<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 18, 2000
REGISTRATION STATEMENT NO. 333-93337
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
JONES INTERNATIONAL NETWORKS, LTD.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
COLORADO 7922 84-1470911
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of Industrial Identification
incorporation or organization) Classification Code Number) Number)
</TABLE>
9697 EAST MINERAL AVENUE, ENGLEWOOD, COLORADO 80112, (303) 792-3111
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive office)
JEFFREY C. WAYNE, PRESIDENT, JONES INTERNATIONAL NETWORKS, LTD.
9697 EAST MINERAL AVENUE, ENGLEWOOD, COLORADO 80112, (303) 792-3111
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPY TO:
<TABLE>
<S> <C>
PATRICIA PETERSON, ESQ. WILLIAM M. HARTNETT, ESQ.
Davis, Graham & Stubbs LLP Cahill Gordon & Reindel
370 17(th) Street, Suite 4700 80 Pine Street
Denver, Colorado 80201 New York, New York 10005
(303) 892-9400 (212) 701-3000
</TABLE>
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE AGGREGATE OFFERING AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PRICE PER SHARE(2) PRICE(2) REGISTRATION FEE(2)
<S> <C> <C> <C> <C>
Class A Common Stock, $.01 par
value............................... 5,635,000(1) $17.00(2) $95,795,000 $25,290(3)
</TABLE>
(1) Includes 735,000 shares subject to the underwriter's over-allotment option.
(2) Estimated solely for the purposes of calculating the amount of the
registration fee in accordance with Rule 457(o) under the Securities Act of
1933, as amended.
(3) $22,770 was previously paid.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy them in any state
where the offer or sale is not permitted.
<PAGE>
SUBJECT TO COMPLETION DATED FEBRUARY 18, 2000
4,900,000 Shares
[LOGO]
Jones International Networks, Ltd.
Class A Common Stock
-----------
Prior to this offering, there has been no public market for our Class A
Common Stock. The initial public offering price of our Class A Common Stock is
expected to be between $14.00 and $17.00 per share. We have made application to
list our Class A Common Stock on The Nasdaq Stock Market's National Market under
the symbol JINI.
The underwriters have an option to purchase a maximum of 735,000 additional
shares to cover over-allotments.
We have outstanding two classes of common stock. The holders of Class A
Common Stock are entitled to one vote for each share, whereas the holders of
Class B Common Stock are entitled to ten votes for each share. Holders of
Class A Common Stock elect 25% of our directors and holders of Class B Common
Stock elect the remaining 75% of our directors.
INVESTING IN THE CLASS A COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
STARTING ON PAGE 7.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions Jones
---------------- ---------------- ----------------
<S> <C> <C> <C>
Per Share............................................ $ $ $
Total................................................ $ $ $
</TABLE>
Delivery of the shares of Class A Common Stock will be made on or about
, 2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
CREDIT SUISSE FIRST BOSTON
DEUTSCHE BANC ALEX. BROWN
J.P. MORGAN & CO.
The date of this prospectus is , 2000.
<PAGE>
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY.................. 1
RISK FACTORS........................ 7
USE OF PROCEEDS..................... 18
DIVIDEND POLICY..................... 18
CAPITALIZATION...................... 19
DILUTION............................ 21
SELECTED CONSOLIDATED FINANCIAL
INFORMATION....................... 22
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS..................... 25
BUSINESS............................ 45
MANAGEMENT.......................... 61
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS...................... 69
PRINCIPAL SHAREHOLDERS.............. 72
DESCRIPTION OF CAPITAL STOCK........ 75
DESCRIPTION OF INDEBTEDNESS......... 77
SHARES ELIGIBLE FOR FUTURE SALE..... 79
UNDERWRITING........................ 81
NOTICE TO CANADIAN RESIDENTS........ 83
LEGAL MATTERS....................... 84
EXPERTS............................. 84
ADDITIONAL INFORMATION.............. 84
INDEX TO FINANCIAL STATEMENTS....... F-1
</TABLE>
------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS
DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE
INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF THIS DOCUMENT.
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING) ALL
DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
UNLESS OTHERWISE INDICATED, ALL INFORMATION CONTAINED IN THIS PROSPECTUS
(I) ASSUMES THAT THE UNDERWRITERS WILL NOT EXERCISE THEIR OVER-ALLOTMENT OPTION,
(II) ASSUMES THAT ALL OF THE OUTSTANDING SHARES OF OUR SERIES A CONVERTIBLE
PREFERRED STOCK WILL BE CONVERTED INTO SHARES OF OUR CLASS A COMMON STOCK
CONCURRENT WITH COMPLETION OF THIS OFFERING AND (III) REFLECTS THE EFFECTS OF
THE 5-FOR-4 STOCK SPLIT OF OUR CLASS A COMMON STOCK AND CLASS B COMMON STOCK,
WHICH OCCURRED JANUARY 28, 2000. THIS PROSPECTUS CONTAINS FORWARD-LOOKING
STATEMENTS, WHICH INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS
A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND
ELSEWHERE IN THIS PROSPECTUS.
JONES INTERNATIONAL NETWORKS, LTD.
OVERVIEW
We own and operate a leading network radio programming business and two
cable television networks and are developing a complementary Internet business.
Through our traditional media businesses, we create, develop and produce network
radio and cable programming that is distributed to more than 2,450 radio
stations and 1,750 cable systems, respectively, throughout the United States. We
provide advertisers with the ability to reach approximately 60 million weekly
radio listeners and 42 million cable viewing households on a full- or part-time
basis. We currently operate multiple web sites that extend our traditional media
content and personalities to the Internet and allow us to capitalize on Internet
advertising and e-commerce opportunities. As a complement to our programming
businesses, we own and operate a leading network advertising sales business that
provides advertisers with an efficient means to reach national radio and cable
television audiences as well as Internet users. We also provide satellite
services to facilitate the distribution of our programming and that of other
companies.
We expect the demand for radio and cable television programming content to
increase dramatically during the next several years, primarily as a result of
technological advances such as audio and video streaming over the Internet,
satellite radio and digital cable television. The growing popularity of the
Internet creates a need for additional programming content that will attract
viewers to web sites for extended time periods. In this expanding distribution
environment, we believe that there will be strong demand for branded programming
content that can be channeled across multiple media outlets. We believe that we
are well-positioned to benefit from this increased demand for content.
Our portfolio of businesses includes the following:
- PROGRAMMING CONTENT
RADIO. We produce or license over 2,000 hours of original radio
programming weekly. This programming is comprised of twelve 24-hour formats
and 19 syndicated programs. Our radio programming covers a wide variety of
genres, such as country, adult contemporary, talk and Hispanic. It features
well-known syndicated programs such as The Crook & Chase Country Countdown,
Delilah and The Dennis Prager Show.
CABLE TELEVISION. We own and operate two cable television networks,
Great American Country (GAC) and the Product Information Network (PIN). GAC
is a 24-hour country music video network reaching nearly 12 million cable
households. PIN, a joint venture with Cox Communications, Inc., airs
long-form paid programming produced by advertisers and infomercial
providers. PIN reaches more than 30 million households on a full- or
part-time basis.
INTERNET. We have developed multiple web sites that complement our radio
and cable programming content and are developing additional sites. To extend
GAC and our country radio programming content to the Internet, we developed
CountryStars.com, a portal catering to the "country" lifestyle.
RadioDelilah.com and DennisPrager.com are examples of our web sites that
1
<PAGE>
extend our personality-driven radio programs to the Internet. Our web sites
provide valuable cross-promotion and e-commerce opportunities.
- PROGRAMMING SUPPORT SERVICES
ADVERTISING SALES SERVICES. We currently represent more than 90 network
radio programs or services, including over 60 programs produced by third
parties that are distributed to approximately 6,000 radio stations. In
addition, we sell network advertising for our two cable networks. We have
recently begun to provide advertising sales services to our web sites and to
web sites owned by third parties. In February 2000, we entered into an
agreement to provide advertising sales services for Matchmaker.com, an
online dating service. In addition, we have an exclusive long-term agreement
to provide advertising sales services to Sirius Satellite Radio, one of only
two licensed satellite radio providers in the United States. Sirius is
expected to launch its service in the fourth quarter of 2000 with
approximately 100 channels of digital radio service, up to 50 of which will
carry commercials.
SATELLITE SERVICES. We provide satellite delivery and production support
services for GAC, PIN and cable channels operated by other companies. We own
two satellite transponders and an uplink facility. Ownership of these assets
allows us to control the distribution of our radio and cable programming. It
also provides us with a cost-effective platform for launching new radio and
cable networks. We generate additional revenues from leasing excess
satellite capacity and providing related support services to other cable
programmers.
We believe that our ability to develop and distribute programming content
across multiple forms of media allows us to capitalize on significant operating
synergies arising from our radio, cable television and Internet programming
businesses and to generate strong revenue and cash flow growth. For the year
ended December 31, 1999, we generated $64.4 million of revenue, $12.0 million of
EBITDA and $2.0 million of operating income, representing an increase of 68.5%,
178.8% and 216.0%, respectively, as compared to the year ended December 31,
1998. Assuming that the acquisition that we completed in 1999 had been completed
on January 1, 1999, our revenue, EBITDA and operating income for the year ended
December 31, 1999 would have been $69.1 million, $13.4 million and
$0.9 million, respectively.
COMPETITIVE STRENGTHS
We believe we have the following competitive strengths:
EFFICIENT MEANS FOR ADVERTISERS TO REACH TARGETED AUDIENCES. Through our
varied programming formats, multiple distribution channels and experienced sales
organization, we can aggregate a large, national audience according to specific
demographics, providing advertisers with an efficient, cost-effective means to
reach desired audiences across multiple media platforms.
EXCLUSIVE, PERSONALITY-DRIVEN PROGRAMMING. We have an established history
of identifying and attracting successful on-air personalities and developing
radio and cable television programs that generate a significant and loyal
audience. Our exclusive programming includes such widely recognized shows as
Delilah, The Crook & Chase Country Countdown and Neon Nights.
VALUE CREATION THROUGH CROSS-PROMOTION AND BRANDING. We cross-promote and
brand our programming content in an effort to encourage our audience to seek out
and access our content across multiple platforms. Our cross-promotion strategy
utilizes traditional commericials, as well as in-program and on-air promotions
by our popular personalities. For example, our CountryStars.com web site is
promoted on GAC, our three 24-hour country radio formats and through our four
syndicated country radio programs.
ESTABLISHED NATIONAL ADVERTISING SALES ORGANIZATION. We have a 16 person
sales force with offices in New York, Los Angeles, Chicago, Detroit, Dallas and
Denver and intend to open an office in Nashville in the first half of 2000. With
an average of 16 years of advertising sales experience, our sales force has
2
<PAGE>
established long-term relationships with many national advertisers and
advertising agencies. As a result, we are well-positioned to assist national
advertisers in developing complementary advertising programs spanning all three
of our media platforms.
ABILITY TO LEVERAGE EXISTING INFRASTRUCTURE TO DEVELOP NEW REVENUE
OPPORTUNITIES. We have made a substantial investment in our advertising sales,
affiliate sales, content development and satellite distribution capabilities. We
intend to leverage these resources to develop new program offerings for radio,
cable television and the Internet at a low incremental cost. In addition, we
have an extensive library of audio and video content for distribution across
multiple platforms, including the Internet, in a cost-effective manner.
EXPERIENCED MANAGEMENT TEAM. Our Chairman, Glenn R. Jones, a prominent
leader in the cable television industry, was the founder, Chairman and Chief
Executive Officer of Jones Intercable, Inc., a top ten multiple system cable
operator. In addition to Mr. Jones, we have assembled a senior management team
with extensive experience in all areas of our business. With an average of over
20 years of relevant industry experience for our top five executives, we enjoy
long-term relationships with advertisers, advertising agencies, cable and radio
affiliates, the music recording industry and independent producers of network
programming.
OPERATING STRATEGY
Our operating strategy is designed to take advantage of the increasing
demand for programming content while leveraging our core competencies. This
strategy includes the following:
- develop high quality, personality-driven programming;
- increase programming distribution;
- increase advertising sales revenues;
- enhance revenue growth by capitalizing on Internet revenue opportunities;
- develop new cable programming networks;
- leverage cross-media platform synergies; and
- recruit and retain experienced management.
An important part of our business strategy is to pursue acquisitions and
ventures that enhance our existing businesses or provide entry to new related
businesses. Our recent acquisitions of Broadcast Programming in August 1999 and
MediaAmerica in July 1998 demonstrate this strategy. Broadcast Programming,
which we acquired for $20.9 million, owns and distributes two high-growth
syndicated radio programs, Delilah and Neon Nights, and provides a wide spectrum
of programming and programming consulting services to approximately 800 radio
stations. MediaAmerica, which we acquired for $26.7 million in cash and
$8.1 million of Class A Common Stock, operates a network radio advertising sales
business and owns several syndicated radio programs. This acquisition became the
basis for our in-house advertising sales services business.
BACKGROUND
We are a Colorado corporation incorporated in 1998 and are the successor to
certain affiliated entities that previously conducted our businesses. We are a
holding company. Our operations are conducted through a number of subsidiaries,
including Jones Radio Networks and Broadcast Programming (radio programming),
Great American Country and Product Information Network Venture (cable television
programming), MediaAmerica (advertising sales services) and Jones Direct
(Internet operations). Our principal shareholder is Jones International, Ltd.,
which owns a number of subsidiaries with which we have business dealings. From
the inception of Jones Intercable, Inc. until April 1999, Jones International
owned a controlling interest in Jones Intercable.
Our corporate offices are located at 9697 East Mineral Avenue, Englewood,
Colorado 80112. Our telephone number is (303) 792-3111.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Class A Common Stock offered................. 4,900,000 shares
Common Stock to be outstanding after this
offering................................... 12,692,426 shares of Class A Common Stock(1)
2,231,400 shares of Class B Common Stock(2)
Voting rights................................ Holders of Class A Common Stock are entitled
to one vote per share and are entitled to
elect 25% of our directors. Holders of Class
B Common Stock are entitled to ten votes per
share and are entitled to elect 75% of our
directors.
Use of proceeds.............................. We intend to use the net proceeds from the
offering to repay debt, for working capital
and for general corporate purposes. General
corporate purposes include acquisitions,
cable programming distribution payments to
cable operators for carrying GAC, and
developing our Internet businesses, which we
expect will include Internet programming
content and advertising sales services.
Nasdaq Symbol................................ JINI
</TABLE>
- ----------
(1) This number includes 2,397,500 shares issuable upon conversion of our
Series A Convertible Preferred Stock into shares of Class A Common Stock
upon completion of this offering. This number excludes (i) 529,375 shares of
Class A Common Stock issuable upon exercise of outstanding options under our
stock option plan, (ii) 218,000 shares of Class A Common Stock that will be
issuable upon exercise of options that become effective as of the closing of
this offering, (iii) approximately 24,516 shares of Class A Common Stock
issuable upon exercise of immediately exercisable non-qualified stock
options to be issued to management upon closing of this offering at an
exercise price equal to 25% of the price of Class A Common Stock in this
offering, and (iv) 978,109 shares of Class A Common Stock available for
issuance under our stock option plan. Also excludes an estimated
approximately 60,000 shares of Class A Common Stock that we expect to issue
in connection with acquisitions.
(2) Class B Common Stock to be outstanding after this offering is based on
shares outstanding as of February 1, 2000. Each share of Class B Common
Stock is convertible at any time, at the option of the holder, into one
share of Class A Common Stock.
4
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following tables summarize certain financial and operating data for our
business. This information should be read along with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and our
consolidated financial statements and notes to those statements included
elsewhere in this prospectus. The historical statements of operations and
balance sheet data as of and for each of the years in the three-year period
ended December 31, 1999, have been derived from our consolidated financial data.
This data has been audited by Arthur Andersen LLP, independent auditors.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
---------- ---------- ----------
(IN THOUSANDS EXCEPT SHARE,
PER SHARE AND RADIO STATION
AFFILIATE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues.................................................. $ 29,112 $ 38,212 $ 64,366
Operating expenses:
Operations.............................................. 17,049 27,181 43,617
Selling and marketing................................... 3,491 5,412 6,438
General and administrative.............................. 1,151 1,116 1,491
Depreciation and amortization........................... 5,168 6,266 10,775
---------- ---------- ----------
Total operating expenses.............................. 26,859 39,975 62,321
---------- ---------- ----------
Operating income (loss)................................... 2,253 (1,763) 2,045
---------- ---------- ----------
Interest expense, net..................................... 5,569 8,195 11,729
Other expense............................................. 616 1,228 (32)
Income tax provision (benefit)............................ (1,342) 49 (470)
Minority interest......................................... 903 215 881
---------- ---------- ----------
Net loss.................................................. $ (3,493) $ (11,450) $ (10,063)
========== ========== ==========
Net loss per common share:
Basic................................................... $ (0.64) $ (1.71) $ (1.32)
Fully diluted........................................... $ (0.64) $ (1.71) $ (1.32)
Weighted average shares outstanding:
Basic................................................... 5,500,560 6,715,805 7,617,926
Fully diluted........................................... 5,500,560 6,702,010 7,601,868
OTHER DATA:
EBITDA(a)................................................. $ 6,599 $ 4,290 $ 11,960
Capital expenditures...................................... 1,367 2,258 850
Cable programming distribution payments(b)................ -- 3,064 6,354
Net cash provided by (used in):
Operating activities.................................... 7,589 (7,065) 2,398
Investing activities.................................... (1,156) (35,021) (32,633)
Financing activities.................................... (2,720) 59,023 22,851
AUDIENCE DATA (at end of period):
Radio station affiliates(c)............................... 1,484 2,146 2,485
Radio Station AQH (24-hour formats)(d).................... 2,296 2,369 1,986
Radio Station AQH (syndicated)(d)......................... 1,048 6,090 12,401
Great American Country subscribers(e)..................... 1,550 7,131 11,971
Product Information Network subscribers(e)................ 11,497 20,634 30,094
Product Information Network FTRE's(f)..................... 7,036 8,647 12,934
BALANCE SHEET DATA (at end of period):
Cash and cash equivalents(g).............................. $ 3,717 $ 10,654 $ 13,271
Working capital (deficit)................................. (9,331) 16,047 13,246
Total assets.............................................. 41,358 110,894 128,462
Total long-term debt(h)................................... 45,312 100,000 100,000
Shareholders' equity (deficit)............................ (18,206) (11,333) 2,702
</TABLE>
- -------------
(a) EBITDA is unaudited and represents operating income (loss) plus depreciation
and amortization minus the EBITDA attributable to the minority interest in
the PIN Venture, a consolidated 55.3%-owned subsidiary. Management
acknowledges that EBITDA is not a measure of performance or liquidity
calculated in accordance with generally accepted accounting principles.
However, EBITDA is a measure widely used by analysts and investors in the
media industry to determine a company's operating performance and ability to
service and incur debt. EBITDA should not be considered in isolation or as a
substitute for net income (loss), cash flows from operating activities or
other consolidated income or cash flow statement data prepared in accordance
with generally accepted accounting principles or as a measure of
profitability or liquidity.
5
<PAGE>
(b) Cable programming distribution payments made by GAC to multiple system cable
television operators for carrying GAC programming. These payments are
reflected as intangible assets on the balance sheet and are amortized over
the period during which any portion of such payment is refundable (usually 5
to 10 years).
(c) Represents the number of non-duplicating radio station affiliates receiving
our programs at the end of the periods indicated.
(d) AQH represents the average audience estimated to have listened, for a
minimum of five minutes during any quarter hour, to a radio station
broadcasting our advertising. For the 24-hour formats, the period used to
determine AQH is Monday through Friday, 6am to 7pm. The period used to
determine AQH for syndicated programs is the time during which the
commercials associated with the programs or services are broadcast. These
AQH estimates are derived from data provided by Marketron (a third party
processor) that is based on Arbitron copyrighted and proprietary audience
estimates. They are not estimates produced by Arbitron. Radio advertising is
generally sold on the basis of the listening audience as quantified by AQH.
Beginning in the period ended December 31, 1998, we have excluded the AQH
related to non-recurring specials. AQH (24-hour formats) has been restated
for periods prior to 1998 to reflect our creation in 1998 of a second
selling network resulting from the division of our then-existing network.
This division more accurately reflects our audience to radio advertisers.
The effect of this restatement is to make periods prior to 1998 comparable
to 1998 and later periods.
(e) Represents the total number of subscribers at the end of the periods
indicated.
(f) FTREs represent the number of full-time revenue equivalent subscribers
receiving PIN at the end of the periods indicated. FTRE weights part-time
subscribers based on the number of hours carried, the daypart carried and
the revenue associated therewith.
(g) Excludes restricted cash of $10.0 million at December 31, 1998.
(h) Includes current and non-current maturities of long-term debt and capital
lease obligations.
6
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS IN ADDITION TO THE
REMAINDER OF THIS PROSPECTUS BEFORE PURCHASING OUR CLASS A COMMON STOCK. THE
RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE INTENDED TO HIGHLIGHT RISKS THAT ARE
SPECIFIC TO US AND ARE NOT THE ONLY ONES THAT WE MAY FACE. ADDITIONAL RISKS AND
UNCERTAINTIES, SUCH AS THOSE THAT GENERALLY APPLY TO BUSINESS ENTERPRISES IN OUR
INDUSTRY, MAY ALSO IMPAIR OUR BUSINESS OPERATIONS.
IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL
CONDITION OR OPERATING RESULTS WOULD LIKELY SUFFER. IN THAT CASE, THE TRADING
PRICE OF OUR CLASS A COMMON STOCK COULD DECLINE AND YOU MAY LOSE ALL OR PART OF
YOUR INVESTMENT.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES, SUCH AS STATEMENTS OF OUR PLANS, OBJECTIVES, EXPECTATIONS AND
INTENTIONS. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN
THESE FORWARD-LOOKING STATEMENTS FOR MANY REASONS, INCLUDING THE FACTORS
DESCRIBED BELOW AND ELSEWHERE IN THIS PROSPECTUS. YOU SHOULD NOT PLACE UNDUE
RELIANCE ON THESE FORWARD-LOOKING STATEMENTS.
WE HAVE A HISTORY OF NET LOSSES.
We cannot assure if or when we will achieve or sustain profitability. We had
net losses of $(3.5) million, $(11.5) million and $(10.1) million and operating
income (loss) of $2.3 million, $(1.8) million and $2.0 million for the years
ended December 31, 1997, 1998 and 1999, respectively. Net losses have resulted
in an accumulated deficit of $48.9 million as of December 31, 1999. Failure to
achieve profitability could adversely affect the market price of our Class A
Common Stock, which in turn could adversely affect our ability to raise
additional equity capital. In addition, our ability to incur additional
indebtedness and to make investments depends significantly on our ability to
generate cash flow from operations.
HOLDERS OF CLASS A COMMON STOCK WILL HAVE LIMITED VOTING POWER.
Holders of Class A Common Stock have limited voting rights. Holders of our
Class A Common Stock are entitled to one vote per share, while holders of
Class B Common Stock are entitled to ten votes per share on all matters where
all shareholders vote together as a single class. There is class voting for
directors, with holders of Class A Common Stock entitled to elect approximately
25% of our directors and holders of the Class B Common Stock entitled to elect
approximately 75% of our directors. Following completion of this offering, Glenn
R. Jones, chairman of our board of directors, will beneficially own 100% of the
voting power of our outstanding Class B Common Stock, approximately 49% of the
voting power of our outstanding Class A Common Stock and approximately 82% of
the total voting power of all outstanding common stock, considering both classes
together. Thus, Mr. Jones will have the power to elect our entire Board and to
otherwise control all matters requiring shareholder approval, including
transactions involving a change of control, such as a sale or merger, in which
shareholders might otherwise receive a premium over the current market price.
This, in turn, could reduce the market price of the Class A Common Stock.
WE ARE CONTROLLED BY ONE SHAREHOLDER, WHOSE INTERESTS MAY DIFFER FROM THOSE OF
OTHER SHAREHOLDERS.
The investment considerations that are important to Mr. Jones may be
different from those that are important to our other shareholders. For example,
the time period over which Mr. Jones expects to realize the benefits of his
investment may differ from that of other shareholders, and his evaluation of our
possible strategic alliances could be affected by their possible dilutive impact
on his voting control.
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WE HAVE A SIGNIFICANT AMOUNT OF DEBT OUTSTANDING AND WE WILL NEED TO INCREASE
OUR CASH FLOWS TO MEET OUR PRINCIPAL REPAYMENT OBLIGATIONS.
After application of a portion of the proceeds of this offering, our
indebtedness will include approximately $65.0 million of our 11 3/4% Senior
Secured Notes due 2005. We also have the ability to borrow up to $20.0 million
under our credit facility, which expires June 30, 2000, unless extended. We
intend to seek an increase in permitted borrowing under our indenture from $20.0
million to $75.0 million. As a result of our indebtedness:
- substantial amounts of the cash flow from our operations will have to be
used for the payment of principal and interest on our Senior Notes and on
our other indebtedness, if any, and therefore will not be available to use
in our operations;
- it will be more difficult to obtain additional financing in the future on
favorable terms, or at all, to use for working capital, acquisitions,
capital expenditures, refinancing or other purposes; and
- we will be more vulnerable to changes in economic conditions generally and
in our industry and may not be able to withstand competitive pressures,
keep pace with technological developments, make acquisitions, enter into
ventures or capitalize on business opportunities.
Timely payment of the principal of our Senior Notes will require an increase
in cash flows from operations. This, in turn, will require a significant
increase in revenues and will continue to be affected by various factors
discussed in this prospectus, including in this section and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Unless we realize these increases, we may be unable to meet obligations under
our Senior Notes and our other indebtedness. Our cash flow depends upon our
future performance and financial, economic and other factors, some of which are
beyond our control.
If we are unable to generate cash flow from operations in amounts sufficient
for us to be able to pay our debts as they become due, we may be required to
refinance all or a portion of our debt, sell some or all of our assets or sell
additional equity securities at prices that may be dilutive to existing
investors. We may not be able to refinance all or a portion of our debt or sell
our equity securities or assets on a timely basis, on acceptable terms or at
all.
OUR OUTSTANDING DEBT AND RESTRICTIVE TERMS OF OUR INDENTURE MAY MAKE IT MORE
DIFFICULT FOR US TO OBTAIN THE BANK OR OTHER FINANCING WE WILL NEED TO IMPLEMENT
OUR STRATEGY.
Our business strategy will likely require us to incur additional debt to
support our growth. This strategy may not be achievable because of our high
level of debt and the restrictions imposed by the indenture governing our Senior
Notes. The indenture restricts our ability to incur debt, make distributions,
sell assets, create liens, make investments or engage in mergers and
acquisitions. The indenture also restricts our ability to sell a minority
interest in our subsidiaries or operate through joint ventures (such as the PIN
Venture), a form of entity that is typically used in the businesses in which we
operate and which, if not available, limits our ability to respond to market
opportunities. Amendment of the indenture to accommodate these activities is
uncertain, and we may not be able to negotiate an amendment on acceptable terms,
if at all. These restrictions reduce our operating flexibility and may prevent
us from expanding our existing businesses or developing or acquiring businesses.
Banks or other financial institutions may not be willing to lend to us,
particularly in light of the significant amount and terms of our Senior Notes.
Further, they may not be willing to lend on terms that are acceptable to us. Our
inability to obtain bank or other financing could negatively affect our ability
to meet our cash needs and could limit our ability to implement our business
strategy.
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WE MAY NOT BE ABLE TO MAINTAIN OR INCREASE DISTRIBUTION OF OUR RADIO
PROGRAMMING.
Our ability to maintain or increase the distribution of our radio
programming is dependent upon, among other factors, our ability to assess
consumer preferences accurately and to develop, acquire and distribute radio
programming that is attractive to radio stations and their listeners. We cannot
assure you that we will be able to continue to develop or acquire radio
programming that will be accepted in our targeted markets or that we will be
able to enter into new affiliation agreements, or maintain our existing
affiliation agreements, with radio stations. As radio station ownership is
consolidated into larger station groups, more radio station owners may develop
and produce content in-house, thereby reducing their need for the type of radio
programming we provide.
WE DEPEND ON ADVERTISING REVENUES AND MAY NOT BE ABLE TO MAINTAIN OR INCREASE
THESE REVENUES IN THE FUTURE.
We are heavily dependent on advertising revenues. For the year ended
December 31, 1999, advertising revenues comprised approximately 80% of our total
revenues. In order to attract advertisers, we must demonstrate that our radio
and cable television networks and Internet sites are able to deliver the type
and quantity of audience that advertisers seek to reach.
In our industry advertising revenue can be adversely affected by competitive
and other conditions, many of which are beyond our control, including:
- general economic downturns;
- the amount of funds that advertisers dedicate to radio, cable television
and Internet advertising, in general and to our networks, in particular;
- the popularity of programming which we provide and ratings achieved by
radio station affiliates that broadcast our radio programming or utilize
our services;
- seasonal fluctuations in advertising revenues in the radio and cable
television industries;
- the number of advertisers who seek audiences within the demographic groups
our programming targets;
- the number of advertisers that require a network to subscribe to a
particular rating service, the cost of that service and whether we
subscribe to that service;
- competition in national and regional markets from radio, television,
Internet and other media;
- regulatory restrictions on advertising of certain products (such as beer,
wine, liquor or cigarettes); and
- the continued popularity of traditional radio and cable television as
entertainment media, particularly in light of competition from other
entertainment sources, including the Internet.
We cannot assure you that we will be able to maintain our existing
advertisers or attract additional advertisers in the future. If we are not able
to do so, our advertising revenues and operating results could be negatively
affected.
GAC's growth contemplates a shift in the source of its advertising revenues
from lower rate direct response advertising to higher rate spot advertising.
This transition will be highly dependent on GAC's ability to expand its
subscriber base, obtain sufficient television ratings from a national rating
service and assemble an effective national advertising sales group. Similarly,
PIN's growth is largely dependent on increasing distribution to cable television
subscribers and, to a lesser extent, increasing the number of hours of
advertising from non-traditional long-form advertisers. We cannot assure you
that GAC and PIN will be successful in these growth efforts.
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WE DEPEND ON OUR DISTRIBUTION OF TELEVISION PROGRAMMING AND MAY NOT BE ABLE TO
MAINTAIN OR INCREASE THIS DISTRIBUTION IN THE FUTURE.
Growth in our television programming business is largely dependent on
increasing the distribution of GAC and PIN through cable television systems and
other video distributors. GAC and PIN compete for a limited number of available
cable channels with a large number of other cable television programmers
supplying a variety of programming, including entertainment, sports, news,
public affairs and educational programming. Many of these programmers provide
substantial cash incentives to cable television systems and other video
distributors that we are not able or willing to match.
A significant amount of cable programming distribution is controlled by
multiple-system operators (MSOs), some of which are affiliated with competing
program providers. Sales of cable systems by MSOs or sales of MSOs that have
affiliation agreements with us could result in a loss of subscribers if the new
owners do not retain our programming; the number of lost subscribers and the
amount of lost revenues could be material.
PIN's affiliation agreements with systems operated by an MSO or with an MSO
do not guarantee PIN carriage and, in many cases, these agreements do not
provide for the distribution of PIN's programming on a full-time basis. Most
affiliation agreements are short-term in nature. Many of the MSOs that carry PIN
may also carry programming with which PIN competes. See "--Product Information
Network has structural, organizational and operating risks."
Some of our affiliation agreements with larger MSOs allow these MSOs to
delete our programming on a system-by-system basis. Because advertising revenues
generated by GAC and PIN are a function of distribution, which declines when
deletions occur, success in the distribution of our cable television programming
will directly affect the amount of advertising revenues generated by our cable
television networks. Further, distribution also directly affects the amount of
license fees generated by GAC.
Our expansion plans for GAC and PIN are dependent, in part, upon our ability
to retain and expand our distribution to more subscribers under existing
affiliation agreements, to renew existing affiliation agreements and to obtain
affiliation agreements with additional MSOs and video programming distributors.
We cannot assure you that we will be able to negotiate new affiliation
agreements, expand our distribution or retain or renew existing affiliation
agreements.
WE DEPEND ON A CONSISTENT SUPPLY OF MUSIC VIDEOS FROM RECORD COMPANIES.
GAC is highly dependent on timely access to music videos, which provide the
programming content that attracts viewers and advertisers to the network. GAC
relies on record companies to supply these music videos. Record companies could
decide to cease production of videos, reduce the number being produced or could
decide to charge a fee for videos. In the past, a competitor has attempted to
enter into exclusive agreements with record companies which would have
eliminated our access to this supply. If this source of music videos were not to
continue, there may not be a satisfactory replacement source and our content,
distribution and viewership could suffer. We cannot assure you that this or
another competitor may not be successful in the future in limiting our source of
programming through exclusive agreements with record companies. See "--We may
not be able to compete effectively against our competitors."
WE MAY BE UNABLE TO EXECUTE OUR INTERNET STRATEGY.
We anticipate spending significant capital in the future to realize our
Internet strategy and expect to encounter difficulties establishing ourselves in
the Internet market. We have limited experience in creating and distributing
content, selling merchandise and advertising through the Internet. Competition
for Internet users' attention and spending is growing rapidly. The technical
infrastructure of the
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Internet and our Internet businesses may not be able to adequately serve the
increasing consumer demand. This may result in slowed growth or a decline in
visitors to our web sites.
We have not produced any significant Internet revenues to date and we cannot
assure you that we will be able to develop Internet merchandise sales or
advertising revenues in the future. These revenue sources depend on a variety of
factors affecting the Internet in general, as well as our web sites in
particular. We will depend on the continued rapid growth of Internet users and
our ability to attract a large enough share of those users to our web sites to
support our Internet business. If the content of our web sites is not
attractive, the number of visitors to our web sites may be too small to generate
meaningful revenue. Merchandise sales may be hurt if the quality and price of
the merchandise are not attractive or if potential customers are concerned about
the security of their personal information. Advertising sales may also be
affected if there are not enough visitors to the web sites or if the visitors'
demographics are unattractive to potential advertisers. In addition, the costs
we will incur to attract visitors to our web sites will be substantial and are
likely to exceed revenues from Internet operations for an extended period of
time. We cannot assure you that our Internet business will be profitable.
There is intense competition for qualified employees to create and maintain
web sites. This competition could restrict our ability to develop our Internet
business, delay the development of our web sites or result in higher than
projected staffing costs.
We may be subject to claims for defamation, libel, negligence, copyright or
trademark infringement and personal injury based on the content of our web sites
or other web sites to which they are linked. We may also be subject to product
liability suits for the merchandise that is sold through the web sites.
Government regulations regarding Internet user privacy, pricing, content and
distribution are evolving and new regulations may hurt our Internet business.
WE MAY NOT BE ABLE TO RENEW OUR ADVERTISING SALES AGREEMENTS.
Approximately 60% of our advertising sales services revenues in 1999 were
from the sales of programs produced by companies we do not own. Several of these
advertising sales agreements are scheduled to expire in 2000. Advertising sales
agreements are generally short-term in nature, varying from one to three years
in length, and in many cases include provisions that allow for earlier
termination by the client if we do not attain preset benchmarks. Industry
consolidation may contribute to non-renewal of one or more of these agreements,
as programming clients may consolidate with companies that compete with us or
that provide advertising sales services in-house. We cannot assure you that
existing agreements will be renewed.
WE MAY LOSE REVENUES FROM OUR SATELLITE SERVICES.
Revenues from the provision of satellite services to others, including some
related parties, is subject to uncertainties. Two of our channels are currently
not being leased and lease of this unutilized space in the near future is
uncertain. While we are actively marketing the channels available on our
compressed transponder, there are a number of other companies that are competing
with us to lease transponder capacity, some of whom are offering lower lease
rates. With respect to transponder space that is currently leased, one related
party has indicated that it will terminate some transponder and associated
services that we provide, effective the first quarter of 2000. This will result
in a $75,000 per month loss of revenues. The lease of another of our channels to
a different related party will likely be terminated in 2001. The lease of a
channel to a third party, which provides for monthly payments of $70,000, is
currently in default and it is unlikely that we will receive any further lease
payments under this agreement. It is uncertain that replacement lessees can be
found for lease capacity that is vacated. If third party lessees were no longer
paying for such services, our loss of revenues would be significant. There is no
assurance that other leases could be obtained on similar terms. We cannot
provide assurances that we will be able to maintain or increase our revenues
from satellite leases.
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WE DEPEND ON OUR SATELLITE TRANSPONDERS TO DELIVER OUR CABLE TELEVISION
PROGRAMMING, AND TECHNICAL FAILURE OF OUR SATELLITE TRANSPONDERS WOULD MAKE US
UNABLE TO DELIVER OUR PRODUCT.
We deliver our cable television programming through our own satellite
delivery and production support facilities and depend on the continued effective
operation of our two satellite transponders. These transponders are not likely
to have a meaningful useful life beyond 2004, when we will be required to locate
a replacement to use for our programming. We cannot assure you that we will be
able to enter into new satellite leases at that time on favorable terms.
Our principal satellite transponder agreement provides various protections
to us in the event of satellite failure, and the transponders are not subject to
preemption by third parties in most instances. Although the agreement provides
that if service is unavailable for any reason on the satellite transponders, the
satellite owner is required to place our programming on a replacement satellite
transponders, there can be no assurance that this would occur. There are a
limited number of domestic communications satellites available for the
transmission of radio and cable television programming. The availability of
transponders in the future is dependent on a number of factors over which we
have no control. These factors include the limited availability of desirable
orbital slots for commercial communications satellites, the successful launches
of additional commercial communications satellites by third parties and the
competition and demand for transponder leases on existing and new satellites.
PRODUCT INFORMATION NETWORK HAS STRUCTURAL, ORGANIZATIONAL AND OPERATING RISKS.
We operate PIN through a joint venture with Cox Communications, Inc.
Because, in certain circumstances, the joint venture requires agreement between
the participants, there is a risk that we and Cox may not agree on significant
aspects of PIN's business plans. Cox, being a major MSO, has goals and
objectives that may be different from ours.
The PIN Venture agreement contains a number of provisions that either allow
or require a partner to withdraw from the venture. Either partner is required to
withdraw if the number of subscribers provided by that partner falls below a
specified level. A reduction in subscribers at specified levels could also
result in monetary penalties. Such a withdrawal would cause a dissolution of the
PIN Venture. The PIN Venture is scheduled to expire on December 31, 2004. See
"--We depend on distribution of television programming and may not be able to
maintain or increase this distribution in the future."
If, for any reason, we were unable to consolidate PIN's results of
operations, our financial statements would change because PIN's revenues and
operating income, if any, would not be included in our consolidated revenues and
operating income.
PIN's operating results are very sensitive to the rates received for the
sale of its airtime and rebates paid to cable system operators. A relatively
small decrease in rates or increase in rebates could cause a disproportionately
large decrease in PIN's operating income.
WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY AGAINST OUR COMPETITORS.
All of our businesses are in industries with a high degree of competition,
which has become more intense as a result of industry consolidations and
technological changes.
Our radio network competes for advertising, radio station affiliations and
new radio programs and talent with major network radio distribution companies,
as well as with a large number of smaller independent producers and
distributors. Because the radio programming industry has recently experienced
rapid consolidation, the largest competitors in the industry are under common
ownership with major radio station group owners. These competitors have
recognized brand names, as well as large networks that include affiliates to
which such competitors pay compensation to broadcast the network's programming
and commercials.
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Radio networks also face competition from improving technologies enabling
local stations to pre-record announcements and automate their operations,
thereby reducing costs and improving operational efficiencies. Another
technological advance, satellite radio, expected to launch commercially in 2000,
will permit digital quality radio programming to be broadcast throughout the
continental United States via direct broadcast satellite. Also, high-speed
Internet technology will likely increase the quality and availability of
Internet radio, which includes the technology of wireless Internet radio for
automobiles. We cannot predict what effect these new technologies will have on
us or the radio industry in general.
Our cable television networks compete for the distribution of programming on
cable systems, for viewers and for advertising revenues, with numerous cable and
broadcast television networks that provide a variety of infomercial and
entertainment programming. GAC has one principal direct competitor, Country
Music Television (CMT), a large network with substantial financial resources
that distributes its programming to approximately 51% of the multi-channel
subscribers in the United States. CMT is owned by CBS, which has announced that
it plans to merge with Viacom, a large entertainment company with significant
cable programming holdings, including the MTV network. This transaction could
negatively impact GAC's growth because of the strong presence of Viacom in the
music industry, which will put CMT in a position to package the carriage of its
country music channel with Viacom's other music formats. In addition, CMT has a
substantial number of Direct Broadcast Satellite (DBS) subscribers. GAC to date
has no DBS subscribers. PIN competes for viewers directly with at least two
long-form advertising networks, certain cable shopping channels and at least 30
cable television networks that air long-form advertising, many of which have a
substantial number of viewers. We expect to encounter additional competition for
viewers because of the implementation of technological advances, including the
deployment of digital compression technology and fiber optic cable. The
"multiplexing" of cable services, which allows cable systems to greatly expand
their channel capacity and, as a result, their ability to add new networks.
Our advertising sales services business (MediaAmerica) is also subject to
significant competition, both to attract program provider clients and to sell
commercial inventory to advertisers. We compete with major network radio
distribution companies, which operate divisions that both sell their own
company's airtime inventory and also contract with third party radio programmers
to sell their airtime inventory. Over the last several years, many independent
program providers have been acquired by major network distribution companies.
These companies have large amounts of airtime inventory and significant
resources. The formation by certain group radio station owners of radio
networks, such as AMFM, Inc., has adversely affected our advertising revenues in
the past. We cannot assure you that the presence of existing competitors or the
introduction of new competitors will not result in an over-supply of inventory
to the marketplace, leading to depressed pricing and decreased sales of airtime
inventory.
The e-commerce and advertising markets are intensely competitive. We compete
with other music web sites, some of which target the same audience segments that
we target. We also compete for Internet advertising revenues with large web
publishers, search engine companies, advertising networks and other advertising
representation services.
Because there are generally few barriers to entry into our markets, we could
face competition from new competitors offering services similar to ours. Our
radio and television networks also compete with broadcast and cable television,
print, outdoor advertising, the Internet and other forms of media for
advertising dollars. Many of our competitors have greater financial and other
resources and we cannot assure you that we will be able to compete successfully
in the future.
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THE EXPANSION OF OUR BUSINESS MAY TAKE US INTO LINES OF BUSINESS IN WHICH WE DO
NOT HAVE OPERATING EXPERIENCE.
Our business strategy contemplates growth, which may occur through
acquisition, joint venture or investment by third parties, as well as internal
growth. Business opportunities may be presented to us that would result in our
engagement and investment in enterprises that are different from the businesses
in which we currently operate and in which we do not have a developed expertise.
Acquisitions and joint ventures entail risks, including integration of companies
and melding of operational philosophies. To the extent we are engaging in
businesses in which we do not have prior experience, these acquisition risks are
increased. Acquisitions and joint ventures may be accomplished through sale of
our equity securities, or of the equity of a particular subsidiary. Such equity
issuances may be dilutive to existing investors and, to the extent we have sold
stock in a subsidiary, will reduce cash flow from that subsidiary. We cannot
assure you that our future operations will only be in businesses in which we are
currently engaged or that any expansion of our existing business or any new
businesses in which we may engage will be successful. In addition, such
opportunities may arise unexpectedly and may require capital or other
expenditures that have not been provided for in our budget process, thereby
requiring us to adjust our funding priorities or to seek additional financing.
IF WE CANNOT RETAIN OUR KEY PERSONNEL AND HIRE ADDITIONAL QUALIFIED MANAGEMENT
AND TECHNICAL PERSONNEL, WE MAY NOT BE ABLE TO SUCCESSFULLY MANAGE OUR
OPERATIONS AND PURSUE OUR STRATEGIC OBJECTIVES.
We are dependent on the efforts and abilities of Glenn R. Jones, our
Chairman, and of our senior management, including Jeffrey C. Wayne, President,
Jay B. Lewis, Group Vice President and Chief Financial Officer, Ron Hartenbaum
and Gary Schonfeld, the executives in charge of our radio network and
advertising sales operations, and Edith Hilliard, President of our Broadcast
Programming subsidiary. Except for Messrs. Hartenbaum and Schonfeld and
Ms. Hilliard, we do not have employment agreements with any of our senior
management, and we do not carry key life insurance on any of these employees.
Our success depends, in part, upon our ability to attract and retain
talented performers, producers and other creative personnel. We cannot assure
you that we will continue to be successful in attracting and retaining qualified
creative personnel.
We are also dependent upon the talents and abilities of our advertising
account executives. Our account executives have personal relationships with
national advertisers and their advertising agencies, which are important to our
ability to continue to maintain and increase our share of the advertising
market. We cannot assure that we will continue to be successful in attracting
and retaining qualified sales personnel.
WE MAY DEVELOP NEW CABLE NETWORKS THAT MAY NOT BE ABLE TO DEVELOP SUFFICIENT
DISTRIBUTION TO BE SUCCESSFUL.
We have contemplated, from time to time, the development of new cable
networks which entails certain risks. New networks will compete for distribution
with other more established networks, and are likely to lose money until
distribution reaches certain levels, which may not occur for a significant
period of time, if ever. We may have to expend considerable capital to develop
the networks and to obtain distribution. We cannot assure you that any new cable
network we may develop would be successful.
WE HAVE ENGAGED AND WILL CONTINUE TO ENGAGE IN TRANSACTIONS WITH RELATED
PARTIES.
We have engaged in transactions with related parties, such as loans,
affiliation agreements for the distribution of cable television programming,
satellite transponder leases and production support
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services, and lease and service agreements related to certain technical,
computer and administrative services and expect to continue to engage in certain
of these transactions in the future. For the year ended December 31, 1999,
approximately $5.3 million, or 8%, of our total revenues and approximately
$6.2 million, or 10%, of our total operating expenses involved related party
transactions. The terms of these agreements are not the result of arm's-length
negotiations, and the terms of any transactions with related parties may not
have been, and may not in the future be, as favorable as those we could obtain
from unrelated parties. Our indenture requires that the terms of any transaction
we enter into with any related party after July 10, 1998 and during the time our
Senior Notes are outstanding must be on arms' length terms.
WE MAY BE SUBJECT TO BURDENSOME GOVERNMENT REGULATIONS.
The radio stations, cable television systems and other video distributors to
which we sell our programming are regulated by the Federal Communications
Commission. As a result, the federal laws and FCC regulations that affect these
entities affect us indirectly.
Our satellite delivery and production support services are directly
regulated by the FCC. We hold FCC microwave and earth station uplink licenses
for our delivery and support services. There can be no assurance that these
licenses will be able to be maintained or that additional regulatory burdens
will not be imposed in the future.
POSSIBLE INFRINGEMENT OF INTELLECTUAL PROPERTY RIGHTS COULD HARM OUR BUSINESS.
We regard our original programming as proprietary and rely primarily on a
combination of statutory and common law copyright, trademark and trade secret
laws, customer licensing agreements, nondisclosure agreements and other methods
to protect our proprietary rights. If substantial unauthorized use of our
programming were to occur, our results of operations could be negatively
affected. There can be no assurance that our means of protecting our proprietary
rights will be adequate or that our competitors will not independently develop
similar program content and distribution methods. In addition, there can be no
assurance that third parties will not claim that our current or future
programming infringes on the proprietary rights of others.
OUR STOCK PRICE IS LIKELY TO BE VOLATILE AND COULD DROP UNEXPECTEDLY.
We cannot assure that our Class A Common Stock will not trade at a price
less than the offering price. The securities markets have experienced
significant price and volume fluctuations in recent years that have often been
unrelated or disproportionate to the operating performance of particular
companies. These broad fluctuations may hurt the market price of our Class A
Common Stock, particularly because there will be a relatively small public float
of our shares.
In addition, our quarterly and annual results of operations are affected by
a wide variety of factors, many of which are outside our control, and could have
a harmful effect on us and the market price of our Class A Common Stock. Our
future revenue or operating results may be below the expectations of public
market analysts and investors, which could cause the price of our Class A Common
Stock to decline.
THERE HAS BEEN NO PRIOR PUBLIC MARKET FOR OUR STOCK.
Prior to this offering, there has been no public market for our Class A
Common Stock and there can be no assurance that an active public market will
develop or continue after this offering. We have applied for approval for
quotation of our Class A Common Stock on the Nasdaq National Market and expect
to receive approval for quotation on the Nasdaq National Market before the sale
of our Class A Common Stock. Our Class A Common Stock may experience volatility
until trading values become
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established. As a result, it could be difficult to make purchases or sales of
our Class A Common Stock in the market at any particular time.
SHARES ELIGIBLE FOR PUBLIC SALE BY EXISTING STOCKHOLDERS AFTER THIS OFFERING
COULD HURT OUR STOCK PRICE.
The market price for our Class A Common Stock could be negatively affected
by the availability of shares of Class A Common Stock for sale after this
offering or actual sales of substantial amounts of Class A Common Stock after
this offering by existing shareholders. We will have 7,792,426 shares of
Class A Common Stock outstanding upon completion of this offering that are
"restricted securities" within the meaning of Rule 144 under the Securities Act.
These shares may not be sold in the absence of registration under the Securities
Act unless an exemption from registration is available, including the exemption
contained in Rule 144. Furthermore, each of the 2,231,400 shares of our Class B
Common Stock that are currently outstanding is convertible at the election of
their holders into one share of Class A Common Stock. The shares of Class B
Common Stock and the shares of Class A Common Stock into which they may be
converted are also "restricted securities" within the meaning of and subject to
Rule 144.
Our directors and executive officers and a majority of our current
shareholders (including Mr. Jones and his affiliates) have agreed that for a
period of 180 days they will not sell, offer to sell, contract to sell, pledge
or otherwise dispose of any shares of our Class A Common Stock without the prior
written consent of Credit Suisse First Boston Corporation, subject to certain
conditions. Following the expiration of the lock-up agreements, 5,393,985 shares
of Class A Common Stock will be available for resale in the public market,
subject to the volume limitations, holding period and other restrictions of
Rule 144. Many of these restrictions do not apply to the 484,886 shares held by
persons who are not our affiliates.
In addition, as of February 1, 2000, 1,750,000 shares of our Class A Common
Stock were reserved for issuance under our stock option plan, as amended,
529,375 of which were subject to outstanding options as of that date and another
approximately 242,516 shares will be subject to options outstanding as of the
closing of this offering. We have granted registration rights to some of our
current shareholders relating to 3,434,620 shares of Class A Common Stock, which
would facilitate their resale efforts. Future sales of shares of our Class A
Common Stock, or the perception that such sales could occur, could have a
harmful effect on the market price of our Class A Common Stock. See "--There has
been no prior public market for our stock," and "--Our stock price is likely to
be volatile and could drop unexpectedly."
INVESTORS WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION.
The initial public offering price per share is significantly higher than our
net tangible book value per share. Accordingly, investors purchasing shares in
this offering will suffer immediate and substantial dilution of their
investment. See "Dilution."
FORWARD-LOOKING INFORMATION
This prospectus contains forward-looking statements. Forward-looking
statements are not statements of historical facts but rather reflect our current
expectations, estimates and predictions about future results and events. We use
words such as "anticipate," "continue," "estimate," "expect," "predict," "may,"
"will," "project," "should," "assume," "believe," "plan," "intend" and similar
expressions to identify forward-looking statements. These statements are not
guarantees of future performance and are subject to certain risks, uncertainties
and other factors, many of which are beyond our ability to control or predict,
that could cause actual results to differ materially from those anticipated in
these forward-looking statements. These risks and uncertainties, including
general risks and uncertainties associated with our substantial leverage and
restrictions imposed by indenture, the
16
<PAGE>
development or acquisition of television, radio and Internet programming that
audiences will like, the pace of development of our Internet business and the
Internet in general, dependence on the sale of advertising airtime and
generation of advertising revenues, risks and uncertainties associated with the
satellite delivery and production support market and technology and those other
risks and uncertainties and are described in "Risk Factors" and elsewhere in
this prospectus.
You should not unduly rely on these forward-looking statements. These
statements speak only as to our management's view as of the date of this
prospectus. We are not obligated to update these statements or publicly release
any revisions to them to reflect events or developments after the date of this
prospectus or to reflect the occurrence of unanticipated events. All subsequent
written and oral forward-looking statements attributable to us and to persons
acting on our behalf are qualified in their entirety by the cautionary
statements contained in this section and elsewhere in this prospectus.
17
<PAGE>
USE OF PROCEEDS
The net proceeds we will receive from the sale of the shares of Class A
Common Stock offered by us are estimated to be approximately $69.9 million
($80.5 million if the underwriters exercise their over-allotment option in
full), assuming a price to the public of $15.50 per share and after deducting
estimated underwriting discounts and commissions and offering expenses. We
currently expect to use the net proceeds from the offering as estimated below:
- approximately $39.0 million to repurchase a portion of our Senior Notes,
including the payment of related fees and premiums; and
- the remaining proceeds for working capital and general corporate purposes,
including acquisitions.
We anticipate the following expenditures for working capital and general
corporate purposes over the next 12 to 18 months:
- approximately $10.5 million for development of our Internet business,
which will include expenditures relating to Internet programming content
and Internet advertising sales services; and
- approximately $8.0 million for making cable programming distribution
payments to cable system operators for carrying GAC.
Our Senior Notes were issued in July 1998, bear interest at 11 3/4% per
annum and mature in 2005. Under the terms of the indenture, our Senior Notes may
be redeemed with the proceeds of a public equity offering at a purchase price
equal to 111.75% of their principal amount, so long as, after the redemption, at
least $65.0 million aggregate principal amount of our Senior Notes remains
outstanding. Any such redemption must occur within 90 days of the closing of the
offering.
If we redeem our Senior Notes under this provision of the indenture,
Mr. Glenn R. Jones, who owns approximately $23.7 million aggregate principal
amount of our Senior Notes, will receive his pro rata share of any redemption
payments. Alternatively, or in conjunction with this redemption, we may elect to
repurchase our Senior Notes in negotiated transactions or in open market
purchases. If we elect one or both of these methods of repurchase, we will not
purchase Senior Notes from Mr. Jones in negotiated transactions. To the extent
that we have not purchased $35.0 million aggregate principal of our Senior Notes
through negotiated purchases or open market transactions, we will exercise our
redemption right under the indenture for the remainder.
While the amounts indicated above reflect what we currently expect to spend
on these matters, opportunities may arise that cause us to change the allocation
of proceeds designated for working capital and general corporate purposes.
Pending such uses, we intend to invest the net proceeds from this offering in
short-term, interest-bearing, investment-grade securities.
DIVIDEND POLICY
We have not paid any cash dividends. Our policy is to retain future earnings
to provide funds for the operation and expansion of our business. Therefore, we
do not currently intend to pay cash dividends on any of our classes of stock.
Any payment of future cash dividends and the amounts of those dividends will
depend on our earnings, financial requirements and other factors deemed relevant
by our board of directors.
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<PAGE>
CAPITALIZATION
The following table sets forth: (i) our actual capitalization as of
December 31, 1999; and (ii) our capitalization as adjusted to give effect to
(a) the conversion of all outstanding shares of Series A Convertible Preferred
Stock into 2,397,500 shares of Class A Common Stock, (b) the termination of the
put on 126,405 shares of Class A Common Stock subject to put, which put right
terminates upon completion of this offering, and (c) the sale in this offering
of 4,900,000 shares of our Class A Common Stock at an estimated offering price
of $15.50 per share (less underwriting discounts, commissions and estimated
expenses we expect to pay in connection with this offering) and the application
of the proceeds. You should read this table in conjunction with our historical
consolidated financial statements and the related notes thereto and other
information included elsewhere in this prospectus. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents.............................. $ 13,271 $ 44,027
Available for sale securities.......................... 6,889 6,889
-------- --------
Total cash, cash equivalents and available for sale
securities......................................... $ 20,160 $ 50,916
======== ========
Total debt:
Revolving credit facility(1)......................... $ -- $ --
11 3/4% Senior Secured Notes due 2005................ 100,000 65,000
Minority interests..................................... 565 565
Class A Common Stock subject to put: 126,405 shares
issued and outstanding, actual; no shares issued and
outstanding, as adjusted............................. 1,213 --
Shareholders' equity (deficit):
Series A Convertible Preferred Stock, $.01 par value:
1,918,000 shares authorized; 1,918,000 shares
issued and outstanding, actual; no shares issued
and outstanding, as adjusted(2).................... 23,975 --
Class A Common Stock, $.01 par value: 100,000,000
shares authorized; 5,268,521 shares issued and
outstanding, actual; 12,692,426 shares issued and
outstanding, as adjusted(2)(3)..................... 53 127
Class B Common Stock, $.01 par value: 2,231,400
shares authorized; 2,231,400 shares issued and
outstanding, actual and as adjusted................ 22 22
Accumulated other comprehensive income............... (26) (26)
Additional paid-in capital........................... 27,588 122,586
Accumulated deficit.................................. (48,910) (54,827)
-------- --------
Total shareholders' equity......................... 2,702 67,882
-------- --------
Total capitalization............................. $104,480 $133,447
======== ========
</TABLE>
- ----------
(1) We currently have no borrowings outstanding under our credit facility. The
full $20.0 million is available to us. Our credit facility terminates in
June 2000, unless extended.
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<PAGE>
(2) In September and November 1999, we issued 1,918,000 shares of Series A
Convertible Preferred Stock for an aggregate purchase price of
$24.0 million. The preferred stock will convert into 2,397,500 shares of
Class A Common Stock upon the completion of this offering.
(3) Excludes (i) 529,375 shares of Class A Common Stock issuable upon exercise
of outstanding options under our stock option plan, (ii) 218,000 shares of
Class A Common Stock that will be issuable upon exercise of options that
become effective as of the closing of this offering, (iii) approximately
24,516 shares of Class A Common Stock issuable upon exercise of immediately
exercisable non-qualified stock options to be issued to management upon
closing of this offering at an exercise price equal to 25% of the price of
Class A Common Stock in this offering, and (iv) 978,109 shares of Class A
Common Stock available for issuance under our stock option plan. Also
excludes an estimated approximately 60,000 shares of Class A Common Stock
that we expect to issue in connection with acquisitions.
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<PAGE>
DILUTION
Purchasers of Class A Common Stock offered by this prospectus will suffer an
immediate and substantial dilution in net tangible book value per share.
Dilution is the amount by which the initial public offering price paid by
purchasers of Class A Common Stock in this offering will exceed the net tangible
book value per share of common stock after the offering. Our net tangible book
value as of December 31, 1999 was a deficit of approximately $(64.4) million, or
$(6.43) per share of common stock (considering together for this purpose the
Class A Common Stock, Class B Common Stock, Class A Common Stock subject to put
and Class A Common Stock to be issued upon conversion of Series A Convertible
Preferred Stock). Net tangible book value per share represents the amount of
tangible assets less total liabilities, divided by the number of shares of
common stock outstanding. After giving effect to the sale of the 4,900,000
shares of Class A Common Stock offered hereby (at an assumed initial offering
price of $15.50 per share and after deduction of underwriting discounts and
commissions and estimated offering expenses), our as adjusted net tangible book
value at December 31, 1999 would have been $1.3 million, or $0.09 per share of
common stock. This represents an immediate increase in net tangible book value
of $6.52 per share of common stock to existing shareholders and an immediate
dilution of $15.41 per share to purchasers of the Class A Common Stock in this
offering.
The following table illustrates the per share dilution to new investors.
<TABLE>
<S> <C> <C>
Assumed initial public offering price..................... $15.50
------
Net tangible book value as of December 31, 1999......... $ (6.43)
Increase in net tangible book value attributable to this
offering.............................................. 6.52
--------
Net tangible book value after this offering............... 0.09
------
Dilution to purchasers in the offering.................... $15.41
======
</TABLE>
The following table summarizes, on an as adjusted basis as of December 31,
1999, the number of shares of common stock and preferred stock purchased from
us, the total cash consideration paid to us and the average cash price per share
paid by existing shareholders and by new investors purchasing Class A Common
Stock in this offering at an assumed initial offering price of $15.50 (before
deducting underwriting discounts and commissions and estimated offering
expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CASH CONSIDERATION
---------------------- ------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- -------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C>
Existing
shareholders......... 10,023,827 67.2% $ 39,985,000 34.5% $ 3.99
New investors.......... 4,900,000 32.8 75,950,000 65.5 15.50
----------- ---- ------------ ----
Total................ 14,923,827 100% 115,935,000 100%
=========== ==== ============ ====
</TABLE>
If the underwriters' over-allotment option is exercised in full, the
following will occur:
- the number of shares of common stock held by existing stockholders will
decrease to approximately 64.0% of the total number of shares of our
common stock outstanding after this offering; and
- the number of shares held by new investors will increase to 5,635,000 or
approximately 36.0% of the total number of shares of our common stock
outstanding after this offering.
The above table excludes:
- 529,375 shares of Class A Common Stock issuable upon exercise of
outstanding options at an exercise price of $12.00 per share;
- 218,000 shares of Class A Common Stock that will be issuable upon exercise
of options that become effective as of the closing of this offering at an
exercise price equal to the price of the Class A Common Stock in this
offering;
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<PAGE>
- approximately 24,516 shares of Class A Common Stock issuable upon exercise
of immediately exercisable non-qualified stock options to be issued to
management upon closing of this offering at an exercise price equal to 25%
of the price of Class A Common Stock in this offering; and
- 978,109 shares of Class A Common Stock available for issuance under our
stock option plan.
To the extent that the above options are exercised, further dilution to
investors may result.
The table also excludes an estimated approximately 60,000 shares of Class A
Common Stock that we expect to issue in connection with acquisitions.
Approximately 40,000 shares will be issued if a pending acquisition is
completed, at a price per share equal to the price of the Class A Common Stock
in this offering. We also are obligated to issue additional shares to Adelphia
in connection with our purchase of Adelphia's interest in PIN, based on the
difference between estimated and audited financial results for PIN. We expect
this issuance to be approximately 20,000 shares.
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following tables summarize certain financial and operating data for our
business. This information should be read along with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and our
consolidated financial statements and notes to those statements included
elsewhere in this prospectus. The historical statements of operations and
balance sheet data as of and for each of the years in the five-year period ended
December 31, 1999 have been derived from our consolidated financial data. This
data has been audited by Arthur Andersen LLP, independent auditors.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
(IN THOUSANDS EXCEPT SHARE, PER SHARE AND RADIO STATION
AFFILIATE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues................................................. $ 15,127 $ 16,654 $ 29,112 $ 38,212 $ 64,366
Operating expenses:
Operations............................................. 8,095 8,914 17,049 27,181 43,617
Selling and marketing.................................. 1,374 1,807 3,491 5,412 6,438
General and administrative............................. 303 581 1,151 1,116 1,491
Depreciation and amortization.......................... 3,888 4,476 5,168 6,266 10,775
--------- --------- --------- --------- ---------
Total operating expenses............................. 13,660 15,778 26,859 39,975 62,321
--------- --------- --------- --------- ---------
Operating income (loss).................................. 1,467 876 2,253 (1,763) 2,045
--------- --------- --------- --------- ---------
Interest expense, net.................................... 4,006 4,428 5,569 8,195 11,729
Other expense............................................ 5 (841) 616 1,228 (32)
Income tax provision (benefit)........................... (498) (387) (1,342) 49 (470)
Minority interest........................................ -- (9) 903 215 881
--------- --------- --------- --------- ---------
Net loss................................................. $ (2,046) $ (2,315) $ (3,493) $ (11,450) $ (10,063)
========= ========= ========= ========= =========
Net loss per common share:
Basic.................................................. $ (0.40) $ (0.45) $ (0.64) $ (1.71) $ (1.32)
Fully diluted.......................................... $ (0.40) $ (0.45) $ (0.64) $ (1.71) $ (1.32)
Weighted average shares outstanding:
Basic.................................................. 5,129,466 5,129,466 5,500,560 6,715,805 7,617,926
Fully diluted.......................................... 5,129,466 5,129,466 5,500,560 6,702,010 7,601,868
OTHER DATA:
EBITDA(a)................................................ $ 5,355 $ 5,352 $ 6,599 $ 4,290 $ 11,960
Capital expenditures..................................... 1,262 2,969 1,367 2,258 850
Cable programming distribution payments(b)............... -- -- -- 3,064 6,354
Net cash provided by (used in):
Operating activities................................... 364 4,776 7,589 (7,065) 2,398
Investing activities................................... (1,873) (3,971) (1,156) (35,021) (32,633)
Financing activities................................... (809) (807) (2,720) 59,023 22,851
AUDIENCE DATA (at end of period):
Radio station affiliates(c).............................. 929 1,273 1,484 2,146 2,485
Radio station AQH (24-hour formats)(d)................... 1,530 2,180 2,296 2,369 1,986
Radio station AQH (syndicated)(d)........................ -- 834 1,048 6,090 12,401
Great American Country subscribers(e).................... 14 1,049 1,550 7,131 11,971
Product Information Network subscribers(e)............... 4,825 8,111 11,497 20,634 30,094
Product Information Network FTRE's(f).................... 3,607 4,803 7,036 8,647 12,934
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents(g)............................. $ 5 $ 4 $ 3,717 $ 10,654 $ 13,271
Working capital (deficit)................................ (847) (6,615) (9,331) 16,047 13,246
Total assets............................................. 36,352 38,298 41,358 110,894 128,462
Total long-term debt(h).................................. 53,476 53,277 45,312 100,000 100,000
Shareholders' equity (deficit)........................... (20,360) (23,269) (18,206) (11,333) 2,702
</TABLE>
- -------------
(a) EBITDA is unaudited and represents operating income (loss) plus depreciation
and amortization minus the EBITDA attributable to the minority interest in
the PIN Venture, a consolidated 55.3%-owned subsidiary. Management
acknowledges that EBITDA is not a measure of performance or liquidity
calculated in accordance with generally accepted accounting principles.
However, EBITDA is a measure widely used by analysts and investors in the
media industry to determine a company's operating performance and ability to
service and incur debt. EBITDA should not be considered in isolation or as a
substitute for net income (loss), cash flows from operating activities or
other consolidated income or cash flow statement data prepared in accordance
with generally accepted accounting principles or as a measure of
profitability or liquidity.
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<PAGE>
(b) Cable programming distribution payments made by GAC to multiple system cable
television operators for carrying GAC programming. These payments are
reflected as intangible assets on the balance sheet and are amortized over
the period during which any portion of such payment is refundable (usually 5
to 10 years).
(c) Represents the number of non-duplicating radio station affiliates receiving
our programs at the end of the periods indicated.
(d) AQH represents the average audience estimated to have listened, for a
minimum of five minutes during any quarter hour, to a radio station
broadcasting our advertising. For the 24-hour formats, the period used to
determine AQH is Monday through Friday, 6am to 7pm. The period used to
determine AQH for syndicated programs is the time during which the
commercials associated with the programs or services are broadcast. These
AQH estimates are derived from data provided by Marketron (a third party
processor) that is based on Arbitron copyrighted and proprietary audience
estimates. They are not estimates produced by Arbitron. Radio advertising is
generally sold on the basis of the listening audience as quantified by AQH.
Beginning in the period ended December 31, 1998, we have excluded the AQH
related to non-recurring specials. AQH (24-hour formats) has been restated
for periods prior to 1998 to reflect our creation in 1998 of a second
selling network resulting from the division of our then-existing network.
This division more accurately reflects our audience to radio advertisers.
The effect of this restatement is to make periods prior to 1998 comparable
to 1998 and later periods.
(e) Represents the total number of subscribers at the end of the periods
indicated.
(f) FTREs represent the number of full-time revenue equivalent subscribers
receiving PIN at the end of the periods indicated. FTRE weights part-time
subscribers based on the number of hours carried, the daypart carried and
the revenue associated therewith.
(g) Excludes restricted cash of $10.0 million at December 31, 1998.
(h) Includes current and non-current maturities of long-term debt and capital
lease obligations.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SHOULD BE READ IN CONJUNCTION WITH OUR HISTORICAL CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS
PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS
DISCUSSED IN ANY FORWARD-LOOKING STATEMENT.
OVERVIEW
We create, develop, acquire and produce programming that we distribute to
radio stations, cable television system operators and other video distributors.
We have also recently launched multiple, complementary web sites extending our
programming content and talent to the Internet. Through our leading advertising
sales business, we are able to capitalize on our multi-platform programming
content and our ability to effectively target a nationwide audience, providing
national advertisers with an efficient means to aggregate their desired
demographic groups. We also provide satellite services for our two cable
networks and for other cable networks.
The comparison of our results of operations from period to period is
affected by the purchase of the business of MediaAmerica on July 10, 1998 and
the purchase of Broadcast Programming on August 2, 1999.
OPERATING MODEL
Our revenues and operating expenses are derived from radio programming and
cable television programming businesses, advertising sales services and
satellite support services and, starting in the fourth quarter of 1999, include
Internet operations. Operating expenses are comprised of operations expenses,
which are direct expenses and related expenses incurred by each business
segment, selling and marketing expenses, general and administrative expenses,
and depreciation and amortization expenses.
RADIO PROGRAMMING
Our radio programming revenues consist primarily of advertising revenues
and, to a lesser extent, monthly license fees paid by smaller radio station
affiliates. We provide radio programming and services to radio stations in
exchange for advertising time that we resell to national advertisers who market
their products or services on our radio network. We recognize revenues upon
airing advertisements. In smaller markets, we charge radio stations monthly
license fees in addition to advertising time. Revenues from license fees have
remained stable, reflecting our decision to focus on programming targeted at
larger market radio stations that generally are not charged license fees.
Radio programming operations expenses consist of program licensing, program
development and production costs, distribution and delivery costs and other
costs, including the costs of researching, designing, producing and licensing
programs for our radio network. Radio distribution and delivery costs include
satellite transponder expenses, uplinking charges and other associated costs.
CABLE TELEVISION PROGRAMMING
We provide cable television programming to cable television system operators
and other video distributors, sell advertising time on our two cable networks
and receive a license fee for our country music television network. We recognize
advertising revenues upon airing advertisements. Any amounts received from
customers for advertisements that have not been aired during the period are
recorded as unearned revenues until such time as the advertisements are aired.
25
<PAGE>
GREAT AMERICAN COUNTY. GAC's revenues consist of advertising revenues, as
well as subscriber license fees paid by cable operators who receive the network.
GAC generates advertising revenues by selling airtime to advertisers. GAC's
advertising revenues consist of both direct response and national spot
advertising. Direct response advertising is airtime sold to agencies or national
advertisers who have developed commercials designed to motivate viewers to call
an 800 phone number to purchase their product or service. Payment for such
advertising is typically guaranteed, regardless of viewer response. Direct
response advertising usually earns significantly lower rates than traditional
national spot advertising.
Traditional national spot advertising is typically sold by cable television
networks that can demonstrate an ability to deliver the type and quantity of
viewers that national advertisers seek to target with their advertising. As the
number of GAC subscribers and audience continue to increase, GAC will become a
more attractive advertising vehicle for national spot advertisers. Advertising
revenues are impacted by a variety of factors, including the level of
distribution (number of subscribers), ratings, audience composition
(demographics), advertising market conditions and the amount of advertising
inventory allocated for national advertising.
License fee revenues are earned monthly based on a per subscriber rate set
pursuant to the cable operator's agreement with us and the number of subscribers
that are receiving GAC during the month.
Historically, we have typically entered into 5 to 10 year contracts with
affiliates providing for carriage of GAC. In order to increase the distribution
of GAC, we offer affiliates a one-time cable programming distribution payment,
which is generally based on the number of subscribers receiving the GAC service.
These payments are capitalized and amortized over the period during which any
portion of such payment is refundable.
PRODUCT INFORMATION NETWORK. We launched PIN in February 1995 as a joint
venture with Cox Communications, Inc. and, later, with Adelphia Communications
Corp. We now own 55.3% of PIN. Effective April 1, 1997, we consolidated the
results of operations of PIN for financial reporting purposes. As a part of the
organization of PIN and in exchange for their equity interests, Cox and Adelphia
agreed to carry PIN for 10 years.
PIN generates its revenues through the sale of long-form paid advertising
known as infomercials. An infomercial is an advertisement that is paid for by
the advertiser on the basis of the time of day it is aired and the number of
homes reached at that time of day. Infomercials are approximately one half-hour
in length and are often produced in an entertainment format with high production
quality. As PIN increases its distribution to additional households, we believe
PIN will be able to increase the rates it charges for airtime.
PIN compensates cable system operators for carriage of PIN through a rebate
program. Such payments, which are generally in the form of annual rebates per
subscriber, averaged approximately 75% of PIN's net advertising revenues in 1999
attributable to the time that the cable system carried PIN programming.
Because most of the programming on our cable networks is provided to us
without cost, cable television programming operations expenses consist primarily
of program distribution and delivery costs, such as satellite transponder
expenses, uplinking charges and associated costs.
26
<PAGE>
INTERNET
We currently operate multiple web sites that allow us to capitalize on
Internet advertising and e-commerce opportunities. We anticipate deriving
revenues from our Internet web sites through three primary sources:
- ADVERTISING SALES. Our advertising sales include the sale of "banner ads"
through our network advertising representation services, sponsorship of
events and other special content, "click through" Internet advertising
sold separately or packaged with our other advertising inventory, and
audio and video advertising packaged with "streaming media" and Internet
radio products.
- E-COMMERCE. Our web sites will highlight the availability of products that
are of interest to site visitors. Visitors who wish to purchase a
particular product will be able to "click" directly to that product within
the web site storefront and will be exposed to other related products.
Most products will be supplied by third parties, such as catalog
distributors and wholesalers, with established procurement and fulfillment
capabilities. We may also pursue additional e-commerce opportunities such
as online auctions and ticket sales.
- PAY-PER-VIEW. We plan to sell live events on a pay-per-view basis to web
site visitors with high-speed, broadband Internet connections. We plan to
test the technology for streaming programming content over the Internet in
2000 and to begin regularly scheduled pay-per-view events in subsequent
years.
We are implementing a broad Internet strategy in which we will develop web
sites for many of our radio formats and certain of our syndicated programming.
As a result, Internet operations expenses increased substantially beginning in
the fourth quarter of 1999 and will continue to increase in 2000. To date, we
have not generated significant revenues from our Internet business, nor have we
incurred significant costs in creating, developing and operating our Internet
business. Over the next 12 to 18 months we anticipate salary, content
development and associated expenses and marketing expenses to increase as we
develop new web sites and expand our existing web sites.
ADVERTISING SALES SERVICES
Our advertising sales services business produces revenue by charging fees to
advertising sales services clients. Fees generally consist of a percentage of
the advertising revenue generated on the client's national radio programs. By
combining our owned and third party advertising inventory, we have the ability
to create customized advertising networks that allow advertisers to reach their
target markets. We are also developing an Internet advertising sales services
business, which will sell national advertising for our own web sites, as well as
the web sites of third parties. We believe we will begin to generate Internet
advertising sales services revenues in the first half of 2000. Further, in 2000
we will expand sales of national spot advertising for GAC through our existing
advertising sales services organization.
Advertising sales services expenses consist of costs associated with the
selling of advertising time for third party radio programmers and our own radio
and cable networks. These costs are relatively fixed in nature and consist of
research, trafficking and management associates. Our fixed cost structure
enables us to leverage our existing infrastructure, thereby allowing for
expansion of our advertising sales services to cable television and web site
publishers at a marginal incremental cost.
Beginning in the first quarter of 2000, we plan to significantly increase
our operating expenses to develop our Internet and our cable advertising sales
services businesses. We intend to hire associates to sell and market Internet
advertising to third party web site publishers and associates to sell GAC spot
advertising.
27
<PAGE>
SATELLITE SERVICES
We generate revenues by providing satellite delivery and production support
services, including uplinking, trafficking and playback to related parties,
third parties and for our own programming operations. We recognize satellite
delivery and production support revenues upon the completion of the services or
as provided by contract.
Satellite delivery and production support operations expenses include
uplinking charges and other associated operating costs. These costs are
relatively fixed in nature, which gives us a high degree of operating leverage.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses are incurred to retain and increase the
number of radio station and cable system affiliates and advertising sales
clients. These expenses include salaries and commissions, travel and associated
expenses related to our sales and marketing activities, in addition to costs of
designing, producing and distributing marketing, advertising and promotional
materials for all segments. We anticipate increases in selling and marketing
expenses and associated costs as we continue to expand the distribution of our
radio programming, cable television programming, and Internet products and
increase the number of advertising sales clients. We intend to use our radio and
cable television content, commercial inventory and on-air promotions to drive
targeted audiences to our complementary web sites. We also anticipate purchases
of third party advertising time to promote our radio, cable television and
Internet programming.
Historically we have shared a cable television affiliate sales department
with a related company. Because this company ceased distribution efforts in the
last quarter of 1999, cable television affiliate sales expenses increased
beginning in the last quarter of 1999 and are anticipated to further increase in
2000.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses include personnel and associated costs
for corporate management staff and support personnel including the accounting
and financial reporting functions. As we continue to grow, we anticipate that
our general and administrative expenses will rise.
DEPRECIATION AND AMORTIZATION EXPENSES
As the result of the acquisitions of the assets of Broadcast Programming and
MediaAmerica, our amortization expenses related to intangible assets and
goodwill have increased dramatically. In addition, we amortize our cable
programming distribution payments using the straight-line method over the period
during which any portion of such payment is refundable.
OTHER EXPENSE
Total other expenses consist primarily of interest expense, interest income,
equity in (income) loss of subsidiaries and other miscellaneous items.
RESULTS OF OPERATIONS
The following table sets forth the amount of, and percentage relationship to
total net revenues of, certain items included in our historical consolidated
statements of operations for each of our business segments for the periods
indicated and certain items included in our unaudited pro forma consolidated
statements of operations for the period indicated. Operating expenses include
operations expenses, selling and marketing expenses and depreciation and
amortization expenses attributable to each segment. General and administrative
expenses include depreciation and amortization of assets not
28
<PAGE>
attributable to a particular business segment. The pro forma data gives effect
to (i) the Broadcast Programming acquisition and (ii) our issuance of the
Series A Convertible Preferred Stock (together, the "1999 Pro Forma
Transactions"). This pro forma data assumes that the 1999 Pro Forma Transactions
were completed on January 1, 1999, and that the proceeds thereof were used to
repay our $20.0 million revolving credit facility. We have not historically
disclosed non-significant acquisitions, such as Broadcast Programming, and are
not required to do so in the future.
We have provided pro forma information, which presents comparable results,
in order to enhance understanding of future operations. Under the caption "Year
Ended December 31, 1999 Compared to Year Ended December 31, 1998," we have
compared revenues and operations expense on a pro forma basis. The pro forma
revenues and operations expense for the year ended December 31, 1998 give
effect, in addition to the 1999 Pro Forma Transactions, to the acquisition of
the assets of MediaAmerica (the "1998 Pro Forma Transaction"), and assume that
the 1998 Pro Forma Transaction and the 1999 Pro Forma Transactions were
completed on January 1, 1998.
<TABLE>
<CAPTION>
ACTUAL PRO FORMA
--------------------------------------------------------------------- -------------------
YEAR ENDED DECEMBER 31, YEAR ENDED
--------------------------------------------------------------------- DECEMBER 31,
1997 1998 1999 1999
------------------- ------------------- ------------------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Programming content:
Radio........................ $10,200 35% $ 10,428 27% $ 19,379 30% $ 24,352 35%
Cable television............. 12,002 41 16,892 44 27,345 42 27,345 40
Internet..................... -- -- -- -- 108 1 108 --
Programming support services:
Advertising sales services... -- -- 4,720 13 9,035 14 8,840 13
Satellite services........... 6,910 24 6,172 16 8,499 13 8,499 12
------- ---- -------- ---- -------- ---- -------- ----
Total revenues............. 29,112 100 38,212 100 64,366 100 69,144 100
------- ---- -------- ---- -------- ---- -------- ----
Operating expenses:
Programming content:
Radio........................ 9,533 33 11,890 31 19,320 30 25,250 37
Cable television............. 11,400 39 17,419 46 27,106 42 27,106 39
Internet..................... -- -- -- -- 453 1 453 1
Programming support services:
Advertising sales services... -- -- 4,283 11 8,604 14 8,604 12
Satellite services........... 4,771 16 5,262 14 5,339 8 5,339 8
------- ---- -------- ---- -------- ---- -------- ----
Segment total.............. 25,704 88 38,854 102 60,822 95 66,752 97
General and administrative..... 1,155 4 1,121 3 1,499 2 1,499 2
------- ---- -------- ---- -------- ---- -------- ----
Total operating expenses..... 26,859 92 39,975 105 62,321 97 68,251 99
------- ---- -------- ---- -------- ---- -------- ----
Operating income (loss).... 2,253 8 (1,763) (5) 2,045 3 893 1
------- ---- -------- ---- -------- ---- -------- ----
Interest expense, net............ 5,569 19 8,195 21 11,729 18 11,557 17
Other expense (income), net...... 616 2 1,228 3 (32) -- (32) --
Income tax provision (benefit)... (1,342) (4) 49 -- (470) (1) (470) (1)
Minority interest................ 903 3 215 1 881 2 1,336 2
------- ---- -------- ---- -------- ---- -------- ----
Net loss......................... $(3,493) (12)% $(11,450) (30)% $(10,063) (16)% $(11,498) (17)%
======= ==== ======== ==== ======== ==== ======== ====
</TABLE>
The unaudited pro forma data reflects the 1999 Pro Forma Transactions
through the following adjustments:
a) the elimination of intercompany transactions;
b) the elimination of interest from our credit facility, which was utilized
for the acquisition of Broadcast Programming and was repaid from the
proceeds of the sale of the Series A Convertible Preferred Stock; and
29
<PAGE>
c) adjustments to radio programming operating expenses for the amortization
of goodwill and intangible assets related to the Broadcast Programming
acquisition.
The following table sets forth EBITDA for the years ended December 31, 1997,
1998 and 1999. EBITDA is unaudited and represents operating income (loss) plus
depreciation and amortization minus EBITDA attributable to the minority interest
in the PIN Venture, a consolidated 55.3%-owned subsidiary. Management
acknowledges that EBITDA is not a measure of performance or liquidity calculated
in accordance with generally accepted accounting principles. However, EBITDA is
a measure widely used by analysts and investors in the media industry to
determine a company's operating performance and ability to service and incur
debt. EBITDA should not be considered in isolation or as a substitute for net
income (loss), cash flows from operating activities or other consolidated income
or cash flow statement data prepared in accordance with generally accepted
accounting principles or as a measure of profitability or liquidity.
<TABLE>
<CAPTION>
ACTUAL PRO FORMA
------------------------------ -------------
YEAR ENDED DECEMBER 31, YEAR ENDED
------------------------------ DECEMBER 31,
1997 1998 1999 1999
-------- -------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
EBITDA:
Programming content:
Radio............................................. $ 1,537 $ (472) $ 3,728 $ 5,387
Cable television.................................. 796 177 2,332 2,332
Internet.......................................... -- -- (344) (344)
Programming support services:
Advertising sales services........................ -- 1,039 1,409 1,215
Satellite services................................ 6,239 4,875 7,186 7,186
------- ------- ------- -------
Segment total................................... 8,572 5,619 14,311 15,776
------- ------- ------- -------
General and administrative.......................... (1,151) (1,116) (1,491) (1,491)
Less: EBITDA minority interest...................... 822 213 860 860
------- ------- ------- -------
Total EBITDA...................................... $ 6,599 $ 4,290 $11,960 $13,425
======= ======= ======= =======
</TABLE>
30
<PAGE>
QUARTERLY OPERATING RESULTS AND OTHER DATA:
The table below sets forth our quarterly operating data, including radio
station and household data, for each quarter of 1998 and 1999. This quarterly
information is unaudited but, in our opinion, reflects all normally recurring
adjustments necessary for a fair presentation of the information for the periods
presented when read in conjunction with the audited consolidated financial
statements and notes thereto. Operating results for any quarter are not
necessarily indicative of results for any future period.
<TABLE>
1998 1999
QUARTER ENDED QUARTER ENDED
------------------------------------------ ------------------------------------------
MAR. 31 JUN. 30 SEPT. 30 DEC. 31 MAR. 31 JUN. 30 SEPT. 30 DEC. 31
--------- -------- -------- -------- --------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT RADIO STATION AFFILIATE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues:
Programming content:
Radio................................ $ 1,582 $ 2,158 $ 3,032 $ 3,656 $ 2,959 $ 3,906 $ 5,488 $ 7,026
Cable television..................... 3,842 4,022 4,127 4,901 5,797 6,846 6,586 8,116
Internet............................. -- -- -- -- -- -- -- 108
Programming support services:
Advertising sales services........... -- -- 2,215 2,505 1,575 2,282 2,598 2,580
Satellite services................... 1,144 1,049 1,794 2,185 2,174 2,203 2,190 1,932
------- ------- -------- ------- ------- ------- -------- -------
Total revenues..................... 6,568 7,229 11,168 13,247 12,505 15,237 16,862 19,762
------- ------- -------- ------- ------- ------- -------- -------
Operating expenses(a):
Programming content:
Radio................................ 2,296 2,557 2,678 3,369 3,229 3,249 4,042 5,132
Cable television..................... 3,937 3,970 4,233 4,575 5,590 6,075 6,118 7,231
Internet............................. -- -- -- -- -- -- 175 275
Programming support services:
Advertising sales services........... -- -- 1,671 2,010 1,741 1,870 1,987 2,028
Satellite services................... 258 262 319 458 321 361 329 302
General and administrative............. 403 57 279 377 348 382 301 460
Depreciation and amortization.......... 1,359 1,292 1,713 1,902 1,990 1,981 2,528 4,276
------- ------- -------- ------- ------- ------- -------- -------
Total operating expenses........... 8,253 8,138 10,893 12,691 13,219 13,918 15,480 19,704
------- ------- -------- ------- ------- ------- -------- -------
Operating income (loss).................. (1,685) (909) 275 556 (714) 1,319 1,382 58
Interest expense, net.................... 1,300 1,248 2,828 2,819 2,879 2,879 3,123 2,848
Other expense (income), net.............. (45) 229 736 308 -- 1 12 (45)
Income tax provision/benefit and minority
interest............................... 261 76 (284) 211 70 397 556 (612)
------- ------- -------- ------- ------- ------- -------- -------
Net loss................................. $(3,201) $(2,462) $(3,005) $(2,782) $(3,663) $(1,958) $(2,309) $(2,133)
======= ======= ======== ======= ======= ======= ======== =======
OTHER DATA:
EBITDA(b).............................. $ (310) $ 310 $ 2,020 $ 2,270 $ 1,218 $ 2,896 $ 3,748 $ 4,098
Capital expenditures................... 145 394 1,377 342 274 168 146 262
Cable programming distribution
payments(c).......................... -- -- 1,129 1,935 1,471 672 1,618 2,593
Net cash provided by (used in):
Operating activities................. (8,380) 235 730 350 (2,479) 1,910 (208) 3,175
Investing activities................. (832) 136 (31,370) (2,955) (2,309) (3,826) (21,178) (5,319)
Financing activities................. 9,570 (2,001) 50,694 760 -- -- 20,100 2,751
AUDIENCE DATA (at end of period):
Radio station affiliates(d)............ -- -- -- 2,146 2,205 2,105 2,499 2,485
Radio station AQH (24-hour
formats)(e).......................... -- -- -- 2,369 2,259 2,122 2,188 1,986
Radio station AQH (syndicated)(e)...... -- -- -- 6,090 6,386 6,569 12,355 12,401
Great American Country households(f)... 2,222 3,458 4,819 7,131 8,063 8,659 10,959 11,971
Product Information Network
households(f)........................ 17,806 18,630 18,970 20,634 22,551 24,673 28,110 30,094
Product Information Network FTREs(g)... 7,088 7,682 8,056 8,647 10,159 10,709 11,683 12,934
</TABLE>
- -------------
(a) Includes selling and marketing expenses for each segment.
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<PAGE>
(b) EBITDA is unaudited and represents operating income (loss) plus depreciation
and amortization minus EBITDA attributable to the minority interest in the
PIN Venture, a consolidated 55.3%-owned subsidiary. Management acknowledges
that EBITDA is not a measure of performance or liquidity calculated in
accordance with generally accepted accounting principles. However, EBITDA is
a measure widely used by analysts and investors in the media industry to
determine a company's operating performance and ability to service and incur
debt. EBITDA should not be considered in isolation or as a substitute for
net income (loss), cash flows from operating activities or other
consolidated income or cash flow statement data prepared in accordance with
generally accepted accounting principles or as a measure of profitability or
liquidity.
(c) Cable programming distribution payments made by GAC to multiple system cable
television operators for carrying GAC programming. These payments are
reflected as intangible assets on the balance sheet and are amortized over
the period during which any portion of such payment is refundable (usually 5
to 10 years).
(d) Represents the number of non-duplicating radio station affiliates receiving
our programs at the end of the periods indicated.
(e) AQH represents the average audience estimated to have listened, for a
minimum of five minutes during any quarter hour, to a radio station
broadcasting our advertising. For the 24-hour formats, the period used to
determine AQH is Monday through Friday, 6am to 7pm. The period used to
determine AQH for syndicated programs is the time during which the
commercials associated with the programs or services are broadcast. These
AQH estimates are derived from data provided by Marketron (a third party
processor) that is based on Arbitron copyrighted and proprietary audience
estimates. They are not estimates produced by Arbitron. Radio advertising is
generally sold on the basis of the listening audience as quantified by AQH.
Beginning in the period ended December 31, 1998, we have excluded the AQH
related to non-recurring specials. AQH (24-hour formats) has been restated
for periods prior to 1998 to reflect our creation in 1998 of a second
selling network resulting from the division of our then-existing network.
This division more accurately reflects our audience to radio advertisers.
The effect of this restatement is to make periods prior to 1998 comparable
to 1998 and later periods. Quarterly AQH data prior to December 31, 1998, is
not available.
(f) Represents the total number of subscribers at the end of the periods
indicated.
(g) FTREs represent the number of full-time revenue equivalent subscribers
receiving PIN at the end of the periods indicated. FTRE weights part-time
subscribers based on the number of hours carried, the daypart carried and
the revenue associated therewith.
32
<PAGE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES
Total revenues increased $26.2 million, or 68%, from $38.2 million for the
year ended December 31, 1998 to $64.4 million for the year ended December 31,
1999. This increase was due to strong growth in our operations, as well as the
Broadcast Programming and MediaAmerica acquisitions. On a pro forma basis, total
pro forma revenues increased $18.3 million, or 36%, from $50.8 million for the
year ended December 31, 1998 to $69.1 million for the year ended December 31,
1999.
OPERATING EXPENSES
OPERATIONS. Operations expense increased $16.4 million, or 60%, from
$27.2 million for the year ended December 31, 1998 to $43.6 million for the year
ended December 31, 1999. As a percentage of total revenues, total operations
expense decreased from 71% for the year ended December 31, 1998 to 68% for the
year ended December 31, 1999. On a pro forma basis, total operating expenses
increased $9.8 million, or 27%, from $36.6 million for the year ended
December 31, 1998 to $46.4 million for the year ended December 31, 1999. As a
percentage of pro forma total revenues, pro forma total operations expense
decreased from 72% for the year ended December 31, 1998 to 67% for the year
ended December 31, 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 allocated to the various entities
affiliated with Mr. Jones, including ourselves. Because Jones Intercable was the
largest of such sharing entities, its exclusion from the allocation process has
caused us, 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 legal, risk management and human resources services. We
therefore estimate that operating expenses will most likely increase by
approximately $35,000 to $50,000 per month beginning the first quarter of 2000.
We have taken certain steps and will take additional steps to mitigate the
impact of this change; however, there can be no assurance that we will be able
to reduce the level of these costs.
SELLING AND MARKETING. Selling and marketing expenses increased
$1.0 million, or 19%, from $5.4 million for the year ended December 31, 1998 to
$6.4 million for the year ended December 31, 1999. On a pro forma basis, selling
and marketing expenses were $6.9 million for the year ended December 31, 1999.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
$0.4 million, or 34%, from $1.1 million for the year ended December 31, 1998 to
$1.5 million for the year ended December 31, 1999.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased $4.5 million, or 72%, from $6.3 million for the year ended
December 31, 1998 to $10.8 million for the year ended December 31, 1999. On a
pro forma basis, depreciation and amortization expenses were $13.4 million for
the year ended December 31, 1999. This increase was due to the amortization of
cable programming distribution payments.
OPERATING INCOME (LOSS)
Operating income (loss) increased $3.8 million from an operating loss of
$(1.8) million for the year ended December 31, 1998 to operating income of
$2.0 million for the year ended December 31, 1999 as a result of the factors
discussed herein. Pro forma income was $0.9 million for the year ended
December 31, 1999.
33
<PAGE>
EBITDA
EBITDA increased $7.7 million, or 179%, from $4.3 million for the year ended
December 31, 1998, to $12.0 million for the year ended December 31, 1999. Pro
forma EBITDA was $13.4 million for the year ended December 31, 1999.
OTHER EXPENSE
Total other expense increased $2.3 million, or 24%, from $9.4 million for
the year ended December 31, 1998 to $11.7 million for the year ended
December 31, 1999. This change is due primarily to an increase of $6.3 million
in interest expense related to our Senior Notes and credit facility and an
increase of $0.5 million in interest expense related to the amortization of
offering costs related to our Senior Notes. The increase was partially offset
by:
- a $3.0 million decrease in interest expense related to the repayment of
debt from the proceeds of our Senior Notes;
- a $1.1 million decrease in other expense due to the incurrence of debt
offering related expenses of $0.9 million in 1998 with no similar expense
incurred in 1999;
- a $0.2 million increase in interest income earned on cash, cash
equivalents and available for sale securities; and
- a $0.2 million decrease in equity in income of subsidiaries.
NET LOSS
Net loss decreased $1.4 million, or 12%, from $(11.5) million for the year
ended December 31, 1998 to $(10.1) million for the year ended December 31, 1999.
Pro forma net loss was $(11.5) million for the year ended December 31, 1999.
RADIO PROGRAMMING
REVENUES. Radio programming revenues increased $9.0 million, or 86%, from
$10.4 million for the year ended December 31, 1998 to $19.4 million for the year
ended December 31, 1999, due primarily to an increase in radio advertising
revenue and the acquisition of the assets of Broadcast Programming on August 2,
1999. Following the acquisition, Broadcast Programming generated advertising and
programming license fee revenues of $4.1 million during the year ended
December 31, 1999. On a pro forma basis, radio programming revenues increased
$5.8 million, or 31%, from $18.6 million for the year ended December 31, 1998 to
$24.4 million for the year ended December 31, 1999.
During the latter half of 1999, we benefited from strong network radio
advertising demand, driven primarily by strong economic conditions and a
significant increase in the use of network radio advertising by Internet
companies. Due to increased demand for network radio advertising, both our
syndicated radio programs and 24-hour formats have experienced an increase in
advertising rates and inventory sellout percentages. Sales of network radio
advertising for 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.
EXPENSES. Radio programming expenses increased $7.4 million, or 62%, from
$11.9 million for the year ended December 31, 1998 to $19.3 million for the year
ended December 31, 1999. This increase was primarily due to:
- a $3.7 million increase in operating expenses as a result of the Broadcast
Programming acquisition on August 2, 1999;
34
<PAGE>
- a $2.0 million increase in amortization expenses related to the Broadcast
Programming acquisition;
- a $0.8 million increase related to the write-off of capitalized costs for
programs that we no longer distribute;
- a $0.5 million increase in marketing expenses to increase the number of
radio stations receiving our programming;
- a $0.3 million increase in fees paid to license certain radio programming;
and
- a $0.1 million increase in operating expenses reflecting an increase in
the number of syndicated radio programs we offered.
As a percentage of radio programming revenues, radio programming expenses
decreased from 114% for the year ended December 31, 1998 to 100% for the year
ended December 31, 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. A significant portion of our radio programming expenses is
fixed in nature.
On a pro forma basis, radio programming expenses increased $2.3 million, or
10%, from $23.0 million for the year ended December 31, 1998 to $25.3 million
for the year ended December 31, 1999. As a percentage of pro forma radio
programming revenues, pro forma radio programming expenses decreased from 123%
for the year ended December 31, 1998 to 104% for the year ended December 31,
1999.
OPERATING INCOME (LOSS). Operating income (loss) from radio programming
increased $1.5 million from an operating loss of $(1.5) million for the year
ended December 31, 1998 to a break-even point for the year ended December 31,
1999 as a result of the factors stated herein. Pro forma operating loss from
radio programming was $(0.9) million for the year ended December 31, 1999.
SEGMENT EBITDA. Segment EBITDA from radio programming increased
$4.2 million, or 890%, from $(0.5) million for the year ended December 31, 1998
to $3.7 million for the year ended December 31, 1999. Pro forma EBITDA from
radio programming was $5.4 million for the year ended December 31, 1999.
CABLE TELEVISION PROGRAMMING
REVENUES. Cable television programming revenues increased $10.4 million, or
62%, from $16.9 million for the year ended December 31, 1998 to $27.3 million
for the year ended December 31, 1999. This increase was due to the following:
- GAC's revenues increased $2.4 million, or 97%, as a result of a
$2.2 million, or 181%, increase in advertising revenues and $0.2 million,
or 14%, increase in license fees. Advertising revenues increased due to
higher advertising rates charged for airtime based on a 68% increase in
the number of subscribers receiving GAC; and
- PIN's revenues increased $8.0 million, or 56%, primarily as a result of a
50% increase in FTRE's receiving PIN.
During 1999, GAC added numerous, significant cable television systems and
advertising markets including Atlanta, Detroit, Minneapolis, Sacramento, Salt
Lake City, Baltimore, Knoxville and Los Angeles. GAC subscribers increased by
4.8 million, or 68%, from December 31, 1998 to December 31, 1999. This increase
in subscribers has allowed GAC to increase its advertising rates.
During 1999, PIN also added a number of significant cable television systems
and advertising markets, including Boston, Dallas, Houston, Miami, Salt Lake
City, Las Vegas and Detroit. The number of full-time revenue equivalent
subscribers, or FTRE's, receiving PIN increased by 4.3 million,
35
<PAGE>
or 50%, from December 31, 1998 to December 31, 1999. The number of households
receiving PIN increased by 9.5 million, or 46%, from December 31, 1998 to
December 31, 1999. PIN is developing certain paid programming blocks, which we
believe will generate higher per program advertising revenues as compared to
traditional infomercials.
EXPENSES. Cable television programming expenses rose $9.7 million, or 56%,
from $17.4 million for the year ended December 31, 1998 to $27.1 million for the
year ended December 31, 1999. This was primarily due to increases of
$6.3 million in rebates to cable systems receiving PIN, driven by an increase in
PIN revenues of $8.0 million from December 31, 1998 to December 31, 1999. The
remaining increase in cable television programming expenses resulted from an
increase in GAC affiliate sales costs related to absorption of a higher
proportion of total affiliate sales costs; an increase in cable television
programming management and support expenses; an increase in amortization
expenses for GAC cable programming distribution agreement payments; an increase
in marketing expenses to improve the distribution of GAC and an increase in
programming expenses incurred to develop GAC programming.
For each of the years ended December 31, 1998 and 1999, PIN made rebates of
approximately 73% and 75%, respectively, of its advertising revenues to systems
receiving its programming. Rebates paid to cable systems receiving PIN
programming have remained relatively constant over the comparable periods on a
per FTRE basis. However, as FTRE's continue to grow, total cable television
programming expenses will increase because PIN will pay out additional rebates
to cable systems. As a percentage of cable television programming revenues,
cable television programming expenses decreased from 103% for the year ended
December 31, 1998 to 99% for the year ended December 31, 1999.
Historically we have shared a cable television affiliate sales department
with a related company. Because this company ceased distribution efforts in the
last quarter of 1999, cable television affiliate sales expenses increased by
approximately $70,000 per month beginning in the fourth quarter of 1999 and are
anticipated to further increase in 2000.
OPERATING INCOME (LOSS). Operating income (loss) from cable television
programming increased $0.7 million from an operating loss of $(0.5) million for
the year ended December 31, 1998 to an operating income of $0.2 million for the
year ended December 31, 1999 as a result of the factors stated above.
SEGMENT EBITDA. Segment EBITDA from cable television programming increased
$2.1 million from $0.2 million for the year ended December 31, 1998 to
$2.3 million for the year ended December 31, 1999.
INTERNET
We are implementing a broad Internet strategy in which we will develop web
sites for many of our radio formats and certain of our syndicated programming.
As a result, Internet expenses increased beginning in the fourth quarter of 1999
and will continue to increase throughout 2000. We have not generated significant
revenues from our Internet business, nor have we incurred significant costs in
creating, developing and operating our Internet business. We anticipate salary,
content development and associated expenses and marketing expenses to increase
as we develop new web sites and expand existing web sites.
REVENUES. We generated Internet revenues of $0.1 million for the year ended
December 31, 1999.
EXPENSES. We incurred Internet expenses of $0.4 million for the year ended
December 31, 1999.
OPERATING LOSS. We generated an operating loss from our Internet activities
of $(0.3) million for the year ended December 31, 1999.
SEGMENT EBITDA. We generated a deficit in segment EBITDA from our Internet
activities of $(0.3) million for the year ended December 31, 1999.
36
<PAGE>
ADVERTISING SALES SERVICES
REVENUES. Advertising sales services revenues increased $4.3 million, or
91%, from $4.7 million for the year ended December 31, 1998 to $9.0 million for
the year ended December 31, 1999. Advertising sales services revenues for the
year ended December 31, 1998 do not include MediaAmerica revenues for the entire
period, as the MediaAmerica business was not acquired until July 10, 1998.
Accordingly, advertising sales services revenues for the year ended
December 31, 1998 are not comparable to the year ended December 31, 1999. On a
pro forma basis, advertising sales services revenues decreased $0.3 million, or
3%, from $9.1 million for the year ended December 31, 1998 to $8.8 million for
the year ended December 31, 1999. The decrease is primarily a result of the
termination, prior to our acquisition of the MediaAmerica assets, of an
agreement to sell network advertising and other services to a major producer of
talk radio programs. Non-recurring revenues for 1998 reflect amounts received
under this agreement consisting of a $0.8 million termination payment and
$1.2 million of advertising revenue. The decrease was offset by an increase in
advertising sales services revenues generated by new customers obtained in the
latter part of 1998 and in 1999 and an increase in advertising revenues of our
advertising sales services customers largely attributable to improved
advertising rates and sellout conditions. See discussion of radio market
conditions above.
EXPENSES. Advertising sales services expenses increased $4.3 million, or
101%, from $4.3 million for the year ended December 31, 1998 to $8.6 million for
the year ended December 31, 1999. Advertising sales services expenses for the
year ended December 31, 1998 do not include MediaAmerica expenses for the entire
period since the MediaAmerica business was not acquired until July 10, 1998.
Accordingly, advertising sales services expenses for the year ended
December 31, 1998 are not comparable to those for the year ended December 31,
1999. On a pro forma basis, advertising sales services expenses decreased
$0.4 million, or 5%, from $9.0 million for the year ended December 31, 1998 to
$8.6 million for the year ended December 31, 1999. As a percentage of
advertising sales services revenues, advertising sales services expenses
increased from 91% for the year ended December 31, 1998 to 95% for the year
ended December 31, 1999. On a pro forma basis, advertising sales services
expenses decreased from 99% of advertising sales services revenue for the year
ended December 31, 1998 to 97% for the year ended December 1999.
OPERATING INCOME (LOSS). Operating income from advertising sales services
remained relatively flat at $0.4 million for the years ended December 31, 1998
and 1999. Pro forma income from advertising sales services was $0.2 million for
the year ended December 31, 1999.
SEGMENT EBITDA. Segment EBITDA from advertising sales services increased
$0.4 million, or 36%, from $1.0 million for the year ended December 31, 1998, to
$1.4 million for the year ended December 31, 1999. Pro forma EBITDA from
advertising sales services was $1.2 million for the year ended December 31,
1999.
SATELLITE SERVICES
REVENUES. Satellite services revenues increased $2.3 million, or 38%, from
$6.2 million for the year ended December 31, 1998 to $8.5 million for the year
ended December 31, 1999. This increase was driven largely by:
- $1.9 million in revenues from new third party satellite transponder and
earth station agreements that we entered into in the second half of 1998
and second quarter of 1999; and
- $0.4 million increase in satellite services fees charged to affiliated
parties.
EXPENSES. Satellite services expenses remained relatively flat at
$5.3 million for the years ended December 31, 1998 and 1999. As a percentage of
satellite services revenues, satellite services expenses decreased from 85% for
the year ended December 31, 1998 to 63% for the year ended December 31,
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1999. Because a significant portion of the costs of our satellite services is
fixed, as we increased our utilization of the excess capacity on our Satcom C-3
transponder, the percentage of satellite services expenses in relation to the
satellite services revenues decreased.
OPERATING INCOME (LOSS). Operating income from satellite services increased
$2.3 million from $0.9 million for the year ended December 31, 1998 to
$3.2 million for the year ended December 31, 1999 as a result of the factors
stated above.
SEGMENT EBITDA. Segment EBITDA from satellite services increased
$2.3 million, or 47%, from $4.9 million for the year ended December 31, 1998 to
$7.2 million for the year ended December 31, 1999.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES
Total revenues increased $9.1 million, or 31%, from $29.1 million for the
year ended December 31, 1997 to $38.2 million for the year ended December 31,
1998. This increase was due primarily to:
- the acquisition of MediaAmerica in July 1998;
- an increase in GAC advertising revenues; and
- the consolidation of the PIN Venture, which resulted in an increase in
revenues for financial statement reporting purposes.
OPERATING EXPENSES
OPERATIONS. Total operations expense increased $10.2 million, or 59%, from
$17.0 million for year ended December 31, 1997 to $27.2 million for the year
ended December 31, 1998. This increase was due to increases in all of our
expense areas. As a percentage of total revenues, total operations expense
increased from 58% for the year ended December 31, 1997 to 71% for the year
ended December 31, 1998.
SELLING AND MARKETING. Selling and marketing expenses increased
$1.9 million, or 55%, from $3.5 million for the year ended December 31, 1997 to
$5.4 million for the year ended December 31, 1998. This increase was due
primarily to increased expenditures to attract additional radio and cable
television station affiliates.
GENERAL AND ADMINISTRATIVE. General and administrative expenses remained
relatively flat at $1.1 million for the years ended December 31, 1997 and 1998.
As a percentage of total revenues, general and administrative expenses decreased
from 4% for the year ended December 31, 1997 to 3% for the year ended
December 31, 1998.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased $1.1 million, or 21%, from $5.2 million for the year ended
December 31, 1997 to $6.3 million for the year ended December 31, 1998. The
increase is due primarily to the amortization of goodwill related to the
MediaAmerica acquisition and cable programming distribution payments.
OPERATING INCOME (LOSS)
Operating income (loss) decreased $4.0 million from an operating income of
$2.2 million for the year ended December 31, 1997 to an operating loss of $(1.8)
million for the year ended December 31, 1998 as a result of the factors
discussed herein.
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EBITDA
EBITDA decreased $2.3 million, or 35%, from $6.6 million for the year ended
December 31, 1997 to $4.3 million for the year ended December 31, 1998.
OTHER EXPENSE
Total other expense increased $3.2 million, or 52%, from $6.2 million for
the year ended December 31, 1997 to $9.4 million for the year ended
December 31, 1998. The increase was due primarily to:
- a $5.8 million increase in interest expense related to our Senior Notes;
- a $0.6 million increase in other expense related to our credit facility
outstanding at that time;
- a $0.5 million increase in equity in loss of subsidiaries; and
- a $0.4 million increase in expenses incurred in 1998 related to the
MediaAmerica acquisition and our Senior Notes offering.
In 1997, $0.9 million of deferred offering costs were written off; no
similar expense was incurred in 1998. In addition, this increase was partially
offset by an increase in interest income of $0.7 million and a decrease of
$2.5 million in interest expense related to the (i) repayment of outstanding
notes to Jones Global Group, Inc. and Jones Earth Segment, Inc. and
(ii) prepayment of a satellite transponder capital lease covering both our
transponders.
NET LOSS
Net loss increased $8.0 million, or 228% from $(3.5) million for the year
ended December 31, 1997 to $(11.5) million for the year ended December 31, 1998.
RADIO PROGRAMMING
REVENUES. Radio programming revenues increased $0.2 million, or 2%, from
$10.2 million for the year ended December 31, 1997 to $10.4 million for the year
ended December 31, 1998. Sales of radio advertising for 1998 were adversely
affected by the entry in January 1998 of AMFM, Inc. to the network advertising
marketplace. AMFM attracted a significant number of network radio advertisers to
its radio network, which delivers larger market radio stations as compared to
the radio stations delivered by our radio network. As a result, we realized
lower rates in 1998 as compared to 1997. Licensing revenues remained relatively
stable. During late 1998, we began to experience improved advertising rate and
sellout conditions and these trends continued into 1999.
EXPENSES. Radio programming expenses increased $2.4 million, or 25%, from
$9.5 million for the year ended December 31, 1997 to $11.9 million for the year
ended December 31, 1998. Programming expenses rose due to:
- an increase in the number of formats and syndicated programs we offered;
and
- the acquisition of the MediaAmerica assets.
As a percentage of radio programming revenues, radio programming expenses
increased from 93% for the year ended December 31, 1997 to 114% for the year
ended December 31, 1998.
OPERATING INCOME (LOSS). Operating income (loss) from radio programming
decreased $2.1 million from an income of $0.6 million for the year ended
December 31, 1997 to a loss of $(1.5) million for the year ended December 31,
1998 as a result of the factors stated above.
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SEGMENT EBITDA. Segment EBITDA from radio programming decreased
$2.0 million, or 131%, from $1.5 million for the year ended December 31, 1997,
to $(0.5) million for the year ended December 31, 1998.
CABLE TELEVISION PROGRAMMING
REVENUES. Cable television programming revenues increased $4.9 million, or
41%, from $12.0 million for the year ended December 31, 1997 to $16.9 million
for the year ended December 31, 1998. This increase was primarily due to:
- the consolidation of the PIN Venture, which resulted in an increase of
$3.3 million in advertising revenues for financial statement reporting
purposes;
- a $0.9 million increase in GAC advertising revenues due to higher
advertising rates charged for airtime as a result of an increase in the
number of its subscribers;
- a $0.3 million increase in PIN's advertising revenues, as a result of an
increase in the number of subscribers receiving its programming; and
- a $0.4 million increase in GAC affiliate fees due to an increase in the
number of its subscribers paying affiliate fees.
The number of subscribers receiving GAC at December 31, 1997 and
December 31, 1998 totaled 1.5 million and 7.1 million, respectively. GAC
subscribers increased by 5.6 million, or 373%, from December 31, 1997 to
December 31, 1998. This increase in subscribers allowed GAC to increase its
advertising rates as it began the transition from primarily direct response
advertising to national spot advertising.
The number of FTRE's receiving PIN at December 31, 1997 and December 31,
1998 totaled 7.0 million and 8.6 million, respectively. PIN FTRE's increased by
1.6 million subscribers, or 23%, from December 31, 1997 to December 31, 1998.
EXPENSES. Cable television programming expenses increased $6.0 million, or
53%, from $11.4 million for the year ended December 31, 1997 to $17.4 million
for the year ended December 31, 1998. This increase was due primarily to:
- an increase of $4.8 million related to (i) the amounts paid to cable
systems receiving PIN as a result of an increase in the number of FTRE's
receiving PIN, and (ii) the consolidation of the PIN Venture, which
resulted in an increase in cable television programming expenses for
financial statement reporting purposes;
- a $1.3 million increase in marketing expenditures to improve the
distribution of GAC; and
- a $0.4 million increase in the amortization for GAC cable programming
distribution payments for GAC.
The increase was offset by the decrease in allocation of the satellite
services expenses attributable to PIN and GAC. As a percentage of cable
television programming revenues, cable television programming expenses increased
from 95% for the year ended December 31, 1997 to 103% for the year ended
December 31, 1998.
OPERATING INCOME (LOSS). Operating income (loss) from cable television
programming decreased $1.1 million from an operating income of $0.6 million for
the year ended December 31, 1997 to an operating loss of $(0.5) million for the
year ended December 31, 1998 as a result of the factors stated above.
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SEGMENT EBITDA. Segment EBITDA from cable television programming decreased
$0.6 million, or 78%, from $0.8 million for the year ended December 31, 1997 to
$0.2 million for the year ended December 31, 1998 as a result of the factors
stated above.
ADVERTISING SALES SERVICES
REVENUES. As a result of the acquisition of MediaAmerica in July 1998, we
generated advertising sales services revenues of $4.7 million for the year ended
December 31, 1998.
EXPENSES. As a result of the acquisition of MediaAmerica, we generated
advertising sales services expenses of $4.3 million for the year ended
December 31, 1998.
OPERATING INCOME. As a result of the acquisition of MediaAmerica, operating
income from advertising sales services was $0.4 million for the year ended
December 31, 1998.
SEGMENT EBITDA. As a result of the acquisition of MediaAmerica, segment
EBITDA from advertising sales services was $1.0 million for the year ended
December 31, 1998.
SATELLITE SERVICES
REVENUES. Satellite services revenues decreased $0.7 million, or 11%, from
$6.9 million for the year ended December 31, 1997 to $6.2 million for the year
ended December 31, 1998. This decrease was driven largely by:
- the expiration in October 1997 of a third party satellite services
agreement, which generated $2.6 million in satellite delivery revenues in
1997; and
- the consolidation of the PIN Venture, which for financial statement
reporting purposes resulted in the elimination of $0.4 million in
satellite delivery revenues.
This decrease was partially offset by:
- new satellite delivery and production support agreements entered into with
third parties in 1998, which resulted in revenues of $1.4 million; and
- an increase in satellite services fees of $0.9 million charged to related
parties.
EXPENSES. Satellite services expenses increased $0.5 million, or 10%, from
$4.8 million for the year ended December 31, 1997 to $5.3 million for the year
ended December 31, 1998. This increase was due primarily to a decrease in the
allocation of satellite services expenses to cable television programming
expenses attributable to PIN and GAC, as a result of the additional satellite
services customers. As a percentage of satellite services revenues, satellite
services expenses increased from 69% for the year ended December 31, 1997 to 85%
for the year ended December 31, 1998, primarily due to a decrease in third party
revenues in 1998.
OPERATING INCOME (LOSS). Operating income from satellite services decreased
$1.2 million from $2.1 million for the year ended December 31, 1997 to
$0.9 million for the year ended December 31, 1998 as a result of the factors
stated above.
SEGMENT EBITDA. Segment EBITDA from satellite services decreased
$1.3 million, or 22%, from $6.2 million for the year ended December 31, 1997 to
$4.9 million for the year ended December 31, 1998 as a result of the factors
stated above.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Advertising revenues in the radio and cable television industries fluctuate
due to seasonality in these industries. We believe that radio network revenues
are typically lowest in the first quarter and
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cable television network revenues are typically lowest in the third quarter.
Results in our business segments have generally followed these industry
patterns. With the acquisitions of the assets of Broadcast Programming and
MediaAmerica, which increase our presence in radio programming, we expect that
our seasonal trend of lower first quarter revenues will be more significant
because radio programming and advertising sales revenues will be a greater
percentage of total revenues. Other than fees paid to third parties for certain
of our radio programming, fees paid in connection with the distribution of PIN
and the sales commissions paid to account executives for radio and advertising
sales services, our expenses have not historically varied significantly relative
to the seasonal fluctuation of revenues. Our quarterly and annual results of
operations are affected by a wide variety of factors, many of which are outside
of our control and could materially and adversely affect our profitability.
These factors include the timing and volume of advertising on our radio and
cable television networks, the number and size of the radio stations that carry
our radio programming, the number and size of cable systems and video
distributors that carry PIN and GAC and overall economic conditions.
The following table reflects the unaudited percentage of total revenues for
each business segment received in each quarter of 1998 and 1999, adjusted to
give effect to our acquisitions of MediaAmerica and Broadcast Programming as if
they had occurred at the beginning of each respective year.
<TABLE>
1998 1999
QUARTER ENDED QUARTER ENDED
----------------------------------------- -----------------------------------------
MAR. 31 JUN. 30 SEPT. 30 DEC. 31 MAR. 31 JUN. 30 SEPT. 30 DEC. 31
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Pro Forma:
Programming content:
Radio......................... 20% 24% 28% 28% 20% 25% 26% 29%
Cable television.............. 23 24 24 29 21 25 24 30
Programming support services:
Advertising sales services.... 19 25 25 31 17 25 29 29
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have incurred net losses, primarily as a result of
expenses associated with developing and launching our programming networks and
financing costs. For the years ended December 31, 1997, 1998 and 1999, we
incurred net losses of $(3.5) million, $(11.5) million and $(10.1) million,
respectively. Net cash provided by (used in) operating activities for the years
ended December 31, 1997, 1998 and 1999 was $7.6 million, $(7.1) million and
$2.4 million, respectively.
The implementation of our growth strategies depends on a number of factors
including the availability of cash generated from operations and available cash
balances, and may require additional equity and/or debt financings, particularly
to make significant acquisitions. Our indenture currently permits secured
borrowings of up to $20.0 million. In the quarter that we repurchase
$35.0 million of our Senior Notes with the proceeds of this offering, we will
record an extraordinary expense for the early extinguishment of debt of up to
$5.2 million. Subsequent to such repurchase, our interest obligations will be
reduced. We had cash and cash equivalents and available for sale securities of
$20.2 million as of December 31, 1999. We believe that our cash balances,
available for sale securities, net proceeds from this offering and operating
cash flow, including the cash flows of, and dividends and distributions from,
our subsidiaries, will fund our cash flow requirements through 2000.
We will continue to depend significantly upon the earnings and cash flows
of, and dividends and distributions from, our subsidiaries to pay our expenses,
meet our obligations and pay interest and principal on our Senior Notes and our
other indebtedness. While the terms of our joint ventures (including the PIN
Venture) generally require the mutual consent of ourselves and our joint venture
partners to distribute or advance funds to ourselves, there are no significant
contractual restrictions on distributions from our subsidiaries.
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INVESTING ACTIVITIES
For the years ended December 31, 1998 and 1999, net cash used in investing
activities was $(35.0) million and $(32.6) million, respectively.
Our investing activities in 1998 related primarily to the acquisition of the
MediaAmerica assets for cash consideration of $26.7 million and capital
expenditures of $2.3 million for equipment to further compress our Satcom C-3
satellite transponder and to add radio formats and programming. In 1998, we also
made programming distribution payments for GAC of $3.1 million.
In July 1998, we acquired substantially all of the assets and liabilities of
MediaAmerica for $26.7 million in cash and $8.1 million in shares of our
Class A Common Stock.
Our investing activities for the year ended December 31, 1999 consisted
primarily of:
- $20.9 million for the Broadcast Programming acquisition;
- $6.4 million in cable programming distribution agreement payments for GAC
to add 4.8 million subscribers; and
- $0.8 million for the purchase of property and equipment.
FINANCING ACTIVITIES
Net cash provided by financing activities for the years ended December 31,
1998 and 1999 was $59.0 million and $22.9 million, respectively.
Net cash provided by (used in) financing activities in 1998 related
primarily to $100.0 million of proceeds from the issuance of our Senior Notes,
$(52.0) million for repayment of a capital lease obligation and other
borrowings, $16.7 million of proceeds from borrowings under a subsidiary's
credit facility and $(4.5) million of deferred offering costs.
Our financing activities for the year ended December 31, 1999 consisted of
the issuance of $24.0 million of our Series A Convertible Preferred Stock. We
used $20.0 million of the proceeds from our Series A Convertible Preferred Stock
issuance to repay $20.0 million of indebtedness under our $20.0 million credit
facility. The balance will be used to develop our Internet strategy and for
general corporate purposes.
On July 29, 1999, we entered into a $20.0 million credit facility with a
commercial bank to finance the Broadcast Programming acquisition on a short-term
basis. In order to allow us to obtain more favorable terms, Jones International
guaranteed the loan and provided certain collateral as security for the
guaranty. The credit facility bears interest either at the commercial bank's
prime rate minus 2% or a fixed rate (which is approximately equal to LIBOR) plus
0.5%. The interest rate was 6.5% per annum at December 31, 1999. The credit
facility will expire on June 30, 2000, unless extended.
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 divided among the various entities
affiliated with Mr. Jones, including ourselves. Because Jones Intercable was the
largest of such sharing entities, its exclusion from the allocation process has
caused us, 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 legal, risk management and human resources services. As a
result, we estimate that our operating expenses will most likely increase by
approximately $35,000 to $50,000 per month beginning the first quarter of 2000.
Historically we have shared a cable television affiliate sales department
with a related company. Because this company ceased distribution efforts in the
last quarter of 1999, cable television affiliate
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sales expenses increased beginning in the last quarter of 1999 and are
anticipated to further increase in 2000. As a result, we estimate that cable
television affiliate sales expenses increased by approximately $70,000 per month
beginning in the fourth quarter of 1999. Further, this related company will
discontinue the use of certain earth station services provided by us beginning
in the first quarter of 2000. It is estimated that our loss of revenue as result
of the termination of these services to this related party will be approximately
$75,000 per month.
While we have taken certain steps and will take additional steps to mitigate
the impact of these divestitures, there will be no assurance that we will be
able to reduce the level of these costs.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue was the result of many computer programs being written
such that they would malfunction when reading a year of "00." This problem could
have caused system failure or miscalculations causing disruptions of business
processes. We have not experienced any such disruptions to date.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which is effective for the year ending December 31,
2001. This statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. It requires that an entity recognizes all derivatives as either
assets or liabilities in the statement of financial position and measures those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as:
- a hedge of the exposure to changes in the fair value of a recognized asset
or liability or an unrecognized firm commitment;
- a hedge of the exposure to variable cash flows of a forecasted
transaction; or
- a hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale
security, or a foreign-currency-denominated forecasted transaction.
We will adopt this statement by December 31, 2001. We do not expect that the
adoption of this statement will have a harmful impact on our financial
statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our financial
position, results of operations, or cash flows due to adverse changes in
financial market prices. We are exposed to market risk through interest rates.
This exposure is directly related to our normal funding and investing
activities.
As of December 31, 1999, approximately $7.3 million of our current assets
were subject to changes in interest rates; however, we do not use derivatives to
manage this risk. This exposure is linked primarily to the prime rate. We
believe that a moderate change in the prime rate would not materially affect our
operating results or financial condition.
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BUSINESS
OVERVIEW
We own and operate a leading network radio programming business and two
cable television networks and are developing a complementary Internet business.
Through our traditional media businesses, we create, develop and produce network
radio and cable programming that is distributed to more than 2,450 radio
stations and 1,750 cable systems, respectively, throughout the United States. We
provide advertisers the ability to reach an audience of approximately
60 million weekly radio listeners and 42 million cable viewing households on a
full- or part-time basis. We currently operate multiple web sites that extend
our traditional media content and personalities to the Internet and allow us to
capitalize on Internet advertising and e-commerce opportunities. As a complement
to our programming businesses, we own and operate a leading network advertising
sales business that provides advertisers an efficient means to reach national
radio and cable television audiences as well as Internet users. We also provide
satellite services to facilitate the distribution of our programming and that of
other companies.
We expect the demand for radio and cable television programming content to
increase dramatically during the next several years, primarily as a result of
technological advances such as audio and video streaming over the Internet,
satellite radio and digital cable television. The growing popularity of the
Internet creates a need for additional programming content that will attract
viewers to web sites for extended time periods. In this expanding distribution
environment, we believe that there will be strong demand for branded programming
content that can be channeled across multiple media outlets. We believe that we
are well-positioned to benefit from this increased demand for content.
Our portfolio of businesses includes the following:
- PROGRAMMING CONTENT
RADIO. We produce or license over 2,000 hours of original radio
programming weekly. This programming is comprised of twelve 24-hour formats
and 19 syndicated programs. Our radio programming covers a wide variety of
genres, such as country, adult contemporary, talk and Hispanic. It features
well-known syndicated programs such as The Crook & Chase Country Countdown,
Delilah and The Dennis Prager Show.
CABLE TELEVISION. We own and operate two cable television networks, GAC
and PIN. GAC is a 24-hour country music video network reaching nearly
12 million cable households. PIN, a joint venture with Cox Communications,
Inc., airs long-form paid programming produced by advertisers and
infomercial providers. PIN reaches more than 30 million households on a
full- or part-time basis.
INTERNET. We have developed multiple web sites that complement our radio
and cable programming content and are developing additional sites. To extend
GAC and our country radio programming content to the Internet, we have
launched CountryStars.com, a portal catering to the "country" lifestyle.
RadioDelilah.com and DennisPrager.com are examples of our web sites that
extend our personality-driven radio programs to the Internet. Our web sites
provide valuable cross-promotion and e-commerce opportunities.
- PROGRAMMING SUPPORT SERVICES
ADVERTISING SALES SERVICES. We currently represent more than 90 network
radio programs or services, including over 60 programs produced by
third-parties that are distributed to approximately 6,000 radio stations. In
addition, we sell network advertising for our two cable networks. We have
recently begun to provide advertising sales services to our web sites and to
web sites owned by third parties. In February 2000, we entered into an
agreement to provide advertising sales services for Matchmaker.com, an
online dating service. In addition, we have an exclusive long-term
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agreement to provide advertising sales services to Sirius Satellite Radio,
one of only two licensed satellite radio providers in the United States.
Sirius is expected to launch its service in the fourth quarter of 2000 with
approximately 100 channels of digital radio service, up to 50 of which will
carry commercials.
SATELLITE SERVICES. We provide satellite delivery and production support
services for GAC, PIN and cable channels operated by other companies. We own
two satellite transponders and an uplink facility. Ownership of these assets
allows us to control the distribution of our radio and cable programming. It
also provides us with a cost-effective platform for launching new radio and
cable networks. We generate additional revenues from leasing excess
satellite capacity and providing related support services to other cable
programmers.
COMPETITIVE STRENGTHS
We believe we have the following competitive strengths:
WE PROVIDE ADVERTISERS WITH AN EFFICIENT MEANS TO REACH TARGETED AUDIENCES.
Through our radio networks, we provide advertisers the ability to reach an
audience of approximately 60 million weekly radio listeners. Approximately
42 million cable homes receive one of our two cable networks and a growing
audience of Internet users visit our web sites. With our varied programming
formats, multiple distribution channels and experienced sales organization, we
can aggregate a large, national audience according to specific demographics,
providing advertisers with an cost-efficient and effective means to reach
desired audiences across multiple media platforms.
WE HAVE A SUCCESSFUL HISTORY OF DEVELOPING EXCLUSIVE, PERSONALITY DRIVEN
RADIO AND TELEVISION PROGRAMMING. We have an established history of identifying
and attracting successful on-air personalities and developing radio and cable
television programs that generate a significant and loyal audience. Our
exclusive programming includes such widely recognized shows as The Crook & Chase
Country Countdown, Delilah and Neon Nights.
WE CREATE VALUE BY CROSS-PROMOTING OUR PROGRAMMING CONTENT ACROSS ALL OF OUR
MEDIA PLATFORMS. We cross-promote and brand our programming to encourage our
audience to access our content across multiple platforms. Our cross-promotion
strategy utilizes both in-program and on-air promotions by our popular
personalities. Additionally, we use our own traditional advertising inventory to
drive viewership. For example, our CountryStars.com web site is promoted on GAC,
our three 24-hour country radio formats and through our four syndicated country
radio programs.
WE HAVE AN ESTABLISHED ADVERTISING SALES ORGANIZATION AND ARE
WELL-POSITIONED TO OFFER ADVERTISERS ATTRACTIVE PACKAGES ACROSS OUR THREE MEDIA
PLATFORMS. We have a 16 person sales force with offices in New York, Los
Angeles, Chicago, Detroit, Dallas and Denver and intend to open an office in
Nashville in the first half of 2000. With an average of 16 years of advertising
sales experience, our sales force has established long-term relationships with
many national advertisers and advertising agencies. As a result, we are
well-positioned to assist national advertisers in developing complementary
advertising programs spanning all three of our media platforms.
WE HAVE THE ABILITY TO LEVERAGE OUR EXISTING INFRASTRUCTURE AND ASSETS TO
DEVELOP NEW REVENUE OPPORTUNITIES AT A LOW INCREMENTAL COST. We have made a
substantial investment in our advertising sales, affiliate sales, content
development and satellite distribution capabilities. We intend to leverage these
resources to develop new program offerings for radio, cable television and the
Internet at a low incremental cost. In addition, we have an extensive library of
audio and video content for distribution across multiple platforms, including
the Internet, in a cost effective manner.
WE HAVE AN EXPERIENCED MANAGEMENT TEAM WITH STRONG RELATIONSHIPS WITH
ADVERTISERS, CABLE AND RADIO AFFILIATES, AND THE MUSIC RECORDING INDUSTRY. Our
Chairman, Glenn R. Jones, was the founder, Chairman and Chief Executive Officer
of Jones Intercable, Inc., a top ten multiple system cable operator. In
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addition to Mr. Jones, we have assembled a senior management team with extensive
experience in all areas of our business. With an average of more than 20 years
of relevant industry experience for our top five executives, we enjoy long-term
relationships with advertisers, advertising agencies, cable and radio
affiliates, the music recording industry and independent producers of network
programming.
We are currently benefiting from our synergies within the country music
genre. In network radio, we distribute three 24-hour country music formats to
over 400 radio stations, and we distribute four long-form syndicated programs to
approximately 800 radio stations. Our networks reach more than 30% of all
country music radio stations in the United States and more than 14 million
listeners on a weekly basis. Our country music cable television network, GAC,
reaches nearly 12 million cable households with its country music video
programs. Utilizing our portfolio of brand-name country music radio and cable
television shows, we are creating complementary web sites, including
CountryStars.com, CountryDJ.com, RadioLia.com. We cross-promote these web sites
using traditional commercials, as well as in-program and on-air promotions, to
extend our programming recognition and brand and to realize additional
advertising and e-commerce revenue opportunities. With our country-focused
multi-media programming portfolio, our advertising sales organization is able to
offer national advertisers a complete package of radio, cable television and
Internet advertising that targets the country music audience and lifestyle. We
intend to replicate this model with our other radio formats, such as adult
contemporary, Hispanic and talk.
PRINCIPAL BUSINESSES
RADIO PROGRAMMING
We are a leading independent provider of high-quality radio programming to
radio stations nationwide. We distribute radio programming and services to radio
stations in exchange for advertising time on their radio stations that we resell
to national advertisers. This allows us to provide radio stations with a cost
efficient alternative to the talent, time and production expense required to
develop in-house programming. We offer radio stations a wide selection of
24-hour satellite delivered formats, syndicated programming and programming
consulting services. Our high-quality, personality-driven programming expands
our affiliated stations' programming selections and enables them to more
effectively compete in their markets.
Our radio programming operations feature over 90 on-air personalities, the
majority of whom have extensive top 25 market experience. We control the
production of our programming, which allows us to tailor our programs to respond
to current and changing listening preferences. Our high quality, distinctive
content is designed to enable radio stations to improve the quality of their
programming and to differentiate their on-air presentations from other stations
in their local markets. This allows our affiliates to realize higher ratings and
advertising revenues.
To supplement our in-house programming capabilities, we have agreements with
third party programmers to license and distribute their distinctive,
high-quality content. An example of such third party content is "The Music Of
Your Life," a 24-hour program targeted to a mature audience, hosted by Gary
Owens, Wink Martindale and other well-known radio personalities. Agreements with
third party programmers usually provide that the programmer creates and develops
the radio program. Our role is to:
- market the program to radio station affiliates;
- manage the relationship with radio station affiliates;
- sell network advertising; and
- provide technical support and other miscellaneous services.
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We offer our programming to radio stations primarily on a barter basis. In
return for providing the station with programming content, we receive commercial
inventory, which we then sell to network advertisers. In cases where the radio
station affiliate has low ratings, we also receive a monthly license fee. The
amount of commercial inventory we receive is based on the type and length of the
programming. Through our network advertising sales organization, we are able to
aggregate audiences based on the radio stations receiving our programming,
creating a sufficiently large audience of listeners to attract national
advertisers. The commercial inventory is then sold to advertisers, to reach
their target audiences in a cost-efficient and effective manner. We deliver
frequency, reach and the primary measurable demographic targeted by the national
advertisers, the 25 to 54 year-old adult. As a result, we currently sell
advertising to over 100 national advertisers.
Advertisers may buy our commercial inventory in the form of either
"up-front" or "scatter" market purchases. Those advertisers that participate in
the up-front market provide early commitments for national advertising time,
typically lasting 26 to 52 weeks. The quantity and price at which advertising is
sold in the up-front market depends on national advertiser demand, prevailing
advertising market conditions and the ratings of the applicable network. As the
inventory purchased up-front is taken out of the market, the remaining inventory
available in the scatter market is generally purchased at a higher rate. Scatter
purchases are for a specific, and usually shorter, periods of time and are also
for a specific amount of inventory. Typically scatter purchases are sold at
prevailing market rates.
We market our radio programming directly to radio stations through our
13-person affiliate sales group. Our affiliate sales group uses industry market
research and databases to identify prospective radio station affiliates. Using
this data, our salespeople develop relationships with radio station affiliates
in order to serve discrete station programming needs. In addition, our marketing
team assists in the sales effort with marketing campaigns, direct mail, trade
advertising and sales materials. Our presence at industry conventions and trade
shows also allows us to increase awareness of our radio programming and sign up
new affiliates.
We have affiliate agreements with approximately 2,450 radio stations
throughout the United States. Approximately 600 of these stations receive more
than one program. Our programming is generally sold on an exclusive basis to
stations in their city of license. However, we are able to place different
programs within the same market.
Our radio offerings are:
- 24-hour formats;
- long-form syndicated programs;
- short form-syndicated programs; and
- programming and consultation services.
24-HOUR FORMATS. We deliver twelve 24-hour music programs that cover many
of the major music formats used by radio stations nationwide. We have radio
station affiliates in all 50 states and in the 50 largest markets. Our network
is designed to provide complete content for our affiliated radio stations,
replacing their in-house on-air talent and significantly reducing their
production costs. Our "round-the-clock" satellite-delivered programming is aired
live and hosted by professional radio announcers. Examples of this type of
programming include the country, adult contemporary and oldies formats. In order
to present a localized image, our on-air talent record unique liners and
positioning statements for each affiliate, which are delivered via satellite for
broadcast at the local station. In addition, our programming provides stations
with breaks to insert locally sold commercials, news, weather or traffic.
As compensation for providing programming content and services, we receive
one or two minutes per hour of commercial inventory airtime. In situations in
which we receive two minutes per hour of
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inventory, we may also receive a monthly license fee from stations providing a
lower level of audience, as measured by AQH. The typical term of these license
agreements is one to three years. Historically, contract renewals average
between 80% and 85%.
We distribute the following owned or licensed (indicated *) 24-hour radio
programming:
<TABLE>
<CAPTION>
YEAR
LAUNCHED OR
24-HOUR PROGRAM NAME PROGRAM DESCRIPTION LICENSED
- -------------------------------------------------- -------------------------------------------------- ---------------
<S> <C> <C>
Adult Hit Radio(TM)............................... Hot adult contemporary 1989
Soft Hits(TM)..................................... Soft adult contemporary 1989
US Country(TM).................................... Mainstream country 1989
Good-Time Oldies(TM).............................. 60's based oldies 1990
CD Country-Registered Trademark-.................. Hot country, personality driven 1993
NAC (New Adult Contemporary)(TM).................. Smooth jazz 1994
Z-Spanish(TM)*.................................... Hispanic contemporary hit radio 1994
The Music of Your Life(TM)*....................... Adult standards 1996
Classic Hit Country(TM)........................... Country artists of the 60's & 70's 1997
Rock Classics(TM)................................. Mainstream classic rock 1997
La Bonita*........................................ Mass appeal adult contemporary Spanish 1999
La Buena*......................................... Hit regional Mexican mixed with Banda ranchera 1999
</TABLE>
LONG-FORM SYNDICATED PROGRAMMING. Long-form syndicated programming is
designed to fill, on a daily or weekly basis, a one- to six-hour time
period, such as:
- 6 am to 10 am;
- 10 am to noon;
- 4 pm to 5 pm;
- 7 pm to midnight; and
- midnight to 6 am.
Our long-form syndicated programs include talk shows hosted by nationally
known personalities, interview shows featuring popular music talent and music
countdown shows. We will continue to develop and acquire new syndicated
programming in order to increase our talent pool and audience size and to
respond to the needs of our affiliate stations. Two examples of our commitment
to develop new programming are Nashville Nights and The Dennis Prager Show. In
July 1998, we launched "Nashville Nights," a long-form country show produced at
a prominent country radio station in Nashville and distributed to over 100 radio
stations via satellite. We are responsible for all sales and marketing efforts
and our 50% venture partner, AMFM, Inc., is responsible for production of the
program. In April 1999, we launched The Dennis Prager Show on a national basis.
We produce this two-hour daily talk show, which focuses on the moral and ethical
implications of current day events and issues. The show is broadcast from
KABC-AM in Los Angeles, California, where Mr. Prager has been on the air for
over 17 years. We distribute the program via satellite to radio station
affiliates nationwide and are responsible for marketing the show to affiliates
and the advertising community. In addition, we produce a newsletter and audio
and video tapes of the program, which are sold to customers worldwide through
telemarketing and our Internet site. We have also added two high-growth
syndicated shows, Delilah and Neon Nights, through our acquisition of Broadcast
Programming.
We target and distribute our long-form programming to larger market radio
stations that typically have bigger AQH. These shows, because they are
personality-driven, tend to garner high ratings in the markets where they are
carried. In return for providing this programming, we receive up to six minutes
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per hour of commercial inventory from our radio station affiliates for each hour
of programming. The typical affiliate agreement for long-form programming is one
year.
We distribute the following owned or licensed (indicated *) long-form radio
programming:
<TABLE>
<CAPTION>
YEAR
LAUNCHED,
ACQUIRED OR
LONG-FORM PROGRAM NAME DESCRIPTION LICENSED
- ------------------------------------------------- ------------------------------------------------- -------------
<S> <C> <C>
Crook & Chase Centerstage Specials(TM)........... Special shows programmed for holidays 1996
The Crook & Chase Country CountDown(TM).......... Country's amiable ambassadors featuring today's 1996
top country songs
Country's Most Wanted............................ In-studio appearances and artist interviews 1998
hardDrive(TM).................................... A Billboard Magazine syndicated program of the 1998
year nominee that features alternative rock
artists and music
The McLaughlin Radio Hour*....................... Hosted by John McLaughlin 1998
Up Close......................................... Weekly music and interviews featuring 1998
album-oriented rock artists
Your Weekend with Jim Brickman................... Lifestyle information and celebrity guests for 1998
adult contemporary stations
Nashville Nights................................. Live evening show from Nashville featuring in 1998
studio performances by country's hottest acts
All Access....................................... Monthly specials recorded live featuring cutting 1998
edge artists
The Dennis Prager Show........................... Monday through Friday show focused on moral and 1999
ethical issues in everyday life
Rhona At Night*.................................. Daily talk show based on sex and relationships, 1999
hosted by Rhona Raskin, a registered clinical
counselor
Delilah.......................................... Monday through Friday show featuring love songs 1999
and personal relationship discussions
Neon Nights...................................... Evening country music show 1999
</TABLE>
SHORT-FORM SYNDICATED PROGRAMMING. Our short-form programs, generally less
than five minutes in duration, consist largely of 60 to 90 second entertainment
news reports that can be interactive with the programming of affiliated radio
stations. The typical affiliate agreement for short-form programming is
approximately one year. We receive one to two minutes of commercial inventory
airtime in return for such programming.
We distribute the following owned or licensed (indicated *) short-form
programming:
<TABLE>
<CAPTION>
YEAR LAUNCHED
ACQUIRED OR
SHORT-FORM PROGRAM NAME DESCRIPTION LICENSED
- ------------------------------------------------ ------------------------------------------------ -----------------
<S> <C> <C>
Fight Back! With David Horowitz*................ Popular consumer advocate 1998
Oldies Calendar With CharlieTuna................ A daily calendar with information culled from 1998
Charlie's years of interviews with artists
</TABLE>
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SERVICES. We also provide radio stations services such as news, information
on current events and comedy services designed to assist on-air talent in
preparation for these shows. Examples include comedy sound bites, song parodies,
fake commercials and show preparation fax services.
We distribute the following owned or licensed (indicated *) services
programming:
<TABLE>
<CAPTION>
YEAR LAUNCHED,
ACQUIRED OR
SERVICE NAME DESCRIPTION LICENSED
- ------------------------------------------------ ------------------------------------------------ -----------------
<S> <C> <C>
American Comedy Network (TM)(ACN)............... Premier comedy service 1998
ACN/PDQ......................................... Satellite version of ACN 1998
Associated Press*............................... Current news 1999
BP Total Radio.................................. Programming consulting service 1999
</TABLE>
We also provide custom programming and consulting services to approximately
800 radio stations, including:
- format change recommendations;
- playlist and talent critiques; and
- other technical and programming consultation services.
PENDING ACQUISITION. We are in the final stages of negotiating the
acquisition of a company that provides news and information to radio stations.
The consideration is expected to be 50% cash and 50% Class A Common Stock, with
the Class A Common Stock to be valued at the price of the Class A Common Stock
in this offering. The results of this acquisition have not been included in any
pro forma results in this prospectus.
CABLE TELEVISION PROGRAMMING
We own and operate two cable networks:
- Great American Country; and
- Product Information Network.
GREAT AMERICAN COUNTRY. GAC is a 24-hour country music video
network launched on December 31, 1995. GAC features a mix of current top
country hits and past country hits that capitalize on the popularity of
country music. GAC is programmed to appeal to the largest, most affluent
market segment of the country music audience--the 25 to 54 age group.
GAC acquires its music videos at no cost from record companies, which
use this method to promote their performing artists. GAC also airs long
form shows, including "Fast Forward," "The Top 15 Country Countdown,"
"Behind the Scenes" and "Inside Country." We believe that the
programming quality of GAC has significantly benefited from our
experience in the country music radio programming business.
GAC derives its revenues from license fees and national advertising. The
typical length of GAC's affiliate agreements is ten years. The monthly
license fee rate card for GAC during 1999 was $.055 per subscriber. GAC's
affiliate agreements typically provide for annual escalators of $.005 per
month per subscriber. Typically, such fees are waived for a period of time
after initial launch as an incentive to attract new affiliates. The fees are
also subject to volume discounts based on the number of subscribers
receiving GAC or the subscriber commitment made by the MSO. This strategy
has allowed us to supplant our competitors' programming with GAC in top
country markets, including Dallas, Atlanta, Reno, Sacramento, Cincinnati,
Detroit, Baltimore, Knoxville, Chattanooga and Charleston.
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GAC began developing its national spot advertising efforts in late 1997
and currently generates over $400,000 per month in advertising revenue.
GAC's advertising sales are impacted by a variety of factors, including the
level of distribution, ratings, prevailing advertising market rates, sellout
rates and number of advertising minutes available for national advertising.
In January 2000, GAC began to receive rating services from Nielsen. Nielsen
ratings will allow us to better identify our viewership at specific time
periods of the day, which in turn will enhance our ability to sell national
spot advertising. We believe that as GAC continues to increase its
subscriber level, we will be able to target a broader group of advertisers
and derive higher advertising revenues based on traditional spot
advertising, as opposed to relying on direct response advertising.
GAC is distributed to nearly 12 million subscribers on a full-time basis
and the subscriber base is growing at a rapid rate. GAC has affiliate
agreements that allow it to seek carriage on all of the cable systems owned
by five of the ten largest MSOs, including:
- Adelphia Communications Corporation;
- AT&T Corporation;
- Comcast Corporation;
- MediaOne Group, Inc.; and
- Time Warner Inc.
GAC also has an affiliate agreement with the National Cable Television
Cooperative, Inc., a cable programming cooperative.
PRODUCT INFORMATION NETWORK. PIN is a satellite-delivered long-form
advertising service owned by the PIN Venture, a joint venture with Cox
Communications, Inc. PIN was launched in February 1995 and is
distributed on its own dedicated channel 24-hours a day, seven days per
week.
In September 1995, Adelphia received an interest in the venture in
exchange for a 10-year affiliate agreement to carry PIN on its cable
systems. In April 1997, we acquired an 8.35% equity interest in the PIN
Venture from Adelphia. This acquisition resulted in our owning over 50% of
the venture. On December 31, 1998, we acquired Adelphia's remaining interest
in the PIN Venture, increasing our equity position to 55.3%. Cox is now our
sole joint venture partner in PIN. We are the manager of the PIN Venture and
are responsible for its day-to-day operations.
PIN generates its revenues through the sale of long-form paid
advertising known as infomercials. An infomercial is an advertisement paid
for by the advertiser based on the time of day when the infomercial is
aired. Infomercials are usually one-half hour in length and are often
produced in an entertainment format. PIN's programming is produced and
provided by its advertisers at no cost to PIN. The majority of current
programming consists of traditional infomercials from major infomercial
producers, such as the Guthy Renker Corporation.
PIN compensates cable system operators for carriage through a rebate
program. Such payments, which are generally in the form of annual rebates
per subscriber, averaged approximately 75% of PIN's net advertising revenues
in 1999. For 1999, we paid full-time affiliates an average of $1.42 per
full-time subscriber.
PIN is distributed to subscribers through 425 cable systems and
broadcast affiliates and is carried on a portion of the cable systems of
nine of the ten largest MSOs, including:
- Adelphia Communications Corporation;
- AT&T Corporation;
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- Cablevision Systems Corporation;
- Charter Communications Inc.;
- Comcast Corporation;
- Cox Communications Inc.;
- Cable One, Inc.;
- MediaOne Group, Inc.; and
- Time Warner Inc.
PIN's standard affiliation agreement generally requires a one-year
commitment of carriage. However, the Jones Intercable, Cox
Communications Inc. and Adelphia Communications Corp. agreements are
long-term agreements, each with more than five years remaining. As of
December 31, 1999, PIN was distributed on a full- or part-time basis to
cable television systems and broadcast television stations representing over
30 million households.
INTERNET
We have developed multiple web sites that extend our radio and cable
programming content and personalities to the Internet and allow us to capitalize
on advertising and e-commerce opportunities. We have extended our cable
programming such as GAC, to the Internet by developing CountryStars.com, a site
that offers content catering to country music fans and the "country" lifestyle.
Similarly, we have extended our radio programming, such as "Delilah," to the
Internet with our RadioDelilah.com site. This site provides fans the ability to
find out more about Delilah, her radio show and the show's related products. We
have created similar sites for several other of our radio programs, including
"Neon Nights," "Country's Most Wanted" and "The Dennis Prager Show."
We cross-promote our web sites by using our traditional media channels,
through which we drive traffic to our sites by using commercial inventory,
in-programming and on-air promotion. Our show hosts and personalities direct
viewers and listeners to web sites for programming information, personal
appearance schedules and related entertainment links. By utilizing our content
and promotional capabilities to extend our branded programming to the Internet,
we have developed new advertising and e-commerce revenue opportunities in an
effective and cost-efficient manner. In addition, our advertising sales
organization offers national advertisers "one-stop shopping" opportunities to
purchase advertising packages that reach across radio, cable and the Internet.
Based on the initial success of this model, we intend to replicate this strategy
on our other branded radio and television programming.
The primary driver for increasing both advertising sales and e-commerce
revenues is traffic on our web sites. We use our commercial inventory and on-air
promotions to drive visitors to our multiple sites and encourage viewer and
listener participation through the Internet. For example, GAC's popular show
"The Top Fifteen Country Countdown" is tied directly to CountryStars.com. Each
week, thousands of visitors vote for their favorite videos on-line and this data
is used to determine the top 15 videos for that week's show. CountryStars.com
site vistors are also given the opportunity to purchase GAC premium items and
soon will be able to choose from a wide selection of merchandise, including
compact discs, apparel, specialty foods, books, country memorabilia and
collectibles.
The traffic that we drive to our web sites through our traditional media
allows us to offer advertisers the ability to target a pre-qualified audience
that has demonstrated a focused interest in related content. For example,
advertisers that purchase time on our radio program "Delilah," can extend their
purchase to the RadioDelilah.com site. Because our advertising sales efforts for
radio, cable and the Internet are handled by our in-house sales organization,
this strategy allows us to create cost effective, integrated advertising
packages for our clients.
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Our portfolio of Internet sites includes the following:
COUNTRYSTARS.COM. CountryStars.com is a "country" lifestyle portal offering
entertainment, information and shopping related to the country lifestyle. The
site offers fans a variety of news and information about their favorite country
music artists, including:
- daily country music news updates;
- GAC scheduling information, polls, contests and playlists;
- biographies, photos and in-depth interviews with country artists;
- "Country DJ" micro-sites that profile nationally distributed radio hosts;
and
- a country store offering country music and lifestyle products.
RADIODELILAH.COM. Radiodelilah.com is a site designed for listeners and
fans of the Delilah syndicated radio program. Major features of the site
include:
- Delilah's Journal;
- personal information about the people behind the program;
- correspondence from Delilah's listeners;
- audio samples of celebrity interviews;
- a gift shop of Delilah's branded merchandise; and
- links to organizations that deal with personal, emotional and health
issues.
RADIOLIA.COM. Radiolia.com is a web site connected with the Neon Nights
syndicated radio show, hosted by Lia Knight. Major features of the site include:
- artist spotlights that provide information on up-coming celebrity
interviews;
- a celebrity photo gallery and personal information about Lia;
- a correspondence area for listeners and fans, plus polls for web site
visitors;
- information about the radio program; and
- a store from which fans can purchase Lia and Neon Nights branded
merchandise.
DENNISPRAGER.COM. The Dennisprager.com site, associated with The Dennis
Prager Show, features:
- descriptions of the radio program, it's availability and schedule;
- sample issues of the Prager Perspective newsletter and subscription
opportunities;
- information about Mr. Prager's lecture topics, schedules and reviews;
- articles and reviews written by and about Dennis Prager; and
- online purchase opportunities of Mr. Prager's books, audio and video
tapes, articles and CD ROM.
ADVERTISING SALES SERVICES
Most radio stations carry some form of network or syndicated programming
during part of the day or week. The current demand for syndicated programming
has resulted in a large number of syndicated program producers, some of whom are
not able to accumulate sufficient audience or national coverage to attract
advertising revenues from national advertisers. MediaAmerica was created in 1987
to service
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these independent producers. By consolidating the advertising sales revenues
from multiple syndicators, in addition to our owned programming, we have the
economies of scale to staff a national sales organization beyond what some
individual producers could independently afford. In addition, we have the
ability to aggregate the commercial broadcast time of these syndicators and
present packages for sale to national advertisers such as General Motors Corp.,
Procter & Gamble, Warner-Lambert, Amazon.com, A&E Television and GEICO. Our
ability to aggregate time benefits syndicators by giving them access to
advertisers that typically only purchase commercial broadcast time delivering a
specific threshold level of the national audience. Advertisers benefit from the
ease of buying from one professional sales organization that can deliver a
larger audience versus a single producer. The producer pays us a commission for
the sale of the commercial broadcast time and related services such as inventory
management, commercial scheduling, proof-of-performance collection and financial
services.
We represent over 90 programs or services produced by approximately 30
programmers. Such programs include The Motley Fool produced by Cox Radio,
Newsweek on Air and NASCAR Motor Racing Network. In general, our advertising
sales agreements have terms of one to three years in duration and provide for
commissions as a percentage of net sales and revenues from the sale of
advertising time after deducting standard advertising agency fees. These
agreements typically give us exclusive network advertising sales rights for the
programming.
Our 16 advertising account executives and sales managers are located in six
major advertising markets in the United States (New York, Los Angeles, Chicago,
Dallas, Detroit and Denver). In the first half of 2000, we intend to open a
sales office in Nashville. These account executives market the commercial
broadcast time of our producers and programs via personal selling to national
advertisers and their advertising agencies. The sales team has an average of
16 years experience in the advertising sales and sales management arena.
Additionally, we are in the process of developing numerous cross-selling
opportunities and other synergies that arise from the complementary nature of
our services and customer base of national advertisers.
In order to serve our many producers and advertising clients, we have
developed a state of the art, proprietary software system that handles the sales
proposal, airtime inventory management and order processing for our advertising
sales. In addition, our research department continuously analyzes a variety of
data to provide our salespeople with accurate estimates of listening audiences,
creative means to demonstrate the particular advantages of the programs we sell,
and network radio's advantages versus other media forms. We utilize audience
listening data from Arbitron, an independent rating service, to develop our
audience and demographic reports for all of our programs.
In addition to our network radio business, we sell network advertising for
our two cable networks. With the recent launch of our Internet effort, we have
begun providing advertising sales services to our own web sites and to those
owned by third parties. In February 2000, we entered into a two-year agreement
(which can be extended for an additional year) to provide advertising sales
services for Matchmaker.com, an online dating service owned by Metrosplash.com.
We also have an exclusive long-term agreement to provide advertising sales
services to Sirius Satellite Radio, one of only two licensed satellite radio
providers in the United States. Sirius is expected to launch its service in the
fourth quarter of 2000 with approximately 100 channels of digital radio service,
up to 50 of which will carry commercials.
SATELLITE SERVICES
We support our distribution of programming with satellite services. We
transmit our radio and cable television programming directly to radio stations,
cable system operators and other video distributors via satellite transponders
that we either own or lease. We provide playback services, trafficking and
ground-to-satellite transmission of our programming services from our uplink
facility in
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Englewood, Colorado. Through digital compression of one of our transponders we
have created additional channel capacity to use either for our own programming
or to lease to other parties.
We own two satellite transponders on strategically positioned GE Americom
satellites, Satcom C-3 and Satcom C-4. Through these transponders, we deliver a
variety of popular cable television programming. We use digital technology in
providing uplink, playback and trafficking services. On Satcom C-3, GAC, PIN and
two related parties lease four of seven available channels. The lease terms are
generally for the remaining life of the satellite. One related party's lease,
however, is for a seven-year term with a one-time option, exercisable by the
related party on six months advance notice, to terminate the lease on July 1,
2001. We anticipate this option will be exercised. A fifth channel is leased to
a third party through the life of this satellite. This lease is in default due
to nonpayment and it is unlikely we will receive further payments under this
lease. At minimal incremental cost, we could further digitally compress the
transponder to add at least three additional channels.
We have leased the C-4 transponder to an unrelated party. This lease
terminates on December 31, 2002, with an option, exercisable by the lessee, to
extend through October 16, 2004. The lease provides for monthly payments
averaging $160,000.
We continue to market our additional compressible capacity on our Satcom C-3
transponder and related services. We expect that our satellite transponders will
be effective to provide distribution for radio and television programming until
2004, at which time we will be required to locate new satellite transponder
space to use for our programming.
STRATEGY
DEVELOP HIGH QUALITY, PERSONALITY-DRIVEN PROGRAMMING. We believe that the
financial constraints and limited creative resources of many radio stations,
coupled with their need to improve operating efficiencies, create market demand
for additional long-form and short-form radio programming. Specifically, we
believe there are significant market opportunities for personality driven talk
radio such as The Dennis Prager Show and certain types of news and information
programs that we do not currently distribute. We intend to develop and/or
acquire radio programming addressing these market demands.
INCREASE PROGRAMMING DISTRIBUTION. To increase revenues from advertisers,
we will seek to increase the distribution of, and audience for, our programming.
We plan to continue our marketing and sales activities in an effort to increase
the number of our radio station affiliates and the size of our audience. We also
plan to continue to aggressively market our cable television networks to both
cable operators and other multi-channel distributors, including direct broadcast
satellite services systems (DBS) and multi-point/multi-system distribution
systems (MMDS). We also rely on financial incentives and our established
relationships with cable operations.
INCREASE ADVERTISING SALES REVENUES. Our primary revenue growth objective
is to increase our audience by developing new programming and expanding our base
of radio station and cable system affiliates. Our new radio programs are
designed for larger markets, which typically generate higher advertising rates.
As GAC continues to expand its subscriber base, we will be positioned to target
a broader group of advertisers and derive significantly higher advertising
revenues based on traditional spot advertising, as opposed to direct response
advertising. Finally, we intend to promote the benefits of long-form advertising
to attract new advertisers and increase PIN's advertising rates.
ENHANCE REVENUE GROWTH BY CAPITALIZING ON INTERNET REVENUE
OPPORTUNITIES. We have a two-part strategy to capitalize on our Internet
opportunities. First, we are developing a group of integrated web sites that
leverage our traditional programming content. Second, we intend to use the
strength of our advertising sales force to promote our web sites and web sites
of third parties. Our web sites will be designed to attract unique customer
segments that can be targeted individually or marketed together.
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We believe that we can significantly increase traffic to our integrated web
sites by using our multiple forms of programming content. Moreover, we intend to
create additional e-commerce opportunities by developing exclusive Internet
content that leverages our existing programming and by establishing strategic
relationships with other Internet content providers.
DEVELOP NEW CABLE PROGRAMMING NETWORKS. We are considering developing,
either internally or through ventures with others, additional satellite
delivered music video networks that will leverage our music programming
experience. We expect such networks will complement GAC, but will be primarily
targeted to digital cable and direct broadcast satellite. We are currently
conducting market research to determine the appropriate music content for these
networks.
LEVERAGE CROSS-MEDIA PLATFORM SYNERGIES. Our cross-promotion strategy
utilizes commercial time and in-program content on our traditional media to
build value and brand recognition of our web sites. Through this strategy we are
able to encourage viewers and listeners to seek out and access our content
across multiple media platforms. For example, CountryStars.com, our country web
site, is promoted to cable television viewers on GAC. These promotions include
tie-ins with specific television programs on GAC that direct visitors to
CountryStars.com. Each week thousands of GAC viewers visit CountryStars.com to
vote for their favorite videos. The results are used to determine the video
play-list for our weekly Top 15 Country Countdown show. GAC viewers also utilize
a search feature on CountryStars.com to find out when their favorite video will
be played, thus increasing visitors to the web site and enhancing the GAC
viewership experience. Similarly, through our three 24-hour country radio
formats, and our long-form syndicated radio programs, we reach a targeted group
of listeners on hundreds of radio stations nationwide.
RECRUIT AND RETAIN EXPERIENCED MANAGEMENT. Our principal objectives in
attracting, retaining, and motivating high-caliber executives include providing
long-term incentives such as stock options, aligning the interests of our
executives with the goals of our shareholders and delivering compensation
through cost- and tax-effective programs.
PURSUE ACQUISITIONS THAT ENHANCE OUR EXISTING BUSINESS OR PROVIDE ACCESS TO
NEW, RELATED BUSINESSES. We intend to expand by acquiring and/or creating
complementary business lines. The MediaAmerica and Broadcast Programming
acquisitions represent examples of this strategy. We believe that additional
opportunities exist both in the development of new programming and in the
acquisition of complementary businesses. We are constantly evaluating new
programming possibilities both in-house and with third parties. These
possibilities include the national syndication of existing programming, the
creation of new programming for syndication and the development of new cable
networks.
COMPETITION
RADIO PROGRAMMING. Our radio network competes for national advertising
revenues and radio station affiliates with major network radio distribution
companies, as well as with a large number of smaller independent producers and
distributors. The dominant competitors in the industry are affiliated with major
station owners, have recognized brand names and control large networks that
include affiliates to which the competitors pay to broadcast the network's
commercials. Beginning in early 1997, many of our larger competitors began to
consolidate, thus intensifying competition.
Our largest competitors include ABC Radio Networks, Westwood One/CBS Radio
Networks, Premiere Radio Networks and AMFM.
Radio networks also face competition from local radio stations. With the
advent of new technologies, local radio stations can pre-record their local
announcers and automate their operations. This allows for cost reductions and
greater operating efficiency. A recent technological innovation, satellite
radio, permits national radio stations to broadcast digital quality radio
programming nationwide via satellite. In February 1997, the FCC auctioned two
satellite radio licenses. These
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licenses were awarded to Sirius Satellite Radio (formerly CD Radio) and XM
Satellite Radio. Sirius satellite radio service is expected to be available in
late 2000. Additionally, recent technological advancements have improved the
quality and availability of Internet radio, which includes the technology of
wireless Internet radio for automobiles. We cannot predict what effect digital
satellite radio or Internet radio will have on the radio industry or on us.
CABLE TELEVISION NETWORKS. Our cable television networks compete for
distribution, viewers and advertising revenues with hundreds of cable and
broadcast television networks supplying a variety of entertainment and
infomercial programming. GAC's principal direct competitor is Country Music
Television, an advertiser-supported basic cable network owned by CBS, Inc., that
delivers country music videos on a 24-hour basis. GAC also competes with CBS's
The Nashville Network. PIN competes directly with at least two other infomercial
networks, Access Television Network and GRTV, both of which have significant
distribution capabilities. PIN also competes with at least 30 cable television
networks that air infomercial programming, many of which have a substantial
number of subscribers .
With advances in technology, we expect to encounter additional competition
for viewers as technological advances, such as the deployment of fiber optic
cable, digital compression technology and the multiplexing of cable services are
examples of new technologies that allow cable systems to expand their channel
capacity and enhance their ability to add networks.
INTERNET. The e-commerce and Internet advertising markets are competitive.
The volume and variety of companies engaged in e-commerce creates significant
competition for e-commerce dollars. We compete with other music web sites, some
of which target the same audience segments.
ADVERTISING SALES SERVICES. The network advertising representation business
is highly competitive, both in terms of competition to gain program provider
clients and the sale of airtime inventory to national advertisers. Our network
advertising representation business competes with major network radio
distribution companies operating divisions that sell their own company's airtime
inventory and contract with third party radio programmers to sell their national
airtime inventory. Over the last three years, many independent program providers
have been acquired by major network distribution companies. These companies have
large amounts of commercial inventory to sell and also possess significant
resources.
We also compete on behalf of our clients for advertising dollars with other
media such as broadcast and cable television, print, outdoor and Internet. The
primary factors determining success in the radio advertising sales service
industry are strong relationships with advertising agencies and national
advertisers, acquisition and maintenance of representation contracts from
producers with high quality, name brand products and experienced advertising
sales personnel.
We also compete for Internet advertising revenues with large web publishers,
search engine companies, advertising networks and other advertising sales
services. The primary competitors offering Internet advertising sales services
are Doubleclick, 24/7 Media and Flycast. These three companies, whose combined
revenues are currently only 6% of total Internet advertising revenues, have
created networks that represent thousands of affiliated web sites.
SATELLITE SERVICES. We compete in the delivery of domestic satellite
services with satellite owners and resellers, satellite service providers,
microwave carriers and full-service teleports.
Our principal competitors have substantially greater resources, including
Vyvx Teleport, TCI National Digital Television Center, GE Americom and Hughes
Electronics Corp. We believe that transmission quality, reliability, price and
the location of uplink facilities are the key competitive factors in this
market.
OTHER COMPETITIVE FACTORS. As there are generally few legal barriers or
proprietary rights to prevent entry into our markets, we could face future
competition from new competitors offering
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services similar to ours. Many of our competitors have greater resources and
there can be no assurance that we will be able to compete successfully in the
future. Also, technology changes, such as Internet and satellite delivered radio
and television, could cause the entry of new competitors. See "Risk Factors--We
may not be able to compete effectively against our competitors."
GOVERNMENT REGULATION
Although our radio and television networks are not generally directly
regulated by the FCC, the radio stations and cable television systems to which
we sell our programming are regulated. As a result, the federal laws and FCC
regulations that affect these entities indirectly affect us.
Among other things, the FCC adopts and implements regulations and policies
that directly or indirectly affect the ownership, operation and sale of radio
and television stations. The FCC also has the power to impose penalties for
violations of its rules or federal statutes. Such regulation may adversely
affect us. Recent federal regulation has resulted in a greater number of radio
group owners seeking to reduce costs.
The cable television industry is subject to extensive federal, state and
local regulation. Regulation can take the form of price controls, programming
carriage requirements and programming content restrictions. Such regulation
could affect the availability of time on local cable television systems for sale
by us, as well as the price at which such time is available. Both GAC and PIN
are subject to the FCC's rules requiring closed captioning for the hearing
impaired on all programming beginning in the first quarter of 2000. We expect
that compliance with these rules will not have an adverse effect on our
financial condition. We cannot assure you that material, adverse changes in
regulations affecting us, or the cable television industry in general, will not
occur in the future.
Our satellite delivery and production support services are directly
regulated by the FCC. We hold FCC microwave and earth station uplink licenses
that we utilize to provide delivery and support services. Because these licenses
relate primarily to the technical operation of our microwave and uplink
facilities, which are used for internal purposes and program delivery, there are
only limited regulatory burdens associated with keeping these licenses in good
standing. See "Risk Factors--We may be subject to burdensome government
regulation."
FACILITIES
Our principal executive offices are located in Englewood, Colorado. We
sublease office space from affiliates of Jones International, as well as office
space and studio space from third parties. See "Certain Relationships and
Related Transactions." In addition, we own 8.4 acres of land in Englewood,
Colorado. We believe our office space, studio space and Earth Segment's
satellite uplink facility are adequate to meet our current needs. The following
table lists the location and square footage of our facilities and indicates
whether there are owned or leased:
<TABLE>
<CAPTION>
ENTITY UTILIZING FACILITY LOCATION SQUARE FOOTAGE OWNED/LEASED
- -------------------------------------------------------- ------------------------ --------------- -------------
<S> <C> <C> <C>
Earth Segment........................................... Englewood, Colorado 13,194 Owned
Company................................................. Englewood, Colorado 7,571 Leased
Jones Radio Network..................................... Englewood, Colorado 17,496 Leased
MediaAmerica............................................ New York, New York 18,868 Leased
MediaAmerica............................................ Chicago, Illinois 224 Leased
MediaAmerica............................................ Milford, Connecticut 1,966 Leased
MediaAmerica............................................ Dallas, Texas 150 Leased
MediaAmerica............................................ Detroit, Michigan 125 Leased
MediaAmerica............................................ Washington, D.C. 350 Leased
MediaAmerica............................................ Los Angeles, CA 108 Leased
Broadcast Programming................................... Seattle, WA 16,560 Leased
</TABLE>
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EMPLOYEES
We refer to our employees as associates. As of December 31, 1999 we had 269
full-time and 84 part-time associates. In addition, we maintain relationships
with independent writers, program hosts, technical personnel and producers. None
of the associates are covered by a collective bargaining agreement and we
believe our employee relations to be good.
LEGAL PROCEEDINGS AFFECTING JONES INTERNATIONAL NETWORKS
From time to time, we are involved in routine legal proceedings incident to
the ordinary course of our business. We believe that the outcome of all such
routine legal proceedings in the aggregate will not have a material adverse
effect on our financial condition or results of operations.
LEGAL PROCEEDINGS AFFECTING OUR CHAIRMAN
Mr. Jones, our Chairman, has been named, along with Jones Intercable, in a
series of lawsuits arising out of purchases by Jones Intercable of four cable
television systems (the "Systems") from limited partnerships managed by Jones
Intercable as general partner. The lawsuits were filed between June and
September 1999 and are being consolidated into one action in the U.S. District
Court for the District of Colorado.
The lawsuits allege, among other things, breach of fiduciary duty in the
purchase of the Systems at prices that did not accurately reflect their market
value and breach of a provision of the limited partnership agreement requiring
that the sales price be determined by the average of three separate independent
appraisals. The plaintiffs have challenged both the independence and the
timeliness of the appraisals. In addition, the complaints allege that the proxy
solicitation materials used in connection with the limited partner voting on the
sales of the Systems contained inadequate and misleading information in
violation of the Securities Exchange Act of 1934. Jones Intercable and
Mr. Jones have filed motions to dismiss the lawsuits, and all matters in respect
of these lawsuits, including discovery, have been stayed pending resolution of
the motions to dismiss. No answers have been filed, and a trial date has not
been set.
We are not a party to any of the lawsuits, and have had no involvement in
any of the matters giving rise to the lawsuits.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is information as of February 1, 2000 concerning each person
who is an executive officer or director.
<TABLE>
<CAPTION>
NAME AGE POSITION(1)
- ------------------------------ ----------- ---------------------------------------------------------------------------
<S> <C> <C>
Glenn R. Jones................ 69 Chairman of the Board
Jeffrey C. Wayne.............. 45 President and Director
Jay B. Lewis.................. 41 Group Vice President/Finance, Chief Financial Officer, Treasurer and
Director
Ron Hartenbaum................ 47 President-Jones Radio Network and Director(2)
Gary Schonfeld................ 47 Chief Executive Officer-MediaAmerica(2)
Philip C. Laxar............... 46 Chief Operating Officer-Jones Direct, Ltd.
Amy Mickles................... 31 Controller
Yrma G. Rico.................. 52 Director
Fred A. Vierra................ 68 Director
Timothy J. Burke.............. 49 Director
</TABLE>
- ----------
(1) Upon completion of this offering, the Board will create an Audit and a
Compensation Committee.
(2) Pursuant to an agreement entered into in connection with the acquisition of
MediaAmerica, Messrs. Hartenbaum and Schonfeld together may nominate one
member of our Board of Directors. This right terminates upon the earlier of
July 10, 2007 and the date on which, among other things, the direct or
indirect ownership of Class A Common Stock by Messrs. Hartenbaum and
Schonfeld falls below certain levels.
The principal occupations for at least the past five years of each of our
directors and executive officers and certain are as follows:
GLENN R. JONES has been involved in the cable television business in various
capacities since 1961 and currently serves as a director and/or executive
officer of many of our affiliates, including being Chief Executive Officer,
President and a director of JonesKnowledge.com, Inc. He has been our Chairman of
the Board since 1993 and was President from May 1999 to October 1999. For more
than five years, until April 1999, Mr. Jones was Chairman and Chief Executive
Officer of Jones Intercable, Inc., a multiple system cable television operator.
In addition, Mr. Jones is a member of the Board and Education Council of the
National Alliance of Business. In 1994, Mr. Jones was inducted into Broadcasting
and Cable's Hall of Fame. Mr. Jones received a B.S. in Economics from Allegheny
College and a J.D. from the University of Colorado School of Law.
JEFFREY C. WAYNE, who served as President and Chief Operating Officer, Cable
Network Operations, and as Vice President/General Manager for Great American
Country since July 1997, was elected President, Cable Programming Networks and
President/General Manager for Great American Country in January 1998, and was
elected to be our President and a director in October 1999. Mr. Wayne is a
21-year veteran of the cable television industry. From 1995 to July 1997,
Mr. Wayne was Vice President of Programming for The Providence Journal's
Broadcast Division. At The Providence Journal, he was responsible for overseeing
a portfolio of cable network programming ventures including The Television Food
Network and America's Health Network. From 1978 to 1995, Mr. Wayne held various
marketing positions with Colony Communications, Inc., a top 20 multiple system
cable operator with over 800,000 subscribers, serving as Executive Director of
Marketing and Ad Sales from 1988 to 1993 and Vice President of Marketing and Ad
Sales from 1994 to 1995. Mr. Wayne has a B.A. in Political Science from the
University of Colorado.
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JAY B. LEWIS served as Vice President/Finance and as Chief Financial Officer
since July 1996 and was elected Group Vice President/Finance and appointed as a
director, in October 1996. Mr. Lewis has also served as Treasurer since
September 1994. From January 1995 to October 1996, Mr. Lewis was Vice President
of Finance and Treasurer of Jones International, our parent company, and certain
of its subsidiaries. From February 1986 to December 1994, Mr. Lewis was employed
in various capacities, including Controller and Treasurer, by Jones
Spacelink, Ltd., a former affiliate of ours. Mr. Lewis received a B.S. in
Accounting from the University of Wyoming in 1980.
RON HARTENBAUM co-founded MediaAmerica in 1987, and has been its Chairman
since its formation. Mr. Hartenbaum became the President of Jones Radio Network
and a director upon the consummation of the MediaAmerica acquisition in
July 1998. Mr. Hartenbaum has over 20 years of experience in radio advertising
sales. Before forming MediaAmerica, Mr. Hartenbaum was Vice President and
Director of Advertising Sales for Westwood One for six years. Prior to joining
Westwood One, Mr. Hartenbaum was involved in advertising sales for ABC Radio and
advertising development at ad agencies Needham Harper Worldwide and Grey
Advertising for national advertisers. Mr. Hartenbaum has a B.A. from Queens
College and an MBA from New York University.
GARY SCHONFELD co-founded MediaAmerica and has served as its President since
its formation in 1987. Mr. Schonfeld became the Chief Executive
Officer--MediaAmerica upon the consummation of the MediaAmerica acquisition in
July 1998. Mr. Schonfeld has over 20 years of experience in the sales arena,
including Vice-President Eastern Sales Region for Westwood One. Previously
Mr. Schonfeld served as an account executive with CBS Radio Networks and in
various positions with Fairchild Publications, Y&R Advertising and ABC Radio.
Mr. Schonfeld has a B.A. from the University of Vermont and an M.A. from the
University of Michigan.
PHILIP C. LAXAR has served as Chief Operating Officer for Jones
Direct, Ltd. since April 1999. Mr. Laxar has 18 years experience in the cable
television industry. From 1995 to April 1999, he served as Senior Vice President
of Programming for Jones Intercable. From 1988 to 1995, Mr. Laxar was Senior
Vice President of Programming and Pay-Per-View for KBLCOM Incorporated, a cable
operator. Mr. Laxar has a B.S. in Operations Research from Columbia University
and an MBA in Marketing from New York University.
AMY MICKLES has served as our Controller since July 1999. Ms. Mickles has
been associated with Jones International since February 1995, serving as Senior
Accountant from February 1995 to December 1995, as Accounting Manager from
January 1996 to February 1998 and Director of Financial Accounting from
March 1998 to June 1999. From February 1993 to February 1995, Ms. Mickles was a
Senior Auditor at Banc One Corporation (now Banc One, National Association), and
from August 1991 to February 1993, she was an auditor at Deloitte & Touche LLP.
Ms. Mickles received a B.S. in Accounting from the University of Houston and is
a certified public accountant in the State of Colorado.
YRMA G. RICO, one of our directors, is General Manager of KCEC-TV, Channel
50, in Denver, Colorado, a position she has held since 1992. Ms. Rico was
appointed a director in July 1998. She has 19 years of experience in the
television industry and has served as the National Sales Manager for KCEC-TV and
WNAC-TV, headquartered in Providence, Rhode Island.
FRED A. VIERRA, one of our directors, is a consultant to Liberty
Media, Inc., a position he has held since January 1998. Mr. Vierra was appointed
as director in July 1998. From 1994 to January 1998, he served as Vice Chairman
and Chief Executive Officer of Tele-Communications International, Inc. From 1992
to 1994, he served as an Executive Vice President of TCI. Mr. Vierra served as
the President of United Artists Entertainment Company from 1989 to 1991 and as
the President of United Cable Television Corporation from 1982 to 1989, when the
company was merged into United Artists. Mr. Vierra is a member of the Board of
Directors of Flextech plc. Mr. Vierra has previously served as
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a member of the Board of Directors of Turner Broadcasting and the Discovery
Channel. Mr. Vierra has a B.S. in Business Administration from the University of
Tulsa.
TIMOTHY J. BURKE was appointed director in October 1999. Mr. Burke has been
with the Jones International group of companies since 1982, serving as corporate
tax manager, Vice President/Taxation and then Group Vice President
Taxation/Administration of Jones Intercable. Mr. Burke currently is Group Vice
President of Administration and Acting Financial Operations Officer of Jones
International. Prior to joining the Jones International group of companies,
Mr. Burke was employed by Arthur Andersen & Co. (now Arthur Andersen LLP).
Mr. Burke received a B.A. in Accounting and a J.D. from the University of Iowa.
COMMITTEES
Our Board currently has an executive committee, consisting of
Messrs. Jones, Hartenbaum and Burke, which was established on October 11, 1999.
No committee meetings have been held to date. The Board will establish a
compensation committee and an audit committee upon completion of this offering.
The executive committee may act in the Board's stead, except where action by
the full Board is required by law, by our articles of incorporation, our bylaws
or the indenture governing our Senior Notes. The compensation committee will
consist of no fewer than three directors, two of whom will be independent
directors. The compensation committee will determine compensation, excluding
awards under our 1998 Stock Option Plan, for our executive officers. The audit
committee will consist of no fewer than three directors, all of whom will be
independent directors. The audit committee will make recommendations concerning
the engagement of independent public accountants, review with the independent
public accountants the results of audits, approve professional services provided
by the independent public accountants, consider the range of audit and non-audit
fees and review the adequacy of our internal accounting controls.
COMPENSATION OF DIRECTORS
We pay directors who are not officers of ours or our affiliates, $2,500 per
quarter and $500 for attending in person each meeting of the board or one of its
committees. All directors are reimbursed for their expenses in attending board
and committee meetings. All directors hold office for a period of one year or
until their successors are elected and qualified, or until their earlier
resignation or removal.
EMPLOYMENT AGREEMENTS
On July 10, 1998, we entered into employment agreements with Ron Hartenbaum
and Gary Schonfeld. These employment agreements are for three years and restrict
them from competing with us during the term of employment and for two years
after the agreements terminate. These agreements renew annually unless
terminated by the parties. Each agreement provides for an annual salary of
$300,000 and eligibility for a variety of employee benefits and plans generally
made available to our key associates at their level.
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EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the
compensation for services in all capacities for the years ended December 31,
1997, 1998 and 1999 for our President, two of our former Presidents, and our
other four most highly compensated executive officers and key employees whose
total annual salary and bonus exceeded $100,000 (collectively, the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM
---------------------- ALL OTHER COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) AWARDS(2)
- -------------------------------------------- --------- ---------- ---------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Jeffrey C. Wayne............................ 1999 $ 190,246 $ 331,000(3) $ 33,751 100,000
President 1998 170,007 90,275 10,200 25,000
1997 76,897(4) -- 37,215 --
Jay B. Lewis................................ 1999 192,758 60,000 16,780 --
Group Vice President/Finance 1998 175,008 75,000 14,100 62,500
and Chief Financial Officer 1997 150,007 60,000 9,000 --
Ron Hartenbaum.............................. 1999 306,474 37,500 16,800 --
President of Jones Radio 1998 141,667(5) -- -- --
Network 1997 -- -- -- --
Gary Schonfeld.............................. 1999 306,984 37,500 16,800 --
Chief Executive Officer- 1998 141,667(5) -- -- --
MediaAmerica 1997 -- -- -- --
Philip C. Laxar............................. 1999 128,002(6) 20,000 7,680 37,500
Chief Operating Officer- 1998 -- -- -- --
Jones Direct, Ltd. 1997 -- -- -- --
Glenn R. Jones(7)........................... 1999 55,289 -- 3,317 --
Former President 1998 -- -- -- 62,500
1997 -- -- -- --
Gregory J. Liptak(8)........................ 1999 94,637 -- 14,826 --
Former President 1998 283,879 75,000 17,033 50,000
1997 283,879 -- 22,417 --
</TABLE>
- ----------
(1) Our employees are entitled to participate in a 401(k) profit sharing plan
and/or a deferred compensation plan. The amounts shown in this column
represent our contributions to the 401(k) profit sharing plan and/or the
deferred compensation plan for the benefit of the named person's account
and, with respect to Mr. Wayne, includes $33,615 reimbursed to him for
moving expenses in 1997.
(2) Represents the number of shares of Class A Common Stock underlying stock
options granted to named executives.
(3) Pursuant to an agreement with Mr. Wayne, in November 1999, Mr. Wayne
received a $250,000 bonus based on attainment of a specified level of
distribution of GAC.
(4) Reflects compensation from commencement of employment in July 1997.
Mr. Wayne was elected President in October 1999.
(5) Represents partial year payments from commencement of employment in
July 1998.
(6) Represents a partial year payment from commencement of employment in April
1999.
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(7) Mr. Jones has been Chairman of our Board since our inception. He did not
receive any compensation for services during periods prior to May 1999. He
served as our President from May 1999 to October 1999, during which period
he received compensation of $45,833. Since such period, his annual
compensation is $50,000.
(8) On April 27, 1999, Mr. Liptak resigned as President. Mr. Liptak's stock
option was forfieted upon his termination.
OFFERING BONUS
Our board adopted, contingent upon the completion of this offering, a
special bonus plan, in the approximate total amount of $300,000, to award the
special efforts of certain members of our management who contributed to the
completion of this offering. Of the $300,000 in the bonus plan, $15,000 will be
paid in cash and $285,000 will be paid in shares of Class A Common Stock. The
stock component of the bonus will be comprised of immediately exercisable
non-qualified stock options to purchase shares of Class A Common Stock with an
exercise price equal to 25% of the price of the Class A Common Stock in this
offering. Based on an estimated public offering price of $15.50 per share,
approximately 24,516 shares will be subject to issuance under the plan. It is
expected that Messrs. Wayne and Lewis and Ms. Mickles will receive bonuses in
the form of stock options in the amounts of $75,000, $150,000 and $30,000,
respectively, and that a small number of non-executives will receive the
remaining portion of the bonus pool. Mr. Jones will not participate in this
bonus arrangement.
NEW BONUS PLAN
Effective for 2000, the board adopted a bonus plan that will generally cover
all of our divisions and companies, except PIN, which has its own bonus plan.
The plan covers our associates, including executives. Bonuses will be calculated
on a number of different bases, depending upon the division or company involved,
the position held by the recipient, the nature of the business of that division
or company, the specific targets and the means of measuring achievement (such as
comparison of revenues and EBITDA with budgeted revenue and EBITDA levels).
Bonuses are generally based on a percentage of base salary. Bonuses will be
partially "objective" (for example, meeting certain budget criteria) and, to a
lesser extent, "subjective" (relating specifically to an individual's overall
achievements during the year). The bonuses of Messrs. Wayne and Lewis will be in
the range of 25% of base salary if budget levels are achieved. Messrs.
Hartenbaum and Schonfeld's bonuses are based principally on the EBITDA
achievement of Jones Radio Network and MediaAmerica. Other personnel will
participate at ranges of approximately 3% to 25% of their base salaries,
depending on their achievement of the objective and subjective measures under
the plan. Extraordinary levels of achievement could result in bonuses exceeding
25% of an individual's base salary.
STOCK OPTION PLAN
We have adopted an employee stock option plan that provides for the grant of
stock options and stock appreciation rights (SARs) to employees or individuals
providing services to us. The plan is construed, interpreted and administered by
the Board or a committee of two or more non-employee directors. The committee or
the Board determines:
- the individuals to whom options are granted;
- the number of shares subject to the options;
- the exercise price of the options (which may be below fair market value of
the stock on the date of grant);
- the period over which the options become exercisable; and
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- the term of the options, subject to maximum periods set forth in the plan.
The committee or the Board has the discretion to set other terms and
provisions of stock options as it may determine from time to time, subject only
to the provisions of the plan. The plan was approved by our shareholders in May
1998. Under the terms of the plan, as amended in January 2000, a maximum of
1,750,000 shares of our Class A Common Stock are available for grant. Shares of
Class A Common Stock underlying options that expire unexercised are available
for future option grants under the plan.
The plan provides for the grant of incentive stock options within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended, and
non-statutory stock options that do not qualify as incentive stock options under
Section 422.
We may grant either incentive options or non-qualified options or a
combination of the two. The exercise price of each incentive option must be at
least equal to the fair market value of the Class A Common Stock on the date it
is granted. The exercise price of non-qualified options may be less than the
fair market value of the Class A Common Stock on the date it is granted. If an
incentive option is granted to an employee who then owns stock possessing 10% of
the total combined voting power of all classes of our stock, the exercise price
of the incentive option must be at least equal to 110% of the fair market value
of the Class A Common Stock on the date it is granted.
SARs may be granted in tandem with options granted under the plan. Each SAR
entitles the participant, upon the exercise of the SAR, to receive the excess of
the fair market value of a share of Class A Common Stock on the exercise date
over the fair market value of the share on the date the SAR was granted. A SAR
may be exercised only when the market price of Class A Common Stock subject to
the option exceeds the exercise price of such option.
Options and associated SARs are not transferable, except by will or pursuant
to the laws of descent and distribution, and are exercisable only by the option
holder during his or her lifetime or, in the event of disability or incapacity,
by the option holder's guardian or legal representative.
The Board may amend the plan at any time or may terminate it without the
approval of the shareholders; provided, however, that shareholder approval is
required for any amendment to the plan that:
- increases the number of shares for which options may be granted;
- materially increases the benefits to the participants in the plan; and
- materially modifies the eligibility requirements for participation in the
plan.
However, no action by the Board or shareholders may alter or impair any
option previously granted without the consent of the optionee.
Options to acquire 640,625 shares of Class A Common Stock have been granted
under the plan, of which options for 111,250 shares have been terminated or
forfeited upon resignation of the holders. Options to purchase approximately
242,516 shares of Class A Common Stock will become effective upon the closing of
this offering. Of those, options to purchase 218,000 shares vest at rates of
15%, 20%, 25% and 40% per year respectively, over a four year period. These
options will have an exercise price equal to the price of the Class A Common
Stock in this offering. The remainder are options to purchase 24,516 shares that
are immediately exercisable non-qualified stock options with an exercise price
equal to 25% of the price of the Class A Common Stock in the offering. No
options have been
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exercised. The following table sets forth information with respect to grants of
stock options during 1999 to the executive officers named in the summary
compensation table.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT
- ---------------------------------------------------------------------------------------------------- ASSUMED ANNUAL
% OF TOTAL RATES OF
OPTIONS STOCK PRICE
GRANTED TO APPRECIATION
ALL EXERCISE FOR OPTION TERM(1)
OPTIONS EMPLOYEES PRICE EXPIRATION -------------------------
NAME GRANTED(2) IN 1999 ($/SHARE) DATE 5% ANNUAL 10% ANNUAL
- ------------------------------------------------ ----------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey C. Wayne................................ 100,000 47.76% $ 12.00 10/12/09 $ 723,170 $ 1,815,260
Philip C. Laxar................................. 37,500 17.91 12.00 04/07/09 253,798 628,070
</TABLE>
- ----------
(1) The dollar amounts shown under these columns are the result of calculations
at 5% and 10% compound growth rates set by the Securities and Exchange
Commission, and therefore are not intended to forecast possible future
appreciation of our stock price. In all cases, the appreciation is
calculated from the award date to the end of the option term.
(2) Represents the number of shares of Class A Common Stock underlying the
options granted.
Upon the closing of this offering, Messrs. Jones, Wayne, Lewis, Hartenbaum,
Schonfeld and Laxar will be granted options to purchase 20,000, 7,500, 12,500,
10,000, 10,000 and 2,500 shares, respectively, of Class A Common Stock at an
exercise price equal to the price of the Class A Common Stock in this offering.
CHANGES OF VESTING OF CERTAIN OPTIONS. The stock option agreements of
Messrs. Wayne and Lewis, dated as of October 12, 1999 and July 10, 1998, to
purchase 100,000 shares and 62,500 shares, respectively, of Class A Common
Stock, have been amended to require the vesting of any unvested portions of said
option upon the occurrence of certain events, including the sale of all or
substantially all of the assets or a merger in which we, or a company controlled
by Mr. Jones, is not the surviving corporation. These options would not vest if
the optionee is retained in his present position and job site.
EMPLOYEE INVESTMENT 401(K) PLAN
Our employees are eligible to participate in an Employee Profit
Sharing/Retirement Savings plan (the 401(k) plan). Under the 401(k) plan,
eligible employees are permitted to defer receipt of up to 16% of their annual
compensation, subject to a limit prescribed by statute. In general, we currently
match 50% of the employees' deferrals up to a maximum of 6% of their annual
compensation. Our contribution vests immediately. Subject to certain
restrictions, contributions to the 401(k) plan are invested by the trustees of
the 401(k) plan in accordance with the directions of each participant. All
employees who have completed 500 hours of service within a six consecutive-month
period are eligible to participate in the 401(k) plan on the next open
enrollment following the date that the eligibility requirements have been met.
Participants or their beneficiaries are entitled to payment of benefits:
- upon retirement either at or after age 65;
- upon death or disability; and
- upon termination of employment.
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In addition, hardship distributions and loans to participants from the
401(k) plan are available under certain circumstances. The amount of benefits
ultimately payable to a participant under the 401(k) plan will depend on the
performance of the investments to which contributions are made on the
participant's behalf. During 1999, we contributed approximately $262,000 to the
401(k) plan on behalf of our employees.
DEFERRED COMPENSATION PLAN
Certain of our key employees are eligible to participate in a deferred
compensation plan. A select group of highly compensated or management personnel
selected by our Board are eligible to participate in the deferred compensation
plan. Under the deferred compensation plan, key employees are permitted to defer
receipt of up to 100% of their annual compensation. We currently match the key
employees' deferrals up to a maximum of 6% of their contributions. The funds are
deposited with Norwest Bank Colorado, NA, as Trustee of the Deferred
Compensation Plan's Rabbi Trust, and they are invested in pre-selected
investment funds. Both the key employees' contributions and our contributions
are at all times subject to the claims of our general creditors.
Key employees who participate in the deferred compensation plan receive a
distribution of their contributions, our contributions, and earnings
attributable to those contributions on their separation from employment with us
or their death. The deferred compensation plan also permits hardship
distributions in certain circumstances. The amount of benefits ultimately
payable to a key employee participant depends upon the performance of the
investment funds held by the trust. During 1999, we contributed approximately
$110,000 to the deferred compensation plan on behalf of our key employees.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1999, the Board set the compensation of our executive officers. From
January 1, 1999 through April 27, 1999, the Board was comprised of
Messrs. Jones, Liptak, Lewis, Hartenbaum and Vierra and Ms. Rico. Mr. Liptak
resigned from all his positions on April 27, 1999. Effective October 11, 1999,
the Board was comprised of Messrs. Jones, Lewis, Hartenbaum, Vierra, Wayne and
Burke and Ms. Rico. Messrs. Jones and Burke, in addition to serving as
directors, also served as directors and officers of a number of our affiliates
during 1999.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Where applicable, references in this section to amounts paid to or by us
include amounts paid to or by the PIN Venture and Superaudio, entities that are
not wholly owned, as well as our wholly owned subsidiaries.
ADVANCES
Since our inception, we have received advances from Jones International and
related parties to fund our activities. These advances had no maturity date and
accrued interest at the published prime rate plus 2% (approximately 10% per
annum in 1997, 1998 and 1999). We paid interest on these advances of
approximately $868,000, $506,000 and $38,000 for the years ended December 31,
1997, 1998 and 1999, respectively. We repaid these advances monthly from
borrowings, operating cash flow and/or available cash balances.
PURCHASE OF GALACTIC RADIO AND EARTH SEGMENT
Effective upon the closing of the offering of our Senior Notes in
July 1998, a note payable to Jones Global Group, Inc., a related party, was
converted into 833,334 shares of our Class A Common Stock valued at $12.00 per
share. Interest expense on this note totaled approximately $1,196,000 and
$413,000 for the years ended December 31, 1997 and 1998, respectively.
Effective September 30, 1996, we purchased all of the common stock of Jones
Earth Segment from Mr. Jones and Jones International. In connection with this
transaction, we assumed Jones Earth Segment's obligations under an approximately
$6.6 million promissory note payable to Jones Intercable. Approximately $627,000
and $156,000 of interest was paid on the note for the years ended December 31,
1997 and 1998, respectively. The note was paid in full in March 1998.
TAX SHARING AGREEMENT
Prior to April 2, 1997, we joined in filing a consolidated Federal tax
return as provided for under the terms of a tax allocation agreement with Jones
International and certain of Jones International's subsidiaries. Pursuant to the
terms of the tax allocation agreement, tax provisions (benefits) were allocated
to the members of the tax sharing group based on their respective pro rata
contribution of taxable income (loss) to Jones International's consolidated
taxable income (loss). As a result of certain stock issuances on April 1, 1997,
less than 80% of our outstanding common stock was owned by Jones International
and, therefore, we no longer join with Jones International in filing a
consolidated Federal tax return. However, we continue to file combined state tax
returns with Jones International in some states, as provided for under the terms
of the tax allocation agreement.
The tax allocation agreement with Jones International gave Jones
International the option to either make a payment of the tax benefits due to the
subsidiary members of the tax sharing group or defer such payments until a
subsequent taxable period in which the subsidiary member generates taxable
income and has a tax payment due either to Jones International or to a federal
or state taxing authority. Jones International could defer such payments for a
period not to exceed five years from the date the tax benefits were incurred and
would accrue interest at the time the deferred amounts originate. Income tax
benefit (provision) recognized as a result of the tax sharing arrangement were
approximately $1,342,000, ($49,000) and $879,000 for the years ended
December 31, 1997, 1998 and 1999, respectively.
SATELLITE SERVICES
We have agreements to provide uplinking, playback, trafficking and related
services to Jones International that terminate on December 31, 2004. We have the
right to terminate the uplinking
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agreement upon 30-days' written notice. We received approximately $2,193,000,
$2,664,000 and $2,787,000 for these services for the years ended December 31,
1997, 1998 and 1999, respectively. Since July 1, 1998, we have also provided
additional uplinking, playback, trafficking and related services to a related
party of Jones International in connection with the lease of an additional
channel on one of our satellite transponders for a monthly fee of $30,000 plus a
proportionate share of expenses.
SATELLITE TRANSPONDER AGREEMENTS
We lease to Jones International one compressed channel on one of our
satellite transponders. We have the right to terminate the lease at any time
upon 30-days' written notice. The monthly payments may be adjusted periodically
through the December 2004 expiration date based on the number of affiliate
customers using the transponder. We received lease payments of approximately
$896,000, $1,174,000 and $1,475,000 for the years ended December 31, 1997, 1998
and 1999, respectively. Effective July 1, 1998, we leased one additional channel
on the transponder to a related party, Knowledge TV, Inc., at a monthly lease
rental of approximately $61,000. The lease has a seven-year term with an option,
exercisable by the related party on six months' advance notice, to terminate the
lease on July 1, 2001.
We subleased from Jones Satellite Holdings, a subsidiary of Jones
International, an audio channel on a non-preemptible satellite transponder on
the Galaxy V communications satellite for approximately $58,000 per month.
Pursuant to our right to terminate this agreement, we terminated the agreement
on January 31, 2000. Jones Satellite Holdings leases the transponder from an
unrelated party pursuant to a lease that terminates in 2004. Jones Satellite
Holdings charged lease payments of approximately $696,000 for each of the years
ended December 31, 1997, 1998 and 1999.
SALES COMMISSIONS
We earn up to a 3% commission on our sale of airtime for informational
programming on certain network subsidiaries of Knowledge TV, Inc. We received
commissions of approximately $216,000, $176,000 and $114,000 for the years ended
December 31, 1997, 1998 and 1999, respectively. Effective July 1, 1998, these
services are being provided by the PIN Venture, which will receive all future
commissions and will pay for the personnel who perform such services.
A related party, Jones Network Sales, Inc., began providing cable affiliate
sales and marketing services to us in late 1997. This related party charged us
approximately $201,000, $906,000 and $1,418,000 for the years ended
December 31, 1997, 1998 and 1999, respectively.
LICENSE FEES AND OTHER PAYMENTS FOR CABLE SERVICES
GAC is licensed to certain cable television systems owned or managed by
Jones Intercable. Jones Intercable and its managed partnerships paid total
license fees to us of approximately $853,000 and $921,000 for the years ended
December 31, 1997 and 1998, respectively. From January 1, 1999 to April 7, 1999,
Jones Intercable and its affiliated partnerships paid total license fees to us
of approximately $322,000 for this programming service. This agreement expires
on December 31, 2010. Superaudio also licenses its audio services to these
systems. Jones Intercable and its managed partnerships paid Superaudio
approximately $720,000 for each of the years ended December 31, 1997, 1998 and
1999. As of April 7, 1999, Jones Intercable is no longer a related party due to
the sale by Mr. Jones of his interest in Jones Intercable. Jones Intercable has
continued to license our programming, but related party payments terminated
effective April 7, 1999.
PIN is distributed to Jones Intercable and its managed partnerships and to
Cox and Adelphia. Jones Intercable and its managed partnerships received
incentive payments totaling approximately $1.6 million and $417,000 for the year
ended December 31, 1998 and the partial year ended April 6,
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1999. As of April 7, 1999, Jones Intercable is no longer a related party due to
the sale by Mr. Jones of his controlling interest in Jones Intercable.
COMPUTER SERVICES
A subsidiary of Jones International provides computer hardware and software
services and miscellaneous related support services to us and other parties
related to Jones International. We paid service fees to this subsidiary of
approximately $574,000, $733,000 and $787,000 for the years ended December 31,
1997, 1998 and 1999, respectively.
OFFICE LEASE AND SUBLEASE
We lease and sublease office space in Englewood, Colorado from parties
related to Jones International on a month-to-month basis. We paid rent and
associated expenses under these leases and subleases of approximately $88,000,
$148,000 and $226,000 for the years ended December 31, 1997, 1998 and 1999,
respectively.
ADMINISTRATIVE SERVICES
We reimburse Jones International and its related parties for certain
administrative services provided by these companies, such as legal, accounting,
purchasing and human resources services. Jones International and these related
parties charge us for these services based upon an allocation of its personnel
expense associated with providing these services. These allocated expenses
totaled approximately $540,000, $1,116,000 and $968,000 for the years ended
December 31, 1997, 1998 and 1999, respectively.
A related party of ours charged us approximately $197,000 and $33,000 for
the years ended December 31, 1998 and 1999, respectively, for the allocated
costs of its airplane which we used in connection with our Senior Notes offering
and this offering.
TRANSFER OF SATELLITE TRANSPONDER LEASES
In April 1997, we acquired the satellite transponder leases and related
subleases from Jones Space Segment, a related party. These various agreements
were then transferred to a wholly-owned subsidiary, Jones Space Holdings. In
January 1998, we transferred the shares of Jones Space Holdings to Jones Space
Segment for a nominal amount, and we were relieved of the obligations related to
the satellite transponders. Upon the closing of the offering of our Senior Notes
in July 1998, the parties rescinded the transfer of the shares of Jones Space
Holdings to Jones Space Segment. We prepaid the $27.6 million capital lease
obligations for such transponders with the proceeds from such offering and now
own the transponders.
MANAGEMENT OWNERSHIP OF CONVERTIBLE PREFERRED EQUITY
An affiliate of Mr. Jones purchased $20.0 million of our Series A
Convertible Preferred Stock in September 1999.
GUARANTY OF CREDIT FACILITY
Jones International has guaranteed our $20.0 million credit facility, which
was used to finance the acquisition of Broadcast Programming. Both the credit
facility and guaranty expire in June 2000 unless extended. As a result of the
guaranty, which is secured, we received more favorable interest and other terms.
On September 30, 1999, we used the proceeds from our Series A Convertible
Preferred Stock offering to repay all amounts outstanding under this credit
facility.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information as of February 1, 2000,
and as adjusted to give effect to the completion of this offering, regarding
ownership of our Class A Common Stock, Class B Common Stock and Series A
Convertible Preferred Stock by persons (including any group) known to us to be
beneficial owners of more than 5% of such class of stock, our individual
directors, each of the executive officers named in the Summary Compensation
Table and our executive officers and directors as a group. Under the rules of
the Securities and Exchange Commission, a person (or group of persons) is deemed
to be a "beneficial owner" of a security if he or she, directly or indirectly,
has or shares the power to vote or to direct the voting of such security, or the
power to dispose of or to direct the disposition of such security. Accordingly,
more than one person may be deemed to be a beneficial owner of the same
security. A person is also deemed to be a beneficial owner of any security which
that person has the right to acquire within 60 days.
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<TABLE>
<CAPTION>
COMMON STOCK SERIES A
----------------------------------------------------------------- CONVERTIBLE
PREFERRED
CLASS A STOCK
-------------------------------------- ------------
PERCENT OF PERCENT OF CLASS B
CLASS CLASS AFTER -------------------------
NAME AND ADDRESS OF NUMBER OF BEFORE THE THE NUMBER OF PERCENT OF NUMBER OF
BENEFICIAL OWNER(1)(2) SHARES OFFERING OFFERING SHARES CLASS SHARES
- ---------------------------------------- ------------ ----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Glenn R. Jones ......................... 4,247,026(3)(4) 78.5% 49.2% 2,231,400(3)(5) 100% 1,600,000(3)(6)
9697 East Mineral Avenue
Englewood, CO 80112
Jeffrey C. Wayne ....................... 6,250(7) * * -- -- --
9697 East Mineral Avenue
Englewood, CO 80112
Jay B. Lewis ........................... 15,625(8) * * -- -- --
9697 East Mineral Avenue
Englewood, CO 80112
Ron Hartenbaum ......................... 339,320(9) 6.3 2.7 -- -- --
11 West 42nd Street
New York, NY 10036
Gary Schonfeld ......................... 339,319(9) 6.3 2.7 -- -- --
11 West 42nd Street
New York, NY 10036
Tuxedo Shirt, Inc. ..................... 678,639(9) 12.6 5.4 -- -- --
11 West 42nd Street
New York, NY 10036
Philip C. Laxar ........................ 3,750(10) * * -- -- --
9697 East Mineral Avenue
Englewood, CO 80112
Adelphia Communications Corporation .... 358,481(11) 6.7 2.8 -- -- --
5 West Third Street
Coudersport, PA 16915
Sandler Capital Management ............. -- -- 1.6 -- -- 160,000
767 Fifth Avenue, 45th Floor
New York, NY 10153
All executive officers and directors 91.1 54.7(13) 2,231,400 100 1,600,000
as a group (10 persons)............... 4,951,603(12)
<CAPTION>
PERCENT OF TOTAL
PERCENT OF TOTAL VOTING ECONOMIC
PERCENT OF PERCENT OF POWER INTEREST
CLASS CLASS AFTER ------------------------ ------------------------
NAME AND ADDRESS OF BEFORE THE THE BEFORE THE AFTER THE BEFORE THE AFTER THE
BENEFICIAL OWNER(1)(2) OFFERING OFFERING OFFERING OFFERING OFFERING OFFERING
- ---------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Glenn R. Jones ......................... 83.4% --% 95.0% 81.6% 84.5% 56.8%
9697 East Mineral Avenue
Englewood, CO 80112
Jeffrey C. Wayne ....................... -- -- * * * *
9697 East Mineral Avenue
Englewood, CO 80112
Jay B. Lewis ........................... -- -- * * * *
9697 East Mineral Avenue
Englewood, CO 80112
Ron Hartenbaum ......................... -- -- 1.2 1.0 3.6 2.3
11 West 42nd Street
New York, NY 10036
Gary Schonfeld ......................... -- -- 1.2 1.0 3.6 2.3
11 West 42nd Street
New York, NY 10036
Tuxedo Shirt, Inc. ..................... -- -- 2.3 2.0 7.1 4.6
11 West 42nd Street
New York, NY 10036
Philip C. Laxar ........................ -- -- * * * *
9697 East Mineral Avenue
Englewood, CO 80112
Adelphia Communications Corporation .... -- -- 1.2 1.0 3.6 2.4
5 West Third Street
Coudersport, PA 16915
Sandler Capital Management ............. 8.3 -- * * 2.0 1.3
767 Fifth Avenue, 45th Floor
New York, NY 10153
All executive officers and directors 83.4 -- 97.1 83.5 91.2 61.5
as a group (10 persons)...............
</TABLE>
* less than one percent
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- -------------
(1) Directors and executive officers named in the Summary Compensation Table
who are not listed in the table do not beneficially own any of our stock.
(2) Unless otherwise noted, all persons indicated in the table have full voting
and investment power with respect to the share ownership described.
(3) Glenn R. Jones is the Chairman of the Board of Directors and Chief
Executive Officer of Jones International and owns all of the outstanding
shares of Jones International which, in turn, owns 80% of the outstanding
common stock of Jones Global Group. He is therefore deemed to be the
beneficial owner of all our shares owned by Jones International and Jones
Global Group. By virtue of this ownership, Mr. Jones controls approximately
95% of the total votes to be cast by all shareholders of our shares on
matters not requiring a class vote. The holders of the Class B Common Stock
have the right to convert their shares of Class B Common Stock into shares
of Class A Common Stock on a share for share basis at any time at their
option. The holders of the Series A Convertible Preferred Stock have the
right to convert their shares of Series A Convertible Preferred Stock into
2,397,500 shares of Class A Common Stock at any time, and Series A
Convertible Preferred Stock must be converted upon the completion of a
public offering of our equity securities.
(4) Includes 884,108 shares owned by Mr. Jones, 15,625 shares deemed to be held
by Mr. Jones pursuant to a presently exercisable stock option, 2,513,959
shares held by Jones International and 833,334 shares held by Jones Global
Group.
(5) Includes 328,900 shares owned by Mr. Jones, 1,402,500 shares held by Jones
International and 500,000 shares held by Jones Global Group.
(6) Represents shares held by Jones International Trust LLC, a Colorado limited
liability company. An affiliate of Jones International is the managing
member. Through Mr. Jones' ownership of Jones International, he is deemed
to be the beneficial holder of said shares.
(7) Represents shares deemed to be held by Mr. Wayne pursuant to a presently
exercisable stock option.
(8) Represents shares deemed to be held by Mr. Lewis pursuant to a presently
exercisable stock option.
(9) Tuxedo Shirt, Inc. is owned by Messrs. Hartenbaum and Schonfeld, and was
formerly known as MediaAmerica, Inc., the company which sold its
advertising representation business assets to us in 1998. The shares owned
by Tuxedo Shirt, Inc. are beneficially owned 50% by Mr. Hartenbaum and 50%
by Mr. Schonfeld.
(10) Represents shares deemed to be held by Mr. Laxar pursuant to a presently
exercisable stock option.
(11) Adelphia is entitled to receive a number of additional shares of Class A
Common Stock to be determined based on PIN Venture's 1999 audited financial
results.
(12) Includes 41,563 shares deemed to be held by various executive officers and
directors pursuant to presently exercisable stock options.
(13) In addition to the shares listed in footnote twelve, this includes 21,935
shares issuable upon exercise of immediately exercisable non-qualified
stock options that become effective on closing of this offering.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Following this offering, we will have authorized capital stock of
102,231,400 shares, consisting of 100,000,000 shares of Class A Common Stock,
$.01 par value per share, and 2,231,400 shares of Class B Common Stock, $.01 par
value per share. References to common stock in this prospectus refer
collectively to the Class A Common Stock and Class B Common Stock.
The following summary of certain provisions of the common stock does not
purport to be complete and is subject to, and is qualified in its entirety by,
the provisions of our articles of incorporation and bylaws, where such rights
are set forth in full and applicable law.
COMMON STOCK
As of February 1, 2000, there were 7,626,326 outstanding shares of common
stock, consisting of 5,394,926 shares of Class A Common Stock and 2,231,400
shares of Class B Common Stock. Upon completion of this offering, the number of
shares of Class A Common Stock will increase to 12,692,426, including conversion
of the shares of Series A Convertible Preferred Stock. The holders of the
Class A Common Stock and Class B Common Stock are entitled to vote as separate
classes with respect to those matters requiring a class vote under Colorado law,
such as:
- certain amendments to our articles of incorporation which affect a class;
and
- certain mergers or share exchanges.
On all matters requiring a class vote under Colorado law, passage will
require the affirmative vote of the holders of a majority of the shares of each
class, voting separately, and of the total shares entitles to vote thereon.
There is also class voting with respect to the election of directors. The
holders of Class A Common Stock are entitled to elect that number of directors
that constitute 25% of the total membership of our Board (if such number is not
a whole number, the holders of the Class A Common Stock are entitled to elect
the nearest higher whole number of directors that constitute at least 25% of the
Board). Directors elected by the Class A Common Stock may be removed from
office, with or without cause, only by the holders of the Class A Common Stock.
The holders of Class B Common Stock, voting as a separate class, are
entitled to elect all of the directors not specifically entitled to be elected
by the holders of the Class A Common Stock. Directors elected by the Class B
Common Stock may be removed from office, with or without cause, only by the
holders of the Class B Common Stock.
Holders of the common stock are not entitled to cumulative voting in the
election of directors. Any vacancies on the Board may be filled by the remaining
directors regardless of which class of common stock elected the director whose
directorship is being vacated.
The holders of Class A Common Stock and the holders of Class B Common Stock
vote together as a single class on all other matters. In all circumstances where
the shareholders vote together as a single class, the holders of Class A Common
Stock are entitled to one vote per share and the holders of Class B Common Stock
are entitled to ten votes per share.
Upon the completion of this offering:
- the Class A Common Stock will constitute approximately 85.0% of the total
outstanding shares of capital stock and will be entitled to cast
approximately 36.3% of the votes to be cast in matters to be acted upon by
shareholders not requiring a class vote; and
- the Class B Common Stock will constitute approximately 15.0% of the total
outstanding shares of capital stock and will be entitled to cast
approximately 63.7% of the votes to be cast in matters to be acted upon by
shareholders not requiring a class vote.
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Holders of Class A Common Stock and Class B Common Stock are entitled to
share ratably (i) in all dividends (provided that a stock dividend to holders of
common stock is payable only in shares of Class A Common Stock) if declared by
our Board out of any funds legally available therefor and (ii) in assets
available for distribution upon our liquidation, subject to the prior rights of
creditors. We do not currently anticipate paying any dividends.
The shares of common stock are not subject to redemption or to any liability
for further calls or assessments, and the holders of such shares do not have
preemptive or other rights to subscribe for additional shares.
Our articles of incorporation provide that at any time, and from
time-to-time, a holder of shares of Class B Common Stock shall be entitled to
convert their shares of Class B Common Stock to Class A Common Stock on a
share-for-share basis.
LISTING OF CLASS A COMMON STOCK
Application has been made for the listing of our Class A Common Stock on the
Nasdaq National Market, subject to official notice of issuance.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our Class A Common Stock will be
American Securities Transfer & Trust, Inc., Denver, Colorado.
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<PAGE>
DESCRIPTION OF INDEBTEDNESS
SENIOR NOTES
In July 1998, we issued $100 million of 11 3/4% Senior Secured Notes due
2005. The following is a summary of certain provisions of the indenture and our
Senior Notes and does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all of the provisions of the
indenture governing our Senior Notes.
The Senior Notes are our senior obligations. Interest on our Senior Notes is
payable semi-annually on January 1 and July 1 of each year, commencing
January 1, 1999. Our Senior Notes mature on July 1, 2005. Except as described
below, we may not redeem our Senior Notes prior to July 1, 2003. After such
date, we may redeem our Senior Notes, in whole or in part, at a redemption price
of 105.875% of the principal amount to be redeemed for the 12 month period
commencing July 1, 2003 and declining to 100% of the principal amount to be
redeemed for the period after July 1, 2004, together with accrued and unpaid
interest, if any, to the date of redemption.
Prior to July 1, 2001, we may, subject to certain requirements, redeem up to
35% of the aggregate principal amount of our Senior Notes with the cash proceeds
of one or more equity offerings at a redemption price equal to 111.75% of the
principal amount to be redeemed, together with accrued and unpaid interest, if
any, to the date of redemption, provided that at least 65% of the aggregate
principal amount of our Senior Notes remains outstanding immediately after each
such redemption. See "Use of Proceeds" regarding our possible redemption of a
portion of our Senior Notes with proceeds of this offering. Upon the occurrence
of a change of control (as defined in the indenture), we are required to make an
offer to repurchase our Senior Notes at a price equal to 101% of the principal
amount thereof, together with accrued and unpaid interest, if any, to the date
of repurchase.
Our Senior Notes are secured by the capital stock of JPN, Inc., our
wholly-owned intermediate holding company, and JPN's direct subsidiaries
(together with JPN, Inc., the "Subsidiary Guarantors"). Each of the Subsidiary
Guarantors has unconditionally guaranteed (the "Guarantees") our Senior Notes.
The Guarantees are senior obligations of the Subsidiary Guarantors and rank
equal in right of payment with all existing and future senior indebtedness of
the Subsidiary Guarantors, other than bank indebtedness and capitalized lease
obligations of the Subsidiary Guarantors, and are ranked senior in right of
payment to all existing and future subordinated obligations of the Subsidiary
Guarantors. All of our subsidiaries, except for our partially owned subsidiaries
PIN and Superaudio, are Subsidiary Guarantors.
The indenture governing our Senior Notes contains a number of covenants
which restrict our ability to engage in certain transactions. For example, there
are limitations on the amount of indebtedness we may incur. Indebtedness may be
incurred so long as the Consolidated Coverage Ratio (as defined in the
indenture) is maintained. There are a number of exceptions to the borrowing
limitation permitting other indebtedness, including:
- $20.0 million of certain bank indebtedness;
- indebtedness represented by capitalized lease obligations;
- certain other types of financings including refinancing-related
indebtedness; and
- non-bank indebtedness in a principal amount not to exceed $5 million.
The indenture also imposes limitations on Restricted Payments (as defined in
the indenture) that prohibit us from declaring or paying any dividend or making
distributions with respect to our common stock or making investments except in
limited circumstances and then only if we are then able to incur an additional
$1 of senior indebtedness under the limitations of the indenture.
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The indenture can be amended by the vote of holders of a majority of the
outstanding principal amount of the Senior Notes. Senior Notes held by
Mr. Jones ($23.7 million aggregate principal amount) are not considered
outstanding and will not have a vote for purposes of any amendment.
CREDIT FACILITY
On July 29, 1999, we entered into a $20.0 million credit facility with a
commercial bank to finance on a short-term basis, the acquisition of Broadcast
Programming. Jones International guaranteed the loan and provided certain
collateral as security for the guaranty. The credit facility bears interest
either at the bank's prime rate minus 2% or a fixed rate (which is approximately
equal to LIBOR) plus one half of one percent. The interest rate was 6.5% per
annum at December 31, 1999. The credit facility will expire on June 30, 2000,
unless extended. On December 31, 1999, we used a portion of the proceeds from
the offering of our Series A Convertible Preferred Stock to pay down all amounts
outstanding under the credit facility. The full amount of our credit facility is
currently available to us.
78
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have outstanding 12,692,426 shares
(13,427,426 shares if the underwriters' over-allotment option is exercised in
full) of Class A Common Stock. Of these securities, all 4,900,000 shares
(5,635,000 shares if the underwriters' over-allotment is exercised in full) sold
by us in this offering will be freely transferable by persons other than our
"affiliates" without restriction under the Securities Act.
The remaining 7,792,426 shares of Class A Common Stock that will be
outstanding immediately following the offering are currently held by 21
shareholders, including Glenn R. Jones, and will be "restricted securities"
within the meaning of Rule 144 under the Securities Act and may not be sold in
the absence of registration under the Securities Act unless an exemption from
registration is available, including the exemption contained in Rule 144. We
have granted registration rights with respect to (i) 358,481 shares of Class A
Common Stock owned by Adelphia Communications, (ii) 678,639 shares of Class A
Common Stock owned by Tuxedo Shirt, Inc. (which is owned by two of our executive
officers, Ron Hartenbaum and Gary Schonfeld) and (iii) 2,397,500 shares of
Class A Common Stock issuable on conversion of our Series A Convertible
Preferred Stock. Both Adelphia and Tuxedo Shirt have rights to demand
registration, as well as "piggyback" registration rights on certain offerings by
us. The rights of holders of the Series A Convertible Preferred Stock to
register their Class A Common Stock become exercisable after six months from the
completion of this offering. An affiliate of Mr. Jones has the right to demand
one registration and the other holders of the Series A Convertible Preferred
Stock have a similar right. For all such registrations, we will pay all the
costs of registration on behalf of the sellers. We, our executive officers and
directors, and a majority of our current shareholders (including Mr. Jones and
his affiliates, Tuxedo Shirt and the holders of Series A Convertible Preferred
Stock), have agreed not to offer to sell, sell, or contract to sell, pledge or
otherwise dispose of such shares for at least 180 days after the date of this
prospectus without the prior written consent of Credit Suisse First Boston
Corporation, subject to certain exceptions.
Following the expiration of such lock-up agreements, 5,393,985 shares of
Class A Common Stock, and an additional 101,935 shares of Class A Common Stock
purchasable on then-exercisable stock options, held by persons previously
restricted by such agreements, will become available for resale in the public
market, all of which are subject to the volume limitations, holding period and
other restrictions of Rule 144.
In general, Rule 144 provides that a person (or persons whose shares are
aggregated) who has beneficially owned his or her shares of Class A Common Stock
for at least one year, including an "affiliate" of ours, is entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of:
- 1% of the then outstanding shares of our Class A Common Stock; and
- the average weekly trading volume of our Class A Common Stock during the
four calendar weeks preceding each such sale.
A person (or persons whose shares are aggregated) who is not deemed an
"affiliate" of ours and who has beneficially owned shares for at least two years
is entitled to sell such shares under Rule 144 without regard to the volume
limitations described above. Affiliates, including members of our Board and
executive officers, continue to be subject to such limitations.
In addition, 1,750,000 shares of our Class A Common Stock are reserved for
issuance under our stock option plan, as amended, of which options to purchase
529,375 shares have been granted, with an exercise price of $12.00 per share.
Options to purchase an additional approximately 242,516 shares of Class A Common
Stock will become outstanding upon closing of this offering. Of these, 24,516
options, with an exercise price equal to 25% of the price of the Class A Common
Stock in this offering, will be immediately exercisable upon completion of this
offering.
79
<PAGE>
Also, each of the 2,231,400 shares of Class B Common Stock that are
currently outstanding will be convertible at the election of their holders into
one share of Class A Common Stock. See "Description of Capital Stock." The
shares of Class B Common Stock and the shares of Class A Common Stock into which
they may be converted, are also "restricted securities" within the meaning of
and subject to Rule 144.
Before this offering, there has been no market for our Class A Common Stock,
and the amount, timing and nature of any future sales of our Class A Common
Stock will depend upon:
- market conditions;
- the personal circumstances of the sellers; and
- other factors.
No predictions can be made as to the effect, if any, that public sales of
shares or the availability of shares for sale will have on the market price of
our Class A Common Stock prevailing from time to time. Nevertheless, sales of
substantial amounts of our Class A Common Stock in the public market, pursuant
to Rule 144 or otherwise, or the perception that such sales could occur, could
have a harmful impact on the market price of our Class A Common Stock. See "Risk
Factors--Shares eligible for public sale by existing stockholders after this
offering could hurt our stock price."
80
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement, dated , 2000, we have agreed to sell to the underwriters
named below, for whom Credit Suisse First Boston Corporation, Deutsche Bank
Securities Inc. and J.P. Morgan Securities Inc. are acting as representatives,
the following respective numbers of shares of Class A Common Stock:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Credit Suisse First Boston Corporation...........................................
Deutsche Bank Securities Inc.....................................................
J.P. Morgan Securities Inc.......................................................
----------
Total.......................................................................... 4,900,000
----------
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of Class A Common Stock in the offering, if any are
purchased, other than those shares covered by the over-allotment option
described below. The underwriting agreement also provides that if an underwriter
defaults, the purchase commitments of non-defaulting underwriters may be
increased or the offering of Class A Common Stock may be terminated.
We have granted to the underwriters a 30-day option to purchase, on a pro
rata basis, up to 735,000 additional shares at the initial public offering price
less underwriting discounts and commissions. The option may be exercised only to
cover any over-allotments of Class A Common Stock.
The underwriters propose to offer the shares of Class A Common Stock
initially at the public offering price on the cover page of this prospectus and
to selling group members at that price less a concession of $ per
share. The underwriters and selling group members may allow a discount of
$ per share on sales to other broker/dealers. After the initial
public offering, the public offering price and concession and discount to
dealers may be changed by the representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
PER SHARE TOTAL
------------------------------ ------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting Discounts and Commissions paid by
us.............................................. $ $ $ $
Expenses payable by us............................ $ $ $ $
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of Class A Common Stock being offered.
We, our officers and directors and other stockholders have agreed that we
will not offer, sell, contract to sell, announce our intention to sell, pledge
or otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act relating
to, any additional shares of our Class A Common Stock or securities convertible
into or exchangeable or exercisable for any of our Class A Common Stock without
the prior written consent of Credit Suisse First Boston Corporation for a period
of 180 days after the date of this prospectus,
81
<PAGE>
except in the case of issuances pursuant to the exercise of employee stock
options outstanding on the date of this prospectus.
The underwriters have reserved for sale, at the initial public offering
price, up to 245,000 shares of the Class A Common Stock for employees, directors
and certain other persons associated with us who have expressed an interest in
purchasing Class A Common Stock in the offering. The number of shares available
for sale to the general public in the offering will be reduced to the extent
these persons purchase reserved shares. Any reserved shares not so purchased
will be offered by the underwriters to the general public on the same terms as
the other shares.
We have agreed to indemnify the underwriters against certain liabilities
under the Securities Act or contribute to payments that the underwriters may be
required to make in connection with those liabilities.
We have made application to list the shares of Class A Common Stock on The
Nasdaq Stock Market's National Market.
Prior to this offering, there has been no public market for our Class A
Common Stock. The initial public offering price was determined by negotiation
between us and representatives of the underwriters. The principal factors that
were considered in determining the public offering price included: the
information set forth in this prospectus and otherwise available to the
representatives; the history and the prospects for the industry in which we
compete; the ability of our management; our prospects for future earnings; the
present state of our development and our current financial condition; the
general condition of the securities markets at the time of this offering; and
the recent market prices of, and the demand for, publicly traded common stock of
generally comparable companies.
The representatives, on behalf of the underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions,
penalty bids and passive market-making in accordance with Regulation M under the
Securities Exchange Act of 1934. Over-allotment involves syndicate sales in
excess of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase the underlying security so long
as the stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the Class A Common Stock in the open market
after the distribution has been completed, in order to cover syndicate short
positions. Penalty bids permit the representatives to reclaim a selling
concession from a syndicate member when the Class A Common Stock originally sold
by such syndicate member are purchased in a syndicate covering transaction to
cover syndicate short positions. In "passive" market-making, market-makers in
the Class A Common Stock who are underwriters or prospective underwriters may,
subject to certain limitations, make bids for or purchases of the Class A Common
Stock until the time, if any, at which a stabilizing bid is made. Such
stabilizing transactions, syndicate covering transactions and penalty bids may
cause the price of the Class A Common Stock to be higher than it would otherwise
be in the absence of such transactions. These transactions may be effected on
The Nasdaq National Market or otherwise and, if commenced, may be discontinued
at any time.
82
<PAGE>
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the Class A Common Stock in Canada is being made only on
a private placement basis exempt from the requirement that we prepare and
file a prospectus with the securities regulatory authorities in each province
where trades of Class A Common Stock are effected. Accordingly, any resale of
the Class A Common Stock in Canada must be made in accordance with applicable
securities laws which will vary depending on the relevant jurisdiction, and
which may require resales to be made in accordance with available statutory
exemptions or pursuant to a discretionary exemption granted by the applicable
Canadian securities regulatory authority. Purchasers are advised to seek legal
advice prior to any resale of the Class A Common Stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of Class A Common Stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that (i) such purchaser is entitled under
applicable provincial securities laws to purchase such Class A Common Stock
without the benefit of a prospectus qualified under such securities laws,
(ii) where required by law, that such purchaser is purchasing as principal and
not as agent, and (iii) such purchaser has reviewed the text above under "Resale
Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Section 32 of the Regulation under the SECURITIES ACT (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. Substantially all of our assets and the assets of our
directors and officers are located outside of Canada and, as a result, it may
not be possible to satisfy a judgment against the issuer or such persons in
Canada or to enforce a judgment obtained in Canadian courts against such issuer
or persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of Class A Common Stock to whom the SECURITIES ACT (British
Columbia) applies is advised that such purchaser is required to file with the
British Columbia Securities Commission a report within ten days of the sale of
any Class A Common Stock acquired by such purchaser pursuant to this offering.
Such report must be in the form attached to British Columbia Securities
Commission Blanket Order BOR #95/17, a copy of which may be obtained from us.
Only one such report must be filed in respect of Class A Common Stock acquired
on the same date and under the same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of Class A Common Stock should consult their own legal
and tax advisors with respect to the tax consequences of an investment in the
Class A Common Stock in their particular circumstances and with respect to the
eligibility of the Class A Common Stock for investment by the purchaser under
relevant Canadian legislation.
83
<PAGE>
LEGAL MATTERS
The validity of the shares of Class A Common Stock being sold in this
offering will be passed upon for us by Davis, Graham & Stubbs LLP, Denver,
Colorado. Certain legal matters in connection with this offering will be passed
upon for the underwriters by Cahill Gordon & Reindel, New York, New York.
EXPERTS
Our audited consolidated financial statements and schedule included in this
prospectus and elsewhere in the registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as set forth in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission (the "Commission")
a registration statement on Form S-1 (including all amendments thereto) under
the Securities Act with respect to the shares of Class A Common Stock offered
hereby. As permitted by the rules and regulations of the Commission, this
prospectus, which constitutes a part of the registration statement, does not
contain all of the information set forth in the registration statement and the
exhibits and schedules thereto. Statements contained in this prospectus as to
the contents of any agreement or other document to which reference is made are
not necessarily complete. With respect to each such agreement or other document
filed as an exhibit to the registration statement, reference is made to the
exhibit for a more complete description of the matter involved, and each such
statement shall be deemed qualified by such reference.
Copies of the registration statement may be examined without charge at the
Public Reference Section of the Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549 and at the following regional offices of the Commission
located at Seven World Trade Center, New York, New York 10048, and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
all or any portion of the registration statement can be obtained from the Public
Reference Section of the Commission at its Washington, D.C. address upon payment
of the prescribed fees. The Commission also maintains a World Wide Web site that
contains registration statements, reports, proxy and information statements of
registrants (including us) that file electronically with the Commission. The
address of such World Wide Web site is "http://www.sec.gov."
Upon completion of this offering, we will be subject to the informational
reporting requirements of the Securities Exchange Act of 1934, as amended, and
in accordance therewith will file reports, proxy statements and other
information with the Commission.
We intend to furnish our shareholders with annual reports containing audited
financial statements and a report of independent certified public accountants.
We will make available quarterly reports for each of the first three quarters of
each fiscal year containing unaudited summary financial information.
84
<PAGE>
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Statements of Financial Position............... F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Changes in Shareholders' Equity
(Deficit)................................................. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Jones International Networks, Ltd.:
We have audited the accompanying consolidated statements of financial
position of Jones International Networks, Ltd. (a Colorado corporation) and its
subsidiaries (collectively, the "Company") as of December 31, 1998 and 1999 and
the related consolidated statements of operations, changes in shareholders'
equity (deficit) and cash flows for each of the three years ended December 31,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit, also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Jones International
Networks, Ltd. and its subsidiaries as of December 31, 1998 and 1999, and the
results of their operations and their cash flows for each of the three years
ended December 31, 1999 in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Denver, Colorado
February 1, 2000
F-2
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 10,654,013 $ 13,270,784
Restricted cash........................................... 10,000,000 --
Available for sale securities............................. 2,768,646 6,888,741
Accounts receivable, net of allowance for doubtful
accounts of $897,487 and $1,192,818, respectively....... 11,835,108 14,049,008
Accounts receivable--Jones International, Ltd. (Notes 2
and 9).................................................. -- 382,221
Receivables from affiliates............................... 238,777 473,759
Prepaid expenses.......................................... 255,723 284,863
Other current assets...................................... 400,295 693,218
------------ ------------
Total current assets.................................... 36,152,562 36,042,594
------------ ------------
Property and equipment, net (Notes 2 and 3)............... 26,896,880 22,959,104
Intangibles assets, net (Notes 2 and 4)................... 41,046,009 63,642,270
Investment in affiliates.................................. 202,942 309,117
Income tax benefit receivable from Jones International,
Ltd. (Notes 2 and 15)................................... 1,338,402 --
Deferred financing costs, net of accumulated amortization
of $245,700 and $960,077, respectively (Note 2)......... 4,526,428 4,379,558
Other non-current assets.................................. 730,811 1,128,902
------------ ------------
Total assets............................................ $110,894,034 $128,461,545
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable--trade................................... $ 2,796,389 $ 4,738,526
Producers' fees payable................................... 5,922,471 5,307,947
Cable programming distribution payments payable........... 1,617,815 3,236,996
Accounts payable--Jones International, Ltd. (Notes 2
and 9).................................................. 1,377,731 --
Accrued liabilities and other current liabilities......... 2,057,171 2,328,858
Interest payable.......................................... 5,581,250 5,875,000
Deferred revenues (Note 2)................................ 752,263 1,309,155
------------ ------------
Total current liabilities............................... 20,105,090 22,796,482
------------ ------------
LONG-TERM LIABILITIES
Customer deposits and deferred revenues................... 340,842 581,700
Other long-term liabilities............................... -- 602,791
Senior Secured Notes (Note 10)............................ 100,000,000 100,000,000
------------ ------------
Total long-term liabilities............................. 100,340,842 101,184,491
------------ ------------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES (Note 2)..... 567,283 565,149
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTE 17)
Class A Common Stock subject to put, $0.01 par value:
126,405 shares authorized, issued and outstanding....... 1,213,488 1,213,488
------------ ------------
SHAREHOLDERS' EQUITY (DEFICIT):
Series A Preferred Stock, $.01 par value: 1,918,000 shares
authorized, 1,918,000 shares issued and outstanding
(Note 8)................................................ -- 23,975,000
Class A Common Stock, $.01 par value: 100,000,000 shares
authorized; 5,252,507 and 5,268,521 shares issued and
outstanding in 1998 and 1999, respectively (Note 12).... 52,525 52,791
Class B Common Stock, $.01 par value: 2,231,400 shares
authorized; 2,231,400 shares issued and outstanding
(Note 12)............................................... 22,314 22,314
Additional paid-in capital................................ 27,431,987 27,588,264
Accumulated other comprehensive income.................... 8,456 (25,652)
Accumulated deficit....................................... (38,847,951) (48,910,782)
------------ ------------
Total shareholders' equity (deficit).................... (11,332,669) 2,701,935
------------ ------------
Total liabilities and shareholders' equity (deficit).... $110,894,034 $128,461,545
============ ============
</TABLE>
The accompanying notes to these consolidated financial statements
are an integral part of these consolidated financial statements.
F-3
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Revenues, including revenues from affiliated entities
of $5,447,818, $5,690,200, and $5,331,311,
respectively (Note 9).............................. $29,111,200 $ 38,211,521 $ 64,366,037
Operating expenses, including expenses from
affiliated entities of $5,443,930, $7,909,110, and
$6,209,514, respectively (Note 9):
Operations......................................... 17,048,668 27,179,680 43,616,614
Selling and marketing.............................. 3,491,204 5,412,494 6,438,099
General and administrative......................... 1,150,957 1,116,465 1,490,934
Depreciation and amortization...................... 5,167,892 6,266,138 10,775,858
----------- ------------ ------------
Total operating expenses......................... 26,858,721 39,974,777 62,321,505
----------- ------------ ------------
OPERATING INCOME (LOSS).............................. 2,252,479 (1,763,256) 2,044,532
OTHER (INCOME) EXPENSE:
Interest expense (Note 10)......................... 5,676,896 8,971,139 12,750,540
Interest income.................................... (107,843) (775,735) (1,021,214)
Write-off of deferred offering costs (Note 2)...... 938,000 -- --
Equity in (income) loss of subsidiaries............ (396,155) 57,322 (106,175)
Other expense, net................................. 73,972 1,171,264 73,821
----------- ------------ ------------
Total other expense, net......................... 6,184,870 9,423,990 11,696,972
----------- ------------ ------------
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST....... (3,932,391) (11,187,246) (9,652,440)
Income tax provision (benefit) (Notes 2 and 15).... (1,341,997) 48,531 (470,257)
----------- ------------ ------------
LOSS BEFORE MINORITY INTEREST........................ (2,590,394) (11,235,777) (9,182,183)
Minority interest in net income of consolidated
subsidiaries..................................... 902,781 214,693 880,648
----------- ------------ ------------
NET LOSS............................................. $(3,493,175) $(11,450,470) $(10,062,831)
=========== ============ ============
ADJUSTMENTS TO ARRIVE AT COMPREHENSIVE LOSS.......... -- (8,456) 34,108
----------- ------------ ------------
COMPREHENSIVE LOSS................................... $(3,493,175) $(11,442,014) $(10,096,939)
=========== ============ ============
NET LOSS PER COMMON SHARE:
Basic.............................................. $ (0.64) $ (1.71) $ (1.32)
=========== ============ ============
Fully diluted...................................... $ (0.64) $ (1.71) $ (1.32)
=========== ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic.............................................. 5,500,560 6,715,805 7,617,926
=========== ============ ============
Fully diluted...................................... 5,500,560 6,702,010 7,601,868
=========== ============ ============
</TABLE>
F-4
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SERIES A CLASS A CLASS B
PREFERRED STOCK COMMON STOCK COMMON STOCK ADDITIONAL
----------------------- -------------------- -------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- ----------- --------- -------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996........ -- -- 2,460,566 $24,606 1,731,400 $17,314 $ (8,384)
Issuance of common stock in
exchange for Jones Space
Segment, Inc. (Note 1).......... -- -- 520,835 5,208 -- -- (1,041)
Advance to parent company
(Note 2)........................ -- -- -- -- -- -- --
Issuance of common stock in
exchange for minority interest
of Glenn R. Jones (Note 1)...... -- -- 416,667 4,167 -- -- (834)
Issuance of common stock for the
Product Information Network
acquisition (Note 1)............ -- -- 328,125 3,281 -- -- 3,146,719
Conversion of the Jones Global
Group note...................... -- -- -- -- 500,000 5,000 5,995,000
Net loss.......................... -- -- -- -- -- -- --
--------- ----------- --------- ------- --------- ------- -----------
Balance, December 31, 1997........ -- -- 3,726,193 37,262 2,231,400 22,314 9,131,460
Conversion of Jones Global Group
note............................ -- -- 833,334 8,333 -- -- 9,991,667
Issuance of common stock for the
MediaAmerica, Inc.
acquisition..................... -- -- 677,462 6,775 -- -- 8,122,775
Issuance of common stock in
exchange for the ownership
interests in PIN Venture........ -- -- 15,520 155 -- -- 186,085
Other comprehensive income, net of
tax:............................ -- --
Unrealized gains on
securities.................... -- -- -- -- -- -- --
Net loss.......................... -- -- -- -- -- -- --
--------- ----------- --------- ------- --------- ------- -----------
Balance, December 31, 1998........ -- -- 5,252,509 52,525 2,231,400 22,314 27,431,987
Issuance of Series A Preferred
Stock........................... 1,918,000 23,975,000
Issuance of common stock to
Adelphia........................ -- -- 14,836 148 -- -- 142,280
Issuance of common stock for the
MediaAmerica, Inc.
acquisition..................... -- -- 1,176 118 -- -- 13,997
Other comprehensive income, net of
tax:
Unrealized losses on
securities.................... -- -- -- -- -- -- --
Net loss.......................... -- -- -- -- -- -- --
--------- ----------- --------- ------- --------- ------- -----------
Balance, December 31, 1999........ 1,918,000 $23,975,000 5,268,521 $52,791 2,231,400 $22,314 $27,588,264
========= =========== ========= ======= ========= ======= ===========
<CAPTION>
TOTAL
SHAREHOLDERS'
ACCUMULATED COMPREHENSIVE EQUITY
DEFICIT INCOME (LOSS) (DEFICIT)
------------ -------------- -------------
<S> <C> <C> <C>
Balance, December 31, 1996........ $(23,302,842) $ -- $(23,269,306)
Issuance of common stock in
exchange for Jones Space
Segment, Inc. (Note 1).......... (4,167) -- --
Advance to parent company
(Note 2)........................ (593,964) -- (593,964)
Issuance of common stock in
exchange for minority interest
of Glenn R. Jones (Note 1)...... (3,333) -- --
Issuance of common stock for the
Product Information Network
acquisition (Note 1)............ -- -- 3,150,000
Conversion of the Jones Global
Group note...................... -- -- 6,000,000
Net loss.......................... (3,493,175) -- (3,493,175)
------------ ----------- ------------
Balance, December 31, 1997........ (27,397,481) -- (18,206,445)
Conversion of Jones Global Group
note............................ -- -- 10,000,000
Issuance of common stock for the
MediaAmerica, Inc.
acquisition..................... -- -- 8,129,550
Issuance of common stock in
exchange for the ownership
interests in PIN Venture........ -- -- 186,240
Other comprehensive income, net of
tax:............................
Unrealized gains on
securities.................... -- 8,456 8,456
Net loss.......................... (11,450,470) -- (11,450,470)
------------ ----------- ------------
Balance, December 31, 1998........ (38,847,951) 8,456 (11,332,669)
Issuance of Series A Preferred
Stock........................... 23,975,000
Issuance of common stock to
Adelphia........................ -- -- 142,428
Issuance of common stock for the
MediaAmerica, Inc.
acquisition..................... -- -- 14,115
Other comprehensive income, net of
tax:
Unrealized losses on
securities.................... -- (34,108) (34,108)
Net loss.......................... (10,062,831) -- (10,062,831)
------------ ----------- ------------
Balance, December 31, 1999........ $(48,910,782) $ (25,652) $ 2,701,935
============ =========== ============
</TABLE>
The accompanying notes to these consolidated financial statements
are an integral part of these consolidated financial statements
F-5
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(3,493,175) $(11,450,470) $(10,062,831)
Adjustment to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization........................... 5,167,892 6,266,138 10,775,858
Amortization of deferred financing costs................ -- 245,700 714,377
Equity in (income) loss of subsidiaries................. (396,155) 57,322 (106,175)
Distributions received.................................. 100,000 350,000 --
Write-off of deferred offering costs.................... 938,000 -- --
Minority interest in net income......................... 902,781 214,693 880,648
Loss on sale of property and equipment.................. 81,209 3,599 246
Net change in assets and liabilities:
Decrease (increase) in receivables.................... 1,168,733 (4,134,681) (461,488)
Increase in receivables from affiliates............... (538,949) (238,777) (234,982)
Decrease (increase) in prepaid expenses and other
current assets...................................... 388,745 246,476 (164,443)
Decrease (increase) in other assets................... 78,635 (271,171) (140,984)
Increase in accounts payable--trade................... 1,192,730 1,357,787 1,757,390
Increase (decrease) in producers' fee payable......... -- 2,043,770 (614,524)
Increase (decrease) in accounts receivable/payable
from/to Jones International, Ltd.................... 2,861,899 (8,437,143) (421,550)
Increase (decrease) in interest payable............... (161,905) 5,527,631 293,750
Increase in deferred revenues......................... 8,054 738,709 556,892
Increase (decrease) in accrued liabilities and other
liabilities......................................... 112,355 233,806 (483,832)
Increase (decrease) in customer deposits.............. (821,378) 181,904 109,425
----------- ------------ ------------
Net cash provided by (used in) operating activities..... 7,589,471 (7,064,707) 2,397,777
----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment...................... (1,367,026) (2,257,832) (849,703)
Sale of property and equipment.......................... 255,671 56,890 385
Cable programming distribution payments................. -- (3,064,354) (6,353,526)
Purchase of intangible assets and programming........... (44,646) (295,314) (398,392)
Purchase of MediaAmerica, Inc........................... -- (26,700,000) --
Purchase of Broadcast Programming....................... -- -- (20,876,926)
Purchase of available for sale securities............... -- (2,760,190) (4,154,203)
----------- ------------ ------------
Net cash used in investing activities................... (1,156,001) (35,020,800) (32,632,365)
----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deferred financing and offering costs....... (555,239) (4,547,384) (240,859)
Repayment of borrowings................................. -- (23,259,000) --
Repayment of capital lease obligations.................. (1,964,954) (28,757,208) --
Proceeds from borrowings................................ -- 16,704,500 --
Proceeds from Senior Secured Notes...................... -- 100,000,000 --
Proceeds from Series A Preferred Stock.................. -- -- 23,975,000
Distributions paid to minority interest................. -- (1,118,557) (882,782)
Acquisition of minority interest........................ (200,000) -- --
----------- ------------ ------------
Net cash provided by (used in) financing activities..... (2,720,193) 59,022,351 22,851,359
----------- ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 3,713,277 16,936,844 (7,383,229)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 3,892 3,717,169 20,654,013
----------- ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 3,717,169 $ 20,654,013 $ 13,270,784
=========== ============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid............................................. $ 5,838,801 $ 3,443,508 $ 11,676,781
=========== ============ ============
Income taxes paid......................................... $ -- $ -- $ 411,541
=========== ============ ============
Issuance of Class A Common Stock for acquisitions......... $ 3,036,923 $ 13,502,194 $ 14,115
=========== ============ ============
Issuance of Class A Common Stock for GAC Equity
Agreements.............................................. $ -- $ 1,213,488 $ 142,428
=========== ============ ============
Conversion of Jones Global Group note to Class A Common
Stock................................................... $ 6,000,000 $ 10,000,000 $ --
=========== ============ ============
</TABLE>
The accompanying notes to these consolidated financial statements
are an integral part of these consolidated financial statements.
F-6
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(1) ORGANIZATION AND BUSINESS
Jones International Networks, Ltd. (the "Company") was formed in May 1998 as
the successor to businesses operated by entities formerly owned by JPN, Inc. The
Company became the holding company for JPN, Inc. and its subsidiaries upon the
closing in July 1998 of the Company's offering of 11 3/4% Senior Secured Notes
due 2005 (the "Notes") (see Note 10) and its acquisition of the assets of
MediaAmerica Inc. ("MediaAmerica") (see Note 5).
The results of operations and financial position of the Company include the
operations of JPN, Inc. and its subsidiaries. JPN, Inc. was incorporated in
November 1993. JPN, Inc. had acquired certain subsidiaries from Jones
International, Ltd. ("Jones International"). JPN, Inc.'s controlling
shareholder, Mr. Glenn R. Jones, the Chairman of the Company, owns 100% of Jones
International. The accompanying consolidated financial statements have been
prepared on the basis of reorganization accounting of entities under common
control (similar to pooling of interests) as though JPN, Inc. had made the
acquisitions of these Jones International subsidiaries at their inception.
The Company creates, develops, acquires and produces programming that the
Company distributes to radio stations, cable television system operators and
other video distributors. The Company has also recently launched multiple,
complementary web sites extending its programming content and talent to the
Internet. The Company provides radio advertising sales services for the
Company's radio programming, in addition to third parties. The Company also
provides satellite services for its two cable networks and for certain other
cable networks.
VENTURES--The Company is a partner in two joint ventures, the PIN Venture
and Galactic/Tempo ("Superaudio"), and is a member in a third venture,
Jones/Capstar Programming, LLC ("Jones/ Capstar"). The PIN Venture commenced
operations on February 1, 1995 and is a joint venture which is owned
approximately 55 percent by the Company and 45 percent by a third party. The PIN
Venture owns and operates a 24-hour-a-day cable television network for the
airing of long-form advertising ("infomercials"). Superaudio commenced
operations in July 1990 and is a joint venture which is owned 50 percent by the
Company and 50 percent by a third party. Superaudio is in the business of
providing audio programming services to cable television system operators.
Jones/Capstar commenced operations in July 1998 and is a limited liability
company which is owned 50 percent by the Company and 50 percent by a third
party. Jones/Capstar is in the business of developing, producing and
distributing a syndicated radio program known as "Nashville Nights." Profits,
losses and distributions of these ventures are allocated in accordance with the
respective ownership interests of the partners or members. Distributions of
assets are approved by the partners or members for the respective venture prior
to such distributions.
The partners of Superaudio have agreed to terminate the partnership in 2000.
Superaudio ceased distributing its programming on January 31, 2000, and will be
liquidated in 2000.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS--The Company considers all highly liquid
investments with a maturity when purchased of three months or less to be cash
equivalents.
RESTRICTED CASH--$10.0 million of the proceeds from the Notes (see Note 10)
was deposited into a Reserve Account in 1998. Cash balances in the Reserve
Account were restricted to use for acquisitions
F-7
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and payment of principal or interest on the Notes. These funds were used to pay
interest payments in 1999 in accordance with the terms of the Note indenture.
AVAILABLE FOR SALE SECURITIES--Available for sale marketable securities are
carried at fair value, with unrealized holding gains and losses carried as a
separate component of shareholders' equity (deficit). The cost of securities
sold is determined using the first-in, first-out method. At December 31, 1999,
the Company held marketable securities available for sale with an aggregate cost
of approximately $6,914,000 and a net unrealized loss of approximately $26,000.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The fair value of the Company's
financial instruments is estimated based on the quoted market prices for similar
instruments. The carrying value of the Company's accounts receivable and cash
accounts are assumed to approximate fair value due to the short-term nature of
these accounts (see Note 11).
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include
the accounts of all majority-owned and controlled subsidiaries. Investments in
entities which are not majority-owned and controlled by the Company are
accounted for under the equity method. All significant intercompany balances and
profits have been eliminated in consolidation.
MINORITY INTEREST--The minority interest in the net income or loss of the
Company's consolidated subsidiaries is reflected in the statements of
operations. To the extent the minority interest in the net losses of the
Company's consolidated subsidiaries exceeds the minority investment in those
subsidiaries, such excess losses are charged to the Company. No such excess
losses were incurred in 1998 or 1999.
PROPERTY AND EQUIPMENT--Property and equipment are depreciated using the
straight-line method over the estimated useful lives of 3 to 15 years. The
building is depreciated using the straight-line method over an estimated useful
life of 40 years. Leasehold improvements are depreciated using the straight-line
method over the lesser of five years or the term of the lease. Satellite
transponders are depreciated using the straight-line method over the estimated
useful life of 12 years.
GOODWILL--Goodwill consists primarily of the excess purchase price paid in
the PIN Venture acquisition in 1997, the excess purchase price paid in the
MediaAmerica acquisition in 1998 (see Note 5) and the excess purchase price paid
in the Broadcast Programming acquisition in 1999 (see Note 6). Goodwill related
to the PIN Venture, MediaAmerica and Broadcast Programming acquisitions is
amortized using the straight-line method over their estimated economic lives,
which are 18 years, 40 years and 20 years, respectively.
OTHER INTANGIBLE ASSETS--Other intangible assets consist primarily of radio
programming licensing agreements, cable programming distribution payments,
personal service agreements and investment in programming. Radio programming
licensing agreements are amortized using the straight-line method over the term
of the agreements. Cable programming distribution payments are amortized using
the straight-line method over the period during which any portion of such
payment is refundable. Personal service agreements are amortized using the
straight-line method over the terms of the agreements. Investment in programming
is amortized using the straight-line method over the estimated useful life of
each program.
LONG-LIVED ASSETS--The Company reviews for the impairment of long-lived
assets and certain identifiable intangibles whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company has identified no such impairment indicators for the
F-8
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
year ended December 31, 1998. In 1999, the Company wrote off approximately
$802,000 of capitalized costs for programs that are no longer distributed.
ADVANCES TO PARENT COMPANY--Advances to parent company in the statements of
shareholders' equity (deficit) represent the net impact of the intercompany
activity between Jones Space Holdings ("Space Holdings") and Jones
International. Such amounts have been presented as further reductions of
accumulated deficit in connection with the reorganization of these entities
under common control during 1997.
DEFERRED COMMISSIONS--Sales commissions are included in other assets and are
amortized using the straight-line method over the life of the corresponding
affiliate agreements from which the sales commission was paid. The current
amount represents the portion to be amortized within the next 12 months.
DEFERRED OFFERING COSTS--In 1999, the Company incurred approximately
$241,000 in deferred equity offering costs related primarily to financial
advisory, legal and accounting fees in connection with the initial public
offering of the Company's Class A Common Stock. These costs are reported as
other assets and will be charged against the gross proceeds of the initial
public offering or expensed to other expense at such time the Company abandons
the initial public offering.
In 1997, the Company incurred an additional $505,000 of deferred offering
costs related to a proposed equity offering. As a result of the withdrawal of
the proposed offering in early 1997, the portion of the deferred offering costs
that were deemed by management as unusable in pursuing other financing options
were expensed. During the year ended December 31, 1997, the Company expensed
$938,000 of such costs. The remaining deferred offering costs of approximately
$175,000 are included in deferred financing costs in the accompanying
consolidated statement of financial position at December 31, 1998.
DEFERRED FINANCING COSTS--In 1998, the Company incurred approximately
$4,526,000 of debt offering costs related primarily to financial advisory
services, legal counsel, independent public accountants, regulatory and stock
exchange registration fees and other various costs associated with the Notes
offering. Deferred financing costs are amortized to interest expense over the
term of the Notes.
CUSTOMER DEPOSITS AND DEFERRED REVENUES--Customer deposits consist of
unearned revenues associated with affiliate fees and refundable advance payments
that are recognized as income as the related advertising is aired. Deferred
revenues consist of advance payments and a security deposit paid by a lessee of
the Company's satellite transponder.
INCOME TAXES--Prior to April 2, 1997, the Company joined with Jones
International in filing a consolidated Federal tax return as provided for under
the terms of a tax allocation agreement with Jones International. Pursuant to
the terms of the tax allocation agreement, tax provisions (benefits) were
allocated to the members of the tax sharing group based on their respective pro
rata contribution of taxable income (loss) to Jones International's consolidated
taxable income (loss). As a result of the issuance of additional shares of the
Company's common stock, less than 80 percent of the Company's outstanding common
stock was beneficially owned by Jones International as of April 2, 1997.
Therefore, the Company is no longer joined with Jones International in filing a
consolidated Federal tax return. However, the Company continues to file combined
state tax returns with Jones International in certain states as provided for
under the terms of the tax allocation agreement (see Note 15).
F-9
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The tax allocation agreement with Jones International gave Jones
International the option to either make a payment of the tax benefits due to the
subsidiary members of the tax sharing group or to defer such payments until a
subsequent taxable period in which the subsidiary member generated taxable
income and had a tax payment due either to Jones International or to a federal
or state taxing authority. Jones International could defer such payments for a
period not to exceed five years from the date the tax return was filed and could
accrue interest at the time the deferred benefit amounts originated. For the
year ended December 31, 1997, Jones International elected to defer a tax benefit
of approximately $1,342,000 due to the Company and its subsidiaries. For the
year ended December 31, 1998, the Company recorded a tax provision of
approximately $49,000 to adjust estimated tax provisions to actual tax
provisions for the year ended December 31, 1997. In 1999, Jones International
elected to make a $1,293,000 million payment of tax benefit through a reduction
of the intercompany balance between the Company and Jones International. For the
year ended December 31, 1999, the Company recorded a state tax benefit of
approximately $879,000. Jones International will make this payment upon filing
its 1999 combined state income tax return.
The Company accounts for deferred tax liabilities or assets based on the
temporary differences between the financial reporting and tax bases of assets
and liabilities as measured by the enacted tax rates which are expected to be in
effect when these differences reverse. Deferred tax assets are reduced, if
deemed necessary, by a valuation allowance for the amount of any tax benefits
which, based upon current circumstances, are not expected to be realized.
REVENUE RECOGNITION--The Company's revenues are derived from radio
programming revenues, cable television programming, advertising sales services
revenues, and satellite services revenues and, starting in the fourth of 1999,
included Internet revenues.
In accordance with industry practice, radio programming, cable television
programming and advertising sales services revenues are recognized based on the
standard broadcast calendar that ends on the last Sunday of each reporting
period. The broadcast calendar for the calendar years ended December 31, 1997,
1998 and 1999 each had 52 weeks.
Radio programming revenues consist primarily of advertising revenue and, to
a lesser extent, monthly license fees paid by smaller radio station affiliates.
The Company provides radio programming and services to radio stations in
exchange for advertising time that we resell to national advertisers who market
their product or services on the radio network. The Company recognizes revenue
upon airing these advertisements. Any amounts received from customers for radio
advertisements that have not been aired during the period are recorded as
deferred revenues until such time as the advertisement is aired. In smaller
markets, the Company charges radio stations monthly license fees in addition to
advertising time. Radio station license fees are earned monthly from certain
stations based on the radio station's contractual agreement.
Cable television programming revenues include advertising and license fees.
The Company generates television advertising revenues by selling airtime to
advertisers who advertise their products or services on the networks. The
Company recognizes advertising revenues upon the airing of the advertisements.
Any amounts received from customers for television advertisements that have not
been aired during the period are recorded as deferred revenues until such time
as the advertisement is aired. The Company delivers its programming to cable
television systems for distribution to their viewers. Cable television system
license fees are earned monthly based on a per subscriber fee set under the
F-10
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
terms of the cable operator's contractual agreement and the number of
subscribers that are receiving the Company's programming during the respective
month.
Internet programming revenues include advertising and e-commerce. The
Company generates advertising revenues by selling advertising spots to
advertisers who advertise their products or services on the web sites. The
Company recognizes advertising revenues upon airing of the advertisements. The
Company generates e-commerce revenues by selling products to web site visitors.
The Company recognizes revenues when the products are shipped. The Company will
generate pay-per-view revenues by selling live events on a pay-per-view basis to
web site visitors. The Company will recognize pay-per-view revenues upon airing
of the events.
Advertising sales services revenues include revenues from charging fees to
advertising sales clients for selling advertising time. The Company recognizes
advertising sales services revenues upon airing of the advertisements.
Satellite services revenues include revenues from satellite delivery,
uplinking, trafficking, playback and other services. The Company generates
revenues by providing such services to affiliates and third parties. The Company
recognizes satellite delivery and production support revenues upon completion of
the services or upon contractual arrangements.
NEW ACCOUNTING PRONOUNCEMENTS--In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which is effective for the year ending December 31, 2001. This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. The Company will adopt this
statement in 2001. The Company does not expect that the adoption of this
statement will have a harmful impact on our financial statements.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires the Company to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-11
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RECLASSIFICATIONS--Certain prior period amounts have been reclassified to
conform to the current year presentation.
(3) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
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 13,705,620
Leasehold improvements............................. 738,838 788,647
----------- -----------
Total property and equipment..................... 52,578,854 53,891,510
Less accumulated depreciation.................. (25,681,974) (30,932,406)
----------- -----------
Net property and equipment....................... $26,896,880 $22,959,104
=========== ===========
</TABLE>
(4) INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
Goodwill........................................... $33,116,982 $34,164,797
Cable programming distribution payments............ 4,682,139 12,654,846
Personal service and consulting agreements......... 1,280,125 11,876,218
Investment in programming.......................... 2,557,179 2,004,344
Other.............................................. 1,664,309 9,914,104
----------- -----------
Total intangibles................................ 43,300,734 70,614,309
Less accumulated amortization.................. (2,254,725) (6,972,039)
----------- -----------
Net intangibles.................................... $41,046,009 $63,642,270
=========== ===========
</TABLE>
(5) ACQUISITION OF MEDIAAMERICA
On July 10, 1998, the Company acquired substantially all assets and assumed
certain liabilities of MediaAmerica for $32.7 million plus a working capital
adjustment of approximately $2.1 million. MediaAmerica provides advertising
sales services and also owned syndicated radio programming. The seller of
MediaAmerica received $26.7 million in cash and $8.1 million in shares of
Class A Common Stock of the Company valued at $12.00 per share, which included
177,464 and 1,176 shares of Class A Common Stock for a working capital
adjustment in 1998 and 1999, respectively. No further working capital
adjustments are anticipated. The acquisition was accounted for as a purchase.
The Company recorded approximately $29.8 million in goodwill in connection with
the acquisition of MediaAmerica.
The sellers of MediaAmerica have the right to cause the Company to
repurchase the shares of the Company issued in the MediaAmerica acquisition at
any time after three years from the July 10, 1998 closing. The price would be
the fair market value of the Class A Common Stock on the date of exercise of the
put, as determined by agreement or by an independent investment banking firm.
The
F-12
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) ACQUISITION OF MEDIAAMERICA (CONTINUED)
Company has a correlative right to require that the seller of MediaAmerica to
sell such shares to the Company at fair market value. Such rights terminate upon
an initial public offering by the Company. Before the sellers of MediaAmerica
can require the Company to buy its shares, the Company must have available cash
(as defined); this condition lapses after seven and one quarter years from the
date of closing. If the Company has exercised its purchase right and there is a
change of control involving a higher price within nine months of the exercise of
the call, the Company must pay specified additional consideration.
Certain unaudited condensed pro-forma financial information of the Company
assuming the purchase noted above was completed as of January 1, 1998, is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Revenues.................................................... $ 44,564,000
Operating expenses.......................................... 46,131,000
Operating loss.............................................. (1,567,000)
Net loss.................................................... (14,393,000)
Net loss per common share................................... $ (1.92)
</TABLE>
(6) 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
$20.0 million plus estimated closing adjustments of approximately $0.9 million,
in cash (the "BP Acquisition"). The closing adjustments are subject to final
adjustments. 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
acquisition has been accounted for under the purchase method and accordingly,
the purchase price allocation is preliminary and adjustments may be recorded
through August 2000. The Company recorded approximately $1.0 million in goodwill
and $18.6 million in affiliate and personal service agreements in connection
with the BP Acquisition. The affiliate and personal service agreements are
recorded as intangible assets, and are amortized over the terms of the related
agreements, which are generally five years.
(7) CREDIT FACILITY
On July 29, 1999, the Company entered into a $20.0 million credit facility
with a commercial bank to finance the BP Acquisition on a short-term basis (the
"Credit Facility"). In order to allow the Company to obtain more favorable
terms, Jones International has guaranteed the loan and provided certain
collateral as security for the guaranty. The 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
interest rate was 6 1/2% per annum as of December 31, 1999. The Credit Facility
will expire on June 30, 2000, unless extended. On September 30, 1999, the
Company used the proceeds from the Series A Preferred Stock to pay down all
amounts outstanding under the Credit Facility (see Note 8). The full amount of
the credit facility was available to the Company as of December 31, 1999.
F-13
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) SERIES A PREFERRED STOCK
Effective September 1999, the Company issued $24.0 million of Series A
Preferred Stock. The issuance of the $20.0 million of the Series A Preferred
Stock was closed in September 1999. Of the remaining $4.0 million, $2.0 million
was closed in October 1999. The remaining $2.0 million was closed in
November 1999. The Company used $20.0 million of the proceeds from the Series A
Preferred Stock issuance to repay $20.0 million of indebtedness under the
Company's $20.0 million Credit Facility. The balance will be used to develop the
Company's Internet strategy and for general corporate purposes.
The holders of the Series A Preferred Stock are entitled to receive
dividends if and when declared by the Board of Directors. No dividends will be
paid on Class A or Class B Common Stock unless equal dividends have been
declared and paid on the Series A Preferred Stock. Shareholders will have the
right to convert at any time the Series A Preferred Stock into shares of
Class A Common Stock of the Company, on a one-for-one basis subject to the
anti-dilution provisions of the Series A Preferred Stock. The Series A Preferred
Stock will be automatically converted into Class A Common Stock of the Company
upon the completion by the Company of a public offering or a series of public
offerings raising aggregate gross proceeds of at least $20.0 million.
(9) TRANSACTIONS WITH AFFILIATED ENTITIES
The Company is a subsidiary of Jones International, a holding company with
ownership in several companies involved in various industries. Jones
International is wholly owned by Mr. Jones, who is Chairman and Chief Executive
Officer of Jones International and various of its subsidiaries. Certain members
of management of the Company are also officers or directors of these affiliated
entities and, from time to time, the Company may have transactions with these
entities. Certain expenses are paid by affiliated entities on behalf of the
Company and are allocated at cost based on specific identification or other
methods which management believes are reasonable. Recurring transactions with
affiliates, excluding Superaudio and Jones/Capstar, are described below.
REVENUES--The Company earned up to a three percent commission on the sale of
airtime for informational programming on an affiliated network. As a result of
this related party ceasing its distribution efforts in the last quarter of 1999,
this service was terminated in September 1999. For the years ended December 31,
1997, 1998 and 1999, the Company received approximately $216,000, $176,000 and
$114,000, 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,
through its new unaffiliated parent, has continued to pay the Company
programming license fees subsequent to the sale of Mr. Jones' interest in Jones
Intercable. Jones Intercable and its affiliated partnerships paid total license
fees to the Company of approximately $853,000 and $921,000 for the years ended
December 31, 1997 and 1998. From January 1, 1999 to April 7, 1999, Jones
Intercable and its affiliated partnerships paid total affiliated fees to the
Company of approximately $322,000 for this programming service.
Jones Earth Segment, Inc. ("Earth Segment"), a subsidiary of the Company,
provides playback, editing, duplication, trafficking and uplinking services to
its cable programming network affiliates including an affiliated entity as well
as to a third party. As a result of the related party no longer being in
business, this affiliated entity will terminate its use of certain earth station
services provided by Earth
F-14
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) TRANSACTIONS WITH AFFILIATED ENTITIES (CONTINUED)
Segment. It is estimated that the termination of these services will occur early
in the first half of 2000. Earth Segment charges affiliates for its services
using rates which are calculated to achieve a specified rate of return on its
investment to Earth Segment. For the years ended December 31, 1997, 1998 and
1999, Earth Segment charged the related party and its affiliates approximately
$2,193,000, $2,664,000 and $2,787,000, respectively, for these services.
Prior to the consolidation of the PIN Venture, Earth Segment charged the PIN
Venture approximately $201,000 for the year ended December 31, 1997, for these
services.
In addition, Jones Space Holdings ("Space Holdings"), a subsidiary of the
Company, subleases a non-preemptible satellite transponder to an affiliated
entity. Satellite transponder lease revenues of approximately $896,000,
$1,174,000 and $1,475,000, were received from this related party and its
affiliates for the years ended December 31, 1997, 1998, and 1999, respectively.
OPERATING 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. Effective December 31, 1998, the Company
acquired the remaining Adelphia Communications equity interest in the PIN
Venture in exchange for 15,520 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. Subsequent to the consolidation of the PIN
Venture, the PIN Venture paid Jones Intercable and its affiliated partnerships,
Cox Communications and Adelphia Communications approximately $3,546,000 for the
nine months ended December 31, 1997 for system rebates. The PIN Venture paid
Jones Intercable and its affiliated partnerships, Cox Communications and
Adelphia Communications approximately $5,216,000 for the year ended
December 31, 1998 for system rebates 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) and Adelphia Communications
subsequent to the change in the ownership structures. From January 1, 1999 to
April 7, 1999, the PIN Venture paid Jones Intercable (and its affiliated
partnerships) approximately $417,000 for system rebates. The PIN Venture paid
Cox Communications approximately $3,116,000 for the year ended December 31, 1999
for system rebates.
Jones Network Sales ("JNS"), a wholly owned subsidiary of Jones
International, provides affiliate sales and certain marketing services to the
Company. As a result of a related party no longer being in business, the Company
will incur substantially all operating costs of services previously provided by
JNS. Starting in January 2000, all affiliate sales and marketing functions have
been incorporated into the operations of the Company. This affiliate charged the
Company approximately $201,000, $906,000 and $1,418,000 for the years ended
December 31, 1997, 1998 and 1999, respectively, for these services.
Jones Galactic Radio, Inc. ("Galactic Radio"), a wholly-owned subsidiary of
the Company, has a transponder lease agreement with Jones Satellite Holdings
("Satellite Holdings"), an affiliate of the Company, for the use of the
sub-carriers on a non-preemptible satellite transponder. This agreement allows
Galactic Radio to use a portion of the transponder to distribute its audio
programming. Satellite Holdings has the right to terminate the lease agreement
at any time upon 30 days written notice to Galactic Radio. Further, Galactic
Radio may terminate this agreement at any time on or after January 1, 2000.
Galactic Radio has elected to terminate this agreement on January 31, 2000.
Satellite Holdings charged $696,000 for each of the years ended December 31,
1997, 1998 and 1999, for this service.
F-15
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) TRANSACTIONS WITH AFFILIATED ENTITIES (CONTINUED)
The Company leases and subleases office space in Englewood, Colorado from
affiliates of Jones International. The Company was charged approximately
$88,000, $148,000 and $226,000, for the years ended December 31, 1997, 1998 and
1999, respectively, for rent and associated expenses.
An affiliate of Jones International provides computer hardware and software
support services to the Company. This affiliate charged the Company
approximately $574,000, $733,000 and $787,000, for the years ended December 31,
1997, 1998 and 1999, respectively, for such services.
An affiliate of the Company charged the Company approximately $197,000 and
$33,000 for the years ended December 31, 1998 and 1999 for the allocated costs
of its airplane which was used by the Company in connection with the Notes and
equity offerings.
The Company and its consolidated subsidiaries reimburse Jones International
and its affiliates for certain allocated administrative expenses. These expenses
generally consist of payroll and related benefits. Allocations of personnel
costs are generally based on actual time spent by affiliated associates with
respect to the Company. Jones International and its affiliates charged the
Company approximately $540,000, $1,116,000 and $968,000, for the years ended
December 31, 1997, 1998 and 1999, respectively, for these administrative
expenses.
To assist in funding its operating and investing activities, the Company had
borrowed funds from Jones International. Jones International charged interest on
its advances to the Company at rates of approximately 10 percent per annum in
1997, 1998 and 1999. Jones International charged the Company interest of
approximately $868,000, $506,000 and $38,000, for the years ended December 31,
1997, 1998 and 1999, respectively. The Company repaid these advances from
borrowings, operating cash flow and/or available cash balances.
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. Outstanding receivables from Jones International and related
parties at December 31, 1999 were approximately $382,000.
F-16
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) SENIOR SECURED NOTES
In July 1998, the Company issued $100.0 million of 11 3/4% Notes. The
Company used the proceeds from the Notes offering (i) to finance the cash
consideration of the acquisition of MediaAmerica, (ii) to prepay the capital
lease obligation relating to the satellite transponders, (iii) to repay the
outstanding borrowing on a subsidiaries' credit facility and (iv) for general
corporate purposes, including the payment of fees and expenses.
Interest on the Notes is payable semi-annually on January 1 and July 1 of
each year, commencing January 1, 1999. The Notes will mature on July 1, 2005.
Except as described below, the Company may not redeem the Notes prior to
July 1, 2003. On or after such date, the Company may redeem the Notes, in whole
or in part, at any time, at a redemption price of 105.875% of the principal
amount to be redeemed for the 12 month period commencing July 1, 2003 and
declining to 100 percent of the principal amount to be redeemed for the period
after July 1, 2004, together with accrued and unpaid interest, if any, to the
date of redemption. In addition, at any time and from time to time on or prior
to July 1, 2001, the Company may, subject to certain requirements, redeem up to
35 percent of the aggregate principal amount of the Notes with the cash proceeds
of one or more Equity Offerings (as defined) at a redemption price equal to
111.75% of the principal amount to be redeemed, together with accrued and unpaid
interest, if any, to the date of redemption, provided that at least 65 percent
of the aggregate principal amount of the Notes remains outstanding immediately
after each such redemption. Upon the occurrence of a Change of Control (as
defined), the Company will be required to make an offer to repurchase the Notes
at a price equal to 101% of the principal amount thereof, together with accrued
and unpaid interest, if any, to the date of repurchase.
The Notes are senior obligations of the Company. The Notes are secured by
the capital stock of JPN, Inc., the Company's wholly owned intermediate holding
company and JPN's direct subsidiaries. The Notes are unconditionally guaranteed
(the "Guarantees") by each of the Subsidiary Guarantors. The Guarantees are
senior obligations of the Subsidiary Guarantors and rank PARI PASSU in right of
payment with all existing and future Senior Indebtedness of the Subsidiary
Guarantors, other than Bank Indebtedness (as defined) and Capitalized Lease
Obligations (as defined) of the Subsidiary Guarantors, and are ranked senior in
right of payment to all existing and future Subordinated Obligations of the
Subsidiary Guarantors. The Guarantees are not secured.
The Company currently expects to use approximately $39.0 million of the net
proceeds from the offering to repurchase a portion of our Senior Notes including
the payment of related fees and premiums.
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
NOTES--The fair value of the Notes were estimated based on the quoted market
prices for the Notes.
CLASS A COMMON STOCK SUBJECT TO PUT--The fair value of the Company's
Class A Common Stock subject to put is estimated based on the estimated purchase
price to buy back the Class A Common Stock (see Note 17).
F-17
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
1998 1999
-------------------------- ---------------------------
CARRY FAIR CARRY FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Notes.................................. $100,000,000 $64,000,000 $100,000,000 $101,500,000
Class A Common Stock subject to put.... 1,213,000 1,020,000 1,213,000 1,021,000
</TABLE>
(12) COMMON STOCK
VOTING RIGHTS--Holders of Class A Common Stock are entitled to one vote per
share and are entitled to elect 25% of the Board of Directors, and holders of
Class B Common Stock are entitled to ten votes per share and to elect the
remaining 75% of the Board of Directors. Both classes vote together as a single
class on all matters not requiring a class vote under Colorado law.
STOCK SPLIT--The Board of Directors has approved a 5-for-4 stock split with
respect to the shares of the Company's Class A and Class B Common Stock. This
stock split has been reflected retroactively in the accompanying financial
statements.
(13) STOCK OPTIONS
The Company has adopted an employee stock option plan (the "Plan") that
provides for the grant of stock options and stock appreciation rights ("SARs")
to employees of the Company. The Plan is construed, interpreted and administered
by the Board of Directors or a committee of two of more non-employee directors.
The committee or the Board of Directors determines the individuals to whom
options are granted, the number of shares subject to the options, the exercise
price of the options, the period over which the options become exercisable and
the terms and provisions of stock options as it may determine from time to time,
subject only to the provisions of the Plan. The Plan (as amended) covers an
aggregate of up to 1,750,000 shares of the Company's Class A Common Stock. As of
December 31, 1999, options to purchase 640,625 shares of Class A Common Stock
have been granted and 111,250 shares have been terminated or forfeited upon
resignation of the holders. The options outstanding at December 31, 1999 have an
exercise price of $12.00 per share and a weighted average remaining contractual
life of 8.87 years. At December 31, 1999, 66,875 of the options were
exercisable.
The Company accounts for this plan under Accounting Principles Board ("APB")
Opinion No. 25, under which no compensation has been recognized. Had
compensation cost for this plan been determined consistent with SFAS No. 123,
"Accounting for Stock-Based Compensation," the Company's
F-18
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) STOCK OPTIONS (CONTINUED)
net loss and basic and diluted earnings per share would have been reduced to the
pro forma amounts indicated below
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1998 1999
------------ ------------
<S> <C> <C> <C>
Net loss As reported................ $(11,450,000) $(10,063,000)
Pro forma.................. (11,621,000) (10,375,000)
Basic loss per share As reported................ $ (1.71) $ (1.32)
Pro forma.................. (1.73) (1.36)
Diluted loss per share As reported................ $ (1.71) $ (1.32)
Pro forma.................. (1.73) (1.36)
</TABLE>
The fair value of each of the option granted is estimated on the date of
grant using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in 1998: risk-free interest rates
of 5 1/2%, an expected life of seven years. Expected volatility is negligible
due to the lack of public trading of Company's Common Stock. Assumptions used
for grants in 1999: risk-free interest rates at 5 13/50%, an expected life of
seven years and expected volatility of 60%.
(14) NET LOSS PER COMMON SHARE
In February 1997, FASB issued SFAS No. 128, "Earnings Per Share." This
statement replaced the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is similar to
the previously reported fully diluted earnings per share.
Earnings per share amounts for all periods are presented below in accordance
with the requirements of SFAS No. 128.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Weighted average shares for basic EPS....... 5,500,560 6,715,805 7,617,926
Less: Shares subject to put................. -- 13,795 16,058
--------- --------- ---------
Weighted average shares for diluted EPS..... 5,500,560 6,702,010 7,601,868
========= ========= =========
</TABLE>
(15) INCOME TAXES
As described in Note 2, the Company joined in filing a consolidated Federal
tax return as provided for under the terms of a tax sharing agreement with Jones
International and Jones International's other subsidiaries through the first
quarter of 1997. Subsequent to the first quarter of 1997, the Company continues
to join in filing combined state tax returns with Jones International in
accordance with the tax sharing agreement. Pursuant to the terms of the
agreement, tax (provisions) benefits are allocated to members of the tax sharing
group based on their respective pro rata contribution of taxable income (loss)
to Jones International's combined taxable income (loss).
F-19
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) INCOME TAXES (CONTINUED)
The difference between the statutory Federal income tax rate and effective
rate recognized as the result of the tax sharing arrangement is summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Computed "expected tax benefit".......... $1,692,000 $3,991,000 $3,332,000
State taxes, net of Federal benefit...... 157,000 371,000 294,000
Other.................................... 28,000 (35,000) (43,000)
---------- ---------- ----------
1,877,000 4,327,000 3,583,000
Valuation allowance...................... (1,877,000) (4,327,000) (3,583,000)
---------- ---------- ----------
Tax benefit (provision) before impact of
tax sharing agreement.................. -- -- --
Impact of tax sharing agreement.......... 1,342,000 (49,000) 470,000
---------- ---------- ----------
Total income tax benefit (provision)..... $1,342,000 $ (49,000) $ 470,000
========== ========== ==========
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1998 1999
---------- ------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Net operating loss carry forwards.................. $5,138,000 $ 7,752,000
Future deductible amounts associated with other
assets and liabilities........................... 1,502,000 4,665,000
---------- ------------
Total.......................................... 6,640,000 12,417,000
DEFERRED TAX LIABILITIES:
Net assets of MediaAmerica......................... (155,000) (330,000)
Property and equipment............................. (1,617,000) (337,000)
Valuation allowance................................ (4,868,000) (11,750,000)
---------- ------------
Net deferred tax assets............................ $ -- $ --
========== ============
</TABLE>
At December 31, 1999, the Company had net tax operating loss carryforwards
("NOLs") of approximately $20.4 million which expire between 2013 and 2020. The
Company has provided a valuation allowance for its net deferred tax assets at
December 31, 1998 and 1999, due to uncertainty as to the ultimate realization of
those assets from future taxable income generated.
F-20
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(16) EMPLOYEE INVESTMENT AND DEFERRED COMPENSATION PLANS
The Company's employees are eligible to participate in an Employee Profit
Sharing/Retirement Savings Plan (the "401(k) Plan"). Under the 401(k) Plan,
eligible employees are permitted to defer up to 16% of their annual
compensation. The Company currently matches 50% of the employees' deferrals up
to a maximum of 6% of their annual compensation, with the Company's contribution
vesting immediately. Contributions to the 401(k) Plan are invested by the
trustees of the 401(k) Plan in accordance with the directions of each
participant. Participants or their beneficiaries are entitled to payment of
benefits (i) upon retirement either at or after age 65, (ii) upon death or
disability or (iii) upon termination of employment, unless the participant
elects to receive payment prior to one of the events previously listed. For the
years ended December 31, 1997, 1998 and 1999, the Company contributed
approximately $83,000, $99,000 and $262,000 respectively, to the 401(k) Plan on
behalf of its employees.
Certain of the Company's key management personnel are eligible to
participate in a Deferred Compensation Plan (the "Deferred Compensation Plan").
Under the Deferred Compensation Plan, key employees are permitted to defer
receipt of 100% of their annual compensation. The Company currently matches the
key employees' deferrals up to a maximum of 6% of their compensation. The
contributed funds are deposited with an independent trustee and are invested in
a number of pre-selected investment funds. Both the key employees' and the
Company's contributions are subject to the claims of the Company's creditors.
Participants in the Deferred Compensation Plan or their beneficiaries receive a
distribution of their contributions, the Company's contributions, and earnings
attributable to those contributions on their separation from employment with the
Company or their death. Contributions made by the Company to the Deferred
Compensation Plan on behalf of key employees totaled approximately $33,000,
$33,000 and $110,000 for the years ended December 31, 1997, 1998 and 1999,
respectively.
(17) COMMITMENTS AND CONTINGENCIES
GAC EQUITY AGREEMENTS--In the first quarter of 1998, Great American Country
and the Company entered into equity affiliate agreements with two multiple cable
system operators ("MSOs"). Pursuant to the terms of such agreements, the Company
agreed to issue shares of Class A Common Stock to the MSOs in return for the
MSOs providing Great American Country's programming to no less than 550,000 of
their subscribers by May 31, 1998, an additional 500,000 subscribers by
December 31, 1998 and an additional 150,000 subscribers by December 31, 1999.
The total number of shares of Class A Common Stock to be issued is based on the
number of subscribers provided by the MSOs. As of December 31, 1999, 14,836
shares of Class A Common Stock had been issued to one of the MSOs. No additional
shares of Class A Common Stock are required to be issued to this MSO. Pursuant
to the guidelines of SFAS No. 123 "Accounting for Stock-Based Compensation," the
value of the Class A Common Stock was recorded as an intangible asset upon
execution of the affiliate agreements and upon issuance of the Class A Common
Stock. This intangible is being amortized using the straight-line method over
the life of the contract (approximately ten years). Because of a put option
granted to the MSO, the shares issued to that MSO are presented above the
Shareholders' Deficit section of the Statements of Financial Position. The
amount of accretion from the value of the shares issued to the put option at the
exercise date is not significant.
As noted above, one of the MSOs was granted a put option on the Common Stock
issued, whereby, if as of December 31, 2001, the Company or its successor has
not completed a public offering of its securities, the MSO would have the option
within 60 days of such date to require the Company to buy back its Class A
Common Stock at a price equal to all or a portion of the license fees that
F-21
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(17) COMMITMENTS AND CONTINGENCIES (CONTINUED)
would have been paid during the period between the date of the agreement and the
exercise date of the put option. The purchase price would be based on the total
number of MSO subscribers receiving the Great American Country service as of
December 31, 1999. Based on the number of subscribers receiving the Great
American Country service at December 31, 1999, the estimated purchase price of
the Class A Common Stock in the event the put option is exercised would be
approximately $1,021,000.
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. As of December 31, 1999, this third party and the
guarantor of this lease are in default of this agreement and it is doubtful that
the Company will receive any further lease payments under the remaining term of
this lease.
CLASS A COMMON STOCK--In 2000, the Company anticipates that it will issue
additional shares of Class A Common Stock in connection with the acquisition of
Adelphia's interest in the PIN Venture. The value of such shares is not expected
to be material to the Company.
OPERATING LEASE AGREEMENTS--The Company rents office facilities under
various operating lease agreements. As of December 31, 1999, future minimum
lease payments under these noncancelable operating leases for each of the next
five fiscal years and thereafter, are as follows:
<TABLE>
<CAPTION>
FACILITIES
LEASES
----------
<S> <C>
2000........................................................ $ 849,839
2001........................................................ 888,508
2002........................................................ 674,300
2003........................................................ 509,436
2004........................................................ 509,436
Thereafter.................................................. 533,163
----------
$3,964,682
==========
</TABLE>
(18)CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
The Notes are fully and unconditionally guaranteed, jointly and severally,
on a senior unsecured basis by the following wholly-owned subsidiaries of the
Company: JPN, Inc., Jones Direct, Ltd., Jones Space Holdings, Inc., Jones Earth
Segment, Inc., Jones Infomercial Networks, Inc., Jones Radio Holdings, Inc.,
Great American Country, Inc., Jones Galactic Radio, Inc., Jones Infomercial
Network Ventures, Inc., Jones Galactic Radio Partners, Inc., Jones Radio
Network, Inc., Jones Audio Services, Inc., Jones Radio Network Ventures, Inc.,
MediaAmerica, Inc. Broadcast Programming, Inc. and Jones MAI Radio, Inc. and
Jones/Owens Radio Programming LLC (collectively, the "Subsidiary Guarantors").
The only existing subsidiaries of the Company that did not guarantee the Notes
are the following three entities: the PIN Venture, Superaudio and Jones/Capstar
(collectively, the "Non-Guarantor Subsidiaries").
F-22
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(18)CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
(CONTINUED)
The Company has not provided separate complete financial statements and
other disclosures of the respective Subsidiary Guarantors because management has
determined that such information is not material to investors. There are no
significant contractual restrictions on distributions from each of the
Subsidiary Guarantors to the Company.
Investments in subsidiaries are required to be accounted for by investors on
the equity method for purposes of the supplemental condensed consolidating
financial statement presentation. Under this method, investments are recorded at
cost and adjusted for the investor company's ownership share of the
subsidiaries' cumulative results of operations. In addition, investments
increase in the amount of contributions to subsidiaries and decrease in the
amount of distributions from subsidiaries. The elimination entries eliminate the
equity method accounting for the investment in subsidiaries and the equity in
earnings of subsidiaries, intercompany payables and receivables and other
transactions between subsidiaries including contributions and distributions.
Sections 13 and 15(d) of the Securities Exchange Act of 1934 require
presentation of the following supplemental condensed consolidating financial
statements. Presented below is condensed consolidating financial information for
the Company and its subsidiaries as of and for the years ended December 31,
1997, 1998 and 1999.
F-23
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(18)CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997:
<TABLE>
<CAPTION>
NON-
THE SUBSIDIARY GUARANTOR ELIMINATION
COMPANY GUARANTORS SUBSIDIARIES ENTRIES REPORTED
-------- ---------- ------------ ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS:
Revenues..................................... $ 285 $19,772 $13,345 $(4,290) $29,112
Operating expenses:
Operations................................. 148 10,356 10,459 (3,914) 17,049
Selling and marketing...................... 137 2,648 706 -- 3,491
General and administrative................. 1,151 -- -- -- 1,151
Depreciation and amortization.............. 4 5,100 64 -- 5,168
------- ------- ------- ------- -------
Total operating expenses................. 1,440 18,104 11,229 (3,914) 26,859
------- ------- ------- ------- -------
OPERATING INCOME (LOSS).................. (1,155) 1,668 2,116 (376) 2,253
------- ------- ------- ------- -------
OTHER EXPENSE (INCOME):
Interest expense........................... 2,065 3,612 16 (16) 5,677
Interest income............................ (6) (25) (83) 6 (108)
Write-off of deferred offering costs....... 938 -- -- -- 938
Equity in (income) loss of subsidiaries.... 717 (1,417) -- 304 (396)
Other expense (income), net................ -- 35 39 -- 74
------- ------- ------- ------- -------
Total other expense (income)............. 3,714 2,205 (28) 294 6,185
------- ------- ------- ------- -------
Income (loss) before income taxes and
minority interest.......................... (4,869) (537) 2,144 (670) (3,932)
Income tax provision (benefit)............... (1,376) (786) -- 820 (1,342)
------- ------- ------- ------- -------
Income (loss) before minority interest....... (3,493) 249 2,144 (1,490) (2,590)
Minority interest in net income of
consolidated subsidiaries.................. -- -- -- 903 903
------- ------- ------- ------- -------
NET INCOME (LOSS)............................ $(3,493) $ 249 $ 2,144 $(2,393) $(3,493)
======= ======= ======= ======= =======
</TABLE>
F-24
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(18)CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997:
<TABLE>
<CAPTION>
NON-
THE SUBSIDIARY GUARANTOR ELIMINATION
COMPANY GUARANTORS SUBSIDIARIES ENTRIES REPORTED
-------- ---------- ------------ ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................... $(3,493) $ 249 $2,144 $(2,393) $(3,493)
Adjustment to reconcile net loss to net
cash provided by (used in) operating
activities:
Non-cash expenses..................... 694 4,320 82 1,598 6,694
Distributions received................ -- 100 -- -- 100
Net change in assets and
liabilities......................... 3,540 (1,329) 1,227 850 4,288
------- ------ ------ ------- -------
Net cash provided by operating
activities........................ 741 3,340 3,453 55 7,589
------- ------ ------ ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment...... (8) (1,340) (19) -- (1,367)
Sale of property and equipment.......... -- 82 174 -- 256
Purchases of intangible assets.......... (3) (42) -- -- (45)
------- ------ ------ ------- -------
Net cash provided by (used in)
investing activities................ (11) (1,300) 155 -- (1,156)
------- ------ ------ ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deferred financing and
offering costs........................ (505) -- -- -- (505)
Increase in capitalized loan fees....... (50) -- -- -- (50)
Repayment of capital lease obligation... -- (1,965) -- -- (1,965)
Acquisition of minority interest........ (200) -- -- -- (200)
------- ------ ------ ------- -------
Net cash used in financing
activities.......................... (755) (1,965) -- -- (2,720)
------- ------ ------ ------- -------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................. (25) 75 3,608 55 3,713
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD.................................. -- 4 55 (55) 4
------- ------ ------ ------- -------
CASH AND CASH EQUIVALENTS, END OF
PERIOD.................................. $ (25) $ 79 $3,663 $ -- $ 3,717
======= ====== ====== ======= =======
</TABLE>
F-25
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(18)CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION
AS OF DECEMBER 31, 1998:
<TABLE>
<CAPTION>
NON-
THE SUBSIDIARIES GUARANTOR ELIMINATION
COMPANY GUARANTORS SUBSIDIARIES ENTRIES REPORTED
-------- ------------ ------------ ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents............... $ 7,881 $ 956 $1,817 $ -- $ 10,654
Restricted cash......................... 10,000 -- -- -- 10,000
Available for sale securities........... 2,769 -- -- 2,769
Accounts receivable, net................ -- 11,088 748 -- 11,836
Other current assets.................... -- 847 47 -- 894
------- -------- ------ ------- --------
Total current assets................ 20,650 12,891 2,612 -- 36,153
------- -------- ------ ------- --------
Property and equipment.................. 7 26,598 292 -- 26,897
Intangible assets, net.................. 4,515 36,528 3 -- 41,046
Other long-term assets.................. 29,854 (20,886) -- (2,170) 6,798
------- -------- ------ ------- --------
Total assets........................ $55,026 $ 55,131 $2,907 $(2,170) $110,894
======= ======== ====== ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT):
Accounts payable........................ $ 983 $ 1,813 $ -- $ -- $ 2,796
Producers' fees payable................. -- 5,922 -- -- 5,922
Accrued liabilities..................... 5,884 2,248 1,124 -- 9,256
Other current liabilities............... (41,722) 43,567 286 -- 2,131
------- -------- ------ ------- --------
Total current liabilities........... (34,855) 53,550 1,410 -- 20,105
------- -------- ------ ------- --------
Senior Secured Notes.................... 100,000 -- -- -- 100,000
Other long-term liabilities............. -- 341 -- -- 341
------- -------- ------ ------- --------
Total long-term liabilities......... 100,000 341 -- -- 100,341
------- -------- ------ ------- --------
Minority interest....................... -- -- -- 567 567
Class A Common Stock subject to put..... 1,213 -- -- -- 1,213
Shareholders' equity (deficit):
Class A Common Stock.................. 53 -- -- -- 53
Class B Common Stock.................. 22 -- -- -- 22
General Partners' contributions....... -- 1,000 350 (1,350) --
Additional paid-in capital............ 27,432 -- -- -- 27,432
Accumulated other comprehensive
income.............................. 9 -- -- -- 9
Retained earnings (deficit)........... (38,848) 240 1,147 (1,387) (38,848)
------- -------- ------ ------- --------
Total shareholders' equity
(deficit)......................... (11,332) 1,240 1,497 (2,737) (11,332)
------- -------- ------ ------- --------
Total liabilities and shareholders'
equity (deficit).................. $55,026 $ 55,131 $2,907 $(2,170) $110,894
======= ======== ====== ======= ========
</TABLE>
F-26
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(18)CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998:
<TABLE>
<CAPTION>
NON-
THE SUBSIDIARY GUARANTOR ELIMINATION
COMPANY GUARANTORS SUBSIDIARIES ENTRIES REPORTED
-------- ---------- ------------ ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS:
Revenues.............................. $ 173 $25,597 $14,163 $(1,721) $ 38,212
Operating expenses:
Operations.......................... 98 15,915 12,889 (1,721) 27,181
Selling and marketing............... 58 4,543 811 -- 5,412
General and administrative.......... 1,116 -- -- -- 1,116
Depreciation and amortization....... 5 6,166 95 -- 6,266
-------- ------- ------- ------- --------
Total operating expenses............ 1,277 26,624 13,795 (1,721) 39,975
-------- ------- ------- ------- --------
OPERATING INCOME (LOSS)................. (1,104) (1,027) 368 -- (1,763)
-------- ------- ------- ------- --------
OTHER EXPENSE (INCOME):
Interest expense...................... 7,173 1,798 -- -- 8,971
Interest income....................... (615) (33) (128) -- (776)
Equity in (income) loss of
subsidiaries........................ 2,597 (2,710) -- 170 57
Other expense (income), net........... 1,190 (31) 12 -- 1,171
-------- ------- ------- ------- --------
Total other expense (income), net... 10,345 (976) (116) 170 9,423
-------- ------- ------- ------- --------
Income (loss) before income taxes and
minority interest................... (11,449) (51) 484 (170) (11,186)
Income tax provision.................. 1 48 -- -- 49
-------- ------- ------- ------- --------
Income (loss) before minority
interest............................ (11,450) (99) 484 (170) (11,235)
-------- ------- ------- ------- --------
Minority interest in net income of
consolidated subsidiaries........... -- -- -- 215 215
-------- ------- ------- ------- --------
NET INCOME (LOSS)..................... $(11,450) $ (99) $ 484 $ (385) $(11,450)
======== ======= ======= ======= ========
</TABLE>
F-27
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(18)CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998:
<TABLE>
<CAPTION>
NON-
THE SUBSIDIARY GUARANTOR ELIMINATION
COMPANY GUARANTORS SUBSIDIARIES ENTRIES REPORTED
-------- ---------- ------------ ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................ $(11,450) $ (99) $ 484 $ (385) $(11,450)
Adjustment to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Non-cash expenses (income)............. (54) 6,359 97 385 6,787
Distributions received................. -- 350 -- -- 350
Net change in assets and liabilities... (4,625) 1,979 (106) -- (2,752)
-------- ------- ------- ------- --------
Net cash provided by (used in)
operating activities............... (16,129) 8,589 475 -- (7,065)
-------- ------- ------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment....... -- (2,067) (191) -- (2,258)
Sale of property and equipment........... -- 41 16 -- 57
Dividend from joint venture.............. 914 -- -- (914) --
Purchase of investments.................. (2,760) -- -- -- (2,760)
Purchase of intangible assets............ -- (3,359) -- -- (3,359)
Purchase of MediaAmerica, Inc............ (26,700) -- -- -- (26,700)
-------- ------- ------- ------- --------
Net cash used in investing
activities......................... (28,546) (5,385) (175) (914) (35,020)
-------- ------- ------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deferred financing and
offering costs......................... (4,432) (115) -- -- (4,547)
Advances to/from subsidiaries............ (32,987) 32,987 -- -- --
Repayment of borrowings, net............. -- (6,555) -- -- (6,555)
Repayment of capital lease obligations... -- (28,757) -- -- (28,757)
Proceeds from Notes...................... 100,000 -- -- -- 100,000
Dividend paid to partners................ -- -- (2,146) 2,146 --
Distributions paid to minority
interest............................... -- 113 -- (1,232) (1,119)
-------- ------- ------- ------- --------
Net cash provided by (used in)
financing activities............... 62,581 (2,327) (2,146) 914 59,022
-------- ------- ------- ------- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.............................. 17,906 877 (1,846) -- 16,937
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD................................... (25) 79 3,663 -- 3,717
-------- ------- ------- ------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD... $ 17,881 $ 956 $ 1,817 $ -- $ 20,654
======== ======= ======= ======= ========
</TABLE>
F-28
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(18)CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION
AS OF DECEMBER 31, 1999:
<TABLE>
<CAPTION>
NON-
THE SUBSIDIARIES GUARANTOR ELIMINATION
COMPANY GUARANTORS SUBSIDIARIES ENTRIES REPORTED
-------- ------------ ------------ ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents.................. $ 7,889 $ 2,708 $ 2,674 $ -- $ 13,271
Available for sale securities.............. 6,888 -- -- -- 6,888
Accounts receivable, net................... -- 13,627 422 -- 14,049
Other current assets....................... 5 1,772 57 -- 1,834
------- -------- ------- ------- --------
Total current assets................... 14,782 18,107 3,153 -- 36,042
------- -------- ------- ------- --------
Property and equipment..................... 13 22,584 363 -- 22,960
Intangible assets, net..................... 1 63,640 2 -- 63,643
Other long-term assets..................... 34,393 (28,172) 313 (718) 5,816
------- -------- ------- ------- --------
Total assets........................... $49,189 $ 76,159 $ 3,831 $ (718) $128,461
======= ======== ======= ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT):
Accounts payable........................... $ 869 $ 2,242 $ 1,628 $ -- $ 4,739
Producers' fees payable.................... -- 5,308 -- -- 5,308
Accrued liabilities........................ 5,978 5,320 143 -- 11,441
Other current liabilities.................. (62,175) 63,001 483 -- 1,309
------- -------- ------- ------- --------
Total current liabilities.............. (55,328) 75,871 2,254 -- 22,797
Senior Secured Notes....................... 100,000 -- -- -- 100,000
Other long-term liabilities................ 603 582 -- -- 1,185
------- -------- ------- ------- --------
Total long-term liabilities............ 100,603 582 -- -- 101,185
------- -------- ------- ------- --------
Minority interest.......................... -- -- -- 565 565
Class A Common Stock subject to put........ 1,213 -- -- -- 1,213
Shareholders' equity (deficit):
Series A Preferred Stock................. 23,975 -- -- -- 23,975
Class A Common Stock..................... 53 -- -- -- 53
Class B Common Stock..................... 22 -- -- -- 22
General Partners' contributions.......... -- -- 350 (350) --
Additional paid-in capital............... 27,588 -- -- -- 27,588
Accumulated other comprehensive income... (26) -- -- -- (26)
Retained earnings (deficit).............. (48,911) (294) 1,227 (933) (48,911)
------- -------- ------- ------- --------
Total shareholders' equity (deficit)... 2,701 (294) 1,577 (1,283) 2,701
------- -------- ------- ------- --------
Total liabilities and shareholders'
equity (deficit)..................... $49,189 $ 76,159 $ 3,831 $ (718) $128,461
======= ======== ======= ======= ========
</TABLE>
F-29
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(18)CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999:
<TABLE>
<CAPTION>
NON-
THE SUBSIDIARY GUARANTOR ELIMINATION
COMPANY GUARANTORS SUBSIDIARIES ENTRIES REPORTED
-------- ---------- ------------ ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS:
Revenue..................................... $ -- $42,052 $22,314 $ -- $ 64,366
Operating expenses:
Operations................................ -- 23,994 19,623 -- 43,617
Selling and marketing..................... -- 5,669 769 -- 6,438
General and administrative................ 1,491 -- -- -- 1,491
Depreciation and amortization............. 8 10,651 116 -- 10,775
-------- ------- ------- ------- --------
Total operating expenses................ 1,499 40,314 20,508 -- 62,321
-------- ------- ------- ------- --------
OPERATING INCOME LOSS......................... (1,499) 1,738 1,806 -- 2,045
======== ======= ======= ======= ========
OTHER EXPENSE (INCOME):
Interest expense............................ 12,751 -- -- -- 12,751
Interest income............................. (568) (324) (130) -- (1,022)
Equity in (income) loss of subsidiaries..... (2,247) 3,319 (111) (1,067) (106)
Other expense (income), net................. 94 (22) 2 -- 74
-------- ------- ------- ------- --------
Total other expense (income), net......... 10,030 2,973 (239) (1,067) 11,697
-------- ------- ------- ------- --------
Income (loss) before income taxes and
minority interest......................... (11,529) (1,235) 2,045 1,067 (9,652)
Income tax provision (benefit).............. (1,466) 996 -- -- (470)
-------- ------- ------- ------- --------
Income (loss) before minority interest...... (10,063) (2,231) 2,045 1,067 (9,182)
-------- ------- ------- ------- --------
Minority interest in net income of
consolidated subsidiaries................. -- -- -- 881 881
-------- ------- ------- ------- --------
NET INCOME (LOSS)........................... $(10,063) $(2,231) $ 2,045 $ 186 $(10,063)
======== ======= ======= ======= ========
</TABLE>
F-30
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(18)CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999:
<TABLE>
<CAPTION>
NON-
THE SUBSIDIARY GUARANTOR ELIMINATION
COMPANY GUARANTORS SUBSIDIARIES ENTRIES REPORTED
-------- ---------- ------------ ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................... $(10,063) $ (2,231) $ 2,045 $ 186 $(10,063)
Adjustment to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Non-cash expenses (income)................ 2,340 10,106 5 (186) 12,265
Net change in assets and liabilities...... (21,837) 21,039 994 -- 196
-------- -------- ------- -------- --------
Net cash provided by (used in) operating
activities............................ (29,560) 28,914 3,044 -- 2,398
-------- -------- ------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.......... (12) (651) (187) (850)
Cable programming distribution payments..... -- (6,353) -- -- (6,353)
Purchase of investments..................... (4,154) -- -- -- (4,154)
Purchase of intangible assets............... -- (398) -- -- (398)
Purchase of Broadcast Programming........... -- (20,877) -- -- (20,877)
-------- -------- ------- -------- --------
Net cash provided by (used in) investing
activities.............................. (4,166) (28,279) (187) -- (32,632)
-------- -------- ------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deferred financing and offering
costs..................................... (241) -- -- -- (241)
Proceeds from Series A Preferred Stock...... 23,975 -- -- -- 23,975
Dividend paid to partners................... -- (2,000) 2,000 --
Distributions paid to minority interest..... -- 1,117 -- (2,000) (883)
-------- -------- ------- -------- --------
Net cash provided by (used in) financing
activities.............................. 23,734 1,117 (2,000) -- 22,851
-------- -------- ------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................. (9,992) 1,752 857 -- (7,383)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD...................................... 17,881 956 1,817 -- 20,654
-------- -------- ------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD...... $ 7,889 $ 2,708 $ 2,674 $ -- $ 13,271
======== ======== ======= ======== ========
</TABLE>
F-31
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(19) REPORTABLE SEGMENTS
The Company has six reportable segments: radio programming, cable television
programming, Internet programming, advertising sales services, satellite
services and general and administrative-corporate. The Company's reportable
segments have been determined in accordance with the Company's internal
management structure. See Note 2 for descriptive information about the Company's
segments and the summary of significant accounting policies. The Company
evaluates performance based on many factors; one of the primary measures is
EBITDA. EBITDA represents operating income (loss) plus depreciation and
amortization minus the EBITDA attributable to the minority interest in the PIN
Venture, a consolidated 55.3%-owned subsidiary.
The following tables set forth the Company's financial results by business
segments. The presentation of reportable segments has been changed from that
presented in prior periods to (1) reflect the Internet programming segment, a
new segment, and (2) the separate presentation of radio programming and
advertising sales services segments. The Company has also added the presentation
of segment EBITDA. Management believes that this presentation provides a more
meaningful analysis of the Company's business segments. EBITDA of the cable
television programming segment excludes EBITDA attributable to the minority
interest in the PIN Venture. The prior years' results have been reclassified to
conform to the new presentation.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Programming content:
Radio................................................... $10,200 $ 10,428 $ 19,379
Cable television........................................ 12,002 16,892 27,345
Internet................................................ -- -- 108
Programming support services:
Advertising sales services.............................. -- 4,720 9,035
Satellite services...................................... 6,910 6,172 8,499
------- -------- --------
Total revenues........................................ $29,112 $ 38,212 $ 64,366
------- -------- --------
EBITDA:
Programming content:
Radio................................................... $ 1,537 $ (472) $ 3,728
Cable television........................................ 796 177 2,332
Internet................................................ -- -- (344)
Programming support services:
Advertising sales services.............................. -- 1,039 1,409
Satellite services...................................... 6,239 4,875 7,186
------- -------- --------
Segment EBITDA........................................ 8,572 5,619 14,311
Reconciliation to operating income (loss):
General and administrative.................................. 1,151 1,116 1,491
Depreciation and amortization............................... 5,168 6,266 10,775
------- -------- --------
Total operating income (loss)......................... $ 2,253 $ (1,763) $ 2,045
======= ======== ========
Reconciliation of segment EBITDA to total EBITDA:
Segment total............................................. $ 8,572 $ 5,619 $ 14,311
General and administrative................................ (1,151) (1,116) (1,491)
Less: EBITDA minority interest............................ 822 213 860
------- -------- --------
Total EBITDA.......................................... $ 6,599 $ 4,290 $ 11,960
======= ======== ========
</TABLE>
F-32
<PAGE>
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(19) REPORTABLE SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Depreciation and amortization:
Programming content:
Radio................................................... $ 870 $ 990 $ 3,669
Cable television........................................ 194 704 2,093
Internet................................................ -- -- 1
Programming support services:
Advertising sales services.............................. -- 602 978
Satellite services...................................... 4,100 3,965 4,026
------- -------- --------
Segment total......................................... 5,164 6,261 10,767
General and administrative................................ 4 5 8
------- -------- --------
Total depreciation and amortization................... $ 5,168 $ 6,266 $ 10,775
======= ======== ========
Total assets:
Programming content:
Radio................................................... $ 5,960 $ 4,659 $ 25,655
Cable television........................................ 8,204 12,437 20,058
Internet................................................ -- -- 6
Programming support services:
Advertising sales services.............................. -- 43,886 43,487
Satellite services...................................... 25,878 23,183 19,633
------- -------- --------
Segment total......................................... 40,042 84,165 108,839
Corporate................................................. (1,973) 55,219 20,160
Elimination of inter-segment assets....................... 3,289 (28,490) (537)
------- -------- --------
Total assets.......................................... $41,358 $110,894 $128,462
======= ======== ========
Capital expenditures:
Programming content:
Radio................................................... $ 1,237 $ 541 $ 333
Cable television........................................ 28 336 242
Internet................................................ -- -- 4
Programming support services:
Advertising sales services.............................. -- 41 72
Satellite services...................................... 93 1,337 186
------- -------- --------
Segment total......................................... 1,358 2,255 837
Corporate................................................. 9 3 13
------- -------- --------
Total capital expenditures............................ $ 1,367 $ 2,258 $ 850
======= ======== ========
</TABLE>
Segment EBITDA includes intersegment transactions between the satellite
services and cable programming segments for the lease of a transponder by PIN
and GAC for $3,387,000, $3,581,000, and $3,525,000, for the years ended
December 31, 1997, 1998 and 1999, respectively. Segment EBITDA differs from
operating income (loss) of each of the segments by the amount of depreciation
and amortization expenses of each segment.
F-33
<PAGE>
[LOGO]
Jones International Networks, Ltd.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than the
underwriting discount, payable by the Registrant in connection with the sale of
the Class A Common Stock being registered. All amounts are estimates except the
SEC registration fee, the NASD filing fees and the Nasdaq National Market
listing fee.
<TABLE>
<CAPTION>
AMOUNT TO BE PAID
-----------------
<S> <C>
SEC registration fee........................................ $25,290
NASD filing fee............................................. 10,080
National Market listing fee................................. 63,725
Legal fees and expenses..................................... *
Accounting fees and expenses................................ 100,000
Printing and engraving...................................... 400,000
Blue sky fees and expenses (including legal fees)........... *
Transfer agent fees......................................... 1,250
Miscellaneous............................................... *
-------
Total................................................... $*
=======
</TABLE>
- ----------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
In accordance with the Colorado Business Corporation Act, as amended (the
"Colorado Act"), the Registrant's articles of incorporation, as amended,
eliminate in certain circumstances the liability of our directors for monetary
damages for breach of their fiduciary duty as directors. This provision does not
eliminate the liability of a director for: (i) a breach of the director's duty
of loyalty to the Registrant or its shareholders, (ii) acts or omissions by the
director not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) a willful or negligent declaration of an unlawful
distribution or (iv) transactions from which the director derived an improper
personal benefit.
The Registrant's articles of incorporation also provide that we shall
indemnify any person and his or her estate and personal representatives against
all liability and expenses incurred by reason of the person being or having been
a director or officer of the Registrant or, while serving as a director or
officer of the Registrant, serving at the request of it or any of its
subsidiaries as a director, an officer, an agent, an associate, an employee, a
fiduciary, a manager, a member, a partner, a promoter, or a trustee of, or to
hold any similar position with, another domestic or foreign corporation or other
entity or of an employee benefit plan, to the full extent permitted under the
Colorado Act. The Colorado Act requires a corporation to indemnify its officers
and directors against reasonable expenses incurred in any proceeding to which
the officer or director is a party and was wholly successful, on the merits or
otherwise, in defense of the proceeding. In addition to this mandatory
indemnification, the Colorado Act provides that a corporation may indemnify its
officers and directors against liability and reasonable expenses if the officer
or director acted in good faith and in a manner reasonably relieved to be in the
best interests of the corporation in the case of conduct in an official
capacity, in a manner he or she reasonably believed was at least not opposed to
the corporation's best interests in all other cases, or in a manner he or she
had no reasonable cause to believe was unlawful in the case of criminal
proceedings. In actions by or in the name of the corporation, the Colorado Act
provides the same standard but limits indemnification to reasonable expenses
incurred by the director and prohibits any
II-1
<PAGE>
indemnification if the director is adjudged liable to the corporation. The
Colorado Act also prohibits indemnification of a director in connection with
actions charging improper personal benefit to the director if the director is
adjudged liable on that basis.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The Registrant has issued the following securities since May 28, 1998 (its
inception):
a. In May 1998, the Registrant issued one (1) share of its Class A Common
Stock to Jones Network Holdings LLC, a Colorado limited liability company, for
$10.0 million. On July 10, 1998, Jones Network Holdings LLC tendered said share
of Class A Common Stock back to the Registrant. On the same date, the Registrant
issued 2,980,953 shares of its Class A Common Stock and 1,785,120 shares of its
Class B common stock to Jones Network Holdings LLC in exchange for the only
assets it held, which consisted of 2,980,953 shares of Class A Common Stock and
1,785,120 shares of Class B common stock of JPN, Inc., a Colorado corporation.
The Registrant also assumed Jones Network Holdings LLC's obligation under a
certain promissory note in the amount of $10.0 million, plus accrued interest,
payable to Jones Global Group, Inc., an affiliate of the Registrant.
b. Upon the liquidation of Jones Network Holdings LLC in July 1998, it
transferred the shares of Class A Common Stock and Class B common stock of the
Registrant that it held to its members on a one for one basis, as follows:
CLASS A COMMON STOCK
<TABLE>
<CAPTION>
NAME OF TRANSFEREE NUMBER OF SHARES
- ------------------ ----------------
<S> <C>
Jones International, Ltd.................................... 1,594,500
Glenn R. Jones.............................................. 707,286
Jones Space Segment, Inc.................................... 416,667
Adelphia Communications Corporation......................... 262,500
---------
Total................................................... 2,980,953
</TABLE>
CLASS B COMMON STOCK
<TABLE>
<CAPTION>
NAME OF TRANSFEREE NUMBER OF SHARES
- ------------------ ----------------
<S> <C>
Jones International, Ltd.................................... 1,122,000
Glenn R. Jones.............................................. 263,120
Jones Global Group, Inc..................................... 400,000
----------
Total................................................... 1,785,120
</TABLE>
All of the outstanding shares of Class B common stock are convertible at the
election of their holders into shares of Class A Common Stock on a one for one
basis.
c. Also in July 1998, the Registrant converted the $10.0 million principal
of the aforementioned promissory note payable to Jones Global Group by issuing
666,667 shares of its Class A Common Stock to Jones Global Group, which shares
were valued at $15.00 per share.
d. In connection with the carriage of the Registrant's Great American
Country programming, it is obligated under two separate agreements to issue
shares of its Class A Common Stock to TAL Financial, Inc. and Adelphia
Communications Corporation, based on the achievement of certain
II-2
<PAGE>
milestone subscriber levels by said companies. Based upon these two agreements
the Registrant has as of December 31, 1999 issued shares of its Class A Common
Stock as follows:
<TABLE>
<CAPTION>
DATE NUMBER OF SHARES
-------- ----------------
<S> <C> <C>
TAL Financial, Inc................................. 07/22/98 101,124
Adelphia Communications Corporation................ 12/31/98 12,416
Adelphia Communications Corporation................ 05/14/99 11,869
</TABLE>
e. In July 1999, the Registrant acquired substantially all of the assets
and liabilities of MediaAmerica, Inc. After such sale, MediaAmerica, Inc.
changed its name to Tuxedo Shirt, Inc. Pursuant to said acquisition, the
Registrant issued to Tuxedo Shirt, Inc., the seller, as partial payment of the
purchase price, 541,970 shares of Class A Common Stock. In October 1999, the
Registrant issued an additional 941 shares of its Class A Common Stock to Tuxedo
Shirt, representing the final working capital adjustment pursuant to said
acquisition. All of the shares issued to Tuxedo Shirt were valued at $15.00 per
share.
f. In September and November 1999, the Registrant issued an aggregate of
1,918,000 shares of Series A Convertible Preferred Stock at a purchase price of
$12.50 per share, to a total of 15 investors, all of whom are "accredited
investors" within the meaning of Regulation D under the Securities Act of 1933.
These investors include an affiliate of Mr. Jones. The outstanding shares of
Series A Convertible Preferred Stock will convert into 2,397,500 shares of
Class A Common Stock upon completion of a public equity offering.
g. On December 21, 1999, the Board of Directors approved a 5-for-4 stock
split. As a result of said stock split, on January 28, 2000, upon the
shareholders' approval to increase the authorized shares of our Class A Common
Stock and Class B Common Stock, we issued an additional 1,078,986 shares of
Class A Common Stock and 446,280 shares of Class B Common Stock to the current
shareholders. None of the numbers in the above paragraphs reflect said stock
split.
h. The Registrant from time to time has granted stock options under its
employee stock option plan (the "Plan") to employees and consultants. As of
December 31, 1999, options to purchase 640,625 shares of Class A Common Stock
have been granted to 28 persons, of which 111,250 shares have been terminated or
forfeited upon resignation of the holders. All of the options outstanding have
an exercise price of $12.00 per share, and none of the options have been
exercised. Upon the closing of this offering, an additional 218,000 shares of
Class A Common Stock will be subject to outstanding options with an exercise
price equal to the price of the Class A Comon Stock in this offering. In
addition, options to purchase 24,516 shares of Class A Common Stock at an
exercise price equal to 25% of the price of Class A Common Stock in this
offering will become immediately exercisable upon completion of this offering.
The above securities were offered and sold by the Registrant in reliance
upon exemptions from registration pursuant to either (i) Section 4(2) of the
Securities Act, as amended, as transactions not involving any public offering,
(ii) Regulation D promulgated under the Securities Act, as amended, as limited
offers and sales of securities, (iii) Rule 701 promulgated under the Securities
Act, as amended, or (iv) Section 2(3) of the Securities Act, as amended. All
purchasers of the above securities acquired said shares for investment purposes
only and all stock certificates reflect the appropriate legends. No underwriters
were involved in connection with the sales of securities referred to in this
Item 15.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Articles of Incorporation of the Registrant.(1)
3.2 Amendment to the Registrant's Articles of Incorporation
filed September 30, 1999.(4)
3.3 Amended and Restated Articles of Incorporation of the
Registrant filed January 28, 2000.(3)
3.4 Bylaws of the Registrant.(1)
4.1 Indenture, dated July 10, 1998, between the Registrant and
United States Trust Company of New York.(1)
4.2 Form of Exchange Note is included as Exhibit A-3 to the
Indenture.(1)
4.3 Pledge Agreement, dated July 10, 1998, among the Registrant,
United States Trust Company of New York and others.(1)
4.4 Form of Subsidiary Guaranty is included as part of the
Indenture.(1)
4.5 Form of Class A Common Stock certificate.(5)
5.1* Opinion of Davis, Graham & Stubbs LLP.
10.1 1998 Stock Option Plan.(1)
10.2 Amendment No. 1 to the Registrant's 1998 Stock Option
Plan.(3)
10.3 Form of Basic Incentive Stock Option Agreement.(1)
10.4 Form of Basic Non-Qualified Stock Option Agreement.(1)
10.5 Amendment No. 1 to Option Agreement dated February 10, 2000,
between the Registrant and Jeffrey C. Wayne.(5)
10.6 Amendment No. 1 to Option Agreement dated February 10, 2000,
between the Registrant and Jay B. Lewis.(5)
10.7 Purchase and Sale Agreement dated August 9, 1996, between
Jones Global Group, Inc. and Jones International
Networks, Ltd. (n/k/a JPN, Inc.).(1)
10.8 Exchange Agreement dated September 30, 1996, among Glenn R.
Jones, Jones International, Ltd. and Jones International
Networks, Ltd. (n/k/a JPN, Inc.).(1)
10.9 Agreement and its amendment, dated November 6, 1996 and
April 1, 1997, respectively, between Glenn R. Jones and
Jones International Networks, Ltd. (n/k/a JPN, Inc.).(1)
10.10+ Second Amended and Restated Partnership Agreement of Product
Information Network Venture dated April 1, 1997, among
Jones Infomercial Network Ventures, Inc., Cox Consumer
Information Network, Inc. and Adelphia Communications
Corporation.(1)
10.11 Affiliate Agreement dated January 1, 1996, among Great
American Country, Inc., Jones Programming Services, Inc.
and Jones Intercable, Inc.(1)
10.12 Amended and Restated Affiliate Agreement dated August 1,
1994, between Jones Infomercial Networks, Inc. and Jones
Intercable, Inc., together with an Assignment dated
January 31, 1995, between Jones Infomercial
Networks, Inc. and Jones Infomercial Network
Ventures, Inc.(1)
10.13+ Affiliate Agreement dated January 31, 1995, between Product
Information Network Venture and Cox
Communications, Inc.(1)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
10.14+ Affiliate Agreement as Amended, dated October 1, 1995 as
amended effective April 1, 1997, between Product
Information Network Venture and Adelphia Communications
Corporation.(1)
10.15 Uplink Services Agreement dated January 1, 1995, among Jones
Earth Segment, Inc., Jones Infomercial Networks, Inc.,
Jones Computer Network, Ltd., Mind Extension
University, Inc. (n/k/a Knowledge TV, Inc.) and Jones
Galactic Radio, Inc., together with a letter agreement
dated June 10, 1998, between Jones Earth Segment, Inc. and
Knowledge TV, Inc.(1)
10.16 Services Agreement dated January 1, 1995, among Jones Earth
Segment, Inc., Jones Infomercial Networks, Inc., Jones
Computer Network, Ltd. and Mind Extension
University, Inc. (n/k/a Knowledge TV, Inc.), together with
a letter agreement dated June 10, 1998, between Jones
Earth Segment, Inc. and Knowledge TV, Inc.(1)
10.17 Transponder Licenses Agreement dated January 1, 1995, among
Jones Space Segment, Inc., Jones Infomercial
Networks, Inc. and Jones Computer Network, Ltd., together
with a letter agreement dated June 10, 1998, between Jones
Space Holdings, Inc. and Knowledge TV, Inc.(1)
10.18 Transponder Licenses Agreement dated January 1, 1995, among
Jones Satellite Holdings, Inc., Jones Galactic
Radio, Inc. and Mind Extension University, Inc. (n/k/a
Knowledge TV, Inc.).(1)
10.19+ C-3/C-4 Satellite Transponder Service Agreement dated
July 28, 1989, between GE American Communications, Inc.
and Jones Space Segment, Inc.(1)
10.20 Agreement dated June 2, 1998, among MediaAmerica, Inc., Ron
Hartenbaum, Gary Schonfeld, Jones Network Holdings LLC and
the Registrant.(1)
10.21 Post-Closing Agreement dated July 10, 1998, with
MediaAmerica, Inc., Gary Schonfeld and Ron Hartenbaum.(1)
10.22 Employment Agreement dated July 10, 1998, between Ron
Hartenbaum and the Registrant.(1)
10.23 Employment Agreement dated July 10, 1998, between Gary
Schonfeld and the Registrant.(1)
10.24 Agreement dated as of June 15, 1999 among Broadcast
Electronics, Inc., BEI Holding Corporation and the
Registrant.(2)
10.25 Revolving Credit Facility dated as of July 29, 1999 between
Bank of America, N.A. and the Registrant.(2)
10.26 Form of Registration Rights Agreement dated as of
October 1, 1999 between the Registrant and certain holders
of Series A Convertible Preferred Stock.(4)
21.1 Subsidiaries.(4)
23.1 Consent of Arthur Andersen LLP.(5)
23.2* Consent of Davis, Graham & Stubbs, LLP. (See Exhibit 5.1.)
24.1 Powers of Attorney.(4)
27 Financial Data Schedule.(5)
</TABLE>
- ----------
* To be filed by amendment.
+ Portions of this exhibit have been omitted based on a determination dated
November 3, 1998 by the Securities and Exchange Commission that certain
information contained therein shall be afforded confidential treatment.
II-5
<PAGE>
(1) Incorporated by reference from the Registrant's Registration Statement No.
333-62077 on Form S-4 filed on August 21, 1998.
(2) Incorporated by reference from the Registrant's Current Report on Form 8-K
dated August 6, 1999.
(3) Incorporated by reference from the Registrant's Current Report on Form 8-K
dated January 28, 2000.
(4) Previously filed.
(5) Filed herewith.
(b) Financial Statement Schedules
See Schedule II, which follows the Part II pages.
ITEM 17. UNDERTAKINGS.
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Pre-Effective Amendment No. 1 to Registration Statement
No. 333-93337 to be signed on its behalf by the undersigned, thereunto
authorized, in the City of Englewood and the State of Colorado on the 18th day
of February, 2000.
<TABLE>
<S> <C> <C>
JONES INTERNATIONAL NETWORKS, LTD.,
a Colorado corporation
By: /s/ JEFFREY C. WAYNE
-----------------------------------------
Jeffrey C. Wayne
President and Director
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 1 to Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ GLENN R. JONES
-------------------------------------- Chairman of the Board February 18, 2000
(Glenn R. Jones)
/s/ JEFFREY C. WAYNE
-------------------------------------- President and Director (Principal February 18, 2000
(Jeffrey C. Wayne) Executive Officer)
/s/ JAY B. LEWIS Group Vice President/Finance,
-------------------------------------- Treasurer and Director (Chief February 18, 2000
(Jay B. Lewis) Financial Officer)
/s/ AMY MICKLES
-------------------------------------- Controller (Chief Accounting February 18, 2000
(Amy Mickles) Officer)
*
-------------------------------------- Director February 18, 2000
(Ronald Hartenbaum)
*
-------------------------------------- Director February 18, 2000
(Yrma G. Rico)
-------------------------------------- Director
(Fred A. Vierra)
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ TIMOTHY J. BURKE
-------------------------------------- Director February 18, 2000
(Timothy J. Burke)
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ JAY B. LEWIS
--------------------------------------
(Jay B. Lewis)
ATTORNEY-IN-FACT
</TABLE>
II-8
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Jones International Networks, Ltd.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Jones International Networks, Ltd. and
subsidiaries as of December 31, 1998 and 1999, and for the years ended
December 31, 1997, 1998 and 1999 included in this Registration Statement, and
have issued our report thereon dated February 1, 2000. Our audits were made for
the purpose of forming an opinion on these financial statements taken as a
whole. The supplemental schedule included in this Registration Statement is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commissions rules and is not part of
the financial statements. The schedule has been subjected to the auditing
procedures applied in the audits of these financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to these financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Denver, Colorado
February 1, 2000
<PAGE>
SCHEDULE II
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE ADDITIONS DEDUCTIONS
AT CHARGED TO FOR BALANCE
BEGINNING COSTS AND ACCOUNTS AT END OF
CLASSIFICATIONS OF PERIOD EXPENSES WRITTEN-OFF PERIOD
- --------------- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Fiscal Year ended December 31, 1999:
Allowance for Doubtful Accounts................. $897,487 $750,580 $(455,249) $1,192,818
Fiscal Year ended December 31, 1998:
Allowance for Doubtful Accounts................. 157,405 858,765 (118,683) 897,487
Fiscal Year ended December 31, 1997:
Allowance for Doubtful Accounts................. 286,562 114,357 (243,514) 157,405
</TABLE>
<PAGE>
EXHIBIT INDEX
JONES INTERNATIONAL NETWORKS, LTD.
FORM S-1 REGISTRATION STATEMENT
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ---------------------
<C> <S>
4.5 Form of Class A Common Stock Certificate
10.5 Amendment No. 1 to Option Agreement dated February 10, 2000,
between
the Registrant and Jeffrey C. Wayne
10.6 Amendment No. 1 to Option Agreement dated February 10, 2000,
between
the Registrant and Jay B. Lewis
23.1 Consent of Arthur Andersen LLP
27 Financial Data Schedule
</TABLE>
<PAGE>
CLASS A CLASS A
COMMON STOCK COMMON STOCK
JONES INTERNATIONAL NETWORKS, LTD.
Incorporated Under the Laws of the State of Colorado
CUSIP 480210 10 3
SEE REVERSE FOR CERTAIN DEFINITIONS
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF CLASS A COMMON STOCK, $.01 PAR VALUE, OF
JONES INTERNATIONAL NETWORKS, LTD.
transferable on the books of the Corporation by the holder hereof in person,
or by duly authorized attorney, upon surrender of this certificate properly
endorsed. This certificate shall not be valid until countersigned by the
Transfer Agent and registered by the Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
DATED
SECRETARY CHAIRMAN OF THE BOARD
Countersigned and Registered:
AMERICAN SECURITIES TRANSFER & TRUST, INC.
P.O. Box 1596
Denver, Colorado 80201
Transfer Agent and Registrar
By
JONES INTERNATIONAL NETWORKS, LTD.
<PAGE>
The Corporation will furnish to any shareholder upon request and without
charge a full statement of the designations, preferences, limitations and
relative rights of the shares of each class of stock of the Corporation
authorized to be issued.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT Custodian
TEN ENT - as tenants by the entireties ------ -------
JT TEN - as joint tenants with right (Cust) (Minor)
of survivorship and not as under Uniform Gifts to Minors
tenants in common Act
-----------
(State)
Additional abbreviations may also be used though not in the above list.
For value received, _____ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
/ /
----------------------
- -----------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- ---------------------------------------------------------------------- shares
of the Class A Common Stock represented by the within Certificate, and do
hereby irrevocably constitute and appoint ___________________________________
Attorney to transfer the said stock on the books of the within named
Corporation with full power of substitution in the premises.
Dated
-------------------------
- ------------------------------
Signature
- ------------------------------
Signature
Signature Guaranteed By
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THIS CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. THE SIGNATURE(S) MUST BE
GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
AMENDMENT NO. 1 TO
OPTION AGREEMENT
This Amendment to Option Agreement ("Amendment") is made this 10th day of
February, 2000, by and between JONES INTERNATIONAL NETWORKS, LTD., a Colorado
corporation (the "Company") and JEFFREY C. WAYNE ("Optionee").
WHEREAS, the Company and Optionee have entered into that certain Option
Agreement dated as of October 12, 1999 (the "Agreement"), whereby an option to
purchase 100,000 shares of Class A Common Stock of the Company (the "Option")
was granted to Optionee. The Option reflects the 5-for-4 forward stock split
that was effected on January 28, 2000. Defined terms used herein shall have the
same meaning as set forth in the Agreement except as expressly provided for
herein.
NOW, THEREFORE, in accordance with the foregoing and the terms and
provisions hereof, the parties agree to amend the Agreement as follows:
Paragraph 4 of the Agreement shall be amended by striking out and
eliminating the existing text thereof in its entirety and substituting the
following in its place:
"4. DATES OF EXERCISE.
(a) The Option may be exercised by the Optionee to purchase the total
number of shares specified in Paragraph 1 at the dates and in the percentages
determined under the following schedule:
<TABLE>
<CAPTION>
Percentage of
Option Shares
Purchasable
Date of Exercise (Cumulative)
---------------- -------------
<S> <C>
First Anniversary of Date of Grant 25%
Second Anniversary of Date of Grant 25%
Third Anniversary of Date of Grant 25%
Fourth Anniversary of Date of Grant 25%
</TABLE>
<PAGE>
The Optionee need not exercise any part of the Option when it becomes
exercisable, but may accrue the percentage increments described above and
exercise them in any later period, prior to expiration of the Option.
(b) If the Company is sold, or all or substantially all of its assets are
sold, or if it is merged with or into another company and the Company, or a
company controlled by Mr. Glenn R. Jones, is not the buyer or surviving
corporation, any unvested portions of the Option shall vest at the closing of
said sale or merger, unless Optionee is retained in a job substantially the same
as the one he had prior to the transaction with at least the same level of
compensation; provided further that the new work location is no further than 30
miles from the current Englewood office location.
(c) If a sale or merger (as the case may be) that is described in 4(b)
above, is cancelled, revoked or terminated, then the purchase by the Optionee of
any shares of Class A Common Stock for which the Option would not have otherwise
been exercisable at the time of said event, but for the operation of
subparagraph 4(b), shall be rescinded. Upon such rescission, the shares and the
payment therefore shall be returned by the parties."
IN WITNESS WHEREOF, the parties have executed this Amendment as of the day
and year first above written.
JONES INTERNATIONAL NETWORKS, LTD.
By: /s/ Glenn R. Jones
----------------------------
Glenn R. Jones
Chairman
/s/ Jeffrey C. Wayne
---------------------------------
Jeffrey C. Wayne
42935
<PAGE>
AMENDMENT NO. 1 TO
OPTION AGREEMENT
This Amendment to Option Agreement ("Amendment") is made this 10th day of
February, 2000, by and between JONES INTERNATIONAL NETWORKS, LTD., a Colorado
corporation (the "Company") and JAY B. LEWIS ("Optionee").
WHEREAS, the Company and Optionee have entered into that certain Option
Agreement dated as of July 10, 1998 (the "Agreement"), whereby an option to
purchase 62,500 shares of Class A Common Stock of the Company (the "Option") was
granted to Optionee. The Option reflects the 5-for-4 forward stock split that
was effected on January 28, 2000. Defined terms used herein shall have the same
meaning as set forth in the Agreement except as expressly provided for herein.
NOW, THEREFORE, in accordance with the foregoing and the terms and
provisions hereof, the parties agree to amend the Agreement as follows:
Paragraph 4 of the Agreement shall be amended by striking out and
eliminating the existing text thereof in its entirety and substituting the
following in its place:
"4. DATES OF EXERCISE.
(a) The Option may be exercised by the Optionee to purchase the total
number of shares specified in Paragraph 1 at the dates and in the percentages
determined under the following schedule:
<TABLE>
<CAPTION>
Percentage of
Option Shares
Purchasable
Date of Exercise (Cumulative)
---------------- ------------
<S> <C>
First Anniversary of Date of Grant 25%
Second Anniversary of Date of Grant 25%
Third Anniversary of Date of Grant 25%
Fourth Anniversary of Date of Grant 25%
</TABLE>
<PAGE>
The Optionee need not exercise any part of the Option when it becomes
exercisable, but may accrue the percentage increments described above and
exercise them in any later period, prior to expiration of the Option.
(b) If the Company is sold, or all or substantially all of its assets are
sold, or if it is merged with or into another company and the Company, or a
company controlled by Mr. Glenn R. Jones, is not the buyer or surviving
corporation, any unvested portions of the Option shall vest at the closing of
said sale or merger, unless Optionee is retained in a job substantially the same
as the one he had prior to the transaction with at least the same level of
compensation; provided further that the new work location is no further than 30
miles from the current Englewood office location.
(c) If a sale or merger (as the case may be) that is described in 4(b)
above, is cancelled, revoked or terminated, then the purchase by the Optionee of
any shares of Class A Common Stock for which the Option would not have otherwise
been exercisable at the time of said event, but for the operation of
subparagraph 4(b), shall be rescinded. Upon such rescission, the shares and the
payment therefore shall be returned by the parties."
IN WITNESS WHEREOF, the parties have executed this Amendment as of the day
and year first above written.
JONES INTERNATIONAL NETWORKS, LTD.
By: /s/ Glenn R. Jones
------------------------------
Glenn R. Jones
Chairman
/s/ Jay B. Lewis
--------------------------------
Jay B. Lewis
42935
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of
this registration statement.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Denver, Colorado
February 16, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 13,270,784
<SECURITIES> 6,888,741
<RECEIVABLES> 15,241,826
<ALLOWANCES> 1,192,818
<INVENTORY> 0
<CURRENT-ASSETS> 36,042,594
<PP&E> 53,891,510
<DEPRECIATION> 30,932,406
<TOTAL-ASSETS> 128,461,545
<CURRENT-LIABILITIES> 22,796,482
<BONDS> 100,000,000
0
23,975,000
<COMMON> 75,105
<OTHER-SE> (21,348,170)
<TOTAL-LIABILITY-AND-EQUITY> 128,461,545
<SALES> 0
<TOTAL-REVENUES> 64,366,037
<CGS> 0
<TOTAL-COSTS> 62,321,505
<OTHER-EXPENSES> 73,821
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,750,540
<INCOME-PRETAX> (9,652,440)
<INCOME-TAX> (9,182,183)
<INCOME-CONTINUING> (10,062,831)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,062,831)
<EPS-BASIC> (1.32)
<EPS-DILUTED> 0
</TABLE>
