<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[x] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended June 30, 1999.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to .
Commission File Number 333-62077
Jones International Networks, Ltd.
Exact name of registrant as specified in charter
Colorado #84-1470911
State of organization I.R.S. employer I.D.#
9697 East Mineral Avenue, Colorado 80112
Address of principal executive office
(303) 792-3111
Registrant's telephone number
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section l3 or l5(d) of the Securities Exchange Act of l934 during
the preceding l2 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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JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
INDEX
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PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Jones International Networks, Ltd.:
Unaudited Consolidated Statements of Financial Position
as of December 31, 1998 and June 30, 1999 ....................... 2
Unaudited Consolidated Statements of Operations
for the Three and Six Months Ended June 30, 1998 and 1999 ..... 4
Unaudited Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1998 and 1999 ................. 5
Notes to Unaudited Consolidated Financial Statements............... 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations ..................... 16
PART II. OTHER INFORMATION
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 24
Item 5. Other Materially Important Events............................... 24
Item 6. Exhibits and Reports on Form 8-K................................ 24
</TABLE>
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JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ ---------
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CURRENT ASSETS:
Cash and cash equivalents........................................... $ 10,654,013 $ 9,285,878
Restricted cash..................................................... 10,000,000 4,664,510
Available for sale securities....................................... 2,768,646 5,935,020
Accounts receivable, net of allowance for doubtful accounts of
$897,487 and $1,320,040, respectively............................ 11,835,108 11,807,912
Receivables from affiliates......................................... 238,777 466,032
Prepaid expenses.................................................... 255,723 396,379
Deferred commissions, current....................................... 221,973 195,238
Other current assets................................................ 178,322 65,187
------------ --------------
Total current assets........................................... 36,152,562 32,816,156
------------ --------------
PROPERTY, PLANT AND EQUIPMENT:
Land ............................................................... 1,395,592 1,395,592
Building............................................................ 2,321,463 2,321,463
Satellite transponders.............................................. 35,680,188 35,680,188
Furniture, fixtures and equipment................................... 12,442,773 12,860,873
Leasehold improvements.............................................. 738,838 762,643
------------ --------------
Total property, plant and equipment............................ 52,578,854 53,020,759
Less accumulated depreciation and amortization...................... (25,681,974) (28,256,230)
------------- --------------
Net property, plant and equipment.............................. 26,896,880 24,764,529
------------ --------------
OTHER ASSETS:
Goodwill, net of accumulated amortization of
$719,588 and $1,197,069, respectively............................ 32,397,394 31,919,913
Other intangible assets, net of accumulated amortization of
$1,030,391 and $1,213,922, respectively.......................... 1,914,043 2,015,382
Cable programming distribution agreements, net of
accumulated amortization of $326,969 and $836,056, respectively.. 4,355,170 5,774,045
Investment in programming, net of accumulated amortization of
$177,777 and $404,129, respectively.............................. 2,379,402 2,363,040
Investment in affiliates............................................ 202,942 258,944
Income tax benefit receivable from Jones International, Ltd.
(Note 2)......................................................... 1,338,402 --
Deferred commissions, long-term .................................... 390,336 390,477
Debt offering costs, net of accumulated amortization of
$245,700 and $614,184, respectively.............................. 4,526,428 4,484,592
Other assets........................................................ 340,475 334,022
------------ --------------
Total other assets............................................. 47,844,592 47,540,415
------------ --------------
Total assets................................................... $110,894,034 $ 105,121,100
============ ==============
</TABLE>
The accompanying notes to these unaudited consolidated financial statements
are an integral part of these unaudited consolidated financial statements.
2
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JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
LIABILITIES AND SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
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CURRENT LIABILITIES:
Accounts payable--trade.......................................... $ 2,796,389 $ 2,652,101
Producers' fees payable.......................................... 5,922,471 5,526,486
Cable programming distribution payments payable.................. 1,617,815 1,402,496
Accrued liabilities.............................................. 2,047,233 1,787,025
Accounts payable--Jones International, Ltd....................... 1,377,731 820,124
Interest payable................................................. 5,581,250 5,875,000
Deferred revenues................................................ 752,263 1,211,192
Other current liabilities........................................ 9,938 107,775
------------- --------------
Total current liabilities................................... 20,105,090 19,382,199
------------- --------------
LONG-TERM LIABILITIES:
Customer deposits and deferred revenues.......................... 340,842 354,564
Senior secured notes............................................. 100,000,000 100,000,000
------------- --------------
Total long-term liabilities................................. 100,340,842 100,354,564
------------- --------------
MINORITY INTERESTS IN
CONSOLIDATED SUBSIDIARIES..................................... 567,283 1,013,034
------------- --------------
COMMITMENTS AND CONTINGENCIES (Note 5)
COMMON STOCK SUBJECT TO PUT, Class A Common Stock,
$.01 par value: 101,124 shares issued and outstanding,
respectively.................................................. 1,213,488 1,213,488
------------- --------------
SHAREHOLDERS' DEFICIT:
Class A Common Stock, $.01 par value: 50,000,000 shares
authorized; 4,202,006 and 4,213,875 shares issued and
outstanding, respectively..................................... 42,020 42,139
Class B Common Stock, $.01 par value: 1,785,120 shares
authorized, issued and outstanding............................ 17,851 17,851
Additional paid-in capital....................................... 27,446,955 27,589,264
Accumulated other comprehensive income........................... 8,456 (22,402)
Accumulated deficit.............................................. (38,847,951) (44,469,037)
------------- --------------
Total shareholders' deficit................................. (11,332,669) (16,842,185)
------------- --------------
Total liabilities and shareholders' deficit................. $ 110,894,034 $ 105,121,100
============= ==============
</TABLE>
The accompanying notes to these unaudited consolidated financial statements
are an integral part of these unaudited consolidated financial statements.
3
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1999 1998 1999
------- ------- ------- ------
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REVENUES:
Radio programming.......................................... $ 2,157,773 $ 3,905,807 $ 3,739,193 $ 6,864,992
Radio advertising representation........................... - 2,282,087 - 3,857,586
Television programming:
Non-affiliated entities............................... 3,744,594 6,717,632 7,300,147 12,232,713
Affiliated entities (Note 2).......................... 277,649 128,044 564,415 409,868
------------- ----------- ----------- --------------
Total television programming..................... 4,022,243 6,845,676 7,864,562 12,642,581
Satellite delivery and production support:
Non-affiliated entities............................... - 929,000 - 1,823,000
Affiliated entities (Note 2).......................... 971,037 1,274,042 2,128,118 2,553,790
------------- ----------- ----------- --------------
Total satellite delivery and production support 971,037 2,203,042 2,128,118 4,376,790
------------- ----------- ----------- --------------
Total revenues 7,151,053 15,236,612 13,731,873 27,741,949
------------- ------------ ----------- --------------
OPERATING EXPENSES:
Radio programming.......................................... 1,885,225 2,662,309 3,489,844 5,160,690
Radio advertising representation........................... - 945,091 - 1,892,219
Television programming:
Non-affiliated entities............................... 1,560,769 4,209,117 3,415,425 7,696,703
Affiliated entities (Note 2).......................... 1,615,818 1,115,063 3,251,566 2,641,838
------------- ------------ ----------- --------------
Total television programming..................... 3,176,587 5,324,180 6,666,991 10,338,541
Satellite delivery and production support (Note 2)......... 1,125,015 1,326,426 2,329,432 2,641,824
Selling and marketing...................................... 953,369 1,396,135 1,747,231 2,757,388
General and administrative (Note 2)........................ 920,164 2,263,454 2,092,697 4,346,405
------------- ------------ ----------- --------------
Total operating expenses......................... 8,060,360 13,917,595 16,326,195 27,137,067
------------- ------------ ----------- --------------
OPERATING INCOME (LOSS)........................................ (909,307) 1,319,017 (2,594,322) 604,882
------------- ------------ ----------- --------------
OTHER (INCOME) EXPENSE:
Interest expense (Note 2).................................. 1,298,389 3,124,380 2,640,260 6,281,030
Interest income............................................ (50,669) (245,759) (99,025) (523,234)
Equity in income of affiliates............................. (34,589) (51,816) (73,001) (56,002)
Other expense.............................................. 263,801 54,320 263,801 58,500
------------- ------------ ----------- --------------
Total other expense, net......................... 1,476,932 2,881,125 2,732,035 5,760,294
------------- ------------ ----------- --------------
LOSS BEFORE INCOME TAXES
AND MINORITY INTERESTS....................................... (2,386,239) (1,562,108) (5,326,357) (5,155,412)
Income tax provision....................................... - 460 267,575 19,923
------------- ------------ ----------- --------------
LOSS BEFORE MINORITY INTERESTS................................. (2,386,239) (1,562,568) (5,593,932) (5,175,335)
Minority interests in net income (loss)
of consolidated subsidiaries............................ 75,726 395,398 68,941 445,751
------------- ------------ ----------- --------------
NET LOSS....................................................... $ (2,461,965) $(1,957,966) $(5,662,873) $ (5,621,086)
============= =========== =========== ==============
ADJUSTMENTS TO ARRIVE AT COMPREHENSIVE LOSS - 25,186 - 30,858
------------- ------------ ----------- --------------
COMPREHENSIVE LOSS............................................. $ (2,461,965) $(1,983,152) $(5,662,873) $ (5,651,944)
============= =========== =========== ==============
LOSS PER COMMON SHARE (Note 3)................................ $ (0.52) $ (0.33) $ (1.19) $ (0. 93)
============= =========== =========== ==============
LOSS PER COMMON SHARE--assuming dilution (Note 3).............. $ (0.52) $ (0.33) $ (1.19) $ (0. 93)
============= =========== =========== ==============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING.................................................. 4,766,073 6,096,163 4,766,073 6,092,206
============= =========== =========== ==============
</TABLE>
The accompanying notes to these unaudited consolidated financial statements
are an integral part of these unaudited consolidated financial statements.
4
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
-----------------------------
1998 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................................. $ (5,662,873) $ (5,621,086)
Adjustment to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization.......................................... 2,650,885 3,970,707
Amortization of debt offering costs.................................... -- 368,484
Equity in income of affiliates......................................... (73,001) (56,002)
Distributions received................................................. 350,000 --
Minority interest in net income (loss)................................. 68,941 445,751
Net change in assets and liabilities:
Decrease (increase) in receivables.................................... (1,344,057) 27,196
Increase in receivables from affiliates............................... (40,215) (227,255)
Decrease (increase) in prepaid expenses and other current assets...... 116,066 (27,521)
Decrease in deferred commissions...................................... 16,194 26,594
Decrease in tax benefit receivable from Jones International, Ltd...... -- 1,338,402
Increase in other assets.............................................. (237,535) (320,195)
Decrease in accounts payable.......................................... (174,716) (144,288)
Decrease in producers' fees payable................................... -- (395,985)
Decrease in accounts payable to Jones International, Ltd.............. (4,122,787) (557,607)
Increase in accrued interest.......................................... 468,852 293,750
Increase in deferred revenues......................................... 288,029 458,929
Decrease in accrued and other liabilities............................. (448,976) (162,371)
Increase in customer deposits......................................... 241 13,722
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Net cash used in operating activities................................. (8,144,952) (568,775)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment................................ (538,807) (441,905)
Purchase of available for sale securities................................ -- (3,197,232)
Cable programming distribution agreements payments....................... -- (2,143,281)
Purchases of programming and other intangible assets .................... (157,632) (352,432)
------------- -------------
Net cash used in investing activities................................. (696,439) (6,134,850)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in debt offering costs.......................................... (56,162) --
Increase in capitalized loan fees........................................ (518,583) --
Repayment of borrowings.................................................. (6,554,500) --
Repayment of capital lease obligations................................... (1,166,201) --
Proceeds from borrowings................................................. 16,704,500 --
Distributions paid to minority interests................................. (840,060) --
------------- -------------
Net cash provided by financing activities............................. 7,568,994 --
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................... (1,272,397) (6,703,625)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................. 3,717,169 20,654,013
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD................................... $ 2,444,772 $ 13,950,388
============= =============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid............................................................ $ 2,171,408 $ 5,590,980
============= =============
Income tax provision..................................................... $ 267,575 $ 19,923
============= =============
Deferred offering costs.................................................. $ 1,111,000 $ --
============= =============
</TABLE>
The accompanying notes to these unaudited consolidated financial statements
are an integral part of these unaudited consolidated financial statements.
5
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This Form 10-Q is being filed by Jones International Networks, Ltd. and its
subsidiaries (collectively the "Company"). The accompanying consolidated
statements of financial position as of December 31, 1998 and June 30, 1999, the
consolidated statements of operations for the three and six months ended June
30, 1998 and 1999, and the statements of cash flows for the six months ended
June 30, 1998 and 1999, are unaudited. This Form 10-Q is being filed in
conformity with the SEC requirements for unaudited financial statements and does
not contain all of the necessary footnote disclosures required for a complete
presentation of the consolidated statements of financial position, consolidated
statements of operations and consolidated statements of cash flows in conformity
with generally accepted accounting principles. However, in the opinion of
management, these statements include all adjustments, consisting of normal
recurring adjustments, necessary for the fair presentation of results for these
interim periods. The results of operations for the six months ended June 30,
1999 are not necessarily indicative of results to be expected for the entire
year, or for any other interim period.
AVAILABLE FOR SALE SECURITIES AND COMPREHENSIVE INCOME (LOSS)--Available
for sale marketable securities are carried at fair value, with unrealized
holding gains and losses (comprehensive income or losses) carried as a separate
component of shareholders' deficit. The cost of securities sold is determined
using the first-in, first-out method. At June 30, 1999, the Company held
marketable securities available for sale with an aggregate cost of $5.9 million
and a net unrealized loss of approximately $22,000.
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 revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
(2) TRANSACTIONS WITH AFFILIATED ENTITIES
The Company is a subsidiary of Jones International, Ltd. ("Jones
International"), a holding company with ownership interests in several companies
involved in various aspects of the telecommunications industry. Jones
International is wholly owned by Glenn R. Jones, Chairman and Chief Executive
Officer of Jones International and various other subsidiaries of Jones
International. Certain members of management of the Company are also officers or
directors of these affiliated entities and, from time to time, the Company may
have transactions with these entities. Certain expenses are paid by affiliated
entities on behalf of the Company and are allocated at cost based on specific
identification or other methods which management believes are reasonable.
Principal recurring transactions with affiliates are described below.
TELEVISION PROGRAMMING REVENUES--The Company earns up to a three percent
commission on the sale of airtime for informational programming on Knowledge TV,
Inc. ("KTV"). As a result of the sale of KTV's distribution assets in 1999, KTV
will terminate its use of this service provided by the Company. It is estimated
that the termination of this service will begin in the fourth quarter of 1999.
For the three months ended June 30, 1998 and 1999, KTV paid total commissions to
the Company of approximately $45,000 and $43,000, respectively, for this
service. For the six months ended June 30, 1998 and 1999, KTV paid total
commissions to the Company of approximately $97,000 and $88,000, respectively,
for this service.
The Company distributes Great American Country to certain cable
television systems owned or managed by Jones Intercable, Inc. ("Jones
Intercable"). Effective April 7, 1999, Jones Intercable is no longer an
affiliate of the Company due to the sale of Mr. Jones' interest in
Intercable. Jones Intercable has continued to pay the Company programming
license fees subsequent to the sale of Mr. Jones' interest in Jones
Intercable. For the three months ended June 30, 1998 and 1999, Jones
Intercable and its affiliated partnerships paid total license fees to the
Company of approximately $233,000 and $85,000, respectively, for this
programming service. For the six months ended June 30, 1998 and 1999, Jones
Intercable and its affiliated partnerships paid total license fees to the
Company of approximately $468,000 and $322,000, respectively, for this
programming service.
SATELLITE DELIVERY AND PRODUCTION SUPPORT REVENUES--Jones Earth Segment,
Inc. ("Earth Segment"), a subsidiary of the Company, provides playback, editing,
duplication, trafficking and uplinking services primarily to its cable
programming network
6
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JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
affiliates including KTV. As a result of the sale of KTV's distribution assets
in 1999, KTV will terminate its use of certain earth station services provided
by Earth Segment. It is estimated that the termination of these services will
begin in the fourth quarter of 1999. 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 three months ended June 30, 1998 and
1999, Jones International and its affiliates paid satellite delivery and
production support charges to Earth Segment of approximately $736,000 and
$905,000, respectively. For the six months ended June 30, 1998 and 1999, Jones
International and its affiliates paid satellite delivery and production support
charges to Earth Segment of approximately $1,658,000 and $1,817,000,
respectively.
In addition, Jones Space Holdings, Inc. ("Space Holdings"), a subsidiary of
the Company, leases two digitally compressed channels on a non-preemptible
satellite transponder to Jones International and its affiliates. For the three
months ended June 30, 1998 and 1999, Jones International and its affiliates paid
satellite delivery charges to Space Holdings of approximately $235,000 and
$369,000, respectively. For the six months ended June 30, 1998 and 1999, Jones
International and its affiliates paid satellite delivery charges to Space
Holdings of approximately $470,000 and $737,000.
TELEVISION PROGRAMMING EXPENSES--The Product Information Network Venture
("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. For the three months
ended June 30, 1998, the PIN Venture paid Jones Intercable (and its
affiliated partnerships), Cox Communications and Adelphia Communications
approximately $1,409,000 for system rebates. For the six months ended June
30, 1998, the PIN Venture paid Jones Intercable (and its affiliated
partnerships), Cox Communications and Adelphia Communications approximately
$2,819,000 for system rebates. Effective December 31, 1998, the Company
acquired the remaining Adelphia Communications equity interest in the PIN
Venture in exchange for 12,416 shares of the Company's Class A Common Stock.
As a result, Adelphia Communications is no longer an affiliated party to the
PIN Venture as of January 1, 1999. Effective April 7, 1999 Jones Intercable
is no longer an affiliate of the Company due to the sale of Mr. Jones'
interest in Jones Intercable. The PIN Venture has continued to pay rebates to
Jones Intercable (and its affiliated partnerships) subsequent to the sales of
Mr. Jones' interest in Jones Intercable. For the three months ended June 30,
1999, the PIN Venture paid Jones Intercable (and its affiliated partnerships)
and Cox Communications approximately $778,000 for system rebates. For the six
months ended June 30, 1999, the PIN Venture paid Jones Intercable (and its
affiliated partnerships) and Cox Communications approximately $1,940,000 for
system rebates.
Jones Network Sales ("JNS"), a wholly owned subsidiary of Jones
International, provides affiliate sales and certain marketing services to the
Company. For the three months ended June 30, 1998 and 1999, the Company paid JNS
approximately $207,000 and $337,000, respectively, for these services. For the
six months ended June 30, 1998 and 1999, the Company paid JNS approximately
$433,000 and $702,000, respectively, for these services.
SATELLITE DELIVERY AND PRODUCTION SUPPORT EXPENSES--Jones Galactic Radio,
Inc., a subsidiary of the Company, ("Galactic Radio") has a transponder lease
agreement with Jones Satellite Holdings, Inc. ("Satellite Holdings"), a
subsidiary of KTV, 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. Galactic Radio agreed to
pay Satellite Holdings approximately $58,000 per month. This agreement will
expire May 2004. For each of the three months ended June 30, 1998 and 1999,
Galactic Radio paid Satellite Holdings approximately $174,000 for this service.
For each of the six months ended June 30, 1998 and 1999, Galactic Radio paid
Satellite Holdings approximately $348,000 for this service. Satellite Holdings
has the right to terminate the license agreement at any time upon 30 days
written notice to Galactic Radio. Management anticipates Satellite Holdings will
exercise the right to terminate this license agreement in the fourth quarter of
1999 due to the sale of KTV's distribution assets.
GENERAL AND ADMINISTRATIVE EXPENSES--The Company subleases office space in
Englewood, Colorado from affiliates of Jones International. Rent and associated
expenses are allocated to the Company based on the amount of square footage it
occupies. For the three months ended June 30, 1998 and 1999, the Company paid
these affiliates approximately $37,000 and $33,000, respectively, for rent and
associated expenses. For the six months ended June, 1998 and 1999, the Company
paid these affiliates approximately $74,000 and $70,000, respectively, for rent
and associated expenses.
An affiliate of Jones International provides computer hardware and software
support services to the Company. For the three months ended June 30, 1998 and
1999, the Company paid the affiliate approximately $156,000 and $199,000,
respectively, for such services. For the six months ended June 30, 1998 and
1999, the Company paid the affiliate approximately $330,000 and
7
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JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
$410,000, respectively, for such services.
The Company and its consolidated subsidiaries reimburse Jones International
and its affiliates for certain allocated administrative expenses. These expenses
generally consist of salaries and related benefits. Allocations of personnel
costs are generally based on actual time spent by affiliated associates with
respect to the Company. For the three months ended June 30, 1998 and 1999, the
Company paid Jones International and its affiliates approximately $268,000 and
$240,000, respectively, for these administrative expenses. For the six months
ended June 30, 1998 and 1999, the Company paid Jones International and its
affiliates approximately $542,000 and $546,000, respectively, for these
administrative expenses.
To assist funding its operating and investing activities, the Company had
borrowed funds from Jones International. Jones International's interest rate was
calculated using the published prime rate plus two percent. Jones International
charged interest on its advances to the Company at rates of approximately 10
percent per annum for the three and six months ended June 30, 1998 and 1999. For
the three months ended June 30, 1998 and 1999, the Company paid Jones
International interest of approximately $62,000 and $0, respectively. For
the six months ended June 30, 1998 and 1999, the Company paid Jones
International interest of approximately $328,000 and $38,000, respectively. In
the first quarter of 1999, Jones International elected to repay the income tax
benefit receivable of approximately $1,335,000 through a reduction of the
intercompany balance between the Company and Jones International. The remaining
intercompany balance was subsequently reimbursed to Jones International in April
1999.
In the normal course of business, Jones International (1) remits funds on
behalf of the Company to third parties and affiliates in payment for products
and services purchased by the Company, and (2) receives funds on behalf of the
Company in payment for products and services provided by the Company. Starting
in April 1999, these amounts are reimbursed from or to Jones International on a
monthly basis. Due to their short-term nature, such amounts outstanding with
Jones International are classified as a current asset or liability in the
accompanying financial statements.
(3) LOSS PER COMMON SHARE
Basic loss per common share is computed by dividing net loss by the
weighted average number of common shares outstanding during the respective
period. Diluted loss per common share is equal to basic loss per common share as
all potentially dilutive securities are anti-dilutive.
(4) ACQUISITION OF BROADCAST PROGRAMMING
On August 2, 1999, the Company acquired certain radio programming assets
from Broadcast Electronics, Inc. ("BEI"), a Rhode Island corporation, for $20
million plus estimated closing adjustments of approximately $860,000, payable
in cash. The closing adjustments are subject to final working capital
adjustments within 120 days from August 2, 1999. BEI's radio programming
business was conducted through its Broadcast Programming Division ("BP "),
which included the following programs: Delilah, Neon Nights with Lia Knight
and TotalRadio music format services (the "BP Acquisition").
On July 29, 1999, the Company entered into a $20 million revolving
credit facility with a commercial bank to finance the BP Acquisition on a
short-term basis. In order to allow the Company to obtain more favorable
revolving credit facility terms, Jones International has guaranteed the loan
and provided certain collateral as security for the guaranty. The revolving
credit facility bears interest either at the commercial bank's prime rate
minus two percent or a fixed rate (which is approximately equal to LIBOR)
plus one half of one percent. The current interest rate is 5.875% per annum
and the revolving credit facility will be due and payable on June 30, 2000,
unless extended. In the event that the loan is not repaid by such date, and
if the Company has not raised sufficient equity funds to repay the loan,
Jones International has agreed to provide the necessary equity funds to the
Company to repay the loan.
(5) UNAUDITED CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY
GUARANTORS
In 1998, the Company issued $100 million of Senior Secured Notes (the
"Notes"). The Notes are senior obligations of the
8
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Company. The Notes rank pari passu in right of payment with all existing and
future senior indebtedness of the Company and rank senior to all existing and
future subordinated obligations of the Company. The Notes are secured by the
capital stock of the Company's subsidiary, JPN, Inc., and its direct
subsidiaries. The Notes are fully and unconditionally guaranteed, jointly and
severally, on a senior unsecured basis by the following wholly-owned
subsidiaries of the Company: JPN, Inc., Space Holdings, Earth Segment, Jones
Infomercial Networks, Inc., Jones Radio Holdings, Inc., Great American Country,
Inc., Galactic Radio, 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, ("JORP") (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, a
general partnership in which the Company, through a Subsidiary Guarantor, owns a
55.3% interest; Superaudio, a general partnership in which the Company, through
a Subsidiary Guarantor, owns a 50% interest and Jones/Capstar Venture Radio
Programming LLC, a limited liability company in which the Company, through a
Subsidiary Guarantor, owns a 50% interest (collectively, the "Non-Guarantor
Subsidiaries"). The Company has not presented separate financial statements and
other disclosures concerning the Subsidiary Guarantors that are wholly owned
because management has determined that such information is not material to
investors. In lieu thereof, the Company is providing, under Section 13 and 15
(d) of the Securities Exchange Act of 1934, presentation of the following
supplemental unaudited condensed consolidating financial statements. Presented
below is unaudited condensed consolidating financial information for the Company
and its subsidiaries as of and for the six months ended June 30, 1998 and 1999.
9
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION -
AS OF JUNE 30, 1999:
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
THE SUBSIDIARY GUARANTOR ELIMINATION
COMPANY GUARANTORS SUBSIDIARIES ENTRIES REPORTED
---------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents............................ $ 5,124 $ 1,048 $ 3,114 $ -- $ 9,286
Restricted cash...................................... 4,664 -- -- -- 4,664
Available for sale securities........................ 5,935 -- -- -- 5,935
Accounts receivable.................................. 1 11,449 359 (1) 11,808
Other current assets................................. 53 1,024 46 -- 1,123
---------- --------- ---------- ---------- ----------
Total current assets....................... 15,777 13,521 3,519 (1) 32,816
---------- --------- ---------- ---------- ----------
Property, plant and equipment........................ 4 24,401 360 -- 24,765
Goodwill ........................................... -- 31,920 -- -- 31,920
Intangible assets.................................... 1 10,149 2 -- 10,152
Other long-term assets............................... 33,819 (27,485) 458 (1,324) 5,468
---------- --------- ---------- ---------- ----------
Total assets............................... $ 49,601 $ 52,506 $ 4,339 $ (1,325) $ 105,121
========== ========= ========== ========== ==========
LIABILITIES AND SHAREHOLDERS'
INVESTMENT (DEFICIT):
Accounts payable..................................... $ 470 $ 917 $ 1,265 $ -- $ 2,652
Producers' fees payable.............................. -- 5,526 -- -- 5,526
Cable programming distribution payments payable..... -- 1,402 -- -- 1,402
Accrued liabilities.................................. 6,163 (4,441) 66 (1) 1,787
Other current liabilities............................ (41,403) 49,203 215 -- 8,015
---------- --------- ---------- ---------- ----------
Total current liabilities.................. (34,770) 52,607 1,546 (1) 19,382
---------- --------- ---------- ---------- ----------
Senior secured notes................................. 100,000 -- -- -- 100,000
Other long-term liabilities.......................... -- 355 -- -- 355
---------- --------- ---------- ---------- ----------
Total long-term liabilities................ 100,000 355 -- -- 100,355
---------- --------- ---------- ---------- ----------
Minority interests................................... -- -- -- 1,013 1,013
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................. -- -- 350 (350) --
Additional paid-in capital...................... 27,589 -- -- -- 27,589
Other comprehensive income...................... (22) -- -- -- (22)
Retained earnings (accumulated deficit)......... (44,469) (456) 2,443 (1,987) (44,469)
---------- --------- ---------- ---------- ----------
Total shareholders' investment (deficit)... (16,842) (456) 2,793 (2,337) (16,842)
---------- --------- ---------- ---------- ----------
Total liabilities and shareholders'
investment (deficit).................... $ 49,601 $ 52,506 $ 4,339 $ (1,325) $ 105,121
========== ========= ========== ========== ==========
</TABLE>
10
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS -
FOR THE SIX MONTHS ENDED JUNE 30, 1999:
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
THE SUBSIDIARY GUARANTOR ELIMINATION
COMPANY GUARANTORS SUBSIDIARIES ENTRIES REPORTED
---------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
REVENUES:
Radio programming................................... $ -- $ 6,865 $ -- $ -- $ 6,865
Radio advertising representation.................... -- 3,858 -- -- 3,858
Television programming.............................. -- 2,157 10,485 -- 12,642
Satellite delivery and production support........... -- 5,143 -- (766) 4,377
--------- --------- --------- --------- ---------
Total revenues................................. -- 18,023 10,485 (766) 27,742
--------- --------- --------- --------- ---------
OPERATING EXPENSES:
Radio programming................................... -- 5,161 -- -- 5,161
Radio advertising representation.................... -- 1,892 -- -- 1,892
Television programming.............................. -- 1,973 9,132 (766) 10,339
Satellite delivery and production support........... -- 2,642 -- -- 2,642
Selling and marketing............................... -- 2,635 122 -- 2,757
General and administrative.......................... 681 3,386 279 -- 4,346
--------- --------- --------- --------- ---------
Total operating expenses....................... 681 17,689 9,533 (766) 27,137
--------- --------- --------- --------- ---------
OPERATING INCOME (LOSS)........................ (681) 334 952 -- 605
--------- ---------- --------- --------- ---------
OTHER EXPENSE (INCOME):
Interest expense.................................... 6,281 -- -- -- 6,281
Interest income..................................... (428) (41) (54) -- (523)
Equity share of loss (income) of subsidiaries ...... (965) 1,577 (56) (612) (56)
Other expense (income), net......................... 52 5 1 -- 58
--------- --------- --------- --------- ---------
Total other expense (income)................... 4,940 1,541 (109) (612) 5,760
--------- --------- --------- --------- ---------
Income (loss) before income taxes and minority
Interests........................................ (5,621) (1,207) 1,061 612 (5,155)
Income tax provision................................ -- 19 1 -- 20
--------- --------- --------- --------- ---------
Income (loss) before minority interests............. (5,621) (1,226) 1,060 612 (5,175)
Minority interests in net income of consolidated
subsidiaries .................................... -- -- -- 446 446
--------- --------- --------- --------- ---------
NET INCOME (LOSS)................................... $ (5,621) $ (1,226) $ 1,060 $ 166 $ (5,621)
========= ========= ========= ========= =========
Adjustments to arrive at comprehensive income (loss) 31 -- -- -- 31
--------- --------- --------- --------- ---------
COMPREHENSIVE INCOME (LOSS)......................... $ (5,652) $ (1,226) $ 1,060 $ 166 $ (5,652)
========= ========= ========= ========= =========
</TABLE>
11
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
UNAUDITED CONDENSED CONSOLIDATING CASH FLOWS -
FOR THE SIX MONTHS ENDED JUNE 30, 1999:
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
THE SUBSIDIARY GUARANTOR ELIMINATION
COMPANY GUARANTORS SUBSIDIARIES ENTRIES REPORTED
---------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................... $ (5,621) $ (1,226) $ 1,060 $ 166 $ (5,621)
Adjustment to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Non-cash expenses.................................. 369 4,530 (4) (166) 4,729
Net change in assets and liabilities............... 356 (342) 309 -- 323
---------- ---------- ---------- ---------- ---------
Net cash provided by (used in) operating
activities..................................... (4,896) 2,962 1,365 -- (569)
---------- --------- ---------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment............ -- (374) (68) -- (442)
Purchase of investments.............................. (3,197) -- -- -- (3,197)
Purchase of intangible assets........................ -- (2,496) -- -- (2,496)
---------- ---------- ---------- ---------- ---------
Net cash used in investing activities............. (3,197) (2,870) (68) -- (6,135)
---------- ---------- ----------- ---------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....... (8,093) 92 1,297 -- (6,704)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD......... 17,881 956 1,817 -- 20,654
---------- --------- ---------- ---------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD............... $ 9,788 $ 1,048 $ 3,114 $ -- $ 13,950
========== ========= ========== ========== =========
</TABLE>
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS -
FOR THE SIX MONTHS ENDED JUNE 30, 1998:
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
THE SUBSIDIARY GUARANTOR ELIMINATION
COMPANY GUARANTORS SUBSIDIARIES ENTRIES REPORTED
---------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
REVENUES:
Radio programming................................... $ -- $ 3,739 $ -- $ -- $ 3,739
Television programming.............................. 174 996 6,695 -- 7,865
Satellite delivery and production support........... -- 3,038 -- (910) 2,128
-------- --------- ---------- --------- --------
Total revenues................................. 174 7,773 6,695 (910) 13,732
-------- --------- ---------- --------- --------
OPERATING EXPENSES:
Radio programming................................... -- 3,490 -- -- 3,490
Television programming.............................. 81 1,268 6,228 (910) 6,667
Satellite delivery and production support........... -- 2,330 -- -- 2,330
Selling and marketing............................... 49 1,528 170 -- 1,747
General and administrative.......................... 833 1,045 214 -- 2,092
-------- --------- ---------- -------- --------
Total operating expenses....................... 963 9,661 6,612 (910) 16,326
-------- --------- ---------- -------- --------
OPERATING INCOME............................... (789) (1,888) 83 -- (2,594)
--------- --------- ---------- -------- --------
OTHER EXPENSE (INCOME):
Interest expense.................................... 740 1,900 -- -- 2,640
Interest income..................................... (6) (3) (90) -- (99)
Write-off of deferred offering costs ............... -- -- -- -- --
Equity share of loss (income) of subsidiaries ...... 4,048 (3,956) (73) (92) (73)
Other expense (income), net......................... -- 261 3 -- 264
-------- --------- ---------- -------- --------
Total other expense............................ 4,782 (1,798) (160) (92) 2,732
-------- --------- ----------- -------- --------
Income (loss) before income taxes and minority
interests........................................ (5,571) (90) 243 92 (5,326)
Income tax provision (benefit)...................... 92 176 -- -- 268
-------- --------- ---------- -------- --------
Income (loss) before minority interests............. (5,663) (266) 243 92 (5,594)
Minority interests in net income of consolidated
subsidiaries .................................... -- -- -- 69 69
-------- --------- ---------- -------- --------
NET INCOME (LOSS)................................... $ (5,663) $ (266) $ 243 $ 23 $ (5,663)
======== ========= ========== ======== ========
Adjustments to arrive at comprehensive income (loss) -- -- -- -- --
--------- --------- --------- --------- ---------
COMPREHENSIVE INCOME (LOSS)......................... $ (5,663) $ (226) $ 243 $ 23 $ (5,663)
========= ========= ========= ========= =========
</TABLE>
12
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
UNAUDITED CONDENSED CONSOLIDATING CASH FLOWS -
FOR THE SIX MONTHS ENDED JUNE 30, 1998:
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
THE SUBSIDIARY GUARANTOR ELIMINATION
COMPANY GUARANTORS SUBSIDIARIES ENTRIES REPORTED
---------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................... $ (5,663) $ (266) $ 243 $ 23 $ (5,663)
Adjustment to reconcile net loss to net cash provided
(used in) by operating activities:
Non-cash expenses (income)......................... 4,050 (1,280) (100) (23) 2,647
Distributions received............................. -- 350 -- -- 350
Net Change in assets and liabilities............... 1,418 (7,226) 330 -- (5,478)
---------- ---------- --------- --------- ----------
Net cash provided by (used in) operating activities (195) (8,422) 473 -- (8,144)
---------- ---------- --------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment............ (3) (467) (69) -- (539)
Purchases of intangible assets....................... -- (154) (4) -- (158)
Dividend from joint venture.......................... 960 -- -- (960) --
---------- --------- --------- ---------- ----------
Net cash provided by (used in) investing activities 957 (621) (73) (960) (697)
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deferred offering costs.................. (56) -- -- -- (56)
Increase in capitalized loan fees.................... (519) -- -- -- (519)
Repayment of borrowings.............................. -- (6,555) -- -- (6,555)
Repayment of capital lease obligations............... -- (1,166) -- -- (1,166)
Proceeds from borrowings............................. -- 16,705 -- -- 16,705
Distributions paid to minority interests ............ -- -- (1,800) 960 (840)
---------- --------- ---------- --------- ----------
Net cash provided by (used in) financing activities (575) 8,984 (1,800) 960 7,569
----------- --------- ---------- --------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....... 187 (59) (1,400) -- (1,272)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD......... (25) 79 3,663 -- 3,717
---------- --------- --------- --------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD............... $ 162 $ 20 $ 2,263 $ -- $ 2,445
========== ========= ========= ========= ==========
</TABLE>
(6) COMMITMENTS AND CONTINGENCIES
GAC EQUITY AGREEMENT-In the first quarter of 1998, Great American Country
and the Company entered into an equity affiliate agreement with a multiple cable
system operator ("MSO"). Pursuant to the terms of such agreement, the Company
agreed to issue shares of Class A Common Stock to this MSO in return for this
MSO delivering Great American Country's programming. The total number of shares
of Class A Common Stock to be issued is based on the number of subscribers
provided by the MSO. Based on the number of subscribers receiving Great American
Country's programming as of June 30, 1999, the Company is currently required to
issue a total of 109,071 shares of Common Stock. As of June 30, 1999, 101,124
shares of Class A Common Stock had been issued to this MSO.
SATELLITE TRANSPONDER AND EARTH STATION AGREEMENTS- In the second quarter
of 1999, the Company received notification from a party leasing three of the
company's satellite transponder channels of its election to terminate the lease
of such channels effective August 31, 1999. Also, effective in the second
quarter of 1999, the Company entered into an agreement to lease a satellite
transponder channel to a third party for the remaining life of the satellite, as
well as to provide other uplinking and earth station services. The Company has
obtained a guarantee from a shareholder of the lessee, which covers lease
payments through May 15, 2000. There can be no assurance that the Company will
receive the lease payments for the full term of this lease.
13
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(7) 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 Company evaluates performance based on profit or loss from operations
before income taxes not including nonrecurring gains and losses. 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 strategies. Reportable segments are presented
as follows 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 SIX MONTHS ENDED JUNE 30, 1999:
<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..................... $ 10,723,000 $ 12,642,000 $ 4,377,000 $ -- $ 27,742,000
Intersegment revenues............................... -- -- 1,737,000 -- 1,737,000
Interest income..................................... (41,000) (54,000) -- (428,000) (523,000)
Interest expense.................................... -- -- -- 6,281,000 6,281,000
Depreciation and amortization....................... 1,155,000 795,000 2,018,000 3,000 3,971,000
Equity in income of subsidiaries.................... (56,000) -- -- -- (56,000)
Segment income (loss)............................... (452,000) (225,000) 1,697,000 (6,641,000) (5,621,000)
Capital expenditures................................ 182,000 132,000 128,000 -- 442,000
Segment assets...................................... 44,097,000 15,118,000 21,344,000 89,970,000 170,529,000
RECONCILIATIONS OF REPORTABLE SEGMENT REVENUE AND
ASSETS:
REVENUES
Total revenues for reportable segments.............. $ 29,479,000
Other revenues...................................... --
Elimination of intersegment revenues................ (1,737,000)
------------
Total consolidated revenues....................... $ 27,742,000
============
ASSETS
Total assets for reportable segments................ $ 170,529,000
Elimination of investment in subsidiaries........... (65,408,000)
-------------
Total consolidated assets......................... $ 105,121,000
=============
</TABLE>
14
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
REPORTED SEGMENT PROFIT OR LOSS,
AND SEGMENT ASSETS
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 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..................... $ 3,739,000 $ 7,865,000 $ 2,128,000 $ -- $ 13,732,000
Intersegment revenues............................... -- -- 1,985,000 -- 1,985,000
Interest income..................................... (2,000) (91,000) -- (6,000) (99,000)
Interest expense.................................... -- -- 1,900,000 740,000 2,640,000
Depreciation and amortization....................... 487,000 157,000 2,004,000 3,000 2,651,000
Equity in income of subsidiaries.................... (73,000) -- -- -- (73,000)
Segment loss........................................ (1,537,000) (421,000) (2,110,000) (1,595,000) (5,663,000)
Capital expenditures................................ 365,000 131,000 41,000 2,000 539,000
Segment assets...................................... 6,594,000 7,183,000 23,638,000 4,677,000 42,092,000
RECONCILIATIONS OF REPORTABLE SEGMENT REVENUE AND
ASSETS:
REVENUES
Total revenues for reportable segments.............. $ 15,717,000
Other revenues...................................... --
Elimination of intersegment revenues................ (1,985,000)
------------
Total consolidated revenues....................... $ 13,732,000
============
ASSETS
Total assets for reportable segments................ $ 42,092,000
Elimination of investment in subsidiaries........... (1,330,000)
------------
Total consolidated assets......................... $ 40,762,000
============
</TABLE>
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of results of the Company's financial condition
and results of operations contains, in addition to historical information,
forward-looking statements that are based upon certain assumptions and are
subject to a number of risks and uncertainties. The Company's actual results may
differ significantly from the results predicted in such forward-looking
statements.
RESULTS OF OPERATIONS
The following table sets forth the amount of, and percentage relationship
to total net revenues of, certain items included in the Company's historical
unaudited consolidated statements of operations for the three and six months
ended June 30, 1998 and 1999, respectively:
REPORTED RESULTS:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
1998 1999 1998 1999
-------- ------ -------- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Radio programming..................... $ 2,158 30% $ 3,906 26% $ 3,739 27% $ 6,865 25%
Radio advertising representation...... -- -- 2,282 15 -- -- 3,858 14
Television programming................ 4,022 56 6,846 45 7,865 57 12,642 45
Satellite delivery and production
support............................. 971 14 2,203 14 2,128 16 4,377 16
-------- ------ -------- ----- -------- ----- -------- ----
Total revenues...................... 7,151 100 15,237 100 13,732 100 27,742 100
-------- ------ -------- ----- -------- ----- -------- ----
OPERATING EXPENSES:
Radio programming..................... 1,885 26 2,663 17 3,490 25 5,161 18
Radio advertising representation...... -- -- 945 6 -- -- 1,892 7
Television programming................ 3,177 44 5,324 35 6,667 49 10,339 37
Satellite delivery and production
support............................. 1,125 16 1,326 9 2,330 17 2,642 10
Selling and marketing................. 953 13 1,396 9 1,747 13 2,757 10
General and administrative............ 920 14 2,264 15 2,092 15 4,346 16
-------- ------ -------- ----- -------- ----- --------- ------
Total operating expenses............ 8,060 113 13,918 91 16,326 119 27,137 98
-------- ------ -------- ----- -------- ----- ---------- ------
OPERATING INCOME (LOSS).................. (909) (13) 1,319 9 (2,594) (19) 605 2
--------- ------- -------- ----- --------- ------ ---------- ------
OTHER EXPENSE............................ 1,477 20 2,881 19 2,732 19 5,760 21
INCOME TAX PROVISION (BENEFIT) AND
MINORITY INTERESTS....................... 76 1 396 3 337 3 466 1
-------- ------ -------- ----- -------- ----- --------- ------
NET LOSS................................. $ (2,462) (34%) $ (1,958) (13%) $ (5,663) (41%) $ (5,621) (20%)
======== ====== ======== ===== ======== ===== ========= ======
</TABLE>
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
TOTAL REVENUES--Total revenues increased $8.1 million, or 113%, from $7.1
million for the three months ended June 30, 1998 to $15.2 million for the three
months ended June 30, 1999. This increase was due to strong growth in all of the
Company's operations as well as the acquisition of MediaAmerica, Inc.
("MediaAmerica"). On July 10, 1998, the Company acquired substantially all the
assets and assumed certain of the liabilities of MediaAmerica. MediaAmerica
provides advertising sales representation services and also owned syndicated
radio programming. As a result of the acquisition of MediaAmerica, the Company
generated $2.3 million in radio advertising representation revenues for the
three months ended June 30, 1999. The increase in television programming
revenues was due to an increase in the number of subscribers receiving both
Great American Country and Product Information Network, which resulted in
increased advertising revenue. The increase in satellite delivery and production
support revenue was due to new affiliate and third party transponder and earth
station services agreements that the Company entered into in the third quarter
of 1998 and the second quarter of 1999.
RADIO PROGRAMMING REVENUES-- Radio programming revenues increased $1.7
million, or 81%, from $2.2 million for the three months ended June 30, 1998 to
$3.9 million for the three months ended June 30, 1999, due primarily to an
increase in radio advertising revenue. Sales of network radio advertising for
the first six months of 1998 were adversely affected by the January 1998 entry
of a significant competitor into the market, which added approximately 20% more
network radio advertising inventory into the marketplace, thereby increasing
competition for network radio advertising dollars. During late 1998, the
16
<PAGE>
Company began to experience improved advertising rates and sellout conditions
and these trends have continued into 1999. The advertising market has been
strong, with approximately 37% more in gross network radio advertising booked as
of late July 1999, as compared to the amount booked in the comparable period in
the prior year. Gross network radio advertising includes advertising bookings
for both the Company's owned radio programming as well as its advertising
representation customers. The Company believes the effect of the entry of the
significant competitor into network radio in early 1998 has been absorbed in the
radio advertising market, and the Company has seen significant improvement in
the radio segment's financial results. The Company continues to concentrate on
its development of personality driven talk and other programs, which the Company
believes will appeal to both advertisers on and listeners to the Company's radio
programs and over the long-term, contribute to improved financial results.
RADIO REPRESENTATION REVENUES--As a result of the acquisition of
MediaAmerica, the Company generated radio representation revenue of $2.3 million
for the three months ended June 30, 1999.
TELEVISION PROGRAMMING REVENUES--Television programming revenues increased
$2.8 million, or 70%, from $4.0 million for the three months ended June 30, 1998
to $6.8 million for the three months ended June 30, 1999, due primarily to an
increase of $2.3 million in Product Information Network advertising revenues and
an increase of $0.5 million in Great American Country advertising revenues. This
increase was driven by higher advertising rates being charged for airtime as a
result of an increase in the number of subscribers receiving the Product
Information Network and Great American Country.
SATELLITE DELIVERY AND PRODUCTION SUPPORT REVENUES--Satellite delivery and
production support revenues increased $1.2 million, or 127%, from $1.0 million
for the three months ended June 30, 1998 to $2.2 million for the three months
ended June 30, 1999 due to (i) new third party agreements, which generated $0.9
million in revenues, that the Company entered into in the third quarter of 1998
and second quarter of 1999 to provide satellite transponder and earth station
services and (ii) and an increase in $0.3 million in satellite delivery and
production support fees charged to related parties. In the second quarter of
1999, the Company received notification from a party leasing three of the
company's satellite transponder channels of its election to terminate the lease
of such channels effective August 31, 1999. Also effective in the second quarter
of 1999, the Company entered into an agreement to lease a satellite transponder
channel to a third party for the remaining life of the satellite, as well as to
provide other uplinking and earth station services. The Company has obtained a
guarantee from a shareholder of the lessee, which covers lease payments through
May 15, 2000. There can be no assurance that the Company will receive the lease
payments for the full term of this lease.
As a result of the sale of KTV's distribution assets in 1999, KTV will
terminate its use of certain earth station services provided by the Company. The
Company anticipates that the termination of these services will occur late in
the fourth quarter of 1999. It is estimated that the Company's monthly loss of
revenues as a result of this termination of services will be approximately
$75,000.
TOTAL OPERATING EXPENSES--Total operating expenses increased $5.8 million,
or 73%, from $8.1 million for the three months ended June 30, 1998 to $13.9
million for the three months ended June 30, 1999. As a percentage of total
revenues, total operating expenses decreased from 113% for the three months
ended June 30, 1998 to 91% for the three months ended June 30, 1999.
RADIO PROGRAMMING EXPENSES--Radio programming expenses increased $0.8
million, or 41%, from $1.9 million for the three months ended June 30, 1998 to
$2.7 million for the three months ended June 30, 1999, due primarily to an
increase in the number of syndicated radio programs offered by the Company as a
result of the acquisition of MediaAmerica. As a percentage of radio programming
revenues, radio programming expenses decreased from 87% for the three months
ended June 30, 1998 to 68% for the three months ended June 30, 1999. The
decrease in radio programming expenses as a percentage of radio programming
revenues is due primarily to the increase in radio programming revenues
resulting from improved advertising rates and sellout conditions in 1999. In
addition, a significant portion of the Company's radio programming expenses is
fixed costs.
RADIO ADVERTISING REPRESENTATION EXPENSES--As the result of the acquisition
of MediaAmerica, the Company incurred radio representation expenses of $0.9
million for the three months ended June 30, 1999. These expenses represent 41%
of radio advertising representation revenues for the three months ended June
30,1999.
TELEVISION PROGRAMMING EXPENSES--Television programming expenses increased
$2.1 million, or 68%, from $3.2 million
17
<PAGE>
for the three months ended June 30, 1998 to $5.3 million for the three months
ended June 30, 1999, due primarily to an increase in the amounts paid in the
form of rebates to cable systems receiving the Product Information Network. For
the three months ended June 30, 1998 and 1999, the PIN Venture made rebates of
approximately 74% and 68%, respectively, of its net advertising revenues to
these systems. As a percentage of television programming revenues, television
programming expenses decreased from 79% for the three months ended June 30, 1998
to 78% for the three months ended June 30, 1999.
As the result of the sale of KTV's distribution assets in June 1999, the
Company will absorb all of the costs of JNS, which provided cable affiliate
sales and certain marketing services to the Company and KTV. Beginning the
fourth quarter of 1999, JNS will provide these services only to the Company.
As result, management estimates its operating expenses will increase by
approximately $70,000 per month beginning the fourth quarter of 1999.
SATELLITE DELIVERY AND PRODUCTION SUPPORT EXPENSES--Satellite delivery
and production support expenses increased $0.2 million, or 18%, from $1.1
million for the three months ended June 30, 1998 to $1.3 million for the
three months ended June 30, 1999. The increase is due primarily to additional
third party and affiliated party usage of the Company's uplinking and other
earth station services. As a percentage of satellite delivery and production
support revenues, satellite delivery and production support expenses
decreased from 116% for the three months ended June 30, 1998 to 60% for the
three months ended June 30, 1999. The decrease in satellite delivery and
production expenses as a percentage of satellite delivery and production
revenues is due primarily to the significant increase in satellite delivery
and production support revenues resulting from the new satellite transponder
and earth station services agreements that the Company entered into in the
third quarter of 1998 and the second quarter of 1999. A significant portion
of the costs of the Company's satellite transponder and production of support
services is fixed. According, since the Company increased its utilization of
the excess capacity on its Satcom C-3 transponder and related services, the
percentage of satellite delivery and production support expenses in relation
to the satellite delivery and production services revenues decreased.
SELLING AND MARKETING EXPENSES--Selling and marketing expenses increased
$0.4 million, or 46%, from $1.0 million for the three months ended June 30,
1998 to $1.4 million for the three months ended June 30, 1999. The increase
is primarily a result of the acquisition of the assets of MediaAmerica. As a
percentage of total revenues, selling and marketing expenses decreased from
13% for the three months ended June 30, 1998 to 9% for the three months ended
June 30, 1999. Due to the increase in the Company's total revenues, selling
and marketing expenses as a percentage of total revenues decreased.
GENERAL AND ADMINISTRATIVE EXPENSES--General and administrative expenses
increased $1.3 million, or 146%, from $0.9 million for the three months ended
June 30, 1998 to $2.2 million for the three months ended June 30, 1999. The
increase is due to (i) an increase of $0.5 million in amortization expenses
related to the amortization of Great American Country cable programming
distribution payments and goodwill from the acquisition of MediaAmerica (ii) an
increase of $0.5 million due to the acquisition of MediaAmerica, (iii) an
increase of $0.2 million in management and operational support expenses and (iv)
an increase of $0.1 million in expenses related to the development of a
e-commerce and Internet advertising sales business. As a percentage of total
revenues, general and administrative expenses increased from 13% for the three
months ended June 30, 1998 to 15% for the three months ended June 30, 1999.
As a result of the transfer of a controlling interest in Jones
Intercable from Jones International and its affiliates to Comcast Corporation
in April 1999, Jones Intercable no longer shares 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 was the largest of such sharing entities, its
exclusion from the allocation process has caused the Company, beginning in
the second half of 1999, to incur increases in certain overhead and related
costs, including rent, computer services, insurance, and personnel costs for
accounting, legal, risk management and human resources services. As result,
management estimates the operating expenses could increase by approximately
$15,000 - $25,000 per month beginning the third quarter of 1999.
TOTAL OTHER EXPENSE--Total other expense increased $1.4 million, or 95%,
from $1.5 million for the three months ended June 30, 1998 to $2.9 million for
the three months ended June 30, 1999. This increase is due primarily to (i) an
increase of $2.9 million in interest expense related to the Notes and an
increase of $0.2 million related to the amortization of the related debt
offering costs. This increase was partially offset by a decrease of $1.3
million in interest expense from the prepayment of capital leases and other
debt, an increase of $0.2 million in interest income earned on cash and cash
equivalents and available for sale securities and a decrease of $0.2 million in
other expenses.
18
<PAGE>
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
TOTAL REVENUES--Total revenues increased $14.0 million, or 102%, from $13.7
million for the six months ended June 30, 1998 to $27.7 million for the three
months ended June 30, 1999. This increase was due to strong growth in all of the
Company's operations as well as the acquisition of MediaAmerica. As a result of
the acquisition of MediaAmerica, the Company generated $3.9 million in radio
advertising representation revenues for the six months ended June 30, 1999. The
increase in television programming revenues was due to an increase in the number
of subscribers receiving both Great American Country and Product Information
Network, resulting in increased advertising sales revenue. The increase in
satellite delivery and production support revenue was due to new affiliate and
third party satellite transponder and earth station services agreements that the
Company entered into in the third quarter of 1998 and the second quarter of
1999.
RADIO PROGRAMMING REVENUES-- Radio programming revenues increased $3.1
million, or 84%, from $3.8 million for the six months ended June 30, 1998 to
$6.9 million for the six months ended June 30, 1999, due primarily to an
increase in radio advertising revenue See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" for the three months ended
June 30, 1998 and 1999.
RADIO REPRESENTATION REVENUES--As a result of the acquisition of
MediaAmerica, the Company generated radio representation revenue of $3.9 million
for the six months ended June 30, 1999.
TELEVISION PROGRAMMING REVENUES--Television programming revenues increased
$4.8 million, or 61%, from $7.9 million for the six months ended June 30, 1998
to $12.7 million for the six months ended June 30, 1999, due primarily to: (i)
an increase of $3.6 million in Product Information Network advertising revenues
and an increase of $1.0 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 subscribers receiving the Product Information Network
and Great American Country and (ii) an increase of $0.2 million in Great
American Country affiliate fees due to an increase in the number of subscribers
paying affiliate fees.
SATELLITE DELIVERY AND PRODUCTION SUPPORT REVENUES--Satellite delivery and
production support revenues increased $2.3 million, or 106%, from $2.1 million
for the six months ended June 30, 1998 to $4.4 million for the six months ended
June 30, 1999 due to (i) new third party agreements that the Company entered
into in the second half of 1998 and second quarter of 1999 to provide satellite
transponder and earth station services resulting in $1.8 million in revenues and
(ii) and an increase in $0.4 million in satellite delivery and production
support fees charged to affiliated parties.
TOTAL OPERATING EXPENSES--Total operating expenses increased $10.8 million,
or 66%, from $16.3 million for the six months ended June 30, 1998 to $27.1
million for the six months ended June 30, 1999. As a percentage of total
revenues, total operating expenses decreased from 119% for the six months ended
June 30, 1998 to 98% for the six months ended June 30, 1999.
RADIO PROGRAMMING EXPENSES--Radio programming expenses increased $1.7
million, or 48%, from $3.5 million for the six months ended June 30, 1998 to
$5.2 million for the six months ended June 30, 1999, due primarily to an
increase in the number of syndicated radio programs offered by the Company as a
result of the acquisition of MediaAmerica. As a percentage of radio programming
revenues, radio programming expenses decreased from 93% for the six months ended
June 30, 1998 to 75% for the six months ended June 30, 1999. The decrease in
radio programming expenses as a percentage of radio programming revenues is due
primarily to the increase in radio programming revenues resulting from improved
advertising rates and sellout conditions in 1999. In addition, a significant
portion of the Company's radio programming expenses is fixed costs.
RADIO ADVERTISING REPRESENTATION EXPENSES--As the result of the acquisition
of MediaAmerica, the Company incurred radio representation expenses of $1.9
million for the six months ended June 30, 1999. These expenses represent 49% of
radio advertising representation revenues for the six months ended June 30,1999.
TELEVISION PROGRAMMING EXPENSES--Television programming expenses increased
$3.7 million, or 55%, from $6.6 million for the six months ended June 30, 1998
to $10.3 million for the six months ended June 30, 1999, due primarily to an
increase in the amounts paid in the form of rebates to cable systems receiving
the Product Information Network. For the six months ended June 30, 1998 and
1999, the PIN Venture made rebates of approximately 74% and 74%, respectively,
of its advertising revenues to these systems. As a percentage of television
programming revenues, television programming expenses decreased from 85% for
19
<PAGE>
the six months ended June 30, 1998 to 82% for the six months ended June 30,
1999.
SATELLITE DELIVERY AND PRODUCTION SUPPORT EXPENSES--Satellite delivery
and production support expenses increased $0.3 million, or 13%, from $2.3
million for the six months ended June 30, 1998 to $2.6 million for the six
months ended June 30, 1999. The increase is due primarily to additional third
party and affiliate usage of the Company's uplinking and playback services.
As a percentage of satellite delivery and production support revenues,
satellite delivery and production support expenses decreased from 109% for
the six months ended June 30, 1998 to 60% for the six months ended June 30,
1999. The decrease in satellite delivery and production expenses in relation
to revenues is due primarily to the increase in satellite delivery and
production support revenues resulting from the new satellite transponder and
earth station services agreements that the Company entered into in the second
half of 1998 and the second quarter of 1999. A significant portion of the
costs of the Company's satellite transponder and production support services
is fixed. Accordingly, as the Company increased its utilization of the excess
capacity on its Satcom C-3 transponder and related services, the percentage
of satellite delivery and production support expenses in relation to the
satellite delivery and production services revenues decreased.
SELLING AND MARKETING EXPENSES--Selling and marketing expenses increased
$1.0 million, or 58%, from $1.8 million for the six months ended June 30,
1998 to $2.8 million for the six months ended June 30, 1999 due to (i) an
increase of $1.0 million in selling and marketing expenses from the
acquisition of the assets of MediaAmerica and (ii) and increase of $0.1
million in marketing expenses due to the increased marketing efforts
undertaken to increase the distribution of Great American Country. The
increase was partially offset by a decrease of $0.1 million in radio
programming marketing expenses. As a percentage of total revenues, selling
and marketing expenses decreased from 13% for the six months ended June 30,
1998 to 10% for the six months ended June 30, 1999. Due to the increase in
the Company's total revenues, selling and marketing expenses as a percentage
of total revenues decreased.
GENERAL AND ADMINISTRATIVE EXPENSES--General and administrative expenses
increased $2.3 million, or 108%, from $2.1 million for the six months ended June
30, 1998 to $4.4 million for the six months ended June 30, 1999. The increase is
due to (i) an increase of $1.2 million due to the acquisition of MediaAmerica
(ii) an increase of $1.0 million in amortization expenses related to the
amortization of Great American Country cable programming distribution payments
and goodwill from the acquisition of MediaAmerica and (iii) an increase of $0.1
in expenses related to the development of an e-commerce and Internet advertising
sales business. As a percentage of total revenues, general and administrative
expenses increased from 15% for the six months ended June 30, 1998 to 16% for
the six months ended June 30, 1999.
TOTAL OTHER EXPENSE--Total other expense increased $3.0 million, or 111%,
from $2.7 million for the six months ended June 30, 1998 to $5.7 million for the
six months ended June 30, 1999. This increase is due primarily to (i) an
increase of $5.9 million in interest expense related to the Notes and an
increase of $0.3 million related to the amortization of the related debt
offering costs. This increase was partially offset by a decrease of $2.6 million
in interest expense from the prepayment of capital leases and other debt, an
increase of $0.4 million in interest income earned on cash and cash equivalents
and available for sale securities and a decrease of $0.2 million in other
expenses.
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. The Company had cash, cash equivalents, and available for sale
securities of $19.9 million as of June 30, 1999, including $4.7 million of cash
escrowed in a reserve account to be used solely for payment of interest on the
Notes and acquisitions. In July 1999, the remaining cash balance in the reserve
account was used for the payment of interest on the Notes. There can be no
assurance that the Company will have sufficient cash flow from operations after
debt service to support its growth strategies. 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. For the six months ended June 30, 1999, the Company incurred a net
loss of ($5.7) million. Net cash used in operating activities for the six months
ended June 30, 1999 was ($0.6) million compared with net cash used in operations
of ($8.1) million for the six months ended June 30, 1998. Net cash used in
operating activities for the six
20
<PAGE>
months ended June 30, 1998 included the net repayment of $4.1 million of
advances from Jones International.
For the six months ended June 30, 1999, the Company did not have any
financing activities.
The Company's investing activities in the first six months of 1999
totaled $6.1 million and consisted of (i) $3.2 million for the purchase of
available for sale securities, (ii) $2.1 million of cable programming
distribution agreement payments for Great American Country, (iii) $0.4
million of capital expenditures and (iv) $0.4 million of purchases of
programming and other intangible assets. Total capital expenditures for the
balance of 1999 are estimated to be approximately $0.4 million, which will be
used primarily to purchase equipment for the upgrades of certain radio
programming studios and to purchase satellite receivers. Total cable
programming distribution agreement payments for Great American Country for
the balance of 1999 are estimated to be $6.0 million to $6.5 million.
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 June 30,
1999 were approximately $0.8 million. In the first quarter of 1999, Jones
International elected to pay the income tax benefit receivable of approximately
$1.3 million through a reduction of the intercompany balance between the Company
and Jones International. The remaining intercompany balance was subsequently
reimbursed to Jones International in April 1999. In the normal course of
business, Jones International (1) remits funds on behalf of the Company to third
parties and affiliates in payment for products and services purchased by the
Company, and (2) receives funds on behalf of the Company in payment for products
and services provided by the Company. Starting in April 1999, these amounts are
reimbursed from or to Jones International on a monthly basis.
As a result of the transfer of a controlling interest in Jones
Intercable from Jones International and its affiliates to Comcast Corporation
in April 1999, Jones Intercable no longer shares 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 was the largest of such sharing entities, its
exclusion from the allocation process has caused the Company, beginning in
the second half of 1999, to incur increases in certain overhead and related
costs, including rent, computer services, insurance, and personnel costs for
accounting, legal, risk management and human resources services. As result,
management estimates the operating expenses could increase by approximately
$15,000 - $25,000 per month beginning the third quarter of 1999.
In addition, as the result of the sale of KTV's distribution assets in
June 1999, the Company will absorb all of the costs of JNS, which provided
cable affiliate sales and certain marketing services to the Company and KTV.
Beginning the fourth quarter of 1999, JNS will provide these services only to
the Company. As result, management estimates its operating expenses will
increase by approximately $70,000 per month beginning the fourth quarter of
1999. Further, KTV will discontinue the use of certain earth station services
provide by the Company beginning in the fourth quarter of 1999. It is
estimated that the Company's loss of revenue as result of the termination of
these services to KTV will be approximately $75,000 per month.
While Management has taken certain steps and will take additional steps
to mitigate the impact of these divestitures, there will be no assurance that
the company will be able to reduce the level of these costs.
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. While the terms of the
Company's joint ventures (including the PIN Venture) 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 in the Indenture) to the Company. Management believes that its cash
balances, available for sale securities and operating cash flow, including
the cash flows of, and dividends and distributions from its subsidiaries,
will be sufficient to fund the Company's cash flow requirements at least
through 1999.
On July 29, 1999, the Company entered into a $20 million revolving
credit facility with a commercial bank. In order to allow the Company to
obtain more favorable revolving credit facility terms, Jones International
has guaranteed the loan and provided certain collateral as security for the
guaranty. The revolving credit facility bears interest either at the
commercial bank's prime rate minus two percent or a fixed rate (which is
approximately equal to LIBOR) plus one half of one percent. The current
interest rate is 5.875% per annum and the revolving credit facility will be
due and payable on June 30, 2000, unless extended. In the event that the loan
is not repaid by such date, and if the Company has not raised sufficient
equity funds to repay the loan, Jones International has agreed to provide the
necessary equity funds to the Company to repay the loan.
21
<PAGE>
On August 2, 1999, the Company acquired certain radio programming assets
from Broadcast Electronics, Inc., a Rhode Island corporation, and its sole
shareholder BEI Holding Corporation, a Delaware corporation (collectively,
"BEI") for $20 million plus an estimated closing adjustments of approximately
$860,000, payable in cash. The Company financed the acquisition by using $20
million of borrowings from its revolving credit facility and $860,000 from
available cash balances. The closing adjustments are subject to final working
capital adjustments within 120 days from August 2, 1999. BEI's radio
programming business was conducted through its Broadcast Programming Division
("BP "), which included the following programs: Delilah, Neon Nights with Lia
Knight and TotalRadio music format services (the "BP Acquisition").
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>
Financials Y2K testing completed
Contingency planning 3Q99
Unix Hardware Y2K Upgrade/testing completed
Y2K contingency planning 3Q99
LAN/WAN Remediation/testing completed
Contingency planning 3Q99
Telephony Systems Y2K testing completed
Contingency planning 3Q99
GAC/PIN Y2K testing completed
Contingency planning 3Q99
Radio Y2K testing 3Q99
Contingency planning 3Q99
Uplink Y2K testing completed
Contingency planning 3Q99
</TABLE>
22
<PAGE>
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.
Jones International, the Company's Parent, has contacted key vendors
of business application and operating software to determine the compliance of
their software. Several key information systems, including the primary
financial software applications, have been tested and have been determined to
be Year 2000 compliant. Additionally, an inventory has been conducted at the
Jones International data center and the Company's Uplink facilities for all
operational support systems and at the corporate office for all desktop
computer hardware and software to ensure all business application and
operating software is identified. The focus during the 3rd quarter 1999 will
be on contingency planning.
The Company has not incurred any material Year 2000 costs to date.
Management does not have an estimate for future Year 2000 project costs;
however, management expects future Year 2000 costs that may be incurred will
not have a material adverse effect on its financial condition and results of
operations.
The Company has not finalized contingency plans in the event that systems
are not Year 2000 compliant. In the event the Company fails to finalize its
contingency plans, which is not expected, the Company may not resolve its Year
2000 issues, if any, in a timely and efficient manner. This could heighten the
risk that the Year 2000 problem may have a material adverse effect on the
Company's financial condition and results of operations.
23
<PAGE>
ITEM 3. 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 $0.8 million of the Company's current liabilities is subject
to changes in interest rates; however, the Company does not use derivatives to
manage 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 of financial condition of the Company.
ITEM 5: OTHER MATERIALLY IMPORTANT EVENTS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
None
b) Reports on Form 8-K
None
24
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
By:
-------------------------------------------
Jay B. Lewis
Group Vice President/Finance
(Principal Financial Officer)
Dated: August 12, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 13,950,388
<SECURITIES> 5,935,020
<RECEIVABLES> 13,127,952
<ALLOWANCES> 1,320,040
<INVENTORY> 0
<CURRENT-ASSETS> 32,816,156
<PP&E> 53,020,759
<DEPRECIATION> 28,256,230
<TOTAL-ASSETS> 105,121,100
<CURRENT-LIABILITIES> 19,382,199
<BONDS> 100,000,000
0
0
<COMMON> 59,990
<OTHER-SE> (16,902,175)
<TOTAL-LIABILITY-AND-EQUITY> 105,121,100
<SALES> 0
<TOTAL-REVENUES> 27,741,949
<CGS> 0
<TOTAL-COSTS> 27,137,067
<OTHER-EXPENSES> 58,500
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,281,030
<INCOME-PRETAX> (5,155,412)
<INCOME-TAX> (5,175,335)
<INCOME-CONTINUING> (5,621,086)
<DISCONTINUED> 0
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