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Filed Pursuant to Rule 424(b)(3)
File No: 333-62077
PROSPECTUS
[JONES LOGO JONES INTERNATIONAL NETWORKS, LTD.
APPEARS HERE]
OFFER TO EXCHANGE 11 3/4% SENIOR SECURED NOTES
DUE 2005 FOR ALL OF ITS OUTSTANDING
11 3/4% SENIOR SECURED NOTES DUE 2005
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The Exchange Offer will expire at 5:00 P.M., New York City time, on December
21, 1998, unless extended.
Jones International Networks, Ltd. (the "Company"), hereby offers, upon the
terms and subject to the conditions set forth in this Prospectus and the
accompanying Letter of Transmittal (which together constitute the "Exchange
Offer"), to exchange $1,000 principal amount of its 11 3/4% Senior Secured
Notes Due 2005 (the "Exchange Notes") for each $1,000 principal amount of its
outstanding 11 3/4% Senior Secured Notes Due 2005 (the "Old Notes"), of which
$100,000,000 in aggregate principal amount are outstanding as of the date
hereof. The Exchange Offer has been registered under the Securities Act of
1933, as amended (the "Securities Act"), pursuant to a registration statement
of which this Prospectus is a part (the "Registration Statement"). The form
and terms of the Exchange Notes will be substantially identical in all
material respects to the form and terms of the Old Notes, including interest
rate and interest payment dates, except that the exchange will have been
registered under the Securities Act and therefore the Exchange Notes will not
bear legends restricting the transfer thereof. In addition, the Additional
Interest (as defined) provisions will be modified or eliminated as appropriate
and holders of the Exchange Notes will not be entitled to certain rights of
holders of the Old Notes under the Exchange and Registration Rights Agreement
(as defined), which rights with respect to Old Notes that are exchanged will
terminate upon the consummation of the Exchange Offer. See "Description of the
Notes--Exchange Offer; Registration Rights." The Exchange Notes will evidence
the same debt as the Old Notes which they replace and will be entitled to the
benefits of the Indenture dated as of July 10, 1998 governing the Old Notes
and the Exchange Notes. The Exchange Notes and the Old Notes are considered
collectively to be a single class for all purposes under the Indenture,
including, without limitation, waivers, amendments and redemptions and are
sometimes referred to herein collectively as the "Notes." See "The Exchange
Offer" and the "Description of the Notes." References throughout this
Prospectus to the "Notes" are to the Old Notes and the Exchange Notes
collectively.
The Company will accept for exchange any and all validly tendered Old Notes
which are not withdrawn prior to 5:00 p.m., New York City time, on December
21, 1998 ("Expiration Date"); provided, however, that if the Company, in its
sole discretion, has extended the period of time for which the Exchange Offer
is open, the term "Expiration Date" means the latest time and date to which
the Exchange Offer is extended. Tenders of Old Notes may be withdrawn at any
time prior to the Expiration Date. Old Notes may be tendered only in integral
multiples of $1,000.
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SEE "RISK FACTORS" BEGINNING ON PAGE 16 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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The date of this Prospectus is November 4, 1998.
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Interest on the Exchange Notes will be payable semi-annually on January 1
and July 1 of each year, commencing January 1, 1999. The Exchange Notes will
mature on July 1, 2005. Except as described below, the Company may not redeem
the Exchange Notes prior to July 1, 2003. On or after such date, the Company
may redeem the Exchange Notes, in whole or in part, at any time, at the
redemption prices set forth herein, together with accrued and unpaid interest,
if any, to the date of redemption. In addition, at any time and from time to
time on or prior to July 1, 2001, the Company may, subject to certain
requirements, redeem up to 35% of the aggregate principal amount of the
Exchange Notes with the cash proceeds of one or more Equity Offerings (as
defined) at a redemption price equal to 111.75% of the principal amount to be
redeemed, together with accrued and unpaid interest, if any, to the date of
redemption, provided, that at least 65% of the aggregate principal amount of
the Notes remains outstanding immediately after each such redemption. The
Exchange Notes will not be subject to any sinking fund requirement. Upon the
occurrence of a Change of Control (as defined), the Company will be required
to make an offer to repurchase the Exchange Notes at a price equal to 101% of
the principal amount thereof, together with accrued and unpaid interest, if
any, to the date of repurchase.
The Exchange Notes will be senior obligations of the Company. The Exchange
Notes will rank pari passu in right of payment with all existing and future
Senior Indebtedness (as defined) of the Company and will rank senior to all
existing and future Subordinated Obligations (as defined) of the Company. The
Company is a holding company that conducts substantially all of its operations
through subsidiaries. The Exchange Notes will be secured by the capital stock
of the Company's wholly-owned subsidiary, JPN, Inc., and its direct
subsidiaries. The Exchange Notes will be unconditionally guaranteed (the
"Guarantees") by each of the Company's Restricted Subsidiaries (as defined)
(the "Subsidiary Guarantors"). The Guarantees are senior obligations of the
Subsidiary Guarantors and rank pari passu in right of payment with all
existing and future Senior Indebtedness of the Subsidiary Guarantors, other
than Bank Indebtedness (as defined) and Capitalized Lease Obligations (as
defined), and will rank senior in right of payment to all existing and future
Subordinated Obligations of the Subsidiary Guarantors. The Guarantees are not
secured. The Guarantees are full and unconditional.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
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The Old Notes were sold by the Company on July 10, 1998 to NatWest
Capital Markets Limited (the "Initial Purchaser") pursuant to a Purchase
Agreement dated July 2, 1998 by and between the Company and the Initial
Purchaser (the "Purchase Agreement"). Pursuant to the Purchase Agreement, the
Company and the Initial Purchaser entered into an Exchange and Registration
Rights Agreement dated as of July 10, 1998 (the "Exchange and Registration
Rights Agreement") which granted the holders of the Old Notes certain exchange
and registration rights. The Exchange Offer is being made to satisfy certain of
the Company's obligations under the Exchange and Registration Rights Agreement.
Based upon existing interpretations by the staff of the Commission
which were issued to third parties, the Company believes that the Exchange
Notes will be freely transferable by holders thereof (other than affiliates of
the Company and the Subsidiary Guarantors) after the Exchange Offer without
further registration under the Securities Act if the holder of the Exchange
Notes represents that it is acquiring the Exchange Notes in the ordinary course
of business, that it has no arrangement or understanding with any person to
participate in the distribution (within the meaning of the Securities Act) of
the Exchange Notes and that it is not an affiliate of the Company or the
Subsidiary Guarantors, as such terms are interpreted by the Commission;
provided that broker-dealers ("Participating Broker-Dealers"), if any,
receiving Exchange Notes in the Exchange Offer will have a prospectus delivery
requirement with respect to resales of such Exchange Notes. The Commission has
not considered the Exchange Offer itself in the context of its interpretations
and there can be no assurance that the staff of the Commission would make a
similar determination with respect to the Exchange Offer. The Commission has
taken the position that the Participating Broker-Dealers may fulfill their
prospectus delivery requirements with respect to the Exchange Notes (other than
a resale of an unsold allotment from the original sale of the Old Notes) with
the prospectus contained in the Exchange Offer Registration Statement. The
Company has agreed if, at the time of the completion of the Exchange Offer,
information in the Letter of Transmittal submitted by exchanging holders
indicates that there are holders that are Participating Broker-Dealers or
otherwise subject to prospectus delivery requirements, the Company will, for
such period of time as is necessary to comply with applicable law up to the
date that is 180 days after consummation of the Exchange Offer, make available
a prospectus meeting the requirements of the Securities Act to such persons, if
any, for use in connection with any resale of such Exchange Notes.
The Exchange Offer is not conditioned on any minimum amount of Old
Notes being tendered for exchange. The Company will not receive any proceeds
from the Exchange Offer and will pay all of its expenses incident thereto.
Tenders of Old Notes pursuant to the Exchange Offer may be withdrawn at any
time prior to the Expiration Date. In the event that the Company terminates the
Exchange Offer (which is not anticipated) and does not accept for exchange any
Old Notes, the Company will promptly return the Old Notes to the holders
thereof. Old Notes not tendered or accepted will remain outstanding. See "The
Exchange Offer."
Prior to this Exchange Offer, there has been no public market for
the Old Notes or the Exchange Notes. The Company does not intend to list the
Exchange Notes on any securities exchange or to seek approval for quotation
through any automated quotation system. There can be no assurance that a market
for the Exchange Notes will develop. To the extent that a market for the
Exchange Notes does develop, the market value of the Exchange Notes will depend
upon many factors, including the Company's financial condition and results of
operations and other conditions. See "Risk Factors--Absence of Public Market."
Each Exchange Note will bear interest at the rate of 11 3/4% per
annum from the most recent date to which interest has been paid or duly
provided for on the Old Note surrendered in exchange for such Exchange Note or,
if no interest has been paid or duly provided for on such Old Note, from July
10, 1998 (the date of original issuance of such Old Note). Interest on the
Exchange Notes will be payable semiannually on January 1 and July 1 of each
year, commencing on the first such date following the original issuance date of
the Exchange Notes.
Holders of Old Notes whose Old Notes are accepted for exchange will
not receive accrued interest on such Old Notes for any period from and after
the last Interest Payment Date (as defined) to which interest has been paid or
duly provided for on such Old Notes prior to the original issue date of the
Exchange Notes or, if no such interest has been paid or duly provided for, will
not receive any accrued interest on such Old Notes, and will be deemed to have
waived the right to receive any interest on such Old Notes accrued from and
after such Interest Payment Date or, if no such interest has been paid or duly
provided for, from and after July 10, 1998.
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ADDITIONAL INFORMATION
Upon consummation of the Exchange Offer, the Company will be
required to file reports and other information with the Securities and Exchange
Commission (the "Commission") pursuant to the information requirements of the
Securities and Exchange Act of 1934, as amended (the "Exchange Act"). The
Company intends to furnish the holders of the Exchange Notes with annual
reports containing consolidated financial statements audited by independent
certified public accountants following the end of each fiscal year and with
quarterly reports containing unaudited financial information for each of the
first three quarters of each fiscal year following the end of such quarter.
The Company has filed with the Commission a Registration Statement
on Form S-4 under the Securities Act with respect to the Exchange Offer. As
permitted by the rules and regulations of the Commission, this Prospectus,
which is a part of the Registration Statement, omits certain information,
exhibits, schedules and undertakings set forth in the Registration Statement.
For further information pertaining to the Company and the securities offered
hereby, reference is made to such Registration Statement and the exhibits and
schedules thereto. Statements contained in this Prospectus as to the contents
or provisions of any documents referred to herein are not necessarily complete,
and in each instance, reference is made to the copy of the document filed as an
exhibit to the Registration Statement.
The Registration Statement may be inspected without charge at the
office of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of the Registration Statement may be obtained from the Commission at
prescribed rates from the Public Reference Section of the Commission at such
address, and at the Commission's regional offices located at 7 World Trade
Center, 13th Floor, New York, New York 10048, and at Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. In
addition, registration statements and certain other filings made with the
Commission through its Electronic Data Gathering, Analysis and Retrieval
("EDGAR") system are publicly available through the Commission's site on the
Internet's World Wide Web, located at http://www.sec.gov.
FORWARD-LOOKING INFORMATION
This Prospectus contains certain forward-looking statements. Such
forward-looking statements may concern, among other things, the market and
prospects for radio and television programming, the market and demand for
satellite delivery and production support services, the Company's ability to
continue to consolidate the PIN Venture (as defined) for financial reporting
purposes, its ability to increase the distribution of its television networks
and the timing of such distribution, the expected impact of the GAC Equity
Agreements (as defined) and the Acquisition (as defined) on the Company's
financial condition, results of operation and business prospects, the Company's
ability to increase the audience for its radio programming, the Company's
ability to develop or acquire new radio and television programming, the
Company's ability to sell advertising airtime on its radio and television
networks, the Company's ability to market such airtime and to increase its
advertising rates, the Company's ability to lease its unused satellite
transponder capacity and the price and timing of any leases that may be entered
into, plans for acquiring and/or creating complementary businesses and value-
added services, the Company's ability to integrate the operations of
MediaAmerica and increase the Company's profitability, the competition in the
radio and television businesses, the technology of delivering the Company's
programming, the Company's ability to operate effectively and profitably,
including to pursue its planned investment strategy in accordance with the
operating restrictions and cash flow requirements imposed by the Indenture,
including its ability to access bank or other financing, and other statements
of expectations, beliefs, future plans and strategies, anticipated developments
and other matters that are not historical facts. In particular, any statements,
express or implied, concerning future operating results or the ability to
generate revenues and operating income to service the Notes, including Great
American Country's projected subscriber level, license fees and advertising
revenues expected to be received that were used in preparing the pro forma
information presented elsewhere herein and the information under the caption
"Management's Discussion and Analysis of
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Financial Condition and Results of Operations" are forward-looking statements.
Such forward-looking statements generally are accompanied by words such as
"expect," "predict," "anticipate," "should," "assume," "believe," "plan,"
"intend" or other words that convey the uncertainty of future events or
outcomes.
Such forward-looking information is based upon management's current
plans, expectations, estimates and assumptions and is subject to a number of
risks and uncertainties that could significantly affect current plans,
anticipated actions, the timing of such actions and the Company's financial
condition and results of operations. As a consequence, actual results may differ
materially from expectations, estimates or assumptions expressed in or implied
by any forward-looking statements made by or on behalf of the Company. The risks
and uncertainties include generally risks and uncertainties associated with the
Company's substantial leverage, restrictions imposed by the Indenture, the
acquisition and distribution of television and radio programming and the
development or acquisition of programming that audiences will like, risks and
uncertainties associated with reliance on others for the distribution of
television programming, risks associated with the Acquisition, uncertainties
associated with the integration of acquired companies and businesses, dependence
on the sale of advertising airtime and to generate advertising revenues, risks
associated with the PIN Venture, risks and uncertainties associated with the
satellite delivery and production support market and technology and those other
risks and uncertainties discussed herein under "Risk Factors." Also, the impact
of competition on all aspects of the business is not predictable. Additionally,
unpredictable or unknown factors not discussed herein could have material
adverse effects on actual results related to matters which are the subject of
forward-looking information. Forward-looking statements speak only as of the
date of this Prospectus. The Company does not intend to update these cautionary
statements.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by and should be read in
conjunction with the more detailed information and the historical and pro forma
consolidated Financial Statements and Notes thereto appearing elsewhere in this
Prospectus. Unless the context requires otherwise, references to the Company
herein include Jones International Networks, Ltd. and its direct and indirect
subsidiaries. Unless the context requires otherwise and when statistical data
are provided as of a specific date, all information reflects the completion of
the Acquisition. The Company was incorporated in May 1998. The Company formerly
was a wholly-owned subsidiary of Jones Network Holdings LLC ("Network
Holdings"), a Colorado limited liability company. Network Holdings' wholly-
owned subsidiary, JPN, Inc. was incorporated in November 1993. Effective upon
the closing of the offering of the Old Notes in July 1998 and the Acquisition
(as defined), the Company acquired all of the shares of JPN, Inc. from Network
Holdings, and the members of Network Holdings exchanged their Class A Ownership
Interests and Class B Ownership Interests in Network Holdings for shares of
Class A Common Stock and Class B Common Stock, respectively, of the Company,
and Network Holdings was dissolved (the "Reorganization"). All information in
this Prospectus assumes that the Reorganization occurred on January 1, 1995.
Investors should consider carefully the information set forth under the heading
"Risk Factors".
THE COMPANY
Jones International Networks, Ltd. (the "Company") provides radio programming
to radio stations in the U.S. and cable television programming to cable system
operators. The Company's radio programming includes twelve 24-hour formats and
18 syndicated programs that are broadcast by approximately 2,300 radio station
affiliates throughout the United States to over 60 million weekly listeners.
The Company's cable television programming consists of Great American Country
(country music videos) and the Product Information Network (long-form
advertising). Pursuant to affiliate agreements with five of the ten largest
multiple-system operators ("MSOs"), as well as the two cable programming
cooperatives and others, Great American Country was distributed to 4.6 million
subscribers at August 15, 1998. The Product Information Network is presently
distributed to 278 cable systems and broadcast affiliates and is available to
18.6 million households. The Company has successfully expanded the reach of its
cable television programming to a broad number of major MSOs as a result of the
extensive experience of the Company's senior management team, including Mr.
Glenn R. Jones, the Company's Chairman and majority shareholder.
In July, 1998, the Company acquired substantially all the assets of
MediaAmerica, Inc. ("MediaAmerica") (the "Acquisition"). MediaAmerica was
founded in 1987 to provide advertising representation services to providers of
radio programming, such as the Company, and in 1994 expanded to provide radio
programming and other services to radio stations. The Acquisition provides the
Company with a group of experienced executives who have long-standing
relationships with many advertising agencies and advertisers that the Company
believes will be valuable in driving its advertising-related revenue growth.
See "The Acquisition and Related Transactions."
The Company primarily derives its revenues from the sale of its commercial
radio or cable television airtime inventory to national advertisers that are
attracted to the Company's ability to efficiently reach a large national
audience across a variety of demographics and markets. The Company also
receives license fees from MSOs that carry Great American Country and provides
satellite delivery and production support services for its own programming
operations as well as to others. The Company's strategy is to increase
advertising revenues by continuing to increase its base of radio station
affiliates and cable system affiliates, thereby broadening its audience of
radio listeners and cable television viewers. The Company also plans to
diversify and expand its sources of revenues by developing new radio and cable
television programming, acquiring complementary businesses (such as
MediaAmerica), offering programming-related and other value-added services and
leasing satellite transponder capacity made available by more efficient digital
compression techniques. There is no assurance that the Company will be
successful in these efforts.
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The Company provides a wide variety of advertisers many different ways to
reach their target audiences through network radio and cable television. Given
network radio's wide reach and relatively low advertising costs, it is one of
the most cost-effective means to reach targeted demographic groups. The
Company's radio audience demographics are primarily adults, ages 25-54. Great
American Country, the Company's country music television network, also targets
this attractive demographic sector. According to industry sources, country
music is one of America's most popular music formats and has been one of the
fastest growing segments of the music industry. In addition, the Company
believes the Product Information Network's long-form advertising provides
television advertisers with a cost-effective medium to deliver sales messages,
product introductions and demonstrations to targeted audiences. The Company
believes that the number of advertisers and the volume of long-form advertising
will continue to grow as the Product Information Network's coverage of U.S.
households increases and Fortune 500 companies and other major advertisers
increasingly take advantage of the benefits of long-form advertising to reach
their desired audience.
RADIO PROGRAMMING. The Company, through its radio programming division, Jones
Radio, typically provides programming to its radio affiliates in exchange for
commercial airtime inventory which it sells to national advertisers. Jones
Radio's programming and related services offer radio stations a cost-efficient
alternative to the talent, time and expense required to develop in-house
programming. In addition, Jones Radio's variety of appealing 24-hour formats,
primarily country and adult contemporary, and its nationally recognized group
of syndicated programs and personalities, enable radio stations to distinguish
themselves within their increasingly competitive markets. As a group, Jones
Radio's radio station affiliates generally capture larger audience (measured by
average quarter hour listeners ("AQH")) as a result of broadcasting Jones
Radio's programming, which can result in additional local advertising revenues
for these radio stations. Jones Radio has been a successful provider of country
music programming, one of the most popular music formats with over 4 million
U.S. listeners each week. Jones Radio provides its programming to approximately
30% of all country radio stations in the United States and believes it is the
largest provider of country music programming to U.S. radio stations. Between
December 31, 1994 and June 30, 1998, Jones Radio's base of radio station
affiliates grew from 925 to 1,510, representing a compound annual growth rate
("CAGR") of 14.1%. For the same period, Jones Radio has experienced a 37.9%
CAGR in AQH, growing from 670,000 at December 31, 1994 to 2,473,000 at June 30,
1998. In addition to its advertising representation business, MediaAmerica
provides radio programming and services to 990 radio station affiliates in
mostly larger markets. As a result of the Acquisition, Jones Radio has more
than doubled its AQH to 6.5 million, which represents 60 million total weekly
listeners. While Jones Radio has historically provided programming to radio
stations in small and medium-sized markets, it is currently focusing its
programming development efforts to appeal to larger markets. Jones Radio has
radio station affiliates in all 50 states and in all of the top 50 markets.
RADIO ADVERTISING REPRESENTATION SERVICES. As a result of the Acquisition,
the Company offers advertising representation services to providers of radio
programming throughout the United States. As a representation firm,
MediaAmerica historically acted as an intermediary between advertisers and
radio programming providers, such as the Company. The Company was one of
MediaAmerica's largest customers in 1997 for this type of service. The Company
plans to develop numerous cross-selling opportunities and other synergies that
arise from the complementary nature of MediaAmerica's services and customer
base. There can be no assurance that the Company will be successful in these
efforts.
TELEVISION PROGRAMMING--GREAT AMERICAN COUNTRY. Great American Country is a
24-hour country music video network that capitalizes on the popularity of
country music and leverages the Company's core competency in country music
programming. Great American Country represents a high-quality alternative to
currently available country music networks and offers MSOs attractive
incentives for carriage. In order to drive subscriber growth, Great American
Country generally offers affiliates a one-time cash launch incentive and waives
license fees for a certain period which varies based on the level of subscriber
commitment. The Company is enhancing its near-term operating cash flow through
new agreements with two significant MSOs
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to issue them shares of the Company's Class A Common Stock in return for which
Great American Country will be paid license fees from the date of launch (the
"GAC Equity Agreements"). Great American Country has affiliate agreements with
five of the ten largest MSOs, including Adelphia Communications Corporation
("Adelphia"), Comcast Cable Communications, Inc. ("Comcast"), Jones Intercable,
Inc. ("Jones Intercable"), TCI Communications, Inc. ("TCI") and Time Warner
Networks, Inc. ("Time Warner"), as well as the two cable programming
cooperatives, Telesynergy, Inc. and National Cable Television Cooperative, Inc.
The Company believes that by offering its carriage incentive programs and
competitive license fee rates and local advertising avails, it will attract
additional subscribers from existing and new MSO affiliates that are
increasingly seeking to decrease costs and generate more advertising revenues.
TELEVISION PROGRAMMING--PRODUCT INFORMATION NETWORK. The Company introduced
the Product Information Network in October 1993 to capitalize on the growing
infomercial industry which, based on industry statistics, represents
approximately $1 billion of airtime expenditures. The Product Information
Network is aired on a full-time (24-hour) basis or on a part-time basis,
thereby affording cable and broadcast affiliates the opportunity to generate
incremental revenues from otherwise under-utilized time. The Product
Information Network airs long-form informational programming from all of the
major infomercial producers, such as Guthy-Renker Corporation and National
Media Corporation. Through agencies, it also airs advertising from major
corporate advertisers, which have recently included Phillips-Magnavox, Simmons,
Hanes, Sunbeam, The Sharper Image and Time-Life. Since December 31, 1994, the
Product Information Network has increased its base of cable subscribers and
broadcast households from 1.5 million to 18.6 million at June 30, 1998,
representing a CAGR of 74.1%. The Product Information Network is presently
distributed to 9.7 million full-time equivalent subscribers through 278 cable
systems and broadcast affiliates. The MSOs that carry the network on a portion
of their cable systems include nine of the ten largest MSOs, including
Adelphia, Cablevision Systems Corporation ("Cablevision"), Comcast, Cox
Communications, Inc. ("Cox"), Jones Intercable, Marcus Cable Company, LP
("Marcus Cable"), MediaOne Group, TCI and Time Warner. The Product Information
Network operates through a joint venture among the Company, Adelphia and Cox
(the "PIN Venture").
SATELLITE DELIVERY AND PRODUCTION SUPPORT SERVICES. The Company supports the
production and distribution of its radio and cable television programming
operations through its state-of-the-art satellite uplinking facilities. The
Company's satellite delivery and production support services provide reliable
and efficient playback, trafficking, uplinking and satellite transmission
services to the Company's radio and cable television programming operations and
to certain related companies. The Company believes that the integration of
these distribution services gives it strict management and quality control over
the distribution of its programming. The Company has financed its ownership of
two analog satellite transponders through a capital lease that was fully
prepaid with a portion of the proceeds of the offering of the Old Notes. The
channel capacity on one satellite transponder has been digitally compressed to
seven channels, four of which are currently leased to Product Information
Network, Great American Country and two related parties. This transponder could
now be digitally compressed into additional channels if demand warranted. In
August 1998, the Company entered into a lease agreement with an unaffiliated
party for the lease of three digital channels until August 31, 1999. The other
satellite transponder is an analog channel which the Company recently leased to
a third party. The Company believes that the demand for its satellite delivery
and production support services should increase as digital programming and
distribution technologies continue to develop and cable systems complete
upgrades and rebuilds to expand their channel capacity. The cable systems'
expansion of their channel capacity provides more programming space for cable
programmers who, in turn, would require satellite transponders to provide the
programming.
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COMPETITIVE STRENGTHS
EXPERIENCED MANAGEMENT TEAM WITH STRONG RELATIONSHIPS WITH RADIO STATION
AFFILIATES, MSOS AND ADVERTISERS. Glenn R. Jones, the Company's Chairman and
majority shareholder is also the Chairman and Chief Executive Officer of Jones
Intercable, one of the ten largest MSOs in the United States. It is anticipated
that following consummation of the pending acquisition from entities affiliated
with Mr. Jones of shares representing a controlling interest in Jones
Intercable by Comcast Corporation, Mr. Jones will no longer be affiliated with
Jones Intercable. Mr. Jones has assembled a management team with extensive
experience in all aspects of the Company's businesses. The Company's senior
management team has an aggregate of 141, 94 and 142 years of experience in the
radio, cable television and advertising industries, respectively. The Company's
radio programming experience dates back to 1989 when it launched its first 24-
hour satellite delivered format. The rapid increase in radio station affiliates
is the result of the Company's sales and marketing efforts, which emphasize its
quality programming, customer service and experienced air talent. The Company's
cable television programming has benefited substantially from management's
experience and relationships with major MSOs, with five of the ten largest MSOs
affiliating with Great American Country and cable systems owned by nine of the
ten largest MSOs affiliating with the Product Information Network. Finally, the
Acquisition provides the Company with a group of experienced executives who
have long-standing relationships with many advertising agencies and advertisers
that the Company believes will be valuable in driving advertising-related
revenue growth.
LARGE AND GROWING INSTALLED BASE OF LISTENERS AND SUBSCRIBERS WITH ATTRACTIVE
DEMOGRAPHICS. The Company's radio and cable television programming reaches a
large nationwide audience, in most cases, 24 hours a day, seven days a week.
The Company's audience includes 60 million weekly radio listeners and 18.6
million households for the Product Information Network. This audience has grown
dramatically over the past five years, as the Company has developed or acquired
new and improved programming for an increasing number of radio station and
cable system affiliates. The Company's audience is represented by a variety of
demographics in small, medium-sized and large markets, which the Company
believes appeals to a broad array of national advertisers. As the Company's
audience increases, the Company believes it will be able to obtain a more than
proportional increase in advertising revenues.
SIGNIFICANT OPERATING LEVERAGE WITH LOW PROGRAMMING COSTS AND STATE-OF-THE-
ART INFRASTRUCTURE. The Company's radio and cable television programming costs
are low relative to many of its competitors. The Company's programming
operations utilize state-of-the-art digital equipment to automate its
operations and thus reduce its operating costs. Great American Country receives
country music videos at no cost from the record label companies, and the
Product Information Network's advertisers purchase airtime from the Company to
broadcast their programs. The Company's satellite uplinking and distribution
costs are generally fixed and, as a result, additional radio or cable
television programming can be distributed by the Company at minimal incremental
cost.
INTEGRATED PROVIDER OF HIGH-QUALITY RADIO PROGRAMMING. The Company is
strategically positioned as an independent provider of radio programming. In
their increasingly competitive markets, radio stations may seek programming
from the Company, because as an "independent," the Company does not own or
operate competitive radio stations. The Company's independence also enables it
to act as a radio programming distributor for large group radio station owners,
such as CapStar Broadcasting Corp. ("CapStar"). The Company ensures the quality
of the distribution of its radio programming in part through its integrated
state-of-the-art satellite uplinking and distribution facilities which employ
recent innovations in digital storage and delivery.
COMPLEMENTARY ACQUISITION OF MEDIAAMERICA YIELDS SUBSTANTIAL BENEFITS. The
Acquisition offers a number of opportunities for the Company and is expected to
enhance its profitability. MediaAmerica had $15.1 million of net revenues in
1997. MediaAmerica will also enable the Company to pursue programming alliances
4
<PAGE>
with parties to which it previously had no access. For example, the Company and
MediaAmerica are in joint discussions with a major cable television network to
develop a group of news and entertainment radio programs utilizing the
network's talent and news gathering resources. The Company believes there are
also potential synergies in MediaAmerica's radio programming operations, which
add 14 radio programs provided through 990 radio station affiliates to an
audience of 28 million weekly listeners. Finally, MediaAmerica's management
team brings an aggregate of 142 years of experience in the radio advertising
representation industry. The Company believes that MediaAmerica's long-standing
relationships with advertising agencies and advertisers should significantly
enhance the Company's ability to drive advertising-related revenue growth;
although there can be no assurance to that effect.
COMBINATION OF RADIO AND CABLE TELEVISION OFFERS ADVERTISERS EFFICIENT MEANS
OF REACHING A LARGE AUDIENCE. As a diversified provider of radio and cable
television programming, the Company provides to a wide variety of advertisers
many different ways to reach their target audience. Radio is one of the most
cost-effective means to reach targeted demographics. According to industry
sources, 167 million people listen to radio each day. Similarly, cable
television is a relatively inexpensive means to target large audiences as
compared to broadcast television. According to industry sources, 68 million of
97 million U.S. TV households subscribe to cable and 54% of viewing time is on
cable networks. The Company believes it is strategically positioned to offer
both radio and cable television advertising inventory in a single package. For
example, the Company is developing joint media proposals for advertisers to
target a large nationwide audience through the Company's country music radio
programs and Great American Country.
STRATEGY
The Company's objective is to increase its revenues and operating income by
employing the following strategies:
DISTRIBUTE PROGRAMMING TO A LARGER AUDIENCE. To increase its revenues from
advertisers, the Company must increase the distribution of, and audience for,
its programming. Jones Radio plans to increase its marketing and sales
activities in an effort to increase the number of its radio station affiliates
and the size of its audience. The Company also plans to continue to
aggressively market its cable television networks to both cable operators and
other multi-channel distributors, including direct broadcast satellite services
systems ("DBS"), multi-point, multi-system distribution systems ("MMDS") and
others. The Company relies on financial incentives and its established
relationships with MSOs to market these networks.
DEVELOP OR ACQUIRE ADDITIONAL HIGH-QUALITY PROGRAMMING. The Company believes
that there is market demand for additional long-form and short-form radio
programming due to the financial constraints and limited creative resources of
many radio stations and their need to improve operating efficiencies. In
addition, the Company believes there are additional market opportunities for
24-hour music and information programs that the Company does not currently
distribute, such as news/talk radio. Jones Radio intends to develop and/or
acquire radio programming addressing these market demands. An example of new
radio programming includes "Nashville Nights," a national long-form country
night-time show targeted at larger markets, which is being produced in a
venture with CapStar. The Company is exploring opportunities to produce
additional low-cost cable television programming based on the strength of its
relationships with major MSOs and its success with Great American Country and
the Product Information Network. The Company believes that any new cable
television programming would typically serve unfilled or underserved niches
and, similar to Great American Country, would most likely serve as an
attractive competitively priced alternative to an existing cable network.
INCREASE ADVERTISING REVENUES. The Company's primary goal in driving revenue
growth is to increase its audience by developing new programming and expanding
its base of radio station and cable system affiliates. In addition, the
Company's new radio programs are designated to increasingly target larger
markets which typically
5
<PAGE>
generate higher advertising rates. Management believes that when Great American
Country's attainment of a 5 million subscriber level is reached, of which there
is no assurance, the Company will be able to target a broader group of
advertisers and derive significantly higher advertising revenues based on
traditional spot advertising as opposed to direct response advertising.
Finally, the Company intends to promote the benefits of long-form advertising
to Fortune 500 companies and other major advertisers, with the goal of
attracting more advertising from such advertisers, enhancing the quality of the
Product Information Network's programming and increasing the rates for its
advertising time.
ACQUIRE OR CREATE COMPLEMENTARY BUSINESSES AND VALUE-ADDED SERVICES. The
Company intends to expand its business by acquiring and/or creating businesses
complementary to its business. The Acquisition represents an example of this
strategy. The Company believes that numerous opportunities exist, both in the
development of new programming and the acquisition of complementary businesses.
A portion of the proceeds from the offering of the Old Notes will provide the
Company with additional resources for these purposes.
INCREASE UTILIZATION OF SATELLITE TRANSPONDER CAPACITY AND PRODUCTION SUPPORT
FACILITIES. The Company's satellite delivery and production support facilities
provide reliable and efficient playback, trafficking, uplinking and satellite
transmission services to the Company's radio and cable television programming
operations, to certain related companies and to a third party. The Company has
seven channels on its digitally compressed satellite transponder, which could
be digitally compressed into additional channels if demand warranted. All seven
channels on this satellite transponder are leased. The Company also has one
analog channel on another satellite transponder which is leased. The Company
believes that its remaining compressible satellite transponder capacity
represents a valuable asset because of the potential demand from new cable
programmers for satellite transponder space, the opportunity to provide
profitable uplinking and other services along with the satellite transponder
space, and the availability of satellite transponder space in-house in the
event that the Company develops or acquires additional cable television
networks in the future.
COMPANY BACKGROUND
The Company was founded by Glenn R. Jones. Mr. Jones is the Chairman and
Chief Executive Officer of Jones Intercable, one of the ten largest MSOs
serving more than 1.4 million subscribers through 37 cable television systems
in the United States. Mr. Jones has been instrumental in leading the Company's
early growth and continues as its majority shareholder and Chairman. Mr. Jones
beneficially owns 100% of the Company's Class B Common Stock, which has the
right as a class to elect 75% of the Company's Board of Directors, and 78.9% of
the Company's Class A Common Stock, and he controls the election of the six
members of the Company's Board of Directors (subject to certain contractual
agreements made in connection with the Acquisition). Mr. Jones has been a
leader in the cable television business for over 35 years and in 1994 he was
inducted into the Broadcasting and Cable Hall of Fame. Jones Intercable is a
significant customer of the Company, as it distributes Great American Country
and the Product Information Network to most of its subscribers. This
relationship is expected to continue in accordance with current contractual
arrangements after the closing of the acquisition by Comcast Corporation of
certain shares representing a controlling interest in Jones Intercable from Mr.
Jones and other major shareholders of Jones Intercable. Two affiliated
companies, Jones Education Company and Knowledge TV, Inc., also lease satellite
transponder capacity and purchase uplinking and other services from the
Company.
Upon the sale of Mr. Jones' interest in Jones Intercable, Jones Intercable
will no longer share in many of the administrative and related expenses which
have historically been shared by the various entities affiliated with Mr.
Jones, including the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The Company was incorporated as a Colorado corporation and is the successor
to certain affiliated entities that previously conducted certain of its
businesses. The Company's corporate offices are located at 9697 East Mineral
Avenue, Englewood, Colorado 80112, and its telephone number is (303) 792-3111.
6
<PAGE>
THE EXCHANGE OFFER
The Exchange Offer.......... The Company is offering to exchange $1,000
principal amount of Exchange Notes for each
$1,000 principal amount of Old Notes that is
properly tendered and accepted. The form and
terms of the Exchange Notes are substantially
identical in all material respects as the form
and terms of the Old Notes except that the
exchange will have been registered under the
Securities Act and therefore the Exchange Notes
will not bear legends restricting the transfer
thereof. In addition, the Additional Interest
provisions will be modified or eliminated as
appropriate and holders of the Exchange Notes
will not be entitled to certain rights of holders
of the Old Notes under the Exchange and
Registration Rights Agreement, which rights with
respect to Old Notes that are exchanged will
terminate upon the consummation of the Exchange
Offer. See "The Exchange Offer--Payment of
Additional Interest Under Certain Conditions."
The issuance of the Exchange Notes is intended to
satisfy certain obligations of the Company
contained in the Exchange and Registration Rights
Agreement. Subject to certain conditions, a
holder who wishes to tender must transmit a
properly completed and duly executed Letter of
Transmittal to United States Trust Company of New
York (the "Exchange Agent") on or prior to the
Expiration Date. For procedures for tendering,
see "The Exchange Offer."
Based upon existing interpretations by the staff
of the Commission issued to third parties, the
Company believes the Exchange Notes will be
freely transferable by holders thereof (other
than affiliates of the Company and the Subsidiary
Guarantors) after the Exchange Offer without
further registration under the Securities Act if
the holder of the Exchange Notes represents that
it is acquiring the Exchange Notes in the
ordinary course of business, that it has no
arrangement or understanding with any person to
participate in the distribution (within the
meaning of the Securities Act) of the Exchange
Notes and that it is not an affiliate of the
Company or the Subsidiary Guarantors, as such
terms are interpreted by the Commission; provided
that broker-dealers ("Participating Broker-
Dealers") receiving Exchange Notes in the
Exchange Offer will have a prospectus delivery
requirement with respect to resales of such
Exchange Notes. The Commission has not considered
the Exchange Offer itself in the context of its
interpretations and there can be no assurance
that the staff of the Commission would make a
similar determination with respect to the
Exchange Offer. The Commission has taken the
position that the Participating Broker-Dealers
may fulfill their prospectus delivery
requirements with respect to the Exchange Notes
(other than a resale of an unsold allotment from
the original sale of the Old Notes) with the
prospectus contained in the Exchange Offer
Registration Statement. The Company has agreed
if, at the time of the completion of the Exchange
Offer, information in the Letter of Transmittal
submitted by exchanging holders indicates that
there are holders that are
7
<PAGE>
Participating Broker-Dealers or otherwise subject
to prospectus delivery requirements, the Company
will, for such period of time as is necessary to
comply with applicable law up to the date that is
180 days after consummation of the Exchange
Offer, make available a prospectus meeting the
requirements of the Securities Act to such
persons, if any, for use in connection with any
resale of such Exchange Notes.
Exchange and Registration
Rights Agreement............ The Old Notes were sold by the Company on July
10, 1998 to the Initial Purchaser pursuant to the
Purchase Agreement. Pursuant to the Purchase
Agreement, the Company and the Initial Purchaser
entered into the Exchange and Registration Rights
Agreement. This Exchange Offer is intended to
satisfy certain obligations of the Company
contained in the Exchange and Registration Rights
Agreement, which terminate upon the consummation
of the Exchange Offer. The holders of the
Exchange Notes are not entitled to any exchange
or registration rights with respect to the
Exchange Notes. The Old Notes are subject to the
payment of Additional Interest under certain
circumstances if the Company is not in compliance
with its obligations under the Exchange and
Registration Rights Agreement. See "The Exchange
Offer, Payment of Additional Interest Under
Certain Circumstances."
Expiration Date............. The Exchange Offer will expire at 5:00 p.m., New
York City time, on the "Expiration Date." As used
herein, the term "Expiration Date" means 5:00
p.m., New York City time, on December 21, 1998;
provided, however, that if the Company its sole
discretion, has extended the period of time for
which the Exchange Offer is to remain open, the
term "Expiration Date" means the latest time and
date to which the Exchange Offer is extended.
Withdrawal.................. Tenders of Old Notes pursuant to the Exchange
Offer may be withdrawn at any time prior to the
Expiration Date by sending a written notice of
withdrawal to the Exchange Agent. Any Old Notes
so withdrawn will be deemed not to have been
validly tendered for exchange for purposes of the
Exchange Offer. Any Old Notes not accepted for
exchange for any reason will be returned without
expense to the tendering holder thereof as
promptly as practicable after the expiration or
termination of the Exchange Offer. See "The
Exchange Offer--Terms of the Exchange Offer;
Period for Tendering Old Notes."
Certain Conditions to the
Exchange Offer.............. The Exchange Offer is subject to certain
customary conditions, which may be waived by the
Company. See "The Exchange Offer--Certain
Conditions to the Exchange Offer."
Federal Income Tax The exchange of the Old Notes for Exchange Notes
Consequences................ pursuant to the Exchange Offer should not
constitute a taxable exchange for federal income
tax purposes. See "Certain United States Federal
Income Tax Considerations."
8
<PAGE>
Use of Proceeds............. There will be no proceeds to the Company from the
issuance of the Exchange Notes pursuant to the
Exchange Offer.
Exchange Agent.............. United States Trust Company of New York is
serving as Exchange Agent in connection with the
Exchange Offer.
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for Exchange Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legends thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities
Act and applicable state securities laws. Accordingly, such Old Notes may only
be offered, sold, pledged or otherwise transferred (A)(i) to a person whom the
seller reasonably believes is a qualified institutional buyer within the
meaning of Rule 144A under the Securities Act ("Rule 144A") in a transaction
meeting the requirements of Rule 144A, (ii) in an offshore transaction meeting
the requirements of Rule 903 or Rule 904 of Regulation S under the Securities
Act, (iii) pursuant to an exemption from registration under the Securities Act
provided by Rule 144 thereunder ("Rule 144"), if available or (iv) pursuant to
another exemption from registration as set forth in the legend on the Old Notes
and (B) in accordance with all applicable securities laws of the states of the
United States. The Company does not anticipate that it will register the Old
Notes under the Securities Act. See "Risk Factors--Consequences of Failure to
Exchange Old Notes" and "The Exchange Offer--Consequences of Failure to
Exchange."
THE EXCHANGE NOTES
The form and terms of the Exchange Notes are substantially identical in all
material respects to the form and terms of the Old Notes except that the
exchange will have been registered under the Securities Act and therefore the
Exchange Notes will not bear legends restricting the transfer thereof. In
addition, the Additional Interest provisions will be modified or eliminated as
appropriate and holders of the Exchange Notes will not be entitled to certain
rights of holders of the Old Notes under the Exchange and Registration Rights
Agreement, which rights with respect to Old Notes that are exchanged will
terminate upon the consummation of the Exchange Offer. See "Description of the
Notes--Exchange Offer; Registration Rights." The Exchange Notes will evidence
the same debt as the Old Notes (which they replace) and will be issued under,
and be entitled to the benefits of, the Indenture. See "Description of the
Notes" for further information and for definitions of certain capitalized terms
used below.
Each Exchange Note will bear interest at the rate of 11 3/4% per annum from
the most recent date to which interest has been paid or duly provided for on
the Old Note surrendered in exchange for such Exchange Note or, if no interest
has been paid or duly provided for on such Old Note, from July 10, 1998 (the
date of original issuance of such Old Notes). Interest on the Exchange Notes
will be payable semiannually on January 1 and July 1 of each year, commencing
on the first such date following the original issuance date of the Exchange
Notes.
Holders of Old Notes whose Old Notes are accepted for exchange will not
receive accrued interest on such Old Notes for any period from and after the
last Interest Payment Date to which interest has been paid or duly provided for
on such Old Notes prior to the original issue date of the Exchange Notes or if
no such interest has been paid or duly provided for, will not receive any
accrued interest on such Old Notes, and will be deemed to have waived the right
to receive any interest on such Old Notes accrued from and after such Interest
Payment Date or, if no such interest has been paid or duly provided for, from
and after July 10, 1998.
9
<PAGE>
THE NOTES
Securities.................. $100,000,000 aggregate principal amount of 11
3/4% Senior Secured Notes due 2005.
Maturity Date............... July 1, 2005.
Interest Payment Dates...... January 1 and July 1 of each year, commencing on
January 1, 1999.
Optional Redemption......... Except as described below and under "Change of
Control," the Company may not redeem the Notes
prior to July 1, 2003. On or after such date, the
Company may redeem the Notes, in whole or in
part, at any time at the redemption prices set
forth herein, together with accrued and unpaid
interest, if any, to the date of redemption. In
addition, at any time and from time to time on or
prior to July 1, 2001, the Company may, subject
to certain requirements, redeem up to 35% of the
aggregate principal amount of the Notes with the
cash proceeds received from one or more Equity
Offerings at a redemption price equal to 111.75%
of the principal amount to be redeemed, together
with accrued and unpaid interest, if any, to the
date of redemption, provided that at least 65% of
the aggregate principal amount of the Notes
remains outstanding immediately after each such
redemption.
Change of Control........... Upon the occurrence of a Change of Control, the
Company will be required to make an offer to
repurchase the Notes at a price equal to 101% of
the principal amount thereof, together with
accrued and unpaid interest, if any, to the date
of repurchase.
Ranking..................... The Notes rank pari passu in right of payment
with all existing and future Senior Indebtedness
of the Company and rank senior in right of
payment to all existing and future Subordinated
Obligations of the Company. Claims of holders of
the Notes are structurally subordinated to claims
of holders of indebtedness of the Company's
subsidiaries.
Security.................... The collateral securing the Notes consists of the
capital stock of the Company's wholly-owned
subsidiary, Jones Programming, and its direct
subsidiaries. The Guarantees are not secured.
Guarantees.................. The Notes are unconditionally guaranteed, jointly
and severally, by each of the Subsidiary
Guarantors. The Guarantees are senior unsecured
obligations of each Subsidiary Guarantor and rank
pari passu in right of payment with all existing
and future Senior Indebtedness of each Subsidiary
Guarantor, other than Bank Indebtedness and
Capitalized Lease Obligations, and rank senior in
right of payment to all existing and future
Subordinated Obligations of each Subsidiary
Guarantor.
Restrictive Covenants....... The indenture under which the Notes are issued
(the "Indenture") contains certain covenants
that, among other things, limit (i) the
10
<PAGE>
incurrence of additional indebtedness by the
Company and its subsidiaries, (ii) the payment of
dividends on, and redemption of, capital stock of
the Company and the redemption of certain
subordinated obligations of the Company, (iii)
investments, including investments over a certain
amount in any entity that is not a Wholly-Owned
Subsidiary, (iv) sales of assets and subsidiary
stock, (v) transactions with affiliates and (vi)
consolidations, mergers and transfers of all or
substantially all of the assets of the Company.
The Indenture also prohibits the restriction of
certain distributions and asset transfers from
Restricted Subsidiaries. All the limitations and
prohibitions are subject to a number of important
qualifications and exceptions.
Transfer Restrictions;
Absence of a Public If issued, the Exchange Notes will generally be
Market...................... freely transferable but will be new securities
for which there will not initially be a market.
The Old Notes are designated for trading in the
PORTAL market. The Initial Purchaser has advised
the Company that it may make a market in the Old
Notes and in the Exchange Notes. However, the
Initial Purchaser is not obligated to do so, and
any market-making may be discontinued at any time
without notice. The Company does not intend to
apply for listing of the Old Notes, or, if
issued, the Exchange Notes, on any securities
exchange or automated dealer quotation system.
See "Exchange Offer and Registration Rights" and
"Plan of Distribution."
Use of Proceeds............. The Company will receive no proceeds from the
issuance of the Exchange Notes. The net proceeds
from the offering of the Old Notes was
approximately $95.2 million. See "Use of
Proceeds."
For more complete information regarding the Notes, see "Description of
Notes."
11
<PAGE>
SUMMARY UNAUDITED REPORTED AND PRO FORMA FINANCIAL DATA
The following table sets forth certain summary unaudited reported and pro
forma consolidated financial data of the Company for the periods ended and as
of the dates indicated and are derived from and described in "Selected
Unaudited Pro Forma Financial Data" and "Selected Consolidated Financial Data."
The summary unaudited pro forma income statement and other data for 1997 give
effect to the consolidation on a pro forma basis of the Company's subsidiary,
the PIN Venture, as if this transaction had occurred at the beginning of 1997.
The summary unaudited pro forma income statement and other data are further
adjusted to reflect the Acquisition, the offering of the Old Notes and the
application of the net proceeds therefrom, the payment of launch incentive
fees, receipt of subscriber license fees and issuance of Class A Common Stock
pursuant to the GAC Equity Agreements and the conversion of the $10 million
note to Global Group into shares of Class A Common Stock (collectively, the
"Transactions") as if they had occurred at the beginning of the periods
presented. The summary unaudited pro forma balance sheet data give effect to
the Transactions as if they had occurred on June 30, 1998. The summary
unaudited pro forma financial data are provided for informational purposes only
and should not be construed to be indicative of what the Company's results of
operations or financial condition would have actually been had any of the
aforementioned Transactions been consummated as of such dates or to project the
Company's results of operations or financial condition for any future period or
date.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------- ---------------------------------
REPORTED PRO FORMA REPORTED PRO FORMA
------------------------- ---------- ----------------- ---------
1995 1996 1997 1997 1997 1998 1998
------- ------- ------- ---------- ------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Radio programming..... $ 5,121 $ 6,978 $10,200 $14,041 $ 5,090 $ 3,739 $ 5,400
Radio advertising and
sales
representation....... -- -- -- 11,285 -- -- 4,314
Television
programming.......... 340 1,153 12,002 15,484 3,898 7,865 8,126
Satellite delivery and
production support... 9,666 8,523 6,910 6,485 3,918 2,128 2,128
------- ------- ------- ------- ------- -------- --------
Total revenues.......... 15,127 16,654 29,112 47,295 12,906 13,732 19,968
------- ------- ------- ------- ------- -------- --------
Total operating ex-
penses................. 13,660 15,778 26,859 40,696 11,544 16,326 22,235
------- ------- ------- ------- ------- -------- --------
Operating income
(loss)................. 1,467 876 2,253 6,599 1,362 (2,594) (2,267)
------- ------- ------- ------- ------- -------- --------
Interest expense, net... 4,006 4,428 5,569 12,081 2,845 2,541 6,062
Other (income) expense,
net.................... 5 (841) 616 785 651 191 260
Income tax provision
(benefit).............. (498) (387) (1,342) (1,188) (356) 268 311
Minority interests (a).. -- (9) 903 1,072 418 69 69
------- ------- ------- ------- ------- -------- --------
Net loss................ $(2,046) $(2,315) $(3,493) $(6,151) $(2,196) $ (5,663) $ (8,969)
======= ======= ======= ======= ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
----------------------
AS REPORTED PRO FORMA
----------- ----------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 2,445 $ 26,260(b)
Working capital..................................... (6,395) 23,079
Total assets........................................ 40,762 111,963
Total long-term debt (c)............................ 54,296 100,000
Minority interests (d).............................. 822 822
Shareholders' deficit............................... (23,869) (4,852)
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------- ---------------------------
REPORTED PRO FORMA REPORTED PRO FORMA
----------------------- ---------- ------------- ---------
1995 1996 1997 1997 1997 1998 1998
------- ------- ------- ---------- ------- ----- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA (e).............. $ 5,355 $ 5,352 $ 6,561 $12,215 $ 3,788 $ 19 $1,140
Depreciation and
amortization (f)..... 3,888 4,476 5,130 6,622 2,512 2,651 3,445
Capital expenditures.. 1,262 2,969 1,367 1,551 1,002 539 645
Ratio of earnings to
fixed charges (g).... -- -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------- ---------------------------
REPORTED PRO FORMA REPORTED PRO FORMA
------------------ ---------- ------------- ---------
1995 1996 1997 1997 1997 1998 1998
----- ----- ------ ---------- ------ ------ ---------
(IN THOUSANDS, EXCEPT RADIO STATION AFFILIATE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Audience Data (at End of
Period):
Radio AQH (24-hour
formats) (h)......... 765 1,090 1,148 1,148 1,105 1,324 1,324
Radio AQH (syndicated)
(h).................. -- 834 1,048 4,644 798 1,148 4,808
Radio station
affiliates........... 929 1,273 1,484 2,139 1,317 1,510 2,255
Great American Country
households........... 14 1,049 1,550 2,750 1,172 3,578 4,060
Product Information
Network households... 4,825 8,111 11,500 11,500 10,522 18,630 18,630
</TABLE>
- --------
(a) Represents minority interest in the net income (loss) of the Company's
consolidated subsidiaries.
(b) Includes $10.0 million of restricted cash from the net proceeds of the
Offering that was deposited into a Reserve Account.
(c) Includes current and non-current maturities of long-term debt and capital
lease obligations.
(d) Represents the minority interest in the net assets of the Company's
consolidated subsidiaries.
(e) EBITDA represents operating income (loss) plus depreciation and
amortization minus the EBITDA attributable to the minority interests in the
Company's consolidated 54%-owned PIN Venture subsidiary. EBITDA does not
include cash distributions of $100 and $350 for the year ended December 31,
1997 and the six months ended June 30, 1998, respectively, from the
Company's unconsolidated 50% owned Superaudio subsidiary. (See calculations
in the table below.) Management believes that EBITDA is a measure commonly
used by analysts and investors to determine a company's ability to service
and incur its debt. EBITDA should not be considered in isolation or as a
substitute for net income (loss), cash flows from operating activities or
other consolidated income or cash flow statement data prepared in
accordance with generally accepted accounting principles or as a measure of
profitability or liquidity as the items excluded in the calculation of
EBITDA, such as interest, depreciation and amortization, are significant
components in understanding and assessing the Company's financial
performance. EBITDA measures presented may not be comparable to similarly
titled measures presented by other companies.
13
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------- ------------------------------
REPORTED PRO FORMA REPORTED PRO FORMA
-------------------- --------- --------------- ---------
1995 1996 1997 1997 1997 1998 1998
------ ------ ------ --------- ------ ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CALCULATION OF EBITDA:
Operating income
(loss)................. $1,467 $ 876 $2,253 $ 6,599 $1,362 $(2,594) $(2,267)
Plus: Depreciation and
amortization........... 3,888 4,476 5,130 6,622 2,512 2,651 3,445
Less: EBITDA
attributable to PIN
Venture's minority
interests.............. -- -- (822) (1,006) (86) (38) (38)
------ ------ ------ ------- ------ ------- -------
EBITDA.................. $5,355 $5,352 $6,561 $12,215 $3,788 $ 19 $ 1,140
</TABLE>
- --------
(f) Excludes the amortization of debt issuance costs.
(g) The ratio of earnings to fixed charges is determined by dividing (i) the
sum of earnings before extraordinary items and accounting changes, interest
expense, taxes and that portion of operating lease rental expense which is
representative of an interest factor by (ii) interest expense. For Reported
Financial Data, earnings were insufficient to cover fixed charges by
$2,380, $3,249, $3,291 and $4,788 for the years ended December 31, 1995,
1996 and 1997, and for the six months ended June 30, 1998, respectively.
For Pro Forma Financial Data, earnings were insufficient to cover fixed
charges by $5,456 and $8,051 for the year ended December 31, 1997 and the
six months ended June 30, 1998, respectively. The ratio does not take into
account depreciation and amortization.
(h) AQH represents the average audience (persons age 12 or older) listening to
radio stations broadcasting the Company's advertising inventory (i) during
any 15-minute period from 6am-7pm, Monday through Friday for 24-hour
formats or (ii) during any 15-minute period that the program is being
broadcast for syndicated programs, each as measured by the Arbitron rating
service. Radio advertising is generally sold on the basis of the listening
audience as quantified by the AQH.
RECENT FINANCIAL RESULTS
The following table sets forth preliminary summary unaudited consolidated
financial data of the Company for the periods ended and as of the dates
indicated. In the opinion of management, the summary unaudited consolidated
financial data include all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of results for these interim
periods. The preliminary results of operations for the nine months ended
September 30, 1998 are not necessarily indicative of results to be expected for
the full year ending December 31, 1998 or for any other interim period. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Recent Financial Results" for a discussion of the preliminary data.
14
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------
1997 1998 1997 1998
--------- --------- -------- --------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues
Radio programming................... $ 2,750 $ 2,884 $ 7,840 $ 6,623
Radio advertising and sales repre-
sentation........................... -- 2,362 -- 2,362
Television programming.............. 3,738 4,127 7,637 11,992
Satellite delivery and production
support............................. 1,701 1,782 5,619 3,988
-------- --------- -------- --------
Total revenues....................... 8,189 11,155 21,096 24,965
-------- --------- -------- --------
Total operating expenses............. 7,495 10,880 19,038 27,285
-------- --------- -------- --------
Operating income (loss).............. 694 275 2,058 (2,320)
-------- --------- -------- --------
Interest expense, net................ 1,431 2,838 4,276 5,378
Other (income) expense, net.......... (7) 736 644 927
Income tax provision (benefit)....... -- (253) (356) 15
Minority interests................... 43 (32) 461 37
-------- --------- -------- --------
Net income (loss).................... $ (773) $ (3,014) $ (2,967) $ (8,677)
======== ========= ======== ========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
------------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents, and short-term invest-
ments (a)..................................... $ 24,680
Working capital................................ 18,412
Total assets................................... 112,839
Total long-term debt........................... 100,000
Shareholders' deficit.......................... (8,736)
</TABLE>
(a) Includes $10.0 million of restricted cash from the net proceeds of the
offering of the Old Notes that was deposited into a Reserve Account.
15
<PAGE>
RISK FACTORS
Investors should carefully consider the following risk factors, as well as
other information contained in this Prospectus. This Prospectus contains
forward-looking statements. These statements appear in a number of places and
include statements regarding the intent, belief or current expectations of the
Company, its directors or its officers, primarily with respect to the future
operating performance of the Company. Investors are cautioned that any such
forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, and that actual results may differ materially
from those in the forward-looking statements as a result of various factors.
The accompanying information contained in this Prospectus, including the
information set forth below, identifies certain important factors that could
cause such differences. See "Forward-Looking Information."
SUBSTANTIAL LEVERAGE; POTENTIAL INABILITY TO PAY INTEREST OR PRINCIPAL OF DEBT
WHEN DUE
For the year ended December 31, 1997 and the six months ended June 30, 1998,
on a pro forma basis, earnings were insufficient to cover fixed charges by
$5.5 million and $8.1 million, respectively. The Company has and will have a
significant amount of debt outstanding. The Company presently has
approximately $100 million of indebtedness. See "Capitalization" and "Selected
Unaudited Pro Forma Financial Data."
Because the Company has a significant amount of debt outstanding, and is
subject to significant financial and operating restrictions, the Company could
experience several adverse consequences that may impair or impede its ability
to pay principal and interest on the Notes as they become due as a result of
maturity, acceleration, redemption or other repurchase obligation, such as a
change of control, or may cause it to be otherwise in default. Such
consequences include the following:
. Substantial amounts of the cash flow from the Company's operations will
have to be used for the payment of the principal and interest on the
Notes and other indebtedness, and will not be available to use for other
purposes, which may result in a competitive disadvantage.
. The Company could be unable to obtain additional financing, particularly
bank financing, in the future on favorable terms, or at all, to use for
working capital, acquisitions, capital expenditures, refinancing or
other purposes.
. As a result of the foregoing, the Company could be more vulnerable to
changes in economic conditions and in its industry and may not be able
to withstand competitive pressures, to keep up with technological
developments, to consummate acquisitions or to capitalize on business
opportunities.
Furthermore, it is possible that the Company will not have the available
cash or be able to generate the cash flow required to pay the principal and
interest that will become due on the Notes or to pay its other outstanding
indebtedness, in the long term. Payment of interest for the full term of the
Notes will require an increase in cash flows from operations, which will
continue to be affected by various factors discussed herein, including in
"Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Continued losses would have a material
adverse effect on the Company's results of operations and financial condition
and could adversely affect its ability to meet its obligations, in the long
term, including obligations under the Notes. The Company's cash flow depends
upon its future performance and financial, economic and other factors, some of
which are beyond its control.
If the Company is unable to generate cash flow from operations or otherwise
in amounts sufficient for it to be able to pay its debt as it becomes due as a
result of maturity, acceleration, redemption or other repurchase obligation,
such as a change of control, the Company may be required to refinance all or a
portion of such debt or sell equity securities or some or all of its assets.
The Company is restricted by the terms of the Indenture in its ability to
incur additional indebtedness. Even without such restrictions, the Company may
not be able to refinance all or a portion of its debt or sell its equity
securities or the assets of its subsidiaries on a timely basis, on acceptable
terms or at all. In such event, the Company may be in default on the Notes and
other indebtedness, and payment of such debt could be accelerated. See
"Description of Notes."
16
<PAGE>
HISTORY OF NET LOSSES
On a historical basis, the Company has sustained net losses of ($2.0)
million, ($2.3) million, ($3.5) million and ($5.7) million and operating
income (loss) of $1.5 million, $0.9 million, $2.3 million and ($2.6) million,
for the years ended December 31, 1995, 1996 and 1997 and the six months ended
June 30, 1998. Net losses have resulted in an accumulated deficit of $33.1
million as of June 30, 1998. On a pro forma basis, operating income (loss) and
net losses would have been $6.6 million and $(6.2) million, respectively, for
the year ended December 31, 1997 and $(2.3) million and $(9.0) million,
respectively, for the six months ended June 30, 1998. The Company's ability to
incur additional indebtedness and to make investments under the Indenture is
determined in part by the Company's Consolidated Cash Flow (as defined) and
Cumulative Available Cash Flow (as defined), each of which is derived from
earnings. There can be no assurance that the Company will generate net income
in the future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Description of Notes--Certain
Covenants--Limitation on Indebtedness" and "--Limitation on Restricted
Payments."
RISKS RELATED TO HOLDING COMPANY STATUS; DEPENDENCE UPON EARNINGS AND CASH
FLOWS OF SUBSIDIARIES AND ADVANCES AND LOANS FROM AFFILIATES; STRUCTURAL
SUBORDINATION
The Company is a holding company with no business operations of its own. The
Company's assets are the direct and indirect equity interests in its
subsidiaries, through which the Company conducts its business operations.
Accordingly, the Company depends, and will continue to depend, significantly
upon the earnings and cash flows of, and dividends and distributions from, its
subsidiaries to pay its expenses, meet its obligations and pay interest and
principal on the Notes and its other indebtedness. Furthermore, the creditors
of the Company's subsidiaries are, and will continue to be, entitled to
payment of obligations owing to them before the subsidiaries can dividend or
distribute their earnings to the Company. In addition, the terms of the
Company's joint ventures generally require the mutual consent of the Company
and its joint venture partners to distribute or advance funds to the Company.
The Company cannot assure the holders of the Notes that its subsidiaries will
generate sufficient earnings and cash flow for the subsidiaries to pay
dividends or otherwise provide funds to enable the Company to pay its
expenses, meet its obligations and pay interest and principal on the Notes and
its other indebtedness or that other restrictions on the subsidiaries would
not prohibit such payments. If the Company cannot do so, it may not be able to
pay its indebtedness as it becomes due and, as a result, may be in default on
such indebtedness, including the Notes, and payment of such indebtedness could
be accelerated. Historically, the Company has relied on advances and loans
from Jones International and its affiliates to fund a portion of its cash
needs, with cumulative borrowings of $23.0 million, $28.6 million, $26.4
million and $15.4 million as of December 31, 1995, 1996 and 1997 and June 30,
1998, respectively. Jones International and related parties are under no
obligation to provide additional financial assistance to the Company, and the
Company does not expect that such funding will be available in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Description of Notes."
The Indenture permits certain indebtedness to be incurred by subsidiaries
and joint ventures of the Company and creditors of such subsidiaries may be
permitted to obtain a security interest in the assets of such subsidiaries,
subject to certain thresholds. Claims of holders of the Notes will be
effectively subordinated to the indebtedness and other liabilities and
commitments of the Company's subsidiaries and joint ventures and will be
limited to the extent of the Company's direct or indirect equity interest in
such entities. Consequently, in the event of an insolvency, liquidation,
reorganization, dissolution or other winding up of the Company's subsidiaries
and joint ventures, the claims of the Company's creditors, including holders
of the Notes, will be subject to the prior claims of those entities'
creditors, including trade creditors, and any prior or equal claim of any
joint venture partner. Upon the occurrence of a payment default under, or
acceleration of, bank indebtedness, bank creditors of subsidiaries with a
security interest in the assets of such subsidiaries may be entitled to
restrict the payment of dividends to the Company and, if secured by the assets
of the subsidiaries, would be permitted to foreclose on the assets of such
subsidiaries.
17
<PAGE>
RESTRICTIONS IMPOSED BY TERMS OF THE INDENTURE
The terms and conditions of the Indenture impose restrictions that affect
the ability of the Company to incur debt, make distributions, sell assets,
create liens, make investments or engage in merger and acquisition activity.
The Indenture imposes certain restrictions on the Company's ability to operate
through joint ventures, such as the PIN Venture, a form of entity that has
been used in the past and which the Company anticipates using in the future.
See "Description of Notes--Certain Covenants." The financial requirements of
and calculations in the Indenture are not governed by, and may not conform to,
generally accepted accounting principles, so that certain accounting measures
and coverages reflected in this Prospectus do not necessarily reflect how such
measures and coverages would be calculated under the Indenture. The Company is
also required to limit its transactions with related parties. The restrictive
covenants contained in the Indenture, as well as the highly leveraged position
of the Company, could significantly limit the ability of the Company to
respond to changing business or economic conditions or to substantial declines
in operating results. The ability of the Company to comply with the provisions
in the Indenture can be affected by events beyond the Company's control.
UNENFORCEABILITY OR UNAVAILABILITY OF THE GUARANTEES OF THE RESTRICTED
SUBSIDIARIES; FRAUDULENT CONVEYANCE CONSIDERATIONS
Various federal and state fraudulent conveyance laws enacted for the
protection of creditors apply to the Guarantees issued by the Subsidiary
Guarantors and could make these Guarantees unenforceable or otherwise
avoidable in whole or in part. In addition, such laws could make the
Guarantees subordinate to indebtedness that the Subsidiary Guarantors owe to
creditors other than the holders of the Notes. A court could find one or more
of the Guarantees unenforceable or avoidable or could subordinate them to
other indebtedness, including for any of the following reasons:
. If the Subsidiary Guarantor does not receive fair consideration or
reasonably equivalent value for giving its Guarantee and
.is insolvent,
.becomes insolvent as a result of giving the Guarantee,
.is engaged or is about to engage in a business or transaction for which
the remaining assets of such Subsidiary constitute unreasonably small
capital to carry on its business, or
.intends to incur, or believes that it would incur, debts beyond its
ability to pay as they mature.
. If the Subsidiary Guarantor does so with the intent to hinder, delay or
defraud any of its present or future creditors or if the Subsidiary
Guarantor is contemplating insolvency in order to prefer one or more of
its creditors over other creditors.
The measure of insolvency for purposes of a fraudulent conveyance claim will
vary depending upon the law of the jurisdiction applied in the proceeding.
Generally, a court may find that a subsidiary is insolvent at a particular
time if the sum of its debts, including contingent liabilities, is greater
than the fair market value of its assets or if the fair market value of its
assets is less than the amount that would be required to pay its probable
liability in respect of existing debts, including contingent liabilities, as
they become absolute and mature.
A court considering whether a guarantee is unenforceable or avoidable as a
fraudulent conveyance or whether to subordinate a guarantee to other
indebtedness may focus on, among other things, the benefits, if any, realized
by the subsidiary giving the guarantee. Part of the proceeds of the offering
of the Old Notes were used for repayment of Company obligations and for
prepayment of a capital lease on which a Subsidiary of the Company is obligor.
The Guarantees of the Notes are for the benefit of the Company and only
indirectly for the benefit of the Subsidiary Guarantors, and a court may find
that the obligations of the Subsidiary Guarantors were incurred for less than
reasonably equivalent value or fair consideration. In order to decrease the
likelihood that a court would find that any or all of the Guarantees are
unenforceable or avoidable or should be subordinated, the obligations of each
Subsidiary Guarantor under its Guarantee will be limited to the maximum amount
that will, after giving effect to all of the liabilities of such Subsidiary
Guarantor, result in such obligations not being held
18
<PAGE>
unenforceable or avoidable or subordinated to other indebtedness. The Company
cannot give any assurances that a court, particularly in light of developments
that may occur after the Notes are issued, would apply the above tests or that
a court would not find for any other reason that the Guarantees are
unenforceable or avoidable or should be subordinated.
If a court were to find that a Guarantee is unenforceable or avoidable in
whole or in part as a fraudulent conveyance, holders of the Notes would not
have any claim against the Subsidiary Guarantor giving such guarantee to the
extent the Guarantee was avoidable and would be creditors only of the Company
and any of its Subsidiary Guarantors that gave Guarantees that are not found
to be unenforceable or avoidable. As a result, the claims of the holders of
the Notes against the Subsidiary Guarantor whose Guarantee was not enforceable
or avoidable would be subject to the prior payment of all other liabilities of
such Subsidiary Guarantor. If any of the above events occurs, there may not be
sufficient assets to satisfy all or any part of the claims of the holders of
the Notes.
DIFFICULTY IN SECURING FUTURE BANK OR OTHER INDEBTEDNESS
The Company believes that it may be necessary during the period that the
Notes are outstanding to secure bank or other financing. While the Indenture
permits the Company to incur a limited amount of bank or other indebtedness,
and permits such borrowings to be secured by assets of the Company's
subsidiaries, the Indenture restricts the terms of such bank or other
indebtedness, including the ability of a bank or other lender to limit the
flow of funds from the subsidiaries to the Company.
Banks or other financial institutions may not be willing to lend to the
Company under such circumstances, particularly in light of the Company's
overall leverage position, or may not be willing to lend on terms that are
acceptable to the Company. The inability of the Company to obtain bank or
other financing during the term of the Notes could have a material adverse
effect on the Company and its ability to meet its cash flow needs, and could
limit the Company's ability to implement its business strategy.
TRANSACTIONS WITH AND RELIANCE ON RELATED PARTIES; CONFLICTS OF INTEREST
The Company has engaged, and expects to continue to engage, in certain
transactions with related parties. To date, these transactions have involved
primarily loans and advances, affiliation agreements for the distribution of
cable television programming, leasing of satellite transponder and production
support services, and lease and service agreements related to certain
technical, computer and administrative services. For the year ended December
31, 1997, approximately $5.0 million, or 11%, of the Company's pro forma total
revenues and approximately $6.5 million, or 16%, of its pro forma total
operating expenses involved related party transactions. In addition, $27.6
million of the proceeds of the offering of the Old Notes was used to prepay
the obligation under a capital lease. See "Certain Relationships and Related
Transactions--Transfer of Satellite Transponder Leases." $16.7 million of such
proceeds were used to repay outstanding indebtedness under Radio Holdings'
credit facility with a commercial bank, which was incurred in March 1998 and
was used to repay related party advances and to repay a related party note.
See "Use of Proceeds." Principal management employees devote substantially all
of their time to the Company's business. Because certain officers and
directors of the Company are also officers and directors of related parties,
the terms of any distribution, programming, production, lease or other
agreements between the Company and such related parties are not the result of
arm's-length negotiations. There can be no assurance that the terms of any
transactions between the Company and related parties have been or will be as
favorable as the Company could obtain from unrelated parties or that such
transactions will continue in the future, on their current or other terms. The
Indenture provides that, with certain exceptions, future dealings with related
parties must be approved by the disinterested members of the Board of
Directors of the Company and transactions over a specified threshold are
subject to the receipt of a fairness opinion from a nationally recognized
independent investment banking firm. See "--Dependence on Key Personnel,"
"Certain Relationships and Related Transactions" and "Description of Notes--
Certain Covenants."
19
<PAGE>
Upon the sale of Mr. Jones' interest in Jones Intercable, Jones Intercable
will no longer share in many of the administrative and related expenses which
have historically been shared by the various entities affiliated with Mr.
Jones, including the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RISKS ASSOCIATED WITH ACQUISITION AND DISTRIBUTION OF RADIO PROGRAMMING
The Company's ability to maintain and increase the distribution of its radio
network and to increase the audience for its radio programming is dependent
upon, among other factors, the radio stations' demand for the Company's radio
programming and the Company's ability to assess consumer preferences
accurately and to develop, acquire and distribute radio programming that is
attractive to radio listeners. Even though the Company has recently launched
several new radio programs, there can be no assurance that the Company will be
able to continue to develop or acquire radio programming that will be accepted
in its targeted markets. There can similarly be no assurance that the Company
will be able to enter into new affiliation agreements, or maintain its
existing affiliation agreements, with radio stations. As radio station
ownership is consolidated into larger station groups, more radio station
owners may develop and produce programming in-house and thereby reduce their
need for the type of radio programming provided by the Company. See
"Business--Radio Programming--The Radio Network--Jones Radio."
DEPENDENCE ON ADVERTISING REVENUES
The Company is heavily dependent on advertising revenues. For the year ended
December 31, 1997, advertising revenues comprised 82% of the Company's total
pro forma revenues. The Company's ability to attract advertisers is dependent
upon its ability to demonstrate that its radio and cable television networks
are able to deliver the type and quantity of radio listeners and cable
television viewers that such advertisers seek to target with their
advertising. The Company's ability to maintain or increase its advertising
revenues is, and will continue to be, affected by a number of factors,
including the ability to expand the distribution of the networks, to deliver
high quality entertaining programming that is appealing to additional
listeners and viewers and to increase awareness of its networks. There is no
assurance of success in this endeavor. In addition, competitive conditions in
the industry may have an adverse effect on the number of advertising spots
sold and the advertising rates in the market.
Advertising revenues and operating income also may be adversely affected by
economic downturns. Such economic downturns, if prolonged, might have an
adverse impact on radio and cable television advertising and on the Company's
financial condition and results of operations. In addition, advertising
revenues may be impacted by many other factors beyond the Company's control,
including but not limited to: (i) the amount of funds that advertisers
dedicate to radio and cable television advertising in general and to the
Company's networks in particular, (ii) the popularity of programming and
ratings achieved by radio station affiliates that broadcast the Company's
radio programming or utilize its services, (iii) the number of advertisers who
seek audiences within the demographic groups to which the networks target
their programming, (iv) competition within national and regional markets from
radio, television and other media and (v) regulatory restrictions on
advertising (e.g., beer, wine, liquor or cigarette advertising). There can be
no assurance that the Company will be able to maintain its existing
advertisers or attract additional advertisers in the future. If the Company is
not able to do so, its advertising revenues and operating results will be
adversely affected. See "--Competition" and "Business."
DEPENDENCE ON ADVERTISING RELATIONSHIPS
Historically, the Company's radio network advertising revenues have been
highly dependent on the efforts of MediaAmerica. In 1997, 97% of the Company's
radio advertising revenues were derived from sales made through MediaAmerica.
The Company believes that sales of advertising time through the new
MediaAmerica division will not be adversely affected, but there can be no
assurance to that effect. See "--Risks Regarding the Acquisition."
20
<PAGE>
The Product Information Network's advertising revenues historically have
been highly dependent on its relationships with five national media agencies.
In 1997, 53% of the PIN Venture's gross advertising revenues were derived from
sales of airtime to two national media agencies. The Product Information
Network's contract with one of the agencies, National Media Corporation,
representing 12% of 1997 gross advertising revenues, expires in December 1998
and will automatically renew for an additional six months unless the Product
Information Network is notified otherwise. The agreement with the other
agency, representing 41% of the PIN Venture's 1997 gross advertising revenues,
was mutually terminated in July 1997. While the Product Information Network
has replaced the large block of airtime placed by such agency through sales to
other advertisers, it has not been able to fill such airtime with the type of
non-traditional infomercials of Fortune 500 companies provided by such agency.
The termination of the relationship with such agency and the resulting loss of
non- traditional infomercials from certain major corporate advertisers have
contributed to a decrease in the revenue per subscriber of approximately 4.6%
in the last approximately twelve months. There can be no assurance that the
remaining media agency will continue, maintain or increase the amount of
airtime it purchases. In addition, there can be no assurance that the Product
Information Network will be able to renew its contract with such agency, or
obtain a suitable replacement, on acceptable terms. See "Business--Television
Programming--The Product Information Network."
RISKS ASSOCIATED WITH DISTRIBUTION OF TELEVISION PROGRAMMING
Growth in the Company's television programming business is largely dependent
upon the distribution of Great American Country and the Product Information
Network through cable television systems and other video distributors. With
respect to cable distribution, Great American Country and the Product
Information Network compete for a limited number of available cable channels
with a large number of other cable television programmers supplying a variety
of alternative programming, including entertainment, sports, news, public
affairs and educational programming. Many of these programmers provide
substantial cash incentives to cable television systems and other video
distributors that the Company may not be able to match. In addition, cable
programming distribution is controlled by MSOs, some of which are affiliated
with competing program providers. Sales of cable systems by MSOs, or sales of
MSOs, that have affiliation agreements with the Company could result in a loss
of subscribers if the new cable system owners do not retain the programming,
and the number of lost subscribers could be material. Jones Intercable, a
significant distributor of Great American Country and the Product Information
Network, expects to sell during 1998 and the first quarter of 1999, through
its managed partnerships, cable television systems representing approximately
283,000 and 420,000 subscribers for Great American Country and the Product
Information Network, respectively. The buyers of such cable television systems
may not continue to subscribe for the Company's cable television programs. In
addition, some affiliation agreements allow the MSOs to delete the Company's
programming on a system-by-system basis. Because advertising revenues
generated by Great American Country and the Product Information Network are a
function of distribution, success in the distribution of the Company's cable
television programming will directly affect the amount of advertising revenues
generated by the Company's cable television networks. The Company's expansion
plans for Great American Country and the Product Information Network are
dependent, in part, upon the ability to retain and expand its distribution
from existing affiliation agreements, to renew existing affiliation agreements
when such agreements expire, and to obtain affiliation agreements with
additional MSOs and other video programming distributors. There can be no
assurance that the Company will be able to negotiate new affiliation
agreements, expand its distribution or retain or renew existing affiliation
agreements. See "Business--Television Programming."
RISKS RELATED TO DISTRIBUTION OF THE PRODUCT INFORMATION NETWORK
A significant portion of the Product Information Network's distribution is
on cable systems owned and/or managed by affiliates of the PIN Venture's three
partners. While the PIN Venture has entered into affiliation agreements with
systems owned by nine of the ten largest MSOs in the United States, as well as
with a number of smaller MSOs, carriage on each of the systems operated by an
MSO is not guaranteed by such agreements and, in many cases, these agreements
do not provide for the distribution of the Product Information Network's
21
<PAGE>
programming for 24 hours per day. Most affiliation agreements for the Product
Information Network, other than those with the Company's partners in the PIN
Venture, are short-term in nature. Many of the MSOs which carry the Product
Information Network may also carry programming which is competitive with the
Product Information Network. See "Risks Associated with the Product
Information Network," "Business--Overview--Strategy" and "--Television
Programming--The Product Information Network" and "Certain Relationships and
Related Transactions."
RISKS REGARDING THE ACQUISITION
A substantial portion ($26.7 million) of the proceeds of the offering of the
Old Notes was used to pay the cash portion of the consideration in the
Acquisition. MediaAmerica provides advertising representation services and
more recently has entered the radio programming business. Provision of
advertising representation services is a new business for the Company and
presents the risks associated with integration of a business in which the
Company has no prior experience. While the Company has historically made
acquisitions, primarily from affiliated entities, it has never made a
significant acquisition from an unrelated party. Because MediaAmerica and the
Company's radio programming operations are in the same line of business, and
subject to the same market trends, the Acquisition could increase the
Company's vulnerability to adverse market trends. The Company expects that its
accounting for the Acquisition will result in a significant amount of
goodwill, and if the benefits of the Acquisition do not substantiate the
carrying value, write-offs could be required, which could adversely affect the
Company's operating income and earnings. See "--Substantial Leverage;
Potential Inability to Pay Debt When Due."
The benefits expected to be realized from the Acquisition will depend on the
Company achieving synergies, particularly in radio programming, and in
retaining and increasing MediaAmerica's current customer base. MediaAmerica
produces programming which competes with some of the programming produced by
its representation customers. As a result of the Acquisition, the range of
programming produced by the Company will expand and thereby increase the
possibility that a customer or potential customer will perceive the
programming produced by the Company to be competitive with its own
programming. These customers may be more reluctant to utilize the Company's
advertising representation services after the Acquisition because of the
Company's competitive position, and thus the market for customers for the
advertising representation division may be adversely affected.
The Company relies on the services of Messrs. Ron Hartenbaum and Gary
Schonfeld (the "MediaAmerica Principals"), the principal executives and former
owners of MediaAmerica, to support and strengthen the Company's advertising
representation business. The MediaAmerica Principals have three-year
employment agreements with the Company which provide that they will not
compete with the Company during the term of their employment and for two years
after the employment agreements terminate. There is no assurance that the
MediaAmerica Principals will remain with the Company for the full term of the
employment agreements or thereafter. Further, no assurance can be given that
the Company will be successful in the advertising representation business, or
that the MediaAmerica Principals will be integrated into the Company's
operations so as to cause this business to maintain operations at current
levels or to grow. Certain agreements between MediaAmerica and its existing
clients allow the clients to terminate the agreements if the MediaAmerica
Principals are no longer involved in the business. Even in the absence of such
provisions, clients may discontinue or reduce the level of services provided
by MediaAmerica if the MediaAmerica Principals are no longer employed by the
Company.
The terms of several of MediaAmerica's representation agreements with some
of its major clients are scheduled to expire in 1998 and 1999, unless renewed.
The Company intends to seek to obtain renewals of such agreements in due
course, but there can be no assurance that any such renewals will be obtained.
INABILITY TO SUSTAIN OR MANAGE GROWTH
The Company's revenues have grown in recent years primarily as a result of
increased advertising and licensing revenues generated by the Company's radio
and television programming networks and syndicated
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programs. The ability to maintain growth will depend on a number of factors,
many of which are beyond the Company's control, including maintaining and
expanding distribution of Great American Country and the Product Information
Network through MSOs, as well as through alternative distribution systems such
as DBS, MMDS and video distribution systems being established by various
telecommunications companies; maintaining and expanding distribution of its
radio network; developing and/or acquiring additional programming for the
radio network that is consistent with listener preferences; developing and/or
acquiring additional cable television programming that will be carried by
MSOs; and attracting and maintaining advertisers that are willing to pay
competitive rates. In addition, the Company is subject to a variety of
business risks generally associated with growing companies. Future growth and
expansion could place significant strain on management personnel and may
require additional management personnel.
As part of its business strategy, the Company intends to acquire and/or
create complementary businesses. See "Business--Overview--Strategy." The
success of this strategy depends on the availability of such businesses for
acquisition and the availability of resources to effect such acquisition, as
well as the Company's ability to integrate acquired businesses into its
organization effectively and to retain and motivate key personnel of acquired
businesses. The recent rapid consolidation of the radio programming industry
has reduced the availability of potential acquisition targets complementary to
the radio programming business. The Company may not be successful in its
endeavors to identify and acquire businesses suitable for acquisition. Certain
complementary businesses may not be available because of price or because
other objectives of potential sellers may not be met. The Company faces
competition in its acquisition strategy from other companies, some of which
may have substantially greater financial resources. There can be no assurance
that the Company will be able to manage its expanding operations effectively
or that it will be able to attract and retain sufficient management personnel
necessary for continued growth. Furthermore, there is no assurance that,
because of the significance of its debt service requirements, the Company will
be able to carry out its growth strategies.
RISKS ASSOCIATED WITH SATELLITE DELIVERY AND PRODUCTION SUPPORT SERVICES
The Company delivers its television programming through its own satellite
delivery and production support facilities, and subleases transponder space
from third parties to deliver its radio programming. The Company also earns
revenues by providing satellite delivery and production support services to a
related party. If such related party were no longer able to obtain and pay for
such services, the loss of revenues would be significant to the Company and
there is no assurance that a replacement could be obtained on similar terms.
The satellite delivery and production support services have represented
substantial fixed costs. The satellite transponder agreement covers two
transponders. One is a digitally compressed transponder, on which seven
channels are leased. The other transponder was leased to a third party as of
July, 1998. See "Business--Satellite Delivery and Production Support
Services." The Company could increase its channel capacity by further digital
compression if demand warranted. Although the Company believes that picture
quality would not be adversely affected by further compression, this
possibility may dissuade some potential lessees. There are a number of other
companies which are competing with the Company to lease their transponder
capacity, certain of which are offering lease rates that are lower than those
being offered by the Company. There can be no assurance that the Company will
be able to lease whatever capacity may be available at any particular time.
The Company used $27.6 million of the proceeds of the offering of the Old
Notes to prepay the capital lease obligations under the satellite
transponders, which allows the Company to now own the transponders. See "Use
of Proceeds." There can be no assurance that the payments to be received in
connection with the lease of the transponders over the remaining life of the
satellites, as well as the value to the Company of having available satellite
capacity for its own use, will recoup the price of the satellite transponders.
The satellites may not have a useful life beyond 2004, at which time the
Company will be required to locate replacements to use for its programming.
The Indenture restricts the incurrence of Indebtedness through capital lease
obligations and, accordingly, there can be no assurance that the Company will
be able to enter into new satellite leases at that time on favorable terms, if
at all.
The satellite transponder agreement referred to above provides various
protections in the event of satellite failure, and the transponders are not
subject to preemption by third parties in most instances. Although the
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agreement provides that if service is unavailable for any reason on the
satellite, the lessor is required to place the Company's programming on a
replacement satellite, there can be no assurance that this would occur. There
are a limited number of domestic communications satellites available for the
transmission of cable television programming to cable system operators. The
availability of transponders in the future is dependent on a number of factors
over which the Company has no control. These factors include, primarily, the
limited availability of desirable orbital slots for commercial communications
satellites, the successful launches of additional commercial communications
satellites by third parties and competition and demand for transponder leases
on existing and new satellites. See "Business--Satellite Delivery and
Production Support Services."
RISKS ASSOCIATED WITH THE PRODUCT INFORMATION NETWORK
The growth expectations for the Product Information Network are largely
dependent on increasing the number of hours of long-form advertising from
major corporate advertisers, as this advertising results in higher rates for
airtime sold and is more attractive to MSOs. In addition, increased
advertising from major corporate advertisers decreases the reliance of the
Product Information Network on national media infomercial buyers. See "--
Dependence on Advertising Relationships." While the Product Information
Network has implemented a strategy to accomplish this goal, the strategy may
not be successful, and it may not be able to air as many of these long-form
advertisements as it has in the past. See "Business--Overview--Strategy."
The Product Information Network is operated by the PIN Venture, a joint
venture among the Company, Cox and Adelphia. Pursuant to the agreement
governing the PIN Venture, the Company manages the day-to-day operations of
the PIN Venture. The PIN Venture has an Executive Committee consisting of five
persons, two of whom are appointed by the Company, two by Cox, and one by
Adelphia. The other venture partners, however, have voting rights with respect
to major decisions concerning the venture and there is a risk that the
partners may not agree on significant aspects of the PIN Venture's business
plans. Unlike the Company, Cox and Adelphia are major MSOs and may have
different goals and objectives with respect to the PIN Venture's affiliation
agreements with MSOs, particularly the amount of the rebate payable to MSOs by
the PIN Venture. See "Business--Television Programming."
The Company, Cox and Adelphia own approximately 53.8%, 45.4% and 0.8%,
respectively, of the PIN Venture. The PIN Venture may in the future issue
equity to its existing partners or new partners which would dilute the
Company's interest in the PIN Venture and could result in the venture's
operations no longer being consolidated by the Company for financial reporting
purposes.
The PIN Venture agreement contains a number of provisions that either allow
or require a partner to withdraw from the PIN Venture. The Company or Cox
could be required to withdraw if the number of subscribers provided by either
of them falls below a certain level. See "--Risks Associated with Distribution
of Television Programming." Such a withdrawal would cause a dissolution of the
PIN Venture. The PIN Venture by its terms expires on December 31, 2004, but
Cox could elect to terminate its participation after 1999. Such a withdrawal
would cause Cox to lose its equity interest in the PIN Venture.
If, for any reason, the Company is unable to consolidate the PIN Venture's
results of operations, the Company's financial statements would change because
the PIN Venture's revenues and operating income, if any, would not be included
in the Company's consolidated revenues and operating income. On a pro forma
basis for the year ended December 31, 1997, the PIN Venture accounted for 28%
of the Company's consolidated revenues and 26% of consolidated operating
income.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the efforts and abilities of its senior
management, including Glenn R. Jones, Chairman of the Board, Gregory J.
Liptak, President, Jay B. Lewis, Group Vice President and Chief Financial
Officer, Eric Hauenstein, the President and General Manager of the radio
network, and Jeffrey C. Wayne, the President and Chief Operating Officer of
cable television network operations. In addition, as a result of the
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Acquisition, the Company employs Messrs. Ron Hartenbaum and Gary Schonfeld as
executives in charge of its radio network and advertising representation
operations. Except for Messrs. Hartenbaum and Schonfeld, the Company does not
have employment agreements with, and does not carry key life insurance on, any
of its employees. The Company's success depends in part upon its ability to
attract and retain talented writers, performers and other creative personnel.
Although the Company believes that its relations with its creative personnel
are good and that it will continue to be successful in attracting and
retaining qualified creative personnel, there can be no assurance that it will
be able to continue to do so. See "Business--Employees" and "Management."
The Company is also dependent upon the talents and abilities of its
advertising account executives. The account executives have personal
relationships with the national advertisers and their advertising agencies
which are important to the Company's ability to continue to maintain and
increase the Company's share of the radio advertising market. While the
Company believes that its relations with its account executives are good and
that it will continue to be successful in attracting and retaining qualified
sales personnel, there can be no assurance that it will be able to do so. See
"--Dependence on Advertising Revenues."
COMPETITION
Competition in the radio programming market is intense. The Company's radio
network competes for both advertising and radio station affiliations with
major network radio distribution companies, as well as with a large number of
smaller independent producers and distributors. The radio programming industry
has recently experienced rapid consolidation, which has increased competition
from well financed larger radio programming distribution companies. The
largest competitors in the industry are affiliated with major station owners.
These competitors have recognized brand names as well as large networks which
include affiliates to which such competitors pay compensation to broadcast the
network's commercials. There can be no assurance that the Company will be able
to compete successfully for radio advertising revenues in the future.
Radio networks also face competition from improving technologies available
to local radio stations that may enable them to pre-record their local
announcers and automate their operations, thereby allowing them to reduce
costs and operate more efficiently. Another technological advance, Digital
Audio Radio Service ("DARS"), permits national radio stations to broadcast
digital quality radio programming nationwide to homes, automobiles and other
locations via satellite. The Company cannot predict what effect the potential
future development of digital automation or DARS will have on the radio
industry or the Company.
The advertising representation business acquired from MediaAmerica will also
be subject to significant competition. The radio advertising representation
business is highly competitive, both in terms of competition to gain program
provider clients and to sell airtime inventory to advertisers. The Company's
radio advertising representation firm competes with major network radio
distribution companies, which operate divisions that both sell their own
company's airtime inventory and also contract with third party radio
programmers to sell their airtime inventory. Over the last two years, many
independent program providers have been acquired by major network distribution
companies. These companies have large amounts of airtime inventory to sell and
have significant resources. The formation by certain group radio station
owners of radio networks, such as AMFM, has adversely affected, and may
continue to adversely affect, the Company's advertising revenues.
Competition in the cable television programming market is also intense. The
Company's cable television networks compete for distribution of programming on
cable systems, for viewers and for advertising revenues with hundreds of cable
and broadcast television networks which provide a variety of infomercial and
entertainment programming.
Great American Country has one principal direct competitor, a large network
with substantial financial resources that distributes its programming to
approximately 60% of the cable television subscribers in the United States. In
attempting to expand its distribution, Great American Country will directly
compete for carriage with such network, which has undertaken a substantial
campaign in at least one major market to retain its subscribers and may do so
in other markets. There can be no assurance that the Company will be able to
expand the distribution of its cable television networks or compete
successfully against the other networks.
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The Product Information Network competes directly with at least three other
long-form advertising networks and believes that new infomercial networks are
currently being planned or formed that also will compete directly with the
Product Information Network. The Product Information Network also competes
with at least 30 cable television networks that air long-form advertising,
many of which have a substantial number of viewers. The Company expects to
encounter additional competition for viewers as the implementation of
technological advances, including the deployment of digital compression
technology, the deployment of fiber optic cable and the "multiplexing" of
cable services, allows cable systems to greatly expand their channel capacity
and, as a result, their ability to add new networks. There can be no assurance
that long-form advertising will continue to be attractive to advertisers and
consumers or that it will be able to continue to compete against other forms
of advertising.
The Company competes in the delivery of domestic satellite services with
satellite owners, satellite service providers, microwave carriers and full
service teleports, many of which have substantially greater financial and
other resources than the Company.
As there are generally few barriers to entry into the Company's markets, the
Company could in the future face competition from new competitors offering
services similar to those of the Company. The Company's radio and television
networks also compete with other forms of media for advertising dollars, such
as broadcast and cable television, print, outdoor, the Internet and other
media. Many of the Company's competitors have greater resources than the
Company and there can be no assurance that the Company will be able to compete
successfully in the future. See "Business--Competition."
THE IMPACT OF THE AMFM NETWORK
In 1998 Chancellor Media, one of the largest radio station ownership groups
in the United States, formed a new network known as AMFM. This network
consists of advertising time on the stations owned by Chancellor Media and an
affiliate. In general, these stations are in larger markets than those of the
other radio networks, including those of the Company. The Company believes
that AMFM has grown largely by attracting advertisers to its network and away
from the other radio networks, including the Company's. This competitive
factor has already caused a decline in the Company's revenues and will likely
continue to have a negative impact on the Company's radio advertising revenues
and operations. There can be no assurance that the Company will be able to
regain its market share from these advertisers in the future.
SEASONALITY
Advertising revenues in the radio and cable television industries fluctuate
due to seasonality in such industries. The Company believes that radio network
revenues are typically lowest in the first quarter and cable television
network revenues are typically lowest in the third quarter. With the
Acquisition, the Company expects that its seasonal trend of lower first
quarter revenues will be more significant. Other than the fees paid by the
Company to third parties for certain of its radio programming, the fees paid
by the Company in connection with the distribution of the Product Information
Network and the sales commissions paid to account executives for radio
advertising representation sales, the Company's expenses have not historically
varied significantly relative to the seasonal fluctuation of revenues. The
Company's quarterly and annual results of operations are affected by a wide
variety of factors, many of which are outside the Company's control, which
could materially and adversely affect profitability. These factors include the
timing and volume of advertising on the Company's radio network and cable
television networks, the number and size of the radio stations that carry the
Company's radio programming, the number and size of cable systems and other
video distributors that carry the Product Information Network and Great
American Country and general economic conditions. There can be no assurance
that the seasonality of the Company's business will not adversely affect its
ability to generate cash flow from operations in certain periods in amounts
sufficient for it to be able to pay it debts, including the Notes, as they
become due.
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GOVERNMENT REGULATION
Although the Company's radio and television networks are not generally
directly regulated by the Federal Communications Commission ("FCC"), the radio
stations, cable television systems and other video distributors to which the
Company sells its programming are regulated. As a result, the federal laws and
FCC regulations that affect these entities indirectly affect the Company. See
"Business--Governmental Regulation."
The Company's satellite delivery and production support services are
directly regulated by the FCC. The Company holds FCC microwave and earth
station uplink licenses that it utilizes to provide delivery and support
services. Because the licenses relate primarily to the technical operation of
its microwave and uplink facilities, which are used for internal purposes and
program delivery, the Company believes that there are limited regulatory
burdens associated with maintaining these licenses in good standing. There can
be no assurance, however, that these licenses will be able to be maintained or
that additional regulatory burdens will not be imposed in the future. See
"Business--Government Regulation."
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is the result of many computer programs being written
such that they will malfunction when reading a year of "00." This problem
could cause system failure or miscalculations causing disruptions of business
processes. Jones Intercable, an affiliate of the Company, initiated an
assessment of how the Year 2000 problem could affect its operations and the
operations of related companies, including the Company, in the summer of 1997
and established a Year 2000 Program Office (the "Y2K Office") to manage the
process for all related companies. The Company depends upon the Y2K Office to
identify which of its systems are likely to be affected by the Year 2000
issue, assess the potential risks, determine its Year 2000 priorities and
implement appropriate solutions. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Impact of the Year 2000 Issue"
for a discussion of these matters. There can be no assurance that the Y2K
Office will continue to be available to the Company in the future or that it
provide to the Company the resources and time necessary to resolve all Year
2000 issues in a timely manner.
If the Company's systems are not Year 2000 compliant in time, the Company
could experience operational difficulties, including loss of power to transmit
signals leading to service interruption, inaccuracies in billing and financial
information systems and the failure of insertion equipment to include the
Company's full complement of programming, which would in turn require the
Company to replace missed air time. There can be no assurance that the
Company's failure to be Year 2000 compliant would not have a material adverse
effect on the Company's business, financial condition or results of
operations.
The Y2K Office commenced contacting the Company's vendors of application and
operating system software in 1997 and continues to work with vendors through
industry groups focused on Year 2000 issues. The Company has not yet
determined the extent to which it is vulnerable to the failure by vendors and
customers that have a material relationship with the Company to remediate Year
2000 compliance issues. There can be no assurance that the failure of the
Company's vendors and customers to be Year 2000 compliant would not have a
material adverse effect on the Company's business, financial condition or
results of operations. In addition, the Company could be adversely affected by
disruptions in the operations of other companies with which the Company does
business, from general widespread problems or an economic crisis resulting
from noncompliant Year 2000 systems.
The Company has not incurred any material historical Year 2000 costs to
date. Management does not have an estimate of future Year 2000 project costs
that may be incurred. Management expects, but makes no assurance that, future
Year 2000 costs will not have a material adverse effect on its financial
condition and results of operations. The Company has not yet formulated
contingency plans in the event that its systems are not Year 2000 compliant.
The lack of contingency plans could prevent the Company from resolving Year
2000 issues in a timely and efficient manner, and could heighten the risk that
the Year 2000 problem may have a material adverse effect on the Company's
financial condition and results of operations.
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INTELLECTUAL PROPERTY
The Company regards its original programming as proprietary and relies
primarily on a combination of statutory and common law copyright, trademark
and trade secret laws, customer licensing agreements, nondisclosure agreements
and other methods to protect its proprietary rights. If substantial
unauthorized use of the Company's programming were to occur, the Company's
results of operations could be negatively affected. There can be no assurance
that the Company's means of protecting its proprietary rights will be adequate
or that the Company's competitors will not independently develop similar
program content and distribution methods. In addition, there can be no
assurance that third parties will not claim that the Company's current or
future programming infringes on the proprietary rights of others.
CONSEQUENCES OF A FAILURE TO EXCHANGE OUTSTANDING NOTES
The Old Notes have not been registered under the Securities Act or any state
securities laws and therefore may not be offered, sold or otherwise
transferred except in compliance with the registration requirements of the
Securities Act and any other applicable securities laws, or pursuant to an
exemption therefrom or in a transaction not subject thereto, and in each case
in compliance with certain other conditions and restrictions, including the
Company's and the Trustee's right in certain cases to require the delivery of
opinions of counsel, certifications and other information prior to any such
transfer. Old Notes that are not exchanged pursuant to the Exchange Offer will
continue to bear a legend reflecting such restrictions on transfer. In
addition, upon consummation of the Exchange Offer, holders of Old Notes that
remain outstanding will not be entitled to have such Old Notes registered
under the Securities Act, subject to certain limited exceptions. The Company
currently intends to register under the Securities Act Old Notes that remain
outstanding after consummation of the Exchange Offer only if such Old Notes
are held by the Initial Purchaser or persons ineligible to participate in the
Exchange Offer, neither of which is anticipated.
The Exchange Notes and any Old Notes that remain outstanding after
consummation of the Exchange Offer will constitute a single series of debt
securities under the Indenture and, accordingly, 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. See "Description of the
Notes."
ABSENCE OF PUBLIC MARKET
The Exchange Notes are being offered to the holders of the Old Notes. The
Old Notes were resold by the Initial Purchaser to qualified institutional
buyers pursuant to Rule 144A under the Securities Act. The Old Notes are
eligible for trading in the Private Offerings, Resales and Trading through
Automated Linkages ("PORTAL") Market, the National Association of Securities
Dealers' screen based, automated market for trading of securities eligible for
resale under Rule 144A. There currently is no market for the Exchange Notes
and the Exchange Offer is not conditioned upon any minimum or maximum
aggregate principal amount of Old Notes being tendered for exchange. Although
the Initial Purchaser may make a market in the Old Notes and has advised the
Company that it currently intends to make a market in the Exchange Notes, it
is not obligated to do so and may discontinue such market making at any time
without notice. The Company does not currently intend to apply for listing of
the Old Notes or the Exchange Notes on a national securities exchange or
automated quotation system. Accordingly, no assurance can be given that an
active market will develop for any of the Notes or as to the liquidity of the
trading market for any of the Notes. If a trading market does not develop or
is not maintained, holders of the Exchange Notes may experience difficulty in
reselling their Exchange Notes or may be unable to sell them at all. If a
market for the Exchange Notes develops, any such market may be discontinued at
any time. To the extent that a market for the Exchange Notes does develop, the
market value of the Exchange Notes will depend upon many factors, including
prevailing interest rates, market conditions, yields on alternative
investments, general economic conditions, the Company's financial condition
and results of operations and other conditions. Historically, the market for
non-investment grade debt has been subject to disruptions that have caused
substantial volatility in the prices of securities similar to the Exchange
Notes. There can be no assurance that, if a market for the Exchange Notes were
to develop, such a market would not be subject to similar disruptions.
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THE EXCHANGE OFFER
REASON FOR THE EXCHANGE OFFER
The Old Notes were issued on July 10, 1998 in an offering that was exempt
from registration under the Securities Act. Accordingly, the Old Notes may not
be offered, sold or otherwise pledged, hypothecated or transferred in the
United States unless registered under the Securities Act or unless an
exemption from such registration requirements and applicable state securities
laws is available. The Company and the Initial Purchaser have entered into an
exchange and registration rights agreement dated July 10, 1998 (the "Exchange
and Registration Rights Agreement") pursuant to which the Company agreed for
the benefit of the holders of the Old Notes, that it will, at its cost, within
45 days after July 10, 1998, the original issue date of the Old Notes (the
"Issue Date"), file a registration statement (the "Exchange Offer Registration
Statement") under the Securities Act with respect to an offer to exchange the
Old Notes for newly issued notes of the Company which will have the form and
terms substantially identical in all material respects to the form and terms
of the Old Notes (the "Exchange Notes"), including interest rate and interest
payment dates, except that the exchange will have been registered under the
Securities Act and therefore the Exchange Notes will not bear legends
restricting the transfer thereof. In addition, the Additional Interest
provisions will be modified or eliminated as appropriate and holders of the
Exchange Notes will not be entitled to certain rights of holders of the Old
Notes under the Exchange and Registration Rights Agreement, which rights with
respect to Old Notes that are exchanged will terminate upon the consummation
of the Exchange Offer. See "Description of the Notes--Exchange Offer;
Registration Rights." The Company agreed to use its best efforts to cause the
Exchange Offer Registration Statement to be declared effective within 120 days
after the Issue Date. The Registration Statement, of which this Prospectus is
a part, is intended to be the Exchange Offer Registration Statement required
to be filed by the Company, therefore the Company believes it has satisfied
such requirement. The Company has also agreed to use its best efforts to
consummate the Exchange Offer within 180 days after the Issue Date.
The Company is hereby offering the Exchange Notes (and the related
guarantees) in exchange for surrender of the Old Notes (and the related
guarantees). The Company will keep the Exchange Offer open for not less than
30 business days (or longer if required by applicable law) after the date
notice of the Exchange Offer is mailed to the holders of the Old Notes. For
each of the Old Notes surrendered pursuant to the Exchange Offer, the holder
who surrendered such Old Note will receive an Exchange Note having a principal
amount equal to that of the surrendered Old Note. Interest on each Exchange
Note will accrue from the last interest payment date on which interest was
paid on the Old Note surrendered in exchange therefor or, if no interest has
been paid on such Old Note, from the Issue Date. The Exchange Notes will
evidence the same debt as the Old Notes which they replace and will be issued
under, and be entitled to the benefits of, the Indenture.
RESALE OF THE EXCHANGE NOTES
Based upon existing interpretations by the staff of the Commission issued to
third parties, the Company believes that the Exchange Notes will be freely
transferable by holders thereof (other than affiliates of the Company and the
Subsidiary Guarantors) after the Exchange Offer without further registration
under the Securities Act if the holder of the Exchange Notes represents that
it is acquiring the Exchange Notes in the ordinary course of business, that it
has no arrangement or understanding with any person to participate in the
distribution (within the meaning of the Securities Act) of the Exchange Notes
and that it is not an affiliate of the Company or the Subsidiary Guarantors,
as such terms are interpreted by the Commission; provided that broker-dealers
("Participating Broker-Dealers") receiving Exchange Notes in the Exchange
Offer will have a prospectus delivery requirement with respect to resales of
such Exchange Notes. The Commission has not considered the Exchange Offer
itself in the context of its interpretations and there can be no assurance
that the staff of the Commission would make a similar determination with
respect to the Exchange Offer. The Commission has taken the position that the
Participating Broker-Dealers may fulfill their prospectus delivery
requirements with respect to the Exchange Notes (other than a resale of an
unsold allotment from the original sale of the Old Notes) with the prospectus
contained in the Exchange Offer Registration Statement. The Company has agreed
if, at the time of completion the Exchange Offer, information in the Letter of
Transmittal
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submitted by exchanging holders indicates that there are holders that are
Participating Broker-Dealers or otherwise subject to prospectus delivery
requirements, the Company will, for such period of time as is necessary to
comply with applicable law up to the date that is 180 days after consummation
of the Exchange Offer, make available a prospectus meeting the requirements of
the Securities Act to such persons, if any, for use in connection with any
resale of such Exchange Notes.
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), the Company will accept for exchange any and all Old Notes
which are properly tendered on or prior to the Expiration Date and not
withdrawn as permitted below. The Company will issue $1,000 principal amount
of Exchange Notes in exchange for each $1,000 principal amount at maturity of
outstanding Old Notes surrendered pursuant to the Exchange Offer. Old Notes
may be tendered only in integral multiples of $1,000. As of the date of this
Prospectus, an aggregate of $100,000,000 in principal amount of the Old Notes
is outstanding. The Exchange Offer is being made on or about November 5, 1998,
to all record holders of Old Notes.
Holders of the Old Notes do not have any appraisal or dissenters' rights in
connection with the Exchange Offer.
The Company expressly reserves the right, at any time or from time to time,
to extend the period of the Exchange Offer, and thereby delay acceptance for
exchange of any Old Notes, by giving written notice of such extension to the
holders thereof as described below. During any such extension, all Old Notes
previously tendered will remain subject to the Exchange Offer and may be
accepted for exchange by the Company. Any Old Notes not accepted for exchange
for any reason will be returned to the tendering holders thereof as soon as
practicable after the expiration of the Exchange Offer.
The Company reserves the right to amend or terminate the Exchange Offer upon
the occurrence of any of the conditions of the Exchange Offer specified below
under "--Certain Conditions of the Exchange Offer." The Company will give
written notice of any extension, amendment, nonacceptance or termination to
the holders of the Old Notes as promptly as practicable, such notice in the
case of any extension to be issued by means of a press release or other public
announcement no later than 9:00 a.m., New York City time, on the next business
day after the previously scheduled Expiration Date.
PROCEDURES FOR TENDERING OLD NOTES
The tender of Old Notes by a holder thereof as set forth below and the
acceptance thereof by the Company will constitute a binding agreement between
the tendering holder and the Company upon the terms and subject to the
conditions set forth in this Prospectus and in the Letter of Transmittal.
Except as set forth below, a holder who wishes to tender Old Notes for
exchange pursuant to the Exchange Offer must provide a properly completed and
duly executed Letter of Transmittal, including all other documents required by
such Letter of Transmittal, to the Exchange Agent at one of the addresses set
forth below under "--Exchange Agent" on or prior to the Expiration Date. In
addition, either (i) certificates for such Old Notes must be received by the
Exchange Agent along with the Letter of Transmittal, or (ii) a timely
confirmation of a book-entry transfer including an Agent's Message (a "Book-
Entry Confirmation") of such Old Notes, if such procedure is available, into
the Exchange Agent's account at The Depository Trust Company (the "Book-Entry
Transfer Facility") pursuant to the procedure for book-entry transfer
described below, must be received by the Exchange Agent prior to the
Expiration Date, or (iii) the holder must comply with the guaranteed delivery
procedures described below.
THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH
DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED,
WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD
BE ALLOWED TO ASSURE TIMELY DELIVERY.
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<PAGE>
NO LETTERS OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY.
Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trustee or other nominee and who wishes to tender
should contact such registered holder and instruct such registered holder to
tender on behalf of the beneficial owner. If such beneficial owner wishes to
tender on its own behalf, it must, prior to completing and executing the
Letter of Transmittal and delivering its Old Notes, either make appropriate
arrangements to register ownership of the Old Notes in such beneficial owner's
name or obtain a properly completed power of attorney from the registered
holder of such Old Notes. If the Letter of Transmittal is signed by a person
or persons other than the registered holder or holders of Old Notes, such Old
Notes must be endorsed or accompanied by appropriate powers of attorney, in
either case signed exactly as the name or names of the registered holder or
holders that appear on the Old Notes.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed unless the Old Notes surrendered for exchange
pursuant thereto are tendered (i) by a registered holder of the Old Notes who
has not completed the box entitled "Special Issuance Instructions" or "Special
Delivery Instructions" on the Letter of Transmittal or (ii) for the account of
an Eligible Institution (as defined herein below). In the event that
signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, are required to be guaranteed, such guarantees must be by a firm which
is a member of a registered national securities exchange or a member of the
National Association of Securities Dealers, Inc. or by a commercial bank or
trustee having an office or correspondent in the United States (collectively,
"Eligible Institutions"). If Old Notes are registered in the name of a person
other than a signer of the Letter of Transmittal, if Old Notes not accepted
for exchange or not tendered are to be returned to a person other than the
registered holder, or if Exchange Notes are to be issued in the name of or
sent to a person other than the registered holder, the Old Notes surrendered
for exchange must be endorsed by, or be accompanied by a written instrument or
instruments of transfer or exchange, in satisfactory form as determined by the
Company in its sole discretion, duly executed by the registered holder with
the signature thereon guaranteed by an Eligible Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined
by the Company in its sole discretion, which determination shall be final and
binding. The Company reserves the absolute right to reject any and all tenders
of any Old Notes not properly tendered or not to accept any Old Notes whose
acceptance might, in the judgment of the Company, be unlawful. The Company
also reserves the absolute right to waive any defects or irregularities or
conditions of the Exchange Offer as to any particular Old Notes either before
or after the Expiration Date (including the right to waive the ineligibility
of any holder who seeks to tender Old Notes in the Exchange Offer). The
interpretation of the terms and conditions of the Exchange Offer as to any
particular Old Notes either before or after the Expiration Date (including the
Letter of Transmittal and the instructions thereto) by the Company shall be
final and binding on all parties. Unless waived, any defects or irregularities
in connection with tenders of Old Notes for exchange must be cured within such
reasonable period of time as the Company shall determine. Neither the Company
nor the Exchange Agent shall be under any duty to give notification of any
defect or irregularity with respect to any tender of Old Notes for exchange,
nor shall they incur any liability for failure to give such notification.
If the Letter of Transmittal or any Old Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Company, proper evidence satisfactory to the Company of their authority to
so act must be submitted.
Each holder who wishes to exchange its Old Notes for Exchange Notes in the
Exchange Offer will be required to represent that any Exchange Notes to be
received by it will be acquired in the ordinary course of its business and
that at the time of the commencement of the Exchange Offer it has no
arrangement or understanding with any person to participate in the
distribution (within the meaning of the Securities Act) of the Exchange Notes
and that it is not an affiliate of the Company.
31
<PAGE>
If the holder is not a broker-dealer, it will be required to represent that
it is not engaged in, and does not intend to engage in, the distribution of
the applicable Exchange Notes. If the holder is a broker-dealer that will
receive Exchange Notes for its own account in exchange for Notes that were
acquired as a result of market making activities or other trading activities,
it will be required to acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Old Notes
properly tendered and will issue the Exchange Notes promptly after acceptance
of the Old Notes. See "--Certain Conditions of the Exchange Offer" below. For
purposes of the Exchange Offer, the Company shall be deemed to have accepted
properly tendered Old Notes for exchange when, as and if the Company has given
oral or written notice thereof to the Exchange Agent, with written
confirmation of any oral notice to be given promptly thereafter.
The issuance of Exchange Notes for Old Notes that are accepted for exchange
pursuant to the Exchange Offer will be made only after timely receipt by the
Exchange Agent of certificates for such Old Notes or a timely Book-Entry
Confirmation of such Old Notes into the Exchange Agent's account at the Book-
Entry Transfer Facility, a properly completed and duly executed 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 amount than the
holder desires to exchange, Old Notes in the appropriate denomination will be
promptly returned to the holder thereof or, in the case of Old Notes tendered
by book-entry procedures described below, such non-exchanged Old Notes will be
credited to an account maintained with such Book-Entry Transfer Facility
designated by the tendering holder as promptly as practicable after the
expiration or termination of the Exchange Offer.
CERTAIN CONDITIONS OF THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or to issue Exchange Notes in exchange
for, any Old Notes and may terminate or amend the Exchange Offer as provided
herein prior to the Expiration Date, if because of any changes in law, or
applicable interpretations thereof by the Commission, or because any action or
proceeding is instituted or threatened in any court or governmental agency
with respect to the Exchange Offer, the Company determines that it is not
permitted to effect the Exchange Offer.
INTEREST ON THE EXCHANGE NOTES
Each Exchange Note will bear interest at the rate of 11 3/4% per annum from
the most recent date to which interest has been paid or duly provided for on
the Old Note surrendered in exchange for such Exchange Note or, if no interest
has been paid or duly provided for on such Old Note, from July 10, 1998 (the
date of original issuance of such Old Notes). Interest on the Exchange Notes
will be payable semiannually on January 1 and July 1 of each year, commencing
on the first such date following the original issuance date of the Exchange
Notes.
Holders of Old Notes whose Old Notes are accepted for exchange will not
receive accrued interest on such Old Notes for any period from and after the
last Interest Payment Date to which interest has been paid or duly provided
for on such Old Notes prior to the original issue date of the Exchange Notes
or if no such interest has been paid or duly provided for, will not receive
any accrued interest on such Old Notes, and will be deemed to have waived the
right to receive any interest on such Old Notes accrued from and after such
Interest Payment Date or, if no such interest has been paid or duly provided
for, from and after July 10, 1998.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer promptly after the date of this Prospectus, and any
32
<PAGE>
financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected through book-entry transfer at the Book-
Entry Transfer Facility, the Letter of Transmittal or facsimile thereof, or an
Agent's Message, with any required signature guarantees and any other required
documents, must, in any case, be transmitted to and received by the Exchange
Agent at one of the addresses set forth below under "--Exchange Agent" on or
prior to the Expiration Date or the guaranteed delivery procedures described
below must be complied with.
The term "Agent's Message" means a message, transmitted by DTC to, and
received by, the Exchange Agent and forming a part of a book-entry
confirmation, which states that DTC has received an express acknowledgment
from the tendering participant, which acknowledgment states that such
participant has received and agrees to be bound by the terms of the Letter of
Transmittal, and the Company may enforce the Letter of Transmittal against
such participant.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Old Notes desires to tender such Old Notes and
the Old Notes are not immediately available, or time will not permit such
holder's Old Notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if (i) the tender is
made through an Eligible Institution, (ii) prior to the Expiration Date, the
Exchange Agent has received from such Eligible Institution a properly
completed and duly executed Letter of Transmittal (or a facsimile thereof) and
Notice of Guaranteed Delivery, substantially in the form provided by the
Company (by telegram, telex, facsimile transmission, mail or hand delivery),
setting forth the name and address of the holder of the Old Notes and the
amount of Old Notes, stating that the tender is being made thereby and
guaranteeing that within five trading days (on the Nasdaq Stock Market's
National Market (the "Nasdaq National Market")) after the date of execution of
the Notice of Guaranteed Delivery, the certificates for all physically
tendered Old Notes, in proper form for transfer, or a Book-Entry Confirmation,
as the case may be, and any other documents required by the Letter of
Transmittal will be deposited by the Eligible Institution with the Exchange
Agent, and (iii) the certificates for all physically tendered Old Notes, in
proper form for transfer, or a Book-Entry Confirmation, as the case may be,
and all other documents required by the Letter of Transmittal, are received by
the Exchange Agent within five Nasdaq National Market trading days after the
date of execution of the Notice of Guaranteed Delivery.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn by the tendering parties at any time
prior to the Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at one of the addresses set forth below under
"--Exchange Agent." Any such notice of withdrawal must specify the name of the
person having tendered the Old Notes to be withdrawn, identify the Old Notes
to be withdrawn (including the amount of such Old Notes), and (where
certificates for Old Notes have been transmitted) specify the name in which
such Old Notes are registered, if different from that of the withdrawing
holder. If certificates for Old Notes have been delivered or otherwise
identified to the Exchange Agent, then, prior to the release of such
certificates the withdrawing holder must also submit the serial numbers of the
particular certificates to be withdrawn and a signed notice of withdrawal with
signatures guaranteed by an Eligible Institution unless such holder is an
Eligible Institution. If Old Notes have been tendered pursuant to the
procedure for book-entry transfer described above, any notice of withdrawal
must specify the name and number of the account at the Book-Entry Transfer
Facility to be credited with the withdrawn Old Notes and otherwise comply with
the procedures of such facility. All questions as to the validity, form and
eligibility (including time of receipt) of such notices will be determined by
the Company, whose determination shall be final and binding on all parties.
Any Old Notes so 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
33
<PAGE>
returned to the holder thereof without cost to such holder (or, in the case of
Old Notes tendered by book-entry transfer into the Exchange Agent's account at
the Book-Entry Transfer Facility pursuant to the book-entry transfer
procedures described above, such Old Notes will be credited to an account with
such Book-Entry Transfer Facility specified by the holder) 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 Old Notes"
above at any time on or prior to the Expiration Date.
EXCHANGE AGENT
United States Trust Company of New York has been appointed as the Exchange
Agent for the Exchange Offer. All executed Letters of Transmittal should be
directed to the Exchange Agent at the addresses set forth below. Questions and
requests for assistance, requests for additional copies of this Prospectus or
of the Letter of Transmittal and requests for Notices of Guaranteed Delivery
should be directed to the Exchange Agent addressed as follows:
Deliver To: United States Trust Company of New York, Exchange Agent
BY MAIL: BY HAND:
United States Trust Company of United States Trust Company of
New York P.O. Box 841, Peter New York 111 Broadway, Lower
Cooper Station New York, NY Level New York, NY 10006
10276-0841 Attention: Corporate Attention: Corporate Trust and
Trust and Agency Services Agency Services
FOR INFORMATION, CALL:
(800) 225-2398
FAX: (212) 420-6155
BY OVERNIGHT COURIER OR EXPRESS MAIL:
United States Trust Company of New York 770 Broadway, 13th Floor New York,
NY 10003 Attention: Corporate Trust and Agency Services
DELIVERY OF A LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH
ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF SUCH LETTER OF TRANSMITTAL.
FEES AND EXPENSES
The Company will not make any payment to brokers, dealers or others
soliciting acceptances of the Exchange Offer.
The expenses to be incurred in connection with the Exchange Offer will be
paid by the Company.
ACCOUNTING TREATMENT
For accounting purposes, the Company will recognize no gain or loss as a
result of the Exchange Offer. The expenses of the Exchange Offer will be
amortized over the term of the Exchange Notes.
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<PAGE>
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to pay
any transfer taxes in connection therewith, except that holders who instruct
the Company to register Exchange 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 will be responsible for the
payment of any applicable transfer tax thereon.
CONSEQUENCES OF FAILURE TO EXCHANGE
Participation in the Exchange Offer is voluntary. Holders of the Old Notes
are urged to consult their financial and tax advisors in making their own
decisions on what action to take. See "Certain United States Federal Income
Tax Considerations."
The Old Notes that are not exchanged for the Exchange Notes pursuant to the
Exchange Offer will remain restricted securities and may only be offered,
sold, pledged or otherwise transferred (A)(i) to a person whom the seller
reasonably believes is a qualified institutional buyer within the meaning of
Rule 144A in a transaction meeting the requirements of Rule 144A, (ii) in an
offshore transaction meeting the requirements of Rule 903 or Rule 904 of
Regulations S under the Securities Act, or (iii) pursuant to an exemption from
registration under the Securities Act provided by Rule 144 thereunder or other
exemption from such registration (if available) and (B) in accordance with all
applicable securities laws of the states of the United States. Under certain
circumstances, the Company is required to file a Shelf Registration Statement
(as defined below) on behalf of the Initial Purchaser or those holders of Old
Notes who are not eligible to participate in the Exchange Offer. See
"Description of the Notes--Exchange Offer; Registration Rights."
PAYMENT OF ADDITIONAL INTEREST UNDER CERTAIN CIRCUMSTANCES
If the Exchange Offer is not consummated within 180 days after the Issue
Date, or, under certain circumstances, if the Initial Purchaser or any holder
of Notes (other than the Initial Purchaser) who is not eligible to participate
in the Exchange Offer so requests (each a "Shelf Request"), the Company will
at its cost, (a) within 45 days of such Shelf Request, file a shelf
registration statement (a "Shelf Registration Statement") covering resales of
the Notes held by such requesting holders (the "Shelf Notes"), (b) use its
best efforts to cause such Shelf Registration Statement to be declared
effective under the Securities Act no later than 120 days following a Shelf
Request and (c) use its best efforts to keep effective such Shelf Registration
Statement until the earlier of two years after the Issue Date or such shorter
time as all of the applicable Notes have been sold thereunder or all
applicable Notes have ceased to be Registrable Notes (as defined). The Company
will, in the event of the filing of a Shelf Registration Statement, provide to
each holder of the Shelf Notes copies of the prospectus which is a part of
such Shelf Registration Statement, notify each such holder when such Shelf
Registration Statement has become effective and take certain other actions as
are required to permit unrestricted resales of the Shelf Notes. A holder that
sells its Shelf Notes pursuant to a Shelf Registration Statement generally
will be required to be named as a selling security holder in the related
prospectus and to deliver a prospectus to purchasers, will be subject to
certain of the civil liability provisions under the Securities Act in
connection with such sales and will be bound by the provisions of the Exchange
and Registration Rights Agreement which are applicable to such holder
(including certain indemnification obligations).
The Exchange and Registration Rights Agreement provides that as liquidated
damages and as the sole and exclusive remedy therefor, additional interest
(the "Additional Interest") will become payable under certain circumstances
with respect to the Notes as follows:
(i) if the Exchange Offer Registration Statement or Shelf Registration
Statement is not filed within, in the case of the Exchange Offer
Registration Statement, 45 days following the Issue Date or, in the
case of the Shelf Registration Statement, 45 days following a Shelf
Request, Additional Interest will accrue on the Old Notes, in the case
of the Exchange Offer Registration Statement, or the Shelf Notes, in
the case of the Shelf Registration Statement, over and above the stated
interest at a rate of 0.50% per annum for the first 30 days commencing
on the 46th day after the Issue Date or the Shelf Request,
respectively, such Additional Interest rate increasing by an additional
0.50% per annum at the beginning of each subsequent 30-day period.
35
<PAGE>
(ii) if the Exchange Offer Registration Statement or Shelf Registration
Statement is not declared effective within, in the case of the
Exchange Offer Registration Statement, 120 days following the Issue
Date or, in the case of the Shelf Registration Statement, 120 days
following a Shelf Request, Additional Interest will accrue on the Old
Notes, in the case of the Exchange Offer Registration Statement, or
the Shelf Notes, in the case of the Shelf Registration Statement, over
and above the stated interest at a rate of 0.50% per annum for the
first 90 days commencing on the 121st day after the Issue Date or the
Shelf Request, respectively, such Additional Interest rate increasing
by an additional 0.50% per annum at the beginning of each subsequent
90-day period; or
(iii) if (A) the Company has not exchanged all Old Notes validly tendered
in accordance with the terms of the Exchange Offer on or prior to 180
days after the Issue Date or (B) the Exchange Offer Registration
Statement ceases to be effective at any time prior to the time that
the Exchange Offer is consummated or (C) if applicable, the Shelf
Registration Statement has been declared effective and such Shelf
Registration Statement ceases to be effective at any time prior to
the second anniversary of the Issue Date (unless all the Notes have
been sold thereunder or all applicable Notes have ceased to be
Registrable Notes (as defined)), then Additional Interest will accrue
on the Old Notes, with respect to (x) and (y), and the Shelf Notes,
with respect to (z), over and above the stated interest at a rate of
0.50% per annum for the first 90 days commencing on (x) the 181st day
after the Issue Date with respect to the Old Notes validly tendered
and not exchanged by the Company, in the case of (A) above, or (y)
the day the Exchange Offer Registration Statement ceases to be
effective or usable for its intended purpose in the case of (B)
above, or (z) the day such Shelf Registration Statement ceases to be
effective in the case of (C) above, such Additional Interest rate
increasing by an additional 0.50% per annum at the beginning of each
subsequent 90-day period;
provided, however, that the Additional Interest rate on the Old Notes or the
Shelf Notes under clauses (i), (ii) or (iii) above, may not exceed in the
aggregate 2.0% per annum; and provided further, that (1) upon the filing of
the Exchange Offer Registration Statement or Shelf Registration Statement (in
the case of clause (i) above), (2) upon the effectiveness of the Exchange
Offer Registration Statement or Shelf Registration Statement (in the case of
clause (ii) above), or (3) upon the exchange of Exchange Notes for all Old
Notes tendered (in the case of clause (iii)(A) above), or upon the
effectiveness of the Exchange Offer Registration Statement which had ceased to
remain effective in the case of clause (iii)(B) above), or upon the
effectiveness of the Shelf Registration Statement which had ceased to remain
effective (in the case of clause (iii)(C) above), Additional Interest on the
Notes as a result of such clause (or the relevant subclause thereof), as the
case may be, will cease to accrue.
The Company has already met the conditions regarding the filing and
effectiveness of the Exchange Offer Registration Statement in (i) and (ii)
above, accordingly as to such registration statement, (i) and (ii) are no
longer applicable.
The above is a summary of the terms set forth in more detail in the Exchange
and Registration Rights Agreement and such summary is qualified by reference
to such agreement, which is filed as an exhibit to the Exchange Offer
Registration Statement.
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<PAGE>
USE OF PROCEEDS
The Company will receive no proceeds from the issuance of the Exchange Notes
pursuant to the Exchange Offer.
The net proceeds to the Company from the offering of the Old Notes were
$95.2 million after deducting the fees and expenses of $4.8 million payable by
the Company. Of the net proceeds, the Company used (i) $27.6 million to prepay
the capital lease obligation relating to the satellite transponders, which
allows the Company to now own the transponders, (ii) $26.7 million to finance
the cash portion of the Acquisition, and (iii) $16.7 million to repay
outstanding indebtedness under Radio Holdings' $30 million revolving credit
facility. The remaining $24.2 million will be used for general corporate
purposes, $10.0 million of which was deposited into the Reserve Account. Cash
balances in the Reserve Account are restricted to use for only acquisitions
and payment of principal of or interest on the Notes. Borrowings under Radio
Holding's credit facility bore interest at a maximum rate of LIBOR plus 2.875%
(approximately 7.9% at June 30, 1998) and was otherwise repayable between
March 31, 2000 and March 31, 2002. Borrowings under this credit facility were
used to repay certain indebtedness and to pay credit facility fees. See
"Certain Relationships and Related Transactions--Advances" and "--Purchase of
Galactic Radio and Earth Segment." In connection with the offering of the Old
Notes, the Company terminated the Radio Holdings' credit facility.
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<PAGE>
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Company
as of June 30, 1998 (i) on a historical basis as reported, and (ii) on a pro
forma basis to reflect the Transactions. This table should be read in
conjunction with the Company's historical consolidated financial statements
and the related notes thereto and the other information included elsewhere in
this Offering Memorandum. See "Use of Proceeds," "Selected Consolidated
Financial Data," "Selected Unaudited Pro Forma Financial Data," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
JUNE 30, 1998
------------------
PRO
REPORTED FORMA
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Cash and cash equivalents.................................. $ 2,445 $ 16,260
Restricted cash(1)......................................... -- 10,000
-------- --------
Total cash, cash equivalents and restricted cash........... $ 2,445 $ 26,260
======== ========
Debt:
Credit facility.......................................... $ 16,705 $ --
11 3/4% Senior Secured Notes due 2005.................... -- 100,000
Capital lease obligation................................. 27,591 --
Jones Global Group Note(2)............................... 10,000 --
-------- --------
Total debt............................................... 54,296 100,000
-------- --------
Minority interests......................................... 822 822
Class A Common Stock Subject to Put........................ -- 1,213
Shareholders' deficit:
Class A Common Stock, $.01 par value: 50,000,000 shares
authorized; 2,980,953, and 4,264,407 shares issued and
outstanding, respectively............................... 30 43
Class B Common Stock, $.01 par value: 1,785,120 shares
authorized; 1,785,120, and 1,785,120 shares issued and
outstanding, respectively............................... 18 18
Additional paid-in capital............................... 9,143 28,147
Accumulated deficit...................................... (33,060) (33,060)
-------- --------
Total shareholders' deficit.............................. (23,869) (4,852)
-------- --------
Total capitalization....................................... $ 31,249 $ 97,183
======== ========
</TABLE>
- --------
(1) Restricted to acquisitions and payment of principal of and interest on the
Notes.
(2) Concurrent with the closing of the offering of the Old Notes, the Jones
Global Group Note was converted into 666,667 shares of Class A Common
Stock at $15 per share, which was the value agreed upon by the parties.
38
<PAGE>
SELECTED UNAUDITED PRO FORMA FINANCIAL DATA
OVERVIEW
The following Selected Unaudited Pro Forma Financial Data as of and for the
six months ended June 30, 1998 have been derived from the unaudited financial
statements of the Company and the unaudited financial statements of
MediaAmerica. The Unaudited Pro Forma Statement of Operations for the year
ended December 31, 1997 is based on the audited financial statements of the
Company, adjusted to reflect the effects of the consolidation of the PIN
Venture as a result of the Company's acquisition of a majority interest, and
the audited financial statements of MediaAmerica. The Selected Unaudited Pro
Forma Financial Data further adjust the unaudited financial statements to
reflect the Transactions.
The further Selected Unaudited Pro Forma Financial Data reflect adjustments
that are based upon available information and factually supportable
assumptions that the Company believes are reasonable and do not necessarily
reflect the results of operations or the financial position of the Company
that actually would have resulted had the Acquisition been consummated or the
GAC Equity Agreements been in place. Pro forma adjustments above have been
reflected, as of the date or for the periods indicated. In preparing the
Selected Unaudited Pro Forma Financial Data, the Company believes it has
utilized reasonable methods to conform the basis of presentation.
The Selected Unaudited Pro Forma Financial Data and accompanying notes
should be read in conjunction with the Selected Consolidated Financial Data of
the Company as well as the consolidated financial statements of the Company
and MediaAmerica and the other financial information pertaining to the
Company, including "Use of Proceeds," "Capitalization" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein.
THE ACQUISITION
On July 10, 1998, the Company acquired certain of the assets and assumed
certain of the liabilities of MediaAmerica. Pursuant to the Acquisition,
MediaAmerica received $26.7 million in cash and $6.0 million in shares of
Class A Common Stock of the Company valued at $15 per share. MediaAmerica also
received approximately 142,000 additional shares of Class A Common Stock,
valued at $15 per share, in the amount of the estimated working capital
adjustment calculated on the date of the closing of the Acquisition, subject
to final adjustment sixty days after closing. In addition, MediaAmerica can
earn up to $5 million in additional shares of Class A Common Stock valued at
$15 per share, with remaining amounts to be paid in cash, based on certain
multiples of "EBITDA" (earnings before interest, taxes, depreciation and
amortization) from the MediaAmerica business (as defined) for the twelve-month
period following the closing of the Acquisition (the "Earnout"). The closing
of the Acquisition was contingent on and was closed simultaneous with the
closing of the offering of the Old Notes on July 10, 1998.
The Acquisition will be accounted for by the purchase method of accounting,
under which the purchase price of MediaAmerica will be allocated to the
tangible and intangible assets and liabilities of MediaAmerica. The Selected
Unaudited Pro Forma Financial Data have been prepared based upon certain
assumptions made by management regarding a preliminary estimate of the
purchase price allocation. In Management's opinion, the actual accounting
treatment regarding the Acquisition and the final adjustments and allocation
of the purchase price will not materially differ from the preliminary
treatment and the estimated amounts.
THE GAC EQUITY AGREEMENTS
In the first quarter of 1998, Great American Country and the Company entered
into equity affiliate agreements with two MSOs. Pursuant to the terms of such
agreements, the Company agreed to issue shares of Class A Common Stock to the
MSOs in return for the MSOs providing Great American Country's programming to
no less than 550,000 subscribers by May 31, 1998, an additional 500,000
subscribers by December 31, 1998 and to another 150,000 subscribers by
December 31, 1999. The total number of shares to be issued is based on
39
<PAGE>
the number of subscribers provided by the MSOs. As of June 30, 1998, 714,770
subscribers had been provided by the MSOs. As a result, the Company is
required to issue 104,237 shares to such MSOs. If the MSOs provide the
remaining 485,230 additional subscribers by the dates specified, the Company
would be required to issue a total of 70,763 additional shares to such MSOs.
At August 1, 1998, 101,124 shares of Class A Common Stock had been issued to
one of the MSOs.
Pursuant to the GAC Equity Agreements, the MSOs agreed to pay a specified
rate per subscriber, less a volume discount based on the level of subscribers
provided. Pro forma subscriber license fee revenues were calculated based on
the total number of subscribers that these MSOs agreed to provide to Great
American Country and the agreed upon rate per subscriber. In addition, launch
incentive payments of $1.2 million are to be paid by the Company under the GAC
Equity Agreements.
40
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
SELECTED UNAUDITED PRO FORMA STATEMENT OF FINANCIAL POSITION
JUNE 30, 1998
<TABLE>
<CAPTION>
COMPANY
COMPANY MEDIAAMERICA(A) ADJUSTMENTS PRO FORMA
------- --------------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash
equivalents............. $ 2,445 $ 809 13,006 (b) $ 16,260
Restricted cash.......... -- -- 10,000 (b) 10,000
Accounts receivable...... 2,799 7,150 -- 9,949
Other current assets..... 504 684 -- 1,188
------- ------- ------- --------
Total current assets... 5,748 8,643 23,006 37,397
------- ------- ------- --------
Property, plant and
equipment............... 26,920 840 -- 27,760
Goodwill................. 3,009 -- 29,780 (c) 32,789
Intangible assets........ 1,082 2,202 3,300 (d) 6,584
Other long-term assets... 4,003 41 3,389 (e) 7,433
------- ------- ------- --------
Total assets........... $40,762 $11,726 $59,475 $111,963
======= ======= ======= ========
LIABILITIES AND
SHAREHOLDERS' INVESTMENT
(DEFICIT):
Accounts payable......... $ 1,264 $ 5,751 $(1,111)(e) $ 5,904
Accrued liabilities...... 1,954 405 -- 2,359
Other current
liabilities............. 8,925 99 (2,969)(e)(f) 6,055
------- ------- ------- --------
Total current
liabilities........... 12,143 6,255 (4,080) 14,318
------- ------- ------- --------
Note payable--affiliated
entity.................. 10,000 -- (10,000)(f) --
Senior secured notes..... -- -- 100,000 (f) 100,000
Credit facility.......... 16,705 -- (16,705)(f) --
Capital lease
obligations............. 24,922 -- (24,922)(f) --
Other long-term
liabilities............. 39 423 -- 462
------- ------- ------- --------
Total long-term
liabilities........... 51,666 423 48,373 100,462
------- ------- ------- --------
Minority interests......... 822 -- -- 822
Class A Common Stock
subject to put............ -- -- 1,213 (g) 1,213
Shareholders' investment
(deficit):
Class A Common Stock..... 30 50 (37)(h) 43
Class B Common Stock..... 18 -- -- 18
Additional paid-in
capital................. 9,143 292 18,712 (h) 28,147
Retained earnings
(accumulated deficit)... (33,060) 4,706 (4,706)(h) (33,060)
------- ------- ------- --------
Total shareholders'
investment (deficit).. (23,869) 5,048 13,969 (4,852)
------- ------- ------- --------
Total liabilities and
shareholders' investment
(deficit)............... $40,762 $11,726 $59,475 $111,963
======= ======= ======= ========
</TABLE>
See notes to selected unaudited pro forma financial data.
41
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
SELECTED UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
COMPANY
COMPANY MEDIAAMERICA ADJUSTMENTS PRO FORMA
------- ------------ ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
REVENUES:
Radio programming.............. $ 3,739 $ 998 $ 663 (j) $ 5,400
Radio advertising sales
representation................ -- 4,990 (676)(j) 4,314
Television programming......... 7,865 -- 13 (j) 8,126
248 (k) --
Satellite delivery and
production support............ 2,128 -- -- 2,128
------- ----- ------- -------
Total revenues............... 13,732 5,988 248 19,968
------- ----- ------- -------
OPERATING EXPENSES:
Radio programming.............. 3,490 -- -- 3,490
Radio advertising sales
representation................ -- 1,154 -- 1,154
Television programming......... 6,667 -- -- 6,667
Satellite delivery and
production support............ 2,330 -- -- 2,330
Selling and marketing.......... 1,747 1,874 -- 3,621
General and administrative..... 2,092 2,390 491 (m) 4,973
------- ----- ------- -------
Total operating expenses..... 16,326 5,418 491 22,235
------- ----- ------- -------
OPERATING INCOME (LOSS)...... (2,594) 570 (243) (2,267)
------- ----- ------- -------
OTHER EXPENSE (INCOME):
Interest expense............... 2,640 24 3,556 (n) 6,220
Interest income................ (99) (59) -- (158)
Equity share of income of
subsidiary(q)................. (73) -- -- (73)
Other expense (income), net.... 264 69 -- 333
------- ----- ------- -------
Total other expense
(income).................... 2,732 34 3,556 6,322
------- ----- ------- -------
Income (Loss) before income
taxes and minority interests.. (5,326) 536 (3,799) (8,589)
Income tax provision........... 268 43 -- 311
------- ----- ------- -------
Loss before minority
interests..................... (5,594) 493 (3,799) (8,900)
Minority interests in net loss
of consolidated subsidiaries.. 69 -- -- 69
------- ----- ------- -------
NET INCOME (LOSS).............. $(5,663) $ 493 $(3,799) $(8,969)
======= ===== ======= =======
OTHER DATA:
EBITDA(s)...................... $ 19 $ 823 $ 298 $ 1,140
Depreciation and
amortization(t)............... 2,651 253 541 3,445
Capital expenditures........... 539 106 -- 645
EBITDA attributable to PIN
Venture's minority
interests(u).................. (38) -- -- (38)
</TABLE>
See notes to selected unaudited pro forma financial data.
42
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
SELECTED UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRO
COMPANY PIN VENTURE(I) MEDIAAMERICA ADJUSTMENTS FORMA
------- -------------- ------------ ----------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
REVENUES:
Radio programming......................... $10,200 $ -- $ 1,702 $ 2,139 (j) $14,041
Radio advertising sales representation.... -- -- 13,436 (2,151)(j) 11,285
Television programming.................... 12,002 2,858 -- 12 (j) 15,484
612 (k)
Satellite delivery and production support. 6,910 -- -- (425)(l) 6,485
------- ------ ------- ------- -------
Total revenues............................ 29,112 2,858 15,138 187 47,295
------- ------ ------- ------- -------
OPERATING EXPENSES:
Radio programming......................... 5,816 -- -- -- 5,816
Radio advertising sales representation.... -- -- 1,296 -- 1,296
Television programming.................... 9,272 2,175 -- (221)(1) 11,226
Satellite delivery and production support. 4,685 -- -- (204)(l) 4,481
Selling and marketing..................... 2,918 104 4,594 -- 7,616
General and administrative................ 4,168 203 5,219 671 (m) 10,261
------- ------ ------- ------- -------
Total operating expenses.................. 26,859 2,482 11,109 246 40,696
------- ------ ------- ------- -------
OPERATING INCOME (LOSS)................... 2,253 376 4,029 (59) 6,599
------- ------ ------- ------- -------
OTHER EXPENSE (INCOME):
Interest expense.......................... 5,677 12 14 6,704 (n) 12,407
Interest income........................... (108) (3) (227) 12 (n) (326)
Write-off of deferred offering costs(o)... 938 -- -- -- 938
Officers' incentive compensation.......... -- -- 2,600 (2,600)(p) --
Equity share of loss (income) of
subsidiary............................... (396)(q) -- -- 169 (r) (227)
Other expense (income), net............... 74 -- -- -- 74
------- ------ ------- ------- -------
Total other expense....................... 6,185 9 2,387 4,285 12,866
------- ------ ------- ------- -------
Income (loss) before income taxes and
minority interests....................... (3,932) 367 1,642 (4,344) (6,267)
Income tax provision (benefit)............ (1,342) -- 154 -- (1,188)
------- ------ ------- ------- -------
Income (loss) before minority interests... (2,590) 367 1,488 (4,344) (5,079)
Minority interests in net income of
consolidated subsidiaries................ 903 -- -- 169 (r) 1,072
------- ------ ------- ------- -------
NET INCOME (LOSS)......................... $(3,493) $ 367 $ 1,488 $(4,513) $(6,151)
======= ====== ======= ======= =======
OTHER DATA:
EBITDA(s)................................. $ 6,561 $ 216 $ 4,326 $ 1,112 $12,215
Depreciation and amortization(t).......... 5,130 24 297 1,171 6,622
Capital expenditures...................... 1,367 19 165 -- 1,551
EBITDA attributable to PIN Venture's
minority interests(u).................... (822) (184) -- -- (1,006)
</TABLE>
See notes to selected unaudited pro forma financial data.
43
<PAGE>
NOTES TO SELECTED UNAUDITED PRO FORMA FINANCIAL DATA
(a) On July 10, 1998, the Company acquired substantially all assets and
assumed certain liabilities of MediaAmerica, Inc. for $32.7 million. The
allocation of purchase price between cash and Class A Common Stock is
summarized as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Cash......................................................... $26,700
Class A Common Stock valued at $15 per share................. 6,000
-------
Total...................................................... $32,700
=======
</TABLE>
The $15 per share market value was determined by agreement of the parties.
This column represents only those assets acquired and those liabilities
assumed in the Acquisition.
The Unaudited Pro Forma Statement of Financial Position gives effect to the
following unaudited pro forma adjustments:
(b) Represents the receipt of gross proceeds of $100.0 million from the
offering of the Old Notes less (i) the payment of a $27.6 million capital
lease obligation relating to the satellite transponders, (ii) the payment
of $26.7 million for the cash portion of the Acquisition, (iii) the
repayment of $16.7 million of outstanding indebtedness under Radio
Holdings' revolving credit facility, (iv) the deposit of $10.0 million
into the Reserve Account, (v) the payment of $4.8 million of issuance
costs related to the offering of the Old Notes and (vi) the payment of
$1.2 million related to launch incentive fees to the MSOs under the GAC
Equity Agreements.
(c) Represents goodwill of approximately $29.8 million related to the
Acquisition based on a preliminary allocation of the purchase price in
accordance with the purchase method of accounting. The allocation to
goodwill consists of the excess of the purchase price over the specific
asset amounts set forth in the MediaAmerica column of the Unaudited Pro
Forma Statement of Financial Position as of June 30, 1998. For radio
programming assets (including related agreements with radio stations), the
allocation made by the Company represented MediaAmerica's historical
acquisition costs for such assets. No other amounts were specifically
allocated to any other acquired agreements, including representation
agreements, because of (1) the short-term nature of most of the
agreements, (2) the fact that the other parties to certain of the
agreements have the ability to terminate the agreements unilaterally under
certain circumstances and (3) because the Company believes that the
purchase price was paid principally for the ongoing ability of
MediaAmerica to contribute to the long-term success of the Company
(through expertise, business relationships, etc.), and not for the
acquisition of any specific agreement or agreements.
(d) Represents (i) intangible assets of approximately $2.1 million related to
the Class A Common Stock expected to be issued under the GAC Equity
Agreements and (ii) intangible assets of approximately $1.2 million
related to the payment of launch incentive fees to the MSOs under the GAC
Equity Agreements.
(e) Represents the payment of $4.8 million for issuance costs related to the
offering of the Old Notes. The Company had already incurred approximately
$1.4 million of the $4.8 million total estimated issuance costs as of June
30, 1998, with $1.1 million reflected in accounts payable and $0.3 million
reflected in other current liabilities.
(f) Represents the (i) addition of $100.0 million in Notes pursuant to the
offering of the Old Notes, (ii) payment of a $27.6 million capital lease
obligation relating to the satellite transponders, (iii) repayment of
$16.7 million of outstanding amounts under the Radio Holdings' revolving
credit facility and (iv) conversion of the $10.0 million Jones Global
Group Note into shares of the Company's Class A Common Stock valued at $15
per share.
(g) Represents the addition of $1.2 million in shares of Class A Common Stock,
subject to put, expected to be issued pursuant to one of the GAC Equity
Agreements.
44
<PAGE>
(h) Represents the (i) addition of $6.0 million in Class A Common Stock issued
pursuant to the Acquisition valued at $15 per share, (ii) addition of $2.1
million in shares of Class A Common Stock expected to be issued in the
Acquisition pursuant to the working capital adjustment, (iii) addition of
$0.9 million in shares of Class A Common Stock expected to be issued
pursuant to one of the GAC Equity Agreements, (iv) conversion of the $10.0
million Jones Global Group Note into shares of the Company's Class A
Common Stock valued at $15 per share and (v) elimination of MediaAmerica's
shareholders' investment. The $15 per share values were determined by
agreement of the parties in both instances.
(i) Reflects the operating results on a consolidated basis of the PIN Venture
as a result of the Company's acquiring a majority interest.
The Unaudited Pro Forma Statements of Operations give effect to the
following unaudited pro forma adjustments:
(j) Represents the reclassification of representation fees charged by
MediaAmerica to the Company from radio advertising sales representation to
radio programming and cable programming.
(k) Represents subscriber license fees expected to be received under the GAC
Equity Agreements, which are not included in the historical revenues of
the Company.
(l) Represents the (i) elimination of the satellite delivery and production
support revenues the Company charged to the PIN Venture and (ii)
reclassification of the portion of satellite transponder and production
support expenses that the Company charged its own subsidiaries to
television programming expenses as a result of the consolidation of the
PIN Venture.
(m) Reflects the (i) amortization over 40 years of goodwill resulting from the
Acquisition, (ii) elimination of certain contractual expenses related to
the Acquisition, (iii) amortization over 10 years (approximate life of
agreements) relating to the GAC Equity Agreements and (iv) amortization of
goodwill pertaining to the PIN Venture over 18 years (remaining life of
the partnership agreement) as summarized below:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE
1997 30, 1998
------------ ----------
(IN THOUSANDS)
<S> <C> <C>
The Acquisition:
Amortization of Acquisition goodwill............. $ 764 $376
Identified cost savings related to the
Acquisition..................................... (200) (50)
Nonrecurring legal expenses...................... (300) --
----- ----
Subtotal....................................... 264 326
GAC Equity Agreements:
Amortization of subscriber incentive payments.... 121 60
Amortization of intangibles...................... 210 105
PIN Venture, amortization of goodwill.............. 76 --
----- ----
Subtotal......................................... 407 165
----- ----
Total............................................ $ 671 $491
===== ====
</TABLE>
Elimination of certain expenses related to the Acquisition consisted of
identified cost savings related to the Acquisition that are pursuant to
contractual items of the combination. Management believes the Company will
realize other cost savings in addition to the adjustments that are not
pursuant to contractual items of the combination that would have increased pro
forma net income by approximately $560 and $353 for the year ended December
31, 1997 and the six months ended June 30, 1998, respectively.
45
<PAGE>
(n) The pro forma adjustment to interest expense reflects interest expense on
the Notes plus the amortization of debt financing costs related to the
Notes and the revolving credit facility minus historical interest expense
as summarized below:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE
1997 30, 1998
------------ ----------
(IN THOUSANDS)
<S> <C> <C>
Interest Expense
Elimination:
Capital lease interest
expense.................. $(2,985) $(1,414)
Jones Global Group Note
interest expense......... (1,196) (413)
Jones International
interest expense on
advances................. (868) (327)
Revolving Credit Facility
interest expense......... -- (330)
Jones Earth Segment
interest expense......... (627) (156)
PIN Venture interest
expense.................. (12) --
------- -------
Subtotal................ (5,688) (2,640)
Interest Expense
Adjustments:
Interest expense on the
Notes.................... 11,750 5,875
Amortization of debt
financing costs.......... 642 321
------- -------
Subtotal................ 12,392 6,196
------- -------
Total................... $ 6,704 $ 3,556
======= =======
</TABLE>
(o) Represents portion of deferred financing costs incurred during 1996 and
1997 in connection with a proposed initial public offering that was deemed
not transferable to other financing activities.
(p) Represents the elimination of MediaAmerica's officers' incentive
compensation.
(q) Represents the Company's share of the net loss (income) of its
unconsolidated Superaudio joint venture, which is 50% owned by the Company
and is accounted for under the equity method.
(r) Represents the elimination of (i) the Company's equity share of income
(loss) of the PIN Venture and (ii) the minority interest in the PIN
Venture on an adjusted basis.
(s) EBITDA represents operating income (loss) plus depreciation and
amortization minus the EBITDA attributable to the minority interests in
the Company's consolidated 54%-owned PIN Venture subsidiary. EBITDA does
not include cash distributions of $350 and $100 from the Company's
unconsolidated 50%-owned Superaudio subsidiary for the six months ended
June 30, 1998 and the year ended December 31, 1997, respectively.
Management believes that EBITDA is a measure commonly used by analysts and
investors to determine a company's ability to service and incur its debt.
EBITDA should not be considered in isolation from or as a substitute for
net income (loss), cash flows from operating activities or other
consolidated income or cash flow statement data prepared in accordance
with generally accepted accounting principles or as a measure of
profitability or liquidity as the items excluded for the calculation of
EBITDA, such as interest, depreciation and amortization, are significant
components in understanding and assessing the Company's financial
performance. EBITDA measures presented may not be comparable to similarly
titled measures presented by other companies.
(t) Excludes the amortization of debt issuance costs.
(u) Represents the EBITDA attributable to the minority interests in the
Company's consolidated 54%-owned PIN Venture subsidiary.
46
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The historical statements of operations and statements of financial position
data as of and for each of the years in the five-year period ended December
31, 1997 have been derived from the consolidated financial statements of the
Company, which have been audited by Arthur Andersen LLP, independent auditors.
The selected consolidated financial data as of and for the six months ended
June 30, 1997 and 1998 have been derived from unaudited financial statements
included elsewhere herein. In the opinion of management, these statements
include all adjustments, consisting solely of normal recurring accruals and
other adjustments as discussed in "Management's Discussion and Analysis of
Financial Condition and Results of Operations," necessary for the fair
presentation of financial position and of the results of operations for those
periods. The results of operations for the six months ended June 30, 1998 may
not be indicative of results that may be expected for the full year ending
December 31, 1998.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------------------- ------------------------
1993 1994 1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
REVENUES:
Radio programming...... $ 3,186 $ 2,541 $ 5,121 $ 6,978 $ 10,200 $ 5,090 $ 3,739
Television
programming........... 290 1,946 340 1,153 12,002 3,898 7,865
Satellite delivery and
production support.... 7,745 6,805 9,666 8,523 6,910 3,918 2,128
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenues....... 11,221 11,292 15,127 16,654 29,112 12,906 13,732
----------- ----------- ----------- ----------- ----------- ----------- -----------
OPERATING EXPENSES:
Radio programming...... 1,974 2,068 3,068 4,163 5,816 2,804 3,490
Television
programming........... 355 1,149 366 1,157 9,272 3,006 6,667
Satellite delivery and
production support.... 5,045 4,546 6,530 5,451 4,685 2,605 2,330
Selling and
marketing............. 955 1,090 1,374 1,737 2,918 1,266 1,747
General and
administrative........ 1,319 1,958 2,322 3,270 4,168 1,863 2,092
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating
expenses............ 9,648 10,811 13,660 15,778 26,859 11,544 16,326
----------- ----------- ----------- ----------- ----------- ----------- -----------
OPERATING INCOME
(LOSS)................. 1,573 481 1,467 876 2,253 1,362 (2,594)
----------- ----------- ----------- ----------- ----------- ----------- -----------
OTHER EXPENSE (INCOME):
Interest expense....... 3,522 3,459 4,070 4,500 5,677 2,867 2,640
Interest income........ (194) (58) (64) (72) (108) (22) (99)
Write-off of deferred
offering costs (a).... -- -- -- -- 938 938 --
Equity share of income
of subsidiary (b)..... (161) (237) (11) (829) (396) (287) (73)
Other expense
(income), net......... 34 9 16 (12) 74 -- 264
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total other expense.. 3,201 3,173 4,011 3,587 6,185 3,496 2,732
----------- ----------- ----------- ----------- ----------- ----------- -----------
Loss before income
taxes and minority
interests............. (1,628) (2,692) (2,544) (2,711) (3,932) (2,134) (5,326)
Income tax provision
(benefit)............. (170) (389) (498) (387) (1,342) (356) 268
----------- ----------- ----------- ----------- ----------- ----------- -----------
Loss before minority
interests............. (1,458) (2,303) (2,046) (2,324) (2,590) (1,778) (5,594)
Minority interests in
net income (loss) of
consolidated
subsidiaries.......... -- -- -- (9) 903 418 69
----------- ----------- ----------- ----------- ----------- ----------- -----------
NET LOSS................ $ (1,458) $ (2,303) $ (2,046) $ (2,315) $ (3,493) $ (2,196) $ (5,663)
=========== =========== =========== =========== =========== =========== ===========
BASIC AND DILUTED NET
LOSS PER COMMON SHARE.. $ (0.36) $ (0.56) $ (0.50) $ (0.56) $ (0.79) $ (0.50) $ (1.19)
=========== =========== =========== =========== =========== =========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING..... 4,103,573 4,103,573 4,103,573 4,103,573 4,400,448 4,366,073 4,766,073
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------------------------ ------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT RATIO AND RADIO STATION AFFILIATE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents........... $ 715 $ 705 $ 5 $ 4 $ 3,717 $ 349 $ 2,445
Working capital
(deficit)............. (5,150) 276 (847) (6,615) (9,331) (5,109) (6,395)
Total assets........... 40,721 39,196 36,352 38,298 41,358 42,026 40,762
Total long-term debt... 45,171 52,667 53,476 53,277 45,312 52,333 54,296
Minority interests
(c)................... -- -- -- 291 1,593 1,145 822
Shareholders' deficit.. (12,484) (16,302) (20,360) (23,269) (18,206) (22,793) (23,869)
OTHER DATA:
Cash provided by (used
in) operating
activities............ $ 2,938 $ 6,933 $ 364 $ 4,776 $ 7,589 $ 2,574 $ (8,145)
Cash used in investing
activities............ 4,348 1,271 1,873 3,971 1,156 741 696
Cash provided by (used
in) financing
activities............ 1,444 8,266 809 (807) (2,720) (1,488) 7,569
EBITDA (d)............. 4,960 3,769 5,355 5,352 6,561 3,788 19
Depreciation and
amortization.......... 3,387 3,288 3,888 4,476 5,130 2,512 2,651
Capital expenditures... 4,384 1,641 1,262 2,969 1,367 1,002 539
Ratio of earnings to
fixed charges (e)..... -- -- -- -- -- -- --
AUDIENCE DATA (AT END OF
PERIOD):
Radio station AQH (24-
hour formats) (f)..... 516 670 765 1,090 1,148 1,105 1,324
Radio station AQH
(syndicated) (f)...... -- -- -- 834 1,048 798 1,148
Radio station
affiliates............ 718 925 929 1,273 1,484 1,317 1,510
Great American Country
households............ -- -- 14 1,049 1,550 1,172 3,578
Product Information
Network households.... 275 1,489 4,825 8,111 11,500 10,552 18,630
</TABLE>
- --------
(a) Represents portion of deferred financing costs incurred during 1996 and
1997 in connection with a proposed initial public offering that was deemed
not transferable to other financing activities.
(b) Represents the Company's share of the net loss (income) of its
unconsolidated Superaudio joint venture, which is 50% owned by the Company
and is accounted for under the equity method.
(c) Represents the minority interest in the net assets of the Company's
consolidated subsidiaries.
(d) EBITDA represents operating income (loss) plus depreciation and
amortization minus the EBITDA attributable to the minority interests in
the Company's consolidated 54%-owned PIN Venture subsidiary. EBITDA does
not include cash distributions of $375, $175, $300, $100 and $350 received
from the Company's unconsolidated 50%-owned Superaudio subsidiary for the
years ended December 31, 1994, 1995, 1996 and 1997 and for the six months
ended June 30, 1998, respectively. Management believes that EBITDA is a
measure commonly used by analysts and investors to determine a company's
ability to service and incur its debt. EBITDA should not be considered in
isolation from or as a substitute for net income (loss), cash flows from
operating activities or other consolidated income or cash flow statement
data prepared in accordance with generally accepted accounting principles
or as a measure of profitability or liquidity as the items excluded for
the calculation of EBITDA, such as interest, depreciation and
amortization, are significant components in understanding and assessing
the Company's financial performance. EBITDA measures presented may not be
comparable to similarly titled measures presented by other companies.
48
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------------------- ---------------
1993 1994 1995 1996 1997 1997 1998
------ ------ ------ ------ ------ ------ -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CALCULATION OF EBITDA:
Operating income (loss).. $1,573 $ 481 $1,467 $ 876 $2,253 $1,362 $(2,594)
Plus: Depreciation and
amortization............ 3,387 3,288 3,888 4,476 5,130 2,512 2,651
Less: EBITDA attributable
to PIN Venture's minor-
ity interests........... -- -- -- -- (822) (86) (38)
------ ------ ------ ------ ------ ------ -------
EBITDA................... $4,960 $3,769 $5,355 $5,352 $6,561 $3,788 $ 19
</TABLE>
- --------
(e) The ratio of earnings to fixed charges is determined by dividing the sum
of earnings before (i) extraordinary items and accounting changes,
interest expense, taxes and that portion of operating lease rental expense
which is representative of an interest factor by (ii) interest expense.
Earnings were insufficient to cover fixed charges by $1,790, $2,554,
$2,380, $3,249, $3,291, and $4,788 for the years ended December 31, 1993,
1994, 1995, 1996, 1997 and the six months ended June 30, 1998,
respectively.
(f) AQH represents the average audience (persons age 12 or older) listening to
radio stations broadcasting the Company's advertising inventory (i) during
any 15-minute period from 6am-7pm, Monday through Friday for 24-hour
formats or (ii) during any 15-minute period that the program is being
broadcast for syndicated programs, each as measured by the Arbitron rating
service. Radio advertising is generally sold on the basis of the listening
audience as quantified by the AQH.
RECENT FINANCIAL RESULTS
The following table sets forth preliminary summary unaudited consolidated
financial data of the Company for the periods ended and as of the dates
indicated. In the opinion of management, the summary unaudited consolidated
financial data include all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of results for these interim
periods. The preliminary results of operations for the nine months ended
September 30, 1998 are not necessarily indicative of results to be expected
for the full year ending December 31, 1998 or for any other interim period.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Recent Financial Results" for a discussion of the preliminary
data.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------
1997 1998 1997 1998
--------- --------- -------- --------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues
Radio programming................... $ 2,750 $ 2,884 $ 7,840 $ 6,623
Radio advertising and sales
representation..................... -- 2,362 -- 2,362
Television programming.............. 3,738 4,127 7,637 11,992
Satellite delivery and production
support............................ 1,701 1,782 5,619 3,988
-------- --------- -------- --------
Total revenues........................ 8,189 11,155 21,096 24,965
-------- --------- -------- --------
Total operating expenses.............. 7,495 10,880 19,038 27,285
-------- --------- -------- --------
Operating income (loss)............... 694 275 2,058 (2,320)
-------- --------- -------- --------
Interest expense, net................. 1,431 2,838 4,276 5,378
Other (income) expense, net........... (7) 736 644 927
Income tax provision (benefit)........ -- (253) (356) 15
Minority interests.................... 43 (32) 461 37
-------- --------- -------- --------
Net income (loss)..................... $ (773) $ (3,014) $ (2,967) $ (8,677)
======== ========= ======== ========
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998
-------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Cash, cash equivalents, and short-term investments (a)...... $ 24,680
Working capital............................................. 18,412
Total assets................................................ 112,839
Total long-term debt........................................ 100,000
Shareholders' deficit....................................... (8,736)
</TABLE>
- --------
(a) Includes $10.0 million of restricted cash from the net proceeds of the
offering of the Old Notes that was deposited into a Reserve Account.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
------------ -----------
SEPTEMBER 30, 1998
------------------------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
OTHER DATA:
Cash provided by (used in) operating activities....... 2,200 (5,945)
Cash used in investing activities..................... (43,082) (43,778)
Cash provided by financing activities................. 50,936 58,505
EBITDA (a)............................................ 2,021 2,369
Ratio of earnings to fixed charges (b)................ -- --
</TABLE>
- --------
(a) EBITDA (i) includes $33 and $(26) of EBITDA attributable to the PIN
Venture's minority interest, for the three and nine months ended September
30, 1998, respectively. EBITDA does not include cash distributions of $350
for the nine months ended September 30, 1998 from the Company's
unconsolidated 50%-owned Superaudio subsidiary. No distribution was made
by Superaudio for the three months ended September 30, 1998.
(b) Earnings were insufficient to cover fixed charges by $2,687 and $7,668 for
the three months and nine months ended September 30, 1998, respectively.
50
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion of results of operations and financial condition
should be read in conjunction with the Company's historical consolidated and
reconsolidated financial statements and notes thereto appearing elsewhere in
this Prospectus. This Prospectus contains forward-looking statements that
involve risks and uncertainties. See "Forward-Looking Information" and "Risk
Factors." The Company's actual results may differ materially from the results
discussed in any forward-looking statement.
OVERVIEW OF OPERATIONS
The Company creates, develops, acquires and produces programming which it
distributes to radio stations, cable television system operators and other
video distributors. The Company (i) provides radio programming to radio
stations in exchange for advertising time that it resells to national
advertisers, (ii) provides cable television programming to cable television
system operators and other video distributors, sells advertising time on its
two cable television networks and receives license fees for its country music
television network, and (iii) owns and operates playback, uplink and satellite
transmission facilities that are used to distribute the Company's programming
and also are subleased to others for a fee.
Prior to the Acquisition, the Company's revenues consisted of radio
programming revenues, cable television programming revenues and satellite
delivery and production support revenues. Radio programming revenues consist
primarily of advertising revenues and, to a lesser extent, license fees paid
by smaller radio station affiliates. License fees from radio stations have
remained stable over the past three years, reflecting the Company's decision
to focus on obtaining advertising time, instead of license fees, from its
affiliated radio stations. The Company generates radio advertising revenues by
selling airtime to advertisers who advertise their products or services on the
Company's radio network. The Company recognizes advertising revenues upon
airing of the advertisements. Any amounts received from customers for radio
advertisements that have not been aired during the period are recorded as
unearned revenues until such time as the advertisements are aired. The Company
delivers its programming to radio stations for distribution to their
listeners. Radio station license fees are earned monthly based on each radio
station's contractual agreement.
Television programming revenues consist primarily of advertising revenues
from the sale of infomercial time on the Product Information Network and
advertising time on Great American Country, as well as license fees relating
to Great American Country. The Company generates cable television advertising
revenues by selling airtime to advertisers who advertise their products or
services on the Company's television networks. The Company recognizes
advertising revenues upon airing of the advertisements. Any amounts received
from customers for television advertisements that have not been aired during
the period are recorded as unearned revenues until such time as the
advertisements are aired. The Company delivers its programming to cable
television systems and broadcast affiliates for distribution to their viewers.
License fees are earned monthly based on a per subscriber rate set pursuant to
the cable operator's agreement with the Company and the number of subscribers
that are receiving the Company's programming during the month.
Satellite delivery and production support revenues include revenues from
satellite delivery, uplinking, trafficking, playback and other services. The
Company generates revenues primarily by providing such services to related
parties. The Company recognizes satellite delivery and production support
revenues upon completion of the services or as provided by contract.
The Company's operating expenses consist of: (i) radio programming expenses,
(ii) television programming expenses, (iii) satellite delivery and production
support expenses, (iv) selling and marketing expenses, and (v) general and
administrative expenses.
Radio programming expenses consist of program licensing, programming
development and production costs, distribution and delivery costs and other
costs related to the operation of the Company's radio network. Program
licensing and programming development and production costs include the costs
of researching,
51
<PAGE>
designing, producing, and licensing programs for the Company's radio network
and other associated programming costs. Radio distribution and delivery costs
include satellite transponder expenses, uplinking charges and other associated
costs.
Television programming expenses consist primarily of distribution and
delivery costs and other costs related to the operation of the Company's cable
television networks. Because substantially all of the programming is made
available to the Company at no cost by third parties and requires limited
additional production effort by the Company, programming and production costs
are not significant. Cable television program distribution and delivery costs
include satellite transponder expenses, uplinking charges and other associated
costs.
Satellite delivery and production support expenses include a portion of the
satellite transponder expenses, uplinking expenses and other associated
operating costs to provide these services.
Selling and marketing expenses include salaries, travel and other associated
expenses related to the Company's sales and marketing activities, as well as
the costs of designing, producing and distributing marketing, advertising and
promotional materials.
General and administrative expenses include personnel and associated costs
for the Company's executive management and management staff and operational
support and management staff.
Many of the costs associated with program distribution and delivery, such as
satellite transponder expenses and uplinking expenses, are relatively fixed
with respect to each of the Company's radio and cable television networks; as
a result, an increase in the Company's radio or cable television programming
revenues should not result in a proportionate increase in program distribution
and delivery costs. The Company charges satellite transponder and uplinking
fees to its own subsidiaries as well as to related parties and third parties.
The portions of these expenses related to subsidiary activities are included
in radio or television programming expense as appropriate.
Total other expense consists primarily of net interest expense, write-off of
deferred offering costs, equity share of loss (income) of subsidiaries and
other miscellaneous items.
52
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the amount of, and percentage relationship to
total net revenues of, certain items included in the Company's historical
consolidated statements of operations for the years ended December 31, 1995,
1996 and 1997 and the six months ended June 30, 1997 and 1998, respectively:
REPORTED RESULTS:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Radio programming.............. $ 5,121 34% $ 6,978 42% $10,200 35%
Television programming......... 340 2 1,153 7 12,002 41
Satellite delivery and
production support............ 9,666 64 8,523 51 6,910 24
------- --- ------- --- ------- ---
Total revenues............... 15,127 100 16,654 100 29,112 100
------- --- ------- --- ------- ---
OPERATING EXPENSES:
Radio programming.............. 3,068 20 4,163 25 5,816 20
Television programming......... 366 2 1,157 7 9,272 32
Satellite delivery and
production support............ 6,530 43 5,451 33 4,685 16
Selling and marketing.......... 1,374 9 1,737 10 2,918 10
General and administrative..... 2,322 16 3,270 20 4,168 14
------- --- ------- --- ------- ---
Total operating expenses..... 13,660 90 15,778 95 26,859 92
------- --- ------- --- ------- ---
OPERATING INCOME (LOSS).......... 1,467 10 876 5 2,253 8
------- --- ------- --- ------- ---
OTHER EXPENSE.................... 4,011 27 3,587 21 6,185 21
INCOME TAX PROVISION (BENEFIT)
AND MINORITY INTERESTS.......... (498) (3) (396) (2) (439) (1)
------- --- ------- --- ------- ---
NET LOSS......................... $(2,046) (14)% $(2,315) (14)% $(3,493) (12)%
======= === ======= === ======= ===
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
---------------------------
1997 1998
------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Radio programming............................... $ 5,090 39% $ 3,739 27%
Television programming.......................... 3,898 30 7,865 57
Satellite delivery and production support....... 3,918 31 2,128 16
------- --- ------- ---
Total revenues................................ 12,906 100 13,732 100
------- --- ------- ---
OPERATING EXPENSES:
Radio programming............................... 2,804 22 3,490 25
Television programming.......................... 3,006 23 6,667 49
Satellite delivery and production support....... 2,605 20 2,330 17
Selling and marketing........................... 1,266 10 1,747 13
General and administrative...................... 1,863 14 2,092 15
------- --- ------- ---
Total operating expenses...................... 11,544 89 16,326 119
------- --- ------- ---
OPERATING INCOME (LOSS)........................... 1,362 11 (2,594) (19)
------- --- ------- ---
OTHER EXPENSE..................................... 3,496 27 2,732 20
INCOME TAX PROVISION (BENEFIT) AND
MINORITY INTERESTS............................... 62 1 337 2
------- --- ------- ---
NET LOSS.......................................... $(2,196) (17)% $(5,663) (41)%
======= === ======= ===
</TABLE>
53
<PAGE>
RECENT FINANCIAL RESULTS
The Company expects that its revenues for the third quarter of 1998,
excluding MediaAmerica, will be below 1997 revenues for the comparable period
and its operating income for the third quarter is expected to be significantly
below third quarter 1997 operating income. The principal reason for the
decline in revenues has been the Company's radio programming operations. Sales
of radio advertising for the first nine months of 1998 have been adversely
affected by the recent entry into the market of AMFM, which added
approximately 20% more radio advertising inventory to the marketplace, thereby
increasing competition for network radio advertising dollars. Additionally,
AMFM has been able to shift the focus of network radio advertisers to its
radio network which delivers larger market radio stations as compared to the
radio stations delivered by the Company's radio network. During the third
quarter of 1998, the Company has continued to sell a decreased amount of radio
advertising spots and is realizing lower rates, as compared to 1997. AMFM's
entry into the marketplace, as well as the increased amount of advertising
inventory in the marketplace, will continue to have a negative impact on the
Company's advertising sellout percentage and its advertising spot rates in the
fourth quarter of 1998. There is no assurance that these factors will not
materially adversely affect the Company's 1999 radio programming operations.
In December 1997, MediaAmerica's agreement with its largest radio
advertising representation customer was terminated, and a termination fee was
paid to MediaAmerica in the first half of 1998. MediaAmerica has continued to
provide radio advertising representation services to such customer in 1998,
but the level of service has declined substantially from that provided in
1997. AMFM's entry into the marketplace has also negatively affected
MediaAmerica's revenues from representation clients. These factors have
resulted in lower commission revenue generated by MediaAmerica and therefore
its operating income for the second half of 1998 is expected to be lower than
the 1997 comparable period.
The Company has recently entered into agreements to lease four channels on
its C-3 satellite transponder and all of its capacity on its C-4 transponder;
all but one of the channels on the Company's C-3 transponder were leased by
third parties. Based on the satellite transponder leases, the Company believes
its satellite delivery and production results will improve significantly in
the second half of 1998. These improvements, however, will not be sufficient
to offset the decline in total revenues and operating income in the first
three quarters of 1998 as compared to the same period for 1997 on a Company
wide basis. Further, the Company's operating results for the first three
periods will be negatively affected by the increase in expenses over the
comparable 1997 period, including certain non-recurring expenses associated
with the Offering. The increase in expenses resulted principally from the
Company's strategy to grow the distribution of its cable television
programming which resulted in increased sales and marketing expenses to expand
distribution of Great American Country and the Product Information Network and
increases in rebates offered to cable television operators to carry the
Product Information Network.
Upon the sale of Mr. Jones' interest in Jones Intercable, Jones Intercable
will no longer share in many of the administrative and related expenses which
have historically been shared by the various entities affiliated with Mr.
Jones, including the Company. Because Jones Intercable is the largest of such
sharing entities, its exclusion from the allocation process will cause the
Company to incur material increases beginning in the second half of 1999 in
certain overhead and related costs, including computer services, insurance,
and personnel costs for accounting, legal, risk management and human resources
services.
As a result of the changes occurring in the marketplace, the Company is
focusing on increasing the amount it receives per radio advertising spot and
its sellout percentage. Historically, the Company has sold its advertising to
traditional network advertisers. With the recent shift in the radio
advertising market the Company is concentrating its efforts on advertisers
that have targeted the specific demographic areas that the Company serves.
Additionally, the Company will be implementing cost reductions such as
consolidating its programming, using voice tracking and other technologies to
reduce programming costs, and reducing overhead.
54
<PAGE>
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Total Revenues. Total revenues increased $0.8 million, or 6%, from $12.9
million as reported for the six months ended June 30, 1997 to $13.7 million as
reported for the six months ended June 30, 1998. This increase was due
primarily to an increase in Great American Country advertising revenues and
the consolidation of the PIN Venture.
Radio Programming Revenues. Radio programming revenues decreased $1.4
million, or 27%, from $5.1 million as reported for the six months ended June
30, 1997 to $3.7 million as reported for the six months ended June 30, 1998,
due to a $1.4 million, or 31%, decrease in advertising revenues. Advertising
revenues decreased primarily due to a decrease in the number of advertising
spots sold. Sales of radio advertising for the three months ended June 30,
1998 were adversely affected by the recent entry into the market of AMFM,
which added approximately 20% more radio advertising inventory to the
marketplace, thereby increasing competition for network radio advertising
dollars and causing a decrease in the number of advertising spots sold in the
first six months of 1998 compared to the similar period in the prior year.
Licensing revenues remained relatively stable reflecting the Company's
strategy to focus on radio station affiliates with significant audiences,
which are generally not charged a license fee.
Television Programming Revenues. Television programming revenues increased
$4.0 million, or 102%, from $3.9 million as reported for the six months ended
June 30, 1997 to $7.9 million as reported for the six months ended June 30,
1998, due primarily to: (i) an increase of $3.3 million in advertising
revenues due to the consolidation of the PIN Venture, (ii) an increase of $0.3
million in advertising revenues on the Product Information Network as a result
of the increase in the number of subscribers receiving its programming, (iii)
an increase of $0.3 million in Great American Country advertising revenues due
to higher advertising rates being charged for airtime as a result of an
increase in the number of its subscribers, and (iv) an increase of $0.1
million in Great American Country affiliate fees due to an increase in the
number of its subscribers.
Satellite Delivery and Production Support Revenues. Satellite delivery and
production support revenues decreased $1.8 million, or 46%, from $3.9 million
as reported for the six months ended June 30, 1997 to $2.1 million as reported
for the six months ended June 30, 1998 due to (i) the expiration in October
1997 of a third party satellite delivery and production support services
agreement, resulting in a reduction of $1.6 million in satellite delivery
revenues, and (ii) the consolidation of the PIN Venture which for financial
statement reporting purposes resulted in the elimination of $0.4 million in
satellite delivery revenues. This decrease was partially offset by an increase
in satellite delivery and production support fees charged to related parties.
The Company recently leased three digital channels and will provide certain
related services to a third party beginning August 15, 1998 through August 31,
1999, subject to early termination at the option of the Company. The revenues
from this lease and service agreement are $138,000 per month. In addition, the
Company leased the C-4 satellite transponder to a third party beginning in
July 1998 through December 31, 2002, at which time the third party may
terminate and pay the Company $750,000 or extend the lease through the end of
lease. The Company also leased one digital channel and certain related
services to an affiliate beginning July 1998 through July 1, 2001. These
agreements will generate revenues of approximately $160,000 and $97,000 per
month, respectively.
Total Operating Expenses. Total operating expenses increased $4.8 million,
or 41%, from $11.5 million as reported for the six months ended June 30, 1997
to $16.3 million as reported for the six months ended June 30, 1998. This
increase was due primarily to an increase in television programming expenses,
radio programming expenses and selling and marketing expenses. The increase in
television programming expenses was due primarily to the consolidation of the
PIN Venture. The increase in radio programming expenses was due primarily to
an increase in programming production expenses. The increase in selling and
marketing expenses was due primarily to increased marketing efforts undertaken
for Great American Country as well as due to increased commission expense paid
to sales associates for such increased distribution. As a percentage of total
revenues, total operating expenses increased from 89% for the six months ended
June 30, 1997 to 119% for the six months ended June 30, 1998.
55
<PAGE>
Radio Programming Expenses. Radio programming expenses increased $0.7
million, or 24%, from $2.8 million as reported for the six months ended June
30, 1997 to $3.5 million as reported for the six months ended June 30, 1998,
due primarily to an increase in programming production expenses. Programming
production expenses increased approximately $0.7 million due to an increase in
the number of formats and syndicated programs offered by the Company. As a
percentage of radio programming revenues, radio programming expenses increased
from 55% for the six months ended June 30, 1997 to 93% for the six months
ended June 30, 1998.
Television Programming Expenses. Television programming expenses increased
$3.7 million, or 122%, from $3.0 million as reported for the six months ended
June 30, 1997 to $6.7 million as reported for the six months ended June 30,
1998, due primarily to the consolidation of the PIN Venture. As a percentage
of television programming revenues, television programming expenses increased
from 77% for the six months ended June 30, 1997 to 85% for the six months
ended June 30, 1998.
Satellite Delivery and Production Support Expenses. Satellite delivery and
production support expenses decreased $0.3 million, or 11%, from $2.6 million
as reported for the six months ended June 30, 1997 to $2.3 million as reported
for the six months ended June 30, 1998 due primarily to the consolidation of
the PIN Venture and the allocation of the satellite delivery and production
support expenses attributable to the Product Information Network to television
programming expenses from satellite delivery and production support expenses.
As a percentage of satellite delivery and production support revenues,
satellite delivery and production support expenses increased from 66% for the
six months ended June 30, 1997 to 109% for the six months ended June 30, 1998
due to the expiration in October 1997 of the third party satellite delivery
and product support service agreement.
Selling and Marketing Expenses. Selling and marketing expenses increased
$0.5 million, or 38%, from $1.3 million as reported for the six months ended
June 30, 1997 to $1.8 million as reported for the six months ended June 30,
1998 due to an increase of $0.4 million in marketing expenditures to increase
Great American Country's distribution and an increase of $0.1 million due to
the consolidation of the PIN Venture. As a percentage of total revenues,
selling and marketing expenses increased from 10% for the six months ended
June 30, 1997 to 13% for the six months ended June 30, 1998.
General and Administrative Expenses. General and administrative expenses
increased $0.2 million, or 12%, from $1.9 million as reported for the six
months ended June 30, 1997 to $2.1 million as reported for the six months
ended June 30, 1998 due primarily to an increase in management and operational
support for the Company's radio operations. As a percentage of total revenues,
general and administrative expenses increased from 14% for the six months
ended June 30, 1997 to 15% for the six months ended June 30, 1998.
Total Other Expense. Total other expense decreased $0.8 million from $3.5
million as reported for the six months ended June 30, 1997 to $2.7 million as
reported for the six months ended June 30, 1998. The decrease was due to a
write-off of deferred offering costs of $0.9 million in 1997 for which no
similar expense was incurred in the first six months of 1998 and $0.3 million
of expenses incurred in the first half of 1998 related to the MediaAmerica
acquisition and the Notes offering.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO DECEMBER 31, 1996
Total Revenues. Total revenues increased $12.4 million, or 75%, from $16.7
million as reported for the year ended December 31, 1996 to $29.1 million as
reported for the year ended December 31, 1997. This increase was due primarily
to increases in both television and radio programming revenues. The increase
in television programming revenues is due primarily to a 98% increase in the
number of Great American Country's households from December 31, 1996 to
December 31, 1997. The increase in radio programming revenues is due to a 5%
increase in the number of radio affiliates from December 31, 1996 to December
31, 1997.
56
<PAGE>
Radio Programming Revenues. Radio programming revenues increased $3.2
million, or 46%, from $7.0 million as reported for the year ended December 31,
1996 to $10.2 million as reported for the year ended December 31, 1997 due to
a $3.2 million, or 52%, increase in advertising revenues. Advertising revenues
increased due primarily to an increase in the rates charged by the Company for
its advertising spots as a result of an increase in AQH. Licensing revenues
remained relatively stable, reflecting the Company's strategy to focus on
radio station affiliates with significant audiences, which are generally not
charged a license fee.
Television Programming Revenues. Television programming revenues increased
$10.8 million, or 940%, from $1.2 million as reported for the year ended
December 31, 1996 to $12.0 million as reported for the year ended December 31,
1997, due primarily to: (i) an increase of $10.4 million in advertising
revenues due to the consolidation of the PIN Venture and (ii) an increase in
Great American Country advertising and license revenues of $0.4 million due
primarily to higher advertising rates being charged for airtime on Great
American Country as a result of an increase in the number of subscribers
receiving Great American Country's programming, a decrease in the amount of
unsold airtime, and an 84% increase in the number of sold direct response paid
spots.
Satellite Delivery and Production Support Revenues. Satellite delivery and
production support revenues decreased $1.6 million, or 19%, from $8.5 million
as reported for the year ended December 31, 1996 to $6.9 million as reported
for the year ended December 31, 1997 due primarily to the expiration in
October 1997 of a third party satellite delivery and production support
services agreement and the consolidation of the PIN Venture. The decrease was
partially offset by an increase in production support fees charged to related
parties.
Total Operating Expenses. Total operating expenses increased $11.1 million,
or 70%, from $15.8 million as reported for the year ended December 31, 1996 to
$26.9 million as reported for the year ended December 31, 1997. This increase
was due to increases in television programming expenses, radio programming
expenses, selling and marketing and general and administrative expenses. These
increases were primarily due to the consolidation of the PIN Venture. As a
percentage of total revenues, total operating expenses decreased from 95% for
the year ended December 31, 1996 to 92% for the year ended December 31, 1997.
Radio Programming Expenses. Radio programming expenses increased $1.6
million, or 40%, from $4.2 million as reported for the year ended December 31,
1996 to $5.8 million as reported for the year ended December 31, 1997 due
primarily to an increase in programming production and distribution expenses.
Programming production expenses increased approximately $1.4 million due to an
increase in the number of formats and syndicated programs offered by the
Company. Programming distribution expenses, such as the satellite transponder
and uplink expenses, increased approximately $0.2 million due to an increase
in the costs of distributing the new formats and syndicated programs offered
by the Company. As a percentage of radio programming revenues, radio
programming expenses decreased from 60% for the year ended December 31, 1996
to 57% for the year ended December 31, 1997.
Television Programming Expenses. Television programming expenses increased
$8.1 million, or 701%, from $1.2 million as reported for the year ended
December 31, 1996 to $9.3 million as reported for the year ended December 31,
1997, due primarily to the consolidation of the PIN Venture. As a percentage
of television programming revenues, television programming expenses decreased
from 100% for the year ended December 31, 1996 to 77% for the year ended
December 31, 1997.
Satellite Delivery and Production Support Expenses. Satellite delivery and
production support expenses decreased $0.8 million, or 14%, from $5.5 million
as reported for the year ended December 31, 1996 to $4.7 million as reported
for the year ended December 31, 1997 due primarily to the launch in late 1995
and early 1996 of Great American Country and allocation of the satellite
delivery and production support expenses attributable to Great American
Country to television programming expenses from satellite delivery and
production support expenses. As a percentage of satellite delivery and
production support revenues, satellite delivery and production support
expenses increased from 64% for the year ended December 31, 1996 to 68% for
the year ended December 31, 1997.
57
<PAGE>
Selling and Marketing Expenses. Selling and marketing expenses increased
$1.2 million, or 68%, from $1.7 million as reported for the year ended
December 31, 1996 to $2.9 million as reported for the year ended December 31,
1997 due primarily to an increase in marketing expenditures of approximately
$0.7 million related to the Company's radio programming marketing activities,
an increase in marketing expenditures of approximately $0.1 million related to
the Company's television programming marketing activities and an increase in
marketing expenditures of approximately $0.4 million related to the
consolidation of the PIN Venture. As a percentage of total revenues, selling
and marketing expenses remained relatively stable at 10% for the years ended
December 31, 1996 and 1997.
General and Administrative Expenses. General and administrative expenses
increased $0.9 million, or 27%, from $3.3 million as reported for the year
ended December 31, 1996 to $4.2 million as reported for the year ended
December 31, 1997 due primarily to the consolidation of the PIN Venture. As a
percentage of total revenues, general and administrative expenses decreased
from 20% for the year ended December 31, 1996 to 14% for the year ended
December 31, 1997.
Total Other Expense. Total other expense increased $2.6 million as reported
from $3.6 million for the year ended December 31, 1996 to $6.2 million as
reported for the year ended December 31, 1997. The increase was due to a
write- off of deferred offering costs of approximately $0.9 million, an
increase of approximately $1.2 million in interest expense relating to the
Jones Global Group Note and an increase of approximately $0.5 million in
interest expense 3relating to advances from Jones International.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO DECEMBER 31, 1995
Total Revenues. Total revenues increased $1.6 million, or 10%, from $15.1
million as reported for the year ended December 31, 1995 to $16.7 million as
reported for the year ended December 31, 1996. This increase was due primarily
to an increase in radio programming revenues and, to a lesser extent,
television programming revenues. Radio programming revenues increased
primarily due to an increase in the rates charged by the Company as a result
of an increase in AQH and the launch of the Crook and Chase Country CountDown
program in January 1996. Television programming revenues increased primarily
due to the launch of Great American Country in December 1995.
Radio Programming Revenues. Radio programming revenues increased $1.9
million, or 36%, from $5.1 million as reported for the year ended December 31,
1995 to $7.0 million as reported for the year ended December 31, 1996, due
primarily to a $1.9 million, or 44%, increase in advertising revenues.
Advertising revenues increased due primarily to: (i) an increase in the rates
charged by the Company for its advertising spots as a result of a 23% increase
in AQH, which accounted for $1.2 million of the increase, and (ii) the launch
of the Crook and Chase Country CountDown program, which accounted for $0.7
million of the increase. Licensing revenues were stable as compared to the
prior period, reflecting the Company's strategy to focus on radio station
affiliates with significant audiences, which are generally not charged a
license fee.
Television Programming Revenues. Television programming revenues increased
$0.9 million, or 239%, from $0.3 million as reported for the year ended
December 31, 1995 to $1.2 million as reported for the year ended December 31,
1996, due primarily to a $0.7 million increase in licensing revenues and $0.1
million increase in advertising revenues. Licensing and advertising revenues
increased due primarily to the launch of Great American Country on Jones
Intercable systems in December 1995.
Satellite Delivery and Production Support Revenues. Satellite delivery and
production support revenues decreased $1.2 million, or 12%, from $9.7 million
as reported for the year ended December 31, 1995 to $8.5 million as reported
for the year ended December 31, 1996, due primarily to a decrease in satellite
production support fees charged to related parties.
Total Operating Expenses. Total operating expenses increased $2.1 million,
or 16%, from $13.7 million as reported for the year ended December 31, 1995 to
$15.8 million as reported for the year ended December 31, 1996. This increase
was due primarily to increases in radio programming expenses, television
programming expenses and general and administrative expenses. These increases
were due primarily to the launch of Great American Country. As a percentage of
total revenues, total operating expenses increased from 90% for the year ended
December 31, 1995 to 95% for the year ended December 31, 1996.
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Radio Programming Expenses. Radio programming expenses increased $1.1
million, or 36%, from $3.1 million as reported for the year ended December 31,
1995 to $4.2 million as reported for the year ended December 31, 1996 due
primarily to an increase in programming production expenses. Programming
production expenses increased $0.4 million due to an increase in the number of
formats offered by the Company and $0.7 million due to the launch of the Crook
and Chase Country CountDown program. Programming distribution expenses did not
increase significantly as a result of the relatively fixed nature of many of
the costs, such as satellite transponder expenses. As a percentage of radio
programming revenues, radio programming expenses remained consistent at 60%
for the years ended December 31, 1995 and 1996.
Television Programming Expenses. Television programming expenses increased
$0.8 million, or 216%, from $0.4 million as reported for the year ended
December 31, 1995 to $1.2 million as reported for the year ended December 31,
1996 due primarily to an increase in programming distribution expenses.
Programming distribution expenses increased as a result of the launch of Great
American Country. As a percentage of television programming revenues,
television programming expenses decreased from 107% for the year ended
December 31, 1995 to 100% for the year ended December 31, 1996. This decrease
was due to the substantial start-up costs, relative to revenues, related to
the launch of Great American Country in 1995.
Satellite Delivery and Production Support Expenses. Satellite delivery and
production support expenses decreased $1.0 million, or 17%, from $6.5 million
as reported for the year ended December 31, 1995 to $5.5 million as reported
for the year ended December 31, 1996. As a percentage of satellite delivery
and production support revenues, satellite delivery and production support
expenses decreased from 68% for the year ended December 31, 1995 to 64% for
the year ended December 31, 1996.
Selling and Marketing Expenses. Selling and marketing expenses increased
$0.3 million, or 26%, from $1.4 million as reported for the year ended
December 31, 1995 to $1.7 million as reported for the year ended December 31,
1996. Selling and marketing expenses increased due primarily to: (i) an
increase of $0.2 million due to the launch of Great American Country and (ii)
an increase of $0.1 million due to the launch of the Crook and Chase Country
CountDown program. As a percentage of total revenues, selling and marketing
expenses increased from 9% for the year ended December 31, 1995 to 10% for the
year ended December 31, 1996.
General and Administrative Expenses. General and administrative expenses
increased $1.0 million, or 41%, from $2.3 million as reported for the year
ended December 31, 1995 to $3.3 million as reported for the year ended
December 31, 1996. Approximately $0.7 million of the increase was due to an
increase in management and operational support expenses as a result of the
launch of Great American Country and approximately $0.2 million of the
increase was due to an increase in management and operational support for the
Company's radio operations. As a percentage of total revenues, general and
administrative expenses increased from 15% for the year ended December 31,
1995 to 20% for the year ended December 31, 1996.
Total Other Expense. Total other expense decreased $0.4 million from $4.0
million as reported for the year ended December 31, 1995 to $3.6 million as
reported for the year ended December 31, 1996 due primarily to an increase in
equity share of income of subsidiary, which was partially offset by an
increase in interest expense.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Advertising revenues in the radio and cable television industries fluctuate
due to seasonality in such industries. The Company believes that radio network
revenues are typically lowest in the first quarter and cable television
network revenues are typically lowest in the third quarter. With the
Acquisition, the Company expects that its seasonal trend of lower first
quarter revenues will be more significant. Other than the fees paid by the
Company to third parties for certain of its radio programming, the fees paid
by the Company in connection with the distribution of the Product Information
Network and the sales commissions paid to account executives for radio and
advertising representation sales, the Company's expenses have not historically
varied significantly relative to the seasonal fluctuation of revenues. The
Company's quarterly and annual results of operations are
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affected by a wide variety of factors, many of which are outside the Company's
control, which could materially and adversely affect profitability. These
factors include the timing and volume of advertising on the Company's radio
network and cable television networks, the number and size of the radio
stations that carry the Company's radio programming, the number and size of
cable systems and other video distributors that carry the Product Information
Network and Great American Country, and general economic conditions.
LIQUIDITY AND CAPITAL RESOURCES
The Company's ability to successfully implement its growth strategies is
subject to the availability of cash generated from operations and equity
and/or debt financing. On a pro forma basis to reflect the placement of the
Notes and the use of the proceeds therefrom, the Company had cash and cash
equivalents of $26.2 million (as of June 30, 1998), including $10.0 million of
cash set aside in the Reserve Account, and will be limited by the Indenture in
its ability to enter into other debt financing. There can be no assurance that
the Company will have sufficient cash flow from operations after debt service
to support these strategies in the long term. In addition, there can be no
assurance that the capital resources necessary to accomplish the Company's
growth strategies over the long term will be available or, if available, will
be on terms and conditions acceptable to the Company.
Since its inception, the Company has incurred net losses primarily as a
result of expenses associated with developing and launching its programming
networks. Net cash provided by (used in) operating activities for the years
ended December 31, 1995, 1996, 1997 and the six-month period ended June 30,
1998 was $0.4 million, $4.8 million, $7.6 million and $(8.1) million,
respectively. Net cash provided by (used in) operating activities decreased
for the six-month period ended June 30, 1998 because of modest revenue growth
and significantly higher expenses during the period, as described above. Net
cash used in operating activities for the six-month period ended June 30, 1998
includes the net repayment of $4.1 million of advances from Jones
International.
For the years ended December 31, 1995, 1996, 1997 and for the six-month
period ended June 30, 1998, net cash used in investing activities was $1.9
million, $4.0 million, $1.2 million and $0.7 million, respectively. The
Company's investing activities in 1995 consisted primarily of: (i) purchases
of equipment for the Company's satellite delivery and production facility,
(ii) purchases of equipment for the radio programming network and (iii) the
acquisition of certain radio programming network assets. In 1996, the
Company's investing activities related primarily to the conversion of the
delivery system of its radio programming networks to a digital satellite
delivery system and the purchase of automated playback and other equipment for
Great American Country and miscellaneous equipment. In addition, the Company
invested $1.0 million in a radio programming venture, Jones/Owens Radio
Programming LLC, in October 1996. The Company's 1997 net capital expenditures
of approximately $1.4 million were primarily related to the completion of the
conversion to a digital satellite delivery system and to the purchase of the
equipment to effect the digital compression of one of the Company's satellite
transponders. During the first six months of 1998, the Company's capital
expenditures totaled $539,000. Total capital expenditures for the 1998 year
are estimated to be $1.1 million primarily to purchase equipment to further
digitally compress the Satcom C-3 satellite transponder and to add formats and
programming for Jones Radio. During the first six months of 1998, the Company
made subscriber incentive payments for Great American Country totaled $0.2
million. Total subscriber incentive payments for 1998 are estimated to be $3.5
million.
Net cash provided by (used in) financing activities for the years ended
December 31, 1995, 1996, 1997 and for the six month period ended June 30, 1998
were $0.8 million, $(0.8) million, $(2.7) million, and $7.6 million,
respectively. For these periods, the Company's financing activities consisted
primarily of borrowings under the Company's credit facility and from related
parties and repayments of a capital lease obligation and loans from related
parties.
Effective August 15, 1996, the Company purchased all of the outstanding
common stock of Galactic Radio from Global Group for $17.2 million. Global
Group had acquired Galactic Radio from Jones Intercable, a related party, for
$17.2 million on June 14, 1996. The purchase price was paid using $1.2 million
in cash, which was advanced to the Company by Jones International, with the
balance paid in the form of a $16.0 million note.
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Effective September 30, 1997, $6.0 million of the $16.0 million note payable
to Global Group was converted into 400,000 shares of the Company's Class B
Common Stock at $15 per share. Effective upon the closing of the offering of
the Notes, the remaining $10 million of the Jones Global Group Note was
converted into 666,667 shares of Class A Common Stock valued at $15 per share.
In July 1998, the Company acquired substantially all of the assets and
liabilities of MediaAmerica. Pursuant to the Acquisition, MediaAmerica
received $26.7 million in cash and $6.0 million in shares of Class A Common
Stock of the Company. MediaAmerica also received approximately 142,000
additional shares of Class A Common Stock, valued at $15 per share, as the
estimated working capital adjustment calculated on the date of closing. In
addition, MediaAmerica may receive up to $5 million in additional shares of
Class A Common Stock, with the excess, if any, to be paid in cash, pursuant to
the Earnout.
In March 1998, Radio Holdings entered into a five year $30 million secured
revolving credit facility with a commercial bank. Borrowings under the credit
facility bore interest at a maximum of LIBOR plus 2.875% (approximately 7.9%
at June 30, 1998). Borrowings of $16.7 million under the credit facility were
outstanding as of June 30, 1998. The Company terminated this credit facility
in connection with the offering of the Notes. Borrowings of $16.3 million
under the credit facility were used to repay a $6.6 million note payable to
Jones Intercable and to repay $9.7 million in advances from Jones
International. In July 1998, the Company repaid the credit facility, using the
proceeds from the old Notes offering.
The Company has received advances and loans from Jones International and
related companies to fund its operating and investing activities in the past
and anticipates that Jones International will not make additional advances to
the Company in the future. Outstanding advances from Jones International and
related parties at June 30, 1998 were approximately $5.4 million. The Company
expects to repay these advances with cash flow from operations and/or
available cash balances. Jones International and such related companies are
under no obligation to provide additional advances or loans to the Company.
The Company has historically financed its ownership of two analog satellite
transponders through a capital lease agreement that was fully prepaid with
$27.6 million of the proceeds of the offering of the Old Notes. The channel
capacity on one satellite transponder has been digitally compressed to seven
channels, four of which are currently leased to Product Information Network,
Great American Country and two related parties. This transponder could now be
digitally compressed into additional channels if demand warranted. The Company
recently leased the other three digital channels and certain related services
until August 31, 1999, subject to early termination at the option of the
Company. The revenues from this lease are $138,000 per month. In addition, the
Company has leased the C-4 satellite transponder to a third party beginning
July 1998, and one digital channel and certain related services to an
affiliate beginning July 1, 1998. These agreements will generate revenues of
approximately $160,000 and $97,000 per month, respectively.
Pursuant to the terms of one GAC Equity Agreement, an MSO was granted a put
option in respect of the shares of Class A Common Stock that may be issued to
it under such agreement. The put option provides that, if as of December 31,
2001, the Company or its successor has not completed a public offering of its
securities, the MSO may within 60 days of such date require the Company to
purchase its Class A Common Stock. If the put election is made, the Company or
its successor would be required to purchase the Class A Common Stock at a
price equal to all or a portion of the license fees that would have been paid
during the period between the date of the agreement and the exercise date of
the put option. The purchase price would be based on the total number of MSO
subscribers receiving Great American Country as of December 31, 1998. In the
event the MSO provides the full number of subscribers committed under the
agreement by December 31, 1998, the estimated purchase price of the Class A
Common Stock in the event the put option is exercised would be approximately
$1,300,000. The Company intends to continue to enter into similar arrangements
in the future, to the extent permitted under the terms of the Indenture.
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The Company depends, and will continue to depend, significantly upon the
earnings and cash flows of, and dividends and distributions from, its
subsidiaries to pay its expenses, meet its obligations and pay interest and
principal on the Notes and its other indebtedness. The terms of the Company's
joint ventures generally require the mutual consent of the Company and its
joint venture partners to distribute or advance funds to the Company. There
are no significant contractual restrictions on distributions from each of the
Subsidiary Guarantors (as defined) to the Company. Management believes that
the proceeds from the Notes and operating cash flow, including the cash flows
of, and dividends and distributions from its subsidiaries will be sufficient
to fund the Company's capital needs through at least December 31, 1998. The
Company deposited $10.0 million of the proceeds of the offering of the Notes
in a Reserve Account which will be used for acquisitions and payment of
principal of and interest on the Notes. However, payment of interest for the
full term of the Notes will require an increase in cash flows from operations,
which will continue to be affected by various factors discussed herein,
including in "Risk Factors."
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards 128 ("SFAS 128") entitled,
"Earnings per Share." SFAS 128 is effective for fiscal years ending after
December 15, 1997; early adoption is not permitted. SFAS 128 replaces primary
and fully diluted earnings per share with basic and diluted earnings per
share, respectively. Under SFAS 128, net loss per share for the periods
reported would be the same for both basic and fully diluted.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
About Capital Structure," which is effective for financial statements for
periods ended after December 15, 1997. This statement establishes standards
for disclosing information about an entity's capital structure. The Company
has adopted this statement. The adoption of this statement did not have a
material impact on the financial statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which is effective for the year ending December 31, 1998. This
statement establishes standards for the reporting and display of comprehensive
income and its components in financial statements and thereby a measure of all
changes in equity of an enterprise that result from transactions and other
economic events other than transactions with owners.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information," which is effective for the year ending
December 31, 1998. This statement changes the requirements under which
publicly held companies report disaggregated information.
The Company will adopt SFAS No. 130 and No. 131 on their respective dates.
Management of the Company does not expect that the adoption of these
statements will have a material impact on the financial statements.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is the result of many computer programs being written
such that they will malfunction when reading a year of "00." This problem
could cause system failure or miscalculations causing disruptions of business
processes.
Jones Intercable initiated an assessment of how the Year 2000 problem could
affect its operations and the operations of related companies in the summer of
1997 and established the Y2K Office to manage the process for all Jones
companies. A subsidiary of Jones International provides computer hardware and
software services to the Company and related parties, including Jones
Intercable, which is the largest user of these services. The Y2K Office meets
regularly with a review committee that includes the Chief Accounting Officer
of the Company.
During 1997, the Y2K Office conducted Year 2000 awareness sessions within
the Company and developed a comprehensive inventory of computer systems and
computer-controlled devices that are potentially affected by the Year 2000
issue. Then, the Y2K Office prepared a risk assessment profile to identify
Year 2000 priorities by
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analyzing and determining whether the Year 2000 related risks were low, medium
or high and whether the business impact would be marginal, manageable,
critical or fatal for each system and device that may be affected by the Year
2000 issue. Based on its risk assessment profile, the Y2K Office analyzed the
various systems and devices and determined whether to retire, repair/correct,
replace/upgrade or ignore those that posed Year 2000 issues. The Company
determined that its first priority would be operational support/facility
systems and then all other systems thought to be non-compliant.
The Y2K Office is currently implementing the steps needed to address the
Year 2000 problem based upon its set priorities and is testing the implemented
solutions. The Y2K Office's schedule for implementing and testing its Year
2000 solutions for systems that have been determined to be first priority for
the Company is as follows:
<TABLE>
<CAPTION>
EXPECTED
COMPLETION
PROJECT DESCRIPTION DATE
------- ----------- ----------
<S> <C> <C>
Financial Information
Management System...... Test for Y2K compliance 1Q99
Human Resources
Information System..... Test for Y2K compliance 2Q99
Unix Hardware and
Software............... Upgrade to Y2K compliant releases and test for compliance 4Q98
Local Area Network
("LAN") and Wide Area
Network ("WAN")
Components............. Determine which components are not Y2K compliant 4Q98
LAN/WAN Hardware and
Software............... Upgrade to Y2K compliant releases and test for compliance 2Q99
Telephony Systems....... Upgrade to Y2K compliant releases and test for compliance 4Q98
PIN Network Traffic and
Billing System......... Y2K certification testing 4Q98
</TABLE>
In 1999, the Y2K Office will focus on Year 2000 compliance issues with
respect to other systems, such as desktop hardware and software, data
archiving systems, traffic and billing reconciliation applications and other
record management systems. The Company has not used, and does not plan to
employ, unaffiliated third party verification and validation processes to
assure the reliability of its risk and cost estimates. The Company has not
deferred any other information technology projects due to Year 2000 efforts.
The Y2K Office commenced contacting vendors of application and operation
system software in 1997 and continues to work with vendors through industry
groups focused on Year 2000 issues. The Company has not yet determined the
extent to which it is vulnerable to the failure by vendors and customers that
have a material relationship with the Company to remediate Year 2000
compliance issues. Management believes, but makes no assurance, that the
Company does not supply to third parties systems or equipment that may cause a
Year 2000 problem.
The Company has not incurred any material historical Year 2000 costs to
date. Management does not have an estimate for future Year 2000 project costs
that may be incurred. Management expects, but makes no assurance that, future
Year 2000 project costs will not have a material adverse effect on its
financial condition and results of operations.
The Company has not yet formulated contingency plans in the event that
systems are not Year 2000 compliant. The Company recognizes the need for a
contingency plan and plans to develop one by the first quarter of 1999. There
can be no assurance that the Company's systems will be Year 2000 compliant in
time. The Year 2000 issue poses many risks for the Company and could
materially adversely affect its financial condition and results of operations.
See "Risk Factors--Impact of the Year 2000 Issue" for a discussion of such
risks.
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BUSINESS
OVERVIEW
The Company provides radio programming to radio stations in the U.S. and
cable television programming to cable system operators. The Company's radio
programming includes twelve 24-hour formats and 18 syndicated programs that
are broadcast by approximately 2,300 radio station affiliates throughout the
United States to over 60 million weekly listeners. The Company's cable
television programming consists of Great American Country (country music
videos) and the Product Information Network (long-form advertising). Pursuant
to affiliate agreements with five of the ten largest multiple-system operators
("MSOs"), as well as the two cable programming cooperatives and others, Great
American Country was distributed to 4.6 million subscribers at August 15,
1998. The Product Information Network is distributed to 278 cable systems and
broadcast affiliates and is available to 18.6 million households. The Company
has successfully expanded the reach of its cable television programming to a
broad number of major MSOs as a result of the extensive experience of the
Company's senior management team, including Mr. Glenn R. Jones, the Company's
Chairman and majority shareholder.
In July, 1998, the Company acquired substantially all of MediaAmerica's
assets. MediaAmerica was founded in 1987 to provide advertising representation
services to providers of radio programming, such as the Company, and in 1994
expanded to provide radio programming and other services to radio stations.
The Acquisition provides the Company with a group of experienced executives
who have long-standing relationships with many advertising agencies and
advertisers that the Company believes will be valuable in driving its
advertising-related revenue growth.
The Company primarily derives its revenues from the sale of its commercial
radio or cable television airtime inventory to national advertisers that are
attracted to the Company's ability to efficiently reach a large national
audience across a variety of demographics and markets. The Company also
receives license fees from MSOs that carry Great American Country and provides
satellite delivery and production support services for its own programming
operations as well as to others. The Company's strategy is to increase
advertising revenues by continuing to increase its base of radio station
affiliates and cable system affiliates, thereby broadening its audience of
radio listeners and cable television viewers. The Company also plans to
diversify and expand its sources of revenues by developing new radio and cable
television programming, acquiring complementary businesses (such as
MediaAmerica), offering programming-related and other value-added services and
leasing satellite transponder capacity made available by more efficient
digital compression techniques. There is no assurance that the Company will be
successful in these efforts.
The Company provides a wide variety of advertisers many different ways to
reach their target audiences through network radio and cable television. Given
network radio's wide reach and relatively low advertising costs, it is one of
the most cost-effective means to reach targeted demographic groups. The
Company's radio audience demographics are primarily adults, ages 25-54. Great
American Country, the Company's country music television network, also targets
this attractive demographic sector. According to industry sources, country
music is one of America's most popular music formats and has been one of the
fastest growing segments of the music industry. In addition, the Company
believes the Product Information Network's long-form advertising provides
television advertisers with a cost-effective medium to deliver sales messages,
product introductions and demonstrations to targeted audiences. The Company
believes that the number of advertisers and the volume of long-form
advertising will continue to grow as the Product Information Network's
coverage of U.S. households increases and Fortune 500 companies and other
major advertisers increasingly take advantage of the benefits of long-form
advertising to reach their desired audience.
Radio Programming. The Company, through its radio programming division,
Jones Radio, typically provides programming to its radio affiliates in
exchange ("barter") for commercial airtime inventory which it sells to
national advertisers. Jones Radio's programming and related services offer
radio stations a cost-efficient
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alternative to the talent, time and expense required to develop in-house
programming. In addition, Jones Radio's variety of appealing 24-hour formats,
primarily country and adult contemporary, and its nationally recognized group
of syndicated programs and personalities, enable radio stations to distinguish
themselves within their increasingly competitive markets. As a group, Jones
Radio's radio station affiliates generally capture larger audience (measured
by AQH) as a result of broadcasting Jones Radio's programming, which can
result in additional local advertising revenues for these radio stations.
Jones Radio has been a successful provider of country music programming, one
of the most popular music formats with over 4 million U.S. listeners each
week. Jones Radio provides its programming to approximately 30% of all country
radio stations in the United States and believes it is the largest provider of
country music programming to U.S. radio stations. Between December 31, 1994
and June 30, 1998, Jones Radio's base of radio station affiliates grew from
925 to 1,510 representing a CAGR of 14.1%. For the same period, Jones Radio
has experienced a 37.9% CAGR in AQH, growing from 670,000 at December 31, 1994
to 2,473,000 at June 30, 1998. In addition to its advertising representation
business, MediaAmerica provides radio programming and services to 990 radio
station affiliates in mostly larger markets. As a result of the Acquisition,
Jones Radio has more than doubled its AQH to 6.5 million, which represents 60
million total weekly listeners. While Jones Radio has historically provided
programming to radio stations in small and medium-sized markets, it is
currently focusing its programming development efforts to appeal to larger
markets. Jones Radio has radio station affiliates in all 50 states and in all
of the top 50 markets.
Radio Advertising Representation Services. As a result of the Acquisition,
the Company offers advertising representation services to providers of radio
programming throughout the United States. As a representation firm,
MediaAmerica historically acted as an intermediary between advertisers and
radio programming providers, such as the Company. The Company was one of
MediaAmerica's largest customers in 1997 for this type of service. The Company
plans to develop numerous cross-selling opportunities and other synergies that
arise from the complementary nature of MediaAmerica's services and customer
base. There can be no assurance that the Company will be successful in these
efforts.
Television Programming--Great American Country. Great American Country is a
24-hour country music video network that capitalizes on the popularity of
country music and leverages the Company's core competency in country music
programming. Great American Country represents a high-quality alternative to
currently available country music networks and offers MSOs attractive
incentives for carriage. In order to drive subscriber growth, Great American
Country generally offers affiliates a one-time cash launch incentive and
waives license fees for a certain period which varies based on the level of
subscriber commitment. The Company is enhancing its near-term operating cash
flow through new agreements with two significant MSOs to issue them shares of
the Company's Class A Common Stock in return for which Great American Country
will be paid license fees from the date of launch. Great American Country has
affiliate agreements with five of the ten largest MSOs, including Adelphia,
Comcast, Jones Intercable, TCI, and Time Warner, as well as the two cable
programming cooperatives, Telesynergy, Inc. and National Cable Television
Cooperative, Inc. The Company believes that by offering carriage incentive
programs and competitive license fee rates and local advertising avails, it
will attract additional subscribers from existing and new MSO affiliates that
are increasingly seeking to decrease costs and generate more advertising
revenues.
Television Programming--Product Information Network. The Company introduced
the Product Information Network in October 1993 to capitalize on the growing
infomercial industry which, based on industry statistics, today represents
approximately $1 billion of airtime expenditures. The Product Information
Network is aired on a full-time (24-hour) basis or on a part-time basis,
thereby affording cable and broadcast affiliates the opportunity to generate
incremental revenues from otherwise under-utilized time. The Product
Information Network airs long-form informational programming from all of the
major infomercial producers, such as Guthy-Renker Corporation and National
Media Corporation. Through agencies, it also airs advertising from major
corporate advertisers, which have recently included Phillips-Magnavox,
Simmons, Hanes, Sunbeam, The Sharper Image and Time-Life. Since December 31,
1994, the Product Information Network has increased its base of cable
subscribers and broadcast households from 1.5 million to 18.6 million at June
30, 1998, representing a CAGR of
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74.1%. The Product Information Network is distributed to 9.7 million full-time
equivalent subscribers through 278 cable systems and broadcast affiliates. The
MSOs that carry the network on a portion of their cable systems include nine
of the ten largest MSOs, including Adelphia, Cablevision, Comcast, MediaOne
Group, Cox, Jones Intercable, Marcus Cable, TCI and Time Warner. The Product
Information Network operates through the PIN Venture.
Satellite Delivery and Production Support Services. The Company supports the
production and distribution of its radio and cable television programming
operations through its state-of-the-art satellite uplinking facilities. The
Company's satellite delivery and production support services provide reliable
and efficient playback, trafficking, uplinking and satellite transmission
services to the Company's radio and cable television programming operations
and to certain related companies. The Company believes that the integration of
these distribution services gives it strict management and quality control
over the distribution of its programming. The Company has financed its
ownership of two analog satellite transponders through a capital lease that
was fully prepaid with a portion of the proceeds of the offering of the Old
Notes. The capacity on one satellite transponder has been digitally compressed
to seven channels, four of which are leased to Product Information Network,
Great American Country and two related parties. In August 1998, the Company
entered into a lease agreement with an unaffiliated party for the lease of
three digital channels until August 31, 1999. This transponder could be
digitally compressed into additional channels if demand warranted. The other
satellite transponder is an analog channel which the Company recently leased
to a third party. The Company believes that the demand for its satellite
delivery and production support services should increase as digital
programming and distribution technologies continue to develop and cable
systems complete upgrades and rebuilds to expand their channel capacity. The
cable systems' expansion of their channel capacity provides more programming
space for cable programmers who, in turn, would require satellite transponders
to provide the programming.
STRATEGY
The Company's objective is to increase its revenues and operating income by
employing the following strategies:
Distribute Programming to a Larger Audience. To increase its revenues from
advertisers, the Company must increase the distribution of, and audience for,
its programming. Jones Radio plans to increase its marketing and sales
activities in an effort to increase the number of its radio station affiliates
and the size of its audience. The Company also plans to continue to
aggressively market its cable television networks to both cable operators and
other multi-channel distributors, including DBS, MMDS and others. The Company
relies on financial incentives and its established relationships with MSOs to
market these networks.
Develop or Acquire Additional High-Quality Programming. The Company believes
that there is market demand for additional long-form and short-form radio
programming due to the financial constraints and limited creative resources of
many radio stations and their need to improve operating efficiencies. In
addition, the Company believes there are additional market opportunities for
24-hour music and information programs that the Company does not currently
distribute, such as news/talk radio. Jones Radio intends to develop and/or
acquire radio programming addressing these market demands. An example of new
radio programming includes "Nashville Nights," a national long-form country
night-time show targeted at larger markets, which is being produced in a
venture with CapStar. The Company is exploring opportunities to produce
additional low-cost cable television programming based on the strength of its
relationships with major MSOs and its success with Great American Country and
the Product Information Network. The Company believes that any new cable
television programming would typically serve unfilled or underserved niches
and, similar to priced alternative to an existing cable network.
Increase Advertising Revenues. The Company's primary goal in driving revenue
growth is to increase its audience by developing new programming and expanding
its base of radio station and cable system affiliates. In addition, the
Company's new radio programs are designated to increasingly target larger
markets which typically
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generate higher advertising rates. Management believes that when Great
American Country's attainment of a 5 million subscriber level is reached, of
which there is no assurance, the Company will be able to target a broader
group of advertisers and derive significantly higher advertising revenues
based on traditional spot advertising as opposed to direct response
advertising. Finally, the Company intends to promote the benefits of long-form
advertising to Fortune 500 companies and other major advertisers, with the
goal of attracting more advertising from such advertisers, enhancing the
quality of the Product Information Network's programming and increasing the
rates for its advertising time.
Acquire or Create Complementary Businesses and Value-Added Services. The
Company intends to expand its business by acquiring and/or creating businesses
complementary to its business. The Acquisition represents an example of this
strategy. The Company believes that numerous opportunities exist, both in the
development of new programming and the acquisition of complementary
businesses. A portion of the proceeds from the offering of the Old Notes will
provide the Company with additional resources for these purposes.
Increase Utilization of Satellite Transponder Capacity and Production
Support Facilities. The Company's satellite delivery and production support
facilities provide reliable and efficient playback, trafficking, uplinking and
satellite transmission services to the Company's radio and cable television
programming operations and to certain related companies. The Company has seven
channels on its digitally compressed satellite transponder, which could be
digitally compressed into additional channels if demand warranted. All seven
channels on this satellite transponder are leased. The Company also has one
analog channel on another satellite transponder which is leased. The Company
believes that its remaining compressible satellite transponder capacity
represents a valuable asset because of the potential demand from new cable
programmers for satellite transponder space, the opportunity to provide
profitable uplinking and other services along with the satellite transponder
space, and the availability of satellite transponder space in-house in the
event that the Company develops or acquires additional cable television
networks in the future.
RADIO PROGRAMMING
The Radio Programming Market
According to the FCC, there are approximately 10,500 commercial radio
stations in the United States. Radio broadcasting has consistently maintained
a steady share of total advertising revenues in the United States, in part
because it is among the most cost effective forms of advertising. Radio allows
the advertiser to target specific demographic groups in particular geographic
areas at a relatively low cost, making it available to small, local
advertisers as well as large, regional and national advertisers. This cost
advantage makes radio advertising spending less susceptible to downturns in
the economy. Moreover, more than one-half of all radio listening is done
outside of the home, closer to the point of purchase. With the exception of
1991, radio advertising expenditures have increased every year, growing at a
compound annual rate of 7.6% since 1961. According to industry sources, total
radio advertising revenues were $13.6 billion in 1997.
Radio stations compete for advertising revenues in their respective markets.
To be competitive, radio stations are continuously seeking the highest quality
programming at the lowest cost. Radio stations develop formats such as music,
news/talk or various types of entertainment programming, intended to appeal to
a target listening audience with demographic characteristics that will attract
national, regional and local commercial advertisers. However, limited
financial and creative resources, among other things, prevent most radio
stations from producing national quality programming. Accordingly, radio
stations rely on network programming from independent producers, or
"syndicators," such as the Company, to enhance or provide their radio
programming. National programming broadcast on an exclusive geographic basis
can help differentiate a station within its market, and thereby enable a
station to increase its audience and local advertising revenues. By placing a
program with radio stations throughout the United States, the syndicator
creates a "network" of stations that carry its programming. A radio network
typically provides programming to radio stations in exchange for a contractual
amount of commercial broadcast time, usually expressed as a number of minutes
per hour or per day, which is then resold to advertisers. The Company believes
that most commercial radio stations utilize radio network or
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syndicated third party programming. The commercial broadcast time for such
programs may vary from market to market within a specified time period,
depending upon the requirements of the particular radio station affiliate and
the terms of the contract with the affiliate.
The Telecommunications Act of 1996 (the "Telecom Act") significantly changed
the radio broadcast industry by repealing national limits on the number of
radio stations that may be owned by one entity and by relaxing the common
ownership rules in a single market. As a result, the Telecom Act has created a
wave of radio station acquisitions and increased consolidation in the
industry. This, in turn, has led many ownership groups to seek ways to cut
costs, better manage their operations and improve their efficiencies. Radio
networks, such as the Company's, may address these needs by providing high
quality programming to radio stations and reducing the radio stations' costs.
There are four basic types of programs from which a station may select: 24-
hour programming, long-form programming, short-form programming and services.
24-Hour Programming. This "round-the-clock" programming is aired live and
hosted by announcers. Examples of this type of programming include popular
formats such as country, adult contemporary and oldies.
Long-Form Programming. This type of programming is less than 24 hours in
duration and is designed to fill, on a daily or weekly daypart basis, a one-to
six-hour time period of the day, such as mornings-6 a.m. to 10 a.m., middays-
10 a.m. to 3 p.m., afternoons-3 p.m. to 7 p.m., evenings-7 p.m. to midnight,
or overnights-midnight to 6 a.m. Examples of this type of programming include
talk shows hosted by nationally known personalities and popular countdown
shows hosted by nationally known disc jockeys.
Short-Form Programming. This type of programming generally is less than 5
minutes in duration. Examples of this type of programming include news and
commentary radio shows.
Services. In addition, radio networks provide radio stations services such
as weather reports and comedy services designed to assist on air talent in
preparation for these shows. An example includes comedy services, consisting
of sound bites, song parodies and fake commercials.
The Radio Network--Jones Radio
The Company, through its radio programming division, Jones Radio, provides
for the programming needs of radio stations by supplying them with programs
and services that individual stations may not be able to produce on their own.
The Company offers radio stations a wide selection of regularly scheduled,
syndicated programming as well as 24-hour continuous play formats. Because
these programs and formats are produced by the Company, the stations have
minimal production costs. Typically, each program is offered for broadcast by
the Company exclusively to one station in its geographic market, which assists
the station in competing for audience share in its local marketplace.
The Company enters into affiliation agreements with radio stations. Pursuant
to these affiliation agreements, the Company typically provides programming to
its radio affiliates in exchange for commercial airtime inventory which it
sells to national advertisers ("barter"). With respect to the 24-hour formats,
the Company may also receive a fee from the affiliated stations for the right
to broadcast the formats. The Company's affiliation agreements for 24-hour
formats are generally three years in length; long-form and short-form formats
and service agreements are generally one year.
The Company has affiliation agreements with 2,238 radio stations throughout
the United States and Canada, with approximately 600 of these stations
receiving more than one program. The Company's programming is sold on an
exclusive basis in the radio station's city of license. However, the Company
is able to place different
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programs within the same market. There are currently over 100 markets in which
the Company has a program on three or more radio stations in the market. The
Company controls the production of its programming, allowing it to tailor its
programs to respond to current and changing listening preferences. This high-
quality, distinctive programming is designed to enable radio stations to
improve and differentiate their on-air presentations and increase their
ratings, thereby increasing advertising revenues for both the radio stations
and the Company. The Company is able to deliver to national advertisers
frequency, reach and the primary demographic the national advertisers target,
the 25 to 54 year old adult. The Company currently sells advertising to over
100 national advertisers, including Chrysler Corp., Encore Media, General
Motors Corp., Ocean Spray Inc., Procter & Gamble and Radio Shack.
The Company sells its airtime to advertisers either as "up-front" or
"scatter" purchases. Up-front purchases are early advertiser commitments for
national broadcast time typically lasting 26 to 52 weeks. Scatter purchases
are contracts for a specific period of time that are typically sold at or
above up- front market prices. Advertising prices vary significantly based on
prevailing market conditions. The Company's strategy for growth in advertising
revenues is to increase its audience size for its programming and to expand
the programming it offers to radio stations. See "Business--Overview--
Strategy."
The Company delivers twelve 24-hour music programs that cover the types of
major music formats used by the majority of radio stations across the United
States. The Company has radio station affiliates in all 50 states and in all
of the top 50 markets. This programming is designed to provide all the
programming for the Company's affiliated radio stations, replacing their in-
house air talent and significantly reducing their production costs. In order
to present a localized "sound," the Company's air talents record unique liners
and positioning statements for each affiliate which are cued through the
satellite for broadcast at the local station. In addition, the programming
provides local breaks for the radio station to insert locally sold
commercials, news, weather or traffic. The Company is able to attract and
retain programming personnel to provide the radio stations with a high level
of experience, consistency and quality not available in the majority of their
local markets. The Company has also invested in equipment with redundancy
(back-up capability) that its radio station affiliates can rely on without
going off the air due to network equipment problems. The radio stations
provide the Company with a set amount of their airtime, and in some cases,
fees, in exchange for the programming.
The Company also produces syndicated shows consisting of long-form programs,
short-form programs, specials and services. The Company's long-form programs
include weekly countdown shows hosted by nationally known talent such as Crook
& Chase and Charlie Tuna, music artist interview shows featuring interviews
with popular music talents of today and yesterday. The short-form programs are
60 to 90 second entertainment news reports that are interactive with the
affiliated radio stations, features on recreation and oldies music and a
consumer feature hosted by the national consumer advocate, David Horowitz.
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The following table summarizes the Company's radio programming:
<TABLE>
<CAPTION>
YEAR
LAUNCHED OR
PROGRAM NAME PROGRAM DESCRIPTION ACQUIRED
------------ ------------------- -----------
<C> <S> <C>
24-Hour
Adult Hit Radio(TM).......................... Hot adult contemporary 1989
Soft Hits(TM)................................ Soft adult contemporary 1989
US Country(TM)............................... Mainstream country 1989
Good-Time Oldies(TM)......................... 60's based oldies 1990
CD Country(TM)............................... Hot country, personality 1993
driven
NAC (New Adult Contemporary)(TM)............. Smooth jazz 1994
Z-Spanish(TM)................................ Hispanic contemporary 1994
hit radio
Rock Alternative(TM)......................... Modern adult 1996
contemporary
The New Music of Your Life(TM)............... Adult standards 1996
Classical Collection(TM)..................... Well-known and best- 1997
loved masterpieces
Classic Hit Country(TM)...................... Country artists of the 1997
60's & 70's
Rock Classics(TM)............................ Mainstream classic rock 1997
Long-Form
Crook & Chase Centerstage Specials(TM)....... Special shows programmed 1996
for holidays
The Crook & Chase Country(TM) CountDown(TM).. Country's amiable 1996
ambassadors features
today's top country
songs
AOR Specials................................. Shows programmed for 1998*
holidays
Country's Most Wanted........................ In-studio appearances 1998*
and artist interviews
HardDrive(TM)................................ A Billboard magazine's 1998*
syndicated program of
the year nominee,
featuring alternative
rock artists and music
weekly
The Hitlist with Elvis Duran & Elliot........ A top 40 countdown 1998*
featuring NY's Z100
morning drive team
The McLaughlin Radio Hour+................... Hosted by John 1998*
McLaughlin
Personal Notes............................... Showcases the best new 1998*
contemporary jazz music
and artists
Up Close..................................... Weekly music and 1998*
interviews featuring
album-oriented rock
artists
Your Weekend with Jim Brickman............... Lifestyle information 1998*
and celebrity guests for
adult contemporary
stations
Weekly Top 30................................ Country countdown hosted 1998*
by well-known
personality Charlie Tuna
Short-Form
The Jimmy Carter Entertainment Report(TM).... Interactive 1996
entertainment report
Outdoor Life Radio........................... Features award-winning 1997
outdoor writer Scott
Linden
Fight Back! With David Horowitz+............. Popular consumer 1998*
advocate
News from the 21st Century................... A look at the impact of 1998*
new technology on
everyday lives
Oldies Calendar With CharlieTuna............. A daily calendar with 1998*
information culled from
Charlie's years of
interviews with artists
Services
American Comedy Network (ACN)(TM)............ Premier comedy service 1998*
for morning shows
ACN/PDQ...................................... Satellite version of CAN 1998*
Fax Off!..................................... Show prep for rock 1998*
stations
</TABLE>
- --------
* MediaAmerica programming.
+ License to syndicate.
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The Company's radio programming includes twelve 24-hour formats and 18
syndicated programs that are broadcast by approximately 2,300 radio station
affiliates throughout the United States to over 60 million weekly listeners.
The Company's radio network has over 90 on-air personalities, the majority of
whom have extensive top 25 market experience. In addition, the Company
believes that its programming management is among the best in the industry,
consisting of format experts with over 285 years of combined radio experience.
These program directors access music research and consultants to assist in
creating high-quality programming. To supplement its in-house programming
expertise, from time to time the Company enters into agreements to distribute
distinctive, high-quality programming developed and produced by third party
programmers. These programmers have expertise in developing programming for
specific targeted audiences (e.g., ethnic, mature) and typically employ
recognized talent. An example of such a relationship is The New Music Of Your
Life program hosted by Gary Owens, Wink Martindale, Pat Boone and other well-
known radio personalities.
Agreements with third party programmers usually provide that the programmer
creates and develops the radio program, while the Company markets the program
to radio station affiliates, manages the relationship with the radio station
affiliates, manages the sale of national advertising, and provides technical
support and other services. The term of these license agreements is usually
three to five years. Programming produced under these agreements generated
approximately 10% of the Company's revenues in 1997.
The Company markets its radio programming directly to radio stations through
its 13-person affiliate sales group. These affiliate salespeople develop close
professional relationships with the radio station affiliates in order to
position the Company to serve the station's programming needs. The affiliate
sales group utilizes industry market research and databases to identify
prospective radio station affiliates. The in-house marketing team assists in
the sales effort with marketing campaigns, direct mail, trade advertising and
sales materials. In addition, the Company's presence at industry conventions
and trade shows is designed to increase awareness of its radio programming.
The Company is constantly evaluating new programming possibilities, both in-
house and with third parties. These possibilities include the national
syndication of existing programming and the development of new programming for
syndication. When programming or talent is currently being broadcast on a
station owned by a large radio group, it is usually advantageous to partner
with the owner of the station to maintain or increase carriage on the group's
radio stations.
In July 1998, the Company launched a nighttime long-form country show called
"Nashville Nights" with CapStar, one of the top ten national radio groups,
which is broadcast on its premiere country radio station in Nashville. The
Company is responsible for all sales and marketing efforts and is a 50% owner
in the venture that produces the program.
The Company and MediaAmerica are in joint discussions with a major cable
television network to develop a group of news and entertainment radio programs
utilizing the network's talent and news gathering resources. If these
discussions are successful, the resulting programs would be expected to launch
in 1999.
RADIO ADVERTISING REPRESENTATION SERVICES
The Radio Advertising Market
The diversity in formats and programs has intensified competition among
stations for local advertising revenues. A radio station has two principal
methods of effectively competing for these revenues. First, it can
differentiate itself in its local market by selecting and successfully
executing a format targeted at a particular audience, thus enabling
advertisers to place their commercial messages on stations aimed at audiences
with certain demographic characteristics. A station can also broadcast special
programming, syndicated shows, sporting events or national news product not
available to its competitors within its format. National programming broadcast
on an exclusive geographic basis can help differentiate a station within its
market and thereby enable a station to increase its audience and local
advertising revenues.
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Radio advertising is generally sold on the basis of a radio program's AQH.
AQH is typically defined as the average number of persons listening to a
particular station for at least five minutes in a 15-minute period within a
specific daypart. The AQH can range from zero for a small-market radio station
to greater than 50,000 for a large-market radio station, with the majority of
large-market stations in the range of 10,000-20,000. Radio advertising time
can be purchased on a local, national or network basis. Local purchases allow
an advertiser to target a very specific geographic area; however, this process
is time-consuming and is not cost efficient. National spot buys can be
targeted to specific markets, but again, tend to be less cost efficient for
the advertiser. Advertising purchased from a radio network is one method by
which an advertiser targets its commercial messages to a specific demographic
audience, thereby achieving national coverage on a cost efficient basis. In
order to increase advertising rates, it is necessary to increase the size (or
rating) of the audience the program provider delivers to national advertisers.
MEDIAAMERICA
Most radio stations carry some form of syndicated programming during part of
the day or week. This demand for syndicated programming has resulted in a
large number of syndicated program producers, some of which on a standalone
basis are not able to accumulate sufficient audience or national coverage to
attract advertising revenues from national advertisers. MediaAmerica was
created in 1987 to service these independent producers. By consolidating the
advertising sales revenues from multiple syndicators in addition to
MediaAmerica's owned programming, MediaAmerica has the economies of scale to
staff a national sales organization beyond what the individual producers could
afford on their own. Additionally, MediaAmerica has the ability to aggregate
the commercial broadcast time of these syndicators and present the resulting
packages for sale to national advertisers such as General Motors Corp.,
Procter & Gamble, Warner-Lambert Company, and J.C. Penney Company, Inc. This
ability to aggregate time benefits the syndicators by giving them access via a
professional sales organization to advertisers which are normally not
interested in purchasing commercial broadcast time which does not deliver a
specific threshold level of audience. Advertisers benefit through the ease of
buying from one professional, larger source and the confidence that comes from
an established multi-faceted supplier versus an independent producer. The
producer pays the advertising sales representative firm a commission for the
sale of the commercial broadcast time and related services such as inventory
management, commercial scheduling, proof-of-performance distribution and
collection, and financial services.
As of June 30, 1998, MediaAmerica represented approximately 70 programs or
services produced by approximately 30 programmers. Such programs include,
among others, the Weather Channel Radio Network, Newsweek on Air and Nascar
Motor Racing Network. In general, the representation agreements are up to five
years in duration and provide for varying commissions as a percentage of net
sales (the revenues from the sale of advertising time after deduction of the
standard advertising agency fee). MediaAmerica also provides sales and
marketing to radio station affiliates for certain programs. These additional
services increase the amount of the commission MediaAmerica receives. These
agreements typically give MediaAmerica exclusive national advertising sales
rights but are non-exclusive with respect to the programming MediaAmerica can
represent.
MediaAmerica has been in existence for over 11 years, and throughout that
period has developed relationships with many major advertising agencies and
clients. MediaAmerica's reputation enables it to sell its clients' commercial
broadcast time at favorable rates and achieve high sellout levels.
MediaAmerica's eleven advertising account executives and sales managers are
located in the five major advertising buying markets in the United States (New
York, Los Angeles, Chicago, Detroit and Dallas). These account executives
market the commercial broadcast time of MediaAmerica's producers and owned
programs via personal selling to national advertisers and their advertising
agencies. The sales team, including the principals, has an average of 18 years
experience in the radio advertising sales and sales management arena.
In order to serve its many producers and advertising clients, MediaAmerica
has developed a state of the art, proprietary software system that handles the
sales proposal, commercial inventory management and order processing for its
advertising sales. In addition, the Company's research department continuously
analyzes a
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variety of data to provide its salespeople with accurate estimates of
listening audiences plus creative means with which to demonstrate the
particular advantages of the programs MediaAmerica sells, as well as network
radio's advantages over other media. MediaAmerica utilizes audience listening
data from Arbitron, an independent rating service, to develop its audience and
demographic reports for all its programs.
OTHER AUDIO SERVICES
The Company provides music and information audio programming designed to
complement the video offerings of cable television system operators. The
Company provides these services directly and through Superaudio, a joint
venture which is owned 50% by an indirect subsidiary of the Company and 50% by
a third party, that also programs and sells premium music programming directly
to cable television operators and other video distributors. Superaudio offers
nine formats of 24-hour programming that consist of six analog stereo music
formats and three analog information and entertainment formats. Superaudio's
term as a joint venture will expire in 2000 unless extended. Superaudio's
programming is distributed to cable systems serving approximately 4 million
households.
TELEVISION PROGRAMMING--GREAT AMERICAN COUNTRY
The Cable Television Market
As of 1997, cable television was in approximately 70% of all homes in the
United States, and approximately 82% of U.S. households with an annual income
of at least $60,000. Industry sources indicate that in 1997 Americans spent
$27.9 billion subscribing to cable services. Many advertisers consider cable
television a cost-effective medium to reach audiences using picture, sound and
motion at considerably cheaper rates than broadcast television. Total U.S.
cable advertising revenues were $7.9 billion in 1997, a 17% increase from
1996. The average cable household devoted three and one-half hours a day
watching advertising-supported basic cable television in 1997.
The Country Music Industry
According to industry sources, country music is one of the most popular
music formats in the United States. Every week, approximately 44 million
Americans listen to country music radio. With 2,528 radio stations programming
country music, representing approximately 24% of all commercial radio
stations, country music has become the dominant radio format in the United
States. Country music radio reaches 7 million more listeners per week than
adult contemporary, the next most popular format.
Great American Country
Great American Country is a 24-hour country music video network featuring a
mix of current top country hits and past country hits. Great American Country
was distributed to approximately 4.6 million subscribers at August 15, 1998.
The Company believes that Great American Country offers a programming mix with
attractive economic carriage terms for cable system operators, including local
advertising spots. Great American Country has six minutes per hour of national
avails and four minutes per hour of local avails (the times available for
running advertising). Great American Country programs an average of 14 videos
per hour. Since its debut, Great American Country has concentrated on refining
its programming and on-air presentation in order to broaden its carriage.
Great American Country acquires its music videos at no cost from record
companies, which use this medium to promote their performing artists. The
Company produces or acquires the other programming on Great American Country.
Great American Country targets the largest and most influential and affluent
market segment of the country music audience--the 25-54 age group. Management
believes that Great American Country has significantly benefited from the
Company's experience in the country music radio programming business and is
pursuing additional cross-promotional opportunities.
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In order to drive subscriber growth, Great American Country generally offers
affiliates a one-time cash launch incentive and waives license fees for a
period which varies based on the level of subscriber commitment. The Company
is enhancing its near-term operating cash flow through new agreements with two
significant MSOs to issue them shares of the Company's Class A Common Stock in
return for which Great American Country will be paid license fees from the
date of launch. Great American Country has affiliate agreements with five of
the ten largest MSOs, including Adelphia, Comcast, Jones Intercable, TCI and
Time Warner, as well as the two cable programming cooperatives, Telesynergy,
Inc. and the National Cable Television Cooperative, Inc. Management believes
that when Great American Country's attainment of a 5 million subscriber level
is reached, of which there is no assurance, the Company will be able to target
a broader group of advertisers and derive significantly higher advertising
revenues based on traditional spot advertising as opposed to relying on direct
response advertising. As a result, the Company believes that as its audience
increases, it will be able to obtain a more than proportional increase in
advertising revenues. In addition, the Company believes that by offering
carriage incentive programs and competitive license fee rates and local
advertising avails, it will attract additional subscribers from existing and
new MSO affiliates that are increasingly looking to decrease costs and
generate more advertising revenues.
Great American Country derives its revenues from subscriber fees and
national advertising. Typically the average length of Great American Country's
affiliate agreements is ten years. Monthly license fees for Great American
Country are approximately $.05 per subscriber, which rate the Company believes
to be attractive and competitive. Great American Country's affiliate
agreements typically provide for annual escalators of $.005 per subscriber per
year. Great American Country began selling national advertising in the last
quarter of 1997 and currently generates approximately $155,000 per month in
advertising revenues. Great American Country's advertising sales are impacted
by a variety of factors, including distribution, ratings, advertising rates,
sellout ratios and the number of avails allocated for national advertising.
Management believes that as the network's distribution grows, advertising
rates will outpace the rate of distribution growth, and the network will begin
to attract traditional advertising clients and reduce the amount of avails for
direct response advertisements, which are typically at a much lower rate.
The Company is evaluating a variety of additional revenue opportunities for
the future. These include web site advertising, merchandise sales, catalog
sales and syndicated programming in conjunction with Jones Radio.
TELEVISION PROGRAMMING--THE PRODUCT INFORMATION NETWORK
Long-Form Advertising Market
The Company believes that, during recent years, advertisers evaluating the
benefits of broadcast and cable television advertising have recognized the
effectiveness and reasonable cost of long-form, informational programming,
commonly known as infomercials. An infomercial is an advertisement where
airtime time is paid for by the advertiser on the basis of the time of day the
infomercial is aired and the number of homes reached. Infomercials are usually
one half-hour in length and are often produced in an entertainment format with
high production quality. Regardless of the presentation format, the viewers
are provided information that can be used to make informed purchasing
decisions from their homes.
Increasingly, advertisers are recognizing the benefits of infomercials as an
effective marketing tool. The Company believes that infomercials provide
advertisers with a cost-effective medium through which to deliver sales
messages, product introductions or demonstrations to an interested target
audience. Advertisers are recognizing that infomercials can increase a
company's or product's brand awareness while educating potential new
customers. The viewer or potential consumer is provided information that can
be used to make more informed purchasing decisions. Unlike most traditional
television advertising, the direct response nature of many infomercials
provides advertisers with the ability to sell products or services over the
phone or to encourage the viewer to take other action, such as visiting a web
site for more information or visiting a retail outlet.
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The Company believes that the infomercial industry has grown rapidly during
the past several years. Historically, infomercials occupied time slots that
were less profitable for broadcasters. Increasingly, infomercials are being
placed in more expensive and attractive time periods such as daytime, early
fringe and prime time, and are becoming a more widely accepted form of
advertising.
The production quality of infomercial programming by major advertisers has
also increased the credibility of the infomercial industry. The Company
believes that as the benefits of infomercial programming become more widely
understood, the number of advertisers and the volume of infomercial
programming will continue to grow. In terms of demand for airtime, major
corporate advertisers who use long-form programming for image building rather
than direct selling messages may ultimately surpass infomercial programmers
who rely on immediate sales to viewers via telephone response. Currently,
major advertisers spend only a relatively small part of their overall
advertising budget on infomercials. The Company believes that such advertising
expenditures will continue to increase. According to industry sources, total
infomercial advertising expenditures totaled $787 million, and infomercial
sales totaled $1.4 billion in 1996, compared to $806 million and $1.1 billion,
respectively, in 1995.
The Product Information Network
The Product Information Network is a satellite-delivered, long-form
advertising programming service owned by the PIN Venture, a joint venture
among the Company, Cox and Adelphia. The audience of the programming is
primarily cable subscribers of the Product Information Network's affiliated
systems. The Product Information Network is provided to cable system operators
on its own dedicated channel 24 hours a day, seven days a week.
The Company developed and tested the concept of a 24-hour, long-form
advertising network in 1993. The Company launched the Product Information
Network in October 1993 on cable television systems owned and/or managed by
Jones Intercable. To broaden the Product Information Network's distribution,
the Company formed a partnership with Cox to own and operate the Product
Information Network. Adelphia became a partner approximately one year later.
Both Cox and Adelphia distribute the Product Information Network on a number
of their cable television systems. See "Risk Factors--Risks Associated with
the Product Information Network."
As of June 30, 1998, the Product Information Network was distributed on a
full or part-time basis on cable television systems representing approximately
15.5 million, or approximately 22.6%, of the nation's cable subscribers on a
full- or part-time basis, as well as to over 3.1 million broadcast households.
The Product Information Network is distributed to 9.7 million full-time
equivalent subscribers through 278 cable systems and broadcast affiliates. The
MSOs that carry the network on a portion of their cable systems include nine
of the ten largest MSOs, including Adelphia, Cablevision, Comcast, Cox, Jones
Intercable, Marcus Cable, Media One Group, TCI and Time Warner. Approximately
2.6 of the 3.1 million broadcast households are through KSTV in the Los
Angeles market. The majority of the Product Information Network's present
full-time subscriber base is provided by Cox, Adelphia and Jones Intercable.
The standard Product Information Network affiliation agreement generally
requires a one-year commitment of carriage. In the case of cable systems that
are owned or operated by Cox, Adelphia or Jones Intercable, the affiliation
agreements are for terms of five years, ten years, and ten years,
respectively, and expire on January 31, 2000, October 1, 2005 and February 1,
2005, respectively. See "Risk Factors--Risks Associated with Distribution of
Television Programming."
The Product Information Network compensates cable operators for carriage of
the Product Information Network through a revenue sharing program. Such
compensation, which is generally in the form of an annual rebate per
subscriber, averages approximately 70% of the Product Information Network's
adjusted net advertising revenues (which are revenues less agency commissions
and bad debt expenses) attributable to the time that the system carries the
network's programming. For 1997, the Product Information Network paid its
full-time (24 hours a day) affiliates an average of approximately $1.40 per
subscriber per.year.
The Product Information Network's programming is produced and provided by
its advertisers at no cost to the network. The majority of current programming
consists of traditional infomercials from major infomercial
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producers, including Guthy-Renker Corporation, National Media Corporation and
American Telecast. The strategy of the Product Information Network is to
continue to diversify and strengthen its advertising base by further
developing relationships with representatives of major corporate advertisers,
which have recently included Phillips-Magnavox, Simmons, Hanes, Sunbeam,
Sharper Image and Time-Life. The Product Information Network, through its new
focus on major companies, is in the process of developing direct relationships
with high profile companies in order to reduce its dependence on traditional
infomercial programming for a significant portion of its advertising revenues.
See "Risk Factors--Dependence on Advertising Relationships."
The Product Information Network plans to attract major corporate advertisers
involved in the travel business through its new agreement with Robin Leach,
who will provide the narration and background for infomercials which feature
travel themes. The Product Information Network is marketing this as a two-hour
block and is negotiating with a number of travel-oriented companies and others
as part of its efforts to obtain higher rates for this type of long-form
infomercial programming. If the Product Information Network is successful in
these efforts, it intends to explore similar types of infomercial programming
by the use of "star" talent as the connection between the infomercial theme
and the infomercial advertising.
The Product Information Network is also considering a variety of other means
to broaden the distribution of its programming and to increase the rates
charged for its advertising time. These include the possibility of an
additional satellite "feed," entering into sales representation agreements
with other cable networks to gain broader distribution and bringing in
additional MSOs as equity partners in the Product Information Network, thereby
gaining access to their subscribers.
SATELLITE DELIVERY AND PRODUCTION SUPPORT SERVICES
The Company transmits its radio and cable television programming directly to
radio stations, cable system operators and other video distributors. The
programming is distributed via satellite transponders leased from third
parties and from affiliates. The Company provides playback services,
trafficking and ground-to-satellite transmission of its programming services
from its uplink facility in Englewood, Colorado.
The Company owns one full satellite transponder on each of two strategically
positioned GE Americom satellites, Satcom C-3 and Satcom C-4, which deliver a
variety of popular cable television programming. The Company utilizes advanced
technology in providing uplink, playback and trafficking services. In January
1997, the Company installed General Instrument Corporation's DigiCipher II
(MPEG-2) compression equipment, which increased the compression of its Satcom
C-3 satellite transponder from 4:1 compression to 6:1 compression. The Company
has recently installed additional equipment which increased the capacity to
seven channels. The Company could digitally compress the C-3 transponder to
add additional channels at minimal incremental cost. Any excess capacity
created by this new technology could be used for the distribution of the
Company's programming, related party programming or third party programming.
Four of the digital channels available on the Satcom C-3 satellite
transponder are being used by each of Great American Country, the Product
Information Network and two related parties. The term of each lease for such
channels is generally for the remaining life of the satellite except that one
of the related parties leased a channel on Satcom C-3 for a seven-year term
with a one-time option, exercisable by the related party on six months'
advance notice, to terminate the lease on July 1, 2001. In August 1998, the
Company entered into a lease agreement with an unrelated party to lease three
digital channels on the Satcom C-3 transponder for the period August 15, 1998
through August 31, 1999. The lessee will have the right to renew for
successive monthly periods. The aggregate monthly charge for the three
channels (included related services provided by the Company) is $138,000. The
Company has recently leased the C-4 transponder to an unrelated party. This
lease provides for monthly lease payments averaging $160,000, with higher
lease payments in early years and lower lease payments in the later years. The
lease term commenced in July 1998 and will terminate on December 31, 2002,
with an option, exercisable by the lessee, to extend the lease through October
16, 2004. If the lessee does not exercise the option to extend the lease, it
must make a one-time penalty payment to the Company of $750,000. The Company's
satellite uplinking and distribution costs are generally fixed and, as a
result, additional
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radio or cable television programming can be distributed by the Company at
minimal cost. The Company continues to market its additional compressible
capacity on its Satcom C-3 transponder and related services. The Company
expects that the satellite transponders will be effective to provide
distribution for radio and television programming until 2004, at which time it
will be required to locate replacements to use for its programming.
COMPETITION
Radio Network
The Company's radio network competes for national advertising revenues and
radio station affiliates with major network radio distribution companies in
the United States, as well as with a large number of smaller independent
producers and distributors. The dominant competitors in the industry are
affiliated with major station owners, have recognized brand names and have
large networks which include affiliates to which such competitors pay
compensation to broadcast the network's commercials. Moreover, beginning in
early 1997 many of the Company's larger competitors began to consolidate,
thereby intensifying competition.
In September 1997, Chancellor Media, an owner of a large group of radio
stations, announced that it was forming a national radio network, AMFM, that
will utilize Chancellor Media's existing talent and, in conjunction with
CapStar Broadcasting Partners, a related party, serve over 400 radio stations.
In January 1998, AMFM began taking one minute per hour of advertising time
from both the Chancellor and CapStar radio stations and reselling the
commercial time to national advertisers who typically buy network radio. This
arrangement has diluted the pool of advertising available to other radio
networks, including the Company's radio network. Additionally, AMFM's radio
station line-up is concentrated in larger markets than the typical radio
network, including those of the Company, thereby increasing its attractiveness
to national advertisers.
The Company's largest direct competitors include ABC Radio Networks,
Westwood One/CBS Radio Networks, Jacor Communications and AMFM. The principal
competitive factors in the radio industry are the quality and creativity of
programming and the ability to provide advertisers with a cost-effective
method of delivering commercial advertisements. There can be no assurance that
the Company will be able to compete successfully for radio advertising
revenues.
Radio networks also face competition from improving technologies available
to local radio stations that may enable them to pre-record their local
announcers and automate their operations, thereby allowing them to reduce
costs and operate more efficiently. Another technological advance, DARS,
permits national radio stations to broadcast digital quality radio programming
nationwide to homes, automobiles and other locations via satellite. In
February 1997, the FCC auctioned two licenses for DARS. The Company cannot
predict what effect the potential future development of digital automation or
DARS will have on the radio industry or the Company.
Radio Advertising Representation Services
The radio advertising representation business is highly competitive, both in
terms of competition to gain program provider clients and to sell commercial
inventory to national advertisers. The Company's radio advertising
representation firm competes with the major network radio distribution
companies, which operate divisions that both sell their own company's airtime
inventory and also contract with third party radio programmers to sell their
national commercial inventory. Over the last two years, many independent
program providers have been acquired by the major network distribution
companies. These companies have large amounts of commercial inventory to sell
and have significant resources.
The Company also competes on behalf of its clients for advertising dollars
with other media such as broadcast and cable television, print, outdoor, the
Internet and other media. The primary factors determining success in the radio
advertising representation service industry are strong relationships with
advertising agencies and national advertisers, acquisition and maintenance of
representation contracts from producers with high quality products and
experienced advertising sales personnel.
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Television Networks
The Company's television networks compete for distribution on cable systems,
viewers and advertising revenues with hundreds of cable and broadcast
television networks supplying a variety of entertainment and infomercial
programming.
Great American Country's principal direct competitor is Country Music
Television ("CMT"), an advertiser-supported basic cable network that delivers
country music videos 24 hours a day. The Great American Country network also
competes with The Nashville Network ("TNN"), which plays country music videos
during a portion of the broadcast week. Most of TNN's music programming is
focused on theater-style music concert programming such as the Grand Ole
Opry.CBS, Inc., which owns the CBS broadcasting network, owns CMT and TNN.
The Product Information Network competes directly with at least three other
infomercial networks: Infomall TV, Access Television Network and GRTV, certain
of which have greater distribution than the Product Information Network.
Infomall TV is an infomercial network carried by its affiliated broadcast
television stations. Access Television Network delivers infomercial
programming for use primarily during "remnant time." Remnant time is time that
is made available by "rolling-over" or replacing infomercials contained in
other network programming or time that is not used by the cable operator such
as blacked out programming and unused leased access time. GRTV is an
infomercial network that was recently launched. Guthy-Renker, GRTV's parent
company, is a major supplier of infomercial programming to the Product
Information Network. The Company believes that new infomercial networks are
currently being planned or formed that will compete directly with the Product
Information Network. The Product Information Network also competes with at
least 30 cable television networks, many of which have a substantial number of
subscribers, that air infomercial programming.
The Company expects to encounter additional competition for viewers as
technological advances, such as the deployment of digital compression
technology, the deployment of fiber optic cable and the "multiplexing" of
cable services, allow cable systems to greatly expand their channel capacity.
As a result, their ability to add new networks will be enhanced. In addition,
there can be no assurance that the infomercial concept will continue to be
acceptable to advertisers and consumers or that it will be able to compete
against other forms of advertising.
Satellite Delivery and Production Support Services
The Company competes in the delivery of domestic satellite services with
satellite owners, satellite service providers, microwave carriers and full
service teleports. Some of the Company's principal competitors, many of which
have substantially greater financial and other resources, include Vyvx
Teleport, MicroNet Inc., ID/B Keystone, Rainbow Network Communications,
Washington International Teleport, Inc. and Brewster Teleport. The Company
believes that transmission quality, reliability, price and the location of
uplink facilities are the key competitive factors in this market.
Other Competitive Factors
As there are generally few legal barriers or proprietary rights to prevent
entry into the Company's markets, the Company could in the future face
competition from new competitors offering services similar to that of the
Company. Many of the Company's competitors have greater resources than the
Company, and there can be no assurance that the Company will be able to
compete successfully in the future. If the Company is unable to compete
successfully for distribution of its networks and advertising revenues, the
Company's operating results would be adversely affected. See "Risk Factors--
Competition."
GOVERNMENT REGULATION
Although the Company's radio and television networks are not generally
directly regulated by the FCC, the radio stations and cable television systems
and other video distributors to which the Company sells its programming are
regulated. As a result, the federal laws and FCC regulations that affect these
entities indirectly affect the Company.
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Among other things, the FCC adopts and implements regulations and policies
that directly or indirectly affect the ownership, operation and sale of radio
and television stations, and has the power to impose penalties for violations
of its rules or federal statutes. Such regulation may adversely affect the
Company's business. The Telecom Act significantly changed the radio broadcast
industry by repealing national limits on the number of radio stations that may
be owned by one entity and by relaxing the common ownership rules in a single
market. These measures have led to significant radio industry consolidation.
The Telecom Act has resulted in a greater number of radio group owners seeking
to reduce costs. There can be no assurance that future effects of such
legislation will not negatively impact the Company.
The cable television industry is subject to extensive federal, state and
local regulation. Regulation can take the form of price controls, programming
carriage requirements and programming content restrictions. Such regulation
could affect the availability of time on local cable television systems for
sale by the Company as well as the price at which such time is available. Both
Great American Country and the Product Information Network are subject to the
FCC's new rules requiring closed captions for the hearing impaired on all
programming beginning in the first quarter of 2000. The Company expects that
compliance with these new rules will not have an adverse effect on the
Company's financial condition. There can be no assurance that material adverse
changes in regulations affecting the cable television industry, in general, or
the Company, in particular, will not occur in the future.
The Company's satellite delivery and production support services are
directly regulated by the FCC. The Company holds FCC microwave and earth
station uplink licenses, which it utilizes to provide delivery and support
services. Because these licenses relate primarily to the technical operation
of its microwave and uplink facilities, which are used for internal purposes
and program delivery, there are only limited regulatory burdens associated
with maintaining these licenses in good standing. See "Risk Factors--
Government Regulation."
FACILITIES
The Company's principal executive offices are located in Englewood,
Colorado. The Company subleases office space from affiliates of Jones
International as well as office space and studio space from third parties. See
"Certain Relationships and Related Transactions." In addition, the Company
owns 8.4 acres of land in Englewood, Colorado. The Company believes its office
space, studio space and Earth Segment's satellite uplink facility are adequate
to meet its current needs. The following table lists the location and square
footage of the Company's facilities and indicates whether they are owned or
leased:
<TABLE>
<CAPTION>
ENTITY UTILIZING
FACILITY LOCATIONS SQUARE FOOTAGE OWNED/LEASED
---------------- -------------------- -------------- ------------
<C> <S> <C> <C>
Earth Segment Englewood, Colorado 13,194 Owned
Company Englewood, Colorado 556 Leased
Company Englewood, Colorado 658 Leased
Jones Radio Englewood, Colorado 9,049 Leased
Jones Radio/Superaudio Englewood, Colorado 2,794 Leased
Jones Radio/Superaudio Englewood, Colorado 2,551 Leased
Jones Radio/Superaudio Englewood, Colorado 3,102 Leased
Great American Country Englewood, Colorado 500 Leased
PIN Venture Englewood, Colorado 2,806 Leased
MediaAmerica New York, New York 18,868 Leased
MediaAmerica Chicago, Illinois 250 Leased
MediaAmerica Milford, Connecticut 1,966 Leased
MediaAmerica Dallas, Texas 150 Leased
MediaAmerica Detroit, Michigan 125 Leased
</TABLE>
EMPLOYEES
The Company refers to its employees as associates. As of June 30, 1998, the
Company had 114 full-time and 68 part-time associates, and MediaAmerica had 66
full-time and 7 part-time associates. In addition, the
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Company maintains relationships with independent writers, program hosts,
technical personnel and producers. None of the associates are covered by a
collective bargaining agreement, and the Company believes its employee
relations to be good.
LEGAL PROCEEDINGS
From time to time, the Company is involved in routine legal proceedings
incident to the ordinary course of its business. The Company believes that the
outcome of all such routine legal proceedings in the aggregate will not have a
material adverse effect on its financial condition or results of operations.
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THE ACQUISITION AND RELATED TRANSACTIONS
MEDIAAMERICA
MediaAmerica was founded in 1987 by Messrs. Ron Hartenbaum and Gary
Schonfeld (the "Principals"), both of whom had prior executive experience with
a major radio network before they organized MediaAmerica. The Company,
MediaAmerica and the Principals entered into an agreement dated June 2, 1998
(the "Exchange Agreement") which provided that the Company acquire
substantially all of the assets and assume certain of the obligations of
MediaAmerica for an aggregate consideration of $32.7 million, payable $26.7
million in cash and $6.0 million in shares of Class A Common Stock of the
Company (equal to 400,000 shares), subject to a "working capital adjustment"
which, in general, is the sum of current assets less the sum of current
liabilities at closing. A positive working capital adjustment is paid in
additional shares of Class A Common Stock of the Company at an agreed value of
$15 per share. At closing on July 10, 1998, the Company issued approximately
142,000 shares of Class A Common Stock pursuant to an estimated working
capital adjustment. The final working capital adjustment is not expected to
differ materially from the estimate. In addition, MediaAmerica can earn up to
$5 million in shares of Class A Common Stock, with the excess, if any, to be
paid in cash, pursuant to the Earnout.
The assets of MediaAmerica consist principally of advertising representation
agreements with its various clients and radio programming and related
agreements pursuant to which it receives advertising time (and in some cases,
fees) for providing radio programming or services to radio stations. The radio
programming is either "long" or "short" form programs or services and consists
of those identified in the table under "Business--Jones Radio--The Radio
Network." These programs are licensed to 990 radio station affiliates
throughout the U.S., of which 139 are in major markets. MediaAmerica acquired
the majority of these radio programs in mid-to-late 1997.
RELATED TRANSACTIONS
The Acquisition is intended to qualify for partially tax-free treatment
under Section 351 of the Internal Revenue Code of 1986 and, as a result,
MediaAmerica would recognize taxable gain to the extent of the cash portion of
the exchange consideration. To the extent taxable gain is so recognized, the
Company will obtain additional basis in the acquired assets equal to the
amount of gain recognized by MediaAmerica.
As part of the Exchange Agreement, the Company, MediaAmerica and the
Principals entered into a number of additional agreements, consisting of
employment agreements with the Principals, a registration rights agreement,
and a "Post-Closing Agreement." The employment agreements are for three years
and restrict the Principals from competing with the Company during the term of
employment and for two years after the employment agreements terminate. These
agreements provide for annual salaries of $300,000 for each Principal and
eligibility for a variety of employee benefits and plans generally made
available to the Company's key associates at their level.
The registration rights agreement provides for two "demand" registrations
for the shares of Class A Common Stock of the Company issued in the
MediaAmerica transaction plus an unlimited number of "piggy-back" registration
rights, all of which are to be provided at no cost to the Principals or to
MediaAmerica (except for sales commissions and certain legal costs).
The Post-Closing Agreement gives MediaAmerica the right to cause the Company
to purchase the shares of the Company owned by MediaAmerica at any time after
three years from closing. The price would be the fair market value thereof, as
determined by agreement or by an appraisal conducted by an independent
investment banking firm. The Company has a correlative right to require that
MediaAmerica sell such shares to the Company at fair market value as decided
above. Such rights terminate upon an initial public offering (as defined) by
the Company. Before MediaAmerica can require the Company to buy its shares,
the Company must have "unrestricted cash" (as defined) available to make the
purchase. This condition lapses after seven and one
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quarter years from the date of closing. If the Company has exercised its
purchase right and there is a "change of control" (as defined) involving a
higher price within six months thereafter, the Company must pay the Principals
certain additional consideration. The Post-Closing Agreement also grants the
Principals the right to designate certain nominees to both the Boards of
Directors of the Company and Galactic Radio, Inc., a subsidiary of the Company
which has oversight of all radio-related operations. The Post-Closing
Agreement also grants certain other rights regarding the Class A Common Stock
of the Company as a class and provides that transactions with affiliates must
be on terms substantially the same as those from a third party.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The Company currently has six directors: Glenn R. Jones, Chairman of the
Board, Gregory J. Liptak, President of the Company, Jay B. Lewis, Group Vice
President/Finance and Chief Financial Officer of the Company, Ron Hartenbaum,
Chief Executive Officer--Radio Network, Yrma G. Rico and Fred A. Vierra.
Set forth below is certain information concerning each person who is an
executive officer or director of the Company. Information is also provided for
certain key employees. All directors hold office for a period of one year or
until their respective successors are elected and qualified, or until their
earlier resignation or removal.
<TABLE>
<CAPTION>
DIRECTOR
NAME POSITION AGE SINCE
---- -------- --- --------
<C> <S> <C> <C>
Glenn R. Jones....... Chairman of the Board 68 1993
Gregory J. Liptak.... President and Director 58 1993
Group Vice President/Finance, Chief
Jay B. Lewis......... Financial Officer and Director 40 1996
Elizabeth M. Steele.. Vice President and Secretary 46
Keith D. Thompson.... Chief Accounting Officer 31
Jeffrey C. Wayne..... President, Cable Programming Networks(1) 43
Chief Executive Officer--Radio
Gary Schonfeld....... Advertising(1)(2) 46
Chief Executive Officer--Radio Network
Ron Hartenbaum....... and Director(1)(2) 45 1998
President/General Manager--Radio
Eric Hauenstein...... Network(1) 50
Vice President of Programming--Radio
Phil Barry........... Network(1) 45
Yrma G. Rico......... Director 49 1998
Fred A. Vierra....... Director 66 1998
</TABLE>
- --------
(1) Key employee; an officer of a subsidiary, but not of the Company itself.
(2) Pursuant to an agreement entered into in connection with the Acquisition,
Messrs. Hartenbaum and Schonfeld may nominate one member of the Board of
Directors. This right terminates upon the earlier of the ninth anniversary
of the consummation of the Acquisition and the date on which, among other
things, the direct or indirect ownership of Messrs. Hartenbaum and
Schonfeld in the Company's common stock falls below certain levels.
The principal occupations for at least the past five years of each of the
directors, executive officers and certain key employees of the Company are as
follows:
GLENN R. JONES has been involved in the cable television business in various
capacities since 1961 and currently serves as a director and/or executive
officer of many of the Company's affiliates, including Chief Executive Officer
and a director of Jones Intercable. He has been Chairman of the Board of the
Company since 1993. Mr. Jones will continue to devote a substantial amount of
his time to the Company's business. Mr. Jones received a B.S. in Economics
from Allegheny College and a J.D. from the University of Colorado School of
Law. In 1994, Mr. Jones was inducted into the Broadcasting and Cable Hall of
Fame. Mr. Jones is a member of the Board of Directors and Executive Committee
for the National Cable Television Association, the Board and Education Council
of the National Alliance of Business and the Board of Governors for the UCLA
Center for Communications Policy. He is also one of the founding members of
the James Madison National Council and has served on the Board of Governors
for the American Society for Training and Development.
GREGORY J. LIPTAK has served as a director of the Company since 1993, was
elected an Assistant Vice President in January 1996 and was elected as
President in October 1996. Mr. Liptak has been associated with the Jones
International group of companies since March 1985. He has served as Vice
President of Operations, Group Vice President of Operations and President of
Jones Intercable from 1985 to 1989, as President of Mind Extension University,
Inc., a subsidiary of Jones Education, and President of Jones Spacelink, Ltd.,
from 1989 to 1995. From 1975 to 1985, Mr. Liptak served as an executive
officer of Times Mirror Cable Television, Inc.
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Mr. Liptak received a B.S. and M.S. in Marketing and Communications from the
University of Illinois. Mr. Liptak was also the co-founder and first president
of CTAM, the Cable Television Marketing Society, and has also served as
Chairman of the Cable Television Advertising Bureau, and currently serves as
Chairman of the National Cable Television Cooperative.
JAY B. LEWIS has served as Vice President/Finance and as Chief Financial
Officer of the Company since July 1996 and was elected Group Vice
President/Finance, and appointed as a director, in October 1996. Mr. Lewis has
also served as Treasurer of the Company since September 1994. From January
1995 until October 1996, Mr. Lewis was Vice President of Finance and Treasurer
of Jones International, the parent of the Company, and certain of its
subsidiaries. From February 1986 to December 1994, Mr. Lewis was employed in
various capacities, including Controller and Treasurer, by Jones Spacelink,
Ltd., a former affiliate of the Company. Prior to joining the Jones
International group of companies, Mr. Lewis was employed by Arthur Young & Co.
(now Ernst & Young LLP), a public accounting firm. Mr. Lewis received a B.S.
in Accounting from the University of Wyoming in 1980.
ELIZABETH M. STEELE has served as Secretary of the Company since it was
founded in 1993 and as Vice President of the Company since November 1995. Ms.
Steele has also served as Vice President/General Counsel and Secretary of
Jones Intercable, as well as general counsel to certain of Jones Intercable's
and the Company's affiliates since 1987. Ms. Steele will continue to devote a
significant amount of her time to these affiliates. From 1980 through 1987,
Ms. Steele practiced law with the Denver law firm of Davis, Graham & Stubbs
LLP, where she was elected a partner in 1985. Ms. Steele received a B.A. in
History from Hamilton College and J.D. from the University of New Mexico.
KEITH D. THOMPSON has served as Chief Accounting Officer of the Company
since October 1996. Mr. Thompson also serves as Chief Accounting Officer of
several of the Company's affiliates. Mr. Thompson has been associated with
Jones International since October 1994, serving as Senior Accountant from
October 1994 to April 1995, as Accounting Manager from April 1995 to January
1996, as Director of Accounting from January 1996 to July 1997, and Controller
from July 1997 to present. Mr. Thompson will continue to devote a substantial
amount of his time to Jones International and its affiliates. From July 1989
to October 1994, Mr. Thompson was an auditor for Deloitte & Touche LLP. Mr.
Thompson received a B.S. in Accounting from Oral Roberts University and is a
member of both the American and Colorado Societies of Certified Public
Accountants.
JEFFREY C. WAYNE has served as President and Chief Operating Officer, Cable
Network Operations for the Company and as Vice President/General Manager for
Great American Country since July 1997 and was elected President, Cable
Programming Networks and as President/General Manager for Great American
Country in January 1998. Mr. Wayne is a 21-year veteran of the cable
television industry. From 1995 to July 1997, Mr. Wayne was Vice President of
Programming for The Providence Journal's Broadcast Division. At The Providence
Journal, he was responsible for overseeing a portfolio of cable network
programming ventures including The Television Food Network and America's
Health Network. At the Providence Journal, Mr. Wayne served as acting
President of The Television Food Network; the network's subscriber base grew
from 13 to over 20 million during his tenure. From 1978 to 1995, Mr. Wayne
held various marketing positions with Colony Communications, Inc., a top 20
multiple system cable operator with over 800,000 subscribers, serving as
Executive Director of Marketing and Ad Sales from 1988 to 1993 and Vice
President of Marketing and Ad Sales from 1994 to 1995. Mr. Wayne has a B.A. in
Political Science from the University of Colorado, Boulder.
GARY SCHONFELD is the co-founder of MediaAmerica and has served as its
President since its formation in 1987. Mr. Schonfeld became the Chief
Executive Officer--Radio Advertising upon the consummation of the Acquisition
in July 1998. Mr. Schonfeld has over 20 years of experience in the sales
arena, including Vice-President Eastern Sales Region for Westwood One.
Previously Mr. Schonfeld served as an account executive with CBS Radio
Networks and in various positions with Fairchild Publications, Y&R Advertising
and ABC Radio. Mr. Schonfeld has a B.A. from the University of Vermont and an
M.A. from the University of Michigan.
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RON HARTENBAUM is the co-founder of MediaAmerica, which was founded in 1987,
and has been its Chairman since its formation. Mr. Hartenbaum became the Chief
Executive Officer--Radio Network and a Director upon the consummation of the
Acquisition in July 1998. Mr. Hartenbaum has over 20 years of experience in
radio advertising sales. Before forming MediaAmerica, Mr. Hartenbaum was Vice-
President and Director of Advertising Sales for Westwood One for six years,
growing sales from $5 million to over $50 million in that period. Prior to
joining Westwood One, Mr. Hartenbaum was involved in advertising sales for ABC
Radio and advertising development at ad agencies Needham Harper Worldwide and
Grey Advertising for national advertisers including Procter & Gamble and
General Mills. Mr. Hartenbaum has a B.A. from Queens College and an MBA from
New York University.
ERIC HAUENSTEIN has served as Vice President/General Manager--Radio Networks
since 1994 and was elected President/General Manager--Radio Networks in
January 1998. During his twenty-five years of radio station management and
ownership, he has been responsible for the operation of over twenty radio
stations, including KDKB in Phoenix and KBPI in Denver. From 1991 to 1994, he
was the General Manager of three radio stations in Richmond, Virginia. He has
also served on state and national boards of directors for the radio industry
including the National Association of Broadcasters, the National Radio
Broadcasters Association, the Arizona Broadcasters Association and the
Virginia Association Broadcasters. He attended St. Louis University and the
University of Cincinnati.
PHIL BARRY, whose proper name is Phillip H. Baykian, has served as Vice
President of Programming--Radio Networks since 1991. Mr. Barry has nearly 25
years in on-air and programming experience. He served as Vice President of
Programming for Drake Chenault Radio Consultants in Albuquerque, New Mexico
from 1986 to 1991. Previously, he was Operations Consultant for TM
Programming, a radio industry programming consultant company, from 1981 to
1986. Mr. Barry attended Delta College at University Center.
YRMA G. RICO is General Manager of KCEC-TV, Channel 50 in Denver, Colorado,
a position she has held since 1992. She has 19 years of experience in the
television industry and has served as the National Sales Manager for KCEC-TV
and WNAC-TV, headquartered in Providence, Rhode Island.
FRED A. VIERRA is the Vice Chairman of the Board of Directors of, and a
consultant to, Tele-Communications International, Inc. ("TINTA"), positions he
has held since January, 1998. From 1994 to January 1998, he served as TINTA's
Vice Chairman, President and Chief Executive Officer. From 1992 to 1994, he
served as an Executive Vice President of TCI. Mr. Vierra served as the
President of United Artists Entertainment Company ("UAE") from 1989 to 1991
and as the President of United Cable Television Corporation from 1982 to 1989,
when the company was merged into UAE. Mr. Vierra is a member of the Board of
Directors of Flextech plc, Torneos y Compotencias S.A. and Formus
Communications, Inc. Mr. Vierra has previously served as a member of the Board
of Directors of Turner Broadcasting, the Discovery Channel, Princes Holdings
Ltd., Australas Media Ltd. and Telewest plc. Mr. Vierra has a B.S. in Business
Administration from the University of Tulsa.
COMPENSATION OF DIRECTORS
The Company pays its directors who are not officers of the Company for their
services as directors. Directors who are not officers of the Company or its
affiliates will receive $2,500 per quarter for services rendered as a director
and $500 for attending in person each meeting of the Board or one of its
committees. All directors will be reimbursed for their expenses in attending
Board and committee meetings.
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EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the
compensation for services in all capacities to the Company for the years ended
December 31, 1995, 1996 and 1997 for the President of the Company and the
other four most highly compensated executive officers and key employees of the
Company and its subsidiaries whose total annual salary and bonus attributable
to such entities exceeded $100,000 (collectively, the "Named Executive
Officers"). Mr. Jones was President of the Company during 1995 and through
October 1996 and has been Chairman of the Board during all such periods. He
did not receive any compensation for services rendered to the Company during
such periods.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------------
ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1)
- --------------------------- ---- -------- ------- ---------------
<S> <C> <C> <C> <C>
Gregory J. Liptak(2) ................... 1997 $283,879 $ -- $22,417
President 1996 127,746 38,250 15,566
1995 156,134 46,750 21,843
Jay B. Lewis(3) ........................ 1997 150,007 -- 9,000
Group Vice President/Finance and 1996 44,287 -- 3,543
Chief Financial Officer 1995 -- -- --
Jeffrey C. Wayne(4) .................... 1997 76,897 -- 37,215
President, Cable Programming Networks 1996 -- -- --
1995 -- -- --
Eric Hauenstein ........................ 1997 150,015 13,900 6,883
President/General Manager--Radio Network 1996 139,006 -- 8,340
1995 127,924 20,000 21,513
Phil Barry ............................. 1997 90,024 8,000 2,993
Vice President of Programming--Radio
Network 1996 80,010 5,800 1,547
1995 68,814 13,250 --
</TABLE>
(1) The Company's employees are entitled to participate in a 401(k) profit
sharing plan and/or a deferred compensation plan. The amounts shown in
this column represent the Company's contributions to the 401(k) profit
sharing plan and/or the deferred compensation plan for the benefit of the
named person's account and, with respect to Messrs. Hauenstein and Wayne,
includes $17,713 and $33,615, respectively, reimbursed to them for moving
expenses in 1995 and 1997, respectively.
(2) Mr. Liptak became President of the Company in October 1996. Mr. Liptak's
total compensation for services rendered to the Company during 1995 and
1996 represents an allocation to the Company of the total compensation
paid to Mr. Liptak by Jones International for these years based upon the
time allocated to the Company's business. Mr. Liptak serves as an
executive officer and director of certain of the Company's affiliates.
Since the beginning of 1997, Mr. Liptak has devoted all of his time to the
business of the Company and will continue to do so in the future.
(3) Mr. Lewis' total compensation for services rendered to the Company during
1996 represents an allocation to the Company of the total compensation
paid to Mr. Lewis by Jones International for 1996 based upon the time
allocated to the Company's business. For the year 1995, no portion of Mr.
Lewis' compensation was allocated to the Company, all of which was paid by
Jones International.
(4) Reflects compensation from July 1997 when Mr. Wayne joined the Company.
The Company has agreed to give Messrs. Wayne and Hauenstein each a $250,000
bonus if certain defined levels of distribution in the cable programming
network and the radio network, respectively, are reached within approximately
three years.
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On July 10, 1998, the Company entered into employment agreements with
Messrs. Hartenbaum and Schonfeld. See "The Acquisition and Related
Transactions" for a description of the employment agreements.
STOCK OPTION PLAN
The Company has adopted an employee stock option plan (the "Plan") that
provides for the grant of stock options and stock appreciation rights ("SARs")
to employees or individuals providing services to the Company. The plan is
construed, interpreted and administered by the Board or a committee of two or
more non-employee directors. The committee or the Board determines the
individuals to whom options are granted, the number of shares subject to the
options, the exercise price of the options (which may be below fair market
value of the stock on the date of grant), the period over which the options
become exercisable and the term of the options. The committee or the Board has
the discretion to set other terms and provisions of stock options as it may
determine from time to time, subject only to the provisions of the Plan.
The Plan covers an aggregate of up to 400,000 shares of the Company's Class
A Common Stock. The number of shares available for grant of options under the
Plan and the number of shares included in each outstanding option are subject
to adjustment upon recapitalizations, stock splits or other similar events
that cause changes in the Company's Class A Common Stock. Shares of Class A
Common Stock underlying options that expire unexercised are available for
future option grants under the Plan.
The Plan provides for the grant of incentive stock options ("Incentive
Options") within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), and non-statutory stock options that do not
qualify as incentive stock options under Section 422 of the Code ("Non-
Qualified Options"). Options granted may be either Incentive Options or Non-
Qualified Options or a combination of the two. The exercise price of each
Incentive Option granted must be at least equal to the fair market value of
the Class A Common Stock on the date the Incentive Option is granted. The
exercise price of Non-Qualified Options may be less than the fair market value
of the Class A Common Stock on the date the Non-Qualified Option is granted.
If an Incentive Option is granted to an employee who then owns stock
possessing 10% of the total combined voting power of all classes of stock of
the Company, the exercise price of the Incentive Option must be at least equal
to 110% of the fair market value of the Class A Common Stock on the date the
Incentive Option is granted.
The maximum term of options granted under the Plan is generally ten years,
but with respect to an Incentive Option granted to an employee who then owns
stock possessing 10% of the total combined voting power of all classes of
stock of the Company, the maximum term of the option is five years. Subject to
the foregoing limitation, the Committee or the Board determines the term of
the options and the period over which they vest and come exercisable.
SARs may be granted in tandem with options granted under the Plan. Each SAR
entitles the participant, upon the exercise of the SAR, to receive the excess
of the fair market value of a share of Class A Common Stock on the exercise
date over the fair market value of the share on the date the SAR was granted.
An SAR is exercisable only to the extent the associated stock option is
exercisable. To the extent the option is exercised, the accompanying SAR will
cease to be exercisable, and vice versa. An SAR may be exercised only when the
market price of Class A Common Stock subject to the option exceeds the
exercise price of such option.
Options and associated SARs are not transferable, except by will or pursuant
to the laws of descent and distribution, and are exercisable only by the
option holder during his lifetime or, in the event of disability or
incapacity, by the option holder's guardian or legal representative.
The Board may amend the Plan at any time or may terminate it without the
approval of the shareholders; provided, however, that shareholder approval is
required for any amendment to the Plan that increases the number of shares for
which options may be granted, materially increases the benefits accruing to
participants in the Plan or materially modifies the eligibility requirements
for participation in the Plan. However, no action by the Board or shareholders
may alter or impair any option previously granted without the consent of the
optionee.
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An aggregate of options to acquire 275,000 shares of Class A Common Stock
have been granted under the Plan, including the following: Mr. Jones--50,000
shares; Mr. Liptak--50,000 shares; Mr. Lewis--50,000 shares; Mr. Hauenstein--
20,000 shares; and Mr. Wayne--20,000 shares.
Certain Federal Income Tax Consequences. The following discussion, which is
based on the law as in effect on the date of this Prospectus, summarizes
certain federal income tax consequences of participation in the Plan. The
summary does not purport to cover federal employment tax or certain other
federal tax consequences that may be associated with the Plan, nor does it
cover state, local or non-U.S. taxes. Recipients of stock options or SARs
under the Plan are urged to consult their own tax advisors with respect to the
consequences of their participation in the Plan.
In general, an optionee realizes no taxable income upon the grant or
exercise of an Incentive Option. The exercise of an Incentive Option may
result in an alternative minimum tax liability to the optionee. With certain
exceptions, a disposition of shares purchased under an Incentive Option within
two years from the date of grant or within one year after exercise produces
ordinary income to the optionee (and a corresponding deduction is available to
the Company) equal to the value of the shares at the time of exercise less the
exercise price. Gain or loss recognized on sales of shares acquired upon the
exercise of an Incentive Option will be treated as capital gain or loss for
which the Company is not entitled to a deduction if the shares have been held
for more than one year after exercise and more than two years after the date
of grant. Any such gain will be long-term capital gain and will be subject to
tax at a maximum rate of 20%. In general, an Incentive Option that is
exercised more than three months after termination of employment (other than
termination by reason of death) is treated as a Non-Qualified Option. Options
are also treated as Non-Qualified Options to the extent they first become
exercisable by an individual in any calendar year for shares having a fair
market value (determined as of the date of grant) in excess of $100,000.
An optionee generally recognizes no taxable income upon the receipt of a
Non- Qualified Option. Upon the exercise of a Non-Qualified Option, the
optionee normally recognizes ordinary income equal to the difference between
the option price and the fair market value of the stock on the date of
exercise, and the Company is entitled to a deduction in the same amount.
The grant of SARs has no federal income tax consequences at the time of
grant. Upon the exercise of SARs, the amount received is generally taxable as
ordinary income, and the Company is entitled to a corresponding deduction.
EMPLOYEE INVESTMENT 401(K) PLAN
The Company's employees are eligible to participate in an Employee Profit
Sharing/Retirement Savings Plan (the "401(k) Plan"). Under the 401(k) Plan,
eligible employees are permitted to defer receipt of up to 16% of their annual
compensation, subject to a limit prescribed by statute. In general, the
Company currently matches 50% of the employees' deferrals up to a maximum of
6% of their annual compensation. The Company's contribution vests immediately.
Subject to certain restrictions, contributions to the 401(k) Plan are invested
by the trustees of the 401(k) Plan in accordance with the directions of each
participant. All employees of the Company who have completed 500 hours of
service within a six consecutive-month period are eligible to participate in
the 401(k) Plan on the next open enrollment following the date that the
eligibility requirements have been met.
Participants or their beneficiaries are entitled to payment of benefits: (i)
upon retirement either at or after age 65, (ii) upon death or disability or
(iii) upon termination of employment. In addition, hardship distributions and
loans to participants from the 401(k) Plan are available under certain
circumstances. The amount of benefits ultimately payable to a participant
under the 401(k) Plan will depend on the performance of the investments to
which contributions are made on the participant's behalf. During 1997, the
Company contributed approximately $83,000 to the 401(k) Plan on behalf of its
employees.
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DEFERRED COMPENSATION PLAN
Certain of the Company's key employees are eligible to participate in a
Deferred Compensation Plan (the "Deferred Compensation Plan"). Key employees
eligible to participate in the Deferred Compensation Plan constitute a select
group of highly compensated or management personnel and are selected by the
Company's Board. Under the Deferred Compensation Plan, key employees are
permitted to defer receipt of up to 100% of their annual compensation. The
Company currently matches the key employees' deferrals up to a maximum of 6%
of their contributions. The funds are deposited with Norwest Bank Colorado,
NA, as Trustee of the Deferred Compensation Plan's Rabbi Trust, and they are
invested in a number of pre-selected investment funds. Both the key employees'
contributions and the Company's contributions are at all times subject to the
claims of the Company's general creditors.
Key employees who participate in the Deferred Compensation Plan receive a
distribution of their contributions, the Company's contributions, and earnings
attributable to those contributions on their separation from employment with
the Company or their death. The Deferred Compensation Plan also permits
hardship distributions in certain circumstances. The amount of benefits
ultimately payable to a key employee participant depends upon the performance
of the investment funds held by the trust. During 1997, the Company
contributed approximately $33,000 to the Deferred Compensation Plan on behalf
of its key employees.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1997, the Company's Board, comprised of Messrs. Jones, Liptak and
Lewis, set the compensation of the Company's executive officers. Messrs.
Jones, Liptak and Lewis served as executive officers of the Company and
certain of its subsidiaries, and also served as directors and officers of a
number of the Company's affiliates, during 1997. As individuals, the Company's
executive officers and directors had no transactions with the Company in 1997.
See "Certain Relationships and Related Transactions" for a discussion of
certain transactions between the Company and its affiliates.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In the following transactions, no third party bids or appraisals were
obtained. In addition, certain of these transactions are by their nature
unique to the companies involved. Although the Company believes that these
transactions were fair to it, no assurance can be given that the terms of
these transactions were generally as favorable to it as could have been
obtained from third parties. The transactions described below, other than the
loans and advances, are expected to continue and additional agreements and
transactions with affiliated parties may occur in the future, subject to the
restrictions in the Indenture.
Where applicable, references in this section to amounts paid to or by the
Company include amounts paid to or by the PIN Venture and Superaudio as well
as the Company.
ADVANCES
Since its inception, the Company has received advances from Jones
International and related parties to fund its activities. These advances have
no maturity date and accrue interest at the published prime rate plus 2%
(approximately 11%, 10% and 10% in 1995, 1996 and 1997, respectively). The
Company has received advances from Jones International and related parties to
fund a portion of its cash needs, with cumulative advances of $1.8 million,
$6.0 million, $9.8 million and $5.4 million as of December 31, 1995, 1996 and
1997 and June 30, 1998, respectively. The Company paid interest on these
advances of approximately $142,000, $243,000, $868,000 and $328,000 for the
years ended December 31, 1995, 1996 and 1997 and the six months ended June 30,
1998, respectively. The largest total amount of outstanding advances from
Jones International and related parties in 1997 was approximately $10.3
million. Outstanding borrowings of $16.3 million under Radio Holdings' credit
facility were used to repay a $6.6 million note payable to Jones Intercable
and to repay $9.7 million in advances from Jones International in March 1998.
At June 30, 1998, outstanding advances from Jones International and related
parties were $5.4 million. Jones International is under no obligation to
provide additional financial assistance to the Company.
PURCHASE OF GALACTIC RADIO AND EARTH SEGMENT
Effective August 15, 1996, the Company purchased all of the common stock of
Galactic Radio from Global Group, a related party, for $17.2 million. Galactic
Radio is a holding company that owns a 100% interest in Jones Radio Network,
Inc. and, indirectly, a 50% interest in Superaudio. Global Group had acquired
Galactic Radio from Jones Intercable, another affiliate of the Company, for a
$17.2 million purchase price on June 14, 1996. The $17.2 million purchase
price paid for Galactic Radio consisted of $1.2 million in cash and a $16.0
million note payable to Global Group. The note payable to Global Group bore
interest at 8.25% per annum and was payable quarterly. Interest expenses
totaled approximately $495,000 and $1,196,000 for the years ended December 31,
1996 and 1997, respectively. Effective September 30, 1997, the Company and
Global Group agreed to convert $6.0 million of the $16.0 million note to
Global Group into 400,000 shares of the Company's Class B Common Stock at $15
per share. This note was repaid in conjunction with a reorganization of the
Company's parent in December 1997, and the Company issued a new $10 million
unsecured promissory note to Global Group on December 31, 1997 (the "Global
Group Note"). The Global Group Note accrued interest at 8.25% per annum,
compounded annually. Effective upon the closing of the offering of the Old
Notes in July 1998, the Global Group Note was converted into 666,667 shares of
Class A Common Stock valued at $15 per share. The Company has paid the accrued
interest of approximately $413,000 on the Global Group Note. Interest expense
on the Jones Global Group Note totaled approximately $413,000 for the six
months ended June 30, 1998.
Effective September 30, 1996, the Company purchased all of the common stock
of Earth Segment from Mr. Jones and Jones International for 110,833 shares and
472,500 shares, respectively, of Class A Common Stock valued at $12 per share.
In connection with this transaction, the Company assumed Earth Segment's
obligations under an approximately $6.6 million promissory note payable to
Jones Intercable. Approximately $670,000, $608,000, $627,000 and $156,000 of
interest was paid on the note for the years ended December 31, 1995, 1996, and
1997 and the six months ended June 30, 1998, respectively. This note was paid
in full in March 1998 with borrowings under Radio Holdings' credit facility.
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PURCHASE OF MINORITY INTERESTS IN GREAT AMERICAN COUNTRY AND THE PRODUCT
INFORMATION NETWORK FROM AN AFFILIATE
Mr. Glenn R. Jones is the principal shareholder of the Company and is also a
director. Pursuant to an exchange agreement dated November 6, 1996 (as amended
on April 1, 1997), Mr. Jones transferred 1,196 shares of Class A and Class B
Common Stock of Jones Infomercial Networks, Inc. and 1,900 shares of Class A
and Class B Common Stock of Great American Country, Inc. to the Company in
exchange for 333,333 shares of Class A Common Stock of the Company.
TAX SHARING AGREEMENT
Prior to April 2, 1997, the Company joined in filing a consolidated tax
return as provided for under the terms of a tax allocation agreement with
Jones International and certain of Jones International's subsidiaries.
Pursuant to the terms of the tax allocation agreement, tax provisions
(benefits) were allocated to the members of the tax sharing group based on
their respective pro rata contribution of taxable income (loss) to Jones
International's consolidated taxable income (loss). As a result of certain
stock issuances on April 1, 1997 described above, less than 80% of the
Company's outstanding common stock was owned by Jones International and,
therefore, the Company is no longer included in the Jones International tax
allocation agreement.
The tax allocation agreement with Jones International gave Jones
International the option to either make a payment of the tax benefits due to
the subsidiary members of the tax sharing group or defer such payments until a
subsequent taxable period in which the subsidiary member generates taxable
income and has a tax payment due either to Jones International or to a federal
or state taxing authority. Jones International could defer such payments for a
period not to exceed five years from the date the tax benefits were incurred
and would accrue interest at the time the deferred amounts originate. For the
year ended December 31, 1997, Jones International elected to defer a tax
benefit of approximately $1,342,000 due to the Company and its subsidiaries.
For the six months ended June 30, 1998, the Company incurred a tax provision
of approximately $268,000 to adjust estimated tax provisions to actual tax
provisions for the year ended December 31, 1997.
In 1995, 1996 and 1997, the Company recognized income tax benefits as a
result of the tax sharing arrangement of approximately $498,000, $387,000 and
$1,342,000, respectively.
SATELLITE DELIVERY AND PRODUCTION SUPPORT SERVICES
The Company has agreements to provide uplinking, playback, trafficking and
related services to Jones Education, a related party, that terminate on
December 31, 2004. The Company has the right to terminate the uplinking
agreement upon 30-days' written notice. The Company received approximately
$1.9 million, $2.2 million, $2.2 million and $1.3 million from Jones Education
for these services for the years ended December 31, 1995, 1996 and 1997 and
the six months ended June 30, 1998, respectively. In June 1998, the Company
and an affiliate of Jones Education entered into an agreement pursuant to
which the Company is providing, beginning July 1, 1998, additional uplinking,
playback, trafficking and related services in connection with the lease of an
additional channel on one of the Company's satellite transponders for a
monthly fee of $30,000 and an amount representing a proportionate share of
expenses.
SATELLITE TRANSPONDER AGREEMENTS
The Company has leased to Jones Education one channel on a non-preemptible
satellite transponder on a domestic communications satellite that the Company
historically leased from a third party, which lease was prepaid with a portion
of the proceeds of the offering of the Old Notes. The Company has the right to
terminate the lease to Jones Education at any time upon 30-days' written
notice. The monthly payments under such lease may be adjusted periodically
through the December 2004 expiration date based on the number of customers
using the transponder. The Company received lease payments of approximately
$1.2 million, $0.9 million, $0.9 million and $0.5 million for the years ended
December 31, 1995, 1996 and 1997 and the six months ended June 30, 1998,
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respectively. In June 1998, the Company and an affiliate, Knowledge TV, Inc.,
entered into an agreement pursuant to which such party leased one additional
channel on the transponder from the Company from July 1, 1998 for a seven-year
term with an option, exercisable by the related party on six months' advance
notice, to terminate the lease on July 1, 2001, at a monthly lease rental of
approximately $59,000.
The Company subleases from Satellite Holdings, a related party, an audio
channel on a non-preemptible satellite transponder on the Galaxy V
communications satellite for approximately $58,000 per month. Satellite
Holdings has the right to terminate the sublease prior to its May 2004
expiration date upon 30-days' written notice. Satellite Holdings leases the
transponder from a third party pursuant to a lease that terminates in 2004.
Satellite Holdings charged lease payments of approximately $696,000 for each
of the years ended December 31, 1995, 1996 and 1997, respectively. The Company
paid Satellite Holdings a fee of $348,000 for the six months ended June 30,
1998.
SALES COMMISSIONS
The Company earns up to a 3% commission on its sale of airtime for
informational programming on certain network subsidiaries of Jones Education.
The Company received commissions from Jones Education of approximately
$52,000, $241,000, $216,000 and $97,000 for the years ended December 31, 1995,
1996 and 1997 and the six months ended June 30, 1998, respectively. Effective
July 1, 1998, these services for Jones Education are being provided by the PIN
Venture, which will receive all future commissions and will pay for the
personnel who perform such services.
An affiliate of the Company began providing affiliate sales services to the
Company in late 1997. This affiliate charged the Company approximately
$201,000 for the year ended December 31, 1997 and approximately $444,000 for
the six months ended June 30, 1998.
AFFILIATE FEES
Great American Country is licensed to certain cable television systems owned
or managed by Jones Intercable. Jones Intercable and its affiliated
partnerships paid total license fees to the Company of approximately $719,000,
$853,000 and $468,000 for the years ended December 31, 1996 and 1997 and the
six months ended June 30, 1998, respectively. This affiliation agreement
expires on December 31, 2010. See "Risk Factors--Risks Associated with
Distribution of Television Programming." Superaudio also licenses its audio
services to these systems. Jones Intercable and its affiliated partnerships
paid Superaudio approximately $720,000 for each of the years ended December
31, 1995, 1996 and 1997 and $360,000 for the six months ended June 30, 1998.
The Product Information Network is distributed to Jones Intercable and its
affiliated partnerships and to Cox and Adelphia, both partners in the PIN
Venture. The affiliation agreement with Jones Intercable expires on February
1, 2005. Prior to January 1, 1997, under the terms of the affiliation
agreements with these MSOs, the Company made incentive payments of
approximately 50% of its net advertising revenues to the cable systems that
carry its programming. For the year ended December 31, 1997 and the six months
ended June 30, 1998, the PIN Venture made incentive payments of approximately
60% and 65%, respectively, of its net advertising revenues to these systems.
For the eleven months ended December 31, 1995, the years ended December 31,
1996 and 1997 and the six months ended June 30, 1998, Jones Intercable and its
affiliated partnerships received incentive payments totaling approximately
$0.9 million, $1.2 million, $1.6 million and $0.9 million, respectively.
COMPUTER SERVICES
A subsidiary of Jones International provides computer hardware and software
services and miscellaneous related support services to the Company and other
Jones International affiliates. The Company paid service fees to this
subsidiary of approximately $306,000, $385,000, $574,000 and $330,000 for the
years ended December 31, 1995, 1996 and 1997 and the six months ended June 30,
1998, respectively.
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OFFICE LEASE AND SUBLEASE
The Company leases and subleases office space in Englewood, Colorado from
affiliates of Jones International on a month-to-month basis. The Company paid
rent and associated expenses under these leases and subleases of approximately
$14,000, $32,000, $88,000 and $74,000 for the years ended December 31, 1995,
1996 and 1997 and the six months ended June 30, 1998, respectively.
ADMINISTRATIVE SERVICES
The Company reimburses Jones International and its affiliates for certain
administrative services provided by these companies, such as legal,
accounting, purchasing and human resources services. Jones International and
its affiliates charge the Company for these services based upon an allocation
of its personnel expense associated with providing these services. These
allocated expenses totaled approximately $163,000, $861,000, $540,000 and
$513,000, for the years ended December 31, 1995, 1996 and 1997 and the six
months ended June 30, 1998, respectively. A significant portion of the
administrative expenses for 1996 were non-recurring in nature or were paid
directly by the Company in 1997 as a result of organizational changes which
were effected in early 1997.
An affiliate of the Company charged the Company approximately $110,000 for
the six months ended June 30, 1998 for the allocated costs of its airplane
which was used by the Company in connection with the Notes offering. No
services were provided in the years ended December 31, 1995, 1996 or 1997.
TRANSFER OF SATELLITE TRANSPONDER LEASES
In April 1997, the Company acquired the satellite transponder leases and
related subleases held by Space Segment, an affiliate, in exchange for 416,667
shares of Class A Common Stock valued at $12 per share. These various
agreements were then transferred to a wholly-owned subsidiary, Space Holdings.
In January 1998, the Company transferred the shares of Space Holdings to Space
Segment for a nominal amount, and the Company was relieved of the obligations
related to the activities of Space Holdings. Upon the closing of the offering
of the Old Notes, the parties rescinded the transfer of the shares of Space
Holdings to Space Segment. The Company has prepaid the capital lease
obligations for such transponders with the proceeds from such offering and now
owns the transponders.
CONFLICTS OF INTEREST OF MANAGEMENT
Messrs. Jones, Liptak, Lewis, Wayne and Thompson and Ms. Steele, who are
officers and/or directors of the Company, are also officers and/or directors
of certain affiliated entities and, from time to time, the Company may enter
into transactions with these entities. Consequently, such officers and/or
directors may have conflicts of interest with respect to matters potentially
or actually involving or affecting the Company and such affiliates. In
addition, such directors and/or officers may have such conflicts of interest
with respect to corporate opportunities suitable for both the Company and such
affiliates. Under the Colorado Business Corporation Act, as amended (the
"Colorado Act"), no conflicting interest transaction shall be void or voidable
or be enjoined, set aside or give rise to an award of damages or other
sanctions in a proceeding by a shareholder or by or in the right of the
corporation, solely because the conflicting interest transaction involves a
director of the corporation or an entity in which a director of a corporation
is a director or officer or has a financial interest or solely because the
director is present at or participates in the meeting of the corporation's
board of directors or of a committee of the board of directors which
authorizes, approves, or ratifies the conflicting interest transaction or
solely because the directors' vote is counted for such purpose, if: (i) the
material facts as to the director's relationship or interest and as to the
conflicting interest transaction are disclosed or known to the board of
directors or the committee and said board of directors or committee
authorizes, approves, or ratifies in good faith the conflicting interest
transaction, (ii) the material facts as to the director's relationship or
interest and as to the conflicting interest transaction are disclosed or known
to the shareholders entitled to vote thereon and said shareholders
specifically authorize, approve or ratify in good faith the conflicting
interest transaction, or (iii) the conflicting interest transaction is fair as
to the corporation.
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Conflicts of interest also may arise in managing the operations of more than
one entity with respect to allocating time, personnel and other resources
between entities. To the extent deemed appropriate by the Company, such
conflicts would be resolved by employing additional personnel as necessary.
See "Risk Factors--Transactions with and Reliance on Related Parties;
Conflicts of Interest." Transactions with affiliates will be subject to the
restrictions in the Indenture. See "Description of Notes--Certain Covenants--
Limitation on Affiliate Transactions."
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information as of August 1, 1998 with
respect to the beneficial ownership of the Class A Common Stock and Class B
Common Stock of the Company by the Company's executive officers, directors,
holders of more than 5% of its Class A Common Stock or Class B Common Stock
and its executive officers and directors as a group. Except as otherwise
indicated, each person named in the table has informed the Company that such
person has sole voting and investment power with respect to all shares
beneficially owned by such person.
<TABLE>
<CAPTION>
CLASS A COMMON STOCK CLASS B COMMON STOCK
----------------------- ----------------------- PERCENT OF VOTE
NUMBER PERCENT NUMBER PERCENT OF ALL CLASSES OF
BENEFICIAL OWNER OF SHARES OF SHARES OF SHARES OF SHARES COMMON STOCK(1)
- ---------------- ------------ ---------- ------------ ---------- -----------------
<S> <C> <C> <C> <C> <C>
Glenn R. Jones(2)....... 3,385,120 78.9% 1,785,120 100.0% 95.9%
MediaAmerica(3)......... 541,570 12.6% -- -- 2.4%
Adelphia(4)............. 262,500 6.1% -- -- 1.2%
Ron Hartenbaum(3)....... 270,785 6.3% -- -- 1.2%
TCA..................... 101,124 2.4% -- -- 0.5%
All executive officers
and directors as a
group (8 persons)...... 3,655,905 95.2% 1,785,120 100.0% 97.1%
</TABLE>
- --------
(1) Holders of Class A Common Stock are entitled to one vote per share and are
entitled to elect 25% of the Board of Directors, and holders of Class B
Common Stock are entitled to ten votes per share and to elect the
remaining 75% of the Company's Board of Directors. The holders of the
Class B Common Stock have the right to convert their shares of Class B
Common Stock into shares of Class A Common Stock on a share for share
basis at any time at their option.
(2) Glenn R. Jones is the Chairman of the Board and Chief Executive Officer of
Jones International and owns all of the outstanding shares of Jones
International which, in turn, owns 81% of the outstanding common stock of
Jones Space Segment and 80% of the outstanding common stock of Global
Group. He is therefore deemed to be the beneficial owner of 1,594,500
shares of the Class A Common Stock and 1,122,000 shares of the Class B
Common Stock owned by Jones International, 416,667 shares of the Class A
Common Stock owned by Space Segment and 666,667 shares of Class A Common
Stock and 400,000 shares of the Class B Common Stock owned by Global
Group. Glenn R. Jones', Jones International's, Space Segment's and Global
Group's address is 9697 East Mineral Avenue, Englewood, Colorado 80112.
(3) The above table does not include any additional shares of Class A Common
Stock issuable based on the final working capital adjustment of
MediaAmerica, one-half of which would be beneficially owned by Mr.
Hartenbaum. The number of shares beneficially owned by MediaAmerica
includes the shares beneficially owned by Mr. Hartenbaum. Mr. Hartenbaum
was elected as a director of the Company upon the consummation of the
Acquisition. The address of MediaAmerica and Mr. Hartenbaum is 11 West
42nd Street, New York, New York 10036.
(4) Adelphia's address is 5 West Third Street, Coudersport, Pennsylvania
16915.
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DESCRIPTION OF NOTES
GENERAL
For purposes of this description, the term "Notes" refers to the Old Notes
and the Exchange Notes collectively. The Old Notes and the Exchange Notes are
considered collectively to be a single class under the Indenture. The Notes
are issued under an Indenture, dated as of July 10, 1998 (the "Indenture"),
among the Company and United States Trust Company of New York, as Trustee (the
"Trustee"), a copy of which has been filed as an exhibit to the Exchange Offer
Registration Statement. The following is a summary of certain provisions of
the Indenture and the Notes and does not purport to be complete and is subject
to, and is qualified in its entirety by reference to, all the provisions of
the Indenture (including the definitions of certain terms therein and those
terms made a part thereof by the Trust Indenture Act of 1939, as amended) and
the Notes. References herein to "interest" are deemed to include Additional
Interest, if any, payable as described under "Exchange Offer and Registration
Rights".
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of the
Company in the Borough of Manhattan, The City of New York (which initially
shall be the corporate trust office of the Trustee in New York, New York),
except that, at the option of the Company, payment of interest may be made by
check mailed to the address of the holders as such address appears in the Note
Register. The Trustee will act as Paying Agent and Registrar for the Notes.
The Notes may be presented for registration of transfer and exchange at the
offices of the Registrar, which initially will be the Trustee's corporate
trust office. The Company may change any Paying Agent and Registrar without
notice to holders of the Notes.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple of $1,000. No service charge
will be made for any registration of transfer or exchange of Notes, but the
Company may require payment of a sum sufficient to cover any transfer tax or
other similar governmental charge payable in connection therewith.
TERMS OF NOTES
The Notes are senior secured obligations of the Company, limited to $100
million aggregate principal amount from time to time outstanding, except as
set forth under the Indenture, and mature on July 1, 2005. Each Note bears
interest at the rate of 11 3/4% per annum from the date of issuance, or from
the most recent date to which interest has been paid or provided for, and will
be payable semiannually on January 1 and July 1 of each year (each an
"Interest Payment Date"), commencing on January 1, 1999, to holders of record
at the close of business on the June 15 or December 15 immediately preceding
the Interest Payment Date. Interest will be computed on the basis of a 360-day
year comprised of twelve 30-day months.
SECURITY
The Notes are secured by a first priority security interest in the Capital
Stock of Jones Programming, the Company's wholly-owned intermediate holding
company and of all direct Subsidiaries of Jones Programming. In addition, the
Notes are guaranteed by Subsidiary Guarantees issued by certain domestic
Restricted Subsidiaries of the Company. The Subsidiary Guarantees are not
secured.
REDEMPTION
Mandatory Redemption. The Company is not required to make mandatory
redemptions or sinking fund payments prior to the maturity of the Notes, but
is required to make an offer to repurchase the Notes in connection with a
change of control and, under certain circumstances, following certain asset
sales. See "Change of Control" and "--Certain Covenants--Limitation on Sales
of Assets and Subsidiary Stock".
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Optional Redemption. Except as set forth below, the Notes are not redeemable
at the option of the Company prior to July 1, 2003. On and after such date,
the Notes are redeemable, at the Company's option, in whole or in part, at any
time upon not less than 30 nor more than 60 days' prior notice mailed by
first-class mail to each holder's registered address, at the following
redemption prices (expressed in percentages of principal amount), if redeemed
during the 12-month period commencing on July 1 of the years set forth below,
plus accrued and unpaid interest to the redemption date (subject to the right
of holders of record on the relevant record date to receive interest due on
the relevant Interest Payment Date):
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
------ ----------
<S> <C>
2003.............................................................. 105.875%
2004 and thereafter............................................... 100.000%
</TABLE>
Optional Redemption Upon Equity Offering. In addition, at any time on or
prior to July 1, 2001, the Company may, at its option, redeem up to 35% of the
originally issued aggregate principal amount of the Notes, with net cash
proceeds of one or more Equity Offerings by the Company, at a redemption price
equal to 111.75% of the principal amount thereof, plus accrued and unpaid
interest thereon, if any, to the date of redemption; provided, however, that
after any such redemption the aggregate principal amount of the Notes
outstanding must equal at least 65% of the aggregate principal amount of Notes
issued under the Indenture; and provided, further, that the Company may not so
redeem the Notes in connection with a Change of Control. In order to effect
the foregoing redemption with the proceeds of any Equity Offering, the Company
shall make such redemption not more than 90 days after the consummation of any
such Equity Offering.
Selection. In the case of any partial redemption, selection of the Notes for
redemption will be made by the Trustee 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, however, that if a partial redemption is made with
proceeds of an Equity Offering, selection of the Notes or portions thereof to
be redeemed shall be made by the Trustee only on a pro rata basis, unless such
method is otherwise prohibited. Notes may be redeemed in part in multiples of
$1,000 principal amount only. Notice of redemption will be sent, by first
class mail, postage prepaid, at least 30 days (unless a shorter period is
acceptable to the Trustee) but no more than 60 days prior to the date fixed
for redemption to each holder whose Notes are to be redeemed at the last
address for such holder then shown on the Note Register. If any Note is to be
redeemed in part only, the notice of redemption that relates to such Note
shall state the portion of the principal amount thereof to be redeemed. A new
Note in principal amount equal to the unredeemed portion thereof will be
issued in the name of the holder thereof upon cancellation of the original
Note. On and after any redemption date, interest will cease to accrue on the
Notes or part thereof called for redemption as long as the Company has
deposited with the Paying Agent funds in satisfaction of the redemption price
pursuant to the Indenture.
RANKING
The Notes are senior secured obligations of the Company and rank pari passu
inright of payment with all existing and future Senior Indebtedness of the
Company and rank senior in right of payment to all existing and future
Subordinated Obligations of the Company. Claims of holders of the Notes are
contractually subordinated under the Subsidiary Guarantees to all claims of
holders of Bank Indebtedness and Capitalized Lease Obligations Incurred by
Restricted Subsidiaries of the Company and structurally subordinated to all
claims of holders of Indebtedness of Unrestricted Subsidiaries of the Company.
SUBSIDIARY GUARANTEES
Each Subsidiary Guarantor has unconditionally guaranteed, jointly and
severally, to each holder and the Trustee, the full and prompt payment of
principal, premium, if any, and interest on the Notes, and of all other
obligations of the Company under the Indenture. The Guarantees are senior
unsecured obligations of each Subsidiary Guarantor and rank pari passu in
right of payment with all existing and future Senior Indebtedness of
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each Subsidiary Guarantor (other than Indebtedness of any Subsidiary Guarantor
in respect of Bank Indebtedness and Capitalized Lease Obligations permitted to
be Incurred by such Subsidiary Guarantor under the covenant described under
"--Certain Covenants--Limitation on Indebtedness", as to which the Subsidiary
Guarantees are expressly subordinated) and senior in right of payment to all
existing and future Subordinated Obligations of each Subsidiary Guarantor.
The obligations of each Subsidiary Guarantor are limited to the maximum
amount as will, after giving effect to all other contingent and fixed
liabilities of such Subsidiary Guarantor and after giving effect to any
collections from or payments made by or on behalf of any other Subsidiary
Guarantor in respect of the obligations of such other Subsidiary Guarantor
under its Subsidiary Guarantee or pursuant to its contribution obligations
under the Indenture, result in the obligations of such Subsidiary Guarantor
under the Subsidiary Guarantee not constituting a fraudulent conveyance or
fraudulent transfer under federal or state law. Each Subsidiary Guarantor that
makes a payment or distribution under a Subsidiary Guarantee shall be entitled
to contribution from each other Subsidiary Guarantor in pro rata amount based
on the Adjusted Net Assets of each Subsidiary Guarantor.
Except as set forth in the Indenture, each Subsidiary Guarantor may
consolidate with or merge into or sell its assets to the Company or another
Subsidiary Guarantor. Subject to the satisfaction of certain conditions, each
Subsidiary Guarantor may consolidate with or merge into or sell all or
substantially all its assets to a Person other than the Company or another
Subsidiary Guarantor (whether or not affiliated with the Subsidiary
Guarantor). Upon the sale or disposition of a Subsidiary Guarantor (or all or
substantially all of its assets) to a Person (whether or not an Affiliate of
the Subsidiary Guarantor) which is not a Subsidiary of the Company or the
designation of a Subsidiary Guarantor as an Unrestricted Subsidiary, which
sale or disposition or designation is otherwise in compliance with the
Indenture (including the covenants described under "Certain Covenants--
Limitation on Sales of Assets and Subsidiary Stock" and "--Limitation on
Designations of Unrestricted Subsidiaries"), such Subsidiary Guarantor shall
be deemed released from all its obligations under the Indenture and its
Subsidiary Guarantee and such Subsidiary Guarantee shall terminate; provided,
however, that any such termination shall occur only to the extent that all of
its guarantees of, and all of its pledges of assets or other security
interests which secure, any other Indebtedness of the Company or any other
Restricted Subsidiary shall also terminate upon such release, sale or
transfer.
Subsequent to the Issue Date, separate financial information for the
Subsidiary Guarantors will not be provided except to the extent required by
Regulation S-X under the Securities Act.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder has the right to
require the Company to repurchase all or any part of such holder's Notes at a
purchase price in cash equal to 101% of the principal amount thereof plus
accrued and unpaid interest, if any, to the date of purchase (subject to the
right of holders of record on the relevant record date to receive interest due
on the relevant Interest Payment Date).
Within 30 days following any Change of Control, unless the Company has
maileda redemption notice with respect to all the outstanding Notes in
connection with such Change of Control, the Company shall mail a notice to
each holder with a copy to the Trustee stating: (i) that a Change of Control
has occurred and that such holder has the right to require the Company to
purchase such holder's Notes at a purchase price in cash equal to 101% of the
principal amount thereof plus accrued and unpaid interest, if any, to the date
of purchase (subject to the right of holders of record on a record date to
receive interest on the relevant Interest Payment Date); (ii) the repurchase
date (which shall be no earlier than 30 days nor later than 60 days from the
date such notice is mailed); and (iii) the procedures determined by the
Company, consistent with the Indenture, that a holder must follow in order to
have its Notes purchased.
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to this covenant. To the
extent that the provisions of any securities laws or regulations conflict with
provisions of the
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Indenture, the Company will comply with the applicable securities laws and
regulations and shall not be deemed to have breached its obligations described
in the Indenture by virtue thereof.
The definition of "Change of Control" includes, among other transactions, a
disposition of all or substantially all of the property and assets of the
Company and its Subsidiaries. With respect to the disposition of property or
assets, the phrase "all or substantially all" as used in the Indenture varies
according to the facts and circumstances of the subject transaction, has no
clearly established meaning under New York law (which is the choice of law
under the Indenture) and is subject to judicial interpretation. Accordingly,
in certain circumstances there may be a degree of uncertainty in ascertaining
whether a particular transaction would involve a disposition of "all or
substantially all" of the property or assets of a Person, and therefore it may
be unclear as to whether a Change of Control has occurred and whether the
Company is required to make an offer to repurchase the Notes as described
above.
Future Senior Indebtedness of the Company and its Subsidiaries may contain
prohibitions of certain events that would constitute a Change of Control or
require such Senior Indebtedness to be repurchased upon a Change of Control.
Moreover, the exercise by the holders of their right to require the Company to
repurchase the Notes could cause a default under such Senior Indebtedness,
even if the Change of Control itself does not, due to the financial effect of
such repurchase of the Company. Finally, the Company's ability to pay cash to
the holders upon a repurchase may be limited by the Company's then existing
financial resources. There can be no assurance that sufficient funds will be
available when necessary to make any required repurchases.
The existence of a holder's right to require the Company to repurchase such
holder's Notes upon the occurrence of a Change of Control may deter a third
party from seeking to acquire the Company in a transaction that would
constitute a Change of Control.
CERTAIN COVENANTS
The Indenture contains certain covenants including, among others, the
following:
Limitation on Indebtedness
(a) The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness; provided, however, that the Company
and its Restricted Subsidiaries that are Subsidiary Guarantors may Incur
Indebtedness if (i) no Default or Event of Default shall have occurred and be
continuing at the time of such Incurrence or would occur as a consequence of
such Incurrence and (ii) on the date thereof the Consolidated Coverage Ratio
(A) with respect to Indebtedness pari passu with the Notes, would be greater
than or equal to 2.0:1 and (B) with respect to Subordinated Obligations, would
be greater than or equal to 1.50:1.
(b) Notwithstanding the foregoing paragraph (a), the Company and its
Restricted Subsidiaries may Incur the following Indebtedness:
(i) Indebtedness of the Company or any Restricted Subsidiary under Bank
Indebtedness and under standby letters of credit or reimbursement
obligations with respect thereto issued in the ordinary course of business
and consistent with industry practice, provided, however, that the
principal amount of any Indebtedness Incurred pursuant to this clause (i)
shall not exceed $20 million at any time outstanding;
(ii) Indebtedness represented by Capitalized Lease Obligations, mortgage
financings or purchase money obligations, in each case Incurred for the
purpose of financing all or any part of the purchase price or cost of
construction or improvement of property or equipment used in a Permitted
Business or Incurred to refinance any such purchase price or cost of
construction or improvement, in each case Incurred no later than 365 days
after the date of such acquisition or the date of completion of such
construction or improvement; provided, however, that the principal amount
of any Indebtedness Incurred pursuant to this clause (ii), together with
Indebtedness Incurred in connection with Sale/Leaseback Transactions in
accordance with the "Limitation on Sale/Leaseback Transactions" covenant,
shall not exceed $5 million at any time outstanding;
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(iii) Indebtedness of the Company owing to and held by any Wholly-Owned
Subsidiary or Indebtedness of a Restricted Subsidiary owing to and held by
the Company or any Wholly-Owned Subsidiary; provided, however, that any
subsequent issuance or transfer of any Capital Stock or any other event
which results in any such Wholly-Owned Subsidiary ceasing to be a Wholly-
Owned Subsidiary or any subsequent transfer of any such Indebtedness
(except to the Company or any Wholly-Owned Subsidiary) shall be deemed, in
each case, to constitute the Incurrence of such Indebtedness by the issuer
thereof;
(iv) Indebtedness represented by (w) the Notes, (x) Existing Indebtedness
and (y) any Refinancing Indebtedness Incurred in respect of any
Indebtedness described in this clause (iv) or Incurred pursuant to
paragraph (a);
(v) (A) Indebtedness of a Person Incurred on or before and outstanding on
the date on which such Person becomes a Restricted Subsidiary of the
Company (other than Indebtedness Incurred in anticipation of, or to provide
all or any portion of the funds or credit support utilized to consummate
the transaction or series of related transactions pursuant to which such
Person became a Subsidiary or was otherwise acquired by the Company);
provided, however, that at the time such Person is acquired by the Company,
the Company would have been able to Incur an additional $1.00 of Senior
Indebtedness pursuant to paragraph (a) above after giving effect to the
Incurrence of such Indebtedness pursuant to this clause (v) and (B)
Refinancing Indebtedness Incurred by a Restricted Subsidiary in respect of
Indebtedness Incurred by such Restricted Subsidiary or another Restricted
Subsidiary the Capital Stock of which is owned, either directly or
indirectly, by the Restricted Subsidiary Incurring such Refinancing
Indebtedness, pursuant to this clause (v);
(vi) Indebtedness (A) in respect of performance bonds, bankers'
acceptances and surety or appeal bonds provided by the Company or any of
its Restricted Subsidiaries to their customers in the ordinary course of
their business, (B) in respect of performance bonds or similar obligations
of the Company or any of its Restricted Subsidiaries for or in connection
with pledges, deposits or payments made or given in the ordinary course of
business in connection with or to secure statutory, regulatory or similar
obligations, including obligations under health, safety or environmental
obligations, (C) arising from Guarantees to suppliers, lessors, licensees,
contractors, franchises or customers of obligations (other than
Indebtedness) Incurred in the ordinary course of business and (D) under
Currency Agreements and Interest Rate Agreements; provided, however, that
in the case of Currency Agreements and Interest Rate Agreements, such
Currency Agreements and Interest Rate Agreements are entered into for bona
fide hedging purposes of the Company or its Restricted Subsidiaries (as
determined in good faith by the Board of Directors of the Company) and
correspond in terms of notional amount, duration, currencies and interest
rates as applicable, to Indebtedness of the Company or its Restricted
Subsidiaries Incurred without violation of the Indenture or to business
transactions of the Company or its Restricted Subsidiaries on customary
terms entered into in the ordinary course of business;
(vii) Indebtedness consisting of (A) Guarantees by the Company of
Indebtedness Incurred by a Wholly-Owned Subsidiary without violation of the
Indenture (so long as the Company could have Incurred such Indebtedness
directly without violation of the Indenture) and (B) Guarantees by a
Restricted Subsidiary of Senior Indebtedness Incurred by the Company
without violation of the Indenture (so long as such Restricted Subsidiary
could have Incurred such Indebtedness directly without violation of the
Indenture);
(viii) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument issued by the
Company or its Restricted Subsidiaries drawn against insufficient funds in
the ordinary course of business in an amount not to exceed $500,000 at any
time, provided that such Indebtedness is extinguished within two business
days of its Incurrence; and
(ix) Indebtedness (other than Indebtedness permitted under clauses (i)
through (viii)) in a principal amount which, when taken together with the
principal amount of all other Indebtedness Incurred pursuant to this clause
(ix) and then outstanding, will not exceed $5 million (it being understood
that any Indebtedness Incurred under this clause (ix) shall cease to be
deemed Incurred or outstanding for purposes of this clause (ix) (but shall
be deemed to be Incurred for purposes of paragraph (a) or paragraph (b) (i)
or (ii), as the case may be) from and after the first date on which the
Company or its Restricted Subsidiaries
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could have Incurred such Indebtedness under the foregoing paragraph (a) or,
to the extent applicable, paragraph (b) (i) or (ii) without reliance upon
this clause (ix)).
(c) Neither the Company nor any Restricted Subsidiary shall Incur any
Indebtedness under paragraph (b) above if the proceeds thereof are used,
directly or indirectly, to refinance any Subordinated Obligations of the
Company or any Restricted Subsidiary unless such Indebtedness shall be
subordinated to the Senior Indebtedness to at least the same extent as the
Subordinated Obligations being refinanced.
(d) Notwithstanding paragraphs (a) and (b) above, neither the Company nor
any Restricted Subsidiary of the Company shall incur any liability, either
direct or contingent, in respect of Bank Indebtedness unless (i) in the case
of the Company, the Company is the borrower or primary obligor in respect of
such Bank Indebtedness or (ii) in the case of any Restricted Subsidiary, such
Restricted Subsidiary is either (a) the borrower or primary obligor in respect
of such Bank Indebtedness or (b) a Wholly Owned Subsidiary of such borrower or
primary obligor.
Limitation on Restricted Payments
(a) The Company shall not, and shall not permit any of its Restricted
Subsidiaries, directly or indirectly, to (i) declare or pay any dividend or
make any distribution on or in respect of its Capital Stock (including any
payment in connection with any merger or consolidation involving the Company
or any of its Restricted Subsidiaries) except (A) dividends or distributions
payable in its Capital Stock (other than Disqualified Stock) or in options,
warrants or other rights to purchase such Capital Stock, and (B) dividends or
distributions payable to the Company or any of its Restricted Subsidiaries by
any of its Subsidiaries (and if the Restricted Subsidiary paying the dividend
or making the distribution is not a Wholly-Owned Subsidiary, to its other
holders of Capital Stock on a pro rata basis), (ii) purchase, redeem, retire
or otherwise acquire for value any Capital Stock of the Company held by
Persons other than a Wholly-Owned Subsidiary of the Company (other than in
exchange for Capital Stock of the Company (other than Disqualified Stock)) or
any Capital Stock of a Restricted Subsidiary held by any Affiliate of the
Company, other than a Wholly-Owned Subsidiary (other than in exchange for
Capital Stock of the Company or such Subsidiary (other than Disqualified
Stock)), (iii) purchase, repurchase, redeem, defease or otherwise acquire or
retire for value, prior to scheduled maturity, scheduled repayment or
scheduled sinking fund payment, any Subordinated Obligations (other than the
purchase, repurchase or other acquisition of Subordinated Obligations
purchased in anticipation of satisfying a sinking fund obligation, principal
installment or final maturity, in each case due within one year of the date of
purchase, repurchase or acquisition) or (iv) make any Investment (other than a
Permitted Investment) in any Person (any such dividend, distribution,
purchase, redemption, repurchase, defeasance, other acquisition, retirement or
Investment as described in preceding clauses (i) through (iv) being referred
to as a "Restricted Payment"); if at the time the Company or such Restricted
Subsidiary makes such Restricted Payment:
(1) a Default shall have occurred and be continuing (or would result
therefrom); or
(2) the Company is not able to Incur an additional $1.00 of Senior
Indebtedness pursuant to paragraph (a) under "--Limitation on
Indebtedness"; or
(3) the aggregate amount of such Restricted Payment and all other
Restricted Payments declared or made subsequent to the Issue Date would
exceed the sum of (A) 50% of the Cumulative Available Cash Flow accrued
during the period (treated as one accounting period) from the first day of
the fiscal quarter beginning on or after the Issue Date to the end of the
most recent fiscal quarter ending prior to the date of such Restricted
Payment as to which financial results are available (but in no event ending
more than 135 days prior to the date of such Restricted Payment) (or, in
case such Cumulative Available Cash Flow shall be a deficit, minus 100% of
such deficit); (B) the aggregate net proceeds received by the Company from
the issue or sale of its Capital Stock (other than Disqualified Stock) to
the extent not applied to redeem Notes as described under "--Redemption--
Optional Redemption Upon Equity Offering" or other capital contributions
subsequent to the Issue Date (other than net proceeds received from an
issuance or sale of such Capital Stock to (x) a Subsidiary of the Company,
(y) an employee stock ownership plan or similar
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trust or (z) management employees of the Company or any Subsidiary of the
Company); provided, however, that the value of any non-cash net proceeds
shall be as determined by the Board of Directors in good faith, except that
in the event the value of any non-cash net proceeds shall be $2 million or
more, the value shall be as determined in writing by an independent
investment banking firm of nationally recognized standing; (C) the amount
by which Indebtedness of the Company is reduced on the Company's balance
sheet upon the conversion or exchange (other than by a Restricted
Subsidiary of the Company) subsequent to the Issue Date of any Indebtedness
of the Company convertible or exchangeable for Capital Stock of the Company
(less the amount of any cash, or other property, distributed by the Company
upon such conversion or exchange); and (D) the amount equal to the net
reduction in Investments (other than Permitted Investments) made after the
Issue Date by the Company or any of its Restricted Subsidiaries in any
Person resulting from (i) repurchases or redemptions of such Investments by
such Person (including liquidating dividends thereon), proceeds realized
upon the sale of such Investment to an unaffiliated purchaser, repayments
of loans or advances or other transfers of assets by such Person to the
Company or any Restricted Subsidiary of the Company or (ii) the
redesignation of Unrestricted Subsidiaries as Restricted Subsidiaries or
the qualification of non-wholly owned Restricted Subsidiaries as Wholly
Owned Subsidiaries (valued in each case as provided in the definition of
"Investment") not to exceed, in the case of any Unrestricted Subsidiary or
any non-wholly owned Subsidiary that thereafter qualifies as a Wholly-Owned
Subsidiary, the amount of Investments previously included in the
calculation of the amount of Restricted Payments; provided, however, that
no amount shall be included under this clause (D) to the extent it is
already included in Cumulative Available Cash Flow.
(b) The provisions of paragraph (a) shall not prohibit: (i) any purchase or
redemption of Capital Stock or Subordinated Obligations of the Company made by
exchange for, or out of the proceeds of the substantially concurrent sale of,
Capital Stock of the Company (other than Disqualified Stock and other than
Capital Stock issued or sold to a Subsidiary, an employee stock ownership plan
or similar trust or management employees of the Company or any Subsidiary of
the Company); provided, however, that (A) such purchase or redemption shall be
excluded in the calculation of the amount of Restricted Payments and (B) the
Net Cash Proceeds from such sale shall be excluded from clause (3)(B) of
paragraph (a); (ii) any purchase or redemption of Subordinated Obligations of
the Company made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Subordinated Obligations of the Company in compliance with
the "Limitation on Indebtedness" covenant; provided, however, that such
purchase or redemption shall be excluded in the calculation of the amount of
Restricted Payments; (iii) any purchase or redemption of Subordinated
Obligations from Net Available Cash to the extent permitted under "--
Limitation on Sales of Assets and Subsidiary Stock" below; provided, however,
that such purchase or redemption shall be excluded in the calculation of the
amount of Restricted Payments; (iv) any purchase or redemption of Capital
Stock pursuant to the terms of the MSO Agreements in an amount not in excess
of $2.5 million on a cumulative basis on and after the Issue Date; provided
that such purchase or redemption shall be included in the calculation of
Restricted Payments; and (v) dividends paid within 60 days after the date of
declaration if at such date of declaration such dividend would have complied
with this provision; provided, however, that such dividend shall be included
in the calculation of the amount of Restricted Payments; and provided,
further, in each case that no Default or Event of Default shall have occurred
or be continuing at the time of such payment or as a result thereof.
(c) For purposes of determining compliance with the foregoing covenant,
Restricted Payments may be made with cash or non-cash assets, provided that
any Restricted Payment made other than in cash shall be valued at the fair
market value (determined, subject to the additional requirements of the
immediately succeeding proviso, in good faith by the Board of Directors) of
the assets so utilized in making such Restricted Payment, provided, further
that (i) in the case of any Restricted Payment made with Capital Stock or
Indebtedness, such Restricted Payment shall be deemed to be made in an amount
equal to the greater of the fair market value thereof and the liquidation
preference (if any) or principal amount of the Capital Stock or Indebtedness,
as the case may be, so utilized, and (ii) in the case of any Restricted
Payment made with non-cash assets in an aggregate amount in excess of $2
million, a written opinion as to the fairness of the valuation thereof (as
determined by the Company) for purposes of determining compliance with the
"Limitation on Restricted Payments" covenant in the Indenture shall be issued
by an independent investment banking firm of national standing.
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(d) Not later than the date of making any Restricted Payment, the Company
shall deliver to the Trustee an Officer's Certificate stating that such
Restricted Payment complies with the Indenture and setting forth in reasonable
detail the basis upon which the required calculations were computed, which
calculations may be based upon the Company's latest available quarterly
financial statements and a copy of any required investment banker's opinion.
(e) Insofar as the Company has made Investments in a Wholly Owned
Subsidiary, whether before, on, or after the Issue Date, and such Subsidiary
thereafter ceases to be a Wholly Owned Subsidiary, on the date such Subsidiary
ceases to be a Wholly Owned Subsidiary, the Company shall be deemed to make an
Investment that constitutes either a Restricted Payment or a Permitted Basket
Investment (to the extent eligible) in an amount equal to the sum of (i) fair
market value of the Capital Stock of such Subsidiary owned by the Company and
the Restricted Subsidiaries plus (but without duplication) (ii) the aggregate
amount of other Investments of the Company and its other Restricted
Subsidiaries in such Subsidiary, in each case as of the date on which such
Subsidiary ceases to be a Wholly Owned Subsidiary.
Limitation on Liens
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, create, incur, assume or suffer to exist any Liens,
except for Permitted Liens.
Limitation on Restrictions on Distributions from Restricted Subsidiaries
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, create or permit to exist or become effective any consensual
encumbrance or restriction on the ability of any such Restricted Subsidiary to
(i) pay ordinary dividends or make any other distributions on its Capital
Stock or pay any Indebtedness or other obligation owed to the Company, (ii)
make any loans or advances to the Company or (iii) transfer any of its
property or assets to the Company, except: (a) any encumbrance or restriction
pursuant to an agreement in effect at or entered into on the Issue Date; (b)
any encumbrance or restriction with respect to such a Restricted Subsidiary
pursuant to an agreement relating to any Indebtedness Incurred by such
Restricted Subsidiary on or prior to the date on which such Restricted
Subsidiary was acquired by the Company and outstanding on such date (other
than Indebtedness Incurred in anticipation of, or to provide all or any
portion of the funds or credit support utilized to consummate, the transaction
or series of related transactions pursuant to which such Restricted Subsidiary
became a Restricted Subsidiary of the Company or was acquired by the Company);
(c) any encumbrance or restriction with respect to such a Restricted
Subsidiary pursuant to an agreement evidencing Indebtedness Incurred without
violation of the Indenture or effecting a refinancing of Indebtedness issued
pursuant to an agreement referred to in clause (b) or this clause (c) or
contained in any amendment to an agreement referred to in clauses (a) or (b)
or this clause (c); provided, however, that the encumbrances and restrictions
with respect to such Restricted Subsidiary contained in any of such agreement,
refinancing agreement or amendment, taken as a whole, are no less favorable to
the holders of the Notes in any material respect, as determined in good faith
by the Board of Directors of the Company, than encumbrances and restrictions
with respect to such Restricted Subsidiary contained in agreements in effect
at, or entered into on, the Issue Date; (d) in the case of clause (iii), any
encumbrance or restriction (A) that restricts in a customary manner the
subletting, assignment or transfer of any property or asset that is a lease,
license, conveyance or contract or similar property or asset, (B) by virtue of
any transfer of, agreement to transfer, option or right with respect to, or
Lien on, any property or assets of the Company or any Restricted Subsidiary
not otherwise prohibited by the Indenture, (C) that is included in a licensing
agreement to the extent such restrictions limit the transfer of the property
subject to such licensing agreement, or (D) arising or agreed to in the
ordinary course of business and that does not, individually or in the
aggregate, detract from the value of property or assets of the Company or any
of its Subsidiaries in any manner material to the Company or any such
Restricted Subsidiary; (e) any encumbrance or restriction applicable to a
Restricted Subsidiary that Incurs Bank Indebtedness without violation of the
Indenture, provided, however, that such encumbrances and restrictions are
applicable only following the occurrence and during the continuance, of a
payment default under the terms of the agreements governing, or the
acceleration of all of, such Bank Indebtedness; (f) in the case of clause
(iii) above, restrictions contained in
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security agreements, mortgages or similar documents securing Indebtedness of a
Restricted Subsidiary to the extent such restrictions restrict the transfer of
the property subject to such security agreements; (g) any restriction with
respect to such a Restricted Subsidiary imposed pursuant to an agreement
entered into for the sale or disposition of all or substantially all the
Capital Stock or assets of such Restricted Subsidiary pending the closing of
such sale or disposition; and (h) encumbrances or restrictions arising or
existing by reason of applicable law.
Limitation on Sales of Assets and Subsidiary Stock
(a) The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, make any Asset Disposition unless (i) the Company or such
Restricted Subsidiary receives consideration at the time of such Asset
Disposition at least equal to the fair market value (as determined in good
faith by senior management of the Company or, if the fair market value of such
assets exceeds $500,000, by the Company's Board of Directors) (including as to
the value of all non-cash consideration), of the shares and assets subject to
such Asset Disposition, (ii) at least 80% of the consideration thereof
received by the Company or such Restricted Subsidiary is in the form of cash
or Cash Equivalents, Additional Assets or distribution agreements with radio
stations or cable television operators or other video distributors which would
receive programming of the Company or its Restricted Subsidiaries according to
the Company's historical practice and (iii) an amount equal to 100% of the Net
Available Cash from such Asset Disposition is applied by the Company (or such
Restricted Subsidiary, as the case may be): (A) first, to the extent the
Company or any Restricted Subsidiary elects (or is required by the terms of
any Senior Indebtedness), (x) to prepay, repay or purchase Senior Indebtedness
of the Company or its Restricted Subsidiaries or (y) to the investment in or
acquisition of Additional Assets within 180 days from the later of the date of
such Asset Disposition or the receipt of such Net Available Cash; (B) second,
within 180 days from the receipt of such Net Available Cash, to the extent of
the balance of such Net Available Cash after application in accordance with
clause (A), to make an offer to purchase Notes (C) third, within 180 days
after the later of the application of Net Available Cash in accordance with
clauses (A) and (B) and the date that is one year from the receipt of such Net
Available Cash, to the extent of the balance of such Net Available Cash after
application in accordance with clauses (A) and (B), to prepay, repay or
repurchase Indebtedness (other than Preferred Stock) of a Wholly-Owned
Subsidiary (in each case other than Indebtedness owed to the Company or
another Wholly-Owned Subsidiary); and (D) fourth, to the extent of the balance
of such Net Available Cash after application in accordance with clauses (A),
(B) and (C), to (w) the investment in or acquisition of Additional Assets, (x)
the making of Temporary Cash Investments, (y) the prepayment, repayment or
purchase of Indebtedness of the Company (other than Indebtedness owing to any
Subsidiary of the Company) or Indebtedness of any Subsidiary (other than
Indebtedness owed to the Company or any of its Restricted Subsidiaries) or (z)
any other purpose otherwise permitted under the Indenture, in each case within
the later of 45 days after the application of Net Available Cash in accordance
with clauses (A), (B) and (C) or the date that is one year from the receipt of
such Net Available Cash; provided, however, that, in connection with any
prepayment, repayment or purchase of Indebtedness pursuant to clause (A), (B),
(C) or (D) above, the Company or such Restricted Subsidiary shall retire such
Indebtedness and shall cause the related loan commitment (if any) to be
permanently reduced in an amount equal to the principal amount so prepaid,
repaid or purchased; provided, however, that the foregoing shall not be deemed
to require any reduction in the commitment for Bank Indebtedness to less than
$20 million. Notwithstanding the foregoing provisions, the Company and its
Restricted Subsidiaries shall not be required to apply any Net Available Cash
in accordance herewith except to the extent that the aggregate Net Available
Cash from all Asset Dispositions which has not been applied in accordance with
this covenant at any time exceeds $5 million. The Company shall not be
required to make an offer for Notes pursuant to this covenant if the Net
Available Cash available therefor (after application of the proceeds as
provided in clause (a) (iii) (A)) is less than $5 million for any particular
Asset Disposition (which lesser amounts shall be carried forward for purposes
of determining whether an offer is required with respect to the Net Available
Cash from any subsequent Asset Disposition).
For the purposes of this covenant, the following will be deemed to be cash:
(x) the assumption by the transferee of Senior Indebtedness of the Company or
Senior Indebtedness of any Restricted Subsidiary of the Company and the
release of the Company or such Restricted Subsidiary from all liability on
such Senior
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Indebtedness or Senior Indebtedness in connection with such Asset Disposition
(in which case the Company shall, without further action, be deemed to have
applied such paid Senior Indebtedness in accordance with clause (a)(iii)(A))
and (y) securities received by the Company or any Restricted Subsidiary of the
Company from the transferee that are promptly (and in any event within 60
days) converted by the Company or such Restricted Subsidiary into cash.
(b) In the event of an Asset Disposition that requires the purchase of Notes
pursuant to clause (a)(iii)(B), the Company will be required to purchase Notes
tendered pursuant to an offer by the Company for the Notes at a purchase price
of 101% of their principal amount plus accrued and unpaid interest, if any, to
the purchase date in accordance with the procedures (including prorating in
the event of oversubscription) set forth in the Indenture. If the aggregate
purchase price of the Notes tendered pursuant to the offer is less than the
Net Available Cash allotted to the purchase of the Notes, the Company will
apply the remaining Net Available Cash in accordance with clauses (a)(iii)(C)
or (D) above. (c) The Company will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities
laws or regulations in connection with the repurchase of Notes pursuant to the
Indenture. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company will comply
with the applicable securities laws and regulations and will not be deemed to
have breached its obligations under the Indenture by virtue thereof.
Limitation on Affiliate Transactions
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, enter into or conduct any transaction
or series of related transactions (including the purchase, sale, lease or
exchange of any property or the rendering of any service) with or for the
benefit of any Affiliate of the Company, other than a Wholly-Owned Subsidiary
(an "Affiliate Transaction") unless: (i) the terms of such Affiliate
Transaction are no less favorable to the Company or such Restricted
Subsidiary, as the case may be, than those that could be obtained at the time
of such transaction in arm's length dealings with a Person who is not such an
Affiliate; (ii) in the event such Affiliate Transaction involves an aggregate
amount in excess of $1 million, the terms of such transaction have been
approved by a majority of the members of the Board of Directors of the Company
and by a majority of the Disinterested Directors, if any (and such majority or
majorities, as the case may be, determine that such Affiliate Transaction
satisfies the criteria in (i) above); (iii) in the event such Affiliate
Transaction involves an aggregate amount in excess of $2 million, the Company
has received a written opinion from an independent investment banking firm of
nationally recognized standing that such Affiliate Transaction is fair to the
Company or such Restricted Subsidiary, as the case may be, from a financial
point of view; and (iv) such Affiliate Transaction does not involve the
acquisition of an Affiliate Business.
(b) The foregoing paragraph (a) shall not apply to (i) any Restricted
Payment permitted to be made pursuant to the covenant described under "--
Limitation on Restricted Payments," or to a Permitted Basket Investment, (ii)
any issuance of securities, or other payments, awards or grants in cash,
securities or otherwise pursuant to, or the funding of, employment
arrangements, or any stock options and stock ownership plans for the benefit
of employees, officers and directors, consultants and advisors approved by the
Board of Directors of the Company, (iii) loans or advances to employees in the
ordinary course of business of the Company or any of its Restricted
Subsidiaries in aggregate amount outstanding not to exceed $500,000 at any
time, (iv) loans or advances to senior management of the Company which loans
and advances are secured by shares of Common Stock of the Company owned by
such senior management, in an aggregate amount outstanding not to exceed
$750,000, (v) any transaction between Wholly-Owned Subsidiaries, (vi)
indemnification agreements with, and the payment of fees and indemnities to,
directors, officers and employees of the Company and its Restricted
Subsidiaries, in each case in the ordinary course of business, (vii)
transactions pursuant to (x) agreements in existence on the Issue Date which
are (I) described in the Offering Memorandum or (II) otherwise, in the
aggregate, immaterial to the Company and its Restricted Subsidiaries taken as
a whole, including extensions of any such agreements which are approved by a
majority of Disinterested Directors and (y) arrangements in existence on the
Issue Date between Jones Intercable and the Company with respect to the
allocation of personnel and other related expenses from Jones Intercable to
the Company in accordance with the parties' historical practices; provided,
however,
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that such arrangements must be approved by a majority of the members of the
Board of Directors of the Company and by a majority of the Disinterested
Directors, if any, within 60 days of the Issue Date, (viii) any employment,
non-competition or confidentiality agreements entered into by the Company or
any of its Restricted Subsidiaries with its employees in the ordinary course
of business, and (ix) the issuance of Capital Stock of the Company (other than
Disqualified Stock).
Limitation on Issuances of Capital Stock of Restricted Subsidiaries
The Company will not permit any of its Restricted Subsidiaries to issue any
Capital Stock to any Person (other than to the Company or a Wholly-Owned
Subsidiary of the Company) or permit any Person (other than the Company or a
Wholly-Owned Subsidiary of the Company) to own any Capital Stock of a
Restricted Subsidiary of the Company, if in either case as a result thereof
such Restricted Subsidiary would no longer be a Restricted Subsidiary of the
Company; provided, however, that this provision shall not prohibit (x) the
Company or any of its Restricted Subsidiaries from selling, leasing or
otherwise disposing of all of the Capital Stock of any Restricted Subsidiary
or (y) the designation of a Restricted Subsidiary as an Unrestricted
Subsidiary in compliance with the Indenture. The Company will not permit
Holdco to issue any Capital Stock to any Person (other than to the Company).
Limitation on Sale/Leaseback Transactions
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into, Guarantee or otherwise become liable with
respect to any Sale/Leaseback Transaction with respect to any property or
assets unless (i) the Company or such Restricted Subsidiary, as the case may
be, would be entitled pursuant to the Indenture to Incur Indebtedness secured
by a Permitted Lien on such property or assets in an amount equal to the
Attributable Indebtedness with respect to such Sale/Leaseback Transaction,
(ii) the Net Cash Proceeds from such Sale/Leaseback Transaction are at least
equal to the fair market value of the property or assets subject to such
Sale/Leaseback Transaction (such fair market value determined, in the event
such property or assets have a fair market value in excess of $500,000, no
more than 30 days prior to the effective date of such Sale/Leaseback
Transaction, by the Board of Directors of the Company as evidenced by a
resolution of such Board of Directors), (iii) the Net Cash Proceeds of such
Sale/Leaseback Transaction are applied in accordance with the provisions
described under "--Limitation on Sales of Assets and Subsidiary Stock," and
(iv) the Indebtedness Incurred in connection with such Sale/Leaseback
Transaction, together with Indebtedness Incurred in accordance with clause
(b)(ii) of the "Limitation on Indebtedness" covenant, does not exceed $5
million at any time outstanding.
SEC Reports
The Company will file with the Trustee and provide to the holders of the
Notes, within 15 days after it files them with the Commission, copies of the
annual reports and of the information, documents and other reports (or copies
of such portions of any of the foregoing as the Commission may by rules and
regulations prescribe) which the Company files with the Commission pursuant to
Section 13 or 15(d) of the Exchange Act. In the event that the Company is not
required to file such reports with the Commission pursuant to the Exchange
Act, the Company will nevertheless deliver such Exchange Act information to
the holders of the Notes within 15 days after it would have been required to
file it with the Commission.
Conduct of Business
The Company will not, and will not permit its Restricted Subsidiaries to
directly or indirectly engage in any business other than a Permitted Business.
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Limitation on Designations of Unrestricted Subsidiaries
The Company may designate any Subsidiary of the Company (other than a
Subsidiary of the Company which owns Capital Stock of a Restricted Subsidiary)
as an "Unrestricted Subsidiary" under the Indenture (a "Designation") only if:
(a) no Default shall have occurred and be continuing at the time of or
after giving effect to such Designation; and
(b) the Company would be permitted under the Indenture to make an
Investment constituting a Restricted Payment or a Permitted Basket
Investment at the time of Designation (assuming the effectiveness of such
Designation) in an amount (the "Designation Amount") equal to the sum of
(i) fair market value of the Capital Stock of such Subsidiary owned by the
Company and the Restricted Subsidiaries on such date plus (but without
duplication) (ii) the aggregate amount of other Investments of the Company
and the Restricted Subsidiaries in such Subsidiary on such date; and
(c) unless the Company could make a Permitted Basket Investment in the
amount described in paragraph (b) above, the Company would be permitted to
Incur an additional $1.00 of Senior Indebtedness pursuant to paragraph (a)
of the "--Limitation on Indebtedness" covenant at the time of Designation
(assuming the effectiveness of such Designation).
In the event of any such Designation, the Company shall be deemed to have
made an Investment constituting a Restricted Payment pursuant to the covenant
described under "--Limitation on Restricted Payments" for all purposes of the
Indenture in the Designation Amount. The Indenture will further provide that
the Company shall not, and shall not permit any Restricted Subsidiary to, at
any time (x) provide direct or indirect credit support for or a guarantee of
any Indebtedness of any Unrestricted Subsidiary (including of any undertaking,
agreement or instrument evidencing such Indebtedness), (y) be directly or
indirectly liable for any Indebtedness of any Unrestricted Subsidiary or (z)
be directly or indirectly liable for any Indebtedness which provides that the
holder thereof may (upon notice, lapse of time or both) declare a default
thereon or cause the payment thereof to be accelerated or payable prior to its
final scheduled maturity upon the occurrence of a default with respect to any
Indebtedness of any Unrestricted Subsidiary (including any right to take
enforcement action against such Unrestricted Subsidiary), except, in the case
of clause (x) or (y), to the extent permitted under the covenant described
under "- -Limitation on Restricted Payments" and, in the case of clause (z),
pursuant to a Guarantee of such Indebtedness of an Unrestricted Subsidiary to
the extent such Guarantee is permitted under the covenant described under "--
Limitation on Restricted Payments."
The Indenture will further provide that the Company may revoke any
Designation of a Subsidiary as an Unrestricted Subsidiary (a "Revocation"),
whereupon such Subsidiary shall then constitute a Restricted Subsidiary, if:
(a) no Default shall have occurred and be continuing at the time of and
after giving effect to such Revocation;
(b) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if incurred at
such time, have been permitted to be incurred for all purposes of the
Indenture;
(c) such Unrestricted Subsidiary does not own or operate an Affiliate
Business.
All Designations and Revocations must be evidenced by Board Resolutions of
the Company delivered to the Trustee certifying compliance with the foregoing
provisions.
Merger and Consolidation
The Company shall not consolidate with or merge with or into, or convey,
transfer or lease all or substantially all of its assets (otherwise than
pursuant to one or more Asset Dispositions that comply with the covenant
described under "--Limitation on Sales of Assets and Subsidiary Stock") to,
any Person, unless: (i) the
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resulting, surviving or transferee Person (the "Successor Company") shall be a
corporation, partnership, trust or limited liability company organized and
existing under the laws of the United States of America, any State thereof or
the District of Columbia and the Successor Company (if not the Company) shall
expressly assume, by supplemental indenture, executed and delivered to the
Trustee, in form satisfactory to the Trustee, all the obligations of the
Company under the Notes and the Indenture; (ii) immediately after giving
effect to such transaction (and treating any Indebtedness that becomes an
obligation of the Successor Company or any Subsidiary of the Successor Company
as a result of such transaction as having been incurred by the Successor
Company or such Restricted Subsidiary at the time of such transaction), no
Default or Event of Default shall have occurred and be continuing; (iii)
immediately after giving effect to such transaction, the Successor Company (A)
would have a Consolidated Net Worth equal to or greater than the Consolidated
Net Worth of the Company immediately prior to such transaction and (B) would
be able to Incur at least an additional $1.00 of Senior Indebtedness pursuant
to paragraph (a) of the "--Limitation on Indebtedness" covenant; and (iv) the
Company shall have delivered to the Trustee an Officers' Certificate and an
Opinion of Counsel, each stating that such consolidation, merger or transfer
and such supplemental indenture (if any) comply with the Indenture.
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, the Company under the Indenture, but, in
the case of a lease of all or substantially all its assets, the Company will
not be released from the obligation to pay the principal of and interest on
the Notes.
Notwithstanding the foregoing clauses (ii) and (iii), any Restricted
Subsidiary of the Company may consolidate with or merge into the Company.
Separate Account
On the Issue Date, the Company deposited $10.0 million of the net proceeds
of the offering of the Old Notes into a separate account, which amount may
only be used by the Company (i) for acquisitions or (ii) to pay principal of
or interest on the Notes.
EVENTS OF DEFAULT
Each of the following constitutes an Event of Default under the Indenture:
(i) a default in any payment of interest on any Note when due, continued for
30 days, (ii) a default in the payment of principal of any Note when due at
its Stated Maturity, upon optional redemption, upon required repurchase, upon
declaration or otherwise, (iii) the failure by the Company to comply with its
obligations under the "Merger and Consolidation" covenant described under
"Certain Covenants" above, (iv) the failure by the Company to comply for 30
days after notice with any of its obligations under the covenants described
under "Change of Control" above or under covenants described under "Certain
Covenants" above (in each case, other than a failure to purchase Notes which
shall constitute an Event of Default under clause (ii) above), other than
"Merger and Consolidation," (v) the failure by the Company or any Subsidiary
Guarantor to comply for 60 days after notice with its other agreements
contained in the Indenture, (vi) Indebtedness of the Company or any Restricted
Subsidiary is not paid within any applicable grace period after final maturity
or is accelerated by the holders thereof because of a default and the total
amount of such Indebtedness unpaid or accelerated exceeds $3 million and such
default shall not have been cured or such acceleration rescinded after a 10-
day period (the "cross acceleration default provision"), (vii) certain events
of bankruptcy, insolvency or reorganization of the Company or a Significant
Subsidiary (the "bankruptcy default provision"), (viii) any judgment or decree
for the payment of money in excess of $3 million (to the extent not covered by
insurance) is rendered against the Company or a Significant Subsidiary and
such judgment or decree shall remain undischarged or unstayed for a period of
60 days after such judgment becomes final and non-appealable (the "judgment
default provision") and (ix) except as permitted by the Indenture, the
cessation of effectiveness of any Subsidiary Guarantee of a Significant
Subsidiary or the disaffirmation by any Subsidiary Guarantor that is a
Significant Subsidiary of its obligations under its Subsidiary Guarantee (the
"guarantee default provision"). However, a default under clause (iv) or (v)
will not constitute an Event of Default until the Trustee or the holders of
25% in principal amount of the outstanding Notes notify the Company of the
default and the Company does not cure such default within the time specified
in clause (iv) or (v) after receipt of such notice.
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If an Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in aggregate principal amount of the outstanding Notes by
notice to the Company may declare the principal of and any accrued and unpaid
interest, if any, on all the Notes to be due and payable. Upon such a
declaration, such principal and accrued and unpaid interest shall be due and
payable immediately. If an Event of Default relating to certain events of
bankruptcy, insolvency or reorganization of the Company occurs, the principal
of and accrued and unpaid interest on all the Notes will become and be
immediately due and payable without any notice or other act on the part of the
Trustee or any holders. Under certain circumstances, the holders of a majority
in principal amount of the outstanding Notes may rescind any such acceleration
with respect to the Notes and its consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, if an Event of Default occurs and is continuing, the Trustee will be
under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the holders unless such
holders have offered to the Trustee reasonable indemnity or security against
any loss, liability or expense. Except to enforce the right to receive payment
of principal, premium (if any) or interest when due, no holder may pursue any
remedy with respect to the Indenture or the Notes unless (i) such holder has
previously given the Trustee notice that an Event of Default is continuing,
(ii) holders of at least 25% in principal amount of the outstanding Notes have
requested the Trustee to pursue the remedy, (iii) such holders have offered
the Trustee reasonable security or indemnity against any loss, liability or
expense, (iv) the Trustee has not complied with such request within 60 days
after the receipt of the request and the offer of security or indemnity and
(v) the holders of a majority in principal amount of the outstanding Notes
have not given the Trustee a direction that, in the opinion of the Trustee, is
inconsistent with such request within such 60-day period. Subject to certain
restrictions, the holders of a majority in principal amount of the outstanding
Notes are given the right to direct the time, method and place of conducting
any proceeding for any remedy available to the Trustee or of exercising any
trust or power conferred on the Trustee. The Trustee, however, may refuse to
follow any direction that conflicts with law or the Indenture or that the
Trustee determines is unduly prejudicial to the rights of any other holder or
that would involve the Trustee in personal liability. Prior to taking any
action under the Indenture, the Trustee shall be entitled to indemnification
satisfactory to it in its sole discretion against all losses and expenses
caused by taking or not taking such action.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each holder notice of the
Default within 90 days after it occurs. Except in the case of a Default in the
payment of any amount due on any Note, the Trustee may withhold notice if and
so long as its board of directors, a committee of its board of directors or a
committee of its Trust officers in good faith determines that withholding
notice is in the interests of the holders of the Notes. In addition, the
Company is required to deliver to the Trustee, within 90 days after the end of
each fiscal year of the Company, a certificate indicating whether the signers
thereof know of any Default that occurred during the previous year. The
Company also is required to deliver to the Trustee, within 30 days after the
occurrence thereof, written notice of any events which would constitute a
Default.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the written
consent of the holders of a majority in aggregate principal amount of the
Notes then outstanding and any past default or compliance with any provisions
may be waived with the consent of the holders of a majority in principal
amount of the Notes then outstanding. However, without the consent of each
holder of an outstanding Note affected, no amendment may, among other things,
(i) reduce the amount of Notes whose holders must consent to an amendment,
(ii) reduce the stated rate of or extend the stated time for payment of
interest on any Note, (iii) reduce the principal of or extend the Stated
Maturity of any Note, (iv) reduce the premium payable upon the redemption or
repurchase of any Note or change the time at which any Note may be redeemed as
described under "Optional Redemption" above, (v) make any Note payable in
money other than that stated in the Note, (vi) impair the right of any holder
to receive any payment on or with respect to such holder's Notes on or after
the due date therefor or to institute suit for the enforcement of any payment
on or with respect to such holder's Notes or (vii) make any change in the
amendment provisions which require each holder's consent or in the waiver
provisions.
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Without the consent of any holder, the Company and the Trustee may amend the
Indenture (i) to cure any ambiguity, omission, defect or inconsistency, (ii)
to provide for the assumption by a successor corporation, partnership, trust
or limited liability company of the obligations of the Company under the
Indenture, (iii) to provide for uncertificated Notes in addition to or in
place of certificated Notes (provided that the uncertificated Notes are issued
in registered form for purposes of Section 163(f) of the Code, or in a manner
such that the uncertificated Notes are described in Section 163(f)(2)(B) of
the Code), (iv) to secure the Notes with additional collateral, (v) to add to
the covenants of the Company for the benefit of the holders or to surrender
any right or power conferred upon the Company, (vi) to make any other change
that does not adversely affect the rights of any holder or (vii) to comply
with any requirement of the Commission in connection with the qualification of
the Indenture under the Trust Indenture Act.
The consent of the holders is not necessary under the Indenture to approve
the particular form of any proposed amendment. It is sufficient if such
consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company is
required to mail to the holders a notice briefly describing such amendment.
However, the failure to give such notice to all the holders or any defect
therein, will not impair or affect the validity of the amendment.
DEFEASANCE
Subject to the satisfaction of certain conditions, the Company at any time
may terminate all its obligations under (i) the Notes and the Indenture
("legal defeasance"), except for certain obligations, including those
respecting the defeasance trust and obligations to register the transfer or
exchange of the Notes, to replace mutilated, destroyed, lost or stolen Notes
and to maintain a registrar and paying agent in respect of the Notes or (ii)
the covenants described under "Certain Covenants" (other than "Merger and
Consolidation"), the operation of the cross acceleration default provision,
the bankruptcy default provision with respect to Significant Subsidiaries, the
judgment default provision and the guarantee default provision described under
"Events of Default" above and the limitations contained in clauses (iii) and
(iv) under "Certain Covenants--Merger and Consolidation" above ("covenant
defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes may not be accelerated because
of an Event of Default with respect thereto. If the Company exercises its
covenant defeasance option, payment of the Notes may not be accelerated
because of an Event of Default specified in clause (iv), (v), (vi), (vii)
(with respect only to Significant Subsidiaries), (viii) or (ix) under "Events
of Default" above or because of the failure of the Company to comply with
clause (iii) or (iv) under "Certain Covenants--Merger and Consolidation"
above.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal, premium (if any) and
interest on the Notes to redemption or maturity, as the case may be, and must
comply with certain other conditions, including delivery to the Trustee of an
Opinion of Counsel to the effect that holders of the Notes will not recognize
income, gain or loss for Federal income tax purposes as a result of such
deposit and defeasance 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 (and, in the case of
legal defeasance only, such Opinion of Counsel must be based on a ruling of
the Internal Revenue Service or other change in applicable Federal income tax
law).
TRANSFER AND EXCHANGE
Upon any transfer of a Note, the Registrar may require a holder of Notes,
among other things, to furnish appropriate endorsements and transfer
documents, and to pay any taxes and fees required by law or permitted by the
Indenture. Neither the Registrar nor the Company is required to register the
transfer or exchange of any Notes
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selected for redemption except the unredeemed portion of any Note being
redeemed in part nor is the Registrar or the Company required to register the
transfer or exchange of any Notes for a period of 15 days before a selection
of Notes to be redeemed. The registered holder of a Note may be treated as the
owner of it for all purposes.
CONCERNING THE TRUSTEE
United States Trust Company of New York is the Trustee under the Indenture
and the Registrar and Paying Agent with regard to the Notes.
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim a security or otherwise. The Trustee is permitted to engage in
other transactions; however, if it acquires any conflicting interest (as
defined in the Indenture) it must eliminate such conflict or resign.
The holders of a majority in aggregate principal amount of the then
outstanding Notes issued under the Indenture have the right to direct the
time, method and place of conducting any proceeding for exercising any remedy
available to the Trustee. The Indenture provides that in case an Event of
Default shall occur (which shall not be cured) the Trustee will be required,
in the exercise of its power, to use the degree of care of a prudent person in
the conduct of his or her own affairs. Subject to such provisions, the Trustee
will be under no obligation to exercise any of its rights or powers under the
Indenture at the request of any of the holders of the Notes issued thereunder
unless they shall have offered to the Trustee security and indemnity
satisfactory to it.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Acquisition Agreement" means the Agreement, dated as of June 2, 1998, by
and among the Company, MediaAmerica, Ron Hartenbaum, Gary Schonfeld and Jones
Network Holdings, LLC.
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) in a Permitted Business; (ii) the Capital
Stock of a Person that becomes a Restricted Subsidiary as a result of the
acquisition of such Capital Stock by the Company or a Restricted Subsidiary of
the Company; (iii) Capital Stock constituting a minority interest in any
Person that at such time is a Restricted Subsidiary of the Company; or (iv)
Permitted Investments of the type and in the amounts described in clause
(viii) of the definition thereof; provided, however, that, in the case of
clauses (ii) and (iii), such Restricted Subsidiary is primarily engaged in a
Permitted Business.
"Adjusted Net Assets" of a Subsidiary Guarantor at any date shall mean the
lesser of (x) the amount by which the fair value of the property of such
Subsidiary Guarantor exceeds the total amount of liabilities, including,
without limitation, the probable liability of such Subsidiary Guarantor with
respect to its contingent liabilities (after giving effect to all other fixed
and contingent liabilities incurred or assumed on such date), but excluding
liabilities under the Subsidiary Guarantee of such Subsidiary Guarantor at
such date and (y) the amount by which the present fair salable value of the
assets of such Subsidiary Guarantor at such date exceeds the amount that will
be required to pay the probable liability of such Subsidiary Guarantor on its
debts (after giving effect to all other fixed and contingent liabilities
incurred or assumed on such date and after giving effect to any collection
from any Subsidiary by such Subsidiary Guarantor in respect of the obligations
of such Subsidiary under the Subsidiary Guarantee), excluding debt in respect
of the Subsidiary Guarantee, as they become absolute and matured.
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"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Affiliate Business" means all or any portion of a business (including
related assets) from an Affiliate (other than a Restricted Subsidiary and, in
the case of any Restricted Subsidiary, any other Restricted Subsidiary).
"Asset Disposition" means any sale, lease, transfer, issuance or other
disposition (or series of related sales, leases, transfers, issuances or
dispositions that are part of a common plan) of shares of Capital Stock of (or
any other equity interests in) a Restricted Subsidiary (other than directors'
qualifying shares) or of any other property or other assets (each referred to
for the purposes of this definition as a "disposition") by the Company or any
of its Restricted Subsidiaries (including any disposition by means of a
merger, consolidation or similar transaction) other than (i) a disposition by
a Restricted Subsidiary to the Company or by the Company or a Restricted
Subsidiary to a Wholly-Owned Subsidiary, (ii) a disposition of inventory in
the ordinary course of business, (iii) the licensing of radio and cable
television programming in the ordinary course of business, (iv) the
disposition in the ordinary course of business of airtime and advertising
inventory, (v) a disposition of obsolete or worn out equipment or equipment
that is no longer useful in the conduct of the business of the Company and its
Restricted Subsidiaries and that is disposed of in each case in the ordinary
course of business, (vi) dispositions of property for net proceeds which, when
taken collectively with the net proceeds of any other such dispositions under
this clause (vi) that were consummated since the beginning of the calendar
year in which such disposition is consummated, do not exceed $1 million, and
(vii) transactions permitted under "Certain Covenants--Merger and
Consolidation" above. Notwithstanding anything to the contrary contained
above, a Restricted Payment made in compliance with the "Limitation on
Restricted Payments" covenant shall not constitute an Asset Disposition except
for purposes of determinations of the Consolidated Coverage Ratio.
"Attributable Indebtedness" in respect of a Sale/Leaseback Transaction
means, as at the time of determination, the present value (discounted at the
interest rate borne by the Notes, compounded annually) of the total
obligations of the lessee for rental payments during the remaining term of the
lease included in such Sale/Leaseback Transaction (including any period for
which such lease has been extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the product of the numbers of years (rounded upwards to the nearest month)
from the date of determination to the dates of each successive scheduled
principal payment of such Indebtedness or redemption or similar payment with
respect to Preferred Stock multiplied by the amount of such payment by (ii)
the sum of all such payments.
"Bank Indebtedness" means loans to the Company or a Restricted Subsidiary
that are made by, and reimbursement obligations in respect of letters of
credit for the account of the Company or a Restricted Subsidiary that are
issued by, banks, trust companies and other institutions, principally engaged
in the business of lending money to businesses, under a credit facility, loan
agreement or similar agreement.
"Capitalized Lease Obligations" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented
by such obligation shall be the capitalized amount of such obligation
determined in accordance with GAAP, and the Stated Maturity thereof shall be
the date of the last payment of rent or any other amount due under such lease
prior to the first date such lease may be terminated without penalty.
"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any
Preferred Stock, but excluding any debt securities convertible into such
equity.
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"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof, (iii) certificates of deposit, time
deposits and eurodollar time deposits with maturities of one year or less from
the date of acquisition, bankers' acceptances with maturities not exceeding
one year and overnight bank deposits, in each case with any commercial bank
having capital and surplus in excess of $500 million, (iv) repurchase
obligation for underlying securities of the types described in clauses (ii)
and (iii) entered into with any financial institution meeting the
qualifications specified in clause (iii) above, (v) commercial paper rated A-1
or the equivalent thereof by Moody's or S&P and in each case maturing within
one year after the date of acquisition, (vi) investment funds investing 95% of
their assets in securities of the types described in clauses (i)-(v) above,
(vii) readily marketable direct obligations issued by any state of the United
States of America or any political subdivision thereof having one of the two
highest rating categories obtainable from either Moody's or S&P and (viii)
Indebtedness or Preferred Stock issued by Persons with a rating of "A" or
higher from S&P or "A2" or higher from Moody's.
"Change of Control" means (i) any sale, lease, exchange or other transfer
(in one transaction or a series of related transactions) of all or
substantially all the assets of the Company and its Subsidiaries (to a Person
other than a Wholly Owned Subsidiary); or (ii) the Company shall cease to hold
directly all of the outstanding Capital Stock of Holdco; or (iii) Mr. Glenn R.
Jones and/or his Permitted Transferees at any time cease to hold in the
aggregate, either directly or indirectly, Capital Stock having ordinary voting
power to elect a majority of directors of the Company.
"Common Stock" of any Person means Capital Stock of such Person that does
not rank prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding
up of such Person, to shares of Capital Stock of any other class of such
Person.
"Consolidated Adjusted Operating Cash Flow" means, with respect to any
period the Consolidated Net Income for such period increased by, to the extent
deducted in computing Consolidated Net Income, the sum of (i) depreciation and
(ii) amortization, determined on a consolidated basis in accordance with GAAP.
"Consolidated Cash Flow" for any period means the Consolidated Net Income
for such period, plus the following to the extent deducted in calculating such
Consolidated Net Income: (i) income tax expense, (ii) Consolidated Interest
Expense, (iii) depreciation expense, (iv) amortization expense, (v) exchange
or translation losses on foreign currencies, and (vi) all other non-cash items
reducing Consolidated Net Income (excluding any non-cash item to the extent it
represents an accrual of or reserve for cash disbursements for any subsequent
period prior to the Stated Maturity of the Notes) and less, to the extent
added in calculating Consolidated Net Income, (x) exchange or translation
gains on foreign currencies and (y) non-cash items (excluding such non-cash
items to the extent they represent an accrual for cash receipts reasonably
expected to be received prior to the Stated Maturity of the Notes), in each
case for such period. Notwithstanding the foregoing, the income tax expense,
depreciation expense and amortization expense of a Subsidiary of the Company
shall be included in Consolidated Cash Flow only to the extent (and in the
same proportion) that the net income of such Subsidiary was included in
calculating Consolidated Net Income.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of Consolidated Cash Flow for the period of
the most recent four consecutive fiscal quarters ending prior to the date of
such determination and as to which financial statements are available to (ii)
Consolidated Interest Expense for such four fiscal quarters; provided,
however, that (1) if the Company or any of its Restricted Subsidiaries has
Incurred any Indebtedness since the beginning of such period and through the
date of determination of the Consolidated Coverage Ratio that remains
outstanding or if the transaction giving rise to the need to calculate
Consolidated Coverage Ratio is an Incurrence of Indebtedness, or both,
Consolidated Cash Flow and Consolidated Interest Expense for such period shall
be calculated after giving effect on a pro forma basis to (A) such
Indebtedness as if such Indebtedness had been Incurred on the first day of
such period (provided that if such Indebtedness is Incurred under a revolving
credit facility (or similar arrangement or under any predecessor revolving
credit or similar arrangement) only that portion of such Indebtedness that
constitutes the projected
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weighted average balance of such Indebtedness for the period beginning on the
first day of such four consecutive fiscal quarter period and ending on the
date one year subsequent to such date (as determined in good faith by the
Board of Directors of the Company and as adjusted to give effect to
Indebtedness that has been permanently repaid and the underlying commitment
terminated and has not been replaced) shall be deemed outstanding for purposes
of this calculation), and (B) the discharge of any other Indebtedness repaid,
repurchased, defeased or otherwise discharged with the proceeds of such new
Indebtedness as if such discharge had occurred on the first day of such
period, (2) if since the beginning of such period any Indebtedness of the
Company or any of its Restricted Subsidiaries has been repaid, repurchased,
defeased or otherwise discharged (other than Indebtedness under a revolving
credit or similar arrangement unless such revolving credit Indebtedness has
been permanently repaid and the underlying commitment terminated and has not
been replaced), Consolidated Interest Expense for such period shall be
calculated after giving pro forma effect thereto as if such Indebtedness had
been repaid, repurchased, defeased or otherwise discharged on the first day of
such period, (3) if since the beginning of such period the Company or any of
its Restricted Subsidiaries shall have made any Asset Disposition or if the
transaction giving rise to the need to calculate the Consolidated Coverage
Ratio is an Asset Disposition, Consolidated Cash Flow for such period shall be
reduced by an amount equal to the Consolidated Cash Flow (if positive)
attributable to the assets which are the subject of such Asset Disposition for
such period or increased by an amount equal to the Consolidated Cash Flow (if
negative) attributable thereto for such period, and Consolidated Interest
Expense for such period shall be (i) reduced by an amount equal to the
Consolidated Interest Expense attributable to any Indebtedness of the Company
or any of its Restricted Subsidiaries repaid, repurchased, defeased or
otherwise discharged with respect to the Company and its continuing Restricted
Subsidiaries in connection with such Asset Disposition for such period (or, if
the Capital Stock of any Restricted Subsidiary of the Company is sold, the
Consolidated Interest Expense for such period directly attributable to the
Indebtedness of such Restricted Subsidiary to the extent the Company and its
continuing Restricted Subsidiaries are no longer liable for such Indebtedness
after such sale) and (ii) increased by interest income attributable to the
assets which are the subject of such Asset Disposition for such period, (4) if
since the beginning of such period the Company or any of its Restricted
Subsidiaries (by merger or otherwise) shall have made an Investment in any
Restricted Subsidiary of the Company (or any Person which becomes a Restricted
Subsidiary of the Company as a result thereof) or an acquisition of assets
which constitutes all or substantially all of an operating unit or a business
in connection with a transaction causing a calculation to be made hereunder,
Consolidated Cash Flow and Consolidated Interest Expense for such period shall
be calculated after giving pro forma effect thereto (including the Incurrence
of any Indebtedness) as if such Investment or acquisition occurred on the
first day of such period and (5) if since the beginning of such period any
Person (that subsequently became a Restricted Subsidiary of the Company or was
merged with or into the Company or any Restricted Subsidiary of the Company
since the beginning of such period) shall have made any Asset Disposition,
Investment or acquisition of assets that would have required an adjustment
pursuant to clause (3) or (4) above if made by the Company or a Restricted
Subsidiary of the Company during such period, Consolidated Cash Flow and
Consolidated Interest Expense for such period shall be calculated after giving
pro forma effect thereto as if such Asset Disposition, Investment or
acquisition occurred on the first day of such period. For purposes of this
definition, whenever pro forma effect is to be given to an acquisition or
disposition of assets, the amount of income or earnings relating thereto and
the amount of Consolidated Interest Expense associated with any Indebtedness
Incurred in connection therewith, the pro forma calculations shall be
determined in good faith by a responsible financial or accounting officer of
the Company. If any Indebtedness being Incurred bears a floating rate of
interest and is being given pro forma effect, the interest expense on such
Indebtedness shall be calculated as if the rate in effect on the date of
determination had been the applicable rate for the entire period (taking into
account any Interest Rate Agreement applicable to such Indebtedness if such
Interest Rate Agreement has a remaining term in excess of 12 months).
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its Restricted Subsidiaries determined in
accordance with GAAP, plus, to the extent not included in such interest
expense (i) interest expense attributable to Capitalized Lease Obligations,
(ii) amortization of debt discount, (iii) capitalized interest, (iv) non-cash
interest expense, (v) commissions, discounts and other fees and charges owed
with respect to letters of credit and bankers' acceptance financing, (vi)
interest actually paid by the Company or
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any such Restricted Subsidiary under any Guarantee of Indebtedness or other
obligation of any other Person, (vii) net payments (whether positive or
negative) pursuant to Interest Rate Agreements, (viii) the cash contributions
to any employee stock ownership plan or similar trust to the extent such
contributions are used by such plan or trust to pay interest or fees to any
Person (other than the Company) in connection with Indebtedness Incurred by
such plan or trust and (ix) cash and Disqualified Stock dividends in respect
of all Preferred Stock of Subsidiaries and Disqualified Stock of the Company
held by Persons other than the Company or a Wholly-Owned Subsidiary and less
(a) to the extent included in such interest expense, the amortization of
capitalized debt issuance costs and (b) interest income. Notwithstanding the
foregoing, the Consolidated Interest Expense with respect to any Restricted
Subsidiary of the Company, that was not a Wholly-Owned Subsidiary, shall be
included only to the extent (and in the same proportion) that the net income
of such Restricted Subsidiary was included in calculating Consolidated Net
Income.
"Consolidated Net Income" means, for any period, the consolidated net income
(loss) of the Company and its consolidated Subsidiaries determined in
accordance with GAAP; provided, however, that there shall not be included in
such Consolidated Net Income: (i) any net income (loss) of any Person acquired
by the Company or any of its Restricted Subsidiaries in a pooling of interests
transaction for any period prior to the date of such acquisition, (ii) any net
income of any Restricted Subsidiary of the Company if such Restricted
Subsidiary is subject to restrictions, directly or indirectly, on the payment
of dividends or the making of distributions by such Restricted Subsidiary,
directly or indirectly, to the Company (other than restrictions in effect on
the Issue Date with respect to a Restricted Subsidiary of the Company and
other than restrictions that are created or exist in compliance with the
"Limitation on Restrictions on Distributions from Restricted Subsidiaries"
covenant), (iii) any gain or loss realized upon the sale or other disposition
of any assets of the Company or its consolidated Restricted Subsidiaries
(including pursuant to any Sale/Leaseback Transaction) which are not sold or
otherwise disposed of in the ordinary course of business and any gain or loss
realized upon the sale or other disposition of any Capital Stock of any
Person, (iv) any extraordinary gain or loss, (v) the cumulative effect of a
change in accounting principles, (vi) the net income of any Person, other than
a Restricted Subsidiary, except to the extent of the lesser of (A) cash
dividends or distributions actually paid to the Company or any of its
Restricted Subsidiaries by such Person and (B) the net income of such Person
(but in no event less than zero), (vii) the net loss of any Person (other than
a Subsidiary) in excess of the aggregate Investment of the Company or any of
its Restricted Subsidiaries in such Person and (viii) any non-cash expenses
attributable to grants or exercises of employee stock options. Notwithstanding
the foregoing, (A) Consolidated Net Income for any period shall be reduced by
the aggregate amount of dividends paid during such period pursuant to clause
(v) of paragraph (b) of the "Limitation on Restricted Payments" covenant and
(B) for the purpose of the covenant described under "Certain Covenants--
Limitation on Restricted Payments" only, there shall be excluded from
Consolidated Net Income, as such term is used in calculating Consolidated
Adjusted Operating Cash Flow, any dividends, repayments of loans or advances
or other transfers of assets from Unrestricted Subsidiaries to the Company or
a Restricted Subsidiary to the extent such dividends, repayments or transfers
increase the amount of Restricted Payments permitted under such covenant
pursuant to clause (a)(3)(D) thereof.
"Consolidated Net Worth" means the total of the amounts shown on the balance
sheet of the Company and its consolidated Restricted Subsidiaries, determined
on a consolidated basis in accordance with GAAP, as of the end of the most
recent fiscal quarter of the Company ending prior to the taking of any action
for the purpose of which the determination is being made and for which
financial statements are available (but in no event ending more than 135 days
prior to the taking of such action), as (i) the par or stated value of all
outstanding Capital Stock of the Company plus (ii) paid in capital or capital
surplus relating to such Capital Stock plus (iii) any retained earnings or
earned surplus less (A) any accumulated deficit and (B) any amounts
attributable to Disqualified Stock.
"Cumulative Available Cash Flow" means, as of any date of determination, the
positive cumulative Consolidated Adjusted Operating Cash Flow, or, if such
cumulative Consolidated Adjusted Operating Cash Flow for such period is
negative, the amount by which cumulative Consolidated Adjusted Operating Cash
Flow is less than zero.
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"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement as to which such
Person is a party or a beneficiary.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Disinterested Director" means a member of the Board of Directors of the
Company who is not otherwise affiliated with the Company and who is not
otherwise involved or interested in the transaction in question.
"Disqualified Stock" means any Capital Stock which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event (other than an event which
would constitute a Change of Control), (i) matures (excluding any maturity as
the result of an optional redemption by the issuer thereof) or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is
redeemable at the option of the holder thereof, in whole or in part, on or
prior to the Stated Maturity of the Notes, or (ii) is convertible into or
exchangeable (unless at the sole option of the issuer thereof) for (a) debt
securities or (b) any Capital Stock referred to in (i) above, in each case at
any time prior to the Stated Maturity of the Notes; provided, that Capital
Stock issued pursuant to the Acquisition Agreement and the MSO Agreements
entered into by the Company as of the Issue Date shall not be considered
Disqualified Stock. Disqualified Stock shall be deemed to be Incurred as
Indebtedness in an amount equal to (i) the greater of its maximum voluntary or
involuntary liquidation preference or repurchase price, if any, plus accrued
and unpaid dividends or (ii) if redeemable at fair market value or at some
fixed premium over fair market value, then the average closing price on the
principal securities exchange or automated quotation system on which such
Disqualified Stock is listed or eligible for trading on the five trading days
immediately preceding the date on which it is issued or, if not so listed or
eligible, the value as of such date as determined in writing by an independent
investment banking firm of nationally recognized standing plus, in either
case, any applicable premium.
"Equity Offering" means an offering for cash by the Company of its common
stock, or options, warrants or rights with respect to its common stock.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or any
successor statute or statutes thereto.
"Existing Indebtedness" means Indebtedness of the Company or its Restricted
Subsidiaries in existence on the Issue Date, plus interest accrued thereon,
after application of the net proceeds of the sale of the Notes.
"Fair Market Value" means, with respect to any asset or property, the price
which could be negotiated in an arms-length, free market transaction, for
cash, between a willing seller and a willing and able buyer, neither of whom
is under undue pressure or compulsion to complete the transaction. Except as
otherwise expressly provided, fair market value shall be determined by the
Board of Directors of the Company acting reasonably and in good faith and
shall be evidenced by a Board Resolution of the Board of Directors of the
Company delivered to the Trustee.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the date of the Indenture, including 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 based on GAAP contained in
the Indenture shall be computed in conformity with GAAP.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and
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 agreement to keep-well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement
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conditions or otherwise) or (ii) entered into for purposes of assuring in any
other manner the obligee of such Indebtedness of the payment thereof or to
protect such obligee against loss in respect thereof (in whole or in part);
provided, however, 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 issue, assume, guarantee, incur or otherwise become liable
for, and "Incurrence" has a corresponding meaning; provided, however, that (i)
any Indebtedness or Disqualified Stock of a Person existing at the time such
Person becomes a Restricted Subsidiary (whether by merger, consolidation,
acquisition or otherwise) shall be deemed to be Incurred at the time it
becomes a Restricted Subsidiary and (ii) neither the accrual of interest nor
the accretion of discount on Indebtedness shall be deemed to be an Incurrence
of additional Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of indebtedness of such Person for borrowed money, (ii) the
principal of and premium (if any) in respect of obligations of such Person
evidenced by bonds, debentures, notes or other similar instruments, (iii) all
obligations of such Person in respect of letters of credit or other similar
instruments (including reimbursement obligations with respect thereto) (other
than obligations with respect to letters of credit securing obligations (other
than obligations described in clauses (i), (ii) and (v) ) entered into in the
ordinary course of business of such Person to the extent that such letters of
credit are not drawn upon or, if and to the extent drawn upon, such drawing is
reimbursed no later than the third business day following receipt by such
Person of a demand for reimbursement following payment on the letter of
credit), (iv) all obligations of such Person to pay the deferred and unpaid
purchase price of property or services (except trade payables and accrued
expenses Incurred in the ordinary course of business), 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, (v) all
Capitalized Lease Obligations and all Attributable Indebtedness of such
Person, (vi) 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,
(vii) all Indebtedness of other Persons to the extent Guaranteed by such
Person, (viii) the amount of all obligations of such Person with respect to
the redemption, repayment or other repurchase of any Disqualified Stock or,
with respect to any Restricted Subsidiary of the Company, any Preferred Stock
of such Restricted Subsidiary to the extent such obligation arises on or
before the Stated Maturity of the Notes (but excluding, in each case, accrued
dividends) with the amount of Indebtedness represented by such Disqualified
Stock or Preferred Stock, as the case may be, being equal to the greater of
its voluntary or involuntary liquidation preference and its maximum fixed
repurchase price; provided that, for purposes hereof the "maximum fixed
repurchase price" of any Disqualified Stock or Preferred Stock, as the case
may be, which does not have a fixed repurchase price shall be calculated in
accordance with the terms of such Disqualified Stock or Preferred Stock, as
the case may be, as if such Disqualified Stock or Preferred Stock, as the case
may be, were purchased on any date on which Indebtedness shall be required to
be determined pursuant to the Indenture, and if such price is based on the
fair market value of such Disqualified Stock or Preferred Stock, as the case
may be, such fair market value shall be determined in good faith by the Board
of Directors of the Company and (ix) to the extent not otherwise included in
this definition, obligations under Currency Agreements and Interest Rate
Agreements. Unless specifically set forth above, the amount of Indebtedness of
any Person at any date shall be the outstanding principal amount of all
unconditional obligations as described above, as such amount would be
reflected on a balance sheet prepared in accordance with GAAP, and the maximum
liability of such Person, upon the occurrence of the contingency giving rise
to the obligation, of any contingent obligations described above at such date.
Indebtedness shall not include any obligation to purchase or redeem the
Capital Stock of the Company pursuant to the terms of the MSO Agreements as in
effect on the Issue Date or the Acquisition Agreement.
"Interest Rate Agreement" means with respect to any Person any 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 or other similar
agreement or arrangement as to which such Person is party or a beneficiary.
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"Investment" in any Person means any direct or indirect advance, loan (other
than advances to customers in the ordinary course of business that are
recorded as accounts payable on the balance sheet of such Person) or other
extension of credit (including by way of Guarantee or similar arrangement, but
excluding any debt or extension of credit represented by a bank deposit other
than a time deposit) or capital contribution to (by means of any transfer of
cash or other property (excluding Capital Stock (other than Disqualified
Stock) of the Company) to others or any payment for property or services for
the account or use of others), or any purchase or acquisition of Capital
Stock, Indebtedness or other similar instruments issued by such Person. For
purposes of the "Limitation on Restricted Payments" covenant and
determinations relating to Permitted Basket Investments, (i) "Investment"
shall include the portion (proportionate to the Company's equity interest in a
Restricted Subsidiary to be designated as an Unrestricted Subsidiary or in a
Wholly Owned Subsidiary that otherwise ceases to qualify as such) of the fair
market value of the net assets of such Subsidiary of the Company at the time
that such Restricted Subsidiary is designated an Unrestricted Subsidiary or
such Wholly Owned Subsidiary otherwise ceases to qualify as such; provided,
however, that upon a redesignation of an Unrestricted Subsidiary as a
Restricted Subsidiary or upon the qualification of a non-wholly owned
Restricted Subsidiary as a Wholly Owned Subsidiary, the Company shall be
deemed to continue to have a permanent "Investment" in an Unrestricted
Subsidiary or a non-wholly owned Restricted Subsidiary in an amount (if
positive) equal to (x) the Company's "Investment" in such Subsidiary at the
time of such redesignation or qualification less (y) the portion
(proportionate to the Company's equity interest in such Subsidiary) of the
fair market value of the net assets of such Subsidiary at the time that such
Subsidiary is so redesignated a Restricted Subsidiary or qualifies as a Wholly
Owned Subsidiary; and (ii) any property transferred to or from an Unrestricted
Subsidiary or a Restricted Subsidiary that is not a Wholly Owned Subsidiary
shall be valued at its fair market value at the time of such transfer, in each
case as determined in good faith by the Board of Directors and evidenced by a
resolution of such Board of Directors certified in an Officers' Certificate to
the Trustee.
"Issue Date" means the date on which the Notes were originally issued. The
Issue Date is July 10, 1998. "Jones Programming" means JPN, Inc., a Colorado
corporation and a Wholly Owned Subsidiary of the Company.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Moody's" means Moody's Investors Service, Inc.
"MSO Agreements" means agreements with multiple system operators of cable
television systems providing for the issuance of Class A Common Stock of the
Company in exchange for specified service commitments, entered into in
accordance with the Company's historical practice.
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise, but only as and
when received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Indebtedness or other obligations
relating to the properties or assets subject to such Asset Disposition)
therefrom in each case net of (i) all legal, title and recording tax expenses,
commissions and other fees and expenses incurred, and all Federal, state,
foreign and local taxes required to be paid or accrued as a liability under
GAAP, as a consequence of such Asset Disposition, (ii) all payments made on
any Indebtedness which is secured by any assets subject to such Asset
Disposition, in accordance with the terms of any Lien upon such assets, or
which must by its terms, or in order to obtain a necessary consent to such
Asset Disposition or by applicable law, be repaid out of the proceeds from
such Asset Disposition, (iii) all distributions and other payments made to any
Person owning a beneficial interest in assets subject to sale or minority
interest holders in Subsidiaries or joint ventures as a result of such Asset
Disposition, (iv) the deduction of appropriate amounts to be provided by the
seller as a reserve, in accordance with GAAP, against any liabilities
associated with the assets disposed of in such Asset Disposition, provided
however, that upon any reduction in such reserves (other than to the extent
resulting from payments of the respective reserved liabilities), Net
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Available Cash shall be increased by the amount of such reduction to reserves,
and retained by the Company or any Restricted Subsidiary of the Company after
such Asset Disposition and (v) any portion of the purchase price from an Asset
Disposition placed in escrow (whether as a reserve for adjustment of the
purchase price, for satisfaction of indemnities in respect of such Asset
Disposition or otherwise in connection with such Asset Disposition) provided,
however, that upon the termination of such escrow, Net Available Cash shall be
increased by any portion of funds therein released to the Company or any
Restricted Subsidiary.
"Net Cash Proceeds," with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees and expenses,
discounts or commissions and brokerage, consultant and other fees actually
Incurred in connection with such issuance or sale and net of taxes paid or
payable as a result of such issuance or sale.
"Officer" means the Chairman of the Board, the Chief Executive Officer, the
Chief Financial Officer, or any Vice President, the Treasurer or the Secretary
of the Company.
"Officer's Certificate" shall mean a certificate signed by two Officers of
the Company, at least one of whom shall be the principal executive, financial
or accounting officer of the Company.
"Opinion of Counsel" means a written opinion, in form and substance
acceptable to the Trustee, from legal counsel, which may be internal counsel
to the Company, who is acceptable to the Trustee.
"Paying Agent" means United States Trust Company of New York, as paying
agent under the Indenture, or any successor thereto appointed pursuant to the
Indenture.
"Permitted Basket Investment" means an Investment by the Company or a
Restricted Subsidiary in a Restricted Subsidiary (other than a Wholly Owned
Subsidiary), an Unrestricted Subsidiary or any other Person engaged in a
Permitted Business, including without limitation a loan or advance to, or
Guarantee of Indebtedness of, a Restricted Subsidiary (other than a Wholly
Owned Subsidiary), an Unrestricted Subsidiary or any other Person engaged in a
Permitted Business; provided, however, that no such Investment may qualify as
a Permitted Basket Investment to the extent the amount thereof, when taken
together with all other such Investments that qualify as Permitted Basket
Investments, would exceed an aggregate amount outstanding at any time equal to
the sum of (i) $10 million plus (ii) to the extent not previously reinvested
as a Permitted Basket Investment, any interest payment or dividend or other
distribution from cumulative earnings realized on any Permitted Basket
Investments, or any release or other cancellation of any Guarantee
constituting a Permitted Basket Investment plus (iii) to the extent not
previously reinvested as a Permitted Basket Investment, any return of capital
on a Permitted Basket Investment (including any deemed return of capital
resulting from the designation or qualification of the recipient thereof as a
Restricted Subsidiary (if such recipient was previously an Unrestricted
Subsidiary) or as a Wholly Owned Subsidiary (if such recipient was previously
a non-wholly owned Restricted Subsidiary)) less (iv) all losses realized on
the sale or other disposition of Permitted Basket Investments.
"Permitted Business" means any business which is the same as or related,
ancillary or complementary to any of the businesses of the Company and its
Restricted Subsidiaries on the date of the Indenture, as reasonably determined
by the Company's Board of Directors, including, without limitation,
advertising sales, services and representation; the acquisition, development,
licensing, distribution and sale, through existing or new media, of new
programming, networks, products and services related, ancillary or
complementary to any of the businesses of the Company and its Restricted
Subsidiaries on the date of the Indenture; and all aspects of satellite
delivery and production support, services and facilities; provided, that, an
entity which is not an operating entity and whose primary business is to hold
or maintain intellectual property or licenses shall not qualify as a
"Permitted Business."
"Permitted Investment" means an Investment by the Company or any of its
Restricted Subsidiaries in (i) a Wholly-Owned Subsidiary of the Company;
provided, however, that the primary business of such Wholly-Owned Subsidiary
is a Permitted Business; (ii) another Person if as a result of such Investment
such other Person
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becomes a Wholly-Owned Subsidiary of the Company or is merged or consolidated
with or into, or transfers or conveys all or substantially all its assets to,
the Company or a Wholly-Owned Subsidiary of the Company; provided, however,
that in each case such Person's primary business is a Permitted Business,
(iii) Temporary Cash Investments; (iv) receivables owing to the Company or any
of its Restricted Subsidiaries, created or acquired in the ordinary course of
business and payable or dischargeable in accordance with customary trade
terms; (v) payroll, travel and similar advances to cover matters that are
expected at the time of such advances ultimately to be treated as expenses for
accounting purposes and that are made in the ordinary course of business; (vi)
loans and advances to employees made in the ordinary course of business
consistent with past practices of the Company or such Restricted Subsidiary in
an aggregate amount outstanding at any one time not to exceed $500,000; (vii)
loans or advances to senior management of the Company which loans or advances
are secured by shares of Common Stock of the Company owned by such senior
management in an aggregate amount outstanding not to exceed $750,000; (viii)
stock, obligations or securities received in settlement of debts created in
the ordinary course of business and owing to the Company or any of its
Restricted Subsidiaries or in satisfaction of judgments or claims; (ix) a
Permitted Basket Investment (x) Persons to the extent such Investment is
received by the Company or any Restricted Subsidiary as consideration for
Asset Dispositions effected in compliance with the covenant described under
"--Limitations on Sales of Assets and Subsidiary Stock"; (xi) prepayments and
other credits to suppliers made in the ordinary course of business consistent
with the past practices of the Company and its Restricted Subsidiaries; and
(xii) Investments in connection with pledges, deposits, payments or
performance bonds made or given in the ordinary course of business in
connection with or to secure statutory, regulatory or similar obligations,
including obligations under health, safety or environmental obligations.
"Permitted Liens" means: (i) Liens imposed by law, such as carriers',
warehousemen's and mechanics' Liens, in each case for sums not yet due from
the Company or any Restricted Subsidiary or being contested in good faith by
appropriate proceedings by the Company or any Restricted Subsidiary, as the
case may be, or other Liens arising out of judgments or awards against the
Company or any Restricted Subsidiary with respect to which the Company or such
Restricted Subsidiary, as the case may be, will then be prosecuting an appeal
or other proceedings for review; (ii) Liens for property taxes or other taxes,
assessments or governmental charges of the Company or any Restricted
Subsidiary not yet due or payable or subject to penalties for nonpayment or
which are being contested by the Company or such Restricted Subsidiary, as the
case may be, in good faith by appropriate proceedings; (iii) Liens in favor of
issuers of performance, surety and other bonds issued pursuant to clause
(b)(vi) under "--Certain Covenants--Limitation on Indebtedness"; (iv) survey
exceptions, encumbrances, easements or, reservations of, or rights of others
for, licenses, rights-of-way, sewers, electric lines, telegraph and telephone
lines and other similar purposes or zoning or other restrictions as to the use
of real property of the Company or any Restricted Subsidiary incidental to the
ordinary course of conduct of the business of the Company or such Restricted
Subsidiary or as to the ownership of properties of the Company or any
Restricted Subsidiary, which, in either case, were not incurred in connection
with Indebtedness and which do not in the aggregate materially adversely
affect the value of said properties or materially impair their use in the
operation of the business of the Company or any Restricted Subsidiary; (v)
Liens outstanding immediately after the Issue Date as set forth in a schedule
to the Indenture; (vi) Liens on property or assets of any Person at the time
such Person becomes a Restricted Subsidiary of the Company; provided, however,
that (A) if any such Lien has been Incurred in anticipation of such
transaction, such property or assets subject to such Lien will have a fair
market value at the date of the acquisition thereof not in excess of the
lesser of (1) the aggregate purchase price paid or owed in connection with the
acquisition of such Person and (2) the fair market value of all property and
assets of such Person and (B) any such Lien will not extend to any other
assets owned by the Company or any Restricted Subsidiary; (vii) Liens on
property or assets at the time the Company or any Restricted Subsidiary
acquires such assets, including any acquisition by means of a merger or
consolidation with or into the Company or such Restricted Subsidiary;
provided, however, that (A) if any such Lien is Incurred in anticipation of
such transaction, such property or assets subject to such Lien will have a
fair market value at the date of the acquisition thereof not in excess of the
lesser of (1) the aggregate purchase price paid or owed in connection with the
acquisition thereof and of any other property and assets acquired
simultaneously therewith and (2) the fair market value of all such property
and assets acquired by the Company or such Restricted Subsidiary and (B) any
such
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Lien will not extend to any other property or assets owned by the Company or
any Restricted Subsidiary; (viii) Liens securing Indebtedness or other
obligations of a Restricted Subsidiary owing to the Company or a Wholly Owned
Subsidiary; (ix) Liens to secure any extension, renewal, refinancing,
replacement or refunding (or successive extensions, renewals, refinancings,
replacements or refundings), in whole or in part, of any Indebtedness secured
by Liens referred to in any of clauses (v), (vi) and (vii); provided, however,
that any such Lien will be limited to all or part of the same property or
assets that secured the original Lien (plus improvements on such property) and
the aggregate principal amount of Indebtedness that is secured by such Lien
will not be increased to an amount greater than the sum of (A) the outstanding
principal amount, or, if greater, the committed amount, of the Indebtedness
secured by Liens described under clauses (v), (vi) and (vii) at the time the
original Lien became a Permitted Lien under the Indenture and (B) an amount
necessary to pay any premiums, fees and other expenses Incurred by the Company
in connection with such refinancing, refunding, extension, renewal or
replacement; (x) Liens on property or assets of the Company securing Interest
Rate Agreements and Currency Agreements so long as the related Indebtedness is
permitted under "--Certain Covenants--Limitation on Indebtedness", and is
secured by a Lien on the same property securing the relevant Interest Rate
Agreement or Currency Agreement; (xi) Liens on property or assets of the
Company or any Restricted Subsidiary securing Indebtedness (1) under purchase
money obligations, mortgage financings or Capital Lease Obligations permitted
under the "--Limitation on Indebtedness" covenant or (2) under Sale/Leaseback
Transactions permitted under the "--Limitation on Sale/Leaseback Transactions"
or "--Limitation on Indebtedness" covenants; provided, that (A) the amount of
Indebtedness Incurred in any specific case does not, at the time such
Indebtedness is Incurred, exceed the lesser of the cost or fair market value
of the property or asset acquired or constructed in connection with such
purchase money obligations, mortgage financing or Capital Lease Obligation or
subject to such Sale/Leaseback Transaction, as the case may be, (B) such Lien
will attach to such property or asset upon acquisition of such property or
asset and or upon commencement of such Sale/Leaseback Transaction, as the case
may be, and (C) no property or asset of the Company or any Restricted
Subsidiary (other than the property or asset acquired or contracted in
connection with such purchase money obligations, mortgage financing or Capital
Lease Obligation or subject to such Sale/Leaseback Transaction, as the case
may be) is subject to any Lien securing such Indebtedness; (xii) Liens granted
to the Trustee securing the Company's obligations under the Indenture; (xiii)
Liens on assets of a Restricted Subsidiary and/or the Company securing Bank
Indebtedness permitted under clause (b)(i) of the "--Limitations on
Indebtedness" covenant and outstanding in an aggregate principal amount not
exceeding $20 million; provided, that such Restricted Subsidiary and/or the
Company, as the case may be, is permitted to incur liability with respect to
such Bank Indebtedness under paragraph (d) of the "--Limitation on
Indebtedness" covenant; (xiv) Liens on satellite transponders and/or
transponder capacity, transmitting facilities and/or capacity, and related
assets acquired with the proceeds of, and that secure the repayment of,
Replacement Satellite Indebtedness permitted under "--Limitations on
Indebtedness"; and (xv) Liens on assets of the Restricted Subsidiaries and/or
the Company securing any combination of additional Bank Indebtedness,
additional Capitalized Lease Obligations, additional Attributable Indebtedness
in respect of Sale/Leaseback Transactions and Indebtedness permitted under
clause (b)(ix) of the "--Limitation on Indebtedness" covenant; provided that,
(A) at the time such Lien is granted and after giving effect to the
Indebtedness secured thereby, (I) the Consolidated Coverage Ratio is greater
than or equal to 2.5:1 and (II) the ratio of (x) all Indebtedness that is
secured by Liens on any assets of the Company and its Restricted Subsidiaries
(other than Replacement Satellite Indebtedness) to (y) an amount equal to the
sum of $120 million plus the maximum amount of Indebtedness of the Company and
its Restricted Subsidiaries (other than Replacement Satellite Indebtedness)
that could be Incurred under paragraph (a) of "--Limitation on Indebtedness"
(for which purpose all such Indebtedness not then outstanding shall be deemed
to bear interest at a rate equal to the weighted average interest rate on all
outstanding Indebtedness) does not exceed 1.0:6 and (B) in the case of
additional Bank Indebtedness, such Liens are on property or assets of a Person
that is permitted to incur liability with respect to such Bank Indebtedness
under paragraph (d) of the "--Limitation on Indebtedness" covenant.
"Permitted Transferee" means, with respect to a Person, (i) the spouse,
parent or lineal descendant of such Person, (ii) a trustee, guardian or
custodian for, or an executor, administrator or other legal representative of
the estate of such Person, (iii) the trustee of a trust for the benefit of
such Person or its Permitted Transferees and (iv) a corporation, partnership
or other entity of which such Person and its Permitted Transferees are the
beneficial owners of, and control the Capital Stock representing, a majority
of the ordinary voting power.
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"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust,
unincorporated organization, government or any agency or political subdivision
hereof or any other entity.
"Preferred Stock," as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) which is preferred
as to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
"Refinancing Indebtedness" means Indebtedness that refunds, refinances,
replaces, renews, repays or extends (including pursuant to any defeasance or
discharge mechanism) (collectively, "refinances," and "refinanced" shall have
a correlative meaning) any Indebtedness existing on the date of the Indenture
or Incurred in compliance with the Indenture (including Indebtedness of the
Company that refinances Indebtedness of any Restricted Subsidiary and
Indebtedness of any Restricted Subsidiary that refinances Indebtedness of
another Restricted Subsidiary, the Capital Stock of which is owned, directly
or indirectly, by the Restricted Subsidiary that is Incurring the Refinancing
Indebtedness) including Indebtedness that refinances Refinancing Indebtedness;
provided, however, that (i) the Refinancing Indebtedness has a Stated Maturity
no earlier than the earlier of (A) the first anniversary of the Stated
Maturity of the Notes and (B) Stated Maturity of the Indebtedness being
refinanced, (ii) the Refinancing Indebtedness has an Average Life at the time
such Refinancing Indebtedness is Incurred that is equal to or greater than the
lesser of (A) the Average Life of the Notes and (B) the Average Life of the
Indebtedness being refinanced and (iii) the Refinancing Indebtedness is in an
aggregate principal amount (or if issued with original issue discount, an
aggregate issue price) that is equal to (or 101% of, in the case of a
refinancing of the Notes in connection with a Change of Control) or less than
the sum of the aggregate principal amount (or if issued with original issue
discount, the accreted value) then outstanding of the Indebtedness being
refinanced.
"Registrar" means United States Trust Company of New York, as registrar
under the Indenture, or any successor thereto appointed pursuant to the
Indenture.
"Replacement Satellite Indebtedness" means Indebtedness of the Company or a
Wholly Owned Subsidiary of the Company Incurred on or after January 1, 2002,
to finance the acquisition of satellite broadcasting capacity, including
satellite transponders and/or capacity, transmitting facilities and/or
capacity, and related assets, whether secured or unsecured, and whether
Incurred as regular Indebtedness or as a Capitalized Lease Obligation.
"Restricted Subsidiary" means any Subsidiary of the Company other an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person and the Company or a Subsidiary leases it
from such Person.
"Secured Indebtedness" means any Indebtedness of the Company secured by a
Lien.
"Senior Indebtedness" means, whether outstanding on the Issue Date or
thereafter issued, all Indebtedness of the Company or its Restricted
Subsidiaries, including interest and fees thereon; provided, however, that
Senior Indebtedness will not include any Subordinated Obligation of the
Company or any Restricted Subsidiary.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"S&P" means Standard and Poor's Ratings Group.
"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision.
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"Subordinated Obligation" means any Indebtedness of the Company or a
Restricted Subsidiary (whether outstanding on the Issue Date or thereafter
Incurred) in respect of which, in the instrument creating or evidencing the
same or pursuant to which the same is outstanding, it is provided that the
obligations of the Company or such Restricted Subsidiary in respect of such
Indebtedness are subordinate or junior in right of payment to any other
Indebtedness of such Person of the type described in clause (i) or (ii) or
(vii) of the definition of "Indebtedness".
"Subsidiary" of any Person means any corporation, association or other
business entity of which such Person owns, directly or indirectly through one
or more Subsidiaries, a majority of the Capital Stock or other ownership
interests (including partnership and membership interests) and has ordinary
voting power to elect a majority of the directors, managers, trustees or other
persons performing similar functions or, in the case of a partnership, of
which such Person or any of its Subsidiaries is the general or managing
general partner. Notwithstanding the foregoing, Product Information Network
Venture and Superaudio shall be deemed to be Subsidiaries of the Company.
Unless otherwise specified herein, each reference to a Subsidiary shall refer
to a Subsidiary of the Company.
"Subsidiary Guarantee" means the Guarantee of the Notes by a Subsidiary
Guarantor.
"Subsidiary Guarantor" means each Restricted Subsidiary of the Company,
whether in existence on the Issue Date or created or acquired thereafter
(other than any foreign Subsidiary and other than any domestic Restricted
Subsidiary that is subject to a contractual limitation, existing on the Issue
Date, on its ability to issue a Subsidiary Guarantee which limitation has not,
with the exercise of such Restricted Subsidiary's best efforts, been satisfied
or waived).
"Temporary Cash Investments" means any of the following: (i) any Investment
in direct obligations of the United States of America or any agency thereof or
obligations Guaranteed by the United States of America or any agency thereof,
(ii) Investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 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 having capital surplus and undivided profits
aggregating in excess of $250 million (or the foreign currency equivalent
thereof) and whose long-term debt, or whose parent holding company's long-term
debt, is rated "A" (or such similar equivalent rating) or higher by at least
one nationally recognized statistical rating organization (as defined in Rule
436 under the Securities Act), (iii) repurchase obligations with a term of not
more than 30 days for underlying securities of the types described in clause
(i) above entered into with a bank meeting the qualifications described in
clause (ii) above, (iv) Investments in commercial paper, maturing not more
than 180 days after the date of acquisition, issued by a corporation (other
than an Affiliate of the Company) organized and in existence under the laws of
the United States of America 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, (v) Investments in securities with maturities of six months
or less from the date of acquisition issued or fully 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 "A"
by Moody's and (vi) Investments in mutual funds whose investment guidelines
restrict such funds' investments to those satisfying the provisions of clauses
(i) through (v) above.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that
acquires an Affiliate Business, (ii) any other Subsidiary of the Company that
at the time of determination shall be designated an Unrestricted Subsidiary by
the Board of Directors in the manner provided below, (iii) any Subsidiary of
an Unrestricted Subsidiary, (iv) Product Information Network Venture; (v)
Superaudio; and (vi) Capstar LLC. The Board of Directors may designate any
Subsidiary of the Company (including any newly acquired or newly formed
Subsidiary of the Company) to be an Unrestricted Subsidiary unless such
Subsidiary or any of its Subsidiaries owns any Capital Stock of the Company or
any Restricted Subsidiary of the Company that is not a Subsidiary of the
Subsidiary to be so designated; provided, however, that either (A) the
Subsidiary to be so designated has
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<PAGE>
total consolidated assets of $10,000 or less or (B) if such Subsidiary has
consolidated assets greater than $10,000, then such designation would be
permitted under "Limitation on Restricted Payments." The Board of Directors
may designate any Unrestricted Subsidiary to be a Restricted Subsidiary
subject to the limitations contained in "Limitation on Designations of
Unrestricted Subsidiaries".
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States
of America (including any agency or instrumentality thereof) for the payment
of which the full faith and credit of the United States of America is pledged
and which are not callable or redeemable at the issuer's option.
"Wholly-Owned Subsidiary" means a Restricted Subsidiary of the Company, at
least 99% of the Capital Stock of which (other than directors' qualifying
shares) is owned by the Company or another Wholly-Owned Subsidiary.
123
<PAGE>
BOOK-ENTRY, DELIVERY AND FORM
Except as described in the next paragraph, each of the Old Notes initially
was, and the Exchange Notes will be represented by Global Notes. The Global
Note regarding the Old Notes has been, and the Global Note regarding the
Exchange Notes will be, deposited with, or on behalf of, DTC and registered in
the name of a nominee of DTC.
Old Notes (i) transferred to institutional "accredited investors," as
defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act, who are
not QIBs or to any other persons who are not QIBs or (ii) held by QIBs who
elect to take physical delivery of their certificates instead of holding their
interest through the Global Notes (and which are thus ineligible to trade
through DTC) (collectively referred to herein as the "Non-Global Purchasers")
will be issued in registered form (the "Certificated Notes"). Upon the
transfer to a QIB of any Certificated Note previously issued to a Non-Global
Purchaser, such Certificated Note will, unless the transferee requests
otherwise or such Global Notes has previously been exchanged in whole for
Certificated Notes, be exchanged for an interest in such Global Note.
Global Securities. Pursuant to procedures established by DTC (i) upon the
issuance of the Global Notes, DTC or its custodian will credit, on its
internal system, the principal amount of Notes of the individual beneficial
interest holders represented by such Global Notes to the respective accounts
for persons who have accounts with DTC and (ii) ownership of beneficial
interests in the Global Notes will be shown on, and the transfer of such
ownership will be effected only through, records maintained by DTC or its
nominee (with respect to interests of persons who have accounts with DTC
("participants")), including Euroclear and Cedel, and the records of
participants (with respect to interests of persons other than participants).
Such accounts initially will be designated by or on behalf of the Initial
Purchaser and ownership of beneficial interests in the Global Notes will be
limited to participants or persons who hold interests through participants.
So long as DTC, or its nominee, is the registered owner or holder of the
Global Notes, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Notes represented by the Global Notes for all
purposes under the Indenture. No beneficial owner of an interest in the Global
Notes will be able to transfer that interest except in accordance with DTC's
procedures, in addition to those provided for under the Indenture.
Payments on the Global Notes will be made to DTC or its nominee, as the case
may be, as the registered owner thereof. None of the Company, the Transfer
Agent, the Trustee or any Paying Agent will have any responsibility or
liability for any aspect of the records relating to or payments made on
account of beneficial ownership interest in the Global Notes or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment in
respect of a Global Note, will credit participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the Global
Note as shown on the records of DTC or its nominee. The Company also expects
that payments by participants to owners of beneficial interests in the Global
Note held through such participants will be governed by standing instructions
and customary practice, as is now the case with securities held for the
accounts of customers registered in the names of nominees for such customers.
Such payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in clearinghouse funds. If a
holder requires physical delivery of a Certificated Note for any reason,
including to sell such Note to persons in states which require physical
delivery of Certificated Notes, or to pledge such securities, such holder must
transfer its interest in the Global Note, in accordance with the normal
procedures of DTC.
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<PAGE>
DTC has advised the Company that it will take any action permitted to be
taken by a holder of a Global Note (including the presentation of Notes for
exchange as described below) only at the direction of one or more participants
to whose account the DTC interests in the Global Note are credited and only in
respect of such portion of the Notes as to which such participant or
participants has or have given such direction. However, if there is an Event
of Default under the Indenture, DTC will exchange the Global Note for
Certificated Notes, which it will distribute to its participants.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and facilitate the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in accounts of its participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such
as banks, brokers, dealers and trust companies that clear through or maintain
a custodial relationship with a participant, either directly or indirectly
("indirect participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Notes among participants of DTC, it is
under no obligation to perform such procedures, and such procedures may be
discontinued at any time. None of the Company, the Initial Purchaser, the
Trustee or the Transfer Agent will have any responsibility for the performance
by DTC or its participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
Certificated Notes. If DTC is at any time unwilling or unable to continue as
a depositary for a Global Note and a successor depositary is not appointed by
the Company within 90 days, Certificated Notes will be issued in exchange for
such Global Note.
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<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary describes certain United States Federal income tax
consequences that generally apply to a holder that exchanges Old Notes for
Exchange Notes in the Exchange Offer. This discussion is based on the Internal
Revenue Code of 1986, as amended (the "Code"), existing and proposed Treasury
Regulations, and judicial and administrative holdings, all of which could be
changed at any time, possibly on a retroactive basis. It relates only to
persons who hold their Old Notes and Exchange Notes as capital assets. It does
not discuss state, local or foreign tax aspects, or tax consequences to
holders that are subject to special rules, such as foreign persons, tax-exempt
organizations, insurance companies, banks, dealers in securities, or persons
who hold the Old Notes or the Exchange Notes as part of a "conversion"
transaction, "hedging" transaction, "integrated" transaction or "straddle" for
U.S. Federal income tax purposes. Tax consequences may vary depending on a
holder's tax situation. No rulings will be sought from the Internal Revenue
Service ("IRS") concerning the Exchange Offer.
The following discussion concerns U.S. Federal income tax consequences that
apply to a holder of Old Notes and Exchange Notes that is a U.S. person for
Federal income tax purposes, i.e., (i) a citizen or resident of the United
States, (ii) a corporation or partnership created or organized under the laws
of the United States or any State (including the District of Columbia)
(including any other partnership treated as a U.S. person under Treasury
Regulations), (iii) an estate or trust described in Section 7701(a)(3) of the
Code, or (iv) a person otherwise subject to United States Federal income tax
on its worldwide income (collectively, a "U.S. Holder").
THIS SECTION DOES NOT DEAL WITH ALL ASPECTS OF FEDERAL INCOME TAXATION THAT
MAY BE RELEVANT TO AN INVESTOR'S DECISION TO PARTICIPATE IN THE EXCHANGE
OFFER. EACH INVESTOR SHOULD CONSULT WITH ITS OWN TAX ADVISOR CONCERNING
FEDERAL INCOME TAX LAWS AND OTHER TAX LAWS APPLICABLE TO ITS PARTICULAR
SITUATION BEFORE DECIDING WHETHER TO EXCHANGE ITS OLD NOTES FOR EXCHANGE
NOTES.
THE EXCHANGE OFFER
Under Treasury Regulations, the exchange of Old Notes for Exchange Notes
pursuant to the Exchange Offer should not constitute a significant
modification of the Old Notes and, accordingly, should be a "nonevent" for
Federal income tax purposes. Therefore, a U.S. Holder of Old Notes should not
recognize gain or loss in the exchange, and should continue to include
interest on the Exchange Notes in gross income in accordance with its method
of accounting for Federal income tax purposes. A U.S. Holder's holding period
in Exchange Notes received in the Exchange Offer will include the U.S.
Holder's holding period in the Old Notes exchanged.
TREATMENT OF INTEREST
In general, interest on an Old Note or Exchange Note will be taxable to a
U.S. Holder as ordinary income when received or accrued, depending on the U.S.
Holder's method of accounting for tax purposes.
The Company will treat the Old Notes as being issued without original issue
discount ("OID"). Under Treasury Regulations, contingent payments under a debt
instrument are not taken into account in computing OID if there is a remote
likelihood that the payments will be made. If the Company failed to effect the
Exchange Offer on a timely basis, Additional Interest would be payable on the
Old Notes. Because there was only a remote possibility that this would occur,
the Company determined that the Old Notes were issued without OID. The IRS
could disagree with this determination. If the Old Notes were issued with OID,
U.S. Holders of the Old Notes or Exchange Notes could have to accrue taxable
interest income before the receipt or accrual of stated interest. Each U.S.
Holder should consult its own tax advisor concerning the possible accrual of
OID on the Old Notes.
SALE, EXCHANGE OR REDEMPTION OF PRINCIPAL; DISPOSITIONS
On the sale, redemption, retirement at maturity or other disposition of an
Old Note or an Exchange Note, a U.S. Holder generally will recognize capital
gain or loss equal to the difference between (i) the amount realized
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<PAGE>
on the disposition (except to the extent attributable to accrued but unpaid
interest or market discount, which will be taxable as ordinary income) and
(ii) the U.S. Holder's adjusted tax basis in the Old Note or the Exchange
Note. Such capital gain generally will be taxable at a reduced maximum rate
for a U.S. Holder who is not a corporation and who held the Old Notes or
Exchange Notes for more than one year. A U.S. Holder's adjusted basis in an
Old Note or Exchange Note will generally be its cost to the U.S. Holder plus
the amount of interest previously taken into account, but not yet received, by
the U.S. Holder.
AMORTIZABLE BOND PREMIUM
If a U.S. Holder purchases an Old Note or an Exchange Note for a price that
exceeds its stated redemption price at maturity plus any accrued and unpaid
interest ("Bond Premium"), the U.S. Holder will not have to include OID, if
any, in income and may elect to amortize the Bond Premium. This election
applies to all Notes acquired by the U.S. Holder during the year of election
or in a later year.
MARKET DISCOUNT
A U.S. Holder, other than an initial holder, will be treated as holding an
Old Note or an Exchange Note at a market discount (a "Market Discount Note")
if the U.S. Holder purchased the Old Note or the Exchange Note for a price
less than its redemption price at maturity, subject to a de minimis rule. An
initial holder of an Old Note will be treated as holding a Market Discount
Note if the initial holder purchased the Old Note for less than its issue
price.
In general, any partial payment of principal on, or gain recognized on the
maturity, redemption, or disposition of, a Market Discount Note will be
ordinary interest income to the extent of accrued market discount on the
Market Discount Note. Alternatively, a U.S. Holder of a Market Discount Note
may elect to include market discount in income over the life of each Market
Discount Note.
Market discount accrues on a straight-line basis, unless the U.S. Holder
elects to accrue the discount on a constant yield-to-maturity basis. If this
election is not made, a U.S. Holder of a Market Discount Note generally must
defer interest deductions in the amount of the accrued market discount on the
Market Discount Note, until it matures or is sold. If the Market Discount Note
is disposed of in a nontaxable transaction (other than certain tax-free
exchanges), the U.S. Holder must report the accrued market discount as
ordinary income as if the Market Discount Note were sold at its fair market
value.
BACKUP WITHHOLDING
Under the Code, a U.S. Holder of an Old Note or Exchange Note may be subject
to "backup withholding" at a 31% rate on payments of interest or the gross
proceeds of sale. This withholding generally applies if the U.S. Holder (i)
fails to furnish its social security number or other taxpayer identification
number ("TIN") on request, (ii) furnishes an incorrect TIN, (iii) is notified
by the IRS that it has failed to report properly payments of interest and
dividends and the IRS has notified the Company that it is subject to backup
withholding, or (iv) fails, in certain situations, to provide a certified
statement, signed under penalty of perjury, that the TIN provided is correct
and that the U.S. Holder is not subject to backup withholding. Any amount
withheld under the backup withholding rules is allowed as a credit against the
U.S. Holder's Federal income tax liability, if the required information is
furnished to the IRS. Corporations and certain other entities are generally
exempt from backup withholding if they establish their exempt status.
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<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. This Prospectus, as it may
be amended or supplemented from time to time, may be used by a broker-dealer
in connection with resales of Exchange Notes received in exchange for Old
Notes where such Old Notes were acquired as a result of market-making
activities or other trading activities. The Company acknowledges and each
holder, other than a broker-dealer, must acknowledge that it is not engaged
in, does not intend to engage in, and has no arrangement or understanding with
any person to participate in a distribution of Exchange Notes. The Company has
agreed if, at the time of the completion of the Exchange Offer, information in
the Letter of Transmittal submitted by exchanging holders indicates that there
are holders that are Participating Broker-Dealers or otherwise subject to
prospectus delivery requirements, the Company will, for such period of time as
is necessary to comply with applicable law up to the date that is 180 days
after consummation of the Exchange Offer, make available a prospectus meeting
the requirements of the Securities Act to such persons, if any, for use in
connection with any resale of such Exchange Notes.
The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer 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 Exchange 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 commissions or concessions from
any such broker- dealer and/or the purchasers of any such Exchange Notes. Any
broker- dealer that resells Exchange Notes that were received by it for its
own account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange 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, a broker-dealer will not be
deemed to admit it is an "underwriter" within the meaning of the Securities
Act.
LEGAL MATTERS
The validity of the Exchange Notes offered hereby will be passed upon for
the Company by Davis, Graham & Stubbs LLP, Denver, Colorado.
INDEPENDENT AUDITORS
The Consolidated Financial Statements of the Company as of December 31, 1996
and 1997 and for each of the years in the three-year period ended December 31,
1997 included in this Prospectus have been audited by Arthur Andersen LLP,
independent auditors, and the financial statements of MediaAmerica, Inc. as of
December 31, 1996 and 1997, and for each of the years in the three-year period
ended December 31, 1997 included in this Prospectus have been audited by David
Berdon & Co. LLP, independent auditors.
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<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES CONSOLIDATED FINANCIAL
STATEMENTS
Report of Independent Public Accountants.................................. F-3
Consolidated Statements of Financial Position as of December 31, 1996 and
1997 and June 30, 1998 (unaudited)....................................... F-4
Consolidated Statements of Operations for the Years Ended December 31,
1995, 1996 and 1997 and for the Six Months Ended June 30, 1997 and 1998
(unaudited).............................................................. F-6
Consolidated Statements of Changes in Shareholders' Deficit for the Years
Ended December 31, 1995, 1996 and 1997 and for the Six Months Ended June
30, 1998 (unaudited)..................................................... F-7
Consolidated Statements of Cash Flows for the Years Ended December 31,
1995, 1996 and 1997 and for the Six Months Ended June 30, 1997 and 1998
(unaudited).............................................................. F-8
Notes to Consolidated Financial Statements................................ F-9
MEDIAAMERICA, INC. FINANCIAL STATEMENTS
Independent Auditors' Report.............................................. F-38
Balance Sheets as of December 31, 1996 and 1997........................... F-39
Statements of Income for the Years Ended December 31, 1995, 1996 and
1997..................................................................... F-40
Statements of Shareholders' Equity for the Years Ended December 31, 1995,
1996 and 1997............................................................ F-41
Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and
1997..................................................................... F-42
Notes to Financial Statements............................................. F-43
Accountants' Review Report................................................ F-48
Balance Sheets as of June 30, 1997 and 1998 (unaudited)................... F-49
Statements of Operations for the Six Months Ended June 30, 1997 and 1998
(unaudited).............................................................. F-50
Statements of Shareholders' Equity for the Six Months Ended June 30, 1997
and 1998 (unaudited)..................................................... F-51
Statements of Cash Flows for the Six Months Ended June 30, 1997 and 1998
(unaudited).............................................................. F-52
Notes to Financial Statements (unaudited)................................. F-53
JONES/OWENS RADIO PROGRAMMING, LLC FINANCIAL STATEMENTS
Independent Auditors' Report.............................................. F-59
Statements of Financial Position as of December 31, 1996 and 1997......... F-60
Statements of Operations for the Three Months Ended December 31, 1996 and
the Year Ended December 31, 1997......................................... F-61
Statements of Members' Equity for the Three Months Ended December 31, 1996
and the Year Ended December 31, 1997..................................... F-62
Statements of Cash Flows for the Three Months Ended December 31, 1996 and
for the Year Ended December 31, 1997..................................... F-63
Notes to Financial Statements............................................. F-64
Unaudited Statements of Financial Position as of June 30, 1997 and 1998... F-66
Unaudited Statements of Operations for the Six Months Ended June 30, 1997
and 1998................................................................. F-67
Unaudited Statements of Members' Equity for the Six Months Ended June 30,
1998..................................................................... F-68
Unaudited Statements of Cash Flows for the Six Months Ended June 30, 1997
and 1998................................................................. F-69
Notes to Unaudited Financial Statements................................... F-70
</TABLE>
F-1
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Jones International Networks, Ltd.:
We have audited the accompanying consolidated statements of financial
position of Jones International Networks, Ltd. (a Colorado corporation) and
its subsidiaries (collectively, the "Company") as of December 31, 1996 and
1997 and the related consolidated statements of operations, changes in
shareholders' deficit and cash flows for the three years ended December 31,
1997. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 1996 and 1997, and the results of its operations and cash flows for the
three years ended December 31, 1997 in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Denver, Colorado
August 1, 1998.
F-3
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------------- ------------
1996 1997 1998
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... $ 3,892 $ 3,717,169 $ 2,444,772
Accounts receivable, net of
allowance for doubtful accounts of
$286,562, $157,405 and $169,122,
respectively...................... 851,866 1,454,763 2,798,820
Receivables from affiliates........ 803,162 -- 40,215
Prepaid expenses................... 537,072 54,870 158,405
Deferred commissions, current (Note
2)................................ 248,286 222,302 261,975
Other current assets............... 74,647 263,267 43,666
------------ ------------ ------------
Total current assets............. 2,518,925 5,712,371 5,747,853
------------ ------------ ------------
PROPERTY, PLANT AND EQUIPMENT (Note
2):
Land............................... 1,395,592 1,395,592 1,395,592
Building........................... 2,321,463 2,321,463 2,321,463
Leased satellite transponders (Note
15)............................... 35,010,454 35,010,454 35,010,454
Furniture, fixtures and equipment.. 9,090,374 10,457,665 10,735,179
Leasehold improvements............. 258,908 374,643 635,936
------------ ------------ ------------
Total property, plant and
equipment....................... 48,076,791 49,559,817 50,098,624
------------ ------------ ------------
Less accumulated depreciation and
amortization........................ (15,978,974) (20,784,095) (23,178,762)
------------ ------------ ------------
Net property, plant and
equipment....................... 32,097,817 28,775,722 26,919,862
------------ ------------ ------------
OTHER ASSETS:
Goodwill, net of accumulated
amortization of $15,000, $171,795
and $288,153, respectively (Note
2)................................ 285,000 3,125,567 3,009,209
Other intangible assets, net of
accumulated amortization of
$504,877, $733,428 and $873,287,
respectively (Note 2)............. 1,283,303 1,063,888 1,081,661
Investment in affiliates........... 922,135 577,264 300,265
Income tax benefit receivable from
Jones International, Ltd. (Note
12)............................... -- 1,342,111 1,074,536
Capitalized loan fees (Note 15).... -- 50,000 568,583
Deferred commissions, long-term
(Note 2).......................... 496,572 478,676 422,809
Deferred offering costs (Note 7)... 607,505 174,744 1,341,906
Other assets....................... 86,420 57,785 295,320
------------ ------------ ------------
Total other assets............... 3,680,935 6,870,035 8,094,289
------------ ------------ ------------
Total assets..................... $ 38,297,677 $ 41,358,128 $ 40,762,004
============ ============ ============
</TABLE>
The accompanying notes to these consolidated financial statements are an
integral part of these consolidated financial statements.
F-4
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------------- ------------
1996 1997 1998
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable--trade............ $ 239,872 $ 1,438,602 $ 1,263,886
Accrued liabilities................ 686,131 1,300,516 1,954,538
Accounts payable--Jones
International, Ltd. (Notes 2
and 6)............................ 6,017,809 9,814,874 5,424,512
Interest payable................... 215,524 53,619 522,471
Deferred revenues (Note 2)......... 5,500 13,554 301,583
Capital lease obligations (Note
9)................................ 1,964,954 2,422,022 2,668,202
Other current liabilities.......... 4,574 -- 8,003
------------ ------------ ------------
Total current liabilities........ 9,134,364 15,043,187 12,143,195
------------ ------------ ------------
LONG-TERM LIABILITIES
Customer deposits and deferred
revenues.......................... 829,962 38,532 38,773
Capital lease obligation, net of
current portion (Note 9).......... 28,757,208 26,335,186 24,922,805
Long-term debt--affiliated entities
(Note 8).......................... 22,554,500 16,554,500 10,000,000
Credit facility (Note 15).......... -- -- 16,704,500
------------ ------------ ------------
Total long-term liabilities...... 52,141,670 42,928,218 51,666,078
------------ ------------ ------------
MINORITY INTERESTS IN CONSOLIDATED
SUBSIDIARIES (Note 2)............... 290,949 1,593,168 822,049
COMMITMENTS AND CONTINGENCIES (NOTE
14)
SHAREHOLDERS' DEFICIT:
Class A Common Stock, $.01 par
value: 50,000,000 shares
authorized; 1,968,453, 2,980,953
and 2,980,953 shares issues and
outstanding, respectively......... 19,685 29,810 29,810
Class B Common Stock, $.01 par
value: 1,785,120 shares
authorized; 1,385,120, 1,785,120
and 1,785,120 shares issued and
outstanding, respectively......... 13,851 17,851 17,851
Additional paid-in capital......... -- 9,143,375 9,143,375
Accumulated deficit................ (23,302,842) (27,397,481) (33,060,354)
------------ ------------ ------------
Total shareholders' deficit...... (23,269,306) (18,206,445) (23,869,318)
------------ ------------ ------------
Total liabilities and shareholders'
deficit............................. $ 38,297,677 $ 41,358,128 $ 40,762,004
============ ============ ============
</TABLE>
The accompanying notes to these consolidated financial statements are an
integral part of these consolidated financial statements.
F-5
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------- --------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Radio programming...... $ 5,121,310 $ 6,978,303 $10,199,870 $ 5,089,673 $ 3,739,193
Television programming
Non-affiliated
entities.............. 288,591 193,204 10,863,512 3,326,645 7,300,147
Affiliated entities
(Note 6).............. 51,574 960,254 1,138,000 571,721 564,415
----------- ----------- ----------- ------------ ------------
Total television
programming.......... 340,165 1,153,458 12,001,512 3,898,366 7,864,562
Satellite delivery and
production support
Non-affiliated
entities............. 3,129,844 3,120,000 2,600,000 1,560,000 --
Affiliated entities
(Note 6)............. 6,535,742 5,402,680 4,309,818 2,358,395 2,128,118
----------- ----------- ----------- ------------ ------------
Total satellite
delivery and
production support... 9,665,586 8,522,680 6,909,818 3,918,395 2,128,118
----------- ----------- ----------- ------------ ------------
Total revenues........ 15,127,061 16,654,441 29,111,200 12,906,434 13,731,873
----------- ----------- ----------- ------------ ------------
OPERATING EXPENSES:
Radio programming...... 3,067,745 4,162,634 5,816,250 2,803,601 3,489,844
Television programming
Non-affiliated
entities.............. 256,266 1,156,922 5,726,418 1,832,527 3,848,027
Affiliated entities
(Note 6).............. 109,333 -- 3,545,930 1,173,306 2,818,964
----------- ----------- ----------- ------------ ------------
Total television
programming.......... 365,599 1,156,922 9,272,348 3,005,833 6,666,991
Satellite delivery and
production support.... 6,530,278 5,451,966 4,685,470 2,605,135 2,329,432
Selling and marketing.. 1,374,368 1,737,566 2,916,648 1,266,538 1,747,231
General and
administration........ 2,321,780 3,269,623 4,168,005 1,862,734 2,092,697
----------- ----------- ----------- ------------ ------------
Total operating
expenses............. 13,659,770 15,778,711 26,858,721 11,543,841 16,326,195
----------- ----------- ----------- ------------ ------------
OPERATING INCOME
(LOSS)................. 1,467,291 875,730 2,252,479 1,362,593 (2,594,322)
----------- ----------- ----------- ------------ ------------
OTHER (INCOME) EXPENSE:
Interest expense (Note
6, 8 and 9)........... 4,069,837 4,499,898 5,676,896 2,867,025 2,640,260
Interest income........ (63,792) (72,151) (107,843) (22,235) (99,025)
Write-off of deferred
offering (Note 7)..... -- -- 938,000 938,000 --
Equity in income of
subsidiaries.......... (10,886) (828,992) (396,155) (286,734) (73,001)
Other expense
(income).............. 16,276 (11,660) 73,972 -- 263,801
----------- ----------- ----------- ------------ ------------
Total other expense,
net.................. 4,011,435 3,587,095 6,184,870 3,496,056 2,732,035
----------- ----------- ----------- ------------ ------------
LOSS BEFORE INCOME TAXES
AND
MINORITY INTEREST...... (2,544,144) (2,711,365) (3,932,391) (2,133,463) (5,326,357)
Income tax provisions
(benefit) (Note 12)... (497,739) (386,912) (1,341,997) (355,548) 267,575
----------- ----------- ----------- ------------ ------------
LOSS BEFORE MINORITY
INTERESTS.............. (2,046,405) (2,324,453) (2,590,394) (1,777,915) (5,593,932)
----------- ----------- ----------- ------------ ------------
Minority interests in
net income (loss) of
consolidated
subsidiaries.......... -- (9,051) 902,781 417,852 68,941
----------- ----------- ----------- ------------ ------------
NET LOSS................ $(2,046,405) $(2,315,402) $(3,493,175) $ (2,195,767) $ (5,662,873)
=========== =========== =========== ============ ============
BASIC AND DILUTED NET
LOSS PER COMMON SHARE.. $ (0.50) $ (0.56) $ (0.79) $ (0.50) $ (1.19)
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING..... 4,103,573 4,103,573 4,400,448 4,336,073 4,766,073
=========== =========== =========== ============ ============
</TABLE>
The accompanying notes to these consolidated financial statements are an
integral part of these consolidated financial statements.
F-6
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------------------
CLASS A CLASS B ADDITIONAL TOTAL
----------------- ----------------- PAID-IN ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT DEFICIT
--------- ------- --------- ------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994................... 1,385,120 $13,851 1,385,120 $13,851 $ -- $(16,329,557) $(16,301,855)
Advances to parent
company
(Note 2)............... -- -- -- -- -- (2,011,828) (2,011,828)
Net Loss................ -- -- -- -- -- (2,046,405) (2,046,405)
--------- ------- --------- ------- ---------- ------------ ------------
Balance, December 31,
1995................... 1,385,120 13,851 1,385,120 13,851 -- (20,387,790) (20,360,088)
Issuance of common stock
in exchange for Earth
Segment (Note 1)....... 583,333 5,834 -- -- -- (5,834) --
Advances to parent
company
(Note 2)............... -- -- -- -- -- (593,816) (593,816)
Net Loss................ -- -- -- -- -- (2,315,402) (2,315,402)
--------- ------- --------- ------- ---------- ------------ ------------
Balance, December 31,
1996................... 1,968,453 19,685 1,385,120 13,851 -- (23,302,842) (23,269,306)
Issuance of common stock
in exchange for Jones
Space Segment, Inc.
(Note 1)............... 416,667 4,167 -- -- -- (4,167) --
Advance to parent
company (Note 2)....... -- -- -- -- -- (593,964) (593,964)
Issuance of common stock
in exchange for
minority interests of
Glenn R. Jones (Note
1)..................... 333,333 3,333 -- -- -- (3,333) --
Issuance of common stock
for the Product
Information Network
acquisition (Note 1)... 262,500 2,625 -- -- 3,147,375 -- 3,150,000
Conversion of the Jones
Global Group note (Note
8)..................... -- -- 400,000 4,000 5,996,000 -- 6,000,000
Net Loss................ -- -- -- -- -- (3,493,175) (3,493,175)
--------- ------- --------- ------- ---------- ------------ ------------
Balance, December 31,
1997................... 2,980,953 29,810 1,785,120 17,851 9,143,375 (27,397,481) (18,206,445)
Net Loss (unaudited).... -- -- -- -- -- (5,662,873) (5,662,873)
--------- ------- --------- ------- ---------- ------------ ------------
Balance, June 30, 1998
(unaudited)............ 2,980,953 $29,810 1,785,120 $17,851 $9,143,375 $(33,060,354) $(23,869,318)
========= ======= ========= ======= ========== ============ ============
</TABLE>
The accompanying notes to these consolidated financial statements are an
integral part of these consolidated financial statements.
F-7
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------- ------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss............... $(2,046,405) $(2,315,402) $(3,493,175) $(2,195,767) $(5,662,873)
Adjustment to reconcile
net loss to net cash
provided by (used in)
operating activities:
Depreciation and
amortization.......... 3,888,151 4,476,027 5,167,892 2,512,381 2,650,885
Equity in income of
subsidiaries.......... (10,886) (828,992) (396,155) (286,734) (73,001)
Distributions
received.............. 175,000 300,000 100,000 -- 350,000
Write-off of deferred
offering costs........ -- -- 938,000 938,000 --
Minority interest in
net loss.............. -- (9,051) 902,781 417,852 68,941
Loss on sale of
equipment............. -- -- 81,209 36,579 --
Net change in assets
and liabilities:
Decrease (increase) in
receivables.......... 227,932 5,317 1,168,733 (1,766,267) (1,344,057)
Decrease (increase) in
receivables from
affiliates........... (316,052) (361,809) (538,949) 748,668 (40,215)
Decrease (increase) in
prepaid expenses and
other current
assets............... (1,533) (495,717) 344,865 289,289 116,066
Decrease (increase) in
deferred
commissions.......... 49,377 (104,204) 43,880 19,088 16,194
Decrease (increase) in
other assets......... 4,462 (58,983) 78,635 (10,988) (237,535)
Increase in accounts
payable.............. 8,054 223,393 1,192,730 648,659 (174,716)
Increase (decrease) in
accounts payable to
Jones International.. (1,943,222) 3,668,270 2,861,899 1,115,631 (4,122,787)
Increase (decrease) in
interest payable..... -- 215,524 (161,905) 655 468,852
Increase in deferred
revenues............. -- 5,500 8,054 -- 288,029
Increase (decrease) in
accrued liabilities
and other
liabilities.......... 355,049 52,872 112,355 134,181 (448,976)
Increase (decrease) in
customer deposits.... (25,827) 3,352 (821,378) (27,049) 241
----------- ----------- ----------- ----------- -----------
Net cash provided by
(used in) operating
activities............ 364,100 4,776,097 7,589,471 2,574,178 (8,144,952)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchase of property,
plant and equipment... (1,261,669) (2,969,379) (1,367,026) (1,001,533) (538,807)
Sale of property, plant
and equipment......... -- -- 255,671 261,975 --
Purchases of intangible
assets................ (436,519) (1,001,667) (44,646) (1,110) (157,632)
Investment in joint
venture............... (174,826) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net cash used in
investing activities.. (1,873,014) (3,971,046) (1,156,001) (740,668) (696,439)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Increase in deferred
offering costs........ -- (607,505) (505,239) (494,696) (56,162)
Increase in capitalized
loan fees............. -- -- (50,000) (50,000) (518,583)
Repayment of
borrowings............ (10,642) (7,991) -- -- (6,554,500)
Repayment of capital
lease obligations..... (1,178,409) (1,533,031) (1,964,954) (943,355) (1,166,201)
Proceeds from
borrowings............ 1,997,916 1,341,968 -- -- 16,704,500
Distributions paid to
minority interests.... -- -- -- -- (840,060)
Acquisition of minority
interests............. -- -- (200,000) -- --
----------- ----------- ----------- ----------- -----------
Net cash provided by
(used in) financing
activities............ 808,865 (806,559) (2,720,193) (1,488,051) 7,568,994
----------- ----------- ----------- ----------- -----------
INCREASE (DECREASE) IN
CASH AND CASH
EQUIVALENTS............ (700,049) (1,508) 3,713,277 345,459 (1,272,397)
CASH AND CASH
EQUIVALENTS, BEGINNING
OF PERIOD.............. 705,449 5,400 3,892 3,892 3,717,169
----------- ----------- ----------- ----------- -----------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD................. $ 5,400 $ 3,892 $ 3,717,169 $ 349,351 $ 2,444,772
=========== =========== =========== =========== ===========
SUPPLEMENTAL CASH FLOW
DISCLOSURE:
Interest paid.......... $ 4,069,871 $ 4,499,898 $ 5,838,801 $ 2,866,442 $ 2,171,408
=========== =========== =========== =========== ===========
Income tax benefit
(provision)........... $ 497,739 $ 386,912 $ 1,341,997 $ 355,662 $ (267,575)
=========== =========== =========== =========== ===========
Deferred offering
costs................. $ -- $ -- $ -- $ -- $ 1,111,000
=========== =========== =========== =========== ===========
Goodwill............... $ -- $ 300,000 $ 3,036,923 $ -- $ --
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes to these consolidated financial statements are an
integral part of these consolidated financial statements.
F-8
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (AUDITED)
AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 (UNAUDITED)
(1) ORGANIZATION AND BUSINESS
Jones International Networks, Ltd. (which is now known as JPN, Inc., "Old
Company," effective May 1998) was incorporated in November 1993. The Old
Company was temporarily a wholly-owned subsidiary of Jones Network Holdings
LLC ("Network Holdings"), a Colorado limited liability company. Old Company
has acquired certain subsidiaries from the parent of Network Holdings, Jones
International, Ltd. ("Jones International"). Mr. Glenn R. Jones, Chairman and
Chief Executive Officer, owns 100 percent of Jones International. The
accompanying financial statements have been prepared on the basis of
reorganization accounting of entities under common control (similar to pooling
of interests) as though Old Company had made the acquisitions of these Jones
International subsidiaries at their inception.
In May 1998, a new company named Jones International Networks, Ltd. ("New
Company") was formed as a wholly-owned subsidiary of Network Holdings and a
sister company of Old Company. Effective upon the closing in July 1998 of an
offering of 11 3/4% Senior Secured Notes by New Company (see Note 15) and the
acquisition by New Company of MediaAmerica, Inc. (see Note 15), New Company
acquired all of the shares of Old Company from Network Holdings, and the
members of Network Holdings exchanged their Class A Ownership Interests and
Class B Ownership Interests in Network Holdings for shares of Class A Common
Stock and Class B Common Stock, respectively, of New Company, and Network
Holdings was dissolved. Old Company is now a subsidiary of New Company. Old
Company is hereinafter referred to as the "Company." The results of operations
and financial condition of New Company will be substantially identical to the
financial statements of the Company.
The Company creates, develops, acquires and produces programming that it
distributes to radio stations, cable television system operators and other
video distributors. The Company (i) provides radio programming to radio
stations in exchange for advertising time that it resells to national
advertisers, (ii) provides television and music programming to cable
television system operators and other video distributors, (iii) sells
advertising time on its two television networks and (iv) receives license fees
for its country music television network.
On April 1, 1997, the Company acquired Mr. Glenn R. Jones' 19% equity
interest in Jones Infomercial Networks, Inc. ("Infomercial Networks"), the
subsidiary through which the Company has invested in the PIN Venture, and
Glenn R. Jones' 19% equity interest in Great American Country, Inc. ("Great
American Country"), the subsidiary through which the Company operates Great
American Country, in exchange for 333,333 shares of the Company's Class A
Common Stock. As a result of these transactions, these subsidiaries are wholly
owned by the Company. Also on April 1, 1997, the Company acquired the
satellite transponder leases and related subleases owned by Jones Space
Segment, Inc. ("Space Segment"), an affiliate of the Company, in exchange for
416,667 shares of the Company's Class A Common Stock. These three transactions
were accounted for as a reorganization of entities under common control. The
historical consolidated financial statements have been restated to include
these transactions for all periods presented.
The Company has received advances and loans from Jones International and
related companies to fund its operating and investing activities in the past.
Jones International and such related companies are under no obligation to
provide, nor does the Company expect them to provide, additional advances or
loans to the Company.
Ventures--The Company is a partner in two joint ventures, the PIN Venture
and Galactic/Tempo ("Superaudio"), and is a member in a third venture,
Jones/Owens Radio Programming, LLC ("JORP"). The PIN Venture was organized in
January 1995 and commenced operations on February 1, 1995. The PIN Venture
F-9
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
owns and operates a 24-hour-a-day cable television network for the airing of
long-form advertising ("infomercials"). JORP is in the business of developing,
producing and distributing short-form and long-form syndicated radio programs.
Superaudio commenced operations in July 1990 and is a joint venture which is
owned 50 percent by the Company and 50 percent by a third party. Superaudio
provides audio programming services to cable television system operators.
Profits, losses and distributions of these ventures have been and will be
allocated in accordance with the respective Common Stocks of the partners or
members. Distributions of assets have been and will be approved by the
partners or members for the respective venture prior to such distributions.
From February 1995 until March 31, 1997, the Company owned 50% or less of
the PIN Venture, the entity that owns and operates the Product Information
Network. Effective April 1, 1997, the Company acquired from Adelphia
Communications an 8.35% equity interest in the PIN Venture in exchange for
262,500 shares of the Company's Class A Common Stock. As a result of this
transaction, which was accounted for as a purchase, the Company now owns
approximately 54% of the PIN Venture and, effective April 1, 1997,
consolidated the results of operations of the PIN Venture for financial
reporting purposes.
Interim Financial Information (unaudited)--The accompanying statements of
financial position as of June 30, 1998, the statements of operations and cash
flows for the six months ended June 30, 1997 and 1998, and the statement of
changes in shareholders' deficit for the six months ended June 30, 1998, are
unaudited. However, in the opinion of management, these statements include all
adjustments, consisting of normal recurring adjustments, necessary for the
fair presentation of results for these interim periods. The results of
operations for the six months ended June 30, 1998 are not necessarily
indicative of results to be expected for the entire year, or for any other
interim period.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents--The Company considers all highly liquid
investments with a maturity when purchased of three months or less to be cash
equivalents.
Fair Value of Financial Instruments--The fair value of the Company's
financial instruments is estimated based on the quoted market prices for
similar instruments.
Principles of Consolidation--The consolidated financial statements include
the accounts of all majority-owned and controlled subsidiaries. Investments in
entities which are not majority-owned and controlled by the Company are
accounted for under the equity method. All significant intercompany balances
and transactions have been eliminated in consolidation.
Minority Interest--The minority interest in the net income or loss of the
Company's consolidated subsidiaries is reflected in the statements of
operations. To the extent the minority interest in the net losses of the
Company's consolidated subsidiaries exceeds the minority investment in those
subsidiaries, such excess losses are charged to the Company.
Property, Plant and Equipment--Property and equipment are depreciated using
the straight-line method over the estimated useful lives of 3 to 15 years.
Depreciation of the building is provided using the straight-line method over
an estimated useful life of 40 years. Leasehold improvements are depreciated
over the lesser of five years or the term of the lease. Satellite transponders
are depreciated over the term of the lease.
Goodwill--Goodwill consists primarily of the excess purchase price paid in
the PIN acquisition in 1997 as discussed in Note 5. Goodwill is amortized over
the estimated economic life of the partnership, which is approximately 18
years.
F-10
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Other Intangible Assets--Intangible assets consist primarily of radio
programming licensing agreements obtained from a third party in October 1996.
Intangible assets are amortized over the lesser of 15 years or the term of the
affiliate agreements.
Long-Lived Assets--The Company reviews for the impairment of long-lived
assets and certain identifiable intangibles whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. No such impairment indicators have been identified by the
Company.
Advances to Parent Company--Advances to parent company in the statements of
shareholders' deficit represent the net impact of the intercompany activity
between Space Segment and Jones International. Such amounts have been
presented as further reductions of accumulated deficit in connection with the
reorganization of these entities under common control.
Deferred Commissions--Sales commissions are amortized over the life of the
corresponding affiliate agreements from which the sales commission was paid.
The current amount represents the portion to be amortized within the next 12
months. The remaining portion is classified as long-term.
Deferred Offering Costs--Deferred offering costs consist primarily of
financial advisory, legal and accounting fees incurred in connection with
financing activities. These costs will be charged against the gross proceeds
of the financing activities or written off if and when the financing
activities are not consummated.
Customer Deposits and Deferred Revenues--Customer deposits consist of
unearned revenues associated with affiliate fees and refundable advance
payments received from radio stations. Deferred revenues consist of advance
payments and a security deposit paid by the sub-lessor on the leased
transponders.
Income Taxes--Prior to April 2, 1997, the Company joined in filing a
consolidated tax return as provided for under the terms of a tax allocation
agreement with Jones International and certain of Jones International's
subsidiaries. Pursuant to the terms of the tax allocation agreement, tax
provisions (benefits) were allocated to the members of the tax sharing group
based on their respective pro rata contribution of taxable income (loss) to
Jones International's consolidated taxable income (loss). As a result of the
issuance of additional shares of the Company's common stock (see Note 1), less
than 80% of the Company's outstanding common stock was beneficially (or
indirectly) owned by Jones International. Therefore, the Company is no longer
included in the Jones International tax allocation agreement.
The tax allocation agreement with Jones International gives Jones
International the option to either make a payment of the tax benefits due to
the subsidiary members of the tax sharing group or to defer such payments
until a subsequent taxable period in which the subsidiary member generates
taxable income and has a tax payment due either to Jones International or to a
federal or state taxing authority. Jones International may defer such payments
for a period not to exceed five years from the date the tax benefits were
incurred and will accrue interest at the time the deferred amounts originate.
For the year ended December 31, 1997, Jones International elected to defer a
tax benefit of approximately $1,342,000 due to the Company and its
subsidiaries. For the six months ended June 30, 1998, the Company incurred a
tax provision of approximately $268,000 to adjust estimated tax provisions to
actual tax provisions for the year ended December 31, 1997. This provision was
offset against the income tax receivable.
The Company accounts for deferred tax liabilities or assets based on the
temporary differences between the financial reporting and tax bases of assets
and liabilities as measured by the enacted tax rates which are expected to be
in effect when these differences reverse. Deferred tax assets are reduced, if
deemed necessary, by a valuation allowance for the amount of any tax benefits
which, based upon current circumstances, are not expected to be realized.
F-11
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Revenue Recognition--The Company's revenues consist of radio programming
revenues, television programming revenues and satellite delivery and
production support revenues.
Radio programming revenues include advertising and license fees. The Company
generates radio advertising revenues by selling airtime to advertisers who
advertise their products or services on the networks. The Company recognizes
advertising revenues upon airing of the advertisements. Any amounts received
from customers for radio advertisements that have not been aired during the
period are recorded as deferred revenues until such time as the advertisement
is aired. The Company delivers its programming to radio stations for
distribution to their listeners. Radio station license fees are earned monthly
based on the radio station's contractual agreement.
Television programming revenues include advertising and license fees. The
Company generates television advertising revenues by selling airtime to
advertisers who advertise their products or services on the networks. The
Company recognizes advertising revenues upon the airing of the advertisements.
Any amounts received from customers for television advertisements that have
not been aired during the period are recorded as deferred revenues until such
time as the advertisement is aired. The Company delivers its programming to
cable television systems for distribution to their viewers. Cable television
system license fees are earned monthly based on a per subscriber fee set under
the terms of the cable operator's contractual agreement and the number of
subscribers that are receiving the Company's programming during the respective
month.
Satellite delivery and production support revenues include revenues from
satellite delivery, uplinking, trafficking, playback and other services. The
Company generates revenues by providing such services to affiliates and third
parties. The Company recognizes satellite delivery and production support
revenues upon completion of the services or upon contractual arrangements.
New Accounting Pronouncements--Net loss per common share in the accompanying
consolidated financial statements is based on the weighted average number of
common shares outstanding during the respective periods. In February 1997, the
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards 128 ("SFAS 128") entitled, "Earnings per Share." SFAS 128
is effective for fiscal years ending after December 15, 1997; early adoption
is not permitted. SFAS 128 replaces primary and fully diluted earnings per
share with basic and diluted earnings per share, respectively. Under SFAS 128,
diluted net income (loss) per share for the periods reported would be the same
as the basic earnings per share presented in the accompanying consolidated
financial statements.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
About Capital Structure," which is effective for financial statements for
periods ended after December 15, 1997. This statement establishes standards
for disclosing information about an entity's capital structure. The Company
has adopted this statement. The adoption of this statement did not have a
material impact on the financial statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which is effective for the year ending December 31, 1998. This
statement establishes standards for the reporting and display of comprehensive
income and its components in financial statements and thereby a measure of all
changes in equity of an enterprise that result from transactions and other
economic events other than transactions with owners.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information," which is effective for the year ending
December 31, 1998. This statement changes the requirements under which
publicly held companies report disaggregated information.
The Company will adopt SFAS No. 130 and No. 131 on their respective dates.
Management of the Company does not expect that the adoption of these
statements will have a material impact on the financial statements.
F-12
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires the Company 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.
Reclassifications--Certain prior period amounts have been reclassified to
conform to the current year presentation.
Impact of the Year 2000 Issue (unaudited)--The Year 2000 issue is the result
of many computer programs being written such that they will malfunction when
reading a year of "00." This problem could cause system failure or
miscalculations causing disruptions of business processes.
Jones Intercable initiated an assessment of how the Year 2000 problem could
affect its operations and the operations of related companies in the summer of
1997 and established the Y2K Office to manage the process for all Jones
companies. A subsidiary of Jones International provides computer hardware and
software services to the Company and related parties, including Jones
Intercable, which is the largest user of these services. The Y2K Office meets
regularly with a review committee that includes the Chief Accounting Officer
of the Company.
During 1997, the Y2K Office conducted Year 2000 awareness sessions within
the Company and developed a comprehensive inventory of computer systems and
computer-controlled devices that are potentially affected by the Year 2000
issue. Then, the Y2K Office prepared a risk assessment profile to identify
Year 2000 priorities by analyzing and determining whether the Year 2000
related risks were low, medium or high and whether the business impact would
be marginal, manageable, critical or fatal for each system and device that may
be affected by the Year 2000 issue. Based on its risk assessment profile, the
Y2K Office analyzed the various systems and devices and determined whether to
retire, repair/correct, replace/upgrade or ignore those that posed Year 2000
issues. The Company determined that its first priority would be operational
support/facility systems and then all other systems thought to be non-
compliant.
The Y2K Office is currently implementing the steps needed to address the
Year 2000 problem based upon its set priorities and is testing the implemented
solutions. The Y2K Office's schedule for implementing and testing its Year
2000 solutions for systems that have been determined to be first priority for
the Company is as follows:
<TABLE>
<CAPTION>
EXPECTED
PROJECT DESCRIPTION COMPLETION DATE
------- ---------------------------- ---------------
<S> <C> <C>
Financial Information
Management System........... Test for Y2K compliance 1Q99
Human Resources Information
System...................... Test for Y2K compliance 2Q99
Unix Hardware and Software... Upgrade to Y2K compliant
releases and test for
compliance 4Q98
Local Area Network ("LAN")
and Wide Area Network Determine which components
("WAN") Components.......... are not Y2K compliant 4Q98
LAN/WAN Hardware and Upgrade to Y2K compliant
Software.................... releases and test for
compliance 2Q99
Telephony Systems............ Upgrade to Y2K compliant
releases and test for
compliance 4Q98
PIN Network Traffic and
Billing System.............. Y2K certification testing 4Q98
</TABLE>
F-13
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In 1999, the Y2K Office will focus on Year 2000 compliance issues with
respect to other systems, such as desktop hardware and software, data
archiving systems, traffic and billing reconciliation applications and other
record management systems. The Company has not used, and does not plan to
employ, unaffiliated third party verification and validation processes to
assure the reliability of its risk and cost estimates. The Company has not
deferred any other information technology projects due to Year 2000 efforts.
The Y2K Office commenced contacting vendors of application and operation
system software in 1997 and continues to work with vendors through industry
groups focused on Year 2000 issues. The Company has not yet determined the
extent to which it is vulnerable to the failure by vendors and customers that
have a material relationship with the Company to remediate Year 2000
compliance issues. Management believes, but makes no assurance, that the
Company does not supply to third parties systems or equipment that may cause a
Year 2000 problem.
The Company has not incurred any material historical Year 2000 costs to
date. Management does not have an estimate for future Year 2000 project costs
that may be incurred. Management expects, but makes no assurance that, future
Year 2000 project costs will not have a material adverse effect on its
financial condition and results of operations.
The Company has not yet formulated contingency plans in the event that
systems are not Year 2000 compliant. The Company recognizes the need for a
contingency plan and plans to develop one by the first quarter of 1999. There
can be no assurance that the Company's systems will be Year 2000 compliant in
time. The Year 2000 issue poses many risks for the Company and could
materially adversely affect its financial condition and results of operations.
See "Risk Factors--Impact of the Year 2000 Issue" for a discussion of such
risks.
(3) JONES NETWORK HOLDINGS LLC EXCHANGE
Effective December 31, 1997, all shareholders of the Company contributed
their shares of the Company to Network Holdings in exchange for the same
number of Class A or Class B Ownership Interests in Network Holdings. Network
Holdings was the sole shareholder of all of the Company's outstanding stock as
of December 31, 1997 (see Note 1). On July 10, 1998, the date of the closing
of the Company's 11 3/4% Senior Secured Notes offering, all of the shares of
Old Company were acquired by New Company from Network Holdings, which was then
dissolved.
(4) ACQUISITION OF JONES GALACTIC RADIO, INC. AND JONES EARTH SEGMENT, INC.
Effective August 15, 1996, the Company purchased all of the common stock of
Jones Galactic Radio, Inc. ("Galactic Radio") from Jones Global Group, Inc.
("Global Group"), an affiliate of the Company, for $17,200,000. Galactic Radio
is a holding company which owns 100% of the Company's radio network
programming business, and through a subsidiary, a 50% interest in Superaudio
(see Note 10). The purchase price was paid using $1,200,000 in cash with the
balance in the form of a $16,000,000 promissory note to Global Group.
The net assets of Galactic Radio as of the purchase date totaled
approximately $5.1 million. In accordance with generally accepted accounting
principles for a transfer of entities under common control, the amount of
purchase price paid in excess of Galactic Radio's net assets (approximately
$12.1 million) was charged to shareholders' investment at the beginning of the
periods presented.
Effective September 30, 1996, the Company acquired all of the common stock
of Jones Earth Segment, Inc. ("Earth Segment") from Mr. Glenn R. Jones and
Jones International for 110,833 shares and 472,500 shares, respectively, of
the Company's Class A Common Stock. Earth Segment, now a wholly owned
subsidiary of the
F-14
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company, owns the assets through which the Company provides playback, editing,
duplication and uplinking services, primarily to affiliates. This transaction
was treated as a reorganization of entities under common control and is
included in the Company's historical financial statements for all periods
presented.
(5) ACQUISITION AND CONSOLIDATION OF PIN VENTURE
From February 1995 until March 31, 1997, the Company owned 50% or less of
the PIN Venture, the entity that owns and operates the PIN Network. Effective
April 1, 1997, the Company acquired from Adelphia Communications an 8.35%
equity interest in the PIN Venture in exchange for 262,500 shares of the
Company's Class A Common Stock which was valued at $12 per share for a total
of $3,150,000. As a result of this transaction, which was accounted for as a
purchase, the Company now owns approximately 54% of the PIN Venture and,
effective April 1, 1997, consolidated the results of operations of the PIN
Venture for financial reporting purposes.
The proportionate share (8.35%) of the net assets of the PIN Venture as of
the purchase date totaled approximately $113,000. In accordance with generally
accepted accounting principles for acquisition accounting, the amount of
purchase price paid by the Company in excess of the proportionate share of the
PIN Venture's net assets (approximately $3,037,000) was recorded as goodwill.
Goodwill is being amortized over the estimated life of the partnership, which
is approximately 18 years.
Certain condensed pro-forma financial information of the Company assuming
the PIN Venture was consolidated as of January 1, 1996 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
Total assets..................................... $ 42,454,000 $ 41,358,000
Liabilities...................................... 56,564,000 59,565,000
Shareholders' deficit............................ (14,110,000) (18,207,000)
Revenues......................................... 23,114,000 31,544,000
Operating expenses............................... 21,420,000 28,914,000
Operating income................................. 1,694,000 2,630,000
Net loss......................................... (2,307,000) (3,493,000)
</TABLE>
(6) TRANSACTIONS WITH AFFILIATED ENTITIES
The Company is a subsidiary of Jones International, a holding company with
ownership in several companies involved in various aspects of the
telecommunications industry. Jones International is wholly owned by Glenn R.
Jones, Chairman and Chief Executive Officer of Jones Intercable, Inc. ("Jones
Intercable") and various other subsidiaries of Jones International. Certain
members of management of the Company are also officers or directors of these
affiliated entities and, from time to time, the Company may have transactions
with these entities. Certain expenses are paid by affiliated entities on
behalf of the Company and are allocated at cost based on specific
identification or other methods which management believes are reasonable.
Principal recurring transactions with affiliates, excluding Superaudio, are
described below. See Note 10 for transactions with affiliates related to
Superaudio.
Television Programming Revenues--Prior to July 1, 1998, the Company earned
up to a three percent commission on the sale of airtime for informational
programming on Jones Education Company ("Jones Education") and its affiliates.
Prior to October 1, 1995, the Company did not provide this service to Jones
Education. For the year ended December 31, 1995, 1996 and 1997, the Company
received approximately $52,000, $241,000 and $216,000, respectively, for this
service. For the six months ended June 30, 1997 and
F-15
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1998, the Company received approximately $112,000 and $97,000, respectively,
for this service. After July 1, 1998, PIN will perform such services and will
receive all commissions, as well as paying all related expenses.
Prior to the consolidation of the PIN Venture, which was effective April 1,
1997, the Company received from the PIN Venture approximately $35,000 for the
year ended December 31, 1996 and $8,000 for the three months ended March 31,
1997 for commissions on the sale of airtime for informational programming.
The Company distributes Great American Country to certain cable television
systems owned or managed by Jones Intercable. Great American Country, a 24-
hour country music video network, was launched on December 31, 1995. Jones
Intercable and its affiliated partnerships paid total license fees to the
Company of approximately $719,000 and $853,000 for the years ended December
31, 1996 and 1997. Jones Intercable and its affiliated partnerships paid total
license fees to the Company of approximately $452,000 and $468,000 for the six
months ended June 30, 1997 and 1998, respectively.
Satellite Delivery and Production Support Revenues--Earth Segment provides
playback, editing, duplication and uplinking services primarily to its cable
programming network affiliates. Earth Segment charges affiliates for its
services using rates which are calculated to achieve a specified rate of
return on investment to Earth Segment. For the years ended December 31, 1995,
1996 and 1997, Earth Segment charged Jones Education and its affiliates
approximately $1,885,000, $2,248,000 and $2,193,000, respectively, for these
services. For the six months ended June 30, 1997 and 1998, Earth Segment
charged Jones Education and its affiliates approximately $1,072,000 and
$1,335,000, respectively, for these services.
Prior to the consolidation of the PIN Venture, Earth Segment charged the PIN
Venture approximately $522,000, $726,000 and $201,000 for the years ended
December 31, 1995 and 1996 and for the six months ended June 30, 1997,
respectively, for these services.
In addition, Jones Space Holdings ("Space Holdings"), a subsidiary of the
Company, subleased a non-preemptible satellite transponder to Jones Education
and its affiliates. Satellite transponder lease revenues of approximately
$1,213,000, $852,000 and $896,000, were received from Jones Education for the
years ended December 31, 1995, 1996, and 1997, respectively. Satellite
transponder lease revenues of approximately $448,000 and $468,000, were
received from Jones Education for the six months ended June 30, 1997 and 1998,
respectively.
Prior to the consolidation of the PIN Venture, satellite transponder lease
revenues of approximately $1,112,000, $852,000, and $224,000 were received
from the PIN Venture, for the years ended December 31, 1995 and 1996 and for
the six months ended June 30, 1997, respectively.
Television Programming Expense--Infomercial Networks provided programming to
Jones Intercable and its managed partnerships prior to the formation of the
PIN Venture and, as required under the terms of the affiliate agreement, paid
a fee of approximately 33% of the net revenues generated to the affiliates
which aired the infomercial programming. For the year ended December 31, 1995,
Infomercial Networks paid cable system rebates to Jones Intercable and its
managed systems totaling approximately $109,000. Television programming
expenses decreased in 1996 due to the effects of the deconsolidation of the
PIN Venture for financial reporting purposes on February 1, 1995.
From February 1995 through March 31, 1997, the Company owned 50% or less of
the PIN Venture, the entity that owns and operates the Product Information
Network. Effective April 1, 1997, the Company acquired from Adelphia
Communications an 8.35% equity interest in the PIN Venture. As a result of
this transaction, which was accounted for as a purchase, the Company now owns
approximately 54% of the PIN Venture and, effective April 1, 1997 consolidated
the results of operations of the PIN Venture for financial reporting purposes.
F-16
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During 1997, the PIN Venture paid approximately 60% of the revenues generated
by its infomercial programming in the form of cable system rebates to all
systems which enter into agreements to air such programming. Amounts paid by
the PIN Venture to Jones Intercable and its affiliated partnerships, Cox
Communications and Adelphia Communications were approximately $3,546,000 for
the nine months ended December 31, 1997. Amounts paid by the PIN Venture to
Jones Intercable and its affiliated partnerships, Cox and Adelphia were
approximately $1,173,000 for the three months ended June 30, 1997 and
$2,819,000 for the six months ended June 30, 1998.
An affiliate of the Company began providing affiliate sales services to the
Company in late 1997. This affiliate charged the Company approximately
$201,000 for the year ended December 31, 1997 and approximately $444,000 for
the six months ended June 30, 1998.
Satellite Delivery and Production Support Expense--Galactic Radio has a
transponder lease agreement with Jones Satellite Holdings ("Satellite
Holdings"), an affiliate of the Company, for the use of the sub-carriers on a
non-preemptible satellite transponder. This agreement allows Galactic Radio to
use a portion of the transponder to distribute its audio programming.
Satellite Holdings has the right to terminate the license agreement at any
time upon 30 days written notice to Galactic Radio. The Company agreed to pay
Satellite Holdings approximately $58,000 per month. This agreement will expire
May 7, 2004. Satellite Holdings charged approximately $696,000 for each of the
years ended December 31, 1995, 1996 and 1997, for this service. The Company
paid Satellite Holdings fees of approximately $348,000 for the six months
ended June 30, 1997 and 1998, for this service.
General and Administrative Expenses--The Company leases and subleases office
space in Englewood, Colorado from affiliates of Jones International. Rent and
associated expenses are allocated to the Company based on the amount of square
footage it occupies. The Company was charged approximately $14,000, $32,000
and $88,000, for the years ended December 31, 1995, 1996 and 1997,
respectively for rent and associated expenses. Affiliates of Jones
International charged the Company approximately $39,000 and $74,000, for the
six months ended June 30, 1997 and 1998, respectively for rent and associated
expenses.
An affiliate of Jones International provides computer hardware and software
support services to the Company. This affiliate charged the Company
approximately $306,000, $385,000 and $574,000, for the years ended December
31, 1995, 1996 and 1997, respectively, for such services. This subsidiary
charged the Company approximately $216,000 and $330,000, for the six months
ended June 30, 1997 and 1998, respectively, for such services.
An affiliate of the Company charged the Company approximately $110,000 for
the six months ended June 30, 1998 for the allocated costs of its airplane
which was used by the Company in connection with the Notes offering. No
services were provided in the years ended December 31, 1995, 1996 or 1997.
The Company and its consolidated subsidiaries reimburse Jones International
and its affiliates for certain allocated administrative expenses. These
expenses generally consist of salaries and related benefits. Allocations of
personnel costs are generally based on actual time spent by affiliated
associates with respect to the Company. Jones International and its affiliates
charged the Company approximately $163,000, $861,000 and $540,000, for the
years ended December 31, 1995, 1996 and 1997, respectively, for these
administrative expenses. Jones International and its affiliates charged the
Company approximately $289,000 and $513,000, for the six months ended June 30,
1997 and 1998, respectively, for these administrative expenses.
To assist funding its operating and investing activities, the Company has
borrowed funds from Jones International. Jones International charged interest
on its advances to the Company at rates of approximately 11, 10 and 10 percent
per annum in 1995, 1996 and 1997, respectively. Jones International's interest
rate is
F-17
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
calculated using the published prime rate plus two percent. Jones
International charged the Company interest of approximately $142,000, $243,000
and $868,000, for the years ended December 31, 1995, 1996 and 1997,
respectively. Jones International charged the Company interest of
approximately $375,000 and $328,000, for the six months ended June 30, 1997
and 1998, respectively. The Company anticipates it will repay these advances
from operating cash flow and/or available cash balances.
(7) DEFERRED OFFERING COSTS
The Company had incurred approximately $1,113,000 in deferred offering costs
through December 31, 1997 relating to a proposed initial public offering and
certain other financing undertaken by the Company during 1996 and 1997. Such
costs included amounts paid to financial advisors, legal counsel and
independent public accountants, and for regulatory and stock exchange
registration fees and other various costs. As a result of the Company's
withdrawal of this proposed offering in early 1997, certain deferred offering
costs relating to the offering that were deemed not transferable to other
financing activities were expensed. During 1997, the Company expensed $938,000
of such costs. The remaining deferred offering costs of approximately $175,000
are included in other assets in the accompanying consolidated statements of
financial position at December 31, 1997 and are deemed to benefit the debt
offering which closed in July, 1998 (see Note 15).
(8) NOTE PAYABLE
In December 1994, Earth Segment issued a promissory note which was acquired
by Jones Intercable. As of December 31, 1996 and 1997, the principal amount of
the note was $6,554,500, which approximates fair market value. The note was
secured by all of Earth Segment's present and future tangible and intangible
property and bore interest at one percent over the published prime rate (9.5%
at December 31, 1997). Interest expense, which was payable quarterly, totaled
approximately $670,000, $608,000 and $627,000 for the years ended December 31,
1995, 1996 and 1997, respectively. Interest expense totaled approximately
$311,000 and $156,000 for the six months ended June 30, 1997 and 1998,
respectively. This note and accrued interest were repaid on March 31, 1998
(see Note 15).
In August 1996, the Company issued a $16 million promissory note to Global
Group that bore interest at 8.25 percent per annum and was payable quarterly.
Effective September 30, 1997, the Company and Global Group agreed to convert
$6 million of the $16 million note payable to Global Group into 400,000 shares
of the Company's Class B Common Stock. This note was repaid in conjunction
with the exchange of Network Holdings' Ownership Interests with the Company's
shareholders as of December 31, 1997. Network Holdings issued a new $10
million promissory note to Global Group on December 31, 1997, which replaced
the note with the Company. Such new $10 million promissory note bore interest
at 8.25 percent per annum. Interest on the promissory note accrues and
compounds annually. All outstanding principal and unpaid interest were due and
payable in full on December 31, 2005.
On July 10, 1998, the Company issued $100 million of 11 3/4% Senior Secured
Notes. Effective upon the closing of the Notes offering, the Global Group note
was transferred to the Company and was then converted into 666,667 shares of
the Company's Class A Common Stock valued at $15 per share (see Note 15).
(9) CAPITAL LEASES
The capital lease obligation was comprised of a satellite transponder lease
agreement which provides two non-preemptible satellite transponders, one on
each of two satellites launched in 1992. The agreement provides for full time
usage of two transponders for 12 years. A portion of these satellite
transponders are subleased to affiliated entities and third parties.
F-18
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future minimum payments under these capital leases, together with the
present value of the minimum lease payments, were as follows (see Note 15):
<TABLE>
<S> <C>
1998............................................................ $ 5,190,000
1999............................................................ 5,430,000
2000............................................................ 5,670,000
2001............................................................ 5,910,000
2002............................................................ 6,150,000
Thereafter...................................................... 12,165,000
-----------
Future minimum payments......................................... 40,515,000
Less: amounts representing interest............................. 11,758,000
-----------
Present value of minimum lease payments......................... $28,757,000
===========
</TABLE>
On July 24, 1998, the Company prepaid the entire capital lease obligation
using the proceeds from the Notes offering (see Note 15).
(10) JOINT VENTURE
The Company is a partner in the Superaudio joint venture. The term of this
joint venture is until May 2000. Superaudio commenced operations in July 1990
and is a joint venture which is owned 50 percent by the Company and 50 percent
by a third party. Superaudio provides audio programming services to cable
television system operators.
Certain condensed financial information for Superaudio is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------------------- -------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Total assets........... $1,156,000 $ 950,000 $1,216,000 $1,171,000 $647,000
Total liabilities...... 310,000 72,000 62,000 55,000 47,000
Partners' capital...... 846,000 878,000 1,154,000 1,116,000 600,000
Revenues............... 1,898,000 2,379,000 2,132,000 1,141,000 948,000
Operating expenses..... 1,480,000 1,755,000 1,684,000 914,000 815,000
Operating income....... 418,000 624,000 448,000 227,000 133,000
Net income............. 431,000 632,000 476,000 237,000 146,000
</TABLE>
Superaudio reimburses the Company and its affiliates for certain allocated
overhead and administrative expenses. These expenses generally consist of
salaries and related benefits, rent, data processing services and other
corporate facilities costs. The Company and its affiliates provide
programming, advertising sales management, engineering, marketing,
administrative, accounting, information management, and legal services to
Superaudio. Allocations of personnel costs have been based primarily on actual
time spent by the Company and its affiliates' employees.
Significant transactions for Superaudio with affiliated entities are
described below:
Audio Programming Revenues--Superaudio delivers its audio programming to
cable television systems owned by Jones Intercable and its affiliated
partnerships for a monthly fee of $60,000. For each of the years ended
December 31, 1995, 1996 and 1997, Jones Intercable and its affiliates paid
Superaudio $720,000 for audio programming. For each of the six months ended
June 30, 1997 and 1998, Jones Intercable and its affiliates paid Superaudio
$360,000 for audio programming.
F-19
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Audio Programming Expense--The Company sells certain audio programming and
services to Superaudio. For the years ended December 31, 1995, 1996 and 1997,
the Company charged Superaudio approximately $55,000, $48,000 and $16,000,
respectively, for audio programming and services. For the six months ended
June 30, 1997 and 1998, the Company charged Superaudio approximately $16,000
and $156,000, respectively, for audio programming and services.
Satellite Delivery and Production Support Expense--The Company has a
satellite transponder lease agreement with Satellite Holdings and in turn
subleases the audio subcarriers on this satellite transponder to Superaudio.
The Company charged Superaudio $633,000 for each of the three years in the
period ended December 31, 1997 for this service. The Company charged
Superaudio approximately $316,000 for each of the six months ended June 30,
1997 and 1998, for this service. For the six months ended June 30, 1997 and
1998, Earth Segment charged Superaudio approximately $72,000 and $59,000,
respectively, for satellite delivery and production support services.
General and Administrative Expenses--An affiliate of Jones International
provides computer hardware and software support services to Superaudio. The
affiliate charged Superaudio approximately $41,000, $40,000 and $23,000 for
the years ended December 31, 1995, 1996 and 1997, respectively, for computer
services. The subsidiary charged Superaudio approximately $12,000 and $15,000
for the six months ended June 30, 1997 and 1998, respectively, for computer
services.
Superaudio reimburses Jones International for certain allocated
administrative expenses. These expenses generally consist of salaries and
related benefits. Allocations of personnel costs are generally based on actual
time spent by affiliated associates with respect to Superaudio. Jones
International and its affiliates charged Superaudio approximately $6,000,
$23,000 and $10,000 for the years ended December 31, 1995, 1996 and 1997,
respectively, for these administrative expenses. Jones International and its
affiliates charged Superaudio approximately $6,000 and $10,000 for the six
months ended June 30, 1997 and 1998, respectively, for these administrative
expenses.
(11) COMMON STOCK
Voting Rights--Holders of Class A Common Stock are generally entitled to one
vote per share and are entitled to elect 25% of the Board of Directors, and
holders of Class B Common Stock are entitled to ten votes per share and to
elect the remaining 75% of the Directors. Both classes vote together as a
single class on all matters not requiring a class vote under Colorado law.
Stock Option Plan--The Company has adopted an employee stock option plan
(the "Plan") that provides for the grant of stock options and stock
appreciation rights ("SARs") to employees or individuals providing services to
the Company. The Plan is construed, interpreted and administered by the Board
or a committee of two of more non-employee directors. The committee or the
Board determines the individuals to whom options are granted, the number of
shares subject to the options, the exercise price of the options (which may be
below fair market value of the stock on the date of grant), the period over
which the options become exercisable and the terms and provisions of stock
options as it may determine from time to time, subject only to the provisions
of the Plan. The Plan covers an aggregate of up to 400,000 shares of the
Company's Class A Common Stock. As of December 31, 1997, the Company had not
granted any options or SARs. As of July 10, 1998, the Company had granted
options for 275,000 shares of Class A Common Stock at fair market value.
(12) INCOME TAXES
As described in Note 2, the Company joined in filing a consolidated tax
return as provided for under the terms of a tax sharing agreement with Jones
International and Jones International's other subsidiaries through
F-20
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the first quarter of 1997. Pursuant to the terms of the agreement, tax
(provisions) benefits are allocated to members of the tax sharing group based
on their respective pro rata contribution of taxable income (loss) to Jones
International's consolidated taxable income (loss). Income tax benefits
recognized as a result of the tax sharing arrangement were approximately
$498,000, $387,000 and $1,342,000 for the years ended December 31, 1995, 1996
and 1997.
The difference between the statutory federal income tax rate and effective
rate is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1995 1996 1997
--------- --------- -----------
<S> <C> <C> <C>
Computed "excepted tax benefit"......... $ 602,000 $ 743,000 $ 1,692,000
State taxes, net of federal benefit..... 56,000 72,000 157,000
Other................................... 10,000 20,000 28,000
--------- --------- -----------
668,000 835,000 1,877,000
Valuation allowance..................... (668,000) (835,000) (1,877,000)
--------- --------- -----------
Tax benefit before impact of tax sharing
agreement.............................. -- -- --
Impact of tax sharing agreement (through
April 2, 1997)......................... 498,000 387,000 1,342,000
--------- --------- -----------
Total income tax benefit................ $ 498,000 $ 387,000 $ 1,342,000
========= ========= ===========
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
DEFERRED TAX ASSETS:
Net operating loss carry forwards................ $ 1,306,000 $ 1,654,000
Future deductible amounts associated with other
assets and liabilities.......................... 227,000 154,000
----------- -----------
1,533,000 1,808,000
DEFERRED TAX LIABILITIES:
Investments in property and equipment............ (425,000) (706,000)
VALUATION ALLOWANCE.............................. (1,108,000) (1,102,000)
----------- -----------
Net deferred tax assets.......................... $ -- $ --
=========== ===========
</TABLE>
At December 31, 1997, the Company had net tax operating loss carryforwards
("NOLs") of approximately $4.3 million which expire between 2006 and 2007.
Although management expects future results of operations to improve, it
recognizes the Company's past performance rather than growth projections when
determining the valuation allowance. Any subsequent adjustment to the
valuation allowance, if deemed appropriate due to changed circumstances, will
be recognized as a separate component of the provision for income taxes.
(13) EMPLOYEE INVESTMENT AND DEFERRED COMPENSATION PLANS
The Company's employees are eligible to participate in an Employee Profit
Sharing/Retirement Savings Plan (the "401(k) Plan"). Under the 401(k) Plan,
eligible employees are permitted to defer up to 16% of their annual
compensation. The Company currently matches 50% of the employees' deferrals up
to a maximum of 6% of their annual compensation, with the Company's
contribution vesting immediately. Contributions to the 401(k) Plan are
invested by the trustees of the 401(k) Plan in accordance with the directions
of each participant. Participants or their beneficiaries are entitled to
payment of benefits (i) upon retirement either at or after age 65, (ii) upon
death or disability or (iii) upon termination of employment, unless the
participant elects to receive
F-21
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
payment prior to one of the events previously listed. For the years ended
December 31, 1995, 1996 and 1997, the Company contributed approximately
$51,000, $62,000 and $83,000, respectively, to the 401(k) Plan on behalf of
its employees.
Certain of the Company's key management personnel are eligible to
participate in a Deferred Compensation Plan (the "Deferred Compensation
Plan"). Under the Deferred Compensation Plan, key employees are permitted to
defer receipt of 100% of their annual compensation. The Company currently
matches the key employees' deferrals up to a maximum of 6% of their
compensation. The contributed funds are deposited with an independent trustee
and are invested in a number of pre-selected investment funds. Both the key
employees' and the Company's contributions are subject to the claims of the
Company's creditors. Participants in the Deferred Compensation Plan or their
beneficiaries receive a distribution of their contributions, the Company's
contributions, and earnings attributable to those contributions on their
separation from employment with the Company or their death. Contributions made
by the Company to the Deferred Compensation Plan on behalf of key employees
totaled approximately $25,000, $23,000 and $33,000 for the years ended
December 31, 1995, 1996 and 1997, respectively.
(14) COMMITMENTS AND CONTINGENCIES
Operating Lease
The Company rents an office facility under a lease agreement. Future minimum
lease payments under this noncancelable operating lease at December 31, 1997,
for each of the next five years and thereafter, are approximately as follows:
<TABLE>
<CAPTION>
FISCAL FACILITIES
YEAR LEASE
------ ----------
<S> <C>
1998.......................................................... $158,000
1999.......................................................... 162,000
2000.......................................................... 162,000
2001.......................................................... 162,000
2002.......................................................... 148,000
Thereafter.................................................... --
--------
$792,000
========
</TABLE>
GAC Equity Agreements
In the first quarter of 1998, Great American Country and the Company entered
into equity affiliate agreements with two multiple cable system operators
("MSOs"). Pursuant to the terms of such agreements, the Company agreed to
issue shares of Class A Common Stock to the MSOs in return for the MSOs
providing Great American Country's programming to no less than 550,000 of
their subscribers by May 31, 1998, 500,000 subscribers by December 31, 1998
and 150,000 subscribers by December 31, 1999. The total number of shares of
Class A Common Stock to be issued is based on the number of subscribers
provided by the MSOs. If all the subscribers as described above receive Great
American Country's programming by the specified dates, the Company will be
required to issue a total of 175,000 shares of Common Stock on specified dates
through February 2000. At August 1, 1998, 101,124 shares of Class A Common
Stock had been issued to one of the MSOs. Pursuant to the guidelines of SFAS
123 "Accounting for Stock-Based Compensation," the value of the Class A Common
Stock was recorded as an intangible asset upon execution of the affiliate
agreements and upon issuance of the Class A Common Stock. This intangible will
be amortized over the life of the contract (approximately 10 years). Because
of a put option, the shares issued to one of the MSOs will be presented above
the Shareholders' Deficit section. The amount of accretion from the value of
the shares issued to the put option at the exercise date is not significant.
F-22
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As noted above, one of the MSOs was granted a put option on the Common Stock
issued, whereby, if as of December 31, 2001, the Company or its successor has
not completed a public offering of its securities, the MSO shall have the
option within 60 days of such date to sell its Class A Common Stock back to
the Company. If the put election is made, the Company or its successor would
purchase the Class A Common Stock at a price equal to all or a portion of the
license fees that would have been paid during the period between the date of
the agreement and the exercise date of the put option. The purchase price
would be based on the total number of MSO subscribers receiving the Great
American Country service as of December 31, 1998. In the event the MSO
provides the full number of subscribers committed under the agreement by
December 31, 1998, the estimated purchase price of the Class A Common Stock in
the event the put option is exercised would be approximately $1,300,000.
(15) CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
In July 1998, the Company issued $100 million of Senior Secured Notes (the
"Notes"). The Notes are senior obligations of the Company. The Notes rank pari
passu in right of payment with all existing and future senior indebtedness of
the Company and rank senior to all existing and future subordinated
obligations of the Company. The Notes are secured by the capital stock of the
Company's subsidiary, JPN, Inc., and its direct subsidiaries. The Notes are
fully and unconditionally guaranteed, jointly and severally, on a senior
unsecured basis by the following wholly-owned subsidiaries of the Company:
JPN, Inc., Jones Space Holdings, Inc., Jones Earth Segment, Inc., Jones
Infomercial Networks, Inc., Jones Radio Holdings, Inc., Great American
Country, Inc., Jones Galactic Radio, Inc., Jones Infomercial Network Ventures,
Inc., Jones Galactic Radio Partners, Inc., Jones Radio Network, Inc., Jones
Audio Services, Inc., Jones Radio Network Ventures, Inc., MediaAmerica, Inc.
and Jones MAI Radio, Inc. and by its 90%-owned subsidiary, Jones/Owens Radio
Programming LLC (collectively, the "Subsidiary Guarantors"). The only existing
subsidiaries of the Company that did not guarantee the Notes are the following
three entities: the Product Information Network Venture, a general partnership
in which the Company, through a Subsidiary Guarantor, owns a 54% interest;
Galactic Tempo, d/b/a Superaudio ("Superaudio"), a general partnership in
which the Company, through a Subsidiary Guarantor, owns a 50% interest (see
Note 10) and Jones/Capstar Venture Radio Programming LLC, a recently formed
limited liability company in which the Company, through a Subsidiary
Guarantor, owns a 50% interest (collectively, the "Non-Guarantor
Subsidiaries").
The Company has not provided separate complete financial statements and
other disclosures of the respective Subsidiary Guarantor because management
has determined that such information is not material to investors. There are
no significant contractual restrictions on distributions from each of the
Subsidiary Guarantors to the Company.
Investments in subsidiaries are required to be accounted for by investors on
the equity method for purposes of the supplemental condensed consolidating
financial statement presentation. Under this method, investments are recorded
at cost and adjusted for the investor company's ownership share of the
subsidiaries' cumulative results of operations. In addition, investments
increase in the amount of contributions to subsidiaries and decrease in the
amount of distributions from subsidiaries. The elimination entries eliminate
the equity method investment in subsidiaries accounting and the equity in
earnings of subsidiaries, intercompany payables and receivables and other
transactions between subsidiaries including contributions and distributions.
Sections 13 and 15(d) of the Securities Exchange Act of 1934 require
presentation of the following supplemental condensed consolidating financial
statements.
Presented below is condensed consolidating financial information for the
Company and its subsidiaries as of and for the years ended December 31, 1995,
1996 and 1997, and the six months ended June 30, 1997 and 1998.
F-23
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS--
FOR THE YEAR ENDED DECEMBER 31, 1995:
<TABLE>
<CAPTION>
NON-
THE SUBSIDIARY GUARANTOR ELIMINATION
COMPANY GUARANTORS SUBSIDIARIES ENTRIES REPORTED
------- ---------- ------------ ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
REVENUES:
Radio programming...... $ -- $ 5,121 $ -- $ -- $ 5,121
Television
programming........... -- 340 4,111 (4,111) 340
Satellite delivery and
production support.... -- 9,666 -- -- 9,666
----- ------- ----- ------ -------
Total revenues........ -- 15,127 4,111 (4,111) 15,127
----- ------- ----- ------ -------
OPERATING EXPENSES:
Radio programming...... -- 3,068 -- -- 3,068
Television
programming........... -- 366 3,719 (3,719) 366
Satellite delivery and
production support.... -- 6,530 -- -- 6,530
Selling and marketing.. -- 1,374 115 (115) 1,374
General and
administrative........ 304 2,018 662 (662) 2,322
----- ------- ----- ------ -------
Total operating
expenses............. 304 13,356 4,496 (4,496) 13,660
----- ------- ----- ------ -------
OPERATING INCOME...... (304) 1,771 (385) 385 1,467
----- ------- ----- ------ -------
OTHER EXPENSE (INCOME):
Interest expense....... 35 4,079 33 (77) 4,070
Interest income........ (17) (91) -- 44 (64)
Write-off of deferred
offering costs........ -- -- -- -- --
Equity share of loss
(income) of
subsidiaries.......... 217 (11) -- (217) (11)
Other expense (income),
net................... -- 16 (6) 6 16
----- ------- ----- ------ -------
Total other expense... 235 3,993 27 (244) 4,011
----- ------- ----- ------ -------
Income (loss) before
income taxes and
minority interests.... (539) (2,222) (412) 629 (2,544)
Income tax provision
(benefit)............. (57) (441) -- -- (498)
----- ------- ----- ------ -------
Income (loss) before
minority interests.... (482) (1,781) (412) 629 (2,046)
Minority interests in
net income of
consolidated
subsidiaries.......... -- -- -- -- --
----- ------- ----- ------ -------
NET INCOME (LOSS)...... $(482) $(1,781) $(412) $ 629 $(2,046)
===== ======= ===== ====== =======
</TABLE>
F-24
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS--
FOR THE YEAR ENDED DECEMBER 31, 1995:
<TABLE>
<CAPTION>
NON-
THE SUBSIDIARY GUARANTOR ELIMINATION
COMPANY GUARANTORS SUBSIDIARIES ENTRIES REPORTED
------- ---------- ------------ ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss................ $(482) $(1,781) $(412) $ 629 $(2,046)
Adjustment to reconcile
net loss to net cash
provided by (used in)
operating activities:
Non-cash expenses
(income)............... -- 3,877 18 (18) 3,877
Distributions received.. -- 175 -- -- 175
Net change in assets and
liabilities............ 484 (1,909) 262 (479) (1,642)
----- ------- ----- ----- -------
Net cash provided by
(used in) operating
activities............ 2 362 (132) 132 364
----- ------- ----- ----- -------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property,
plant and equipment.... -- (1,262) (326) 326 (1,262)
Sale of property, plant
and equipment.......... -- -- 124 (124) --
Purchases of intangible
assets................. (2) (434) (436)
Investment in joint
venture................ -- (175) -- -- (175)
----- ------- ----- ----- -------
Net cash used in
investing activities.. (2) (1,871) (202) 202 (1,873)
----- ------- ----- ----- -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Repayment of
borrowings............. -- (11) -- -- (11)
Repayment of capital
lease obligations...... -- (1,178) -- -- (1,178)
Proceeds from
borrowings............. -- 1,998 -- -- 1,998
Distributions paid to
minority interests..... -- -- -- -- --
Contributed capital from
general partners....... -- -- 350 (350) --
----- ------- ----- ----- -------
Net cash provided by
financing activities.. -- 809 350 (350) 809
----- ------- ----- ----- -------
INCREASE (DECREASE) IN
CASH AND CASH
EQUIVALENTS............. -- (700) 16 (16) (700)
CASH AND CASH
EQUIVALENTS, BEGINNING
OF PERIOD............... -- 705 -- -- 705
----- ------- ----- ----- -------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD.................. $ -- $ 5 $ 16 $ (16) $ 5
===== ======= ===== ===== =======
</TABLE>
F-25
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION--
AS OF DECEMBER 31, 1996:
<TABLE>
<CAPTION>
SUBSIDIARY
GUARANTORS
-----------------
NON-
THE EXCLUDING GUARANTOR ELIMINATION
COMPANY JORP JORP SUBSIDIARIES ENTRIES REPORTED
-------- --------- ------ ------------ ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Cash and cash equiva-
lents.................. $ -- $ 4 $ -- $ 55 $ (55) $ 4
Accounts receivable..... -- 721 131 1,778 (1,778) 852
Other current assets.... -- 1,784 22 62 (205) 1,663
-------- -------- ------ ------ ------- --------
Total current assets... -- 2,509 153 1,895 (2,038) 2,519
-------- -------- ------ ------ ------- --------
Property, plant and
equipment.............. -- 32,098 -- 448 (448) 32,098
Goodwill................ -- 285 -- -- -- 285
Intangible assets....... 3 317 963 -- -- 1,283
Other long-term assets.. 4,210 2,205 -- 3 (4,305) 2,113
-------- -------- ------ ------ ------- --------
Total assets........... $ 4,213 $ 37,414 $1,116 $2,346 $(6,791) $ 38,298
======== ======== ====== ====== ======= ========
LIABILITIES AND
SHAREHOLDERS'/MEMBERS'
INVESTMENT (DEFICIT):
Accounts payable........ $ 253 $ (16) $ 3 $ 379 $ (379) $ 240
Accrued liabilities..... 196 490 -- 144 (144) 686
Other current liabili-
ties................... 2,439 5,770 143 810 (953) 8,209
-------- -------- ------ ------ ------- --------
Total current liabili-
ties.................. 2,888 6,244 146 1,333 (1,476) 9,135
-------- -------- ------ ------ ------- --------
Note payable--affiliated
entity.................. 16,000 6,554 -- -- -- 22,554
Capital lease obliga-
tions................... -- 28,757 -- -- -- 28,757
Other long-term liabili-
ties.................... -- 830 -- -- -- 830
-------- -------- ------ ------ ------- --------
Total long-term liabil-
ities................. 16,000 36,141 -- -- -- 52,141
-------- -------- ------ ------ ------- --------
Minority interests....... -- -- -- -- 291 291
Shareholders'/members'
investment (deficit):
Class A Common Stock.... 6 14 -- -- -- 20
Class B Common Stock.... -- 14 -- -- -- 14
General
partners'/members' con-
tributions............. -- -- 1,000 350 (1,350) --
Additional paid-in capi-
tal.................... -- 9,342 -- -- (9,342) --
Retained earnings (accu-
mulated deficit)....... (14,681) (14,341) (30) 663 5,086 (23,303)
-------- -------- ------ ------ ------- --------
Total
shareholders'/members'
investment (deficit).. (14,675) (4,971) 970 1,013 (5,606) (23,269)
-------- -------- ------ ------ ------- --------
Total liabilities and
shareholders'/members'
investment (deficit).... $ 4,213 $ 37,414 $1,116 $2,346 $(6,791) $ 38,298
======== ======== ====== ====== ======= ========
</TABLE>
F-26
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS--
FOR THE YEAR ENDED DECEMBER 31, 1996:
<TABLE>
<CAPTION>
SUBSIDIARY
GUARANTORS
--------------
NON-
THE EXCLUDING GUARANTOR ELIMINATION
COMPANY JORP JORP SUBSIDIARIES ENTRIES REPORTED
------- --------- ---- ------------ ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
REVENUES:
Radio programming...... $ 477 $ 6,342 $177 $ -- $ (18) $ 6,978
Television program-
ming.................. -- 1,153 -- 8,038 (8,038) 1,153
Satellite delivery and
production support.... -- 8,523 -- -- -- 8,523
------- ------- ---- ------ ------- -------
Total revenues........ 477 16,018 177 8,038 (8,056) 16,654
------- ------- ---- ------ ------- -------
OPERATING EXPENSES:
Radio programming...... 420 3,591 170 -- (18) 4,163
Television program-
ming.................. 1,157 -- 5,922 (5,922) 1,157
Satellite delivery and
production support.... -- 5,451 -- -- -- 5,451
Selling and marketing.. 100 1,635 2 240 (240) 1,737
General and administra-
tive.................. 579 2,656 35 751 (751) 3,270
------- ------- ---- ------ ------- -------
Total operating ex-
penses............... 1,099 14,490 207 6,913 (6,931) 15,778
------- ------- ---- ------ ------- -------
OPERATING INCOME...... (622) 1,528 (30) 1,125 (1,125) 876
------- ------- ---- ------ ------- -------
OTHER EXPENSE (INCOME):
Interest expense....... 744 3,940 -- 30 (214) 4,500
Interest income........ (177) (75) -- (2) 182 (72)
Write-off of deferred
offering costs........ -- -- -- -- -- --
Equity share of loss
(income) of subsidiar-
ies................... 1,200 (829) -- -- (1,200) (829)
Other expense (income),
net................... -- (12) -- 21 (21) (12)
------- ------- ---- ------ ------- -------
Total other expense
(income)............. 1,767 3,024 -- 49 (1,253) 3,587
------- ------- ---- ------ ------- -------
Income (loss) before
income taxes and mi-
nority
interests.............. (2,389) (1,496) (30) 1,076 128 (2,711)
Income tax provision
(benefit)............. (377) (10) -- -- -- (387)
------- ------- ---- ------ ------- -------
Income (loss) before
minority interests.... (2,012) (1,486) (30) 1,076 128 (2,324)
Minority interests in
net income (loss) of
consolidated subsidi-
aries................. -- -- -- -- (9) (9)
------- ------- ---- ------ ------- -------
NET INCOME (LOSS)...... $(2,012) $(1,486) $(30) $1,076 $ 137 $(2,315)
======= ======= ==== ====== ======= =======
</TABLE>
F-27
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996:
<TABLE>
<CAPTION>
SUBSIDIARY
GUARANTORS
----------------
NON-
THE EXCLUDING GUARANTOR ELIMINATION
COMPANY JORP JORP SUBSIDIARIES ENTRIES REPORTED
------- --------- ------ ------------ ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss)..... $(2,012) $(1,486) $ (30) $1,076 $ 137 $(2,315)
Adjustment to
reconcile net loss to
net cash provided by
(used in) operating
activities:
Non-cash expenses
(income)............. 2 4,813 37 63 (1,276) 3,639
Distributions
received............. -- 300 -- -- -- 300
Net change in assets
and liabilities...... 2,618 (458) (7) (774) 1,774 3,153
------- ------- ------ ------ ------- -------
Net cash provided by
(used in) operating
activities.......... 608 3,169 -- 365 635 4,777
------- ------- ------ ------ ------- -------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchase of property,
plant and equipment.. -- (2,969) -- (341) 341 (2,969)
Sale of property,
plant and equipment.. -- -- -- 15 (15) --
Purchases of
intangible assets.... -- (2) (1,000) -- -- (1,002)
Investment in joint
venture.............. -- -- -- -- -- --
------- ------- ------ ------ ------- -------
Net cash used in
investing
activities.......... -- (2,971) (1,000) (326) 326 (3,971)
------- ------- ------ ------ ------- -------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Increase in deferred
offering costs....... (608) -- -- -- -- (608)
Increase in
capitalized loan
fees................. -- -- -- -- -- --
Repayment of
borrowings........... -- (8) -- -- -- (8)
Repayment of capital
lease obligations.... -- (1,533) -- -- -- (1,533)
Proceeds from
borrowings........... -- 1,342 -- -- -- 1,342
Members
contributions........ -- -- 1,000 -- (1,000) --
Distributions paid to
minority interests... -- -- -- -- -- --
Acquisition of
minority interests... -- -- -- -- -- --
------- ------- ------ ------ ------- -------
Net cash used in
financing
activities.......... (608) (199) 1,000 -- (1,000) (807)
------- ------- ------ ------ ------- -------
INCREASE (DECREASE) IN
CASH AND CASH
EQUIVALENTS........... -- (1) -- 39 (39) (1)
CASH AND CASH
EQUIVALENTS, BEGINNING
OF PERIOD............. -- 5 -- 16 (16) 5
------- ------- ------ ------ ------- -------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD................ $ -- $ 4 $ -- $ 55 $ (55) $ 4
======= ======= ====== ====== ======= =======
</TABLE>
F-28
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION
--AS OF DECEMBER 31, 1997:
<TABLE>
<CAPTION>
SUBSIDIARY
GUARANTORS NON-
THE EXCLUDING GUARANTOR ELIMINATION
COMPANY JORP JORP SUBSIDIARIES ENTRIES REPORTED
-------- --------- ------ ------------ ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents................. $ (25) $ 5 74 $3,663 $ -- $ 3,717
Accounts receivable....................... -- 578 203 674 -- 1,455
Other current assets...................... -- 528 255 -- (243) 540
-------- -------- ------ ------ -------- --------
Total current assets.................. (25) 1,111 532 4,337 (243) 5,712
-------- -------- ------ ------ -------- --------
Property, plant and equipment............. 7 28,557 -- 212 -- 28,776
Goodwill.................................. -- 3,126 -- -- -- 3,126
Intangible assets......................... 53 1,006 -- 5 -- 1,064
Other long-term assets.................... 1,683 2,964 810 -- (2,777) 2,680
-------- -------- ------ ------ -------- --------
Total assets.......................... $ 1,718 $ 36,764 $1,342 $4,554 $ (3,020) $ 41,358
-------- -------- ------ ------ -------- --------
LIABILITIES AND SHAREHOLDERS'/MEMBERS'
INVESTMENT (DEFICIT):
Accounts payable.......................... $ 417 $ 130 2 $ 890 $ -- $ 1,439
Accrued liabilities....................... 312 961 -- 27 -- 1,300
Other current liabilities................. 5,910 5,915 -- 479 -- 12,304
-------- -------- ------ ------ -------- --------
Total current liabilities............. 6,639 7,006 2 1,396 -- 15,043
-------- -------- ------ ------ -------- --------
Note payable--affiliated entity........... 10,000 6,554 -- -- -- 16,554
Capital lease obligations................. -- 26,335 -- -- -- 26,335
Other long-term liabilities............... 3,289 282 -- -- (3,532) 39
-------- -------- ------ ------ -------- --------
Total long-term liabilities........... 13,289 33,171 -- -- (3,532) 42,928
-------- -------- ------ ------ -------- --------
Minority interests........................ -- -- -- -- 1,593 1,593
Shareholders'/members' investment
(deficit):
Class A Common Stock.................... 30 1 -- -- (1) 30
Class B Common Stock.................... 18 1 -- -- (1) 18
General partners'/members' contributions -- -- 1,000 350 (1,350) --
Additional paid-in capital.............. 9,143 12,840 -- -- (12,840) 9,143
Retained earnings (accumulated
deficit)............................... (27,401) (16,255) 340 2,808 13,111 (27,397)
-------- -------- ------ ------ -------- --------
Total shareholders'/members'
investment (deficit)................. (18,210) (3,413) 1,340 3,158 (1,081) (18,206)
-------- -------- ------ ------ -------- --------
Total liabilities and
shareholders'/members'
investment (deficit)..................... $ 1,718 $ 36,764 $1,342 $4,554 $ (3,020) $ 41,358
======== ======== ====== ====== ======== ========
</TABLE>
F-29
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS--
FOR THE YEAR ENDED DECEMBER 31, 1997:
<TABLE>
<CAPTION>
SUBSIDIARY
GUARANTORS
----------------
NON-
THE EXCLUDING GUARANTOR ELIMINATION
COMPANY JORP JORP SUBSIDIARIES ENTRIES REPORTED
------- --------- ------ ------------ ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
REVENUES:
Radio programming...... $ -- $ 9,115 $1,186 $ -- $ (101) $10,200
Television
programming........... 285 1,230 -- 13,345 (2,858) 12,002
Satellite delivery and
production support.... -- 8,241 -- -- (1,331) 6,910
------- ------- ------ ------- ------- -------
Total revenues........ 285 18,586 1,186 13,345 (4,290) 29,112
------- ------- ------ ------- ------- -------
OPERATING EXPENSES:
Radio programming...... -- 5,229 688 -- (101) 5,816
Television
programming........... 148 2,585 -- 10,045 (3,506) 9,272
Satellite delivery and
production support.... -- 4,685 -- -- -- 4,685
Selling and marketing.. 137 2,489 -- 396 (104) 2,918
General and
administrative........ 1,155 2,300 128 788 (203) 4,168
------- ------- ------ ------- ------- -------
Total operating
expenses............. 1,440 17,288 816 11,229 (3,914) 26,859
------- ------- ------ ------- ------- -------
OPERATING INCOME
(LOSS)............... (1,155) 1,298 370 2,116 (376) 2,253
------- ------- ------ ------- ------- -------
OTHER EXPENSE (INCOME):
Interest expense....... 2,065 3,612 -- 16 (16) 5,677
Interest income........ (6) (25) -- (83) 6 (108)
Write-off of deferred
offering costs........ 938 -- -- -- -- 938
Equity share of loss
(income) of
subsidiaries.......... 663 (1,363) -- -- 304 (396)
Other expense (income),
net................... -- 35 -- 39 -- 74
------- ------- ------ ------- ------- -------
Total other expense
(income)............. 3,660 2,259 -- (28) 294 6,185
------- ------- ------ ------- ------- -------
Income (loss) before
income taxes and
minority interests..... (4,815) (961) 370 2,144 (670) (3,932)
Income tax provision
(benefit).............. (1,376) (786) -- -- 820 (1,342)
------- ------- ------ ------- ------- -------
Income (loss) before
minority interests..... (3,439) (175) 370 2,144 (1,490) (2,590)
Minority interests in
net income of
consolidated
subsidiaries........... -- -- -- -- 903 903
------- ------- ------ ------- ------- -------
NET INCOME (LOSS)....... $(3,439) $ (175) $ 370 $ 2,144 $(2,393) $(3,493)
======= ======= ====== ======= ======= =======
</TABLE>
F-30
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS--
FOR THE YEAR ENDED DECEMBER 31, 1997:
<TABLE>
<CAPTION>
SUBSIDIARY
GUARANTORS
---------------
NON-
THE EXCLUDING GUARANTOR ELIMINATION
COMPANY JORP JORP SUBSIDIARIES ENTRIES REPORTED
------- --------- ----- ------------ ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss)..... $(3,439) $ (175) $ 370 $2,144 $(2,393) $(3,493)
Adjustment to
reconcile net loss to
net cash provided by
(used in) operating
activities:
Non-cash expense...... 640 4,221 153 82 1,598 6,694
Distributions
received............. -- 100 -- -- -- 100
Net change in assets
and liabilities...... 3,540 (880) (449) 1,227 850 4,288
------- ------ ----- ------ ------- -------
Net cash provided by
operating
activities.......... 741 3,266 74 3,453 55 7,589
------- ------ ----- ------ ------- -------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchase of property,
plant and equipment.. (8) (1,340) -- (19) -- (1,367)
Sale of property,
plant and equipment.. -- 82 -- 174 -- 256
Purchases of
intangible assets.... (3) (42) -- -- -- (45)
Investment in joint
venture.............. -- -- -- -- -- --
------- ------ ----- ------ ------- -------
Net cash provided by
(used in) investing
activities.......... (11) (1,300) -- 155 -- (1,156)
------- ------ ----- ------ ------- -------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Increase in deferred
offering costs....... (505) -- -- -- -- (505)
Increase in
capitalized loan
fees................. (50) -- -- -- -- (50)
Repayment of
borrowings........... -- -- -- -- -- --
Repayment of capital
lease obligation..... -- (1,965) -- -- -- (1,965)
Proceeds from
borrowings........... -- -- -- -- -- --
Distributions paid to
minority interests... -- -- -- -- -- --
Acquisition of
minority interests... (200) -- -- -- -- (200)
------- ------ ----- ------ ------- -------
Net cash used in
financing
activities.......... (755) (1,965) -- -- -- (2,720)
------- ------ ----- ------ ------- -------
INCREASE (DECREASE) IN
CASH AND CASH
EQUIVALENTS........... (25) 1 74 3,608 55 3,713
CASH AND CASH
EQUIVALENTS, BEGINNING
OF PERIOD............. -- 4 -- 55 (55) 4
------- ------ ----- ------ ------- -------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD................ $ (25) $ 5 $ 74 $3,663 $ -- $ 3,717
======= ====== ===== ====== ======= =======
</TABLE>
F-31
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS--
FOR THE SIX MONTHS ENDED JUNE 30, 1997:
<TABLE>
<CAPTION>
SUBSIDIARY
GUARANTORS
-------------- NON-
THE EXCLUDING GUARANTOR ELIMINATION
COMPANY JORP JORP SUBSIDIARIES ENTRIES REPORTED
------- --------- ---- ------------ ----------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
REVENUES:
Radio programming...... $ -- $4,588 $558 $ -- $ (56) $ 5,090
Television
programming........... 132 603 -- 6,021 (2,858) 3,898
Satellite delivery and
production support.... -- 4,336 -- -- (418) 3,918
------- ------ ---- ------ ------- -------
Total revenues........ 132 9,527 558 6,021 (3,332) 12,906
------- ------ ---- ------ ------- -------
OPERATING EXPENSES:
Radio programming...... -- 2,525 335 -- (56) 2,804
Television
programming........... 56 936 -- 4,607 (2,593) 3,006
Satellite delivery and
production support.... -- 2,605 -- -- -- 2,605
Selling and marketing.. 66 1,062 -- 242 (104) 1,266
General and
administrative........ 578 1,042 65 381 (203) 1,863
------- ------ ---- ------ ------- -------
Total operating
expenses............. 700 8,170 400 5,230 (2,956) 11,544
------- ------ ---- ------ ------- -------
OPERATING INCOME
(LOSS)............... (568) 1,357 158 791 (376) 1,362
------- ------ ---- ------ ------- -------
OTHER EXPENSE (INCOME):
Interest expense....... 1,035 1,820 -- 16 (4) 2,867
Interest income........ -- (23) -- (3) 4 (22)
Write-off of deferred
offering costs........ 938 -- -- -- -- 938
Equity share of loss
(income) of
Subsidiaries.......... (92) (488) -- -- 293 (287)
Other expense (income),
net................... -- (38) -- 38 -- --
------- ------ ---- ------ ------- -------
Total other expense
(income)............. 1,881 1,271 -- 51 293 3,496
------- ------ ---- ------ ------- -------
Income (loss) before
income taxes and
minority interests.... (2,449) 86 158 740 (669) (2,134)
Income tax provision
(benefit)............. (288) (68) -- -- -- (356)
------- ------ ---- ------ ------- -------
Income (loss) before
minority interests.... (2,161) 154 158 740 (669) (1,778)
Minority interests in
net income of
consolidated
subsidiaries.......... -- -- -- -- 418 418
------- ------ ---- ------ ------- -------
NET INCOME (LOSS)...... $(2,161) $ 154 $158 $ 740 $(1,087) $(2,196)
======= ====== ==== ====== ======= =======
</TABLE>
F-32
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS--
FOR THE SIX MONTHS ENDED JUNE 30, 1997:
<TABLE>
<CAPTION>
SUBSIDIARY
GUARANTORS
--------------- NON-
THE EXCLUDING GUARANTOR ELIMINATION
COMPANY JORP JORP SUBSIDIARIES ENTRIES REPORTED
------- --------- ----- ------------ ----------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss)..... $(2,161) $ 154 $ 158 $ 740 $(1,087) $(2,196)
Adjustment to
reconcile net loss to
net cash provided
(used in) by
operating activities:
Non-cash Expense...... (91) 3,219 83 (362) 769 3,618
Net change in assets
and liabilities...... 2,755 (1,560) (241) (175) 373 1,152
------- ------- ----- ----- ------- -------
Net cash provided by
operating
activities.......... 503 1,813 -- 203 55 2,574
------- ------- ----- ----- ------- -------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchase of property,
plant and equipment.. (7) (876) -- (119) -- (1,002)
Sale of property,
plant and equipment.. -- -- -- 262 -- 262
Purchases of
intangible assets.... (4) 5 -- (2) -- (1)
Investment in joint
venture.............. -- -- -- -- -- --
------- ------- ----- ----- ------- -------
Net cash provided by
(used in) investing
activities.......... (11) (871) -- 141 -- (741)
------- ------- ----- ----- ------- -------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Increase in deferred
offering costs....... (495) -- -- -- -- (495)
Increase in
capitalized loan
fees................. (50) -- -- -- -- (50)
Repayment of
borrowings........... -- -- -- -- -- --
Repayment of capital
lease obligations.... -- (943) -- -- -- (943)
Proceeds from
borrowings........... -- -- -- -- -- --
Distributions paid to
minority interests... -- -- -- -- -- --
Acquisition of
minority interests... -- -- -- -- -- --
------- ------- ----- ----- ------- -------
Net cash used in
financing
activities.......... (545) (943) -- -- -- (1,488)
------- ------- ----- ----- ------- -------
INCREASE (DECREASE) IN
CASH AND CASH
EQUIVALENTS........... (53) (1) -- 344 55 345
CASH AND CASH
EQUIVALENTS, BEGINNING
OF PERIOD............. -- 4 -- 55 (55) 4
------- ------- ----- ----- ------- -------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD................ $ (53) $ 3 $ -- $ 399 $ -- $ 349
======= ======= ===== ===== ======= =======
</TABLE>
F-33
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION--AS OF JUNE 30, 1998:
<TABLE>
<CAPTION>
SUBSIDIARY
GUARANTORS
----------------
NON-
THE EXCLUDING GUARANTOR ELIMINATION
COMPANY JORP JORP SUBSIDIARIES ENTRIES REPORTED
-------- --------- ------ ------------ ----------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Cash and cash
equivalents............ $ 162 $ 1 $ 19 $2,263 -- $ 2,445
Accounts receivable..... 2 1,674 414 709 -- 2,799
Other current assets.... -- 279 88 116 21 504
-------- ------- ------ ------ -------- --------
Total current assets... 164 1,954 521 3,088 21 5,748
-------- ------- ------ ------ -------- --------
Property, plant and
equipment.............. 8 26,603 -- 309 -- 26,920
Goodwill................ -- 3,009 -- -- -- 3,009
Intangible assets....... 3 355 720 4 -- 1,082
Other long-term assets.. 1,748 4,783 -- -- (2,528) 4,003
-------- ------- ------ ------ -------- --------
Total assets........... $ 1,923 $36,704 $1,241 $3,401 $ (2,507) $ 40,762
======== ======= ====== ====== ======== ========
LIABILITIES AND
SHAREHOLDERS'/MEMBERS'
INVESTMENT (DEFICIT):
Accounts payable........ $ 348 $ 191 $ 2 $ 723 $ -- $ 1,264
Accrued liabilities..... 725 1,255 -- 33 (59) 1,954
Other current
liabilities............ -- 7,806 -- 1,134 (16) 8,924
-------- ------- ------ ------ -------- --------
Total current
liabilities........... 1,073 9,252 2 1,890 (75) 12,142
-------- ------- ------ ------ -------- --------
Note payable--affiliated
entity................. 10,000 -- -- -- -- 10,000
Credit facility......... -- 16,705 -- -- -- 16,705
Capital lease
obligations............ -- 24,923 -- -- -- 24,923
Other long-term
liabilities............ 13,481 (19,829) -- 50 6,337 39
-------- ------- ------ ------ -------- --------
Total long-term
liabilities........... 23,481 21,799 -- 50 6,337 51,667
-------- ------- ------ ------ -------- --------
Minority interests...... -- -- -- -- 822 822
-------- ------- ------ ------ -------- --------
Shareholders'/members'
investment (deficit):
Class A Common Stock.... 30 1 (1) 30
Class B Common Stock.... 18 1 -- -- (1) 18
General
partners'/members'
contributions.......... -- -- 1,000 350 (1,350) --
Additional paid-in
capital................ 9,143 12,840 -- -- (12,840) 9,143
Retained earnings
(accumulated deficit).. (31,822) (7,189) 239 1,111 4,601 (33,060)
-------- ------- ------ ------ -------- --------
Total
shareholders'/members'
investment (deficit).. (22,631) 5,653 1,239 1,461 (9,591) (23,869)
-------- ------- ------ ------ -------- --------
Total liabilities and
shareholders'/members'
investment (deficit).... $ 1,923 $36,704 $1,241 $3,401 $ (2,507) $ 40,762
======== ======= ====== ====== ======== ========
</TABLE>
F-34
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS--FOR THE SIX MONTHS
ENDED JUNE 30, 1998:
<TABLE>
<CAPTION>
SUBSIDIARY
GUARANTORS
---------------
NON-
THE EXCLUDING GUARANTOR ELIMINATION
COMPANY JORP JORP SUBSIDIARIES ENTRIES REPORTED
------- --------- ----- ------------ ----------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
REVENUES:
Radio programming...... $ -- $ 3,449 $ 451 $ -- (161) $ 3,739
Television
programming........... 174 996 -- 6,695 -- 7,865
Satellite delivery and
production support.... -- 3,038 -- -- (910) 2,128
------- ------- ----- ------ ------- -------
Total revenues........ 174 7,483 451 6,695 (1,071) 13,732
------- ------- ----- ------ ------- -------
OPERATING EXPENSES:
Radio programming...... -- 3,261 390 -- (161) 3,490
Television
programming........... 81 1,268 -- 6,228 (910) 6,667
Satellite delivery and
production support.... -- 2,330 -- -- -- 2,330
Selling and marketing.. 49 1,431 97 170 -- 1,747
General and
administrative........ 833 980 65 214 -- 2,092
------- ------- ----- ------ ------- -------
Total operating
expenses............. 963 9,270 552 6,612 (1,071) 16,326
------- ------- ----- ------ ------- -------
OPERATING INCOME
(EXPENSE).............. (789) (1,787) (101) 83 -- (2,594)
------- ------- ----- ------ ------- -------
OTHER EXPENSE (INCOME):
Interest expense....... 740 1,900 -- -- -- 2,640
Interest income........ (6) (3) -- (90) -- (99)
Write-off of deferred
offering costs........ -- -- -- -- -- --
Equity share of loss
(income) of
subsidiaries.......... 2,898 (73) -- -- (2,898) (73)
Other expense (income),
net................... -- 261 -- 3 -- 264
------- ------- ----- ------ ------- -------
Total other expense
(income)............. 3,632 2,085 -- (87) (2,898) 2,732
------- ------- ----- ------ ------- -------
Income (loss) before
income taxes and
minority interests.... (4,421) (3,872) (101) 170 2,898 (5,326)
Income tax provision... 92 176 -- -- -- 268
------- ------- ----- ------ ------- -------
Income (loss) before
minority interests.... (4,513) (4,048) (101) 170 2,898 (5,594)
------- ------- ----- ------ ------- -------
Minority interests in
net income of
consolidated
subsidiaries.......... -- -- -- -- 69 69
------- ------- ----- ------ ------- -------
NET INCOME (LOSS)...... $(4,513) $(4,048) $(101) $ 170 $ 2,829 $(5,663)
======= ======= ===== ====== ======= =======
</TABLE>
F-35
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED CONSOLIDATING CASH FLOWS--FOR THE SIX MONTHS ENDED JUNE 30, 1998:
<TABLE>
<CAPTION>
SUBSIDIARY
GUARANTORS
--------------- NON-
THE EXCLUDING GUARANTOR ELIMINATION
COMPANY JORP JORP SUBSIDIARIES ENTRIES REPORTED
------- --------- ----- -------------- ----------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss)...... $(4,513) $(4,048) $(101) $ 170 $2,829 $(5,663)
Adjustment to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Non-cash expenses
(income).............. 2,900 2,863 90 (27) (2,829) 2,997
Distributions
received.............. -- 350 -- -- -- 350
Net change in assets
and liabilities....... 1,418 (7,532) (44) 330 -- (5,828)
------- ------- ----- ------ ------ -------
Net cash provided by
(used in) operating
activities........... (195) (8,367) (55) 473 -- (8,144)
------- ------- ----- ------ ------ -------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchase of property,
plant and equipment... (3) (467) -- (69) -- (539)
Purchases of intangible
assets................ -- (154) -- (4) -- (158)
Dividend from joint
venture............... 960 -- -- -- (960) --
------- ------- ----- ------ ------ -------
Net cash provided by
(used in) investing
activities........... 957 (621) -- (73) (960) (697)
------- ------- ----- ------ ------ -------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Increase in deferred
offering costs........ (56) -- -- -- -- (56)
Increase in capitalized
loan fees............. (519) -- -- -- -- (519)
Repayment of
borrowings............ -- (6,555) -- -- -- (6,555)
Repayment of capital
lease obligations..... -- (1,166) -- -- -- (1,166)
Proceeds from
borrowings............ -- 16,705 -- -- -- 16,705
Distributions paid to
minority interests.... -- -- -- (1,800) 960 (840)
------- ------- ----- ------ ------ -------
Net cash provided by
(used in) financing
activities........... (575) 8,984 -- (1,800) 960 7,569
------- ------- ----- ------ ------ -------
INCREASE (DECREASE) IN
CASH AND CASH
EQUIVALENTS............ 187 (4) (55) (1,400) -- (1,272)
CASH AND CASH
EQUIVALENTS, BEGINNING
OF PERIOD.............. (25) 5 74 3,663 -- 3,717
------- ------- ----- ------ ------ -------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD................. $ 162 $ 1 $ 19 $2,263 $ -- $ 2,445
======= ======= ===== ====== ====== =======
</TABLE>
(16) SUBSEQUENT EVENTS
On March 31, 1998, Jones Radio Holdings, Inc. ("Radio Holdings") entered
into a $30 million revolving credit facility with a commercial bank with a
five-year term. Borrowings under the credit agreement bore interest at a
maximum of LIBOR plus 2.875% (7.9% at June 30, 1998), subject to reduction
should the leverage ratio of Jones Holdings improve. The credit facility was
secured by the assets of Jones Holdings, a subsidiary of the Company. The
amount of available borrowings under the credit facility was based on certain
ratios of debt to operating cash flow as defined in the credit agreement. On
March 31, 1998, the Company borrowed approximately $16.7 million under the
credit facility. The Company used these funds to repay an approximately $6.6
million note payable to Jones Intercable (see Note 8), $9.7 million to repay
advances from Jones International and approximately $0.4 million for fees
related to the credit facility. These fees are included in capitalized loan
fees on the accompanying statements of financial position and are being
amortized over the life of the revolving credit facility. In July 1998, the
Company repaid the credit facility using the proceeds from the Notes offering
and all capitalized debt offering costs related to the credit facility were
written off.
F-36
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On July 10, 1998, the Company acquired substantially all assets and assumed
certain liabilities of MediaAmerica, Inc. ("MediaAmerica") for $32.7 million
plus a Working Capital Adjustment as defined. MediaAmerica provides radio
advertising sales representation services and also owns syndicated radio
programming. MediaAmerica received $26.7 million in cash and $6.0 million in
shares of Class A Common Stock of the Company valued at $15 per share.
MediaAmerica also received 141,970 shares of Class A Common Stock as an
estimated working capital adjustment. In addition, MediaAmerica may receive up
to $5 million in shares of Class A Common Stock, with the excess, if any, to
be paid in cash if certain multiples of "EBITDA" (earnings before interest,
taxes, depreciation and amortization) for the twelve-month period following
the closing are achieved. The acquisition was accounted for by the purchase
method of accounting, under which the purchase price of Media America was
allocated to the tangible and intangible assets and liabilities of Media
America.
MediaAmerica has the right to cause the Company to purchase the shares of
the Company owned by MediaAmerica at any time after three years from closing,
July 10, 1998. The price would be the fair market value thereof, as determined
by agreement or by independent investment banking firm. The Company has a
correlative right to require that MediaAmerica sell such shares to the Company
at fair market value. Such rights terminate upon an initial public equity
offering by the Company. Before MediaAmerica can require the Company to buy
its shares, the Company must have unrestricted cash (as defined) available to
make the purchase. This condition lapses after seven and one quarter years
from the date of closing. If the company has exercised its purchase right and
there is a change of control involving a higher price within six months
thereafter, the Company must pay the prior owners certain additional
consideration.
In July 1998, the Company issued $100 million of 11 3/4% Senior Secured
Notes (the "Notes"). The Company used the proceeds from the Notes offering (i)
to finance the cash consideration of the MediaAmerica transaction, (ii) to
prepay the capital lease obligation relating to the satellite transponders,
(iii) to repay the Radio Holdings credit facility and (iv) for general
corporate purposes, including the payment of fees and expenses.
The Company has financed its ownership of two analog satellite transponders
through a capital lease that was prepaid with a portion of the proceeds of the
Notes offering. The channel capacity on one satellite transponder has been
digitally compressed to seven channels, four of which are currently leased,
respectively, to Product Information Network, Great American Country and two
related parties. The other three channels were recently leased to a third
party. The other satellite transponder is an analog channel which the Company
recently leased to a third party.
F-37
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and
Board of Directors
MediaAmerica, Inc.
New York, New York
We have audited the accompanying balance sheets of MediaAmerica, Inc. as of
December 31, 1996 and 1997 and the related statements of income, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MediaAmerica, Inc. as of
December 31, 1996 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
David Berdon & Co. LLP
Certified Public Accountants
New York, New York
January 23, 1998
F-38
<PAGE>
MEDIAAMERICA, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................ $ 713,455 $ 301,246
Cash held in trust................................... 56,581 99,417
Accounts receivable (less, allowance for doubtful
accounts of $48,000 in 1996 and $53,000 in 1997).... 10,323,844 12,664,152
Prepaid expenses..................................... 108,963 94,781
Loans receivable--related parties.................... 202,120 501,418
Other current assets................................. 464,900 150,267
Investment in U.S. Treasury Note..................... -- 214,340
----------- -----------
TOTAL CURRENT ASSETS............................... 11,869,863 14,025,621
----------- -----------
PROPERTY AND EQUIPMENT--AT COST (Less, accumulated
depreciation and amortization)........................ 916,348 855,587
----------- -----------
OTHER ASSETS:
Investment in U.S. Treasury Note..................... 209,099 --
Investment in partnership............................ 33,000 33,000
Security deposits.................................... 5,854 6,254
Intangible assets (less, accumulated amortization)... 24,708 2,301,882
----------- -----------
TOTAL OTHER ASSETS..................................... 272,661 2,341,136
----------- -----------
$13,058,872 $17,222,344
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable--bank................................... $ 3,000,000 $ 4,500,000
Producers' fees payable.............................. 4,244,012 5,754,010
Accounts payable..................................... 389,689 398,843
Accrued expenses and other current liabilities....... 513,697 774,535
Deferred revenue..................................... 64,160 27,321
Deferred income taxes payable........................ 335,900 345,900
----------- -----------
TOTAL CURRENT LIABILITIES.............................. 8,547,458 11,800,609
----------- -----------
LONG-TERM LIABILITIES:
Deferred rent expense................................ 470,776 464,673
Deferred compensation payable........................ 93,781 272,217
----------- -----------
TOTAL LONG-TERM LIABILITIES............................ 564,557 736,890
----------- -----------
TOTAL LIABILITIES.................................. 9,112,015 12,537,499
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 6, 7, 8, 9, 11, 12
and 13)
SHAREHOLDERS' EQUITY:
Common stock--no par value:
Authorized--1,000 shares; issued and outstanding--
100 shares.......................................... 50,000 50,000
Additional paid-in capital........................... 292,887 292,887
Shareholders' undistributed earnings................. 3,603,970 4,341,958
----------- -----------
TOTAL SHAREHOLDERS' EQUITY............................. 3,946,857 4,684,845
----------- -----------
$13,058,872 $17,222,344
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-39
<PAGE>
MEDIAAMERICA, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Gross advertising revenues--
representation.................... $ 62,814,076 $ 74,075,660 $ 76,292,976
Gross advertising revenues--
programming....................... 917,578 1,139,795 1,837,730
Promotion and other revenues....... 272,644 181,288 1,065,556
------------ ------------ ------------
TOTAL REVENUES................... 64,004,298 75,396,743 79,196,262
Advertising agency commissions..... (9,663,555) (11,310,383) (11,745,087)
Producer fees...................... (44,097,447) (51,483,562) (52,313,532)
------------ ------------ ------------
TOTAL NET REVENUES............... 10,243,296 12,602,798 15,137,643
------------ ------------ ------------
OPERATING EXPENSES:
Radio programming expenses......... 662,816 817,272 1,295,914
Selling and marketing expenses..... 3,515,406 3,909,277 4,593,431
General and administrative
expenses.......................... 2,639,201 3,642,410 4,368,596
Officers' salaries................. 2,730,000 3,811,040 3,450,000
------------ ------------ ------------
TOTAL OPERATING EXPENSES......... 9,547,423 12,179,999 13,707,941
------------ ------------ ------------
INCOME FROM OPERATIONS............... 695,873 422,799 1,429,702
OTHER INCOME (EXPENSES):
Loss on investment in and advances
to affiliate...................... (325,000) (181,649) --
Interest income.................... 157,799 189,240 227,381
Interest expense................... (30,307) (22,698) (14,681)
------------ ------------ ------------
INCOME BEFORE INCOME TAXES........... 498,365 407,692 1,642,402
Provision for state and local
income taxes...................... 125,333 127,147 154,414
------------ ------------ ------------
NET INCOME........................... $ 373,032 $ 280,545 $ 1,487,988
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-40
<PAGE>
MEDIAAMERICA, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
ADDITIONAL SHAREHOLDERS'
COMMON PAID-IN UNDISTRIBUTED
TOTAL STOCK CAPITAL EARNINGS
---------- ------- ---------- -------------
<S> <C> <C> <C> <C>
BALANCE--JANUARY 1, 1995.......... $3,293,280 $50,000 $292,887 $2,950,393
Net income for the year........... 373,032 -- -- 373,032
---------- ------- -------- ----------
BALANCE--DECEMBER 31, 1995........ 3,666,312 50,000 292,887 3,323,425
Net income for the year........... 280,545 -- -- 280,545
---------- ------- -------- ----------
BALANCE--DECEMBER 31, 1996........ 3,946,857 50,000 292,887 3,603,970
Net income for the year........... 1,487,988 -- -- 1,487,988
Distributions to shareholders..... (750,000) -- -- (750,000)
---------- ------- -------- ----------
BALANCE--DECEMBER 31, 1997........ $4,684,845 $50,000 $292,887 $4,341,958
========== ======= ======== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-41
<PAGE>
MEDIAAMERICA, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................. $ 373,032 $ 280,545 $ 1,487,988
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization.......... 128,093 236,146 296,603
Amortization of covenant not to
compete............................... -- -- 6,250
Bad debt (recovery) expense............ 26,696 (67,777) (24,064)
Amortized discount of marketable
securities............................ (4,397) (2,473) (5,241)
Deferred revenue....................... 202,816 (290,298) (36,839)
Deferred taxes......................... 58,000 26,900 10,000
Deferred rent expense.................. 444,383 26,393 (6,103)
Deferred compensation.................. 56,581 37,200 178,436
Loss on investment in and advances to
affiliate............................. -- 181,649 --
Write-down of investment in and
advances to affiliate to net
realizable value...................... 325,000 -- --
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable................... (3,550,760) 269,694 (1,893,585)
Prepaid expenses...................... (1,416) (5,669) 14,182
Due from related parties.............. (80,029) 80,029 (7,805)
Other assets.......................... (77,330) (271,851) 314,233
Increase (decrease) in:
Producers' fee payable................ 2,075,296 (697,248) 1,087,340
Accounts payable...................... 73,814 192,682 (15,846)
Accrued expenses and other current
liabilities.......................... 166,284 48,097 147,004
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES............................. 216,063 44,019 1,552,553
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of radio programs.......... -- -- (2,165,256)
Payments of covenant-not-to-compete
agreement............................. -- -- (50,000)
Capital expenditures................... (572,504) (355,032) (165,177)
(Increase) decrease in loans to related
parties............................... (362,825) 637,113 (291,493)
Decrease (increase) in investment and
advances to affiliate................. (310,830) 81,610 --
Increase in cash held in trust......... -- (56,581) (42,836)
Investment in U.S. Treasury Note....... (202,229) -- --
----------- ----------- -----------
NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES............................. (1,448,388) 307,110 (2,714,762)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of note payable--bank........ (1,500,000) (3,500,000) (3,000,000)
Proceeds from note payable--bank....... 3,500,000 3,000,000 4,500,000
Distributions to shareholders.......... -- -- (750,000)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES............................. 2,000,000 (500,000) 750,000
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................ 767,675 (148,871) (412,209)
CASH AND CASH EQUIVALENTS--BEGINNING OF
YEAR................................... 94,651 862,326 713,455
----------- ----------- -----------
CASH AND CASH EQUIVALENTS--END OF YEAR.. $ 862,326 $ 713,455 $ 301,246
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for
interest.............................. $ 25,856 $ 22,695 $ 23,936
=========== =========== ===========
Cash paid during the year for income
taxes................................. $ 53,646 $ 107,080 $ 151,083
=========== =========== ===========
</TABLE>
For purposes of the statements of cash flows, the Company considers highly
liquid debt instruments purchased with a maturity of three months or less to
be cash equivalents.
The accompanying notes are an integral part of these statements.
F-42
<PAGE>
MEDIAAMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Nature of Business
MediaAmerica, Inc. (the "Company") sells advertising time on nationally
syndicated radio programs.
The Company had an agreement, which was terminated for consideration, to
sell advertising time and other services for one producer of radio programs,
which resulted in net broadcast revenues of approximately $3,362,000,
$3,216,000 and $3,584,000 in 1995, 1996 and 1997, respectively. The
termination agreement provides for the Company to continue certain sales
efforts through the year ended December 31, 1998.
(b) Revenue Recognition
The Company recognizes revenues from advertising at the time the advertising
is aired.
(c) Depreciation
Equipment, software and furniture are depreciated by the straight-line
method over estimated useful lives ranging from 5 to 10 years. Leasehold
improvements are amortized over the life of the lease.
(d) Investment in Partnership
The Company has an interest (less than 20%) in a limited partnership which
is being accounted for under the cost method.
(e) Investment in Affiliate
In 1996, the Company sold its 45% interest in a corporation. Since the
Company could not exercise significant influence in the corporation's
operating or financial policies, this investment was accounted for using the
cost method.
(f) Intangible Assets
In 1997, the Company acquired various radio programs, consisting of related
program libraries, trade names, and contracts with radio stations that
broadcast the programs. The programs are being amortized over a period of ten
years.
In connection with the acquisition of the radio programs, the seller of
certain programs entered into a covenant not to compete with the Company. The
cost of the covenant is being amortized over the term of the covenant using
the straight-line method. In addition, in July 1997, the Company entered into
a second covenant not to compete which requires monthly payments of $8,333
over a period of 48 months.
Start-up costs incurred primarily to open offices in Detroit and Chicago are
being amortized on a straight-line basis over a period of five years.
Goodwill is being amortized on a straight-line basis over a period of 15
years.
(g) Research and Development Costs
Research and development expenditures are expensed as incurred.
F-43
<PAGE>
MEDIAAMERICA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(h) Income Taxes
The Company has elected "S" corporation status under the applicable
provisions of the Internal Revenue Code and certain state statutes. The
shareholders' respective shares in the net income of the Company will be
reportable on their individual tax returns. Accordingly, the financial
statements reflect no provision or liability for Federal and certain state
income taxes. The Company is liable for state and local taxes in certain
jurisdictions.
The Company files its tax returns on the cash basis of accounting. Deferred
state and local income taxes are provided for temporary differences resulting
primarily from the cash basis method of accounting used for income tax
purposes.
(i) Use of Estimates
The preparation of 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 December 31, 1996 and 1997,
and the reported amounts of revenues and expenses for each of the three years
in the period ended December 31, 1997. Actual results could differ from those
estimates.
NOTE 2--INVESTMENT IN UNITED STATES TREASURY NOTE
The Company's investment in United States Treasury Note is classified as
held-to-maturity and, accordingly, is recorded at its amortized cost. The
investment bears interest at the rate of 5.125% per annum and matures on June
30, 1998. The fair market value of the investment was approximately $217,000
and $220,000 at December 31, 1996 and 1997, respectively.
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Equipment................................................ $ 114,301 $ 114,301
Computer equipment and software.......................... 786,565 895,864
Furniture and fixtures................................... 207,320 215,370
Leasehold improvements................................... 71,222 81,844
Other.................................................... 53,112 90,316
---------- ----------
1,232,520 1,397,695
Less: accumulated depreciation and amortization.......... 316,172 542,108
---------- ----------
$ 916,348 $ 855,587
========== ==========
</TABLE>
NOTE 4--INTANGIBLE ASSETS
Intangible assets consist of the following as of December 31:
<TABLE>
<CAPTION>
1996 1997
-------- ----------
<S> <C> <C>
Radio programs............................................. $ -- $2,304,091
Covenant not to compete.................................... -- 50,000
Goodwill................................................... 23,099 23,099
Start-up costs............................................. 119,599 119,599
-------- ----------
142,698 2,496,789
117,990 194,907
-------- ----------
Less: accumulated amortization............................. $ 24,708 $2,301,882
======== ==========
</TABLE>
F-44
<PAGE>
MEDIAAMERICA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--PROVISION FOR STATE AND LOCAL INCOME TAXES
Provision for state and local income taxes consists of the following:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Current........................................... $ 67,333 $100,247 $144,414
Deferred.......................................... 58,000 26,900 10,000
-------- -------- --------
$125,333 $127,147 $154,414
======== ======== ========
</TABLE>
NOTE 6--LINE OF CREDIT
The Company has a $5,000,000 revolving line of credit with a bank, which
bears interest at the prime rate (8.5% at December 31, 1997). The balance
outstanding at December 31, 1996 and 1997 was $3,000,000 and $4,500,000,
respectively. The debt is secured by the assets of the Company and is
guaranteed by the shareholders and an affiliate of the Company, and also
restricts (1) the amount of distributions and compensation that can be paid to
shareholders and (2) the amount of loans to related parties.
NOTE 7--COMMITMENTS AND CONTINGENCIES
(a) Lease Commitments
The Company leases office space under several operating leases. The total
amount of the base rent payments is being charged to expense on the straight-
line method over the terms of the leases. The Company has recorded a deferred
credit to reflect the excess of the rent expense over the cash payments since
the inception of the leases. The leases provide for the minimum rentals plus
operating expenses and real estate tax escalations. The total future minimum
rental payments required for noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ ----------
<S> <C>
1998............................................................ $ 509,000
1999............................................................ 473,000
2000............................................................ 525,000
2001............................................................ 531,000
2002............................................................ 531,000
Thereafter...................................................... 1,552,000
----------
$4,121,000
==========
</TABLE>
One of the leases is secured by a $75,000 letter of credit.
Rent expense amounted to approximately $401,000, $383,000 and $444,000 in
1995, 1996 and 1997, respectively (net of amounts allocated to related
entities).
(b) Consulting Agreement
On July 14, 1997, the Company entered into a consulting agreement that
requires monthly payments of $4,167 over a period of 24 months.
(c) Program Acquisition Contingency
As part of the purchase price of certain radio programs acquired on November
17, 1997, the Company has agreed to pay (i) 10% of the net revenues of the
acquired radio programs, payable for each of the eight calendar quarters
following the date of acquisition, and (ii) 5% of the net revenues of the
acquired radio programs, payable for the next two calendar quarters succeeding
those described above.
F-45
<PAGE>
MEDIAAMERICA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8--EMPLOYEE BENEFIT PLAN
The Company maintains a 401(k) tax deferred savings plan. This plan covers
all full-time employees who meet certain eligibility requirements. The plan
allows employees to defer up to 15% of their compensation, limited to the
amount allowed for income tax purposes. The Company, at its discretion, may
contribute an amount equal to a percentage of the amount the employees
contribute. The Company can also make an additional contribution to the plan.
The Company's expense under this plan was $400, $17,000 and $65,000 in 1995,
1996 and 1997, respectively.
NOTE 9--SHAREHOLDERS' AGREEMENT
The Company is obligated to repurchase the stock of its shareholders upon
the occurrence of certain events at the predetermined price, as set forth in
the shareholders' agreement. In the case of death, a portion of the purchase
price is funded by life insurance policies on the lives of the shareholders.
NOTE 10--RELATED PARTY TRANSACTIONS
(a) Loans to related parties consist of loans to shareholders and
affiliates. The loans are due on demand and bear interest at the Applicable
Federal Rate. The Company earned interest of approximately $51,700, $32,300
and $32,600 on these loans in 1995, 1996 and 1997, respectively.
(b) The Company incurred costs for various services performed by affiliates
amounting to approximately $285,400, $170,500 and $203,400 in 1995, 1996 and
1997, respectively.
(c) The Company charged affiliates for allocated rent and certain office
services of approximately $324,000, $217,600 and $215,300 in 1995, 1996 and
1997, respectively.
(d) The Company recognized revenues for various services performed for an
affiliate amounting to $111,900 in 1997.
NOTE 11--DEFERRED COMPENSATION PLANS
The Company has established two deferred compensation plans for the benefit
of certain employees. Under the terms of the first plan, an annual award is to
be made to an employee based on the "net profits" (as defined), which will be
paid into a trust, 60% of the balance of the trust becomes vested on January
1, 1998, and an additional 20% each January 1 thereafter until January 1,
2000. Distributions from the trust are to be made at the earlier of January 1,
2005, or upon the occurrence of certain events as set forth in the plan.
Under the terms of the second plan, an annual award is to be made to an
employee based on the "net profits" (as defined), which will be paid into a
trust, 25% of the balance of the trust becomes vested on December 23, 1998,
and an additional 25% each December 23, thereafter, until December 23, 2001.
Distributions from the trust are to be made at the earlier of December 23,
2007, or upon the occurrence of certain events as set forth in the plan.
The Company has also established an Equity Appreciation Plan ("EAP") for the
benefit of certain employees. Under the terms of the EAP, a total of one
thousand units are available for distribution. One of such units is equivalent
to one share of common stock. On an annual basis, the fair market value (as
defined) of one unit is to be calculated and each participant is to be
credited an amount based on the number of units awarded to that participant.
Payment of benefits shall be made upon the occurrence of certain events, as
set forth in the EAP. As of December 31, 1997, 3 units have been awarded.
F-46
<PAGE>
MEDIAAMERICA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--LITIGATION
As of December 31, 1997, the Company is a defendant in a lawsuit for an
unspecified amount in connection with one of its sales representation
agreements which expired in 1996. In response to the claims asserted in the
lawsuit, the Company has filed affirmative defenses and counterclaims against
the plaintiff. Arbitration hearings commenced in May 1997 and were completed
in December 1997. Posthearing memoranda will be submitted by February 20,
1998. The arbitrators' decision is likely to be issued by April 1998. No
determination can be made as to the possible outcome of this lawsuit.
Management is of the opinion, however, that this lawsuit will not have a
material adverse effect on the Company's financial position.
NOTE 13--CONCENTRATION OF CREDIT RISK
As of December 31, 1997, the Company had a significant concentration of cash
on deposit with one financial institution.
F-47
<PAGE>
ACCOUNTANTS' REVIEW REPORT
To the Shareholders and Board of Directors
MediaAmerica, Inc.
New York, New York
We have reviewed the accompanying balance sheets of MediaAmerica, Inc. as of
June 30, 1997 and 1998, and the related statements of income, shareholders'
equity and cash flows for the six months then ended. These financial
statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying financial statements for them to be in
conformity with generally accepted accounting principles.
David Berdon & Co. LLP
Certified Public Accountants
New York, New York
July 24, 1998
F-48
<PAGE>
MEDIAAMERICA, INC.
BALANCE SHEETS
JUNE 30, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents........................... $ 2,753,778 $ 809,473
Cash held in trust.................................. 97,102 172,042
Accounts receivable (less, allowance for doubtful
accounts of $89,000 in 1997 and $64,000 in 1998)..... 12,018,837 7,150,102
Prepaid expenses.................................... 114,604 112,449
Loans receivable--related parties................... 456,512 547,018
Other current assets................................ 526,689 596,186
Investment in U.S. Treasury Note.................... 211,669 --
----------- -----------
TOTAL CURRENT ASSETS.............................. 16,179,191 9,387,270
----------- -----------
PROPERTY AND EQUIPMENT--AT COST (Less, Accumulated
Depreciation and Amortization)....................... 897,489 840,420
----------- -----------
OTHER ASSETS:
Investment in partnership........................... 33,000 33,000
Security deposits................................... 5,854 7,810
Intangible assets (less, accumulated amortization).. 16,908 2,202,335
----------- -----------
TOTAL OTHER ASSETS................................ 55,762 2,243,145
----------- -----------
TOTAL ASSETS...................................... $17,132,442 $12,470,835
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Producers' fees payable............................. $10,062,614 $ 5,504,350
Accounts payable.................................... 253,869 246,628
Accrued expenses and other current liabilities...... 1,117,098 721,547
Deferred revenue.................................... 297,995 99,004
Deferred income taxes payable....................... 377,000 47,900
----------- -----------
TOTAL CURRENT LIABILITIES......................... 12,108,576 6,619,429
----------- -----------
LONG-TERM LIABILITIES:
Deferred rent expense............................... 430,109 423,388
Deferred compensation payable....................... 117,402 250,842
----------- -----------
TOTAL LONG-TERM LIABILITIES........................... 547,511 674,230
----------- -----------
TOTAL LIABILITIES..................................... 12,656,087 7,293,659
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 6, 7, 8, 9, 11,
12 and 13)
SHAREHOLDERS' EQUITY:
Common stock--no par value:
Authorized--1,000 shares; issued and outstanding--
100 shares......................................... 50,000 50,000
Additional paid-in capital.......................... 292,887 292,887
Shareholders' undistributed earnings................ 4,133,468 4,834,289
----------- -----------
TOTAL SHAREHOLDERS' EQUITY........................ 4,476,355 5,177,176
----------- -----------
$17,132,442 $12,470,835
=========== ===========
</TABLE>
See accountants' review report.
The accompanying notes are an integral part of these statements.
F-49
<PAGE>
MEDIAAMERICA, INC.
STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
REVENUES:
Gross advertising revenues--representation.......... $38,284,478 $22,529,891
Gross advertising revenues--programming............. 443,442 1,174,623
Promotion and other revenues........................ 367,786 907,529
----------- -----------
TOTAL REVENUES.................................... 39,095,706 24,612,043
Advertising agency commissions...................... (5,865,170) (3,560,043)
Producer fees....................................... (26,479,958) (15,063,803)
----------- -----------
TOTAL NET REVENUES................................ 6,750,578 5,988,197
----------- -----------
OPERATING EXPENSES:
Radio programming expenses.......................... 323,458 1,154,362
Selling and marketing expenses...................... 2,080,928 1,874,356
General and administrative expenses................. 2,156,532 2,040,244
Officers' salaries.................................. 1,650,000 350,000
----------- -----------
TOTAL OPERATING EXPENSES.......................... 6,210,918 5,418,962
----------- -----------
INCOME FROM OPERATIONS................................ 539,660 569,235
OTHER INCOME (EXPENSES):
Litigation settlement............................... -- (68,500)
Interest income..................................... 83,251 58,679
Interest expense.................................... (10,313) (24,083)
----------- -----------
INCOME BEFORE INCOME TAXES............................ 612,598 535,331
Provision for state and local income taxes............ 83,100 43,000
----------- -----------
NET INCOME............................................ $ 529,498 $ 492,331
=========== ===========
</TABLE>
See accountants' review report.
The accompanying notes are an integral part of these statements.
F-50
<PAGE>
MEDIAAMERICA, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998
<TABLE>
<CAPTION>
ADDITIONAL SHAREHOLDERS'
COMMON PAID-IN UNDISTRIBUTED
TOTAL STOCK CAPITAL EARNINGS
---------- ------- ---------- -------------
<S> <C> <C> <C> <C>
BALANCE--JANUARY 1, 1997.......... $3,946,857 50,000 $292,887 $3,603,970
Net income for the six months
ended June 30, 1997.............. 529,498 -- -- 529,498
---------- ------- -------- ----------
BALANCE--JUNE 30, 1997............ $4,476,355 $50,000 $292,887 $4,133,468
========== ======= ======== ==========
BALANCE--JANUARY 1, 1998.......... $4,684,845 $50,000 $292,887 $4,341,958
Net income for the six months
ended June 30, 1998.............. 492,331 -- -- 492,331
---------- ------- -------- ----------
BALANCE--JUNE 30, 1998............ $5,177,176 $50,000 $292,887 $4,834,289
========== ======= ======== ==========
</TABLE>
See accountants' review report.
The accompanying notes are an integral part of these statements.
F-51
<PAGE>
MEDIAAMERICA, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................... $ 529,498 $ 492,331
Adjustments to reconcile net income to net cash provided by
operating
activities:
Depreciation and amortization..................... 116,900 252,813
Bad debt expense.................................. 15,000 15,000
Amortized discount of marketable securities....... (2,570) (5,660)
Deferred revenue.................................. 233,835 71,683
Deferred taxes.................................... 41,100 (298,000)
Deferred rent expense............................. (40,667) (41,285)
Deferred compensation............................. 23,621 (21,375)
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable.............................. (1,754,993) 5,454,045
Prepaid expenses................................. (5,641) (17,668)
Due from related parties......................... (56,982) (45,442)
Other assets..................................... (61,789) (447,475)
Increase (decrease) in:
Producers' fee payable............................ 5,863,602 (204,660)
Accounts payable.................................. (135,820) (127,215)
Accrued expenses and other current liabilities.... 603,401 10,852
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES............ 5,368,495 5,087,944
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of radio programs...................... -- (121,001)
Capital expenditures............................... (90,241) (105,933)
(Increase) in loans to related parties............. (197,410) (158)
Decrease in U.S. treasury note..................... -- 220,000
(Increase) in cash held in trust................... (40,521) (72,625)
----------- -----------
NET CASH (USED IN) INVESTING ACTIVITIES.............. (328,172) (79,717)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of note payable--bank.................... (3,000,000) (4,500,000)
----------- -----------
NET CASH (USED IN) FINANCING ACTIVITIES.............. (3,000,000) (4,500,000)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS............ 2,040,323 508,227
CASH AND CASH EQUIVALENTS--BEGINNING OF YEAR......... 713,455 301,246
----------- -----------
CASH AND CASH EQUIVALENTS--END OF YEAR............... $ 2,753,778 $ 809,473
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest......................................... $ 10,313 $ 26,208
=========== ===========
Income taxes..................................... $ 89,377 $ 73,106
=========== ===========
</TABLE>
For purposes of the statements of cash flows, the Company considers highly
liquid debt instruments purchased with a maturity of three months or less to
be cash equivalents.
See accountants' review report.
The accompanying notes are an integral part of these statements.
F-52
<PAGE>
MEDIAAMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Nature of Business
MediaAmerica, Inc. (the "Company") sells advertising time on nationally
syndicated radio programs.
The Company had an agreement, which was terminated for consideration, to
sell advertising time and other services for one producer of radio programs,
which resulted in net broadcast revenues of approximately $1,735,000 and
$858,000 for the six months ended June 30, 1997 and 1998, respectively. The
termination agreement provides for the Company to continue certain sales
efforts through the year ended December 31, 1998.
(b) Revenue Recognition
The Company recognizes revenues from advertising at the time the advertising
is aired.
(c) Depreciation
Equipment, software and furniture are depreciated by the straight-line
method over estimated useful lives ranging from 5 to 10 years. Leasehold
improvements are amortized over the life of the lease.
(d) Investment in Partnership
The Company has an interest (less than 20%) in a limited partnership which
is being accounted for under the cost method.
(e) Intangible Assets
In 1997, the Company acquired various radio programs, consisting of related
program libraries, trade names, and contracts with radio stations that
broadcast the programs. The programs are being amortized over a period of ten
years.
In connection with the acquisition of the radio programs, the seller of
certain programs entered into a covenant not to compete with the Company. The
cost of the covenant is being amortized over the term of the covenant using
the straight-line method. In addition, in July 1997, the Company entered into
a second covenant not to compete which requires monthly payments of $8,333
over a period of 48 months.
Start-up costs incurred primarily to open offices in Detroit and Chicago are
being amortized on a straight-line basis over a period of five years.
Goodwill is being amortized on a straight-line basis over a period of 15
years.
(f) Research and Development Costs
Research and Development expenditures are expensed as incurred.
(g) Income Taxes
The Company has elected "S" corporation status under the applicable
provisions of the Internal Revenue Code and certain state statutes. The
shareholders' respective shares in the net income of the Company will be
reportable on their individual tax returns. Accordingly, the financial
statements reflect no provision or liability for Federal and certain state
income taxes. The Company is liable for state and local taxes in certain
jurisdictions.
F-53
<PAGE>
MEDIAAMERICA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company files its tax returns on the cash basis of accounting. Deferred
state and local income taxes are provided for temporary differences resulting
primarily from the cash basis method of accounting used for income tax
purposes.
(h) Use of Estimates
The preparation of 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 June 30, 1997 and 1998, and
the reported amounts of revenues and expenses for the periods then ended.
Actual results could differ from those estimates.
NOTE 2--INVESTMENT IN UNITED STATES TREASURY NOTE
The Company's investment in United States Treasury Note is classified as
held-to-maturity and, accordingly, is recorded at its amortized cost. The
investment bears interest at the rate of 5.125% per annum and matured on June
30, 1998. The market value of the investment was $217,000 at June 30, 1997.
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of June 30:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Equipment............................................. $ 114,301 $ 118,669
Computer equipment and software....................... 868,894 931,813
Furniture and fixtures................................ 211,050 216,663
Leasehold improvements................................ 74,409 98,584
Other................................................. 54,107 137,898
---------- ----------
1,322,761 1,503,627
Less, accumulated depreciation and amortization....... 425,272 663,207
---------- ----------
$ 897,489 $ 840,420
========== ==========
</TABLE>
NOTE 4--INTANGIBLE ASSETS
Intangible assets consist of the following as of June 30:
<TABLE>
<CAPTION>
1997 1998
-------- ----------
<S> <C> <C>
Radio programs.......................................... $ -- $2,336,257
Covenant not to compete................................. -- 50,000
Goodwill................................................ 23,099 23,099
Start-up costs.......................................... 119,599 119,599
-------- ----------
142,698 2,528,955
Less, accumulated amortization.......................... 125,790 326,620
-------- ----------
$ 16,908 $2,202,335
======== ==========
</TABLE>
F-54
<PAGE>
MEDIAAMERICA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--PROVISION FOR STATE AND LOCAL INCOME TAXES
Provision for state and local income taxes consists of the following:
<TABLE>
<CAPTION>
1997 1998
------- ---------
<S> <C> <C>
Current................................................... $42,000 $ 341,000
Deferred.................................................. 41,100 (298,000)
------- ---------
$83,100 $ 43,000
======= =========
</TABLE>
NOTE 6--LINE OF CREDIT
The Company has a $5,000,000 revolving line of credit with a bank. The
Company did not utilize any of the available line of credit at June 30, 1997
and 1998, respectively.
NOTE 7--COMMITMENTS AND CONTINGENCIES
(a) Lease Commitments
The Company leases office space under several operating leases. The total
amount of the base rent payments is being charged to expense on the straight-
line method over the terms of the leases. The Company has recorded a deferred
credit to reflect the excess of the rent expense over the cash payments since
the inception of the leases. The leases provide for the minimum rentals plus
operating expenses and real estate tax escalations. The total future minimum
rental payments required for noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30, AMOUNT
-------------------- ----------
<S> <C>
1999............................................................ $ 488,000
2000............................................................ 497,000
2001............................................................ 531,000
2002............................................................ 531,000
2003............................................................ 520,000
Thereafter...................................................... 1,297,000
----------
$3,864,000
==========
</TABLE>
One of the leases is secured by a $75,000 letter of credit.
Rent expense amounted to approximately $223,000 and $238,000 for the six
months ended June 30, 1997 and 1998, respectively (net of amounts allocated to
related entities).
(b) Consulting Agreement
On July 14, 1997, the Company entered into a consulting agreement that
requires monthly payments of $4,167 over a period of 24 months.
(c) Program Acquisition Contingency
As part of the purchase price of certain radio programs acquired on November
17, 1997, the Company has agreed to pay (i) 10% of the net revenues of the
acquired radio programs, payable for each of the eight calendar quarters
following the date of acquisition, and (ii) 5% of the net revenues of the
acquired radio programs, payable for the next two calendar quarters succeeding
those described above.
F-55
<PAGE>
MEDIAAMERICA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8--EMPLOYEE BENEFIT PLAN
The Company maintains a 401(k) tax deferred savings plan. This plan covers
all full-time employees who meet certain eligibility requirements. The plan
allows employees to defer up to 15% of their compensation, limited to the
amount allowed for income tax purposes. The Company, at its discretion, may
contribute an amount equal to a percentage of the amount the employees
contribute. The Company can also make an additional contribution to the plan.
The Company's expense under this plan was $22,200 and $25,500 for the six
months ended June 30, 1997 and 1998, respectively.
NOTE 9--SHAREHOLDERS' AGREEMENT
The Company is obligated to repurchase the stock of its shareholders upon
the occurrence of certain events at the predetermined price, as set forth in
the shareholders' agreement. In the case of death, a portion of the purchase
price is funded by life insurance policies on the lives of the shareholders.
NOTE 10--RELATED PARTY TRANSACTIONS
(a) Loans to related parties consist of loans to shareholders and
affiliates. The loans are due on demand and bear interest at the Applicable
Federal Rate. The Company earned interest of approximately $12,700 and $17,000
on these loans for the six months ended June 30, 1997 and 1998, respectively.
(b) The Company incurred costs for various services performed by affiliates
amounting to approximately $50,900 and $34,300 for the six months ended June
30, 1997 and 1998, respectively.
(c) The Company charged affiliates for allocated rent and certain office
services of approximately $114,100 and $91,200 for the six months ended June
30, 1997 and 1998, respectively.
NOTE 11--DEFERRED COMPENSATION PLANS
The Company has established two deferred compensation plans for the benefit
of certain employees. Under the terms of the first plan, an annual award is to
be made to an employee based on the "net profits" (as defined), which will be
paid into a trust. 60% of the balance of the trust becomes vested on January
1, 1998, and an additional 20% each January 1 thereafter until January 1,
2000. Distributions from the trust are to be made at the earlier of January 1,
2005, or upon the occurrence of certain events as set forth in the plan.
Under the terms of the second plan, an annual award is to be made to an
employee based on the "net profits" (as defined), which will be paid into a
trust. 25% of the balance of the trust becomes vested on December 23, 1998,
and an additional 25% each December 23, thereafter, until December 23, 2001.
Distributions from the trust are to be made at the earlier of December 23,
2007, or upon the occurrence of certain events as set forth in the plan.
The Company has also established an Equity Appreciation Plan ("EAP") for the
benefit of certain employees. Under the terms of the EAP, a total of one
thousand units are available for distribution. One of such units is equivalent
to one share of common stock. On an annual basis, the fair market value (as
defined) of one unit is to be calculated and each participant is to be
credited an amount based on the number of units awarded to that participant.
Payment of benefits shall be made upon the occurrence of certain events, as
set forth in the EAP. As of June 30, 1998, 3 units have been awarded.
F-56
<PAGE>
MEDIAAMERICA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--LITIGATION
As of June 30, 1998, the Company is a defendant in a lawsuit in connection
with one of its sales representation agreements which expired in 1996. On July
10, 1998, the Company paid $68,500 to settle the lawsuit.
NOTE 13--CONCENTRATION OF CREDIT RISK
As of June 30, 1998, the Company had a significant concentration of cash on
deposit with one financial institution.
NOTE 14--SUBSEQUENT EVENT
On July 10, 1998, the Company sold substantially all its assets, subject to
certain liabilities, for $32.7 million, plus approximately $2 million for a
working capital adjustment, as defined. The Company received $26.7 million in
cash and approximately $8 million in shares of Class A Common Stock of the
buyer, valued at $15 per share. In addition, the Company may receive up to $5
million in additional shares of Class A Common Stock, with the excess, if any,
to be paid in cash if certain multiples of "EBITDA" (earnings before interest,
taxes, depreciation and amortization) for the twelve-month period following
the closing are achieved.
The Company has the right to cause the buyer to purchase the shares of the
buyer owned by the Company at any time, for three years for closing. The price
would be the fair market value thereof, as determined by agreement or by
independent investment banking firm. The buyer has a correlative right to
require the Company sell such shares to the buyer at fair market value. Such
rights terminate upon an initial public offering by the buyer. Before the
Company can exercise its rights to have the buyer purchase its shares, the
buyer must have available cash to make the repurchase. This condition lapses
after seven and one-quarter years from the date of closing. If the buyer has
exercised its purchase right and there is a change of control involving a
higher price within six months thereafter, the buyer must also pay certain
additional consideration.
F-57
<PAGE>
ARTHUR ANDERSEN LLP
JONES/OWENS RADIO PROGRAMMING, LLC
FINANCIAL STATEMENTS, TOGETHER WITH
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
FOR THE PERIOD FROM INCEPTION (OCTOBER 1, 1996)
TO DECEMBER 31, 1996 AND THE YEAR
ENDED DECEMBER 31, 1997
F-58
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of Jones/Owens Radio Programming, LLC:
We have audited the accompanying statements of financial position of
Jones/Owens Radio Programming, LLC, a Colorado limited liability company (the
"Company"), as of December 31, 1996 and 1997, and the related statements of
operations, members' equity and cash flows for the period from inception
(October 1, 1996) to December 31, 1996 and the year ended December 31, 1997.
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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 1996 and 1997, and the results of its operations and its cash flows for
the period from inception (October 1, 1996) to December 31, 1996 and the year
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Denver, Colorado,
March 27, 1998.
F-59
<PAGE>
JONES/OWENS RADIO PROGRAMMING, LLC
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------
1996 1997
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash................................................. $ -- $ 74,294
Accounts receivable.................................. 142,146 220,270
Allowance for doubtful accounts...................... (11,105) (17,272)
---------- ----------
Net accounts receivable............................ 131,041 202,998
Advances to Jones Radio Network Ventures, Inc. (Note
3).................................................. -- 243,105
Prepaid expenses..................................... 21,566 11,724
---------- ----------
Total current assets............................... 152,607 532,121
---------- ----------
INTANGIBLE ASSETS:
Intangible assets (Note 2)........................... 1,000,000 1,000,000
Accumulated amortization............................. (36,665) (189,980)
---------- ----------
Net intangible assets.............................. 963,335 810,020
---------- ----------
Total assets....................................... $1,115,942 $1,342,141
========== ==========
CURRENT LIABILITIES:
Accounts payable and accrued liabilities............. $ 3,001 $ 2,000
Advances from Jones Radio Network Ventures, Inc.
(Note 3)............................................ 143,112 --
---------- ----------
Total current liabilities.......................... 146,113 2,000
---------- ----------
MEMBERS' EQUITY:
Member contributions (Note 1)........................ 1,000,000 1,000,000
Retained earnings (accumulated deficit).............. (30,171) 340,141
---------- ----------
Total members' equity.................................. 969,829 1,340,141
---------- ----------
Total liabilities and members' equity.................. $1,115,942 $1,342,141
========== ==========
</TABLE>
The accompanying notes to these financial statements are an integral part of
these statements.
F-60
<PAGE>
JONES/OWENS RADIO PROGRAMMING, LLC
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS FOR THE
ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
REVENUE (Note 2):
Radio programming revenue:
Advertising, net of commissions................... $166,131 $1,146,280
Licensing fees.................................... 10,453 39,984
-------- ----------
Total radio programming revenue.................. 176,584 1,186,264
-------- ----------
OPERATING EXPENSES:
Radio programming expenses:
Non-affiliated entities........................... 90,634 348,638
Affiliated entities (Note 3)...................... 79,449 338,888
-------- ----------
Total radio programming expenses................. 170,083 687,526
Selling and marketing............................. 1,747 --
General and administrative expenses (Note 3)...... 34,925 128,426
-------- ----------
Total operating expenses......................... 206,755 815,952
-------- ----------
NET INCOME (LOSS)..................................... $(30,171) $ 370,312
======== ==========
</TABLE>
The accompanying notes to these financial statements are an integral part of
these statements.
F-61
<PAGE>
JONES/OWENS RADIO PROGRAMMING, LLC
STATEMENTS OF MEMBERS' EQUITY
<TABLE>
<CAPTION>
CAPITAL CONTRIBUTIONS
--------------------------- RETAINED
JONES RADIO JIM OWENS EARNINGS TOTAL
NETWORK & ASSOCIATES, (ACCUMULATED MEMBERS'
VENTURE, INC. INC. DEFICIT) EQUITY
------------- ------------- ------------ ----------
<S> <C> <C> <C> <C>
BALANCE, OCTOBER 1, 1996.. $ -- $ -- $ -- $ --
Member contributions.... 1,000,000 -- -- 1,000,000
Dilution of member's
contributions.......... (300,000) 300,000 -- --
Net loss................ -- -- (30,171) (30,171)
---------- --------- -------- ----------
BALANCE, DECEMBER 31,
1996..................... 700,000 300,000 (30,171) 969,829
---------- --------- -------- ----------
Contribution of Interest
(Note 1)............... 200,000 (200,000) -- --
Net income.............. -- -- 370,312 370,312
---------- --------- -------- ----------
BALANCE, DECEMBER 31,
1997..................... $ 900,000 $ 100,000 $340,141 $1,340,141
========== ========= ======== ==========
</TABLE>
The accompanying notes to these financial statements
are an integral part of these statements.
F-62
<PAGE>
JONES/OWENS RADIO PROGRAMMING, LLC
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS FOR THE
ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................... $ (30,171) $ 370,312
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:....
Amortization expense............................... 36,665 153,315
Net change in assets and liabilities:
Increase in net accounts receivable............... (131,041) (71,957)
Decrease (increase) in prepaid expenses........... (21,566) 9,842
Increase (decrease) in accounts payable and
accrued liabilities.............................. 3,001 (1,001)
Net change in advances to/from Jones Radio Network
Ventures, Inc.................................... 143,112 (386,217)
----------- ---------
Net cash provided by operating activities........ -- 74,294
----------- ---------
CASH FLOWS FROM INVESTMENT ACTIVITIES:
Purchase of intangible assets...................... (1,000,000) --
----------- ---------
Net cash used in investing activities............ (1,000,000) --
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions from member.......................... 1,000,000 --
----------- ---------
Net cash provided by financing activities........ 1,000,000 --
----------- ---------
INCREASE IN CASH..................................... -- 74,294
----------- ---------
CASH, BEGINNING OF PERIOD............................ -- --
----------- ---------
CASH, END OF PERIOD.................................. $ -- $ 74,294
=========== =========
</TABLE>
The accompanying notes to these financial statements are an integral part of
these statements.
F-63
<PAGE>
JONES/OWENS RADIO PROGRAMMING, LLC
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM INCEPTION (OCTOBER 1, 1996) TO DECEMBER 31, 1996 AND THE
YEAR ENDED DECEMBER 31, 1997
(1) ORGANIZATION AND BUSINESS
Jones/Owens Radio Programming, LLC (the "Company") is a limited liability
company which is owned by Jones Radio Network Ventures, Inc. ("JRNV") and Jim
Owens and Associates, Inc. ("Owens"). The Company is in the business of
developing, producing and distributing short-form and long-form syndicated
radio programs.
The Company commenced operations on October 1, 1996. JRNV contributed $1
million for the purchase of certain intangible assets from Owens (Note 2) and
certain of their affiliation agreements to the Company for a 70 percent
ownership interest in the Company. Owens contributed certain rights in the
Crook and Chase Country CountDown show for a 30 percent ownership interest in
the Company. In August 1997, Owens contributed 2/3 of their ownership interest
in the Partnership to JRNV in payment of certain programming and production
costs for which Owens was responsible under the original agreement. After this
contribution, JRNV and Owens had a 90% and 10% ownership interest,
respectively, in the Company. Profits, losses and distributions of the Company
have been and will be allocated in accordance with the respective ownership
interests of the members.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Intangible Assets--Intangible assets consist primarily of personal service
agreements, a consulting agreement, a perpetual license agreement and a right
of first refusal. Personal service agreements of $200,000 and the consulting
agreement of $400,000 are being amortized over the 5 year life of the
agreements. The perpetual license agreement of $100,000 and the right of first
refusal of $300,000 are being amortized over the 10 year life of the
agreements.
Revenue Recognition--The Company generates revenue by providing programming
to radio stations in exchange for advertising time on the radio station and,
in certain cases, a fee to license the programming. The Company then resells
the airtime to national advertisers. Revenue is recorded as the audio
programming is provided.
Jones Radio Network, Inc. ("JRN"), an affiliate of the Company, contracts
with a national advertising representation firm to sell the Company's
advertising time. JRN also distributes the Company's programming (see Note 3).
In 1996 and 1997, approximately 55% and 63%, respectively, of the Company's
radio advertising revenue was derived from sales made through this national
advertising representation firm.
The Company had two major customers purchasing audio programming and airtime
during the three months and year ended December 31, 1996 and 1997,
respectively. The approximate total net revenue and related percentages are as
follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE YEAR
ENDED ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
----------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT
------------ ---------- ----------- ---------
<S> <C> <C> <C> <C>
Customer A..................... $ 66,000 37% $ 140,000 12%
Customer B..................... 22,000 12% 43,000 4%
Customer C..................... -- 0% 142,000 12%
------------ -------- ----------- ------
$ 88,000 49% $ 325,000 28%
============ ======== =========== ======
</TABLE>
F-64
<PAGE>
JONES/OWENS RADIO PROGRAMMING, LLC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Use of Estimates--The preparation of 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.
(3) TRANSACTIONS WITH AFFILIATED ENTITIES
JRNV is an indirectly owned subsidiary of Jones International, Ltd.
("International"). Certain members of management of the Company are also
officers or directors of other affiliated entities and, from time to time, the
Company may have transactions with these entities. Certain expenses are paid
by affiliated entities on behalf of the Company and are allocated at cost
based on specific identification or other reasonable methods. Significant
transactions with affiliated entities are described below.
Radio Programming Expense--JRN distributes radio programming for the
Company. For the three months and year ended December 31, 1996 and 1997,
respectively, JRN charged the Company a fee of approximately $18,000 and
$101,000, respectively, for radio programming distribution services. The fee
represents approximately 10% of the Company's net revenues for the three
months and the ten months ended December 31, 1996 and October 31, 1997,
respectively. Beginning in November 1997, this distribution fee was no longer
charged by JRN to the Company due to an amendment to the original agreement.
In addition, Owens produces radio programming for the Company. For the three
months and year ended December 31, 1996 and 1997, respectively, Owens charged
the Company approximately $61,000 and $238,000, respectively, for radio
programming services.
General and Administrative Expenses--The Company reimburses International
for certain allocated administrative expenses. These expenses generally
consist of salaries and related benefits. Allocations of personnel costs are
generally based on actual time spent by affiliated associates with respect to
the Company. International and its affiliates charged the Company
approximately $1,500 and $17,400 for the three months and year ended December
31, 1996 and 1997, respectively, for these administrative expenses.
Periodically, in the normal course of business, JRNV (1) remits funds on
behalf of the Company to third parties and affiliates in payment for products
and services, purchased by the Company and/or (2) receives funds on behalf of
the Company, primarily from affiliates, in payment for products and services
provided by the Company. These amounts are then subsequently reimbursed
from/to JRNV on a timely basis. Due to their short- term nature, such amounts
outstanding with JRNV are classified as a current asset or liability in the
accompanying financial statements.
(4) INCOME TAXES
Income taxes are not reflected in the accompanying financial statements as
such amounts accrue directly to the members. The Federal and state income tax
returns of the Company will be prepared and filed by the members.
The Company's tax returns and the amount of distributable Company income or
loss are subject to examination by Federal and state taxing authorities. If
such examinations result in changes with respect to the Company's tax status,
or the Company's recorded income or loss, the tax liability of the members
would be adjusted accordingly.
The Company's only significant book-tax differences between the financial
reporting and tax bases of the Company's assets and liabilities are associated
with the accrued expenses recognized under generally accepted accounting
principles and the amount allowed for tax purposes.
F-65
<PAGE>
JONES/OWENS RADIO PROGRAMMING, LLC
UNAUDITED STATEMENTS OF FINANCIAL POSITION
JUNE 30, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash................................................. $ -- $ 18,806
Accounts receivable.................................. 567,372 433,984
Allowance for doubtful accounts...................... (13,296) (20,096)
---------- ----------
Net accounts receivable............................ 554,076 413,888
Advances to Jones Radio Network Ventures, Inc. (Note
2).................................................. -- 16,430
Deferred commissions (Note 3)........................ -- 50,490
Prepaid expenses..................................... 3,715 20,989
---------- ----------
Total current assets............................... 557,791 520,603
---------- ----------
INTANGIBLE ASSETS:
Intangible assets.................................... 1,000,000 1,000,000
Accumulated amortization............................. ( 119,984) (279,968)
---------- ----------
Net intangible assets.............................. 880,016 720,032
---------- ----------
Total assets..................................... $1,437,807 $1,240,635
========== ==========
CURRENT LIABILITIES:
Accounts payable and accrued liabilities............. $ 1,501 $ 1,250
Advances from Jones Radio Network Ventures, Inc.
(Note 2)............................................ 308,930 --
---------- ----------
Total current liabilities........................ 310,431 1,250
---------- ----------
MEMBERS' EQUITY:
Member contributions................................. 1,000,000 1,000,000
Retained earnings.................................... 127,376 239,385
---------- ----------
Total members' equity............................ 1,127,376 1,239,385
---------- ----------
Total liabilities and members' equity............ $1,437,807 $1,240,635
========== ==========
</TABLE>
The accompanying notes to these unaudited financial statements are an integral
part of these unaudited financial statements.
F-66
<PAGE>
JONES/OWENS RADIO PROGRAMMING, LLC
UNAUDITED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
-------- ---------
<S> <C> <C>
REVENUE:
Radio programming revenue:
Advertising, net of commissions......................... $536,549 $ 427,128
Licensing fees.......................................... 21,496 23,883
-------- ---------
Total radio programming revenue........................ 558,045 451,011
-------- ---------
OPERATING EXPENSES:
Radio programming expenses:
Non-affiliated entities................................. 134,783 228,317
Affiliated entities (Note 2)............................ 200,727 161,238
-------- ---------
Total radio programming expenses....................... 335,510 389,555
Selling and marketing.................................... -- 96,959
General and administrative expenses (Note 2)............. 64,988 65,253
-------- ---------
Total operating expenses............................... 400,498 551,767
-------- ---------
NET INCOME (LOSS).......................................... $157,547 $(100,756)
======== =========
</TABLE>
The accompanying notes to these unaudited financial statements are an integral
part of these unaudited financial statements.
F-67
<PAGE>
JONES/OWENS RADIO PROGRAMMING, LLC
UNAUDITED STATEMENTS OF MEMBERS' EQUITY
<TABLE>
<CAPTION>
CAPITAL CONTRIBUTIONS
--------------------------- RETAINED
JONES RADIO JIM OWENS EARNINGS TOTAL
NETWORK & ASSOCIATES, (ACCUMULATED MEMBERS'
VENTURE, INC. INC. DEFICIT) EQUITY
------------- ------------- ------------ ----------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1996.................... $700,000 $300,000 $ (30,171) $ 969,829
Net income............. -- -- 157,547 157,547
-------- -------- --------- ----------
BALANCE, JUNE 30, 1997... $700,000 $300,000 $ 127,376 $1,127,376
======== ======== ========= ==========
BALANCE, DECEMBER 31,
1997.................... $900,000 $100,000 $ 340,141 $1,340,141
Net loss............... -- -- (100,756) (100,756)
-------- -------- --------- ----------
BALANCE, JUNE 30, 1998... $900,000 $100,000 $ 239,385 $1,239,385
======== ======== ========= ==========
</TABLE>
The accompanying notes to these unaudited financial statements are an integral
part of these unaudited financial statements.
F-68
<PAGE>
JONES/OWEN RADIO PROGRAMMING, LLC
UNAUDITED STATEMENTS OF CASH FLOWS
FOR SIX MONTHS ENDED JUNE 30, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)...................................... $ 157,547 $(100,756)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Amortization expense.................................. 83,319 89,988
Net change in assets and liabilities:
Increase in net accounts receivable.................. (423,035) (210,890)
Increase in deferred commission...................... -- (50,490)
Decrease (increase) in prepaid expenses.............. 17,851 (9,265)
Decrease in accounts payable and accrued
liabilities......................................... (1,500) (750)
Net change in advances to/from Jones Radio Network
Ventures, Inc....................................... 165,818 226,675
--------- ---------
Net cash used in operating activities............... -- (55,488)
--------- ---------
CASH, BEGINNING OF PERIOD................................ -- 74,294
--------- ---------
CASH, END OF PERIOD...................................... $ -- $ 18,806
========= =========
</TABLE>
The accompanying notes to these unaudited financial statements are an integral
part of these unaudited financial statements.
F-69
<PAGE>
JONES/OWENS RADIO PROGRAMMING, LLC
NOTES TO UNAUDITED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998
(1) ORGANIZATION AND BASIS OF PRESENTATION
Jones/Owens Radio Programming, LLC (the "Company") is a limited liability
company which is owned 90% by Jones Radio Network Ventures, Inc. ("JRNV") and
10% by Jim Owens and Associates, Inc. ("Owens").
The accompanying statements of financial position as of June 30, 1997 and
1998 and the statements of operations and the statements of cash flows for the
six months ended June 30, 1997 and 1998 are unaudited. However, in the opinion
of management, these statements include all adjustments, consisting of normal
recurring adjustments, necessary for the fair presentation of results for
those interim periods. The results of operations for the six months ended June
30, 1998 are not necessarily indicative of results to be expected for the
entire year, or for any other interim period.
(2) TRANSACTIONS WITH AFFILIATED ENTITIES
JRNV is an indirectly owned subsidiary of Jones International, Ltd.
("International"). Certain members of management of the Company are also
officers or directors of other affiliated entities and, from time to time, the
Company may have transactions with these entities. Certain expenses are paid
by affiliated entities on behalf of the Company and are allocated at cost
based on specific identification or other reasonable methods. Significant
transactions with affiliated entities are described below.
Radio Programming Expense--Jones Radio Network, Inc. ("JRN"), an affiliate
of the Company, distributes radio programming for the Company. For the six
months ended June 30, 1997, JRN charged the Company a fee of approximately
$56,000 for radio programming distribution services. The fee represents
approximately 10% of the Company's net revenues for the six months ended June
30, 1997. Beginning in November 1997, this distribution fee was no longer
charged by JRN to the Company due to an amendment to the original operating
agreement.
In addition, Owens produces radio programming for the Company. For the six
months ended June 30, 1997 and 1998, Owens charged the Company approximately
$145,000 and $161,000, respectively, for radio programming services.
General and Administrative Expenses--The Company reimburses International
for certain allocated administrative expenses. These expenses generally
consist of salaries and related benefits. Allocations of personnel costs are
generally based on actual time spent by affiliated associates with respect to
the Company. International and its affiliates charged the Company
approximately $12,400 and $7,800 for the six months ended June 30, 1997 and
1998, respectively, for these administrative expenses.
Periodically, in the normal course of business, JRNV (1) remits funds on
behalf of the Company to third parties and affiliates in payment for products
and services, purchased by the Company and/or (2) receives funds on behalf of
the Company, primarily from affiliates, in payment for products and services
provided by the Company. These amounts are then subsequently reimbursed
from/to JRNV on a timely basis. Due to their short- term nature, such amounts
outstanding with JRNV are classified as a current asset or liability in the
accompanying financial statements.
(3) DEFERRED COMMISSIONS
Sales commissions are amortized over the life of the corresponding
agreements from which the sales commission was paid. The current amount
represents the portion to be amortized within the next 12 months.
F-70
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THE PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE NOTES BY ANYONE IN ANY JU-
RISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Forward-Looking Information.............................................. ii
Prospectus Summary....................................................... 1
Risk Factors............................................................. 16
The Exchange Offer....................................................... 29
Use of Proceeds.......................................................... 37
Capitalization........................................................... 38
Selected Unaudited Pro Forma Financial Data.............................. 39
Selected Consolidated Financial Data..................................... 47
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 51
Business................................................................. 64
The Acquisition and Related Transactions................................. 81
Management............................................................... 83
Certain Relationships and Related Transactions........................... 90
Principal Shareholders................................................... 94
Description of Notes..................................................... 95
Book-Entry, Delivery and Form............................................ 124
Certain Federal Income Tax Consequences.................................. 126
Plan of Distribution..................................................... 128
Legal Matters............................................................ 128
Independent Auditors..................................................... 128
Index to Financial Statements............................................ F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
JONES INTERNATIONAL NETWORKS, LTD.
[LOGO OF JONES INTERNATIONAL NETWORKS, LTD. APPEARS HERE]
OFFER TO EXCHANGE
11 3/4% SENIOR SECURED NOTES
DUE 2005
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 PM,
NEW YORK CITY TIME, ON DECEMBER 21, 1998,
UNLESS EXTENDED.
---------------------------
PROSPECTUS
---------------------------
DATED NOVEMBER 4, 1998
================================================================================
