereafter authorized by the Board of Directors and the Series A
Convertible Preferred Stock.
The Series B Preferred is entitled to dividends, if earned and declared, in
an amount equal to the dividends paid on each share of Common or Series A
Preferred, respectively, multiplied by a fraction equal to the liquidation
preference of each share of Series B Preferred divided by the liquidation
preference of the Series A Preferred or the Common Stock, respectively. The
liquidation preference with respect to the Common Stock shall be deemed to
equal $.001 per share. All such dividends are payable on any date that
dividends are paid on the Common or Series A Preferred.
The Series B Preferred is convertible, at the option of the holder, into
Common Stock subject to a conversion ratio that may be adjusted from time to
time, as defined by the Certificate of Designations of the Series B Preferred.
The Series B Preferred is not permitted to vote on matters required or
permitted to be voted upon by the stockholders of the Company subject to
certain exceptions.
The Company is required to redeem the Series B Preferred on August 27, 2002
or, at the option of the holders of the Series B Preferred upon a change of
control of the Company at a price equal to the liquidation preference of the
shares, all as defined in the Certificate of Designations of the Series B
Preferred.
12. Stockholders' Equity
Common Stock
In August 1997, the Company's Board of Directors (the "Board") , through an
amendment and restatement of the Company's Certificate of Incorporation,
increased the number of authorized shares of
F-17
TVN ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
common stock from 10,000,000 to 40,000,000 and increased the number of shares
reserved for issuance under its stock option plan from 2,400,000 to 3,000,000.
Preferred Stock
The total number of shares of Preferred Stock that the Company has the
authority to issue is 20,248,107 shares, $.001 par value. The Board of
Directors of the Company is authorized to determine the rights, preferences,
privileges and restrictions granted to or imposed upon any undesignated shares
of Preferred, and to increase or decrease (but not below the number of shares
of any such series then outstanding) the number of shares of any such series
subsequent to the issue of shares of that series. The Board of Directors is
authorized to determine the designation and par value of any series and to fix
the number of shares of any series.
Series A Convertible Preferred Stock
At March 31, 1999, the Company had authorized 7,600,000 shares of Series A
Preferred Stock, 7,499,900 of which are issued and outstanding. The Series A
Preferred is entitled to noncumulative annual dividends, if earned and
declared, commencing February 28, 1996 at the rate of $.25 per share payable
prior and in preference to any payment or any dividend on the Common Stock.
After dividends in the total amount of $.25 per share on the Series A Preferred
have been declared and paid or set apart in any year, if the Board of Directors
elects to declare additional dividends in that year, such additional dividends
shall be declared equally on the Common and Series A Preferred, with the
holders of the Series A Preferred to receive amounts equal to the dividends
declared on the Common into and to which the Series A is convertible. The
Series A Preferred is convertible, at the option of the holder, into Common
Stock at the rate of one share of Common Stock for each share of Series A
Preferred, has voting rights equal to those of the Common Stockholders, and
votes with the Common Stock. Seven million six hundred thousand shares of
Common Stock are reserved for conversion of the Series A Preferred Stock.
Warrants
In August 1997, the Company amended and substituted warrants originally
issued in June 1996, for warrants to purchase 500,002 shares of Series B2
Convertible Preferred Stock, 6,666 of which were exercised at $5.8105 per
share. The remaining warrants to purchase 493,336 shares expired on December
31, 1998.
In August 1997, the Company amended and substituted a warrant originally
issued in December 1996, for a warrant to purchase 200,000 shares of Common
Stock. The warrant is exercisable at $8.49 per share and expires on July 1,
1999.
Employee Stock Option Plan
The Company adopted a stock option plan (the "Plan") in 1996 that provides
for awards to be made in respect to a maximum of 3,000,000 shares of the
Company's Common Stock. Awards may be made as grants of incentive stock options
and nonstatutory stock options. Participants in the Plan who own stock
representing more than 10% of the voting power of all classes of stock at the
date of grant, may be issued an incentive or a nonstatutory stock option having
an exercise price that shall be no less than 110% of the fair market per share
at the date of grant. Participants in the Plan who own stock representing 10%
or less of the voting power of all classes of stock at the date of grant, may
be issued an incentive or a nonstatutory stock option having an exercise price
that shall be no less than 100% of the fair market per share at the date of
grant. Options granted under the Plan vest ratably over five years and have a
maximum term of ten years unless terminated sooner in accordance with the Plan.
F-18
TVN ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Under the terms of an agreement between the Company and one of its
employees, 336,459 option shares are subject to the employee's right to require
the Company to cancel all or a portion of such shares in return for a cash
payment to the employee of up to $2.3 million (the "Put Right"). The Put Right
may be exercised by the employee only if he has not terminated his employment
or been terminated involuntarily for cause prior to September 15, 2000. The Put
Right may not be exercised if prior to September 15, 2000, the Company has
either been acquired, consummated an initial public offering or arranged a
private resale transaction, any of which would provide the employee with an
opportunity to sell his shares at a per share price of $7.59. The value of the
Put Right is being recognized as compensation expense over the three year term
of the related employment agreement.
A summary of the status of the Company's employee stock options, as of March
31, 1997, 1998 and 1999, and the changes during the years then ended is as
follows:
[Download Table]
Wgtd. Avg.
Shares Exer. Price
--------- -----------
Outstanding at March 31, 1996....................... 1,875,000 $0.25
Granted--price greater than fair value.............. 75,000 0.25
Exercised........................................... (50,417) 0.25
Canceled............................................ (149,583) 0.25
--------- -----
Outstanding at March 31, 1997....................... 1,750,000 $0.25
Granted--price greater than fair value.............. 891,482 0.75
Exercised........................................... (2,000) 0.25
Canceled............................................ (28,000) 0.25
--------- -----
Outstanding at March 31, 1998....................... 2,611,482 $0.42
Granted--price greater than fair value.............. 90,000 3.28
Exercised........................................... -- --
Canceled............................................ (20,000) 0.25
--------- -----
Outstanding at March 31, 1999....................... 2,681,482 $0.52
========= =====
[Download Table]
1997 1998 1999
------- --------- ---------
Options exercisable at year end................ 847,500 1,207,500 1,755,528
Options available for future grants............ 599,583 336,101 266,101
The compensation expense associated with the Plan did not result in a
material difference from the reported net loss for the years ended December 31,
1997, 1998, and 1999. The fair value for these awards was estimated at the date
of grant using a minimum value option pricing model with the following
assumptions for 1997, 1998 and 1999: risk free interest rate of between 5.8%
and 6.5%, no dividend yield, no volatility factor, and an expected average life
of 5 years. The effects of applying SFAS No. 123 are not indicative of future
amounts and additional awards in future years are anticipated.
The following table summarizes information about stock options outstanding
at March 31, 1999:
[Download Table]
Options Outstanding Options Exercisable
----------------------------- -------------------------
Wgtd. Avg. Wgtd. Wgtd.
Range of Remaining Avg. Avg.
Exercise Number Contractual Exer. Number Exer.
Price Outstanding Life Price Outstanding Price
-------- ----------- ----------- ----- ----------- -----
$0.25--$0.75 2,591,482 7.38 0.42 1,734,028 0.33
$3.28 90,000 9.16 $3.28 21,500 $3.28
F-19
TVN ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Earnings Per Share
The following table sets forth the computation of basic and diluted net loss
per share applicable to common stockholders for the years ended March 31, 1997,
1998 and 1999:
[Download Table]
1997 1998 1999
------------ ------------ ------------
Numerator:
Net loss....................... $(17,666,549) $(29,862,450) $(53,763,047)
Accretion of redeemable Series
B preferred stock............. -- (115,527) (392,995)
------------ ------------ ------------
Net loss applicable to common
stockholders.................. $(17,666,549) $(29,977,977) $(54,156,042)
============ ============ ============
Denominator:
Weighted average shares........ 2,944 110,237 152,517
============ ============ ============
Basic and diluted net loss
applicable to common
stockholders.................... $ (6,001) $ (272) $ (355)
============ ============ ============
The computation for diluted number of shares excludes preferred stock,
unexercised stock options and warrants which are antidilutive. The number of
such shares were 9,916,568, 22,959,489 and 24,691,553 for the years ended March
31, 1997, 1998 and 1999, respectively.
14. Income Taxes
As a result of net operating losses, the Company has not recorded a
provision for income taxes. The primary components of temporary differences
which give rise to deferred taxes at March 31, are as follows:
[Download Table]
1998 1999
----------- -----------
Deferred tax assets:
Net operating loss carryforward................ $28,486,970 $51,347,400
Allowance for doubtful amounts................. 63,757 170,665
Deferred revenue............................... 208,255 176,109
Refinanced trade payables...................... 5,755,045 1,715,850
Accrued license fees........................... 2,413,258 1,664,187
Accrued liabilities............................ 142,151 153,388
Depreciation and amortization.................. -- 421,042
----------- -----------
Deferred tax asset............................... 37,069,436 55,648,641
Less: valuation allowance...................... (36,530,006) (55,648,641)
----------- -----------
Net deferred tax asset......................... 539,430 --
Deferred tax liabilities:
Depreciation and amortization.................. (539,430) --
----------- -----------
Deferred tax liabilities......................... (539,430) --
----------- -----------
Net deferred tax................................. $ -- $ --
=========== ===========
Due to the uncertainty surrounding the realization of net operating loss
carryforwards and other net deferred tax assets resulting from continued
operating losses, the Company provided a full valuation allowance against its
deferred tax assets.
F-20
TVN ENTERTAINMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At March 31, 1999, the Company had available federal and state net operating
loss carryforwards of approximately $141 million and $57 million, which begin
to expire in the years 2004 and 2000, respectively. Because the Company
experienced a change in ownership during 1998 within the meaning of Section 382
of the Internal Revenue Code, the Company's ability to utilize its net
operating loss carryforwards may be limited.
15. Subsequent Events (unaudited)
In April 1999, the Company entered into a memorandum of understanding to
purchase 60% of a start-up company that is developing and plans to deploy a
system of state-of-the-art technology to deliver and sell entertainment
products such as music, movies and games. The estimated cost of $6 million will
be paid by the Company with a combination of cash and services to be rendered
over a three year period. The Company anticipates that this transaction will be
accounted for as a purchase.
F-21
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Article XI of our Amended and Restated Certificate of Incorporation provides
for the indemnification of our directors to the fullest extent permissible
under Delaware law.
Article VI of our Bylaws provides for the indemnification of our officers,
directors, employees and agents if such person acted in good faith and in a
manner reasonably believed to be in and not opposed to the best interest of the
corporation, and, with respect to any criminal action or proceeding the
indemnified party had no reason to believe his conduct was unlawful.
Section 145 of the Delaware General Corporation Law permits us to include in
its charter documents, and in agreements between the corporation and its
directors and officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law.
We maintain liability insurance coverage for our directors and officers.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits.
[Download Table]
Exhibit
Number Description
------- -----------
1.1 Placement Agreement dated July 24, 1998 by and between TVN and
Morgan Stanley & Co. Incorporated.
3.1 Amended and Restated Certificate of Incorporation, as amended, of
TVN, as currently in effect.
3.2 Bylaws, as currently in effect.
4.1 Securityholder Agreement dated as of August 29, 1997 among TVN,
Princes Gate Investors II, L.P., Storie Partners, L.P., Wenonah
Development Corp., Jerome H. Turk and Carole Turk. Family Trust and
PG Investors II, Inc. as Agent.
4.2 Amendment to Securityholders Agreement dated as of December 19, 1997
among TVN, Princes Gate Investors II, L.P., Storie Partners, L.P.,
Wenonah Development Corp., Jerome H. Turk and Carole Turk Family
Trust and PG Investors II, Inc. as Agent.
4.3 Indenture dated as of July 29, 1998, by and between TVN and The Bank
of New York, including form of 14% Senior Discount Note Due 2008.
4.4 Warrant Agreement dated as of July 29, 1998 between TVN and The Bank
of New York.
4.5 Warrant Registration Rights Agreement dated as of July 29, 1998
among TVN and Morgan Stanley & Co. Incorporated.
4.6++ Specimen 14% Senior Discount Note Due 2008.
4.7 Notes Registration Rights Agreement dated as of July 29, 1998
between TVN and Morgan Stanley & Co. Incorporated.
5.1 Opinion of Irell & Manella LLP.
10.1+ Transponder Lease Agreement for Galaxy IIIR dated as of October 21,
1994 between Hughes Communications Galaxy, Inc. and TVN.
10.2 Galaxy IIIR Transponder Service Agreement dated October 21, 1994
between Hughes Communications Satellite Services, Inc. and TVN.
10.3+ Transponder Lease Agreement for Galaxy IX dated as of November 29,
1995 between Hughes Communications Galaxy, Inc. and TVN.
10.4 Galaxy IX Transponder Service Agreement dated November 29, 1995
between Hughes Communications Satellite Services, Inc. and TVN.
10.5 1996 Stock Option Plan and related option agreement, as currently in
effect.
II-1
[Download Table]
Exhibit
Number Description
------- -----------
10.6+ Service and License Agreement dated June 9, 1997 between National
Digital Television, Inc., doing business as Headend in the Sky(R)
("HITS") and TVN.
10.7 CSG Master Subscriber Management System Agreement dated June 30,
1997 between CSG Systems, Inc. and TVN.
10.8 Employment Agreement entered into between TVN and Stuart Z. Levin.
10.9 Employment Agreement entered into between TVN and James Ramo.
10.10 Employment Agreement entered into between TVN and Arthur Fields.
10.11 Employment Agreement entered into between TVN and Michael Wex.
10.12 Employment Agreement entered into between TVN and John McWilliams.
10.13 Employment Agreement entered into between TVN and David Sears.
10.14 Memorandum of Understanding Between TVN Entertainment Corporation
and New Media Network, Inc. dated April 9, 1999.
21.1 Subsidiaries of TVN.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Irell & Manella LLP (Included in Exhibit 5.1).
24.1 Power of Attorney (Included on page II-5).
25.1 Statement of Eligibility of Trustee.
27.1 Financial Data Schedules.
99.1 Form of Letter of Transmittal with respect to Exchange Offer.
99.2 Form of Notice of Guaranteed Delivery.
99.3 Form of Exchange Agent Agreement.
--------
+ Confidential treatment has been requested for portions of these agreements.
Omitted portions have been filed separately with the Commission.
++ To be filed by amendment.
(b) Financial Statement Schedules
Schedules not listed above have been omitted because the information to be
set forth therein is not applicable or is shown in the financial statements or
Notes thereto.
Item 22. Undertaking
1. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that
in the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than our
payment of expenses incurred or paid by one of our directors, officers or
controlling persons in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, we will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
2. We hereby undertake to respond to requests for information that is
incorporated by reference into the Prospectus pursuant to Items 4, 10(b), 11 or
13 of this Form, within one business day of receipt of such request, and to
send the incorporated documents by first class mail or other equally prompt
means. This includes information contained in documents filed subsequent to the
effective date of the Registration Statement through the date of responding to
the request.
3. We hereby undertake to supply by means of a post-effective amendment all
information concerning a transaction, and the company being acquired involved
therein, that was not the subject of and included in this Registration
Statement when it became effective.
II-2
4. We hereby undertake:
(a) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(b) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(c) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(d) If we are a foreign private issuer, to file a post-effective
amendment to the registration statement to include any financial statements
required by (S)210.3-19 of this chapter at the start of any delayed
offering or throughout a continuous offering. Financial statements and
information otherwise required by Section 10(a)(3) of the Act need not be
furnished, provided that we include in the prospectus, by means of a post-
effective amendment, financial statements required pursuant to this
paragraph (d) and other information necessary to ensure that all other
information in the prospectus is at least as current as the date of those
financial statement. Notwithstanding the foregoing, with respect to
registration statements on Form F-3, a post-effective amendment need not be
filed to include financial statements and information required by Section
10(a)(3) of the Act or (S)210.3-19 of this chapter if such financial
statements and information are contained in periodic reports filed with or
furnished to the Commission by us pursuant to section 13 or section 15(d)
of the Securities Exchange Act of 1934 that are incorporated by reference
in the Form F-3.
II-3
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, we have
duly caused this Registration Statement to be signed on our behalf by the
undersigned, thereunto duly authorized, in the City of Burbank, State of
California on May 20, 1999.
TVN Entertainment corporation
By: /s/ Stuart Z. Levin
-----------------------------------
Stuart Z. Levin
Chairman of the Board, Chief
Executive Officer (Principal
Executive Officer)
II-4
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each such person whose signature
appears below constitutes and appoints, jointly and severally, Stuart Z. Levin
and Arthur Fields as their attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to this
Registration Statement on Form S-4 (including post-effective amendments), to
sign any registration statement for the same offering covered by this
Registration Statement that is to be effective upon filing pursuant to Rule
462(b) promulgated under the Securities Act of 1933, and to file the same, with
all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, thereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutions, may do or
cause to be done by virtue hereof. Pursuant to the requirements of the
Securities Act of 1933, as amended, this Registration Statement has been signed
by the following persons in the capacities and on the dates indicated:
[Download Table]
Signature Title Date
--------- ----- ----
/s/ Stuart Z. Levin Chairman of the Board May 20, 1999
___________________________________ of Directors and Chief
Stuart Z. Levin Executive Officer
(Principal Executive
Officer)
/s/ James B. Ramo President, Chief May 20, 1999
___________________________________ Operating Officer and
James B. Ramo Director
/s/ Arthur Fields Senior Executive Vice May 20, 1999
___________________________________ President, General
Arthur Fields Counsel, Chief
Administrative
Officer, Director and
Secretary
/s/ John McWilliams Senior Vice President, May 20, 1999
___________________________________ Finance (Principal
John McWilliams Financial and
Accounting Officer)
/s/ S. Robert Levine Director May 20, 1999
___________________________________
S. Robert Levine, M.D.
/s/ Stephen R. Munger Director May 20, 1999
___________________________________
Stephen R. Munger
/s/ Martin A. Pasetta Director May 20, 1999
___________________________________
Martin A. Pasetta
/s/ David R. Powers Director May 20, 1999
___________________________________
David R. Powers
/s/ Michael J. Ritter Director May 20, 1999
___________________________________
Michael J. Ritter
/s/ Jerome H. Turk Director May 20, 1999
___________________________________
Jerome H. Turk
II-5
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits.
[Download Table]
Exhibit
Number Description
------- -----------
1.1 Placement Agreement dated July 24, 1998 by and between TVN and
Morgan Stanley & Co. Incorporated.
3.1 Amended and Restated Certificate of Incorporation, as amended, of
TVN, as currently in effect.
3.2 Bylaws, as currently in effect.
4.1 Securityholder Agreement dated as of August 29, 1997 among TVN,
Princes Gate Investors II, L.P., Storie Partners, L.P., Wenonah
Development Corp., Jerome H. Turk and Carole Turk. Family Trust and
PG Investors II, Inc. as Agent.
4.2 Amendment to Securityholders Agreement dated as of December 19, 1997
among TVN, Princes Gate Investors II, L.P., Storie Partners, L.P.,
Wenonah Development Corp., Jerome H. Turk and Carole Turk Family
Trust and PG Investors II, Inc. as Agent.
4.3 Indenture dated as of July 29, 1998, by and between TVN and The Bank
of New York, including form of 14% Senior Discount Note Due 2008.
4.4 Warrant Agreement dated as of July 29, 1998 between TVN and The Bank
of New York.
4.5 Warrant Registration Rights Agreement dated as of July 29, 1998
among TVN and Morgan Stanley & Co. Incorporated.
4.6++ Specimen 14% Senior Discount Note Due 2008.
4.7 Notes Registration Rights Agreement dated as of July 29, 1998
between TVN and Morgan Stanley & Co. Incorporated.
5.1 Opinion of Irell & Manella LLP.
10.1+ Transponder Lease Agreement for Galaxy IIIR dated as of October 21,
1994 between Hughes Communications Galaxy, Inc. and TVN.
10.2 Galaxy IIIR Transponder Service Agreement dated October 21, 1994
between Hughes Communications Satellite Services, Inc. and TVN.
10.3+ Transponder Lease Agreement for Galaxy IX dated as of November 29,
1995 between Hughes Communications Galaxy, Inc. and TVN.
10.4 Galaxy IX Transponder Service Agreement dated November 29, 1995
between Hughes Communications Satellite Services, Inc. and TVN.
10.5 1996 Stock Option Plan and related option agreement, as currently in
effect.
10.6+ Service and License Agreement dated June 9, 1997 between National
Digital Television, Inc., doing business as Headend in the Sky(R)
("HITS") and TVN.
10.7 CSG Master Subscriber Management System Agreement dated June 30,
1997 between CSG Systems, Inc. and TVN.
10.8 Employment Agreement entered into between TVN and Stuart Z. Levin.
10.9 Employment Agreement entered into between TVN and James Ramo.
10.10 Employment Agreement entered into between TVN and Arthur Fields.
10.11 Employment Agreement entered into between TVN and Michael Wex.
10.12 Employment Agreement entered into between TVN and John McWilliams.
10.13 Employment Agreement entered into between TVN and David Sears.
10.14 Memorandum of Understanding Between TVN Entertainment Corporation
and New Media Network, Inc. dated April 9, 1999.
21.1 Subsidiaries of TVN.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Irell & Manella LLP (Included in Exhibit 5.1).
24.1 Power of Attorney (Included on page II-5).
25.1 Statement of Eligibility of Trustee.
27.1 Financial Data Schedules.
99.1 Form of Letter of Transmittal with respect to Exchange Offer.
99.2 Form of Notice of Guaranteed Delivery.
99.3 Form of Exchange Agent Agreement.
--------
+ Confidential treatment has been requested for portions of these agreements.
Omitted portions have been filed separately with the Commission.
++ To be filed by amendment.
Dates Referenced Herein and Documents Incorporated by Reference
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