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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the year ended December 31, 1998
Commission file number: 333-62077
JONES INTERNATIONAL NETWORKS, LTD.
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(Exact name of registrant as specified in its charter)
Colorado 84-1470911
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(State of Organization) (IRS Employer
Identification No.)
P.O. Box 3309, Englewood, Colorado 80155-3309 (303) 792-3111
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(Address of principal executive office and Zip Code) (Registrant's telephone
no. including area code)
Securities registered pursuant to Section 12(g) of the Act: None*
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Indicate by check mark whether the registrant, (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405) is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. __________
*This Annual Report on Form 10-K is being filed pursuant to Section 15(d) of
the Securities Exchange Act of 1934, as amended.
(40771)
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JONES INTERNATIONAL NETWORKS, LTD.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
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PART I
ITEM 1. BUSINESS 1
The Company 1
Radio Programming 2
Radio Advertising Representation Services 3
Television Programming--Great American Country 3
Television Programming--Product Information Network 3
Satellite Delivery and Production Support Services 4
Company Background 4
Employees 5
Issuance of Debt in 1998 5
Radio Programming 6
The Radio Programming Market 6
24-Hour Programming 7
Long-Form Programming 7
Short-Form Programming 7
Services 7
The Radio Network--Jones Radio 7
Radio Advertising Representation Services 10
The Radio Advertising Market 10
MediaAmerica 11
Other Audio Services 12
Television Programming--Great American Country 12
The Cable Television Market 12
The Country Music Industry 12
Great American Country 13
Television Programming--The Product Information Network 14
Long-Form Advertising Market 14
The Product Information Network 15
Satellite Delivery and Production Support Services 16
Competition 17
Radio Network 17
Radio Advertising Representation Services 18
Television Networks 18
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Satellite Delivery and Production Support Services 19
Other Competitive Factors 19
Government Regulation 20
Risk Factors 20
ITEM 2. PROPERTIES 21
ITEM 3. LEGAL PROCEEDINGS 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY 21
HOLDERS
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND 22
RELATED STOCKHOLDER MATTERS
ITEM 6. SELECTED FINANCIAL DATA 23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 32
MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY 33
DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH 69
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE 69
REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION 73
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL 77
OWNERS, DIRECTORS AND MANAGEMENT
ITEM 13. CERTAIN TRANSACTIONS 78
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K 83
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Certain information contained in this Form 10-K Report contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. All statements, other than statements of
historical facts, included in this Form 10-K Report that address activities,
events or developments that Jones International Networks, Ltd. (the
"Company") expects, believes or anticipates will or may occur in the future,
including such matters as changes in the industries in which the Company
operates, the Company's acquisition and marketing strategies, capital
expenditures, the Company's operating strategies, the effects of competition,
the Company's expansion plans and other such matters, are forward-looking
statements. These forward-looking statements are based upon certain
assumptions and are subject to a number of risks and uncertainties. Actual
events or results may differ materially from those discussed in the
forward-looking statements as a result of various factors.
PART I
ITEM 1. BUSINESS
THE COMPANY
Jones International Networks, Ltd. (the "Company") is a Colorado
corporation organized in 1998 as the successor to a number of businesses
which have been in operation for a number of years. 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 33 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 7.2 million subscribers at December 31, 1998. The
Product Information Network is presently distributed to 304 cable systems and
broadcast affiliates and is available to 20.6 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 (the "Acquisition") substantially all
the assets of MediaAmerica, Inc. ("MediaAmerica"). 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.
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The Company primarily derives its revenues from the sale of the radio
station or cable television system 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 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 demographic sector. According to industry sources, country music
is one of America's most popular music formats. 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 other advertisers, who have not
historically utilized long-form advertising, 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 Network, Inc. ("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. As a result of the Acquisition, Jones Radio has substantially
increased its AQH to 6.5 million, which represents 33 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 on programming
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that will 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, Inc. 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. In 1998, the Company entered
into 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 (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.
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. Through agencies, it also airs advertising from
major corporate advertisers. Since December 31, 1994, the Product Information
Network has increased its base of cable subscribers and broadcast households
from 1.5 million to 20.6 million at December 31, 1998. At December 31, 1998,
the Product Information Network was distributed to 8.6 million full-time
revenue equivalent subscribers through 304 cable systems and broadcast
affiliates. The MSOs that carry the network on a portion of their cable
systems include the ten largest MSOs:
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including Adelphia, Cablevision Systems Corporation ("Cablevision"), Comcast,
Cox Communications, Inc. ("Cox"), Jones Intercable, Marcus Cable Company, LP
("Marcus Cable"), MediaOne Group, TCI, Century Communications and Time
Warner. The Product Information Network operates through a joint venture
between the Company 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 other 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 its
11 3/4% Senior Secured Notes due 2005. 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 Company is currently in
the process of soliciting prospective lessees for these three digital
channels once the current lease agreement expires on August 31, 1999. The
Company continues to market both its upcoming and existing additional
compressible capacity on its Satcom C-3 transponder and related services.
The other satellite transponder is an analog channel which the Company leased
on a long-term basis to a third party in mid-1998.
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 78.7% 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
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closing, in early 1999, 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. Knowledge TV, Inc., an
affiliate of the Company, also leases satellite transponder capacity and
purchases 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.
EMPLOYEES
The Company refers to its employees as associates. As of December 31,
1998, the Company had 177 full-time and 78 part-time associates, including
MediaAmerica personnel. In addition, the 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.
ISSUANCE OF DEBT IN 1998
In July 1998, the Company sold $100,000,000 of its 11 3/4% Senior
Secured Notes due July 1, 2005 (the "Senior Notes"). The Senior Notes are
secured by the capital stock of the Company's subsidiary, JPN, Inc., and its
direct subsidiaries. The Senior 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., Jones MAI Radio, Inc. and
Jones/Owens Radio Programming LLC, (collectively, the "Subsidiary
Guarantors"). The only existing subsidiaries of the Company that did not
guarantee the Senior Notes are the following three entities: The PIN
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 and Jones/Capstar Radio Programming
LLC, a limited liability company in which the Company, through a Subsidiary
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Guarantor, owns a 50% interest. Proceeds from the sale of the Senior Notes
were used as follows: (i) $28.2 million to prepay the capital lease
obligations relating to the satellite transponders, (ii) $26.7 million to
finance the cash portion of the Acquisition, (iii) $16.7 million to repay
indebtedness under Radio Holding's $30 million revolving credit facility and
(iv) the remaining $23.9 million for general corporate purposes, of which $10
million was deposited into a separate account and was partially used by the
Company for the payment of interest on the Senior Notes.
In December 1998, the Company, pursuant to an effective Registration
Statement on Form S-4, completed the exchange of its $100,000,000 aggregate
principal amount of 11 3/4% Senior Secured Notes due 2005 (the "Exchange
Notes") for all of the Senior Notes. The Exchange Notes evidence the same
debt as the Senior Notes which they replace and are entitled to the benefits
of the Indenture dated as of July 10, 1998 governing the Senior Notes and the
Exchange Notes. The Exchange Notes do not have certain transfer restriction
features which applied to the Senior Notes. There were no proceeds to the
Company from the issuance of the Exchange Notes pursuant to said exchange
offering.
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.
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 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. Radio 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
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Company believes that most commercial radio stations utilize radio network or
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 music 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 on-air personalities.
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
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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 programs and service agreements are generally one year.
The Company has affiliation agreements with 2,300 radio stations
throughout the United States and Canada, with approximately 700 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 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.
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 orders 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.
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
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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 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 typically interactive
with the affiliated radio stations, features on oldies music and a consumer
feature hosted by national consumer advocate, David Horowitz.
The Company's radio programming is broadcast to over 33 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.
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 16% of the Company's revenues in 1998.
The Company markets its radio programming directly to radio stations
through its eleven-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
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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.
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.
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.
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. 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 advertisers to target
a very specific geographic area. This type of radio advertising is ideal for
local business with a trading area that is relatively small and well defined.
The process of purchasing radio advertising locally is time-consuming and is
not cost efficient for national advertisers. National spot buys are also
targeted to specific markets and stations, but again, tend to be less cost
efficient for the national 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.
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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. 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.
As of December 31, 1998, MediaAmerica represented approximately 90
programs or services produced by approximately 24 programmers. 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 12 advertising account executives and sales
managers are located in six major advertising buying markets in the United
States (New York, Los Angeles, Chicago, Detroit, Dallas and Denver). 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
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addition, the Company's research department continuously analyzes a 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 1998, cable television was in approximately 77% of all homes in
the United States, and approximately 81% of U.S. households with an annual
income of at least $60,000. Industry sources indicate that in 1998 Americans
spent $32 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 $9 billion in 1998, a 16% increase
from 1997. The average cable household devoted 3.7 hours a day watching
advertising-supported basic cable television in 1998.
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 approximately 2,500 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.
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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 7.2 million subscribers at
December 31, 1998. The Company believes that Great American Country offers an
appealing 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.
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 as Great American Country
increases its subscriber base, 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. There can be no assurance that the
Company will be able to achieve any of these objectives.
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 during 1998
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were 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. 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.
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 approximately 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.
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
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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.
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
between the Company and Cox. 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
and has since exchanged its entire partnership interest for an interest in
the Company. Both Cox and Adelphia distribute the Product Information Network
on a number of their cable television systems.
As of December 31, 1998, the Product Information Network was distributed
on a full or part-time basis on cable television systems representing
approximately 17.1 million, or approximately 26%, of the nation's cable
subscribers on a full-or part-time basis, as well as to over 3.5 million
broadcast households. At December 31, 1998, the Product Information Network
was distributed to 8.6 million full-time revenue equivalent subscribers
through 304 cable systems and broadcast affiliates. The MSOs that carry the
network on a portion of their cable systems include the ten largest MSOs:
including Adelphia, Cablevision, Comcast, Cox, Jones Intercable, Marcus
Cable, Media One Group, TCI, Century Communications and Time Warner.
Approximately 2.6 of the 3.5 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.
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 73.5% of the Product Information Network's
adjusted net advertising
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revenues (which are revenues less agency commissions and bad debt expenses)
attributable to the time that the system carries the network's programming.
For 1998, the Product Information Network paid its full-time (24 hours a day)
affiliates an average of approximately $1.45 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
producers.
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 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 to terminate the lease on July 1, 2001, exercisable by the
related party on six months' advance notice. 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 aggregate monthly charge for the three channels
(included related services provided by the Company) is $138,000. Although the
lessee will have the right to renew for successive monthly periods, the
Company does not anticipate that the lessee will renew the agreement beyond
the original term. The Company is currently in the process of soliciting
prospective lessees for these three digital channels once the current lease
agreement expires on August 31, 1999. In mid-1998, the Company leased
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the C-4 transponder to an unrelated party. This lease provides for monthly
lease payments averaging $160,000, with higher lease payments in the early
years of the agreement 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 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 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
would 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, Premiere Radio Networks and AMFM. The
principal competitive factors in the radio industry are the quality and
creativity of programming, the quality and quantity of the radio stations
airing the programming and the ability to provide advertisers with a
cost-effective method of delivering commercial
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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. Both
companies plan to launch service in the last quarter of 2000. The continued
growth of the Internet and improvements in audio technology will provide
another audio source competing for radio listeners. The Company cannot
predict what effect the potential future development of digital automation,
DARS or the Internet 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 approximately 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.
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
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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 two
other infomercial networks: Access Television Network and GRTV, certain of
which have greater distribution than the Product Information Network. 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. 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 TCI's
National Digital Television Center, Vyvx Teleport, MicroNet Inc., GlobeCast,
North America, Rainbow Network Communications, Washington International
Teleport, Inc., Speer WorldWide Digital, Ltd. 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
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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.
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.
RISK FACTORS
The Company's Notes are available for purchase in the market. The
purchase of the Notes involves certain risks. Prospective purchasers of the
Notes should consider carefully the risks related to, among other factors:
(i) the Company's history of net losses, (ii) the Company's dependence upon
earnings and cash flow of its subsidiaries, (iii) distribution of its radio
and television programming, (iv) dependence on advertising relationships and
revenues, (v) the fact that the Company engages in and expects to continue to
engage in certain transactions with its affiliates, (vi) intense competition
from various sources which affect all aspects of the Company's business and
(vii) other information about the Company set forth in this Form 10-K Report.
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ITEM 2. PROPERTIES
The Company's principal executive offices are located in Englewood,
Colorado. The Company subleases office space from affiliates of Jones
International, Ltd. as well as office space and studio space from third
parties. See "Certain 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
- ------------------------- ------------------- -------------- ------------
<S> <C> <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 850 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>
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDERS MATTERS
Not applicable.
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ITEM 6. SELECTED FINANCIAL DATA
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, 1994, 1995, 1996, 1997 and 1998, respectively:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------------------------
1994 1995 1996 1997 1998
---------------- ---------------- ---------------- ---------------- ----------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Radio programming............ $ 2,541 23% $ 5,121 34% $ 6,978 42% $10,200 35% $ 10,041 26%
Radio representation......... -- -- -- -- -- -- -- -- 5,107 13
Television programming....... 1,946 17 340 2 1,153 7 12,002 41 16,892 44
Satellite delivery and
production support......... 6,805 60 9,666 64 8,523 51 6,910 24 6,172 17
------- --- ------- --- ------- --- ------- --- -------- ---
Total revenues............. 11,292 100 15,127 100 16,654 100 29,112 100 38,212 100
------- --- ------- --- ------- --- ------- --- -------- ---
OPERATING EXPENSES:
Radio programming............ 2,068 18 3,068 20 4,163 25 5,816 20 7,778 20
Radio representation......... -- -- -- -- -- -- -- -- 1,129 3
Television programming....... 1,149 10 366 2 1,157 7 9,272 32 14,231 37
Satellite delivery and
production support......... 4,546 40 6,530 43 5,451 33 4,685 16 5,240 14
Selling and marketing........ 1,090 10 1,374 10 1,737 10 2,918 10 4,869 13
General and administrative... 1,958 17 2,322 15 3,270 20 4,168 14 6,728 18
------- --- ------- --- ------- --- ------- --- -------- ---
Total operating expenses... 10,811 95 13,660 90 15,778 95 26,859 92 39,975 105
------- --- ------- --- ------- --- ------- --- -------- ---
OPERATING INCOME (LOSS)........ 481 5 1,467 10 876 5 2,253 8 (1,763) (5)
OTHER EXPENSE.................. 3,173 28 4,011 27 3,587 21 6,185 21 9,423 25
INCOME TAX PROVISION/BENEFIT
AND MINORITY INTERESTS....... (389) (3) (498) (3) (396) (2) (439) (1) (264) (1)
------- --- ------- --- ------- --- ------- --- -------- ---
NET LOSS....................... $(2,303) (20%) $(2,046) (14%) $(2,315) (14)% $(3,493) (12)% $(11,450) (31)%
------- --- ------- --- ------- --- ------- --- -------- ---
------- --- ------- --- ------- --- ------- --- -------- ---
BALANCE SHEET DATA:
Total Assets................. $39,196 $36,352 $38,298 $41,358 $110,894
Total long-term debt......... 52,667 53,476 53,277 45,312 100,000
Shareholders' deficit........ (16,302) (20,360) (23,269) (18,206) (11,333)
</TABLE>
ITEM 7. 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 financial statements and notes thereto appearing elsewhere in
this Form 10K. This document contains forward-looking statements that involve
risks and uncertainties.
CONSOLIDATION OF PIN VENTURE
From February 1995 until March 31, 1997, the Company owned 50 percent or
less of the PIN Venture. Effective April 1, 1997, the Company acquired from
Adelphia Communications Corporation an 8.35 percent equity interest in the
PIN Venture in exchange for 262,500 shares of the Company's Class A Common
Stock. Effective December 31, 1998, the Company acquired the remaining
Adelphia Communications Corporation equity interest in the PIN Venture, 2.18
percent, in exchange for 12,416 shares of the Company's Class A Common Stock.
As a result of these transactions, which were accounted for as a purchase,
the Company now owns approximately 55.3 percent of the PIN Venture. Effective
April 1, 1997, the Company consolidated the results of operations of the PIN
Venture for financial reporting purposes.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
TOTAL REVENUES--Total revenues increased $9.1 million, or 31%, from
$29.1 million for the year ended December 31, 1997 to $38.2 million for the
year ended December 31, 1998. This increase was due primarily to (i) the
acquisition of MediaAmerica, (ii) an increase in Great American Country
advertising revenues and (iii) revenues resulting from the consolidation of
the PIN Venture.
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RADIO PROGRAMMING REVENUES--Radio programming revenues decreased $0.2
million, or 2%, from $10.2 million for the year ended December 31, 1997 to
$10.0 million for the year ended December 31, 1998, due to a $1.4 million, or
15%, decrease in advertising revenues as offset by a $1.2 million increase in
radio programming revenues as a result of the MediaAmerica acquisition. Sales
of radio advertising for 1998 were adversely affected by the entry in January
1998 of AMFM into the marketplace, 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 1998, the Company realized lower rates as
compared to 1997. The decrease was partially offset by the elimination of
$1.0 million in advertising sales representation selling commissions (contra
revenues) charged by MediaAmerica and an $0.2 million increase in promotion
income, both related to the acquisition of MediaAmerica. 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.
During late 1998, the Company began to experience improved advertising
rate and sellout conditions and these trends have continued into early 1999.
As a result of increased competition, as well as other changes occurring in
the network radio advertising marketplace in 1998, the Company is continuing
to focus its efforts on strategies to increase the amount it received per
radio advertising spot and its sellout percentage. One significant area of
concentration is the development of personality driven talk programs, which
the Company believes will appeal to both advertisers of and listeners to the
Company's radio programs. However, there can be no assurance that this and
other strategies the Company is focusing on will be successful in increasing
radio programming revenues or that network radio advertising market
conditions will continue to improve.
RADIO ADVERTISING REPRESENTATION REVENUES--As the result of the
acquisition of MediaAmerica, the Company generated radio representation
revenues of $5.1 million for the year ended December 31, 1998.
TELEVISION PROGRAMMING REVENUES--Television programming revenues
increased $4.9 million, or 41%, from $12.0 million for the year ended
December 31, 1997 to $16.9 million for the year ended December 31, 1998, due
primarily to: (i) the consolidation of the PIN Venture which for financial
statement reporting purposes resulted in an increase of $3.3 million in
advertising revenues, (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
$0.9 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 $0.4 million in Great
American Country affiliate fees due to an increase in the number of its
subscribers paying affiliate fees.
SATELLITE DELIVERY AND PRODUCTION SUPPORT REVENUES--Satellite delivery
and production support revenues decreased $0.7 million, or 11%, from $6.9
million for the year ended December 31, 1997 to $6.2 million for the year
ended December 31, 1998 due to (i) the expiration in October 1997 of a third
party satellite delivery and production support services agreement, which had
generated $2.6 million in satellite delivery revenues in 1997, 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 (i) new satellite delivery
and production support agreements that the Company entered into with third
parties in 1998 resulting in revenues of $1.4 million and (ii) an increase in
satellite delivery and production support fees of $0.9 million charged to
related parties.
TOTAL OPERATING EXPENSES--Total operating expenses increased $13.1
million, or 49%, from $26.9 million for year ended December 31, 1997 to $40.0
million for the year ended December 31, 1998. This increase was due primarily
to increases in radio programming, radio advertising representation,
television
24
<PAGE>
programming, selling and marketing and general and administrative expenses.
As a percentage of total revenues, total operating expenses increased from
92% for the year ended December 31, 1997 to 105% for the year ended December
31, 1998.
RADIO PROGRAMMING EXPENSES--Radio programming expenses increased $2.0
million, or 34%, from $5.8 million for the year ended December 31, 1997 to
$7.8 million for the year ended December 31, 1998. Programming expenses
increased due to (i) an increase in the number of formats and syndicated
programs offered by the Company and (ii) the acquisition of MediaAmerica. The
Company expects to implement cost reductions such as (i) consolidating its
programming, (ii) using voice tracking and other technology to reduce
programming costs and (iii) reducing overhead. As a percentage of radio
programming revenues, radio programming expenses increased from 57% for the
year ended December 31, 1997 to 77% for the year ended December 31, 1998.
RADIO ADVERTISING REPRESENTATION EXPENSES--As a result of the
acquisition of MediaAmerica, the Company generated radio representation
expenses of $1.1 million for the year ended December 31, 1998.
TELEVISION PROGRAMMING EXPENSES--Television programming expenses
increased $5.0 million, or 53%, from $9.3 million for the year ended December
31, 1997 to $14.3 million for the year ended December 31, 1998, due to the
consolidation of the PIN Venture and the increase in amounts paid to cable
systems receiving the Product Information Network. For the years ended
December 31, 1997 and 1998, the PIN Venture made rebate payments to these
systems of approximately $7.8 million and $10.3 million, respectively. The
increase was offset by the decrease in allocation of the satellite delivery
and production support expenses attributable to the Production Information
and the Great American Country Networks. As a percentage of television
programming revenues, television programming expenses increased from 77% for
the year ended December 31, 1997 to 84% for the year ended December 31, 1998.
SATELLITE DELIVERY AND PRODUCTION SUPPORT EXPENSES--Satellite delivery
and production support expenses increased $0.5 million, or 12%, from $4.7
million for the year ended December 31, 1997 to $5.2 million for the year
ended December 31, 1998. The increase was due primarily to a decrease in the
allocation of satellite delivery and production support expenses to
television programming expenses attributable to the Production Information
and Great American Country networks as a result of the additional satellite
delivery and production support customers. As a percentage of satellite
delivery and production support revenues, satellite delivery and production
support expenses increased from 68% for the year ended December 31, 1997 to
85% for the year ended December 31, 1998, due to the expiration in October
1997 of a third party satellite delivery and product support service
agreement and to increased satellite delivery and production support expenses.
SELLING AND MARKETING EXPENSES--Selling and marketing expenses
increased $2.0 million, or 67%, from $2.9 million for the year ended December
31, 1997 to $4.9 million for the year ended December 31, 1998 because of (i)
an increase of $1.2 million due to the acquisition of MediaAmerica, (ii) an
increase of $0.7 million in marketing expenditures incurred to increase Great
American Country's distribution and (iii) 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 year ended December
31, 1997 to 13% for the year ended December 31, 1998.
GENERAL AND ADMINISTRATIVE EXPENSES--General and administrative
expenses increased $2.5 million, or 61%, from $4.2 million for the year ended
December 31, 1997 to $6.7 million for the year ended December 31, 1998 due
primarily to (i) an increase of $1.7 million due to the acquisition of
MediaAmerica (ii) an $0.3
25
<PAGE>
million increase in amortization expenses related to the amortization of
goodwill associated with the acquisition of MediaAmerica, (iii) an $0.3
million increase in the amortization of subscriber incentive payments for
Great American Country. As a percentage of total revenues, general and
administrative expenses increased from 14% for the year ended December 31,
1997 to 18% for the year ended December 31, 1998.
TOTAL OTHER EXPENSE--Total other expense increased $3.2 million, or
52%, from $6.2 million for the year ended December 31, 1997 to $9.4 million
for the year ended December 31, 1998. The increase was due to an increase of
$5.6 million in interest expense related to the Notes, an increase of $0.6
million in other expense related to the Jones Radio Holdings LLC credit
facility (see "Liquidity and Capital Resources") and an increase of $0.4
million of expenses incurred in 1998 related to the MediaAmerica acquisition
and the Notes offering, as offset partially by a write-off of deferred
offering costs of $0.9 million in 1997 for which no similar expense was
incurred in 1998. The increase was also partially offset by the decrease in
interest expense related to the repayment of the Global Group Note, the Earth
Segment Note and the satellite transponder capital leases which totaled $2.5
million.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO DECEMBER 31, 1996
TOTAL REVENUES--Total revenues increased $12.4 million, or 75%, from
$16.7 million for the year ended December 31, 1996 to $29.1 million 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 (i) the consolidation of the PIN
Venture and (ii) a 98% increase in the number of Great American Country's
subscribers 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 receiving the Company's programming from December 31, 1996 to
December 31, 1997.
RADIO PROGRAMMING REVENUES--Radio programming revenues increased $3.2
million, or 46%, from $7.0 million for the year ended December 31, 1996 to
$10.2 million 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 favorable network radio advertising
conditions and increases in AQH for certain radio programs. 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 for the year ended
December 31, 1996 to $12.0 million 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 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
26
<PAGE>
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 for the year ended December 31, 1996 to
$26.9 million 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, excluding radio programming, 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 for the year ended December 31, 1996 to
$5.8 million 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 for the year ended
December 31, 1996 to $9.3 million 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 for the year ended December 31, 1996 to $4.7 million for the year
ended December 31, 1997 due primarily to the launch in late 1995 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.
SELLING AND MARKETING EXPENSES--Selling and marketing expenses
increased $1.2 million, or 68%, from $1.7 million for the year ended December
31, 1996 to $2.9 million 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 for the year ended
December 31, 1996 to $4.2 million for the year ended December 31, 1997 due
primarily to the consolidation of the PIN Venture. As a percentage of total
revenues, general
27
<PAGE>
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 from
$3.6 million for the year ended December 31, 1996 to $6.2 million 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 relating to
advances from Jones International.
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. As a
result of the acquisition of MediaAmerica, 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 affected by a wide variety of factors, many of
which are outside the Company's control, and 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 $20.7 million (as of December 31, 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, 1996, 1997, and 1998 was $4.8 million, $7.6 million and
($7.3) million, respectively. Net cash provided by (used in) operating
activities decreased for the year ended December 31, 1998 in part because of
modest revenue growth and significantly higher expenses during the period, as
described above. Net cash used in operating activities for the year ended
December 31, 1998 also includes the net repayment of $8.4 million of advances
from Jones International.
28
<PAGE>
For the years ended December 31, 1996, 1997, 1998, net cash used in
investing activities was $4.0 million, $1.2 million, and $35.0 million,
respectively. The Company's investing activities in 1996 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. 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. The Company's investing activities in 1998 related primarily to
the acquisition of MediaAmerica with cash consideration of $26.7 million.
Total capital expenditures of $2.3 million for 1998 were primarily related to
equipment to further compress the Satcom C-3 satellite transponder and to add
radio formats and programming. In 1998, the Company also made subscriber
incentive payments for Great American Country of $3.1 million.
Net cash provided by (used in) financing activities for the years ended
December 31, 1996, 1997 and 1998 were ($0.8) million, $(2.7) million and
$59.3 million, respectively. For these periods, the Company's financing
activities consisted primarily of proceeds from the issuance of Senior
Secured Notes, borrowings under the Credit Facility (as defined below) and
from related parties and repayments of a capital lease obligation and loans
from related parties.
In July 1998, the Company issued $100 million of 11 3/4 percent Senior
Secured Notes. The Company used the proceeds from the Notes offering (i) to
finance the cash consideration of the acquisition of MediaAmerica, (ii) to
prepay the capital lease obligation relating to the satellite transponders,
(iii) to repay the Credit Facility and (iv) for general corporate purposes,
including the payment of fees and expenses.
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. 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, Jones Radio Holdings, LLC entered into a five year $30
million secured revolving credit facility with a commercial bank (the "Credit
Facility"). 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 Credit Facility was terminated 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
29
<PAGE>
International. In July 1998, the Company repaid the credit facility, using
the proceeds from the 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. Outstanding advances from Jones International and related parties at
December 31, 1998 were approximately $1.4 million. The Company intends 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 historically financed its ownership of two analog satellite
transponders through a capital lease agreement. This agreement was fully
prepaid with $27.6 million of the proceeds of the offering of the 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 has leased the other three digital channels and
certain related services to a third party 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. The estimated purchase price of the Class A Common Stock
in the event the put option is exercised would be approximately $1,020,000.
The Company intends to continue to enter into similar arrangements in the
future, to the extent permitted under the terms of the Indenture.
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
its available cash balances along with 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,
1999. The Company deposited $10.0 million of the proceeds of the offering of
the Notes in a Reserve Account, from which approximately $5.6 million was
used to pay interest on the Notes in January 1999. The Company intends to use
the remaining proceeds in the Reserve Account for payment of interest on the
Notes.
Total capital expenditures for 1999 are estimated to be $1.6 million,
which will be used primarily to purchase equipment to further digitally
compress the Satcom C-3 satellite transponder, upgrades of certain radio
programming studios and to purchase satellite receivers. Total subscriber
incentive payments for Great American Country in 1999 are estimated to be
$4.0 million.
30
<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. 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.
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.
The Company initiated an assessment of how the Year 2000 problem could
affect its operations in the summer of 1997 and, in conjunction with related
parties, established a Year 2000 Program Office (the "Y2K Office") to manage
the process. The Y2K Office meets periodically with the Company's management
to inform them of its assessment activities, the Year 2000 priorities it has
identified, remediation recommendations and testing and compliance issues. In
addition, the Y2K Office organized and meets regularly with a review
committee comprised of representatives from various departments within the
Company to ensure that management from the affected areas participate in the
decision process.
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 1Q99
Local Area Network ("LAN") and Wide Area Determine which components are
Network ("WAN") Components........................ not Y2K compliant 1Q99
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 1Q99
GAC and PIN Network Traffic and Billing System....... Y2K certification testing 1Q99
Uplink and Broadcast Center.......................... Y2K certification testing 2Q99
</TABLE>
In 1999, the Y2k Office will also focus on Year 2000 compliance issues
with respect to other systems, such as desktop hardware and software, data
archiving systems, traffic and billing reconciliation
31
<PAGE>
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 significant 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 Year 2000 costs to date.
Management does not have an estimate for 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 second 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the financial
position, results of operations, or cash flows of the Company due to adverse
changes in financial market prices. The Company is exposed to market risk
through interest rates. This exposure is directly related to its normal
funding and investing activities.
Approximately $1.4 million of the Company's borrowed debt is subject to
changes in interest rates; however, the Company does not use derivatives to
mange this risk. This exposure is linked primarily to the prime rate. The
Company believes that a moderate change in the prime rate would not
materially affect operating results or financial condition of the Company.
32
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants 34
Consolidated Statements of Financial Position 35
Consolidated Statements of Operations 37
Consolidated Statements of Changes in Shareholders' Deficit 38
Consolidated Statements of Cash Flows 39
Notes to Consolidated Financial Statements 40
</TABLE>
33
<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, 1997 and
1998 and the related consolidated statements of operations, changes in
shareholders' deficit and cash flows for each of the three years ended
December 31, 1998. 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 Jones International
Networks, Ltd. and its subsidiaries as of December 31, 1997 and 1998, and the
results of their operations and their cash flows for each of the three years
ended December 31, 1998 in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Denver, Colorado
February 11, 1999
34
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1997 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................. $ 3,717,169 $10,654,013
Restricted cash....................................................... -- 10,000,000
Available for sale securities......................................... -- 2,768,646
Accounts receivable, net of allowance for doubtful accounts
of $157,405 and $897,487, respectively............................. 1,454,763 11,835,108
Receivables from affiliates........................................... -- 238,777
Prepaid expenses...................................................... 54,870 255,723
Deferred commissions, current (Note 2)................................ 222,302 221,973
Other current assets.................................................. 263,267 178,322
------------ ------------
Total current assets............................................. 5,712,371 36,152,562
------------ ------------
PROPERTY, PLANT AND EQUIPMENT (Note 2):
Land.................................................................. 1,395,592 1,395,592
Building.............................................................. 2,321,463 2,321,463
Satellite transponders (Note 14)...................................... 35,010,454 35,680,188
Furniture, fixtures and equipment..................................... 10,457,665 12,442,773
Leasehold improvements................................................ 374,643 738,838
------------ ------------
Total property, plant and equipment.............................. 49,559,817 52,578,854
------------ ------------
Less accumulated depreciation and amortization................ (20,784,095) (25,681,974)
------------ ------------
Net property, plant and equipment................................ 28,775,722 26,896,880
------------ ------------
OTHER ASSETS:
Goodwill, net of accumulated amortization of $171,795
and $719,588, respectively (Note 2)............................... 3,125,567 32,397,394
Subscriber incentive payments, net of accumulated
amortization of $0 and $326,969, respectively...................... -- 4,355,170
Investment in programming, net of accumulated
amortization of $0 and $177,777, respectively...................... -- 2,379,402
Other intangible assets, net of accumulated amortization of
$733,428 and $1,030,391, respectively (Note 2)..................... 1,063,888 1,914,043
Investment in affiliates.............................................. 577,264 202,942
Income tax benefit receivable from Jones International, Ltd.(Note 13). 1,342,111 1,338,402
Deferred commissions, long-term (Note 2).............................. 478,676 390,336
Debt offering costs, net of accumulated amortization of $0
and $245,700, respectively (Note 2)................................ 224,744 4,526,428
Other assets.......................................................... 57,785 340,475
------------ ------------
Total other assets............................................... 6,870,035 47,844,592
------------ ------------
Total assets..................................................... $41,358,128 $ 110,894,034
------------ ------------
------------ ------------
</TABLE>
The accompanying notes to these consolidated financial statements are an
integral part of these consolidated financial statements.
35
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1997 1998
------------ ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable--trade........................................... $ 1,438,602 $ 2,796,389
Producers' fees payable........................................... -- 5,922,471
Subscriber incentive payments payable............................. -- 1,617,815
Accrued liabilities............................................... 1,300,516 2,047,233
Accounts payable--Jones International, Ltd. (Notes 2 and 4)....... 9,814,874 1,377,731
Interest payable.................................................. 53,619 5,581,250
Deferred revenues (Note 2)........................................ 13,554 752,263
Capital lease obligations (Note 7)................................ 2,422,022 --
Other current liabilities......................................... -- 9,938
------------ ------------
Total current liabilities.................................... 15,043,187 20,105,090
------------ ------------
LONG-TERM LIABILITIES
Customer deposits and deferred revenues........................... 38,532 340,842
Capital lease obligation, net of current portion (Note 7)......... 26,335,186 --
Long-term debt--affiliated entities (Note 5)...................... 16,554,500 --
Senior secured notes.............................................. -- 100,000,000
------------ ------------
Total long-term liabilities.................................. 42,928,218 100,340,842
------------ ------------
MINORITY INTERESTS IN CONSOLIDATED
SUBSIDIARIES (Note 2)............................................. 1,593,168 567,283
COMMITMENTS AND CONTINGENCIES (NOTE 15)
Class A Common Stock subject to put, $0.01 par
value:101,124 shares authorized and outstanding................. -- 1,213,488
SHAREHOLDERS' DEFICIT:
Class A Common Stock, $.01 par value: 50,000,000 shares
authorized; 2,980,953 and 4,202,006 shares issued and
outstanding, respectively....................................... 29,810 42,020
Class B Common Stock, $.01 par value: 1,785,120 shares
authorized; 1,785,120 shares issued and
outstanding, respectively....................................... 17,851 17,851
Additional paid-in capital........................................ 9,143,375 27,446,955
Accumulated other comprehensive income............................ -- 8,456
Accumulated deficit............................................... (27,397,481) (38,847,951)
------------ ------------
Total shareholders' deficit....................................... (18,206,445) (11,332,669)
------------ ------------
Total liabilities and shareholders' deficit....................... $41,358,128 $110,894,034
------------ ------------
------------ ------------
</TABLE>
The accompanying notes to these consolidated financial statements are an
integral part of these consolidated financial statements.
36
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years ended December 31,
------------------------------------------------------------------
1996 1997 1998
------------------- ------------------- ------------------
<S> <C> <C> <C>
REVENUES:
Radio programming............................... $ 6,978,303 $ 10,199,870 $ 10,041,070
Radio representation............................ -- -- 5,106,540
Television programming:
Non-affiliated entities....................... 193,204 10,863,512 15,795,632
Affiliated entities (Note 4).................. 960,254 1,138,000 1,096,580
---------------- ---------------- ---------------
Total television programming.............. 1,153,458 12,001,512 16,892,212
---------------- ---------------- ---------------
Satellite delivery and production support:
Non-affiliated entities....................... 3,120,000 2,600,000 1,578,079
Affiliated entities (Note 4).................. 5,402,680 4,309,818 4,593,620
---------------- ---------------- ---------------
Total satellite delivery and production
support................................. 8,522,680 6,909,818 6,171,699
---------------- ---------------- ---------------
Total revenues............................ 16,654,441 29,111,200 38,211,521
---------------- ---------------- ---------------
OPERATING EXPENSES:
Radio programming............................... 4,162,634 5,816,250 7,778,061
Radio representation............................ -- -- 1,128,713
Television programming:
Non-affiliated entities....................... 1,156,922 5,726,418 9,015,421
Affiliated entities (Note 4).................. -- 3,545,930 5,216,110
---------------- ---------------- ---------------
Total television programming.............. 1,156,922 9,272,348 14,231,531
Satellite delivery and production support....... 5,451,966 4,685,470 5,240,168
Selling and marketing........................... 1,737,566 2,916,648 4,868,700
General and administrative...................... 3,269,623 4,168,005 6,727,604
---------------- ---------------- ---------------
Total operating expenses.................. 15,778,711 26,858,721 39,974,777
---------------- ---------------- ---------------
OPERATING INCOME (LOSS)............................ 875,730 2,252,479 (1,763,256)
---------------- ---------------- ---------------
OTHER (INCOME) EXPENSE:
Interest expense (Note 4, 6 and 7).............. 4,499,898 5,676,896 8,971,139
Interest income................................. (72,151) (107,843) (775,735)
Write-off of deferred offering costs (Note 2)... -- 938,000 --
Equity income (loss) of subsidiaries............ (828,992) (396,155) 57,322
Other expense (income).......................... (11,660) 73,972 1,171,264
---------------- ---------------- ---------------
Total other expense, net.................. 3,587,095 6,184,870 9,423,990
---------------- ---------------- ---------------
LOSS BEFORE INCOME TAXES AND
MINORITY INTERESTS.............................. (2,711,365) (3,932,391) (11,187,246)
Income tax provision (benefit) (Note 13)........ (386,912) (1,341,997) 48,531
---------------- ---------------- ---------------
LOSS BEFORE MINORITY INTERESTS..................... (2,324,453) (2,590,394) (11,235,777)
---------------- ---------------- ---------------
Minority interests in net income (loss) of
consolidated subsidiaries..................... (9,051) 902,781 214,693
---------------- ---------------- ---------------
NET LOSS $ (2,315,402) $ (3,493,175) $ (11,450,470)
---------------- ---------------- ---------------
---------------- ---------------- ---------------
ADJUSTMENTS TO ARRIVE AT
COMPREHENSIVE LOSS.............................. -- -- 8,456
COMPREHENSIVE LOSS................................. $ (2,315,402) $ (3,493,175) $ (11,442,014)
---------------- ---------------- ---------------
---------------- ---------------- ---------------
NET LOSS PER COMMON SHARE.......................... $ (0.56) $ (0.79) $ (2.13)
---------------- ---------------- ---------------
---------------- ---------------- ---------------
NET LOSS PER COMMON SHARE - assuming dilution...... $ (0.56) $ (0.79) $ (2.14)
---------------- ---------------- ---------------
---------------- ---------------- ---------------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING..................................... 4,103,573 4,400,448 5,372,644
---------------- ---------------- ---------------
---------------- ---------------- ---------------
</TABLE>
The accompanying notes to these consolidated financial statements are an
integral part of these consolidated financial statements.
37
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK 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, 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........................ 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 5)............................ -- -- 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)
Conversion of Jones Global Group note...... 666,667 6,667 -- -- 9,993,333 -- 10,000,000
Issuance of common stock for
the MediaAmerica, Inc, acquisition....... 541,970 5,419 -- -- 8,124,131 -- 8,129,550
Issuance of common stock in
exchange for the ownership
interests in PIN Venture................. 12,416 124 -- -- 186,116 -- 186,240
Other comprehensive income, net of tax:
Unrealized gains on securities........... -- -- -- -- -- -- 8,456
Net loss................................... -- -- -- -- -- (11,450,470) (11,450,470)
----------- ---------- --------- --------- ---------- ------------- --------------
Balance, December 31, 1998................. 4,202,006 $42,020 1,785,120 $17,851 $27,446,955 $(38,847,951) $(11,332,669)
----------- ---------- --------- --------- ---------- ------------- --------------
----------- ---------- --------- --------- ---------- ------------- --------------
</TABLE>
The accompanying notes to these consolidated financial statements are an
integral part of these consolidated financial statements.
38
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years ended December 31,
------------------------------------------------------------------
1996 1997 1998
------------------- ------------------- ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................ $ (2,315,402) $ (3,493,175) $ (11,450,470)
Adjustment to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization................. 4,476,027 5,167,892 6,266,138
Equity in (loss) income of subsidiaries....... (828,992) (396,155) 57,322
Distributions received........................ 300,000 100,000 350,000
Write-off of deferred offering costs.......... -- 938,000 --
Minority interest in net (loss) income........ (9,051) 902,781 214,693
Loss on sale of equipment..................... -- 81,209 3,599
Net change in assets and liabilities:
Decrease (increase) in receivables.......... 5,317 1,168,733 (4,134,681)
Increase in receivables from affiliates..... (361,809) (538,949) (238,777)
Decrease (increase) in prepaid expenses.....
and other current assets.................. (495,717) 344,865 157,807
Decrease (increase) in deferred ............ (104,204) 43,880 88,669
commissions...............................
Decrease (increase) in other assets......... (58,983) 78,635 (271,171)
Increase in accounts payable................ 223,393 1,192,730 1,357,787
Increase in producers' fee payable.......... -- -- 2,043,770
Increase (decrease) in accounts payable 3,668,270 2,861,899 (8,437,143)
to Jones International....................
Increase (decrease) in interest payable..... 215,524 (161,905) 5,527,631
Increase in deferred revenues............... 5,500 8,054 738,709
Increase in accrued liabilities and other 52,872 112,355 233,806
liabilities...............................
Increase (decrease) in customer deposits.... 3,352 (821,378) 181,904
------------------- ------------------- ------------------
Net cash provided by (used in) operating activities 4,776,097 7,589,471 (7,310,407)
------------------- ------------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment..... (2,969,379) (1,367,026) (2,257,832)
Sale of property, plant and equipment......... -- 255,671 56,890
Subscriber incentive payments................. -- -- (3,064,354)
Purchases of intangible assets and programming (1,001,667) (44,646) (295,314)
Purchase of MediaAmerica, Inc................. -- -- (26,700,000)
Purchase of investments....................... -- -- (2,760,190)
------------------- ------------------- ------------------
Net cash used in investing activities......... (3,971,046) (1,156,001) (35,020,800)
------------------- ------------------- ------------------
CASH FLOWS FORM FINANCING ACTIVITIES:
Increase in deferred offering costs........... (607,505) (505,239) (4,301,684)
Increase in capitalized loan fees............. -- (50,000) --
Repayment of borrowings....................... (7,991) -- (23,259,000)
Repayment of capital lease obligations........ (1,533,031) (1,964,954) (28,757,208)
Proceeds from borrowings...................... 1,341,968 -- 16,704,500
Proceeds from Senior Secured Notes............ -- -- 100,000,000
Distributions paid to minority interests...... -- -- (1,118,557)
Acquisition of minority interests............. -- (200,000) --
------------------- ------------------- ------------------
Net cash provided by (used in)
financing activities........................ (806,559) (2,720,193) 59,268,051
------------------- ------------------- ------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS... (1,508) 3,713,277 16,936,844
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD....................................... 5,400 3,892 3,717,169
------------------- ------------------- ------------------
CASH AND CASH EQUIVALENTS, END
OF PERIOD....................................... $ 3,892 $ 3,717,169 $ 20,654,013
------------------- ------------------- ------------------
------------------- ------------------- ------------------
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid...................................... $ 4,499,898 $ 5,838,801 $ 3,443,508
------------------- ------------------- ------------------
------------------- ------------------- ------------------
Goodwill........................................... 300,000 3,036,923 5,372,644
------------------- ------------------- ------------------
------------------- ------------------- ------------------
Issuance of Class A Common Stock for GAC equity agreement $ -- $ -- $ 1,213,488
------------------- ------------------- ------------------
------------------- ------------------- ------------------
Issuance of Class A Common Stock for the acquisition of
MediaAmerica, Inc.................................. $ -- $ -- $ 8,129,550
------------------- ------------------- ------------------
------------------- ------------------- ------------------
Conversion of Global Group note to Class A $ -- $ 6,000,000 $ 10,000,000
Common Stock.................................... ------------------- ------------------- ------------------
------------------- ------------------- ------------------
</TABLE>
The accompanying notes to these consolidated financial statements are an
integral part of these consolidated financial statements.
39
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(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
had acquired certain subsidiaries from the parent of Network Holdings, Jones
International, Ltd. ("Jones International"). Mr. Glenn R. Jones, Chairman and
Chief Executive Officer of New Company, owns 100 percent of Jones
International. The accompanying consolidated 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 ("Notes") by New Company (see
Note 14) and the acquisition by New Company of MediaAmerica, Inc.
("MediaAmerica) (see Note 14), 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 wholly-owned subsidiary of New Company. The results of operations
and financial condition of New Company ("the Company") reflect all of the
operations of the Old 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) sells advertising time on nationally syndicated radio
programs, (iii) provides television and music programming to cable television
system operators and other video distributors, (iv) sells advertising time on
its two television networks and (v) receives license fees for its country
music television network.
On April 1, 1997, the Company acquired Mr. Glenn R. Jones' 19 percent
equity interest in Jones Infomercial Networks, Inc. ("Infomercial Networks"),
the subsidiary through which the Company has invested in a majority interest
in the Product Information Network Venture ("PIN Venture") and Mr. Jones' 19
percent equity interest in the 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, Informercial Networks and Great
American Country 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 accompanying consolidated financial statements have been
prepared to include these
40
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
acquisitions as though the Company had made them at their inception.
The Company has received advances and loans from Jones International and
related companies to fund its operating and investing activities. Jones
International and such related companies are under no obligation 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/Capstar Programming, LLC ("Jones/Capstar"). The PIN Venture
commenced operations on February 1, 1995 and is a joint venture which is
owned approximately 55 percent by the Company and 45 percent by a third party
(see Note 3). The PIN Venture owns and operates a 24-hour-a-day cable
television network for the airing of long-form advertising ("infomercials").
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
is in the business of providing audio programming services to cable
television system operators. Jones/Capstar commenced operations in July 1998
and is a limited liability company which is owned 50 percent by the Company
and 50 percent by a third party. Jones/Capstar is in the business of
developing, producing and distributing a syndicated radio program known as
"Nashville Nights." Profits, losses and distributions of these ventures have
been and will be allocated in accordance with the respective ownership
interests 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.
(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.
RESTRICTED CASH--$10.0 million of the proceeds from the Notes (see Note
14) was deposited into a Reserve Account. Cash balances in the Reserve
Account are restricted to use for acquisitions and payment of principal or
interest on the Notes. In January 1999, $5.6 million of these funds were used
to pay the January 1, 1999 interest payment on the Notes.
AVAILABLE FOR SALE SECURITIES--Available for sale marketable securities
are carried at fair value, with unrealized holding gains and losses carried
as a separate component of shareholders' deficit. The cost of securities sold
is determined using the first-in, first-out method. At December 31, 1998, the
Company held marketable securities available for sale with an aggregate cost
of $2,760,190 and a net unrealized gain of $8,456.
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. The carrying value of the Company's accounts receivable
and cash accounts are assumed to approximate fair value due to the short-term
nature of these accounts.
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.
41
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. No such excess
losses were incurred in 1997 and 1998.
PROPERTY, PLANT AND EQUIPMENT--Property and equipment are depreciated
using the straight-line method over the estimated useful lives of 3 to 15
years. The building is depreciated using the straight-line method over an
estimated useful life of 40 years. Leasehold improvements are depreciated
using the straight-line method over the lesser of five years or the term of
the lease. Satellite transponders are depreciated using the straight-line
method over the estimated useful life of 12 years.
GOODWILL--Goodwill consists primarily of the excess purchase price paid
in the PIN Venture acquisition in 1997 (see Note 3) and the excess purchase
price paid in the MediaAmerica acquisition in 1998 (see Note 3). Goodwill
related to the PIN Venture acquisition is amortized using the straight-line
method over the estimated economic life of the partnership, which is 18
years. Goodwill related to the MediaAmerica acquisition is amortized using
the straight-line method over an estimated economic life of 40 years.
OTHER INTANGIBLE ASSETS--Intangible assets consist primarily of radio
programming licensing agreements obtained from a third party in October 1996
and subscriber incentive payments. Intangible assets are amortized using the
straight-line method over the lesser of 15 years or the term of the affiliate
agreement.
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 for the years ended December 31, 1997 and 1998.
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 during 1997.
DEFERRED COMMISSIONS--Sales commissions are amortized using the
straight-line method 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.
DEBT OFFERING COSTS--The Company incurred approximately $4,526,000 of
debt offering costs in the year ended December 31, 1998. Such costs include
fees for financial advisory services, legal counsel, independent public
accountants, regulatory and stock exchange registration fees, and other
various costs associated with the Notes offering. In 1997, the Company
incurred $505,000 of deferred offering costs related to a proposed equity
offering. As a result of the withdrawal of the proposed offering in early
1997, the portion of the deferred offering costs that were deemed by
management as unusable in pursuing other financing options were expensed.
During the year ended December 31, 1997, $938,000 of such costs was expensed
by the Company. The remaining deferred offering costs of approximately
$175,000 are included in debt offering costs in the accompanying consolidated
statements of financial position at December 31, 1997 and are deemed to
benefit the Notes Offering completed by the Company which closed in July 1998
(see Note 14).
42
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CUSTOMER DEPOSITS AND DEFERRED REVENUES--Customer deposits consist of
unearned revenues associated with affiliate fees and refundable advance
payments. Deferred revenues consist of advance payments and a security
deposit paid by a lessee of the Company's satellite transponder.
INCOME TAXES--Prior to April 2, 1997, the Company joined with Jones
International 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 percent of the Company's outstanding
common stock was beneficially (or indirectly) owned by Jones International as
of April 2, 1997. 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 to defer such payments
until a subsequent taxable period in which the subsidiary member generated
taxable income and had 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 return
was filed and could accrue interest at the time the deferred benefit amounts
originated. 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 year ended December 31, 1998, the Company recorded a
tax provision of approximately $49,000 to adjust estimated tax provisions to
actual tax provisions for the year ended December 31, 1997. This provision
was offset against the income tax benefit receivable from Jones International.
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.
REVENUE RECOGNITION--The Company's revenues consist of radio programming
revenues, radio representation 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 from certain stations based on the radio station's
contractual agreement.
Radio representation revenues include revenues from the selling of
advertising time on radio programs. The Company recognizes radio
representation revenues upon airing of the advertisements.
43
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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--In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which is effective for the year ending December 31, 1999. This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
those instruments at fair value. If certain conditions are met, a derivative
may be specifically designated as (a) a hedge of the exposure to changes in
the fair value of a recognized asset or liability or an unrecognized firm
commitment, (b) a hedge of the exposure to variable cash flows of a
forecasted transaction or (c) a hedge of the foreign currency exposure of a
net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. The Company will adopt this statement in 1999. Management of the
Company does not expect that the adoption of this statement will have a
material impact on the Company's financial statements.
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.
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.
The Company initiated an assessment of how the Year 2000 problem could
affect its operations in the summer of 1997 and, in conjunction with related
parties, established a Year 2000 Program Office (the "Y2K Office") to manage
the process. The Y2K Office meets periodically with the Company's management
to inform them of its assessment activities, the Year 2000 priorities it has
identified, remediation recommendations and testing and compliance issues. In
addition, the Y2K Office organizes and meets regularly with a review
committee comprised of representatives from various departments within the
Company to ensure that management from the affected areas participate in the
decision process.
44
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 1Q99
Local Area Network ("LAN") and Wide Area Determine which components are
Network ("WAN") Components........................ not Y2K compliant 1Q99
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 1Q99
GAC and PIN Network Traffic and Billing System....... Y2K certification testing 1Q99
Uplink and Broadcast Center.......................... Y2K certification testing 2Q99
</TABLE>
In 1999, the Y2K Office will also 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 significant 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 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 second 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.
(3) ACQUISITIONS OF PIN VENTURE AND MEDIAAMERICA
45
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
From February 1995 until March 31, 1997, the Company owned 50 percent or
less of the PIN Venture. Effective April 1, 1997, the Company acquired from
Adelphia Communications Corporation an 8.35 percent equity interest in the
PIN Venture in exchange for 262,500 shares of the Company's Class A Common
Stock. Effective December 31, 1998, the Company acquired the remaining
Adelphia Communications Corporation equity interest in the PIN Venture, 2.18
percent, in exchange for 12,416 shares of the Company's Class A Common Stock.
As a result of these transactions, which were accounted for as purchases, the
Company now owns approximately 55.3 percent of the PIN Venture. The Company
recorded goodwill of $13.2 million in conjunction with the acquisitions of
the additional interests. Effective April 1, 1997, the Company consolidated
the results of operations of the PIN Venture for financial reporting purposes.
On July 10, 1998, the Company acquired substantially all assets and
assumed certain liabilities of MediaAmerica for $32.7 million plus a working
capital adjustment of approximately $2.1 million. MediaAmerica provides radio
advertising sales representation services and also owns syndicated radio
programming. The seller of 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. The seller of MediaAmerica also received 141,970 shares of Class A
Common Stock for the working capital adjustment. In addition, the seller of
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 earnings
before interest, taxes, depreciation and amortization ("EBITDA") for the
twelve-month period following the closing are achieved. The acquisition was
accounted for as a purchase. The Company recorded approximately $29.8 million
in goodwill in connection with the acquisition of MediaAmerica.
The seller of MediaAmerica have the right to cause the Company to
repurchase the shares of the Company issued in the MediaAmerica acquisition
at any time after three years from the July 10, 1998 closing. The price would
be the fair market value of the Class A Common Stock on the date of exercise
of the put, as determined by agreement or by an independent investment
banking firm. The Company has a correlative right to require that the seller
of MediaAmerica to sell such shares to the Company at fair market value. Such
rights terminate upon an initial public offering by the Company. Before the
seller of MediaAmerica can require the Company to buy its shares, the Company
must have available cash (as defined); 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 nine months of the exercise of the call, the Company must pay
specified additional consideration.
Certain unaudited condensed pro-forma financial information of the
Company assuming the purchases noted above were completed as of January 1,
1997, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1998
----- ----
<S> <C> <C>
Revenues.......................... 47,295,000 44,564,000
Operating expenses................ 40,136,000 46,131,000
Operating income (loss)........... 7,159,000 (1,567,000)
Net loss.......................... (4,841,000) (14,393,000)
Net loss per common share......... $ (1.01) $(2.40)
</TABLE>
(4) TRANSACTIONS WITH AFFILIATED ENTITIES
46
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 Mr.
Jones, Chairman and Chief Executive Officer of 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. Recurring transactions with affiliates,
excluding Superaudio, are described below. See Note 8 for transactions with
affiliates related to Superaudio.
TELEVISION PROGRAMMING REVENUES--The Company earns up to a three
percent commission on the sale of airtime for informational programming on
Jones Education Company ("Jones Education") and its affiliates. For the year
ended December 31, 1996, 1997 and 1998, the Company received approximately
$241,000, $216,000 and $176,000, respectively, for this service.
The Company distributes Great American Country 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 $921,000 for the years ended December
31, 1996, 1997 and 1998.
SATELLITE DELIVERY AND PRODUCTION SUPPORT REVENUES--Jones Earth Segment,
Inc. ("Earth Segment"), a wholly-owned subsidiary of the Company, 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, 1996,
1997 and 1998, Earth Segment charged Jones Education and its affiliates
approximately $2,248,000, $2,193,000 and $2,664,000, respectively, for these
services.
Prior to the consolidation of the PIN Venture, Earth Segment charged the
PIN Venture approximately $726,000 and $201,000 for the years ended December
31, 1996 and 1997, respectively, for these services.
In addition, Jones Space Holdings ("Space Holdings"), a subsidiary of
the Company, subleases a non-preemptible satellite transponder to Jones
Education and its affiliates. Satellite transponder lease revenues of
approximately $852,000, $896,000 and $1,174,000, were received from Jones
Education for the years ended December 31, 1996, 1997, and 1998, respectively.
Prior to the consolidation of the PIN Venture, satellite transponder
lease revenues of approximately $852,000, and $224,000 were received from the
PIN Venture, for the years ended December 31, 1996 and 1997, respectively.
TELEVISION PROGRAMMING EXPENSE--The PIN Venture pays a significant
portion of the revenues generated by its infomercial programming in the form
of system rebates to all cable 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 $5,216,000 for the year ended
December 31, 1998.
47
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Jones Network Sales, a wholly-owned subsidiary of International, began
providing affiliate sales services to the Company in late 1997. This
affiliate charged the Company approximately $201,000 and $906,000 for the
years ended December 31, 1997 and 1998, respectively, for these services.
SATELLITE DELIVERY AND PRODUCTION SUPPORT EXPENSE--Jones Galactic Radio,
Inc. ("Galactic Radio"), a wholly-owned subsidiary of the Company, 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 lease 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, 1996, 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.
The Company was charged approximately $32,000, $88,000 and $148,000, for the
years ended December 31, 1996, 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 $385,000, $574,000 and $733,000, for the years ended December
31, 1996, 1997 and 1998, respectively, for such services.
An affiliate of the Company charged the Company approximately $197,000
for the year ended December 31,1998 for the allocated costs of its airplane
which was used by the Company in connection with the Notes offering.
The Company and its consolidated subsidiaries reimburse Jones
International and its affiliates for certain allocated administrative
expenses. These expenses generally consist of payroll 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 $861,000, $540,000 and
$1,116,000, for the years ended December 31, 1996, 1997 and 1998,
respectively, for these administrative expenses.
To assist in 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 10
percent per annum in 1996, 1997 and 1998. Jones International's interest rate
is calculated using the published prime rate plus two percent. Jones
International charged the Company interest of approximately $243,000,
$868,000 and $506,000, for the years ended December 31, 1996, 1997 and 1998,
respectively. The Company repaid these advances from borrowings, operating
cash flow and/or available cash balances.
(5) LONG-TERM DEBT - AFFILIATED ENTITIES
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 approximately $6,555,000. The note was secured by all
of Earth Segment's present and future tangible and intangible property.
Interest expense, which was payable quarterly, totaled approximately
$608,000, $627,000 and $156,000 for the years ended
48
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996, 1997 and 1998, respectively. This note and accrued
interest were repaid on March 31, 1998 (see Note 14).
Effective August 15, 1996, the Company purchased all of the outstanding
common stock of Galactic Radio from Jones Global Group, Inc. ("Global
Group"), an affiliate of the Company, for $17.2 million. The Company paid the
purchase price to Global Group 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 to Global Group. 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.
Effective upon the closing of the Notes offering, the remaining $10
million of the Global Group note was converted into 666,667 shares of the
Company's Class A Common Stock at a rate of $15 per share.
(6) SENIOR SECURED NOTES
In July 1998, the Company issued $100 million of 11 3/4 percent Senior
Secured Notes (the "Notes"). The Company used the proceeds from the Notes
offering (i) to finance the cash consideration of the acquisition of
MediaAmerica, (ii) to prepay the capital lease obligation relating to the
satellite transponders, (iii) to repay the Radio Holdings LLC credit facility
and (iv) for general corporate purposes, including the payment of fees and
expenses.
Interest on the Notes is payable semi-annually on January 1 and July 1
of each year, commencing January 1, 1999. The Notes will mature on July 1,
2005. Except as described below, 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 a redemption price of 105.875 percent of
the principal amount to be redeemed for the 12 month period commencing July
1, 2003 and declining to 100 percent of the principal amount to be redeemed
for the period after July 1, 2004, 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 percent of the aggregate principal amount of
the Notes with the cash proceeds of one or more Equity Offerings (as defined)
at a redemption price equal to 111.75 percent 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 percent of the aggregate principal
amount of the Notes remains outstanding immediately after each such
redemption. Upon the occurrence of a Change of Control (as defined), the
Company will be required to make an offer to repurchase the Notes at a price
equal to 101 percent of the principal amount thereof, together with accrued
and unpaid interest, if any, to the date of repurchase.
The Notes are senior obligations of the Company. The Notes are secured
by the capital stock of JPN, Inc., the Company's wholly-owned intermediate
holding company and JPN's direct subsidiaries. The Notes are unconditionally
guaranteed (the "Guarantees") by each of 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) of the Subsidiary Guarantors, and
are ranked senior in right of payment to all existing and future Subordinated
Obligations of the Subsidiary Guarantors. The Guarantees are not secured.
Mr. Jones has purchased Notes from third parties with a face value of
$10,650,000 as of February 11, 1999.
49
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(7) CAPITAL LEASES
The capital lease obligation was comprised of a satellite transponder
lease agreement which provided two non-preemptible satellite transponders. A
portion of these satellite transponders are subleased to affiliated entities
and third parties. On July 24, 1998, the Company prepaid the entire capital
lease obligation using a portion of the proceeds from the Notes offering (see
Note 14).
(8) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
LONG-TERM DEBT - The fair value of the Company's long-term debt is
estimated based on an estimate of fair value for debt of similar
characteristics.
SENIOR SECURED NOTES - The fair value of the Notes were estimated based
on the quoted market prices for the Notes.
CLASS A COMMON STOCK SUBJECT TO PUT - The fair value of the Company's
Class A Common Stock subject to put is estimated based on the estimated
purchase price to buy back the Class A Common Stock (see Note 15).
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------
1997 1998
-------------------------- ---------------------------
Carry Fair Carry Fair
Amount Value Amount Value
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Long-term debt............................. $16,555,000 $16,555,000 $ -- $ --
Senior secured notes....................... -- -- 100,000,000 64,000,000
Class A Common Stock subject to put........ -- -- 1,213,000 1,020,000
</TABLE>
(9) JOINT VENTURE
The Company is a 50 percent partner in the Superaudio joint venture.
Superaudio provides audio programming services to cable television system
operators.
Certain condensed financial information for Superaudio is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Total assets..................... $ 950,000 $1,216,000 $ 770,000
Total liabilities................ 72,000 62,000 64,000
Partners' capital................ 878,000 1,154,000 706,000
Revenues......................... 2,379,000 2,132,000 1,789,000
Operating expenses............... 1,755,000 1,684,000 1,552,000
Operating income................. 624,000 448,000 237,000
Net income....................... 632,000 476,000 251,000
</TABLE>
50
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Superaudio reimburses the Company and its affiliates for certain
allocated overhead and administrative expenses. These expenses generally
consist of payroll and related benefits, rent, computer hardware and software
support 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, 1996, 1997 and 1998, Jones Intercable and its affiliates paid
Superaudio $720,000 for audio programming.
AUDIO PROGRAMMING EXPENSE--The Company sells certain audio programming
and services to Superaudio. For the years ended December 31, 1996, 1997 and
1998, the Company charged Superaudio approximately $48,000, $16,000 and
$36,000, respectively, for audio programming and services.
In 1998, the Company began providing programming personnel to
Superaudio. The Company charged Superaudio approximately $276,000 for audio
programming and engineering personnel services for the year ended December
31, 1998.
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 ended
December 31, 1998 for this service.
Earth Segment provides playback, editing, duplication and uplinking
services to Superaudio. Earth Segment charges Superaudio 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, 1996, 1997 and
1998, Earth Segment charged Superaudio approximately $97,000, $128,000 and
$118,000, respectively, for these services.
GENERAL AND ADMINISTRATIVE EXPENSES--An affiliate of Jones International
provides computer hardware and software support services to Superaudio. The
affiliate charged Superaudio approximately $40,000, $23,000 and $26,000 for
the years ended December 31, 1996, 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 $23,000,
$33,000 and $88,000 for the years ended December 31, 1996, 1997 and 1998,
respectively, for these administrative expenses.
(10) 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
51
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
votes per share and to elect the remaining 75% of the Board of Directors.
Both classes vote together as a single class on all matters not requiring a
class vote under Colorado law.
(11) STOCK OPTIONS
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 of the Company. The Plan is construed, interpreted and
administered by the Board of Directors or a committee of two of more
non-employee directors. The committee or the Board of Directors determines
the individuals to whom options are granted, the number of shares subject to
the options, the exercise price of the options, 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, 1998, options to purchase 345,000
shares of Class A Common Stock have been granted and 29,000 shares have been
terminated or forfeited upon resignation of the holders. The options
outstanding at December 31, 1998 have an exercise price of $15 per share and
a weighted average remaining contractual life of 9.59 years. At December 31,
1998, none of the options were exercisable.
The Company accounts for this plan under Accounting Principles Board
("APB") Opinion No. 25, under which no compensation has been recognized. Had
compensation cost for this plan been determined consistent with SFAS No. 123,
"Accounting for Stock-Based Compensation," the Company's net loss and basic
and diluted earnings per share would have been approximately $11,279,000,
$2.16 and $2.19, respectively. The fair value of each of the option granted
is estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted-average assumptions used for grants in
1998: risk-free interest rates of 5.5 percent and an expected life of 7
years. Expected volatility is negligible due to the lack of public trading of
Company's Common Stock.
(12) NET LOSS PER COMMON SHARE
In February 1997, FASB issued SFAS 128, "Earnings Per Share." This
statement replaced the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is similar to
the previously reported fully diluted earnings per share.
52
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Earnings per share amounts for all periods are presented below in accordance
with the requirements of SFAS 128.
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1998
----------- --------------
<S> <C> <C>
Numerator:
Net loss........................... $ 3,493,000 $ 11,450,000
Denominator:
Denominator for basic loss per
share - weighted-average shares
outstanding........................ 4,440,448 5,372,644
Basic loss per share.................... $ (0.79) $ (2.13)
Denominator:
Denominator for diluted loss per
share-weighted-average shares
outstanding........................ 4,440,448 5,361,608
Diluted loss per share.................. $ (0.79) $ (2.14)
</TABLE>
(13) 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 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 benefit
(provision) recognized as a result of the tax sharing arrangement were
approximately $387,000, $1,342,000 and ($49,000) for the years ended December
31, 1996, 1997 and 1998. The difference between the statutory federal income
tax rate and effective rate is summarized as follows:
<TABLE>
<CAPTION>
December 31,
1996 1997 1998
---------- ------------ ------------
<S> <C> <C> <C>
Computed "expected tax benefit"............................. $ 743,000 $ 1,692,000 $ 3,991,000
State taxes, net of federal benefit......................... 72,000 157,000 371,000
Other....................................................... 20,000 28,000 (35,000)
--------- ----------- -----------
835,000 1,877,000 4,327,000
Valuation allowance......................................... (835,000) (1,877,000) (4,327,000)
--------- ----------- -----------
Tax benefit (provision)before impact of tax sharing
agreement................................................. -- -- --
Impact of tax sharing agreement (through April 2, 1997)..... 387,000 1,342,000 (49,000)
--------- ----------- -----------
Total income tax benefit (provision)........................ $ 387,000 $ 1,342,000 $ (49,000)
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
53
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
DEFERRED TAX ASSETS:
Net operating loss carry forwards.................. $ 1,654,000 $ 5,498,000
Future deductible amounts associated with
other assets and liabilities..................... 154,000 391,000
----------- -----------
Total.......................................... 1,808,000 5,889,000
DEFERRED TAX LIABILITIES:
Net assets of MediaAmerica......................... -- (4,200,000)
Property and equipment............................. (706,000) (753,000)
Valuation allowance................................ (1,102,000) (936,000)
----------- -----------
Net deferred tax assets............................ $ -- $ --
----------- -----------
----------- -----------
</TABLE>
At December 31, 1998, the Company had net tax operating loss
carryforwards ("NOLs") of approximately $9.8 million which expire between
2007 and 2008. Although management expects future results of operations to
improve, it recognized 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.
(15) COMMITMENTS AND CONTINGENCIES
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, an additional
500,000 subscribers by December 31, 1998 and an additional 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. As of December 31, 1998, 101,124 shares of Class A Common Stock had
been issued to one of the MSOs. Pursuant to the guidelines of SFAS No. 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 is
being amortized using the straight-line method over the life of the contract
(approximately 10 years). Because of a put option granted to the MSO, the
shares issued to that MSO are presented above the Shareholders' Deficit
section of the Statements of Financial Position. The amount of accretion from
the value of the shares issued to the put option at the exercise date is not
significant.
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
would have the option within 60 days of such date to require the Company to
buy back its 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. Based on the number of
subscribers receiving the Great American Country service at
54
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, the estimated purchase price of the Class A Common Stock
in the event the put option is exercised would be approximately $1,020,000.
The Company rents office facilities under various operating lease
agreements. As of December 31, 1998, future minimum lease payments under
these noncancelable operating leases for each of the next five fiscal years
and thereafter, are as follows:
<TABLE>
<CAPTION>
Facilities
Leases
-----------
<S> <C>
1999 $ 644,520
2000 666,407
2001 671,124
2002 657,650
2003 509,436
Thereafter 1,042,599
-----------
$ 4,191,736
-----------
-----------
</TABLE>
(16) CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
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 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 PIN Venture, Superaudio and Jones/Capstar
(collectively, the "Non-Guarantor Subsidiaries").
The Company has not provided separate complete financial statements and
other disclosures of the respective Subsidiary Guarantors 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 accounting for the investment
in subsidiaries and the equity in earnings of subsidiaries, intercompany
payables and receivables and other transactions between subsidiaries
including contributions and distributions.
55
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, 1996, 1997 and 1998.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996:
<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................................. $ 477 $ 6,519 $ -- $ (18) $ 6,978
Television programming............................ -- 1,153 8,038 (8,038) 1,153
Satellite delivery and production support......... -- 8,523 -- -- 8,523
------- ------- ------- ------- -------
Total revenues.................................. 477 16,195 8,038 (8,056) 16,654
------- ------- ------- ------- -------
OPERATING EXPENSES:
Radio programming................................. 420 3,761 -- (18) 4,163
Television programming............................ 1,157 5,922 (5,922) 1,157
Satellite delivery and production support......... -- 5,451 -- -- 5,451
Selling and marketing............................. 100 1,637 240 (240) 1,737
General and administrative........................ 579 2,691 751 (751) 3,270
------- ------- ------- ------- -------
Total operating expenses........................ 1,099 14,697 6,913 (6,931) 15,778
------- ------- ------- ------- -------
OPERATING INCOME (LOSS)....................... (622) 1,498 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 subsidiaries..... 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 minority
interests....................................... (2,389) (1,526) 1,076 128 (2,711)
Income tax benefit................................ (377) (10) -- -- (387)
------- ------- ------- ------- -------
Income (loss) before minority interests........... (2,012) (1,516) 1,076 128 (2,324)
Minority interests in net loss of consolidated
subsidiaries.................................... -- -- -- (9) (9)
------- ------- ------- ------- -------
NET INCOME (LOSS)................................... $(2,012) $(1,516) $ 1,076 $ 137 $(2,315)
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
56
<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>
NON-
THE SUBSIDIARY GUARANTOR ELIMINATION
COMPANY GUARANTORS SUBSIDIARIES ENTRIES REPORTED
------- ---------- ------------ ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................... $(2,012) $(1,516) $ 1,076 $ 137 $(2,315)
Adjustment to reconcile net loss to net cash
provided by (used in) operating activities:
Non-cash expenses (income).................... 2 4,850 63 (1,276) 3,639
Distributions received........................ -- 300 -- -- 300
Net change in assets and liabilities.......... 2,618 (465) (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.................. -- (1,002) -- -- (1,002)
------- ------- ------- ------- -------
Net cash used in investing activities....... -- (3,971) (326) 326 (3,971)
------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deferred offering costs............. (608) -- -- -- (608)
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) --
------- ------- ------- ------- -------
Net cash used in financing activities....... (608) 801 -- (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>
57
<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>
NON-
THE SUBSIDIARY GUARANTOR ELIMINATION
COMPANY GUARANTORS SUBSIDIARIES ENTRIES REPORTED
------- ---------- ------------ ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents...................... $ (25) $ 79 $ 3,663 $ -- $ 3,717
Accounts receivable............................ -- 781 674 -- 1,455
Other current assets........................... -- 783 -- (243) 540
-------- ------- ------- ------- --------
Total current assets....................... (25) 1,643 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......................... 1,687 3,770 -- (2,777) 2,680
-------- ------- ------- ------- --------
Total assets............................... $ 1,722 $38,102 4,554 (3,020) 41,358
-------- ------- ------- ------- --------
-------- ------- ------- ------- --------
LIABILITIES AND SHAREHOLDERS'/MEMBERS'
INVESTMENT (DEFICIT):
Accounts payable............................... 417 132 890 -- 1,439
Accrued liabilities............................ 312 961 27 -- 1,300
Other current liabilities...................... 5,910 5,915 479 -- 12,304
-------- ------- ------- ------- --------
Total current liabilities.................. 6,639 7,008 1,396 -- 15,043
-------- ------- ------- ------- --------
Note payable-affiliated entities............... 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) ..... (27,397) (15,919) 2,808 13,111 (27,397)
-------- ------- ------- ------- --------
Total shareholders'/members' investment
(deficit)................................ (18,206) (2,077) 3,158 (1,081) (18,206)
-------- ------- ------- ------- --------
Total liabilities and shareholders'/members'
investment (deficit)..................... $ 1,722 $38,102 $ 4,554 $(3,020) $ 41,358
-------- ------- ------- ------- --------
-------- ------- ------- ------- --------
</TABLE>
58
<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>
NON-
THE SUBSIDIARY GUARANTOR ELIMINATION
COMPANY GUARANTORS SUBSIDIARIES ENTRIES REPORTED
------- ---------- ------------ ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
REVENUES:
Radio programming................................ $ -- $10,301 $ -- $ (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 19,772 13,345 (4,290) 29,112
-------- ------- ------- ------- --------
OPERATING EXPENSES:
Radio programming.................................. -- 5,917 -- (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 2,428 788 (203) 4,168
-------- ------- ------- ------- --------
Total operating expenses....................... 1,440 18,104 11,229 (3,914) 26,859
-------- ------- ------- ------- --------
OPERATING INCOME (LOSS)........................ (1,155) 1,668 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) (591) 2,144 (670) (3,932)
Income tax provision (benefit)....................... (1,376) (786) -- 820 (1,342)
-------- ------- ------- ------- --------
Income (loss) before minority interests.............. (3,439) 195 2,144 (1,490) (2,590)
Minority interests in net income of
consolidated subsidiaries.......................... -- -- -- 903 903
-------- ------- ------- ------- --------
NET INCOME (LOSS).................................... $ (3,439) $ 195 $ 2,144 $(2,393) $ (3,493)
-------- ------- ------- ------- --------
-------- ------- ------- ------- --------
</TABLE>
59
<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>
NON-
THE SUBSIDIARY GUARANTOR ELIMINATION
COMPANY GUARANTORS SUBSIDIARIES ENTRIES REPORTED
------- ---------- ------------ ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................. $ (3,439) $ 195 $ 2,144 $(2,393) $ (3,493)
Adjustment to reconcile net loss to net cash
provided by (used in) operating activities:
Non-cash expenses............................... 640 4,374 82 1,598 6,694
Distributions received.......................... -- 100 -- -- 100
Net change in assets and liabilities............ 3,540 (1,329) 1,227 850 4,288
-------- ------- ------- ------- --------
Net cash provided by operating activities..... 741 3,340 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)
-------- ------- ------- ------- --------
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 capital lease obligation............. -- (1,965) -- -- (1,965)
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) 75 3,608 55 3,713
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD...... -- 4 55 (55) 4
-------- ------- ------- ------- --------
CASH AND CASH EQUIVALENTS,
END OF PERIOD..................................... $ (25) $ 79 $ 3,663 $ -- $ 3,717
-------- ------- ------- ------- --------
-------- ------- ------- ------- --------
</TABLE>
60
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION
AS OF DECEMBER 31, 1998:
<TABLE>
<CAPTION>
NON-
THE SUBSIDIARY GUARANTOR ELIMINATION
COMPANY GUARANTORS SUBSIDIARIES ENTRIES REPORTED
-------- ---------- ------------ ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents.................... $ 7,881 $ 956 $ 1,817 $ -- $ 10,654
Restricted cash.............................. 10,000 -- -- -- 10,000
Available for sale securities................ 2,769 -- -- -- 2,769
Accounts receivable.......................... -- 11,088 748 -- 11,836
Other current assets......................... -- 847 47 -- 894
-------- ---------- ------------ ----------- ----------
Total current assets.................. 20,650 12,891 2,612 -- 36,153
-------- ---------- ------------ ----------- ----------
Property, plant and equipment................ 7 26,598 292 -- 26,897
Goodwill..................................... -- 32,411 -- -- 32,411
Intangible assets............................ 4,515 2,205 3 -- 6,723
Other long-term assets....................... 29,854 (18,974) -- (2,170) 8,710
-------- ---------- ------------ ----------- ----------
Total assets.......................... $ 55,026 $ 55,131 $ 2,907 $ (2,170) $110,894
-------- ---------- ------------ ----------- ----------
-------- ---------- ------------ ----------- ----------
LIABILITIES AND SHAREHOLDERS'
INVESTMENT (DEFICIT):
Accounts payable............................. $ 983 $ 1,813 $ -- $ -- $ 2,796
Producers' fees payable...................... -- 5,922 -- -- 5,922
Accrued liabilities.......................... 5,884 2,238 1,124 -- 9,246
Other current liabilities.................... (41,722) 43,577 286 -- 2,141
-------- ---------- ------------ ----------- ----------
Total current liabilities............. (34,855) 53,550 1,410 -- 20,105
-------- ---------- ------------ ----------- ----------
Senior secured notes......................... 100,000 -- -- -- 100,000
Other long-term liabilities.................. -- 341 -- -- 341
-------- ---------- ------------ ----------- ----------
Total long-term liabilities........... 100,000 341 -- -- 100,341
-------- ---------- ------------ ----------- ----------
Minority interests........................... -- -- -- 567 567
Common stock subject to put.................. 1,213 -- -- -- 1,213
Shareholders' investment (deficit):
Class A Common Stock...................... 42 -- -- -- 42
Class B Common Stock...................... 18 -- -- -- 18
General Partners' Contributions........... -- 1,000 350 (1,350) --
Additional paid-in capital................ 27,447 -- -- -- 27,447
Other comprehensive income................ 9 -- -- -- 9
Retained earnings (accumulated
deficit).................................. (38,848) 240 1,147 (1,387) (38,848)
-------- ---------- ------------ ----------- ----------
Total shareholders'
investment (deficit)................ (11,332) 1,240 1,497 (2,737) (11,332)
-------- ---------- ------------ ----------- ----------
Total liabilities and shareholders'
investment (deficit)................ $ 55,026 $ 55,131 $ 2,907 $ (2,170) $110,894
-------- ---------- ------------ ----------- ----------
-------- ---------- ------------ ----------- ----------
</TABLE>
61
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998:
<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............................... $ -- $ 10,041 $ -- $ -- $ 10,041
Radio representation............................ -- 5,107 -- -- 5,107
Television programming.......................... 173 2,556 14,163 -- 16,892
Satellite delivery and production support....... -- 7,893 -- (1,721) 6,172
---------- ---------- ------------ ----------- --------
Total revenues................................ 173 25,597 14,163 (1,721) 38,212
---------- ---------- ------------ ----------- --------
OPERATING EXPENSES:
Radio programming............................... -- 7,778 -- -- 7,778
Radio representation............................ -- 1,129 -- -- 1,129
Television programming.......................... 87 2,825 13,040 (1,721) 14,231
Satellite delivery and production support....... -- 5,240 -- -- 5,240
Selling and marketing........................... 58 4,510 301 -- 4,869
General and administrative...................... 1,132 5,142 454 -- 6,728
---------- ---------- ------------ ----------- --------
Total operating expenses...................... 1,277 26,624 13,795 (1,721) 39,975
---------- ---------- ------------ ----------- --------
OPERATING INCOME LOSS............................. (1,104) (1,027) 368 -- (1,763)
---------- ---------- ------------ ----------- --------
OTHER EXPENSE (INCOME):
Interest expense................................ 7,173 1,798 -- -- 8,971
Interest income................................. (615) (33) (128) -- (776)
Equity share of loss (income) of subsidiaries... 3,100 (3,213) -- 170 57
Other expense (income), net..................... 1,190 (31) 12 -- 1,171
---------- ---------- ------------ ----------- --------
Total other expense (income).................. 10,848 (1,479) (116) 170 9,423
---------- ---------- ------------ ----------- --------
Income (loss) before income taxes
and minority interests........................ (11,952) 452 484 (170) (11,186)
Income tax provision............................ 1 48 -- -- 49
---------- ---------- ------------ ----------- --------
Income (loss) before minority interests......... (11,953) 404 484 (170) (11,235)
---------- ---------- ------------ ----------- --------
Minority interests in net income
of consolidated subsidiaries.................. -- -- -- 215 215
---------- ---------- ------------ ----------- --------
NET INCOME (LOSS)............................... $ (11,953) $ 404 $ 484 $ (385) $(11,450)
---------- ---------- ------------ ----------- --------
---------- ---------- ------------ ----------- --------
</TABLE>
62
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONDENSED CONSOLIDATING CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998:
<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 income (loss)........................................... $(11,953) $ 404 $ 484 $ (385) $(11,450)
Adjustment to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Non-cash expenses (income)................................ 204 5,856 97 385 6,542
Distributions received.................................... -- 350 -- -- 350
Net change in assets and liabilities...................... (4,625) 1,979 (106) -- (2,752)
------------ ---------- ------------ ----------- ----------
Net cash provided by (used in) operating
activities............................................ (16,374) 8,589 475 -- (7,310)
------------ ---------- ------------ ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment................... -- (2,067) (191) -- (2,258)
Sale of property, plant and equipment....................... -- 41 16 -- 57
Dividend from joint venture................................. 914 -- -- (914) --
Purchase of investments..................................... (2,760) -- -- -- (2,760)
Purchase of intangible assets............................... -- (3,359) -- -- (3,359)
Purchase of MediaAmerica, Inc............................... (26,700) -- -- -- (26,700)
------------ ---------- ------------ ----------- ----------
Net cash provided by (used in) investing activities..... (28,546) (5,385) (175) (914) (35,020)
------------ ---------- ------------ ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deferred offering costs......................... (4,187) (115) -- -- (4,302)
Advances to/from subsidiaries............................... (32,987) 32,987 -- -- --
Repayment of borrowings..................................... -- (6,555) -- -- (6,555)
Repayment of capital lease obligations...................... -- (28,757) -- -- (28,757)
Senior secured notes........................................ 100,000 -- -- -- 100,000
Dividend paid to partners................................... -- -- (2,146) 2,146 --
Distributions paid to minority interests.................... -- 113 -- (1,232) (1,119)
------------ ---------- ------------ ----------- ----------
Net cash provided by (used in) financing activities..... 62,826 (2,327) (2,146) 914 59,267
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................................. 17,906 877 (1,846) -- 16,937
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD...................................................... (25) 79 3,663 -- 3,717
------------ ---------- ------------ ----------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD...................... $ 17,881 $ 956 $ 1,817 $ -- $ 20,654
------------ ---------- ------------ ----------- ----------
------------ ---------- ------------ ----------- ----------
</TABLE>
(17) REPORTABLE SEGMENTS
The Company has four reportable segments: radio programming and
representation, television programming, satellite delivery and production
support, and corporate. The radio programming and representation segment
produces programming that it distributes to radio stations and sells
advertising on nationally syndicated radio programs. The television
programming segment provides cable television programming to cable television
system operators and other video distributors. The satellite delivery and
production support segment provides satellite delivery, uplinking,
trafficking, playback and other services to affiliates and third parties. The
corporate segment includes personnel and associated costs for the Company's
executive and management staff, operational support and other items such as
accounting and financial reporting and debt offering costs.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies in Note 2. The Company
evaluates performance based on profit or loss from operations before income
taxes not including nonrecurring gains and losses. The Company accounts for
intersegment sales and transfers as if the sales or transfers were to third
parties, that is, at current market prices.
The Company's reportable segments are strategic business units that
offer different services and products. They are managed separately because
each business requires different technology and marketing
63
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
strategies. Reportable segments are presented below in accordance with the
requirements of SFAS 131, "Disclosures about Segments of an Enterprise and
Related Information":
REPORTED SEGMENT PROFIT OR LOSS,
AND SEGMENT ASSETS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1996:
<TABLE>
<CAPTION>
Radio Satellite
Programming Delivery And
and Television Production
Representation Programming Support Corporate Total
-------------- ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Revenue from external customers..................... $7,658,000 $ 1,154,000 $ 7,842,000 $ -- $16,654,000
Intersegment revenues............................... -- -- 3,429,000 -- 3,429,000
Interest income..................................... (14,000) (23,000) (35,000) -- (72,000)
Interest expense.................................... -- -- 3,765,000 735,000 4,500,000
Depreciation and amortization....................... 494,000 24,000 3,957,000 1,000 4,476,000
Equity in loss (income) of subsidiaries............. 329,000 503,000 -- -- 832,000
Segment loss........................................ (335,000) (1,558,000) 616,000 (1,038,000) (2,315,000)
Capital expenditures................................ 1,646,000 72,000 1,251,000 -- 2,969,000
Other significant non-cash item:
Goodwill.......................................... -- 300,000 -- -- 300,000
Segment assets...................................... 5,426,000 1,925,000 30,336,000 4,213,000 41,900,000
RECONCILIATIONS OF REPORTABLE SEGMENT REVENUE AND
ASSETS:
REVENUES
Total revenues for reportable segments.............. $20,083,000
Other revenues...................................... --
Elimination of intersegment revenues................ (3,429,000)
-----------
Total consolidated revenues....................... $16,654,000
-----------
-----------
ASSETS
Total assets for reportable segments................ $41,900,000
Elimination of investment in subsidiaries........... (3,602,000)
-----------
Consolidated total................................ $38,298,000
-----------
-----------
</TABLE>
64
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
REPORTED SEGMENT PROFIT OR LOSS,
AND SEGMENT ASSETS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1997:
<TABLE>
<CAPTION>
Radio Satellite
Programming Delivery And
and Television Production
Representation Programming Support Corporate Total
-------------- ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Revenue from external customers..................... $10,833,000 $ 12,002,000 $ 6,276,000 $ -- $29,111,000
Intersegment revenues............................... -- -- 3,387,000 -- 3,387,000
Interest income..................................... (6,000) (93,000) (3,000) (6,000) (108,000)
Interest expense.................................... -- -- 3,612,000 2,065,000 5,677,000
Depreciation and amortization....................... 842,000 222,000 4,100,000 4,000 5,168,000
Equity in loss (income) of subsidiaries............. 228,000 168,000 -- -- 396,000
Segment profit...................................... 450,000 540,000 (1,571,000) (2,912,000) (3,493,000)
Capital expenditures................................ 1,237,000 28,000 93,000 9,000 1,367,000
Other significant non-cash items:
Goodwill.......................................... -- 3,037,000 -- -- 3,037,000
Conversion of Global Group Note................... -- -- -- 6,000,000 6,000,000
Segment assets...................................... 5,960,000 8,204,000 25,878,000 (1,973,000) 38,069,000
RECONCILIATIONS OF REPORTABLE SEGMENT REVENUE AND
ASSETS:
REVENUES
Total revenues for reportable segments.............. $32,498,000
Other revenues...................................... --
Elimination of intersegment revenues................ (3,387,000)
-----------
Total consolidated revenues....................... $29,111,000
-----------
-----------
ASSETS
Total assets for reportable segments................ $38,069,000
Elimination of investment in subsidiaries........... 3,289,000
-----------
Consolidated total................................ $41,358,000
-----------
-----------
</TABLE>
65
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
REPORTED SEGMENT PROFIT OR LOSS,
AND SEGMENT ASSETS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1998:
<TABLE>
<CAPTION>
Radio Satellite
Programming Delivery And
and Television Production
Representation Programming Support Corporate Total
-------------- ------------- ------------ ----------- --------------
<S> <C> <C> <C> <C> <C>
Revenue from external customers..................... $15,780,000 $ 16,719,000 $ 5,540,000 $ 173,000 $ 38,212,000
Intersegment revenues............................... -- -- 3,581,000 -- 3,581,000
Interest income..................................... (33,000) (128,000) -- (615,000) (776,000)
Interest expense.................................... -- -- 1,798,000 7,173,000 8,971,000
Depreciation and amortization....................... 1,598,000 697,000 3,966,000 5,000 6,266,000
Equity in loss (income) of subsidiaries............. 57,000 -- -- -- 57,000
Segment loss........................................ (1,017,000) (775,000) (893,000) (8,765,000) (11,450,000)
Capital expenditures................................ 582,000 336,000 1,337,000 3,000 2,258,000
Other significant non-cash item:
Purchase of MediaAmerica.......................... -- -- -- 8,144,000 8,144,000
Segment assets...................................... 48,545,000 12,437,000 23,183,000 55,219,000 139,384,000
RECONCILIATIONS OF REPORTABLE SEGMENT REVENUE AND
ASSETS:
REVENUES
Total revenues for reportable segments.............. $ 41,793,000
Other revenues...................................... --
Elimination of intersegment revenues................ (3,581,000)
------------
Total consolidated revenues....................... $ 38,212,000
------------
------------
ASSETS
Total assets for reportable segments................ $139,384,000
Elimination of investment in subsidiaries........... (28,490,000)
------------
Consolidated total................................ $110,894,000
------------
------------
</TABLE>
66
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Jones International Networks, Ltd.:
We have audited in accordance with generally accepted auditing
standards, the consolidated financial statements of Jones International
Networks, Ltd. and subsidiaries as of December 31, 1997 and 1998, and for the
years ended December 31, 1996, 1997 and 1998 included in this Form 10-K, and
have issued our report thereon dated February 11, 1999. Our audits were made
for the purpose of forming an opinion on these financial statements taken as
a whole. The supplemental schedule listed in Part IV, Item 14 of this Form
10-K is the responsibility of the Company's management and is presented for
purposes of complying with the Securities and Exchange Commissions rules and
is not part of the financial statements. The schedule has been subjected to
the auditing procedures applied in the audits of the financial statements
and, in our opinion, fairly states in all material respects the financial
data required to be set forth therein in relation to these financial
statements taken as a whole.
ARTHUR ANDERSEN LLP
Denver, Colorado
February 11, 1999
67
<PAGE>
SCHEDULE II
JONES INTERNATIONL NETWORKS, LTD. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance Additions Deductions
at charged to for Balance
beginning costs and accounts at end of
of period expenses written-off period
<S> <C> <C> <C> <C>
Classifications
Fiscal Year ended December 31, 1998: $ 157,405 $ 858,765 $ (118,683) $ 897,487
Allowance for Doubtful Accounts......
Fiscal Year ended December 31, 1997:
Allowance for Doubtful Accounts...... 286,562 114,357 (243,514) 157,405
Fiscal Year ended December 31, 1996:
Allowance for Doubtful Accounts...... 224,808 130,381 (68,627) 286,562
</TABLE>
68
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's Articles of Incorporation provide that, with respect to
the election of Directors, the holders of Class A Common Stock, voting as a
separate class, are entitled to elect that number of Directors constituting
25% of the total membership of the Board of Directors. If such 25% is not a
whole number, holders of Class A Common Stock are entitled to elect the
nearest higher whole number of Directors constituting 25% of the membership
of the Board of Directors. Holders of Class B Common Stock, voting as a
separate class, are entitled to elect the remaining Directors. Directors of
the Company serve until the next annual meeting of the Company and until
their successors shall be elected and qualified.
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>
NAME POSITION AGE
- ---- -------- ---
<S> <C> <C>
Glenn R. Jones . . . . Chairman of the Board 69
Gregory J. Liptak . . . President and Director 58
Jay B. Lewis . . . . . Group Vice President/Finance, Chief Financial 40
Officer and Director
Jeffrey C. Wayne . . . President, Cable Programming Networks(1) 44
Gary Schonfeld . . . . Chief Executive Officer--MediaAmerica(1)(2) 46
Ron Hartenbaum . . . . President --Radio Network and Director(1)(2) 46
Phil Barry . . . . . . Vice President/General Manager--Radio Network(1) 45
Keith D. Thompson . . . Chief Accounting Officer 31
Elizabeth M. Steele . . Vice President and Secretary 46
Yrma G. Rico . . . . . Director 49
Fred A. Vierra . . . . Director 66
</TABLE>
- -------------------
(1) Key employee; an officer of a subsidiary, but not of the Company itself.
69
<PAGE>
(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 is a
member of the Board of Directors and of the Executive Committee of the
National Cable Television Association. In addition, Mr. Jones is a member of
the Board and Education Council of the National Alliance of Business. Mr.
Jones is also a founding member of the James Madison Council of the Library
of Congress. Mr. Jones has been the recipient of several awards including:
the Grand Tam Award in 1989, the highest award from the Cable Television
Administration and Marketing Society; the President's Award from the Cable
Television Public Affairs Association in recognition of Jones International's
educational efforts through Mind Extension University (now Knowledge TV); the
Donald G. McGannon Award for the advancement of minorities and women in cable
from the United Church of Christ Office of Communications; the STAR Award
from American Women in Radio and Television, Inc. for exhibition of a
commitment to the issues and concerns of women in television and radio; the
Cableforce 2000 Accolade awarded by Women in Cable in recognition of the
Company's innovative employee programs; the Most Outstanding Corporate
Individual Achievement Award from the International Distance Learning
Conference for his contributions to distance education; the Golden Plate
Award from the American Academy of Achievement for his advances in distance
education; the Man of the Year named by the Denver chapter of the Achievement
Rewards for College Scientists; and in 1994 Mr. Jones was inducted into
Broadcasting and Cable's Hall of Fame.
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. (now Knowledge TV, Inc.), a subsidiary of Jones
International, and President of Jones Spacelink, Ltd., a former affiliate of
the Company, from 1989 to 1995. From 1975 to 1985, Mr. Liptak served as an
executive officer of Times Mirror Cable Television, Inc. Mr. Liptak was also
the co-founder and first president of CTAM, the Cable Television Marketing
Society, and has also served
70
<PAGE>
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.
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 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.
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--MediaAmerica 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
71
<PAGE>
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.
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 President--Radio Network and a Director of the Company 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.
PHIL BARRY, whose proper name is Phillip H. Baykian, has served as Vice
President of Programming--Radio Networks since 1991 and was elected Vice
President/General Manager--Radio Networks in December 1998. 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.
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.
YRMA G. RICO is General Manager of KCEC-TV, Channel 50 in Denver,
Colorado, a position she has held since 1992. Ms. Rico became a member of the
Board of Directors of the Company in July 1998. 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. Mr. Vierra became a member of the Board of
Directors of the Company in July 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
72
<PAGE>
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.
ITEM 11. 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, 1996, 1997 and 1998 for the President of the Company and
the other five 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
------------------------------------------- LONG TERM
ALL OTHER COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) AWARDS (5)
- --------------------------- ---- ------ ----- --------------- ------------
<S> <C> <C> <C> <C> <C>
Gregory J. Liptak(2)............................. 1998 $ 283,879 $75,000 $17,033 50,000
President 1997 283,879 -- 22,417 --
1996 127,746 38,250 15,566 --
Jay B. Lewis(3).................................. 1998 175,008 75,000 14,100 50,000
Group Vice President/Finance and 1997 150,007 60,000 9,000 --
Chief Financial Officer 1996 44,287 -- 3,543 --
Jeffrey C. Wayne................................. 1998 170,007 90,275 10,200 20,000
President, Cable Programming Networks 1997 76,897(4) -- 37,215 --
1996 -- -- -- --
Eric Hauenstein.................................. 1998 161,270 -- 10,407 20,000
President/General Manager--Radio Network 1997 150,015 13,900 6,883 --
1996 139,006 -- 8,340 --
Ron Hartenbaum................................... 1998 141,667(6) -- -- --
President - Jones Radio and a Director
Gary Schonfeld................................... 1998 141,667(6) -- -- --
Chief Executive Officer - MediaAmerica
</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
73
<PAGE>
compensation plan for the benefit of the named person's account and, with
respect to Mr. Wayne, includes $33,615 reimbursed to him for moving
expenses in 1997.
(2) Mr. Liptak became President of the Company in October 1996. Mr. Liptak's
total compensation for services rendered to the Company during 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.
(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.
(4) Reflects compensation from July 1997 when Mr. Wayne joined the Company.
(5) Represents the number of shares of the Company's Class A Common Stock
underlying the stock options granted.
(6) Partial year payment.
The Company has agreed to give Mr. Wayne a $250,000 bonus if certain
defined levels of distribution in the cable programming network are reached
within approximately three years.
74
<PAGE>
OPTION GRANTS IN 1998
The following table sets forth information with respect to grants of
stock options during 1998 for the Executive Officers named in the Summary
Compensation Table.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM (2)
- ------------------------------------------------------------------------ ---------------------------
% OF TOTAL
OPTIONS
GRANTED TO
ALL
EMPLOYEES EXERCISE
OPTIONS IN PRICE EXPIRATION
NAME GRANTED(1) 1998 ($/SHARE) DATE 5% ANNUAL 10% ANNUAL
---- ---------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gregory J. Liptak 50,000 14.49% $15.00 07/10/08 $ 471,675 $1,195,307
Jay B. Lewis 50,000 14.49% $15.00 07/10/08 $ 471,675 $1,195,307
Jeffrey C. Wayne 20,000 5.80% $15.00 07/10/08 $ 188,670 $ 478,110
Eric Hauenstein(3) 20,000 5.80% $15.00 07/10/08 $ 188,670 $ 478,110
Ron Hartenbaum -- -- -- -- -- --
Gary Schonfeld -- -- -- -- -- --
</TABLE>
- -------------------
(1) Represents the number of shares of the Company's Class A Common Stock
underlying the options granted.
(2) The dollar amounts shown under these columns are the result of calculations
at 5% and 10% compound growth rates set by the Securities and Exchange
Commission, and therefore are not intended to forecast possible future
appreciation of the Company's stock price. In all cases, the appreciation
is calculated from the award date to the end of the option term.
(3) On December 4, 1998, Mr. Hauenstein resigned from all of his positions with
the Company. These options were forfeited upon resignation.
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
75
<PAGE>
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.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Not applicable.
EMPLOYMENT AGREEMENTS
On July 10, 1998, the Company entered into employment agreements with
Messrs. Hartenbaum and Schonfeld. The employment agreements are for three
years and restrict Messrs. Hartenbaum and Schonfeld 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 one and eligibility for a variety of employee benefits and
plans generally made available to the Company's key associates at their level.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Board of Directors, who during the first half of 1998,
comprised of Messrs. Jones, Liptak and Lewis, and effective July 10, 1998,
was comprised of Messrs. Jones, Liptak, Lewis, Hartenbaum and Vierra and Ms.
Rico, 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 1998. As individuals, the
Company's executive officers and directors had no transactions with the
Company in 1998, except for Mr. Hartenbaum. See "Employment Agreements"
above. See "Certain Transactions" for a discussion of certain transactions
between the Company and its affiliates.
76
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS, DIRECTORS AND MANAGEMENT
The following table sets forth certain information as of March 22, 1999,
regarding ownership of the Company's Class A Common Stock or Class B Common
Stock by persons (including any group) known to the Company to be beneficial
owners of more than 5% of either class of stock, the individual directors of
the Company, each of the executive officers named in the Summary Compensation
Table and the executive officers and directors of the Company as a group.
Under the rules of the Securities and Exchange Commission, a person (or group
of persons) is deemed to be a "beneficial owner" of a security if he or she,
directly or indirectly, has or shares the power to vote or to direct the
voting of such security, or the power to dispose of or to direct the
disposition of such security. Accordingly, more than one person may be
deemed to be a beneficial owner of the same security. A person is also
deemed to be a beneficial owner of any security which that person has the
right to acquire within 60 days.
<TABLE>
<CAPTION>
CLASS A COMMON STOCK CLASS B COMMON STOCK
------------------------ --------------------- PERCENT OF VOTE
NUMBER PERCENT NUMBER PERCENT OF ALL CLASSES OF
BENEFICIAL OWNER (1) OF SHARES OF SHARES OF SHARES OF SHARES COMMON STOCK (2)
- -------------------- --------- --------- --------- --------- -----------------
<S> <C> <C> <C> <C> <C>
Glenn R. Jones(3)................. 3,385,120 78.7% 1,785,120 100.0% 95.9%
Tuxedo Shirt, Inc.(4)............. 541,970 12.6% -- -- 2.4%
Adelphia(5)....................... 274,916 6.4% -- -- 1.2%
Ron Hartenbaum(4)................. 270,985 6.3% -- -- 1.2%
TAL Financial Corporation(6)...... 101,124 2.4% -- -- 0.5%
All executive officers and
directors as a group
(11 persons).................... 3,656,105 85.0% 1,785,120 100.0% 97.1%
</TABLE>
- -------------------
(1) Directors and executive officers named in the Summary Compensation Table
who are not listed in the table do not beneficially own any of the
Company's shares.
(2) 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.
(3) 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,
77
<PAGE>
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.
(4) The above table does not include any additional shares of Class A Common
Stock issuable based on the final working capital adjustment for the
Acquisition, one-half of which would be beneficially owned by Mr.
Hartenbaum. The number of shares beneficially owned by Tuxedo Shirt, Inc.
includes the shares beneficially owned by Mr. Hartenbaum. Mr. Hartenbaum
was elected as a director of the Company upon the consummation of the
Acquisition. Tuxedo Shirt, Inc. is owned by Messrs. Hartenbaum and
Schonfeld, and was formerly known as MediaAmerica, Inc., the company which
sold its assets to the Company in 1998. The address of Tuxedo Shirt, Inc.
and Mr. Hartenbaum is 11 West 42nd Street, New York, New York 10036.
(5) Adelphia's address is 5 West Third Street, Coudersport, Pennsylvania 16915.
(6) TAL Financial Corporation's address is 3015 SSE Loop 323, Tyler, TX 75701.
ITEM 13. CERTAIN 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 10% in 1998). The Company paid interest on these advances of
approximately $506,000 for the year ended December 31, 1998. The largest
total amount of outstanding advances from Jones International and related
parties in 1998 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
78
<PAGE>
from Jones International in March 1998. At December 31, 1998, outstanding
advances from Jones International and related parties were $1.4 million.
Jones International is under no obligation to provide additional financial
assistance to the Company.
PURCHASE OF GALACTIC RADIO AND EARTH SEGMENT
Effective upon the closing of the offering of the Senior Notes in July 1998,
a note payable to an affiliate the ("Global Group Note") was converted into
666,667 shares of the Company's Class A Common Stock valued at $15 per share.
Interest expense on the Global Group Note totaled approximately $413,000 for
the year ended December 31, 1998.
Effective September 30, 1996, the Company purchased all of the common
stock of Earth Segment from Mr. Jones and Jones International. 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 $156,000 of interest was paid on the note for the year ended
December 31, 1998. This note was paid in full in March 1998 with borrowings
under Radio Holdings' credit facility.
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, 1998, the Company incurred a tax
provision of approximately $49,000 to adjust estimated tax provisions to
actual tax provisions for the year ended December 31, 1997.
79
<PAGE>
SATELLITE DELIVERY AND PRODUCTION SUPPORT SERVICES
The Company has agreements to provide uplinking, playback, trafficking
and related services to Jones Education Company ("Jones Education"), a
related party, that terminate on December 31, 2004. Effective February 12,
1999, Jones Education was merged into Jones International. The Company has
the right to terminate the uplinking agreement upon 30-days' written notice.
The Company received approximately $2.7 million from Jones Education for
these services for the year ended December 31, 1998. 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 compressed 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 Senior 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 for the year ended December 31, 1998.
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 the
year ended December 31, 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
$176,000 for the year
80
<PAGE>
ended December 31, 1998. 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 cable affiliate sales
services to the Company in late 1997. This affiliate charged the Company
approximately $906,000 for the year ended December 31, 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 $921,000
for the year ended December 31, 1998. This affiliation agreement expires on
December 31, 2010. Superaudio also licenses its audio services to these
systems. Jones Intercable and its affiliated partnerships paid Superaudio
approximately $720,000 for the year ended December 31, 1998.
The Product Information Network is distributed to Jones Intercable and
its affiliated partnerships and to Cox and Adelphia. The affiliation
agreement with Jones Intercable expires on February 1, 2005. For the year
ended December 31, 1998, the PIN Venture made incentive payments of
approximately 77%, of its net advertising revenues to these systems. Jones
Intercable and its affiliated partnerships received incentive payments
totaling approximately $1.6 million for the year ended December 31, 1998.
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 $733,000 for the year ended December 31,
1998.
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 $148,000 for the year ended December 31, 1998.
81
<PAGE>
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 $1,116,000 for the year ended
December 31, 1998.
An affiliate of the Company charged the Company approximately $197,000
for the year ended December 31, 1998 for the allocated costs of its airplane
which was used by the Company in connection with the Notes offering.
TRANSFER OF SATELLITE TRANSPONDER LEASES
In April 1997, the Company acquired the satellite transponder leases and
related subleases held by Space Segment, an affiliate. 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 Senior 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
82
<PAGE>
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.
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.
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a)(1) Financial Statements and Report of Independent Public
Accountants.
(a)(2) Schedules.
(a)(3) Exhibits.
The following exhibits, which are numbered in accordance with Item 601
of Regulation S-K, are filed herewith or, as noted, incorporated by
referenced herein:
3.1 Articles of Incorporation of the Company. (1)
3.2 Bylaws of the Company. (1)
4.1 Indenture, dated July 10, 1998, between the Company and United States
Trust Company of New York (the "Indenture"). (1)
4.2 Form of Exchange Note is included as Exhibit A-3 to the Indenture. (1)
4.3 Exchange and Registration Rights Agreement, dated July 10, 1998, between
the Company and NatWest Capital Markets Limited. (1)
4.4 Pledge Agreement, dated July 10, 1998, among the Company, United States
Trust Company of New York and others. (1)
83
<PAGE>
4.5 Form of Subsidiary Guaranty is included as part of the Indenture. (1)
10.1 1998 Stock Option Plan. (1)
10.2 Form of Basic Incentive Stock Option Agreement. (1)
10.3 Form of Basic Non-Qualified Stock Option Agreement. (1)
10.4 Purchase and Sale Agreement dated August 9, 1996, between Jones Global
Group, Inc. and Jones International Networks, Ltd. (n/k/a JPN, Inc.).
(1)
10.5 Exchange Agreement dated September 30, 1996, among Glenn R. Jones, Jones
International, Ltd. and Jones International Networks, Ltd. (n/k/a JPN,
Inc.). (1)
10.6 Agreement and its amendment, dated November 6, 1996 and April 1, 1997,
respectively, between Glenn R. Jones and Jones International Networks,
Ltd. (n/k/a JPN, Inc.). (1)
10.7+ Second Amended and Restated Partnership Agreement of Product Information
Network Venture dated April 1, 1997, among Jones Infomercial Network
Ventures, Inc., Cox Consumer Information Network, Inc. and Adelphia
Communications Corporation. (1)
10.8 Affiliate Agreement dated January 1, 1996, among Great American Country,
Inc., Jones Programming Services, Inc. and Jones Intercable, Inc. (1)
10.9 Amended and Restated Affiliate Agreement dated August 1, 1994, between
Jones Infomercial Networks, Inc. and Jones Intercable, Inc., together
with an Assignment dated January 31, 1995, between Jones Infomercial
Networks, Inc. and Jones Infomercial Network Ventures, Inc. (1)
10.10+ Affiliate Agreement dated January 31, 1995, between Product Information
Network Venture and Cox Communications, Inc. (1)
10.11+ Affiliate Agreement as Amended, dated October 1, 1995 as amended
effective April 1, 1997, between Product Information Network
Venture and Adelphia Communications Corporation. (1)
10.12 Uplink Services Agreement dated January 1, 1995, among Jones Earth
Segment, Inc., Jones Infomercial Networks, Inc., Jones Computer
84
<PAGE>
Network, Ltd., Mind Extension University, Inc. (n/k/a Knowledge TV,
Inc.) and Jones Galactic Radio, Inc., together with a letter
agreement dated June 10, 1998, between Jones Earth Segment, Inc.
and Knowledge TV, Inc. (1)
10.13 Services Agreement dated January 1, 1995, among Jones Earth Segment,
Inc., Jones Infomercial Networks, Inc., Jones Computer Network, Ltd. and
Mind Extension University, Inc. (n/k/a Knowledge TV, Inc.), together
with a letter agreement dated June 10, 1998, between Jones Earth
Segment, Inc. and Knowledge TV, Inc. (1)
10.14 Transponder Licenses Agreement dated January 1, 1995, among Jones Space
Segment, Inc., Jones Infomercial Networks, Inc. and Jones Computer
Network, Ltd., together with a letter agreement dated June 10, 1998,
between Jones Space Holdings, Inc. and Knowledge TV, Inc. (1)
10.15 Transponder Licenses Agreement dated January 1, 1995, among Jones
Satellite Holdings, Inc., Jones Galactic Radio, Inc. and Mind Extension
University, Inc. (n/k/a Knowledge TV, Inc.). (1)
10.16+ C-3/C-4 Satellite Transponder Service Agreement dated July 28, 1989,
between GE American Communications, Inc. and Jones Space Segment, Inc.
(1)
10.17 Agreement dated June 2, 1998, among MediaAmerica, Inc., Ron Hartenbaum,
Gary Schonfeld, Jones Network Holdings LLC and the Company. (1)
10.18 Post-Closing Agreement dated July 10, 1998, with MediaAmerica, Inc.,
Gary Schonfeld and Ron Hartenbaum. (1)
10.19 Employment Agreement dated July 10, 1998, between Ron Hartenbaum and the
Company. (1)
10.20 Employment Agreement dated July 10, 1998, between Gary Schonfeld and the
Company. (1)
10.21 Purchase Agreement dated July 2, 1998, between the Company and NatWest
Capital Markets Limited. (1)
21 Subsidiaries.
27 Financial Data Schedule.
85
<PAGE>
- -------------------
(1) Incorporated by reference from the Company's Registration Statement
No. 333-62077 on Form S-4, filed on August 21, 1998.
+Portions of this exhibit have been omitted based on a determination by the
Securities and Exchange Commission that certain information contained therein
shall be afforded confidential treatment.
(b) Reports on Form 8-K
Current Report on Form 8-K dated December 28, 1998, describing the
closing of the exchange offering of the Company's 11 3/4% Senior
Secured Notes due 2005.
86
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
JONES INTERNATIONAL NETWORKS, LTD.
Dated: March 25, 1999 By: /s/ Gregory J. Liptak
-------------------------
Gregory J. Liptak
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Glenn R. Jones
-------------------------
Glenn R. Jones
Dated: March 25, 1999 Chairman of the Board of Directors
By: /s/ Gregory J. Liptak
-------------------------
Gregory J. Liptak
President and Director
Dated:: March 25, 1999 (Principal Executive Officer)
By: /s/ Jay B. Lewis
-------------------------
Jay B. Lewis
Group Vice President/Finance
and Director
Dated: March 25, 1999 (Principal Financial Officer)
By: /s/ Keith D. Thompson
-------------------------
Keith D. Thompson
Chief Accounting Officer
Dated: March 25, 1999 (Principal Accounting Officer)
87
<PAGE>
By: /s/ Ronald Hartenbaum
-------------------------
Ronald Hartenbaum
Dated: March 25, 1999 Director
By: /s/ Yrma G. Rico
-------------------------
Yrma G. Rico
Dated: March 18, 1999 Director
By: /s/ Fred A. Vierra
-------------------------
Fred A. Vierra
Dated: March 25, 1999 Director
88
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF JONES INTERNATIONAL NETWORKS, LTD.
(All are Colorado corporations, unless otherwise indicated.)
Great American Country, Inc.
JPN, Inc.
Jones Audio Services, Inc.
Jones/Capstar Radio Programming LLC, a Colorado limited liability company
Jones Earth Segment, Inc.
Jones Galactic Radio, Inc.
Jones Galactic Radio Partners, Inc.
Jones MAI Radio, Inc.
Jones Radio Holdings, Inc.
Jones Radio Network, Inc.
Jones Radio Network Ventures, Inc.
Jones/Owens Radio Programming LLC, a Colorado limited liability company
Jones Infomercial Networks, Inc.
Jones Infomercial Network Ventures, Inc.
Jones Infomercials International, Ltd.
Jones Space Holdings, Inc.
MediaAmerica, Inc., a New York corporation
Product Information Network Venture, a Colorado general partnership
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 20,654,013
<SECURITIES> 2,768,646
<RECEIVABLES> 12,732,595
<ALLOWANCES> 897,487
<INVENTORY> 0
<CURRENT-ASSETS> 36,152,562
<PP&E> 52,578,854
<DEPRECIATION> 25,681,974
<TOTAL-ASSETS> 110,894,034
<CURRENT-LIABILITIES> 20,105,090
<BONDS> 100,000,000
0
0
<COMMON> 59,871
<OTHER-SE> (11,392,540)
<TOTAL-LIABILITY-AND-EQUITY> 110,894,034
<SALES> 0
<TOTAL-REVENUES> 38,211,521
<CGS> 0
<TOTAL-COSTS> 39,974,777
<OTHER-EXPENSES> 452,851
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,971,139
<INCOME-PRETAX> (11,401,939)
<INCOME-TAX> (11,450,470)
<INCOME-CONTINUING> (11,450,470)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,450,470)
<EPS-PRIMARY> (2.13)
<EPS-DILUTED> (2.14)
</TABLE>
