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FORM 10-K/A NO. 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED MAY 31, 1994
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _____ to _____
Commission File No. 0-8947
JONES SPACELINK, LTD.
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(Exact name of registrant as specified in its charter)
Colorado 84-0835095
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(State of Organization) (IRS Employer
Identification No.)
P.O. Box 3309, Englewood, Colorado 80155-3309
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (303) 792-9191
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Securities registered pursuant to Section 12(g) of the Act:
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Class A Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or l5(d) of the Securities Exchange Act of
l934 during the preceding l2 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Aggregate Market Value as of August 15, 1994 of voting stock held by
non-affiliates:
Class A Common Stock $12,805,855
Shares outstanding of each of the registrant's classes of common stock, as of
August 15, 1994:
Class A Common Stock: 77,665,200 shares
Class B Common Stock: 415,000 shares
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405) is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. --x--
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PART I
ITEM 1. BUSINESS
GENERAL
Jones Spacelink, Ltd. ("Spacelink") is a Colorado corporation,
organized in 1980. Spacelink is primarily engaged in the acquisition,
development and operation of cable television systems for itself and its
affiliated managed limited partnerships. See Item 1, The Cable Television
Industry and Spacelink's Cable Television Business. Spacelink, through
subsidiaries, also is engaged in the cable television system brokerage business,
the manufacture and marketing of data encryption products, contract
manufacturing services and the provision of audio programming to radio stations
and cable television systems in the United States.
Spacelink is a subsidiary of Jones International, Ltd.
("International"), which owns approximately 79% of Spacelink's Class A Common
Stock and 100% of Spacelink's Class B Common Stock. Mr. Glenn R. Jones,
Chairman of the Board and Chief Executive Officer of Spacelink, is the owner of
all of the outstanding stock of International and thus is deemed to be the
beneficial owner of all shares of Spacelink owned by International. Mr. Jones
also directly owns approximately 6% of Spacelink's Class A Common Stock. Mr.
Jones' direct and indirect stock ownership enables him to control the election
of a majority of Spacelink's Board of Directors and gives him voting power over
approximately 86% of votes to be cast by all shareholders on matters not
requiring a class vote.
One of Spacelink's consolidated subsidiaries, Jones Intercable, Inc.
("Intercable"), is also engaged in the cable television business. Intercable
has outstanding two classes of stock, Common Stock and Class A Common Stock.
Spacelink owns approximately 58% of Intercable's outstanding Common Stock (or
approximately 14% of all outstanding shares of Intercable taking into account
both classes of Intercable's common stock). Due to certain preferential voting
rights given to holders of Intercable's Common Stock, Spacelink's majority
ownership of Intercable's Common Stock enables it to elect 75% of Intercable's
Board of Directors. Intercable is a public company subject to the reporting
requirements of the Securities Exchange Act of 1934 and has filed its own Annual
Report on Form 10-K for its fiscal year ended May 31, 1994. Certain additional
information about, and exhibits related specifically to, Intercable can be found
in that report.
On May 31, 1994, Spacelink and Intercable agreed that, subject to the
approval of the shareholders of Spacelink and Intercable and certain other
closing conditions, Intercable will acquire from Spacelink substantially all of
the assets of Spacelink. See Proposed Acquisition of Spacelink by Intercable.
Spacelink, through its 80% owned subsidiary The Jones Group, Ltd.
("Jones Group"), also operates a cable television system brokerage firm.
Intercable owns the remaining 20% interest in Jones Group. The cable television
system brokerage business involves the brokering of the purchase and sale of
cable television systems, primarily as representative or agent for
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persons interested in buying and selling cable television systems. A system
broker generally maintains ongoing contacts with owners and prospective buyers
of cable television systems, conducts marketing and demographic analysis. The
brokerage business is dependent upon, among other things, the number of
acquisitions and sales of cable television systems in the marketplace and the
purchase prices therefor. The brokerage business is highly competitive, and
Jones Group primarily earns fees for the brokerage of cable systems purchased
or sold by Spacelink, Intercable and affiliated partnerships.
Spacelink, through its wholly owned subsidiary, Jones Futurex, Inc.
("Futurex"), is engaged in the manufacture and marketing of data encryption
products and contract manufacturing services. See Item 1, Business of Jones
Futurex, Inc.
Spacelink owns an 81% interest in Jones Galactic Radio, Inc.
("Galactic"), with the remaining 19% interest owned by Intercable. Galactic
owns Jones Satellite Networks, Inc., which is in the business of delivering
radio programming to approximately 825 unaffiliated radio stations throughout
the United States via satellite. This business generates revenues from the sale
of advertising time and the sale of formatted programming to the radio stations.
In addition, Spacelink, through Superaudio (a joint venture between Jones
Galactic Radio Partners, Inc., a subsidiary of Galactic, and Tempo Sound, Inc.,
a subsidiary of International Cablecasting Technologies, Inc., an unaffiliated
corporation), offers a nine-channel, 24-hour-a-day FM stereo audio service,
transmitting six popular audio formats including classical, jazz, pop and easy
listening, comedy and news and a reading service format for the visually
impaired to cable television system subscribers. As of May 31, 1994, Superaudio
provided audio programming to approximately 275 cable television systems serving
over six million subscribers. See Item 1, Businesses of Jones Galactic Radio,
Inc.
Spacelink owns an 81% interest in Jones Earth Segment, Inc. ("Earth
Segment). Earth Segment owns and operates a ground-to- satellite transmission
("uplink") facility, which currently uplinks programming originated by Mind
Extension University, Inc., Jones Infomercial Neworks, Inc., Jones Satellite
Networks, Inc. and Superaudio. Mr. Jones owns the remaining 19% interest.
In addition to its ownership interests in Intercable, Jones Group,
Futurex, Galactic and Earth Segment, Spacelink has other subsidiaries.
Spacelink's wholly owned active subsidiaries include Jones Spacelink Cable
Corporation, Jones Spacelink Funds, Inc. and Jones Spacelink of Hawaii, Inc.
Spacelink serves as the general partner of Jones Spacelink
Income/Growth Fund 1-A, Ltd., a managed public limited partnership; and Jones
Spacelink Cable Corporation serves as managing general partner of Jones Growth
Partners L.P. and is the sole general partner of Jones Growth Partners II L.P.,
both managed public limited partnerships. Jones Spacelink Funds, Inc. serves
as the general partner of four managed private partnerships: Spacelink Fund 3,
Ltd., Jones Spacelink Fund 4, Ltd., Jones Spacelink Fund 5, Ltd. and Jones
Spacelink Income Partners 87-1, L.P. All of these partnerships own cable
television systems that are operated by Spacelink and certain of its
affiliates. Jones Spacelink Income/Growth Fund 1-A, Ltd., Jones
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Growth Partners L.P. and Jones Growth Partners II L.P. are publicly held
entities, subject to the reporting requirements of the Securities Exchange Act
of 1934. Certain additional information about, and exhibits related
specifically to, these partnerships can be found in their reports filed under
such Act.
At May 31, 1994, Spacelink had approximately 610 employees, and
Intercable had approximately 2,850 employees. The executive offices of
Spacelink are located at 9697 East Mineral Avenue, Englewood, Colorado 80112,
and its telephone number is (303) 792-9191. Spacelink's Class A Common Stock is
quoted on the NASDAQ National Market System under the symbol SPLKA.
THE CABLE TELEVISION INDUSTRY
The cable television industry developed in the late 1940s and early
1950s in response to the needs of residents in predominantly rural and
mountainous areas of the country where the quality of television reception was
inadequate because of geographic location, surrounding terrain, man-made
structures or the curvature of the earth. During recent decades, cable
television systems have also been constructed in suburban areas and larger
cities where signal interference problems or limited availability of channels
created a desire for better reception and expanded service. Television
reception is substantially improved by cable television because of its
insulation from outside interference.
The cable television industry, which started as a technical solution
to the problem of delivering television signals to remote areas of rural
America, has now become an entertainment staple in a majority of American homes.
It is a dynamic, evolving and ever more complex industry. Cable penetration, or
the percentage of U.S. television households that subscribe to cable television,
now stands at approximately 63%. It is anticipated that national penetration of
cable television will increase in the 1990s as the value of cable television is
enhanced by additional entertainment programming choices, such as exclusive
coverage of sporting events, and educational programs.
A cable television system is a facility that receives satellite,
broadcast and FM radio signals by means of high antennas, a microwave relay
service or earth stations, amplifies the signals and distributes them by coaxial
and/or fiber-optic cable to the premises of its subscribers, who pay a fee for
the service. A cable television system may also originate its own programming
for distribution through the cable.
The physical plant of a cable television system consists of four
principal operating components. The first, known as the "headend" facility,
receives television and radio signals with microwave relay systems, special
antennae and satellite earth stations. The second component, the distribution
network, originating at the headend and extending throughout the system,
consists of coaxial and/or fiber-optic cables placed on poles or buried
underground, and associated electronic equipment. The third component of the
system is a "drop cable" that extends from the distribution network into the
subscriber's home and connects to the
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subscriber's television set. The fourth component, a converter, is the home
terminal device necessary to expand channel capacity to permit reception of
more than twelve channels.
SYSTEM OPERATIONS. Cable television system operations are generally
conducted pursuant to the terms of a franchise or similar license granted by a
state agency or by the local governing body for the area to be served.
Franchises generally are granted on a non-exclusive basis for a period of 5 to
15 years. Joint use or pole rental agreements are normally entered into with
electric and/or telephone utilities serving a cable television system's area
and annual rentals generally range from $2 to $10 for each pole used. These
rates may increase due to inflation in the future. See Item 1, Franchises,
Competition, and Regulation and Legislation.
PROGRAMMING. Cable television systems generally offer various types of
programming, which include basic service, tier service, premium services,
pay-per-view programs and packages including several of these services at
combined rates.
Basic cable television service usually consists of signals of all four
national television networks, various independent and educational television
stations (both VHF and UHF) and certain signals received from satellites and
also usually includes programs originated locally by the system, which may
consist of music, news, weather reports, stock market and financial information
and live or videotaped programs of a public service or entertainment nature.
FM radio signals are also frequently distributed to subscribers as part of the
basic service. The Cable Television Consumer Protection and Competition Act of
1992 (the "1992 Cable Act") contains new broadcast signal carriage
requirements, and the Federal Communications Commission ("FCC") has adopted
regulations implementing these statutory carriage requirements. These new
rules allow local commercial broadcast television stations to elect whether to
demand that a cable system carry its signal ("must carry") or to require the
cable system to negotiate with the station for "retransmission consent." If a
local commercial broadcast television station required the cable system to
negotiate with the station for retransmission consent, and the cable system was
unable to obtain retransmission consent, the cable system would not be
permitted to continue carriage of such station after October 6, 1993. No
broadcast stations carried on Spacelink-owned cable television systems that
elected retransmission consent withheld consent to the retransmission of their
signals. However, certain of these broadcast stations were carried after the
deadline pursuant to temporary extensions of retransmission consent authority
provided by the stations. Spacelink has concluded retransmission negotiations
with all of these stations without having to terminate the carriage of any
signal. See Item 1, Regulation and Legislation, Cable Television Consumer
Protection and Competition Act of 1992.
In most systems, tier services are also offered on an optional basis to
subscribers. Those channels generally include leading- edge programming or
high-cost sporting events such as Entertainment and Sports Programming Network
(ESPN), Cable News Network (CNN), Headline News and Turner Network Television
(TNT). Systems also offer a package that includes the basic service channels
and the tier services.
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Cable television systems also offer premium services to their
subscribers, which consist of feature films, sporting events and other special
features that are presented without commercial interruption. The cable
television operator buys premium programming from suppliers such as HBO,
Showtime, Cinemax or others at a cost based on the number of subscribers served
by the cable operator. Premium service programming usually is significantly
more expensive for the system operator than the basic service or tier service
programming, and consequently the system operator prices premium service
separately when sold to subscribers.
New cable television services have been developed and introduced over
time since the inception of the cable television industry. One relatively new
service currently being marketed by many cable television operators is
pay-per-view programming. Pay-per-view is a service that allows subscribers to
receive single programs, frequently consisting of motion pictures that have
recently completed their theatrical exhibitions and major sporting events, and
to pay for such service on a program-by-program basis. In order to offer
pay-per-view in an efficient manner, it is desirable to have addressable
converters in subscribers' homes. The availability of any of these services
and the ability to deliver these services is dependent upon many factors,
including the channel capacity of any cable television system, technical
feasibility and the like.
SYSTEM REVENUES. Monthly service fees for basic, tier and premium
services constitute the major source of revenue for cable television systems. A
subscriber to a cable television system generally pays an initial connection
charge and a fixed monthly fee for basic service. The amount of the monthly
service fee varies from one area to another, and historically has been a
function, in part, of the number of channels and services included in the
service package and the cost of such services to the cable television system
operator. In most instances, a separate monthly fee for each premium service
and certain other specific programming is charged to subscribers, with
discounts generally available to subscribers receiving multiple premium
services.
Cable television operators have been able to generate additional
revenue through the sale of commercial spots and channel space to advertisers.
As with other forms of advertising, the cable television operator receives a fee
from the advertisers that is based on the volume of advertising and the time of
the day at which it is broadcast. Advertising, as well as fees generated by
newer types of programming, such as home shopping and pay-per-view, represent
potential additional sources of revenue for cable television systems. These
services will not be regulated under the 1992 Cable Act, and therefore may be of
greater significance to cable operators in the future.
The ability of a cable operator to price its services based on these
factors was a function of the fact that as of January 1, 1987, rates charged by
cable television operators for basic service had been deregulated for
approximately 90% of all cable television systems, as a result of the passage
of the Cable Act of 1984. In October of 1992, however, Congress enacted the
1992 Cable Act. The 1992 Cable Act allows for a greater degree of regulation
of the cable television industry, including rate regulation. Under the 1992
Cable Act's definition of "effective competition," nearly all cable systems in
the United States, including those owned by
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Intercable, Spacelink and their managed partnerships, are again subject to rate
regulation with respect to basic cable services. In addition, the FCC is
permitted to regulate rates for non-basic service tiers other than premium
services, in response to complaints filed by franchising authorities and/or
cable subscribers, The rate regulations adopted by the FCC, which became
effective September 1, 1993, provide for a benchmark and price cap system that
will be used to regulate basic and non-basic service rates, and cost-of-service
showings will be available to cable operators to allow them to justify rates
above benchmark levels. Spacelink reduced service rates for basic and tier
services in its owned and managed systems as required effective September 1,
1993. Spacelink has been negatively impacted by this reduction. The reduction
resulted in a decrease in operating revenues in those systems which was
somewhat mitigated by increases in revenues from premium service, pay-per-view
and advertising sales. On February 22, 1994, the FCC adopted several rate
orders including an order which revised its benchmark regulatory scheme. The
FCC's new regulations will generally require rate reductions of 17% of
September 30, 1992 rates, absent a successful cost-of-service showing. The new
regulations became effective on May 15, 1994. Spacelink complied with the new
benchmark regulations and reduced rates in its cable television systems.
Certain of Spacelink's systems were negatively impacted by this new round of
rate reductions. See Item 1, Regulation and Legislation and Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operation.
INDUSTRY GROWTH. Based upon information obtained by Spacelink from
industry sources, Spacelink believes that the following table demonstrates the
growth of the cable television industry in the United States for the periods
indicated:
<TABLE>
<CAPTION>
Approximate Percentage
Approximate Number of TV Households With
End of Year of Basic Subscribers(1) Basic Cable Service(2)
- ----------- ----------------------- ----------------------
<S> <C> <C>
1982 29,340,570 35%
1983 34,113,790 41%
1984 37,290,870 44%
1985 39,872,250 46%
1986 42,237,140 48%
1987 44,970,880 51%
1988 48,636,520 54%
1989 52,564,470 57%
1990 54,871,330 59%
1991 55,786,390 61%
1992 57,211,600 62%
1993 58,834,440 63%
</TABLE>
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(1) The number of basic subscribers is computed by dividing the sum of
total individual-dwelling subscribers and total revenues from bulk-rate
subscribers by the standard basic service rate.
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(2) The percentage is computed by dividing the number of basic subscribers
by the number of TV households in the United States (94,135,104 TV
households in 1993).
BUSINESS OF JONES FUTUREX, INC.
Futurex is engaged in the business of manufacturing and marketing
information security products and providing contract manufacturing services.
Futurex has been in the information security business since 1981. Initially,
Futurex applied encryption techniques to satellite transmissions for the
protection of cable television signals and subsequently applied its expertise to
PC- based requirements.
The encryption business of Futurex developed in response to the
vulnerability of computer systems. In the data delivery business, the
information passed from point to point often needs to be protected from theft.
The encryption and authentication products developed by Futurex offer such
protection. Since 1981, Futurex has been developing, manufacturing and
marketing security products that provide encrypt/decrypt and message
authentication capabilities for remote-site personal computers, such as the IBM
PC and the IBM PS/2 and similar IBM compatible devices.
The encryption systems market is defined as the sale of products that
scramble data transmission prior to dispatch and decrypt the data back to its
plain text form at the receiving terminal. "Encryption" converts regular
computer data into meaningless data; "decryption" converts ciphered data back
into regular computer data. Cryptographic protection of such information as
funds transfer, securities transactions, health records, tax information,
geological studies, financial data and personnel records are being mandated by
security-conscious organizations. Growth of the industry is dependent upon the
public's perception of risk and awareness of computer and communications
security.
The computer security market is composed of many types of products of
varying degrees of complexity, technology and intricacy, including computer
security consultants, mainframe and PC software, physical locks to prevent
computer thefts, microwave shielding and personal ID tools and devices. Futurex
markets to the personal computer high security segment, which includes interbank
electronic transfers of funds and personal computers. Because electronic
banking and personal computers are the primary market and applications for
Futurex products, continued growth in PCs and electronic banking is necessary to
fuel growth in the existing Futurex security products.
Futurex computer hardware products use the digital encryption standard
("DES"), which is a publicly available set of algorithms developed by IBM to
encrypt or encode data and text. These DES algorithms are built into encryption
microchips and computer software programs and are also used in all Futurex
hardware products. The DES is used widely in both government and the private
sector to protect data transmitted between or stored in computers. The best way
to protect data against unauthorized modification and disclosure in an open
environment is to cryptographically protect it using standard techniques like
those specified in
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the DES. Among other uses, the DES algorithm has been adopted by the American
National Standards Institute and the American Bankers Association for
protecting transfers of funds and securities over communications lines, a
process known as electronic funds transfer.
The Futurex Encryptor(C) product line has various models of hardware
and software that encrypt, decrypt and authenticate data stored in and
communicated between microcomputers. The Encryptor(C) products with the DES
algorithms consist of printed circuit boards containing a key storage system
that can be inserted into the additional functionality "slots" of microcomputers
and related software.
A user of a microcomputer equipped with an Encryptor(C) board must have
access to a pre-programmed keyphrase in connection with an encryption procedure.
Once a file or message is encrypted, it can be decrypted only by a user having
knowledge of the keyphrase. The Encryptor(C) products are designed so that a
keyphrase is entered into a microcomputer, or a keyphrase changed without being
displayed so that the keyphrase cannot be inadvertently displayed to an
unauthorized user. When encrypted messages are communicated between
microcomputers or between microcomputers and mainframe computers, the keyphrase
must be conveyed to the intended recipient of the message independent of the
data in order to maintain the security of the communication link. The
Encryptor(C) products provide a sophisticated approach to security and keyphrase
protection.
In contrast to the password system used in typical software-only
security products, the Futurex Encryptor(C) uses a keyphrase kept in the
system, which offers certain product advantages. The keyphrase does not merely
allow entrance into the encryption process as with most software-only product
passwords, but the keyphrase also functions as an integral part of the
encryption process and formula. The hardware-based Encryptor(C) product is much
faster to use and more secure than software-only based products. For high-level
security, the keyphrase stored in the hardware cannot be read from the data
storage files or software programs. The Futurex Encryptor(C) products also have
a tamper-resistant feature to prevent reading the keyphrases from the hardware.
For example, the electronic components that store the keys are housed in a steel
enclosure that prevents an intruder from probing, reading the keys or removing
the board from the computer with keys intact. All of the Futurex Encryptor(C)
hardware boards require accompanying software. Each board is supported by a
software package that functions with the IBM personal computer and IBM
compatible computers, and is delivered to the customer by delivery of a
diskette.
In addition to encryption, some Futurex Encryptor(C) products generate
message authentication codes ("MACs"). MACs are unique codes that are appended
to the message being transmitted which insure the integrity of the message and
authenticate the originator. The receiver of the message generates the same MAC
and verifies the message has not been altered. The use of MACs does not involve
encryption of the data being transmitted but is simply a means of verifying the
integrity of messages or establishing the receipt of the communication without
alteration and authenticating the sender of the message. The MAC process uses
the DES algorithm to generate each MAC code, assuring the security of the MAC
code generating process. Futurex is one of several companies that have received
certification
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of MAC products by the U.S. Treasury Department. Several other companies,
including IBM, have developed MAC products similar to the MAC products designed
by Futurex.
Futurex spends funds on engineering to help provide assurance
against any major technical change that would tend to make Futurex encryption
technology obsolete. It is anticipated that changes in the encryption
algorithm standards would be built into a electronic chip component that
provides the encryption process for the Futurex computer products and that this
chip would be available from encryption chip manufacturers. In this dynamic
and highly technical market, changes in computers likely will also require
changes in Futurex products. Although it is difficult to predict future
requirements of new personal computer generations, it is expected that the
additional product requirements for new computers will have many basic
similarities to existing products.
The vast majority of Futurex Encryptor(C) boards and accompanying
software products have been sold to the Federal Reserve Districts for
encryption of electronic funds transfers between the twelve Federal Reserve
Districts and their member banks, and between the twelve Federal Reserve
Districts directly. The Federal Reserve System is the leader in using
encryption for banking applications and thus it tends to set unofficial
standards for the entire banking industry. Certain member banks of the Federal
Reserve System have purchased comparable encryption products from a competitor,
but Futurex believes its products and its experience have enabled it to
maintain its market share with the Federal Reserve System.
Futurex also has established a relationship with several large
commercial banks, although to date these banks have purchased only small
quantities of Futurex encryption boards and accompanying software products.
The Futurex encryption products have application to commercial banking
communication systems outside of the Federal Reserve banking system, but the
current financial condition of the banking industry and the lack of a perceived
need for security products have resulted in very slow implementation of
commercial bank encryption and MAC security systems. Market growth is
expected as more banks realize the need for the enhanced communication
techniques and accounting controls available with MAC, and this growth is
expected to evolve as banks install new computer systems or new control
systems. Dramatic growth in commercial banking applications of security
systems will likely not occur until substantial improvement has occurred in the
overall financial health and stability of the banking industry.
In March 1994, Futurex purchased from an unaffiliated party
substantially all of the tangible and intangible assets comprising the Excrypt
product lines for a net purchase price of $843,000. Futurex acquired all
rights to the Excrypt line of data security products for Automated Teller
Machines (ATMs) and Point-of-Sale (POS) networks. The Excrypt product line is
comprised of banking industry hardware which addresses Personal Identification
Number (PIN), security including PIN verification, translation and generation
for networks of ATMs. The Excrypt products complement the current data
encryption offerings which allow Futurex to provide banking clients with a full
array of security services for their retail operations.
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Futurex products also have numerous applications in non-banking
markets for secure communication links, such as transactions between offices,
between product users and suppliers, and to secure file data at a headquarters
or at a remote site. As industry moves towards electronic order processing and
payments, the demand for communications security products should increase.
On June 5, 1992, Futurex purchased from TRW Electronic Products Inc.
("EPI") and TRW Inc. ("TRW") substantially all of the assets, properties and
rights held by EPI or TRW that relate to the manufacture of facsimile
encryption devices ("fax Encryptors(C)40") for the commercial communications
security business. EPI and TRW also entered into a covenant not to compete.
Futurex believes that facsimile security is of increasing concern in the
commercial sector, especially as the risk of interception becomes more widely
acknowledged. As a result, the market for encryption and related security
devices could increase in future years.
When two fax Encryptors(C) are used in tandem, they authenticate
each other's identity before sending or receiving a communication, and encrypt
and then decode the communication sent. This process ensures that a facsimile
communication is sent only to the authorized destination. Moreover, the random
key used to encrypt the communication (which is transmitted to the receiving
machine automatically, thereby eliminating the need for manual delivery)
results in a communication that is effectively impossible to decode if
intercepted. In addition to the DES algorithm which is used for domestic fax
encryption applications, the fax Encryptor(C) uses a proprietary algorithm
developed by TRW and purchased by Futurex with the fax encryption business for
export applications. This algorithm has been approved for export by the
National Security Agency and also has application in Futurex encryption
products for export. The fax Encryptor(C) uses a patented key management
system which was purchased by Futurex from TRW for domestic and export sale.
Futurex markets its fax Encryptors(C) domestically and
internationally through a network of authorized dealers. Facsimile technology
is classified by generation or "Group." For example, the Group 1 faxes were
introduced in the late 1960s, and Group 3 was introduced in the mid-1970s. A
Group 4 standard has now been defined, and faxes with a dual Group 3/Group 4
capability are available commercially. Futurex's fax Encryptors(C) are
compatible with all Group 3 facsimile machines and use standard telephone lines
and modular jack connections. Futurex believes that the conversion to Group 4
machines will be slow because there is an installed base of over 5,000,000
Group 3 machines that are only a few years old. These machines are not likely
to be replaced until their working life ends. Group 4 is dependent upon a data
network being implemented by the telephone companies that is not widely
available. Futurex believes that the advent of Group 4 machines should not
impact its fax Encryptors(C) for a number of years and that its current product
development will permit it to be in position to serve Group 4 machines. These
products are sold using an in-house sales force and a worldwide distributor
network.
There are several other vendors that offer fax encryption units.
Two large competitors, AT&T and Motorola, offer a broad product range in the
secure telephone unit family, but the units are only compatible with faxes
having a special port (digital faxes). Several smaller
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companies offer fax Encryptors(C) with various features. Futurex believes its
products are competitive with all of these products.
The new Futurex Sentry product line includes link encryptors and
encrypting modems to protect sensitive data communicated over public lines.
The market for remote access solutions is rapidly expanding, with mobile
computer users requiring access to their home office systems. Security for
these remote access links has become a top priority. The portable Futurex
sentry products address this industry need by offering affordable encryption to
protect the sensitive information passed over the line and to act as an access
control barrier for dial-in lines.
To enhance its presence in the information security business,
Futurex has also leveraged its expertise in computers, encryption and systems
engineering to provide customized solutions. Futurex has successfully provided
solutions with software, firmware, and/or hardware development.
Utilizing some of the existing equipment and in-house technical
resources, Futurex made the decision to expand into the electronic
manufacturing services field. Original equipment manufacturers ("OEM") that
have electronic products or wish to develop a specialized version of an
existing product bring their plan to Futurex to be designed, tested and
assembled using both SMT (surface mount technology) and PTH (pin through hole)
technology. SMT is an assembly technology which allows electronic designers to
reduce circuit board size, allowing for further miniaturization of electronics
products. Using Futurex's engineers and facilities is often faster and more
cost effective than if the OEM company were to staff and equip its own
electronic development and manufacturing facility. Some of the OEM companies
served are in the computer peripheral, communications, medical equipment and
scientific instrumentation industries.
BUSINESSES OF JONES GALACTIC RADIO, INC.
Galactic is engaged in two separate but related businesses.
Galactic, through Jones Satellite Networks, Inc., is in the business of
delivering via satellite high quality formatted radio programming including
on-air disc jockey talent to approximately 825 unaffiliated radio stations
throughout the United States. Galactic originates the radio formats from
studios located in Englewood, Colorado and Washington, D.C. Galactic currently
provides six music formats and conducts research on each of its formats so that
the music mix will appeal to its intended market. In addition, Galactic also
provides a sports talk format. Satellite Music Network ("SMN") and Unistar are
the two primary competitors of Galactic, delivering programming via satellite
to a total of approximately 1,800 stations. SMN and Unistar revenues are
principally generated from sales of advertising time, whereas historically
Galactic's revenues were principally generated from the sale of programming to
radio stations. In January 1994, Galactic began selling and inserting
advertising on all its radio formats. In exchange for allowing Galactic to air
the advertising, the radio station affiliates are, in most cases, charged no
monthly fee, or a significantly reduced fee for the service. Prior to January
1994, these affiliate fees accounted for virtually all of Jones Satellite
Network's revenues.
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Galactic, through Superaudio, is also engaged in the business of
providing stereo audio programming to cable television system basic
subscribers. Superaudio is currently the only entity providing multi-channel
basic cable radio services. Superaudio offers a nine-channel, 24-hour-a-day FM
stereo audio service, transmitting six popular audio music formats including
classical, jazz, pop and easy listening, comedy and news. As of May 31, 1994,
Superaudio provided audio programming to approximately 300 cable television
systems serving approximately 6.2 million subscribers. Superaudio derives its
revenues from system affiliation fees paid by the cable systems, which
currently average 3c. per subscriber per month. Operating expenses
attributable to Superaudio include the costs associated with marketing and
selling the service, and the transponder lease fees paid an affiliate for the
satellite that provides the Superaudio programming to cable television systems.
Radio delivered via cable is still a nascent industry. For many
years, standard FM stations have been available as part of basic cable service
on some cable systems. In 1987, Tempo Sound and Galactic (see Item 1, General
for a description of Tempo Sound and Galactic) developed enhanced radio-type
services. Tempo Sound provided six music channels, while Galactic, in its
original form, offered four radio superstations in addition to six music
formats. Both Tempo Sound and Galactic were available free to cable television
subscribers, with the cable television system operator paying a fee per
subscriber. Galactic and Tempo Sound have now combined their operations,
providing a single basic cable radio service.
The growth of the business of Superaudio has been slowed by the
launching of premium or digital audio services which provide a higher quality
digital broadcast. Two companies currently offer premium cable audio services
that deliver CD-quality sound. General Instrument's Jerrold Division offers
digital cable radio (DCR), and International Cablecasting Technology, Inc., the
parent company of Tempo Sound, offers Digital Music Express (DMX). These
services offer cable subscribers choices of commercial- free music formats,
simulcasting of cable network audio, event music programming and over-the-air
radio stations.
Another potential hurdle to the growth of Superaudio is consumer
reluctance to the installation of coaxial cable inside the house to the stereo
receiver when it is not located in close proximity to the television set. In
addition, Superaudio does not currently have the localism that is normally
attributable to over-the-air radio programming, and the non-local image may
affect sales efforts. Of course, the availability of over-the-air radio also
diminishes the competitiveness of cable audio programming.
As a result of the above pressures on Superaudio's revenues,
management has aggressively reduced certain operating costs of Superaudio and
anticipates that even in the current environment of flat or slightly increasing
revenues, Superaudio will continue to be profitable and to position itself for
future growth.
SPACELINK'S CABLE TELEVISION BUSINESS
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Spacelink currently operates cable television systems for itself and
for private and public limited partnerships. Acquisitions by Spacelink for its
own account generally have been financed by borrowings from commercial banks.
Acquisitions by Spacelink's managed entities have been financed through
borrowings from commercial banks and the proceeds from private and public
offerings of equity interests. The last partnership formed by Spacelink was in
March 1991, and Spacelink is not currently offering any equity interests in
private or public limited partnerships. From time to time, Spacelink and its
managed entities also have sold certain of their cable television systems.
Within the past several years, and at an increasing pace recently,
the cable television industry has seen much change. With recent announcements
of alliances between cable industry companies and telephone, computer and
software companies, Spacelink believes that the nature of the cable television
business is changing from the traditional coaxial network delivering video
entertainment to a more sophisticated, digital platform environment where cable
systems could be capable of delivering the traditional programming as well as
other services, including data, telephone and expanded educational and
entertainment services on an interactive basis. As this convergence of various
technologies progresses, it likely will require cable television companies to
reevaluate their system architecture and to upgrade their cable plants if they
want to take advantage of the new opportunities for revenue and growth that are
expected to result. While Spacelink is, on an ongoing basis, evaluating its
position in this changing marketplace, it has entered into an agreement with
Intercable to sell substantially all of its assets to Intercable, although
there can be no assurance that this transaction will be consummated. See Item
1, Proposed Acquisition of Spacelink.
With respect to the systems owned by Spacelink and its subsidiaries,
Spacelink earns revenues through monthly service rates and related charges to
cable television subscribers. Spacelink's subscribers have the option to
choose a limited basic service consisting generally of broadcast stations and a
few cable networks ("basic" service) or a package of services consisting of
basic service and tier services ("basic plus" service). The tier service
generally consists of most of the cable networks, including ESPN, USA Network,
CNN, Discovery, Lifetime and others. See Item 1, The Cable Television
Industry, Programming.
The monthly service rates include fees for basic service, tier
service and premium services. As of September 1, 1993, as a result of the
requirements of the 1992 Cable Act, Spacelink's Systems' rate structures for
cable programming services and equipment were revised. These rate structures
were further revised in February 1994, as a result of the FCC's adoption of an
order revising its benchmark regulatory scheme. See Item 1, Regulation and
Legislation. At May 31, 1994, monthly basic service rates ranged from $6.31 to
$11.60 for residential subscribers, monthly basic and tier ("basic plus")
service rates ranged from $20.30 to $21.97 for residential subscribers, and
monthly premium services ranged from $3.95 to $14.95 per premium service.
Charges for additional outlets were eliminated, and charges for remote controls
and converters were "unbundled" from the programming service rates. In
addition, Spacelink earns revenues from pay-per-view programs. Pay-per-view
programs, which usually are either unique sporting events or recently released
movies, are available on many of Spacelink's cable television systems.
Subscribers are permitted to choose individual
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movies for a set fee ranging from $1.95 to $4.95 per movie and individual
special events for a set fee ranging from $5.95 to $39.95 per event. Related
charges may include a nonrecurring installation fee that ranges from $7.90 to
$35.00; however, from time to time Spacelink has followed the common industry
practice of reducing the installation fee during promotional periods.
Commercial subscribers such as hotels, motels and hospitals are charged a
nonrecurring connection fee that usually covers the cost of installation.
Except under the terms of certain contracts with commercial subscribers and
residential apartment and condominium complexes, subscribers are free to
discontinue the service at any time without penalty, and most terminations
occur because a subscriber moves to another home or to another city. For the
fiscal year ended May 31, 1994, of the total fees received by Spacelink-owned
systems, basic and tier service fees accounted for approximately 68% of total
revenues, premium service fees accounted for approximately 17% of total
revenues and the remaining 15% of total revenues came from pay-per-view,
advertising, equipment rental, installation and program guide revenues.
Spacelink is dependent upon continuous monthly service charges to provide for
maintenance and replacement of plant and equipment, current operating expenses
and other costs.
As the general partner of the managed limited partnerships,
Spacelink earns management fees which are generally 5% of the gross revenues of
the partnership, not including revenues from the sale of cable television
systems or franchises. To the extent that partnership revenues decrease as a
result of the implementation of rate regulation under the 1992 Cable Act,
Spacelink's management fees will be reduced accordingly. See Item 7,
Management's Discussion and Analysis of Financial Conditions and Results of
Operations. Spacelink also receives reimbursement from the partnerships for
certain allocated overhead and administrative expenses incurred by Spacelink in
its management activities. From time to time, Spacelink has made advances to
certain of its managed limited partnerships and has deferred collection of
management fees and expense reimbursements owed by certain of its managed
limited partnerships to allow for expansion of a cable television system or
other cash needs of such a partnership. Upon dissolution of a
Spacelink-managed partnership or the sale or refinancing of its cable
television systems, Spacelink is generally entitled to receive a percentage
ranging from 15% to 40%, depending upon the particular partnership, of the net
remaining assets of such partnership, after payment of partnership debts and
after investors have received an amount equal to their capital contributions
plus, in most cases, a stated preferential return on their investment.
Pursuant to the terms of the various limited partnership agreements, Spacelink
has full operational control of the management and day-to-day business of the
partnerships.
Spacelink historically has found that the cash flow of a particular
cable television system and the long-term value of that system can be increased
as a result of (i) the addition of new subscribers through increased market
penetration, (ii) the building of extensions to reach new potential subscribers
in the franchise area, (iii) the addition of new programming services or
products, and (iv) periodic rate adjustments. Increases in subscribers usually
result from specific marketing efforts undertaken by a cable system operator
within the community, which may include telephone solicitation, particular
program promotions, direct mailings, increased advertising or other means. A
cable operator also can build extensions to systems, which
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increase the number of homes passed by the cable system and the number of
potential subscribers, and thereby increase potential revenue from additional
subscriber fees. The building of extensions to cable television systems
usually occurs due to the development within the system's franchise area of a
new housing area adjacent to areas then served by the system or the
availability of a franchise for an area adjacent to the current franchise area.
In addition, increased revenues may be generated from the offering of
additional services to subscribers. New cable services have been developed and
introduced since the inception of the cable television industry, and new cable
services are expected to continue to develop. These could include new premium
services offering particular kinds of movies, sporting events or the like.
Finally, additional revenue and long-term value may be realized by periodic
adjustments in subscriber rates. No assurance can be given that Spacelink will
be able to increase the cash flow of any particular cable television system or
the value of that system by any of the methods described above, and the rate
regulations under the 1992 Cable Act limit the amount of any rate increases
with respect to regulated services Spacelink will be able to implement in the
future.
Increases in cash flow, as well as increases in long-term value, of
a cable television system can also be realized through cost efficiencies.
Because Intercable manages numerous cable television systems for itself and
affiliated entities, Spacelink's cable television systems, through their
association with Intercable, generally benefit from a reduction in certain
costs associated with operations. Spacelink, through its association with
Intercable, is able to purchase programming services and cable system equipment
at lower prices than would otherwise be available due to the volume of business
that Spacelink and its affiliates, including Intercable, conduct with such
suppliers and vendors. In addition, Spacelink and Intercable have developed
over time certain centralized operating and marketing systems that are made
available to the cable television systems owned by Spacelink, its managed
partnerships and other affiliates. While Spacelink will seek additional cost
efficiencies in its cable television properties, no assurance can be given that
it will be able to do so, or that any increase in cash flow or value will
result therefrom.
Spacelink's cable television business consists of providing cable
television services to a large number of customers, the loss of any one or more
of which would have no material effect on Spacelink's business. Each of the
cable television systems owned or operated by Spacelink has had some
subscribers who later terminated the service. Terminations occur primarily
because people move to another home or to another city. In other cases, people
terminate on a seasonal basis or because they no longer can afford or are
dissatisfied with the service. The amount of past due accounts in systems
owned or operated by Spacelink is not significant. Spacelink's policy with
regard to these accounts is basically one of disconnecting service before a
past due account becomes material.
Spacelink's cable television business does not depend to any
material extent on the availability of raw materials, it carries no significant
amounts of inventory and it has no material backlog of customer orders.
Spacelink has engaged in research and development activities relating to the
provision of new cable television services but the amount of funds expended for
such research and development has never been material. Compliance with
Federal, state and local provisions that have been enacted or adopted
regulating the discharge
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of materials into the environment or otherwise relating to the protection of
the environment has had no material effect upon the capital expenditures,
earnings or competitive position of Spacelink.
At this time, Spacelink does not intend to actively seek cable
television systems for its own account. See Item 1, Proposed Acquisition of
Spacelink.
CABLE TELEVISION SYSTEMS OWNED BY SPACELINK AND BY SPACELINK'S MANAGED
PARTNERSHIPS
At May 31, 1994, Spacelink managed 15 cable television systems, 11
of which, operating in 8 states, were owned by Spacelink-managed limited
partnerships, and 4 of which, operating in 4 states, were owned by Spacelink.
The Spacelink-owned cable television systems are located in Colorado, Florida,
Hawaii and Wisconsin. Spacelink's current managed partnerships own cable
television systems located in California, Illinois, Indiana, Nevada, New
Mexico, Ohio, Texas and Wisconsin. The last such partnership was formed in
March 1991.
At May 31, 1994, Spacelink-owned systems served approximately 52,000
basic subscribers and 41,000 premium channel subscribers, and the systems held
by the Spacelink-managed partnerships served approximately 109,000 basic
subscribers and 75,000 pay units. (Each premium service subscribed to equals
one pay unit.) Due primarily to the number of subscribers in systems owned or
managed by Intercable, according to industry sources, Spacelink and Intercable
together constitute one of the nation's largest multiple cable television
system operators.
PROPOSED ACQUISITION OF SPACELINK BY INTERCABLE
On May 31, 1994, Spacelink and Intercable entered into an Exchange
Agreement and Plan of Reorganization and Liquidation (the "Spacelink
Agreement") providing that, subject to receiving the approval of the
shareholders of Spacelink and Intercable, Intercable will acquire from
Spacelink substantially all of the assets of Spacelink (other than the
2,859,240 shares of Intercable's Common Stock presently held by Spacelink).
Intercable has agreed to assume all the liabilities of Spacelink, as set forth
in the Spacelink Agreement, other than liabilities with respect to dissenting
shareholders. In exchange, Intercable will issue 4,100,000 shares of
Intercable's Class A Stock, which shares shall be registered under the
Securities Act of 1933. Pursuant to the Spacelink Agreement, Spacelink will
liquidate and distribute its assets, including all of the shares of
Intercable's Common Stock and Class A Common Stock held by Spacelink, to its
shareholders. International has agreed that a portion of Intercable's Class A
Common Stock that would have been received by it upon the dissolution of
Spacelink will instead be reallocated to the other shareholders of Spacelink
(the "Minority Shareholders"), excluding International, Glenn R. Jones and
their subsidiaries (the "Reallocation"). After giving effect to the
distribution made upon the liquidation of Spacelink and the Reallocation, and
assuming the exercise of all outstanding Spacelink stock options, each
non-dissenting Minority Shareholder will receive .09629 shares of Intercable's
Class A Common Stock and .03567 shares of Intercable's Common Stock for each
share of Spacelink held. Mr. Jones, International and the subsidiaries of
International will receive, on a per-share basis, fewer
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shares of Intercable's Class A Common Stock than the Minority Shareholders
because of the Reallocation. The obligations of Spacelink and Intercable under
the Spacelink Agreement are subject to the satisfaction or waiver by each such
party, at or prior to closing, of several conditions. There is no assurance
that this transaction will be consummated.
INFORMATION ABOUT INTERCABLE'S BUSINESS ACTIVITIES
Although Spacelink effectively controls Intercable through its stock
ownership of Intercable, certain loan agreements of Intercable currently limit
the amount of funds it may loan or advances to affiliates including Spacelink
in the form of cash dividends or loans. As a result of these limitations, the
net assets of Intercable are not available to Spacelink to fund its operating
or capital resource needs. These limitations do not impair the ability of
Spacelink to pledge its equity holdings in Intercable; however, any pledge by
Spacelink of its equity holdings in Intercable is subject to the express
approval of Spacelink's and Intercable's Chief Executive Officer, Glenn R.
Jones, or his personal representative. For certain additional information
about Intercable's business activities, see Intercable's Annual Report on Form
10-K for its fiscal year ended May 31, 1994, which has been filed with the
Securities and Exchange Commission.
ACQUISITION OF CABLE TELEVISION SYSTEM BY INTERCABLE
On January 28, 1993, Intercable entered into an agreement with
American Cable TV Investors 2 ("ACT 2") (the "North Augusta Agreement") to
acquire the cable television systems serving North Augusta, South Carolina and
surrounding areas (the "North Augusta System") for $28,500,000, subject to
normal closing adjustments. The North Augusta System is contiguous to the
Augusta, Georgia cable system managed by Intercable on behalf of oneof its
partnerships. As a result of the renegotiation of the North Augusta Agreement,
the purchase price was reduced to $27,200,000, subject to normal closing
adjustments. The transaction closed on December 15, 1993. Intercable paid
Jones Group $680,000 for brokerage services related to this acquisition. See
Item 13, Certain Transactions.
SALE OF CABLE TELEVISION SYSTEM BY INTERCABLE
On January 7, 1994, Intercable entered into an agreement with
Bresnan Communications Company ("Bresnan") to sell its Gaston County, North
Carolina cable television system (the "Gaston System") to Bresnan for
$36,500,000, subject to normal closing adjustments. Bresnan and Time Warner
Cable, a division of Time Warner Entertainment, L.P. ("TWC"), have agreed to a
like-kind exchange of assets whereby TWC would acquire the Gaston System from
Bresnan and Bresnan would acquire from TWC the assets of certain cable
television systems owned by TWC. On July 25, 1994, Intercable sold its Gaston
System for the purchase price less normal closing adjustments. Intercable paid
Jones Group a commission of 2 1/2% of the purchase price, or $912,500, in
connection with brokering the sale of the Gaston System. Proceeds to
Intercable from the sale of the Gaston System were used to pay amounts
outstanding on Intercable's credit facility.
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PROPOSED ACQUISITION BY BELL CANADA INTERNATIONAL INC.
OF SHARES OF INTERCABLE'S CLASS A COMMON STOCK
On December 2, 1993, Intercable and Bell Canada International Inc.
("BCI") entered into a letter of intent providing for an investment by BCI in
Intercable in exchange for an approximate 30% equity interest in Intercable.
From January 1994 through May 1994, Intercable and BCI negotiated definitive
terms of their agreement.
On March 25, 1994, BCI acquired from Intercable, pursuant to an
effective registration statement filed pursuant to the Securities Act of 1933,
as amended, 2,500,000 shares of Intercable's Class A Common Stock at $22.00 a
share. This investment resulted in BCI owning approximately 13% of the issued
and outstanding shares of Intercable, and Intercable received cash proceeds of
$55,000,000. The proceeds to Intercable were used to repay outstanding
indebtedness under Intercable's revolving credit facility.
On May 31, 1994, BCI and Intercable entered into a Stock Purchase
Agreement (the "BCI Agreement") providing for the sale by Intercable to BCI of
7,500,000 shares of Intercable's Class A Common Stock at $27.50 a share, which,
when added to BCI's existing shareholdings in Intercable, will result in BCI
owning 30% of the issued and outstanding shares of Intercable. The closing of
the BCI Agreement will take place no later than ten business days after
satisfaction of the conditions described in the BCI Agreement or December 31,
1994 (the "Closing"). At the Closing, BCI will deliver to Intercable the
purchase price for the shares of Intercable's Class A Common Stock being
purchased and Intercable will execute and deliver certain related agreements as
provided by the BCI Agreement.
BCI entered into the BCI Agreement with Intercable as part of a
larger transaction whereby BCI would ultimately be able to gain control of
Intercable through the acquisition of sufficient shares of Intercable's Common
Stock to control Intercable's Board of Directors. Spacelink currently owns
approximately 58% of Intercable's Common Stock, and International owns all of
Spacelink's Class B Common Stock and approximately 79% of Spacelink's Class A
Common Stock. Glenn R. Jones owns all of the outstanding shares of
International.
If the Spacelink Agreement is consummated, of which there can be no
assurance, International and Mr. Jones will grant to BCI an option (the
"Control Option") to purchase all of the shares of Intercable's Common Stock
held, directly or indirectly, by them, in consideration of the payment by BCI
to International and Mr. Jones of a non-refundable deposit of $19.00 for each
share. The deposit is not deducted from the exercise price to be paid by BCI
upon exercise of the Control Option. The Control Option may be exercised
during any of the following periods: (i) the period commencing on the day Mr.
Jones becomes incapacitated or dies; (ii) the period commencing on the day that
Mr. Jones resigns as Chairman and Chief Executive Officer of Intercable; (iii)
the period commencing on the day that BCI receives a written notice from
International and Mr. Jones requesting that BCI exercise the Control Option;
(iv) the period commencing on the seventh anniversary and ending on the eighth
anniversary of the closing of the BCI Agreement; and (v) the period commencing
on the day of a Jones bankruptcy event and ending 30 days after written notice
thereof.
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In the event that the Spacelink Agreement is not consummated, there
will be no liquidation of Spacelink and no distribution of any shares of
Intercable stock to the Spacelink shareholders. Instead, Spacelink will grant
to BCI an option on the 2,859,240 shares of Intercable's Common Stock owned by
Spacelink pursuant to the terms of an option agreement (the "BCI-Spacelink
Option Agreement") in consideration of the payment by BCI to Spacelink of a
non-refundable deposit of $19.00 a share. The option deposit will not offset
amounts payable by BCI upon the exercise of the option. The option may be
exercised during the same periods provided in the foregoing paragraph. If the
BCI-Spacelink Option Agreement becomes effective, Spacelink and BCI will enter
into a shareholders agreement providing, among other things, that Spacelink
must refer to Intercable certain of its investment opportunities, including all
opportunities to invest in cable television systems, wireline communications
services in certain markets and broadband multi-media services in certain
markets.
Upon the closing of the BCI Agreement, BCI, International, Glenn R.
Jones and Intercable will enter into the following related agreements: (i) a
Shareholders Agreement providing for certain arrangements concerning the
operation and governance of Intercable, certain rights of BCI to consent to
corporate and business transactions, purchases of Intercable's capital stock in
the open market, transfer restrictions, tag along rights and third party offers
and provisions relating to the option granted by International and Mr. Jones to
BCI; (ii) a Supply and Services Agreement pursuant to which BCI will provide
Intercable with access to the expert advice of personnel from BCI and its
affiliates for the equivalent of three man-years on an annual basis in
consideration of the payment by Intercable of $2 million to BCI; (iii) a
Secondment Agreement pursuant to which BCI will provide up to ten people to
Intercable for a period which is the same as that of the Supply and Services
Agreement. These persons, who must be approved by Intercable, will all be
personnel of BCI or its affiliates who have experience in certain specific
areas of operations and other aspects of BCI's business.
INTERNATIONAL INVESTMENTS BY INTERCABLE AND ITS AFFILIATES
United Kingdom. On July 22, 1994, Intercable and certain of its
subsidiaries transferred all of their interests in their cable/telephony
properties in the United Kingdom to Bell Cablemedia plc, a public limited
company incorporated under the laws of England and Wales ("Bell Cablemedia") in
exchange for 6,035,648 American Depositary Shares ("ADSs") representing
30,178,240 Ordinary Shares of Bell Cablemedia. At the closing, Intercable
transferred its equity interests in the companies that owned the Leeds, South
Hertfordshire, Norwich, Peterborough, Broadland and Fenland franchises and
Intercable's equity interest in and shareholder loans to ELT Acquisition
Company Limited to Bell Cablemedia. Also on July 22, 1994, Jones Global Group,
Inc., a corporation owed 38% by Intercable and 62% by International, a
corporation that through its indirect shareholdings owns a controlling interest
in certain of Jones Global Group Inc.'s subsidiaries (Jones Global Group, Inc.
and its subsidiaries are herein collectively referred to as "Global Group"),
also transferred all of their interests in their cable/telephony properties in
the United Kingdom to Bell Cablemedia in exchange for 3,663,584 ADSs
representing 18,317,920 Ordinary Shares of Bell Cablemedia, of which 1,100,000
ADSs representing 5,500,000 Ordinary Shares were sold on July 22, 1994 in
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connection with Bell Cablemedia's initial public offering. At the closing,
Global Group transferred its equity interests in the companies that owned the
Leeds and Aylesbury-Chiltern franchises, its general partner interest in Jones
United Kingdom Fund, Ltd. and the assets of its United Kingdom management
subsidiary to Bell Cablemedia. As a result of these transactions, Intercable
and Global Group no longer own any direct interest in cable/telephony
properties in the United Kingdom; Intercable and Global Group do, however, own
indirect interests in cable/telephony properties in the United Kingdom through
their respective 9.7% and 4.2% ownership of Bell Cablemedia. Messrs. Glenn R.
Jones, a director and officer of Intercable and Global Group, and Patrick J.
Lombardi, a director of Intercable and a director and officer of Global Group,
have become members of the board of directors of Bell Cablemedia.
Prior to the closing of these transactions, Bell Cablemedia was
indirectly owned 80% by BCI and 20% by Cable & Wireless plc ("C&W").
On June 10, 1994, Bell Cablemedia filed a registration statement
with the Securities and Exchange Commission (the "SEC") in connection with the
offerings in the United States and internationally of 12,000,000 ADSs by Bell
Cablemedia and 1,100,000 ADSs by Global Group (the "ADS Offerings"). Bell
Cablemedia also filed a registration statement with the SEC in connection with
the offering of 11.95% Senior Discount Notes due 2004 (the "Notes Offering").
The ADS Offerings registration statement and the Notes Offering registration
statement were both declared effective by the SEC on July 15, 1994. The ADS
Offerings, which closed on July 22, 1994, provided net cash proceeds of
approximately $184.4 million to Bell Cablemedia, and the Notes Offering, which
also closed on July 22, 1994, provided net cash proceeds of approximately
$263.1 million to Bell Cablemedia.
The ADS offerings provided net cash proceeds of $17,547,888 to
Global Group. The proceeds from the sale of the ADSs by Global Group are
intended to allow it to satisfy expected U.S. and U.K. tax liabilities in
connection with the transactions.
The ADSs received by Intercable are "restricted securities" within
the meaning of Rule 144 promulgated under the Securities Act of 1933 (the
"Securities Act"), and Intercable will not be able to sell its ADSs unless an
exemption from registration under the Securities Act is available or unless its
ADSs are registered by a subsequent registration statement. Prior to Bell
Cablemedia's initial public offering, there was no public market for its
Ordinary Shares (in the form of ADSs or otherwise). The ADSs are now quoted on
the NASDAQ National Market System under the symbol "BCMPY." Bell Cablemedia,
BCI, C&W, Intercable and Global Group have agreed that, for a period of 180
days after July 15, 1994 (the date of the definitive prospectuses used in Bell
Cablemedia's ADS Offerings), they will not sell or otherwise dispose of any
ADSs or Ordinary Shares of Bell Cablemedia (except for those ADSs received by
Global Group that were sold as part of the ADS Offerings) without the prior
written consent of the lead U.S. underwriters of the ADS Offerings. Pursuant
to the terms of a principal shareholders registration rights agreement, Bell
Cablemedia has granted certain demand and piggy-back registration rights to
BCI, C&W, Intercable and Global Group. With the exception of demand
registration rights relating to the ADSs issued to C&W, Intercable and Global
Group on July 22, 1994 in connection with the above-described transactions,
which become
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exercisable approximately three years from July 15, 1994, the registration
rights granted by the principal shareholders registration rights agreement
become exercisable 180 days following July 15, 1994. In all cases, however,
the registration rights are subject to certain limitations, including the
provision that demand registration rights may not be exercised within 90 days
after the effective date of Bell Cablemedia's most recent registration
statement. In addition, pursuant to the terms of a separate registration
rights agreement, Bell Cablemedia has agreed to file promptly with the SEC a
registration statement covering all of the ADSs received by Intercable and
Global Group in connection with Bell Cablemedia's acquisition of the United
Kingdom holdings of Intercable and Global Group (except for those ADSs received
by Global Group that were sold as part of the ADS Offerings) and to keep such
registration statement effective for a period of approximately three years from
the closings of the ADS Offerings. Although they have no current plans to sell
any of their ADSs, Intercable and Global Group anticipate that they will be
able to sell their ADSs pursuant to this registration statement 180 days
following July 15, 1994.
After giving effect to Bell Cablemedia's acquisition of the United
Kingdom holdings of Intercable and Global Group and the closings of the ADS
Offerings on July 22, 1994, BCI indirectly owns approximately 42.2%, C&W
indirectly owns approximately 12.8%, Intercable owns approximately 9.7% and
Global Group owns approximately 4.2% of the issued and outstanding shares of
Bell Cablemedia.
Intercable and Global Group paid advisory fees of L.414,854
($632,569) and L.251,812 ($383,963) to Jones Financial Group, Ltd., a
subsidiary of International, for its services to Intercable in connection with
the aforementioned transactions.
BCI, C&W, Intercable and Global Group (Intercable and Global Group
are herein collectively referred to as the "Jones Entities") have entered into
a shareholders agreement relating to their holdings in Bell Cablemedia. The
shareholders agreement provides in part that each of BCI, C&W and the Jones
Entities is entitled (a) to nominate directors for election to Bell
Cablemedia's board of directors according to its shareholdings in Bell
Cablemedia; (b) to have one observer present at meetings of Bell Cablemedia's
board of directors; (c) unless the board of directors determines otherwise, to
be represented on committees of the board of directors and on the boards of
directors of subsidiaries of Bell Cablemedia; and (d) to use its votes at
general meetings in support of the election of such nominees as directors of
Bell Cablemedia.
The shareholders agreement also requires each of BCI, C&W and the
Jones Entities, respectively, to offer any Ordinary Shares or ADSs of Bell
Cablemedia which it wishes to sell to the others before selling to any third
party. In addition, before purchasing Ordinary Shares or ADSs of Bell
Cablemedia from any third party, each of BCI, C&W and the Jones Entities,
respectively, are obliged to offer to purchase such Ordinary Shares or ADSs
from the others.
Except as otherwise provided by the shareholders agreement, BCI, C&W
and the Jones Entities have preemptive rights to purchase newly issued Ordinary
Shares or ADSs issued by Bell Cablemedia for cash.
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Intercable has entered into a technical assistance agreement with
Bell Cablemedia under which Intercable (or one of its affiliates) has agreed to
provide to Bell Cablemedia consulting services, research and development
resources, management services and technical assistance in relation to
telecommunications services for the provider's direct costs plus an additional
amount of 15% of such costs. The technical assistance agreement is terminable
by either party at any time on three months' notice following the date upon
which Intercable no longer has the right to nominate a director for election to
the board of directors of Bell Cablemedia pursuant to the shareholders
agreement.
Bell Cablemedia has agreed to indemnify Intercable, Global Group and
their affiliates in respect of all costs, expenses, losses, liabilities and
damages suffered or incurred by them resulting from any untrue statement or
omission contained in any registration statement or prospectus relating to the
ADS Offerings or the Note Offerings other than costs, expenses, losses,
liabilities and damages resulting from any information in such documents
relating to Intercable, Global Group or their affiliates provided to Bell
Cablemedia by Intercable, Global Group or their affiliates. Intercable, Global
Group and their affiliates have agreed to indemnify Bell Cablemedia in respect
of all costs, expenses, losses, liabilities and damages suffered or incurred by
Bell Cablemedia resulting from any untrue statement or omission contained in
any registration statement or prospectus relating to the ADS Offerings or the
Note Offerings relating to Intercable, Global Group or their affiliates
provided to Bell Cablemedia by Intercable, Global Group or their affiliates.
Pursuant to a cross-indemnity agreement, Bell Cablemedia has agreed
to indemnify Intercable for any amounts that Intercable may be called upon to
pay in connection with certain performance bonds guaranteed by Intercable as a
shareholder of ELT Acquisition Company Limited.
Spain. Jones Spanish Holdings, Inc. ("Spanish Holdings"), an
affiliate owned 38% by Intercable, and 62% by International, has explored cable
television system acquisition, development and operation opportunities in
Spain. During the fiscal year ended May 31, 1994, Intercable advanced
approximately $769,300, and as of May 31, 1994, Intercable's aggregate advances
in these activities in Spain was approximately $7,684,300. In June 1994, Jones
Spanish Holdings, Inc. agreed to transfer all of its interests in its
cable/telephony properties in Spain to Bell Cablemedia in exchange for 190,148
ADSs representing 950,740 Ordinary Shares of Bell Cablemedia. The closing of
this transaction is expected to occur in September 1994. The ADSs to be
received by Spanish Holdings will be restricted securities within the meaning
of Rule 144 under the Securities Act, and Spanish Holdings will agree not to
sell or otherwise dispose of any ADSs or Ordinary Shares of Bell Cablemedia for
a period of 180 days after July 15, 1994. Spanish Holdings will be entitled to
sell the ADSs received in connection with this transaction pursuant to the
terms of the registration rights agreements discussed above..
INVESTMENT BY INTERCABLE IN MIND EXTENSION UNIVERSITY, INC.
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During fiscal 1992 and 1993, Intercable invested $10,000,000 in Mind
Extension University, Inc. ("ME/U"), an affiliated company that provides
educational programming through affiliated and unaffiliated cable television
systems, for 25% of the stock of ME/U, which also received certain advertising
avails and administrative and marketing considerations from Intercable. The
number of shares of Class A Common Stock of ME/U issued to Intercable was based
on the average of two separate independent appraisals of ME/U. In fiscal 1991,
Spacelink invested $3,135,000 in ME/U and received that number of issued and
outstanding shares of common stock of ME/U then constituting 19% of such
shares. In May 1993 and December 1993, the Board of Directors of Intercable
approved a $10,000,000 advance and a $5,000,000 advance to ME/U on an as-needed
basis. Of these advances, one-half will be converted into shares of Class A
Common Stock of ME/U at a price per share equal to the value of such shares as
established by the next equity investment in ME/U by an unaffiliated party.
Any amount not converted into equity will earn interest at Intercable's
weighted average cost of borrowing plus two percent. On May 3, 1994, the Board
of Directors of Intercable approved an additional $5,000,000 advance to ME/U on
an as needed basis. Any amount outstanding will earn interest at Intercable's
weighted average cost of borrowing plus two percent. As of May 31, 1994,
$758,300 of the $5,000,000 had been advanced, for an aggregate total
indebtedness of ME/U to Intercable of $15,758,300, in addition to Intercable's
$10,000,000 equity investment.
CABLE TELEVISION FRANCHISES
The cable television systems owned or managed by Spacelink are
constructed and operated under fixed-term franchises or other types of
operating authorities (referred to collectively herein as "franchises") that
are generally non-exclusive and are granted by state and/or local governmental
authorities. Spacelink's franchises require that franchise fees ranging from
3% to 5% of gross revenues of the cable system be paid to the governmental
authority that granted the franchise, that certain channels be dedicated to
municipal use, that municipal facilities, hospitals and schools be provided
cable service free of charge and that any new cable plant be substantially
constructed within specific periods. During the next three to five years, the
renewal process must commence for a significant number of the franchises for
cable television systems owned or managed by Spacelink and its affiliates. To
date, Spacelink has not experienced significant problems in renewing its
franchises, nor does it currently expect to encounter significant problems in
renewing its franchises in the future. As part of the renewal process,
Spacelink may in some instances be required to provide additional services or
incur capital expenditures for the system involved. See Item 2, Cable
Television Systems Owned by Spacelink.
Cable television franchises are not exclusive, so that more than one
cable television system may be built in the same area (known as an
"overbuild"), with potential loss of revenues to the operator of the original
cable television system. Spacelink has experienced overbuilds in connection
with certain systems that it has owned or managed for limited partnerships, and
currently there is an overbuilder in Spacelink's Panama City Beach cable
television system which has been able to attract a significant number of
subscribers from Spacelink's system. Constructing and developing a cable
television system is a capital intensive process and,
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because most cable television systems provide essentially the same programming,
it is often difficult for a new cable system operator to create a marketing
edge over the existing system. Generally, an overbuilder also would be
required to obtain franchises from the local governmental authorities, obtain
programming contracts from entertainment programmers and, in most cases, would
have to build a complete cable system, including headends, trunk lines and
drops to individual subscribers homes, throughout the franchise areas. The
overbuilder in the Panama City Beach cable television system currently provides
significant competition. See Item 1, Competition for Subscribers in
Spacelink's Systems.
COMPETITION
COMPETITION IN THE INDUSTRY. Cable television systems currently
experience competition from several sources, but two technologies, Multichannel
Multipoint Distribution Service ("MMDS") systems, commonly called wireless
cable systems, and Direct Broadcast Satellite ("DBS") systems, which distribute
programming to home satellite dishes, pose the greatest potential threat to the
cable television industry. MMDS systems will likely focus on providing service
to residents of rural areas that are not served by cable television systems,
but providers of programming via MMDS systems will generally have the potential
to compete directly with cable television systems in urban areas as well, and
in some areas of the country, MMDS systems are now in direct competition with
cable television systems. To date, Spacelink has not lost a significant number
of subscribers, nor a significant amount of revenue, to MMDS operators
competing with Spacelink's cable television systems. However, given the fact
that these are emerging services, the effect of competition from these
technologies on the overall profitability of the cable television industry is
difficult to predict at this time. While the MMDS industry is less capital
intensive than the cable television industry, and it is therefore more
practical to construct MMDS systems in areas of lower subscriber penetration,
the previous unavailability of frequency spectrum, programming services and the
regulatory delays encountered by MMDS systems in obtaining licenses have
delayed the growth of the MMDS industry. Although the channel capacity of MMDS
and DBS systems will be limited, it is expected that developments in
compression technology will enable them to provide a sufficient number of
channels that, while not comparable to the number of channels that will be
provided by cable television systems using fiber-optic and compression
technology, may nevertheless be attractive to subscribers.
An emerging technology, Local Multipoint Distribution Service
("LMDS"), could also pose a significant threat to the cable television
industry, if and when it becomes established. LMDS, sometimes referred to as
cellular television, could have the capability of delivering approximately 50
channels, or if two systems were combined 100 channels, of video programming to
a subscriber's home, which capacity could be increased by using video
compression technology. The potential impact, however, of LMDS is difficult to
assess due to the newness of the technology and the absence of any current
fully operational LMDS systems.
In addition to competing with one another, cable television systems
compete with broadcast television, which consists of television signals that
the viewer is able to receive directly on his television using his antenna
("off-air"). The extent of such competition is
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dependent in part upon the quality and quantity of signals available by such
antenna reception as compared to the services provided by the available cable
systems. Accordingly, it has generally been less difficult to obtain higher
penetration rates in areas where there is signal interference from surrounding
mountains or where signals available off-air are limited, than in metropolitan
areas where higher quality off-air signals are often available without the aid
of cable television systems.
Cable television systems also compete with translator and low power
television stations. Translators receive broadcast signals and rebroadcast
them on different frequencies at low power pursuant to an FCC license. Low
power television stations increase the number of television signals in many
areas of the country, and provide off-air television programs, either pay or
advertiser-supported, to limited local areas. Cable television systems are
also in competition, in various degrees, with other communications and
entertainment media including motion pictures and home video cassette
recorders, and are dependent upon the continued popularity of television
itself. The construction of more powerful transmission facilities near a cable
television system or an increase in the number of television signals in such an
area also could have an adverse effect on revenues.
Additional competition is present from private cable television
systems known as Master Antenna Television (MATV) and Satellite Master Antenna
Television (SMATV) serving multi-unit dwellings such as condominiums, apartment
complexes, and private residential communities. These private cable systems
may enter into exclusive agreements with apartment owners, condominium
associations, and homeowners associations, which may preclude operators of
franchised systems from serving residents of such private complexes. In 1991,
the FCC made available a microwave service to SMATV systems which will
facilitate the ability of private cable television systems to distribute video
entertainment programming among several SMATV systems within a local area.
Private cable systems that do not cross public rights of way or interconnect
separately owned and managed buildings are free from the federal regulatory
requirements imposed on franchised cable television operators. A number of
states have enacted laws to afford operators of franchised cable television
systems access to multi-unit dwellings, although some of these statutes have
been successfully challenged in the courts.
Although programming is currently available to the owners of
backyard earth stations through conventional and medium-powered satellites, DBS
operators propose to deliver premium channel services and specialized
programming to subscribers by high-powered DBS satellites on a wide-scale
basis, and two companies have begun operations in 1994. Subscribers will be
able to receive DBS services virtually anywhere in the United States with a
rooftop or wall-mounted antenna.
In some instances, DBS systems may serve as a complement to cable
television operations by enabling cable television operators to offer
additional channels of programming without the construction of additional cable
plant. Cable television systems may also serve as marketing agents for DBS
operators. DBS companies intend to use video compression technology to
increase the channel capacity of their satellite systems to provide a package
of
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movies, broadcast stations and other program services which are competitive
with those of cable television systems. Current video compression technology
has the capability of providing more than 100 channels of service over a single
high-powered DBS satellite. Cable operators will also use video compression
technology to increase the channel capacity of their systems. DBS companies
may be able to offer new and highly specialized services using a national base
of subscribers, but they may not be able to provide services that are of local
interest to their subscribers nor maintain a local presence, which are
advantages in developing and maintaining the interest of subscribers. Though
DBS systems will sell national advertising, they will not be able to offer the
local advertising availabilities that cable television systems can offer. The
FCC has initiated a new interactive television service which will permit
non-video transmission of information between an individual's home and
entertainment and information service providers. This service will provide an
alternative means for DBS systems and other video programming distributors,
including television stations, to initiate new interactive television services.
This service may also be used as well by the cable television industry.
Although the cable industry does not currently provide two-way interactive
service from its subscribers' homes to cable television offices, such services
can be provided in the future. The ability to obtain access to programming and
the availability of reception equipment at reasonable prices, among other
factors, will determine whether DBS systems will be able to offer services that
are competitive with those offered by cable television.
Several manufacturers of television sets have developed a new
technology called high-definition television ("HDTV"). This new system will
permit television viewers to receive movie-quality pictures and sound. It is
anticipated that VCRs and television sets capable of displaying HDTV formats
will be on the market in the United States in the future. The proposed DBS
systems will have the capacity to transmit HDTV programming to a new generation
of home satellite antennas. HDTV programming will also be transmitted by fiber
optic cables and coaxial cable television systems, with some modifications. At
the present state of development, HDTV transmissions cannot be made by
conventional television stations, and therefore HDTV services will introduce a
new delivery medium, although some manufacturers may develop an interim HDTV
system which can be viewed over current television receivers. Certain multiple
system cable operators, including Spacelink, and telephone companies, have
implemented fiber optic transmission technology in some service areas and are
studying the implementation of HDTV technology. After the FCC chooses a
standard HDTV format, it can be expected the cable industry will develop the
ability to transmit HDTV signals as HDTV technology becomes commercially
feasible and as television broadcast stations and satellite services offer HDTV
services. Spacelink cannot otherwise predict when or to what extent HDTV
services will impact Spacelink's or its managed partnerships' systems or those
of its competitors.
Although Spacelink has not yet encountered competition from a
telephone company entering into the cable television business, Spacelink's
cable television systems could potentially face competition from telephone
companies doing so.
Federal law generally prohibits telephone companies from owning or
operating cable television systems within their own service areas, although the
FCC has recommended
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modification of these restrictions and legislation is pending in Congress that
would permit telephone companies in certain instances to provide video
programming through separate subsidiaries. See Item 1, Regulation and
Legislation, Ownership and Market Structure for a description of the potential
participation of the telephone industry in the delivery of cable television
services. Spacelink cannot predict at this time to what extent, if any,
current restrictions will be modified to permit telephone companies to provide
cable television services within their own service areas in competition with
cable television systems. Participation of telephone companies as direct
competitors or in competition for the acquisition of cable television systems
could affect the profitability and market value of Spacelink's systems. If a
telephone company were to become a direct competitor of Spacelink in an area
served by a Spacelink system, Spacelink could be at a competitive disadvantage
because of the relative financial strength of a telephone company compared to
Spacelink. Such competition could also result in cable television systems
providing the same types of services now provided by the telephone industry.
The FCC has established a new wireless telecommunications service
known as Personal Communications Service ("PCS"). It is envisioned that PCS
would provide portable non-vehicular mobile communications services similar to
that available from cellular telephone companies, but at a lower cost. PCS
would be delivered by placing numerous microcells in a particular area to be
covered, accessible to both residential and business customers. Because of the
need to link the many microcells necessary to deliver this service
economically, many parties are investigating integration of PCS with cable
television operations. Several cable television multiple systems operators
including Spacelink, among other parties, hold or have requested experimental
licenses from the FCC to test PCS technology.
POTENTIAL COMPETITION WITH INTERCABLE. Intercable also is engaged
in the ownership and operation of cable television systems for itself and for
managed limited partnerships that it and its subsidiaries have sponsored in the
past. Intercable has entered into the Spacelink Agreement with Spacelink
providing for the purchase by Intercable of substantially all of the assets of
Spacelink. If the conditions to closing of the Spacelink Agreement are met or
waived, Spacelink will be liquidated and dissolved. If, however, the Spacelink
Agreement is not consummated, Spacelink will not be liquidated, but will enter
into an option agreement with BCI. The option agreement provides, among other
matters, that Spacelink will be required to refer to Intercable certain of its
investment opportunities, including all opportunities to invest in cable
television systems, wireline communications services in certain markets and
broadband multi-media services in certain markets. See Item 1, Proposed
Acquisition of Spacelink and Proposed Acquisition by Bell Canada International
Inc. of Shares of Intercable's Class A Common Stock. In either event, it is
not anticipated that Spacelink will provide any significant competition with
Intercable.
COMPETITION FOR SUBSCRIBERS IN SPACELINK'S SYSTEMS Spacelink owns
the cable television systems serving Empire, Georgetown and Idaho Springs,
Colorado (the "Clear Creek System"), Panama City Beach, Florida (the "Panama
City Beach System") and Kenosha, Wisconsin (the "Kenosha System"). Jones
Spacelink of Hawaii, Inc., a subsidiary of Spacelink, owns the cable television
system serving subscribers in Hilo, Hawaii (the "Hilo System"). The
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Clear Creek System, the Panama City Beach System, the Kenosha System and the
Hilo System may hereinafter collectively be referred to as the "Systems."
Following is a summary of the cable television, DBS MMDS, SMATV and
TVRO operators in Spacelink's Systems:
Clear Creek System: There are no MMDS or SMATV operators or TVRO
operations in the Clear Creek System.
Hilo System: There are no MMDS operators in the Hilo System at this
time. There is one SMATV operator servicing one hotel and providing
little competition. There are a few private satellite operators
selling home dishes in the Hilo System service area, but they provide
minimal competition.
Kenosha System: There are no MMDS operators in the Kenosha System.
There is one SMATV operator in a 800-unit apartment complex and no TVRO
operations or marketing in the service area. DBS dealers in the
Kenosha System area are anticipated to commence business in the fall of
1994.
Panama City Beach System: There are no MMDS operators in the Panama
City Beach System. There are four SMATV operators serving two
condominium complexes and two motels and provide no competition and six
TVRO dealers, only one of which operates in the System's service area
and provides minimal competition. There is an overbuilder in the
Panama City Beach System service area which provides significant
competition to this system.
The Systems also face competition from numerous video cassette rental
outlets in the Systems' service areas and from the large number of first run
movie theaters in their service areas. Spacelink believes the preponderance of
VCR ownership in the Systems' service areas may be a positive rather than a
negative factor because households that have VCRs are attracted to non-
commercial programming delivered by the Systems such as movies and sporting
events on cable television that they can tape at their convenience.
REGULATION AND LEGISLATION
The cable television industry is regulated in varying degrees by the
Federal Communications Commission ("FCC"), some state governments and most
local governments. In addition, the Copyright Act of 1976 imposed copyright
liability on all cable television systems. Present FCC regulations include
requirements with respect to registration of operation, record keeping,
technical standards, and periodic reporting. Several states have assumed
regulatory jurisdiction of the cable television industry, and it is anticipated
that other states will do so in the future. Cable television operations are
subject to local regulation insofar as systems operate under franchises granted
by local authorities. The following is a summary of Federal laws and
regulations materially affecting the growth of the cable television industry,
and a description of state and local laws with which the cable industry must
comply.
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CABLE COMMUNICATIONS POLICY ACT OF 1984. On December 29, 1984, the
Cable Communications Policy Act of 1984 (the "1984 Cable Act"), which amended
the Communications Act of 1934, took effect (as so amended, the "Communications
Act"). This legislation imposed uniform national regulations on cable
television systems and franchising authorities. Among other things, the
legislation regulated the provision of cable television service pursuant to a
franchise, specified those circumstances under which a cable television
operator may obtain modification of its franchise, established criteria under
which a franchise shall be renewed and established maximum fees payable by
cable television operators to franchising authorities.
The law prescribes a standard of privacy protection for cable
subscribers, and imposes equal employment opportunity requirements on the cable
television industry. It restricts the amount of fees paid by the cable
television operator to the franchising authority to a maximum of 5% of gross
revenues during the term of the franchise. Franchising authorities are granted
authority to establish requirements in new franchises and renewal of existing
franchises for the designation and use of public educational and governmental
access channels. Franchising authorities are empowered to establish
requirements for cable-related facilities and equipment, which may include
requirements that relate to channel capacity, system configuration and other
facility or equipment requirements related to the establishment and operation
of a cable television system.
CABLE TELEVISION CONSUMER PROTECTION AND COMPETITION ACT OF 1992. On
October 5, 1992, Congress enacted the Cable Television Consumer Protection and
Competition Act of 1992 (the "1992 Cable Act"), which became effective on
December 4, 1992 and which amended the 1984 Cable Act. This legislation has
effected significant changes to the legislative and regulatory environment in
which the cable television industry operates. The 1992 Cable Act generally
allows for a greater degree of regulation of the cable television industry.
Pursuant to the FCC's definition of effective competition adopted following
enactment of the 1984 Cable Act, and under the FCC's rules and regulations,
substantially all of Spacelink's franchises were rate deregulated in the mid
1980s. Under the 1992 Cable Act's definition of effective competition, nearly
all cable systems in the United States, including those owned and managed by
Spacelink, are again subject to rate regulation of basic cable services. In
addition, the 1992 Cable Act allows the FCC to regulate rates for non-basic
service tiers other than premium services in response to complaints filed by
franchising authorities and/or cable subscribers.
The 1992 Cable Act also (i) eliminates the 5% annual basic rate
increase currently allowed by the 1984 Cable Act without local approval; (ii)
requires the FCC to adopt regulations to establish, on the basis of actual
costs, the prices for installation of cable service, remote controls, converter
boxes and additional outlets; (iii) requires cable to permit subscribers to
purchase video programming offered by the operator on a per-channel or a
per-program basis without the necessity of subscribing to any tier of service,
other than the basic service, unless the system's lack of addressable converter
boxes or other technological limitations does not permit it to do so; (iv)
allows the FCC to impose restrictions on the
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retiering and rearrangement of cable services under certain circumstances; and
(v) permits the FCC and the franchising authorities more latitude in
controlling rates and rejecting rate increase requests.
On April 1, 1993, the FCC adopted regulations governing the regulation
of rates for basic and non-basic services. The regulations became effective on
September 1, 1993. The FCC adopted a benchmark regulatory scheme for the
regulation of basic and cable programming service rates. However, rather than
relying on the benchmark scheme, operators may submit cost-of-service showings
to justify rates above the applicable benchmarks. A cable operator that can
demonstrate through a cost-of-service showing that rates for basic and
non-basic services are justified will not be required to reduce rates or be
regulated under the benchmark and price cap system. Franchising authorities
may not elect cost-of-service as their primary form of rate regulation but must
apply the FCC benchmark system. Except for those operators that filed
cost-of-service showings, cable operators whose rates are subject to regulation
and that were above September 30, 1992 benchmark levels generally reduced those
rates to the benchmark level or by 10%, whichever is less, adjusted forward for
inflation. Operators who have not adjusted rates pursuant to the FCC's
regulations, or whose cost-of-service showings fail to justify current rates,
could be subject to refund liability and interest.
Spacelink reduced service rates for basic and tier services in its
owned and managed systems as required effective September 1, 1993. Spacelink
has been negatively impacted by this reduction. The reduction resulted in a
decrease in operating revenues in those systems which was somewhat mitigated by
increases in revenues from premium service, pay-per-view and advertising sales.
On February 22, 1994, the FCC adopted several rate orders including an
order which revised its benchmark regulatory scheme. The FCC's new regulations
will generally require rate reductions absent a successful cost-of-service
showing of 17% of September 30, 1992 rates (the "Full Reduction Rate"),
adjusted for inflation, channel modifications, equipment costs and increases in
programming costs. However, rate reductions will be held in abeyance for those
systems whose rates are already below the revised benchmark levels, or pending
the completion of cost studies by the FCC of various types of representative
systems, of those systems that would be required to be reduced below the
revised benchmark levels in order to achieve the Full Reduction Rate. Further
rate reductions to the Full Reduction Rate would be required if validated by
the cost studies. The new regulations became effective on May 15, 1994, but
operators could elect to defer a rate reduction prior to July 14, 1994, absent
a change in their rates or restructuring of service offerings between May 15
and July 14. Spacelink complied with the FCC's revised regulations and reduced
rates as required. Spacelink was negatively impacted by this new round of rate
reductions.
On February 22, 1994, the FCC also adopted interim cost-of-service
regulations. Rate reductions will not be required where it is demonstrated
that rates for basic and other regulated programming services are justified and
reasonable using cost-of-service standards. The FCC established an interim
industry-wide 11.25% rate of return, and requested comments on
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whether this standard and other interim cost-of-service standards should be
made permanent. The FCC also established a presumption that acquisition costs
above a system's book value should be excluded from the rate base, but the FCC
will consider individual showings to rebut this presumption. The need for
special rate relief will also be considered by the FCC if an operator
demonstrates that the rates set by a cost-of-service proceeding would
constitute confiscation of investment, and that, absent a higher rate, the
return necessary to operate and to attract investment could not be maintained.
The FCC will establish a uniform system of accounts for operators that elect
cost-of-service rate regulation, and the FCC has adopted affiliate transaction
regulations. The FCC also proposed adopting a productivity factor to be offset
against future inflation increases to be applied regardless of which form of
regulation is used, cost of service or benchmark regulation. After a rate has
been set pursuant to a cost-of-service showing, rate increases for regulated
services will be indexed for inflation, and operators will also be permitted to
increase rates in response to increases in costs beyond their control, such as
taxes and increased programming costs.
Among other issues addressed by the FCC in its February rate orders
was the treatment of packages of a la carte channels. The FCC in its
regulations adopted April 1, 1993, exempted from rate regulation the price of
packages of a la carte channels upon the fulfillment of certain conditions. On
February 22, 1994, the FCC adopted rules which revised its treatment of a la
carte programming offerings by applying various criteria to determine whether a
cable operator's a la carte packages should be subject to rate regulation.
Local franchising authorities have the authority under the FCC rules, subject
to review by the FCC, to determine whether an a la carte offering should be
subject to rate regulation. If an operator is found to have bundled channels
in an a la carte package to evade rate regulation, the FCC may impose
forfeitures or other sanctions.
The 1992 Cable Act encourages competition with existing cable systems
by allowing municipalities, which are otherwise legally qualified, to own and
operate their own cable systems without having to obtain a franchise; prevents
franchising authorities from granting exclusive franchises; or unreasonably
refusing to award additional franchises covering an existing cable system's
service area. The 1992 Cable Act also makes several procedural changes to the
process under which a cable operator seeks to enforce renewal rights which
could make it easier in some cases for a franchising authority to deny renewal.
The 1992 Cable Act prohibits the common ownership of cable systems and
co-located MMDS or SMATV systems, and absent certain exceptions, the sale or
transfer of ownership of a cable system within 36 months after its acquisition
or initial construction. The 1992 Cable Act also precludes video programmers
affiliated with cable companies from favoring cable operators over competitors
and requires such programmers to sell their programs to other multichannel
video distributors. This provision may limit the ability of cable program
suppliers to offer exclusive programming arrangements with cable companies and
could affect the volume discounts that program suppliers currently offer to
Spacelink as a multiple system operator.
Under the 1984 Cable Act cable operators with thirty-six or more
activated channels are required to designate channel capacity for commercial
use by persons unaffiliated with the operator. The 1984 Cable Act provided
operators with substantial latitude in setting rates for
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commercially leased access channels, but, the 1992 Cable Act requires leased
access rates to be set according to a formula determined by the FCC. It is
possible that such leased access services will result in competition to
services offered over cable systems.
The 1992 Cable Act contains new broadcast signal carriage
requirements, and the FCC has adopted regulations implementing the statutory
requirements. These new rules require a local commercial station to elect
whether to require a cable system to carry its signal, or to require the cable
system to negotiate with the station for "retransmission consent" rights. A
cable system is generally required to devote up to one-third of its activated
channel capacity for the mandatory carriage of local commercial television
stations, and non-commercial television stations are also given mandatory
carriage rights, although such stations are not given the option to negotiate
retransmission consent for the carriage of their signals by cable systems.
Additionally, cable systems are required to obtain retransmission consent for
all "distant" commercial television stations (except for commercial
satellite-delivered independent "superstations"), commercial radio stations and
certain low power television stations carried by such systems. In some cases,
the must-carry rules could require cable systems to carry local television
signals in lieu of more popular programming and could increase the costs of
carrying certain broadcast stations. The retransmission consent rules could
result in cable operators not being permitted to carry certain broadcast
stations after October 6, 1993.
On April 8, 1993 a special three-judge federal district court for the
District of Columbia issued a decision upholding the constitutional validity of
the must-carry signal carriage requirements. This decision was vacated by the
United States Supreme Court on June 27, 1994 and remanded to the district court
for further development of a factual record. The Court's majority determined
that the must-carry rules were content neutral, but that it was not yet proven
that the rules were needed to preserve the economic health of the broadcasting
industry. In the interim, the must-carry rules will remain in place during the
pendency of the proceedings in district court, absent a stay of the rules. In
1993, a federal district court for the District of Columbia upheld provisions
of the 1992 Cable Act concerning rate regulation, retransmission consent,
restrictions on vertically integrated cable television operators and
programmers, mandatory carriage of programming on commercial leased channels
and public, educational and governmental access channels and the exemption for
municipalities from civil damage liability arising out of local regulation of
cable services. The 1992 Cable Act's provisions providing for multiple
ownership limits for cable operators and advance notice of free previews for
certain programming services has been found unconstitutional, and these
decisions have been appealed. In November 1993, the United States Court of
Appeals for the District of Columbia held that the FCC's regulations
implemented pursuant to Section 10 of the 1992 Cable Act which permit cable
operators to ban indecent programming on public, educational or governmental
access channels or leased access channels, unconstitutional, but the court has
agreed to reconsider its decision. All of these decisions construing
provisions of the 1992 Cable Act and the FCC's implementing regulations have
been or are expected to be appealed.
The 1992 Cable Act also allows for a greater degree of regulation of
the cable industry with respect to, among other things: (i) programming access
and exclusivity arrangements; (ii)
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access to cable channels by unaffiliated programming services; (iii) leased
access terms and conditions; (iv) horizontal and vertical ownership of cable
systems; (v) franchise renewals; (vi) technical standards; (vii) subscriber
privacy; (viii) consumer protection issues; (ix) cable equipment compatibility;
and (x) obscene and indecent programming. The 1992 Cable Act required the FCC
to establish national customer service standards and the FCC recently adopted
regulations governing office hours, telephone availability, installations,
outages, service calls, and billing and refund policies. Additionally, state
or municipal authorities may enact laws or regulations which impose stricter or
different customer service standards than those set by the FCC.
The responsibility for franchising or other authorization of cable
television systems is left to state and local authorities. There are, however,
several provisions in the Cable Act of 1984 that govern the terms and
conditions under which cable television systems provide service. These include
uniform standards and policies that are applicable to cable television
operators seeking renewal of a cable television franchise. The procedures
established provide for a formal renewal process should the franchising
authority and the cable television operator decline to use an informal
procedure. A franchising authority unable to make a preliminary determination
to renew a franchise is required to hold a hearing in which the operator has
the right to participate. In the event a determination is made not to renew
the franchise at the conclusion of the hearing, the franchising authority must
provide the operator with a written decision stating the specific reasons for
non-renewal. Generally, the franchising authority can finally decide not to
renew a franchise only if it finds that the cable operator has not
substantially complied with the material terms of the present franchise, has
not provided reasonable service in light of the community's needs, does not
have the financial, legal or technical ability to provide the services being
proposed for the future, or has not presented a reasonable proposal for future
service.
OWNERSHIP AND MARKET STRUCTURE. The FCC rules and federal law
generally prohibit the direct or indirect common ownership, operation, control
or interest in a cable television system, on the one hand, and a local
television broadcast station whose television signal (predicted grade B contour
as defined under FCC regulations) reaches any portion of the community served
by the cable television system, on the other hand. For purposes of the
cross-ownership rules, "control" of licensee companies is attributed to all 5%
or greater stockholders, except for mutual funds, banks and insurance companies
which may own less than 10% without attribution of control. The FCC has
requested comment as to whether to raise the attribution criteria from 5% to
10% and for passive investors from 10% to 20%, and whether it should exempt
from attribution certain widely held limited partnership interests where each
individual interest represents an insignificant percentage of total partnership
equity. The FCC recently lifted its ban on the cross-ownership of cable
television systems by broadcast networks. The FCC revised its regulations to
permit broadcast networks to acquire cable television systems serving up to 10%
of the homes passed in the nation, and up to 50% of the homes passed in a local
market. The local limit would not apply in cases where the network-owned cable
system competes with another cable operator. Spacelink has no direct or
indirect ownership, operation, control or interest in a television broadcast
station, or a telephone company, and it is thus presently unaffected by the
cross-ownership rules.
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The Communications Act and FCC regulations generally prohibit the
common operation of a cable television system and a telephone company within
the same service area. Until recently, control was attributed to stockholders
who directly or indirectly own 1% or more of outstanding voting stock and for
mutual funds, 3% of the outstanding voting stock. The FCC's recently revised
regulations will now permit telephone companies to own up to a 5% interest in
cable television systems in their own service areas.
The cross-ownership prohibitions would preclude investors from holding
shares in Spacelink if they simultaneously served as officers or directors of,
or held an attributable ownership interest in, these other businesses, and
would also preclude Spacelink from acquiring a cable television system where
Spacelink's officers or directors served as officers or directors of, or held
an attributable ownership in, these other businesses which were located within
the same area as the cable system which was to be acquired.
In order to encourage and develop a competitive video services
marketplace, the FCC recently conducted a wide-ranging inquiry into the
participation of the telephone industry in the delivery of cable television
services. The FCC concluded that telephone companies should be permitted to
provide a video dialtone service that would be similar to the ordinary
telephone dialtone and would be able to provide access for consumers to a wide
variety of services now provided by cable television systems, as well as new
services (including videophone and advanced telecommunications services) which
may develop. Under the FCC's video dialtone regulations, telephone companies
will be permitted to provide access to video dialtone services of others on a
common carrier basis, as well as provide directly to their telephone customers
their own non-video dialtone and non-video services, subject to certain
structural cross-subsidization safeguards. Telephone companies will also be
permitted to own up to a 5% interest in a program service provided that the
telephone company has some other affiliation with the programmer, such as an
agreement to provide equipment or support services. The Commission also has
been petitioned to adopt specific accounting rules for telephone companies that
provide video dialtone.
All of the Bell Operating Companies and most of the major independent
telephone companies have requested authority to provide video dialtone in
portions of their service areas. The Commission has approved a number of video
dialtone trials and recently authorized Bell Atlantic Corporation to provide a
commercial video dialtone service in Dover, New Jersey. The Commission is not
expected to grant additional applications until after it issues its order on
reconsideration. Several of the proposed video dialtone systems could compete
or will compete directly with Spacelink and its partnerships' systems. If
video dialtone services become widespread in the future, cable television
systems could be placed at a competitive disadvantage because cable television
systems are required to obtain local franchises to provide cable television
service and must comply with a variety of obligations under such franchises.
The FCC has concluded that under the Cable Act interexchange carriers
(such as AT&T, which provide long distance services), are not subject to the
restrictions which bar the provision of cable television service by local
exchange carriers. In addition, the FCC
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concluded that neither a local exchange carrier providing a video dialtone
service nor its programming suppliers leasing the dialtone service are required
to obtain a cable television franchise. This determination has been appealed.
The modification of the current cross-ownership restrictions, which
prohibit common ownership or operation of cable television systems and
telephone companies within the same service area, would create competition by
permitting telephone companies to provide the same types of services as cable
television systems and could also facilitate the use of telephone transmission
facilities by others seeking to compete with franchised operators. It could
also lead to the enactment of legislation to enable cable television systems to
compete with telephone companies in providing telecommunication services.
Federal cross-ownership restrictions have previously limited entry
into the cable television business by potentially strong competitors such as
telephone companies. Proposals now under consideration in Congress and recent
litigation could lead to the elimination of these restrictions, making it
possible for companies with considerable resources, and consequently a
potentially greater willingness or ability to overbuild, to enter the business.
Even in the absence of changes in the cross-ownership restrictions, the
expansion of telephone companies' fiber optic systems may facilitate entry by
other video service providers in competition with cable systems. The 1984
Cable Act codified existing FCC cross-ownership regulations, which, in part,
prohibit local exchange telephone companies ("LECs"), including the Regional
Bell Operating Companies ("RBOCs") from providing video programming directly to
subscribers within their local exchange telephone service areas, except in
rural areas or by specific waiver of FCC rules. This federal cross-ownership
rule is particularly important to the cable industry because these telephone
companies already own certain facilities needed for cable television operation,
such as poles, ducts and associated rights-of-way. In 1992, the Chesapeake and
Potomac Telephone Company of Virginia and Bell Atlantic Video Service Company
(collectively, "Bell Atlantic"), both wholly-owned subsidiaries of Bell
Atlantic Corporation, filed suit in the United States District Court for the
Eastern District of Virginia (Alexandria Division) seeking to have declared
unconstitutional the provision of the 1984 Cable Act which prohibits a
telephone company from owning a cable television system in its own service
area. Spacelink was not a party to this litigation, although the National
Cable Television Association ("NCTA"), an industry group of which Spacelink is
a member, intervened in the case. In its complaint, Bell Atlantic stated that,
if permitted, it will build and operate a cable television system in the City
of Alexandria, Virginia. On August 24, 1993, the court held that the 1984
Cable Act cross-ownership provision is unconstitutional, and it issued an order
enjoining the United States Justice Department from enforcing the
cross-ownership ban. The decision was appealed to the Federal Court of Appeals
for the Fourth Circuit, but the court recently indicated that it was holding
the appeal in abeyance pending possible action by the Congress on pending
legislation to modify the cable television/telephone cross-ownership ban, and
recently in a suit brought by US West in a federal district court in Seattle,
the cross-ownership ban was held unconstitutional. The decisions, which apply
only to these two RBOCs, will enable them to provide cable television services
within their own operating areas if they are not reversed on appeal. Several
other RBOCs have brought similar suits challenging the cross-ownership
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statute in federal district court in Illinois, Michigan, California and Maine.
Spacelink is unable to predict the ultimate outcome of this litigation on
Spacelink's cable television business.
Another court decision, which modifies The Modified Final Judgment in
United States v. American Telephone & Telegraph Co., will permit the RBOCs to
provide information services over their facilities. This decision effectively
permits RBOCs to acquire or construct cable television systems outside of their
own service areas, and several RBOCs have recently invested or acquired cable
television companies.
There are currently bills pending in Congress that would permit the
LECs to provide cable television service over their own facilities conditioned
on establishing a video programming affiliate that will maintain separate
records to prevent cross- subsidization. These bills would, among other
things, also prohibit telephone companies from purchasing existing cable
systems within their telephone service areas.
Recently, Southwestern Bell Telephone Company and US West, both RBOCs,
have separately evidenced an interest in the cable television industry.
Southwestern Bell acquired certain cable television systems from Hauser
Communications, and US West made a significant investment in a subsidiary of
Time Warner, one of the largest cable television operators in the country.
These announced transactions indicate to Spacelink a strong intention on the
part of telephone companies to enter the cable television business.
PROGRAM ORIGINATION AND EXCLUSIVITY OBLIGATION. Cable television
systems may originate programs and may present advertising subject to
compliance with the FCC's regulations governing political broadcasts, political
advertisements and sponsorship identification, and prohibitions on lotteries
and obscene programming.
FCC regulations currently require cable television systems located
within 35 miles of a television market to delete syndicated programs on distant
broadcast signals upon request of the copyright owner or the local station
holding the exclusive rights to broadcast the same program within its
television market. Similar blackout regulations also are applicable to network
programming in which local network affiliates hold exclusive rights.
COPYRIGHT MATTERS. The Copyright Act of 1976 grants cable television
systems a "compulsory license" to carry distant television signals authorized
by the FCC. In consideration for the compulsory license, cable television
systems are required to pay royalties to the owners of the copyrighted material
which is carried. These copyright royalty payments are based upon a percentage
of a cable television system's gross revenues from basic subscriber service.
Every cable television system must submit statements of account and royalty
payments to the Copyright Office. The Copyright Act contains specific
formulas for calculating the amount of the royalty fee. In general, under
these formulas, the larger the system and the greater the number of distant
signals carried, the greater will be the royalty fees. Failure to comply
constitutes copyright infringement and may result in the imposition of fines
and other penalties.
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The Copyright Act established the Copyright Royalty Tribunal (the
"CRT"), which was empowered to distribute royalty payments and to review and
adjust royalty rates in limited situations. Legislation recently enacted by
Congress abolished the CRT, and the distribution of royalties will now be
administered by the Library of Congress, which will use arbitration panels to
resolve royalty distribution disputes. The possible simplification,
modification or elimination of the compulsory license is the subject of
continuing legislative review. Consequently, the nature or amount of future
royalty payments for broadcast signal carriage cannot presently be predicted.
The elimination or substantial modification of the cable compulsory license
could adversely affect Spacelink's ability to obtain suitable programming and
could substantially increase the cost of programming that would remain
available for distribution to Spacelink's cable subscribers.
STATE REGULATION. Several states have subjected cable television
systems to the jurisdiction of state governmental agencies, some of which have
exercised jurisdiction over transfers of control of cable systems, customer
service standards and franchising requirements. Attempts in other states to so
regulate cable television systems are continuing and can be expected to
increase. It cannot be predicted whether state regulation will have an adverse
effect on the growth of the cable television industry and the business of
Spacelink.
LOCAL REGULATION. A cable television system is generally operated
pursuant to a non-exclusive franchise or permit granted by the local governing
body of the area to be served. Franchises are granted for a stated term,
generally 10 to 15 years, and in many cases are cancelable for failure to
comply with various conditions and limitations, including compliance with
national, state and local safety and electrical codes, required rates of
construction and conditions of service. Franchises usually call for the
payment of fees to the granting authority. Some state and local regulations
governing cable television systems may be subject to requirements imposed by
the FCC and are also subject to the requirements imposed by Federal law. The
FCC has generally preempted local regulation of the technical standards with
which cable television systems must comply, and has recently implemented
uniform standards for the industry.
TECHNICAL AND REPORTING REQUIREMENT. The FCC licenses radio,
microwave and satellite facilities used by cable television systems. The FCC
rules include technical standards for cable television systems with which all
systems must comply. The FCC requires cable television systems to file annual
reports pertaining to frequency usage, subscriber information and equal
employment opportunity practices. The FCC has recently adopted new technical
standards, and franchising authorities may not require cable television systems
to adhere to standards that are stricter than those of the FCC.
MISCELLANEOUS. The Communications Act specifically empowers the FCC
to impose fines upon cable television system operators for willful or repeated
violation of the FCC's rules and regulations. The FCC has adjudicatory
authority over pole attachment disputes where a state has not asserted
jurisdiction.
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Implementing provisions of the 1993 Budget Act, the FCC has adopted
requirements for payment of 1994 "regulatory fees." Cable television systems
are to pay regulatory fees of $0.37 per subscriber. Fees are also assessed for
other licenses, including licenses for business radio cable television relay
(CARS) and earth stations.
For a description of the effects of regulation and legislation on
Spacelink, see Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operation.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto authorized.
JONES SPACELINK, LTD.
By /s/ Elizabeth M. Steele
Elizabeth M. Steele,
Vice President
Dated: September 7, 1994
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