FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[x] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1999.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to .
Commission File Number 333-62077
Jones International Networks, Ltd.
Exact name of registrant as specified in charter
Colorado #84-1470911
State of organization I.R.S. employer I.D.#
9697 East Mineral Avenue, Colorado 80112
Address of principal executive office
(303) 792-3111
Registrant's telephone number
Indicate by check mark whether the registrant (l) has filed all reports
required to be filed by Section l3 or l5(d) of the Securities Exchange Act of
l934 during the preceding l2 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Jones International Networks, Ltd.:
Unaudited Consolidated Statements of Financial Position
as of December 31, 1998 and September 30, 1999 ......................... 2
Unaudited Consolidated Statements of Operations
for the Three and Nine Months Ended September 30, 1998 and 1999 ...... 4
Unaudited Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1998 and 1999 .................. 5
Notes to Unaudited Consolidated Financial Statements...................... 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations ............................ 17
PART II. OTHER INFORMATION
Item 3. Quantitative and Qualitative Disclosures About Market Risk............. 27
Item 5. Other Materially Important Events...................................... 27
Item 6. Exhibits and Reports on Form 8-K....................................... 27
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
ASSETS
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
CURRENT ASSETS:
Cash and cash equivalents........................................... $ 10,654,013 $ 12,664,196
Restricted cash..................................................... 10,000,000 -
Available for sale securities....................................... 2,768,646 4,416,120
Accounts receivable, net of allowance for doubtful accounts of
$897,487 and $1,071,699, respectively............................ 11,835,108 12,162,171
Receivables from affiliates......................................... 238,777 571,618
Prepaid expenses.................................................... 255,723 287,681
Deferred commissions, current....................................... 221,973 244,297
Other current assets................................................ 178,322 180,344
------------ --------------
Total current assets........................................... 36,152,562 30,526,427
------------ --------------
PROPERTY, PLANT AND EQUIPMENT:
Land ............................................................... 1,395,592 1,395,592
Building............................................................ 2,321,463 2,321,463
Satellite transponders.............................................. 35,680,188 35,680,188
Furniture, fixtures and equipment................................... 12,442,773 13,456,264
Leasehold improvements.............................................. 738,838 783,080
-------------- --------------
Total property, plant and equipment............................ 52,578,854 53,636,587
Less accumulated depreciation and amortization...................... (25,681,974) (29,549,319)
-------------- ---------------
Net property, plant and equipment.............................. 26,896,880 24,087,268
-------------- --------------
OTHER ASSETS:
Goodwill, net of accumulated amortization of
$719,588 and $1,472,937, respectively............................ 32,397,394 41,257,043
Other intangible assets, net of accumulated amortization of
$1,030,391 and $1,641,268, respectively.......................... 1,914,043 11,551,541
Cable programming distribution agreements, net of
accumulated amortization of $326,969 and $1,250,636, respectively 4,355,170 9,726,963
Investment in programming, net of accumulated amortization of
$177,777 and $521,670, respectively.............................. 2,379,402 2,317,431
Investment in affiliates............................................ 202,942 288,388
Income tax benefit receivable from Jones International, Ltd. (Note 2) 1,338,402 -
Deferred commissions, long-term .................................... 390,336 381,696
Debt offering costs, net of accumulated amortization of
$245,700 and $801,065, respectively.............................. 4,526,428 4,297,711
Other assets........................................................ 340,475 359,037
------------ --------------
Total other assets............................................. 47,844,592 70,179,810
------------ --------------
Total assets................................................... $110,894,034 $ 124,793,505
============ ==============
The accompanying notes to these unaudited consolidated
financial statements are an integral part of these
unaudited consolidated financial statements.
2
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
LIABILITIES AND SHAREHOLDERS' DEFICIT
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
CURRENT LIABILITIES:
Accounts payable--trade.......................................... $ 2,796,389 $ 4,593,583
Producers' fees payable.......................................... 5,922,471 5,339,999
Cable programming distribution payments payable.................. 1,617,815 4,152,402
Accrued liabilities.............................................. 2,047,233 2,050,358
Accounts payable--Jones International, Ltd....................... 1,377,731 307,588
Interest payable................................................. 5,581,250 2,937,500
Deferred revenues................................................ 752,263 1,537,059
Other current liabilities........................................ 9,938 7,777
------------- -------------
Total current liabilities................................... 20,105,090 20,926,266
------------- -------------
LONG-TERM LIABILITIES:
Customer deposits and deferred revenues.......................... 340,842 522,185
Senior secured notes............................................. 100,000,000 100,000,000
------------- -------------
Total long-term liabilities................................. 100,340,842 100,522,185
------------- -------------
MINORITY INTERESTS IN
CONSOLIDATED SUBSIDIARIES..................................... 567,283 1,178,034
------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 5)
COMMON STOCK SUBJECT TO PUT, Class A Common Stock, $.01 par
value: 101,124 shares issued and outstanding, respectively.... 1,213,488 1,213,488
------------- -------------
SHAREHOLDERS' DEFICIT:
Series A Preferred Equity, $.01 par value: 1,918,000 shares
authorized; 1,608,000 shares issued and outstanding (Note 5)..... - 20,100,000
Class A Common Stock, $.01 par value: 50,000,000 shares
authorized; 4,202,006 and 4,213,875 shares issued and
outstanding, respectively...................................... 42,020 42,139
Class B Common Stock, $.01 par value: 1,785,120 shares
authorized, issued and outstanding............................ 17,851 17,851
Additional paid-in capital....................................... 27,446,955 27,589,264
Accumulated other comprehensive income (loss).................... 8,456 (17,907)
Accumulated deficit.............................................. (38,847,951) (46,777,815)
------------- -------------
Total shareholders' deficit................................. (11,332,669) 953,532
------------- -------------
Total liabilities and shareholders' deficit................. $ 110,894,034 $ 124,793,505
============= =============
The accompanying notes to these unaudited consolidated
financial statements are an integral part of these unaudited
consolidated financial statements.
3
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1998 1999
----------- ----------- ----------- -----------
REVENUES:
Radio programming........................................... $ 2,883,794 $ 5,487,953 $ 6,622,987 $ 12,352,945
Radio advertising representation............................ 2,362,091 2,597,381 2,362,091 6,454,967
Television programming:
Non-affiliated entities................................... 3,868,134 6,552,847 11,168,280 18,785,560
Affiliated entities (Note 2).............................. 259,110 33,449 823,526 443,317
----------- ----------- ----------- ------------
Total television programming............................ 4,127,244 6,586,296 11,991,806 19,228,877
Satellite delivery and production support:
Non-affiliated entities................................... 678,193 966,000 678,193 2,789,000
Affiliated entities (Note 2).............................. 1,103,440 1,224,455 3,309,854 3,778,245
----------- ----------- ----------- ------------
Total satellite delivery and production support......... 1,781,633 2,190,455 3,988,047 6,567,245
----------- ----------- ----------- ------------
Total revenues.......................................... 11,154,762 16,862,085 24,964,931 44,604,034
----------- ----------- ----------- ------------
OPERATING EXPENSES:
Radio programming........................................... 2,130,887 2,937,175 5,468,660 8,097,865
Radio advertising representation............................ 481,914 884,023 481,914 2,776,242
Television programming:
Non-affiliated entities................................... 2,181,851 4,366,639 5,675,572 12,063,341
Affiliated entities (Note 2).............................. 1,491,198 1,032,727 4,742,764 3,674,566
----------- ----------- ----------- ------------
Total television programming............................ 3,673,049 5,399,366 10,418,336 15,737,907
Satellite delivery and production support (Note 2).......... 1,309,405 1,278,977 3,790,908 3,920,801
Selling and marketing....................................... 1,325,074 2,014,821 3,072,305 4,772,209
General and administrative (Note 2)......................... 1,959,673 2,965,419 4,052,370 7,311,824
----------- ----------- ----------- ------------
Total operating expenses................................ 10,880,002 15,479,781 27,284,493 42,616,848
----------- ----------- ----------- ------------
OPERATING INCOME (LOSS)....................................... 274,760 1,382,304 (2,319,562) 1,987,186
----------- ----------- ----------- ------------
OTHER (INCOME) EXPENSE:
Interest expense (Note 2)................................... 3,166,559 3,325,536 5,806,819 9,606,566
Interest income............................................. (338,572) (202,473) (437,597) (725,707)
Equity in loss (income) of affiliates....................... 72,664 (29,443) (337) (85,446)
Other expense............................................... 663,198 40,843 926,963 99,345
----------- ----------- ----------- ------------
Total other expense, net................................ 3,563,849 3,134,463 6,295,848 8,894,758
----------- ----------- ----------- ------------
LOSS BEFORE INCOME TAXES
AND MINORITY INTERESTS...................................... (3,289,089) (1,752,159) (8,615,410) (6,907,572)
Income tax provision (benefit)............................ (252,625) 391,617 14,950 411,541
----------- ----------- ----------- ------------
LOSS BEFORE MINORITY INTERESTS................................ (3,036,464) (2,143,776) (8,630,360) (7,319,113)
Minority interests in net income (loss)
of consolidated subsidiaries.............................. (31,752) 165,001 37,225 610,751
----------- ----------- ----------- ------------
NET LOSS...................................................... $(3,004,712) $(2,308,777) $(8,667,585) $ (7,929,864)
----------- ----------- ----------- ------------
ADJUSTMENTS TO ARRIVE AT COMPREHENSIVE LOSS................... (16,898) (4,495) (16,898) 26,363
----------- ----------- ----------- ------------
COMPREHENSIVE LOSS............................................ $(2,987,814) $(2,304,282) $(8,650,687) $ (7,956,227)
=========== =========== =========== ============
LOSS PER COMMON SHARE (Note 3)............................... $ (.57) $ (0.38) $ (1.75) $ (1.30)
=========== =========== =========== ============
LOSS PER COMMON SHARE--assuming dilution (Note 3)............. $ (.57) $ (0.38) $ (1.75) $ (1.31)
=========== =========== =========== ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING................................................. 5,317,182 6,100,119 4,949,776 6,094,844
=========== =========== =========== ============
The accompanying notes to these unaudited consolidated
financial statements are an integral part of these unaudited
consolidated financial statements.
4
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS
ENDED SEPTEMBER 30
------------------------------
1998 1999
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................................. $ (8,667,585) $ (7,929,864)
Adjustment to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization.......................................... 4,364,225 6,499,131
Amortization of debt offering costs.................................... 120,050 555,365
Equity in income of affiliates......................................... (337) (85,446)
Distributions received................................................. 350,000 -
Write-off of capitalized loan fees..................................... 569,647 -
Minority interest in net income........................................ 37,225 610,751
Loss on sale of equipment.............................................. 2,145 -
Net change in assets and liabilities:
Decrease (increase) in receivables.................................... (2,861,984) 1,425,349
Increase in receivables from affiliates............................... (223,433) (332,841)
Decrease in prepaid expenses and other current assets................. 331,386 104,604
Decrease in deferred commissions...................................... (2,639) (13,684)
Decrease in tax benefit receivable from Jones International, Ltd...... - 1,338,402
Increase in other assets.............................................. (303,856) (345,210)
Increase in accounts payable.......................................... 1,484,306 1,797,194
Increase (decrease) in producers' fees payable........................ 1,637,321 (582,472)
Decrease in accounts payable to Jones International, Ltd.............. (7,294,948) (1,070,143)
Increase (decrease) in accrued interest............................... 2,590,131 (2,643,750)
Increase in deferred revenues......................................... 578,885 784,796
Decrease in accrued and other liabilities............................. (455,220) (939,302)
Increase in customer deposits......................................... 207,479 49,910
------------- ------------
Net cash used in operating activities................................ (7,537,202) (777,210)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment................................ (1,915,756) (587,612)
Restricted cash.......................................................... (10,000,000) -
Sale of property, plant, and equipment................................... 43,196 -
Purchase of available for sale securities................................ (2,164,122) (1,673,837)
Cable programming distribution agreement payments........................ (1,129,444) (3,760,873)
Purchase of MediaAmerica, Inc............................................ (26,700,000) -
Purchase of Broadcast Programming assets (Note 4)........................ - (20,860,131)
Purchases of programming and other intangible assets..................... (199,719) (430,154)
------------- ------------
Net cash used in investing activities................................. (42,065,845) (27,312,607)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in debt offering costs.......................................... (4,710,149) -
Increase in capitalized loan fees........................................ (519,646) -
Repayment of borrowings.................................................. (6,554,500) -
Repayment of capital lease obligations................................... (28,757,208) -
Proceeds from borrowings................................................. 100,000,000 -
Proceeds from issuance of Series A Preferred equity (Note 5)............. - 20,100,000
Distributions paid to minority interests................................. (1,073,410) -
------------- ------------
Net cash provided by financing activities............................. 58,385,087 20,100,000
------------- ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................... 8,782,040 (7,989,817)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................. 3,717,169 20,654,013
------------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD................................... $ 12,499,209 $ 12,664,196
------------- ------------
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid............................................................ $ 3,216,688 $ 11,456,250
------------- ------------
Income taxes paid........................................................ $ 37,225 $ 411,541
------------- ------------
SUPPLEMENTAL NON-CASH DISCLOSURES
Conversion of Jones Global Group Note to Class A Common Stock............ $ 10,000,000 $ -
============= ============
Issuance of Class A Common Stock of GAC equity agreements................ $ 1,213,418 $ 142,428
------------- ------------
Issuance of Class A Common Stock for the acquisition of Media America, Inc. $ 8,129,550 $ -
============= ============
The accompanying notes to these unaudited consolidated
financial statements are an integral part of these unaudited
consolidated financial statements.
5
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This Form 10-Q is being filed by Jones International Networks, Ltd. and
its subsidiaries (collectively the "Company"). The accompanying consolidated
statements of financial position as of December 31, 1998 and September 30,
1999, the consolidated statements of operations for the three and nine months
ended September 30, 1998 and 1999, and the statements of cash flows for the
nine months ended September 30, 1998 and 1999, are unaudited. This Form 10-Q
is being filed in conformity with the SEC requirements for unaudited
financial statements and does not contain all of the necessary footnote
disclosures required for a complete presentation of the consolidated
statements of financial position, consolidated statements of operations and
consolidated statements of cash flows in conformity with generally accepted
accounting principles. However, in the opinion of management, these
statements include all adjustments, consisting of normal recurring
adjustments, necessary for the fair presentation of results for these interim
periods. The results of operations for the nine months ended September 30,
1999 are not necessarily indicative of results to be expected for the entire
year, or for any other interim period.
AVAILABLE FOR SALE SECURITIES AND COMPREHENSIVE LOSS--Available for sale
marketable securities are carried at fair value, with unrealized holding
gains and losses (comprehensive income or losses) carried as a separate
component of shareholders' deficit. The cost of securities sold is determined
using the first-in, first-out method. At September 30, 1999, the Company held
marketable securities available for sale with an aggregate cost of $4.4
million and a net unrealized loss of approximately $18,000.
USE OF ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires the Company to make
estimates and assumptions that affect the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
RECLASSIFICATION--Certain prior period amounts have been reclassified to
conform to the current year presentation.
(2) TRANSACTIONS WITH AFFILIATED ENTITIES
The Company is a subsidiary of Jones International, Ltd. ("Jones
International"), a holding company with ownership interests in several
companies involved in various aspects of the telecommunications industry.
Jones International is wholly owned by Glenn R. Jones, Chairman and Chief
Executive Officer of Jones International and various other subsidiaries of
Jones International. Certain members of management of the Company are also
officers or directors of these affiliated entities and, from time to time,
the Company may have transactions with these entities. Certain expenses are
paid by affiliated entities on behalf of the Company and are allocated at
cost based on specific identification or other methods which management
believes are reasonable. Principal recurring transactions with affiliates are
described below.
TELEVISION PROGRAMMING REVENUES--The Company earns up to a three percent
commission on the sale of airtime for informational programming on Knowledge
TV, Inc. ("KTV"). As a result of the sale of KTV's distribution assets, KTV
terminated its use of this service as of September 1999. The unaffiliated
purchaser of KTV's distribution assets has entered into an agreement with the
Company to sell airtime for the fourth quarter of 1999. For the three months
ended September 30, 1998 and 1999, KTV paid total commissions to the Company
of approximately $39,000 and $33,000, respectively, for this service. For the
nine months ended September 30, 1998 and 1999, KTV paid total commissions to
the Company of approximately $135,000 and $121,000, respectively, for this
service.
The Company distributes Great American Country to certain cable
television systems owned or managed by Jones Intercable, Inc. ("Jones
Intercable"). Effective April 7, 1999, Jones Intercable is no longer an
affiliate of the Company due to the sale of Mr. Jones' interest in
Intercable. Jones Intercable, through its new unaffiliated parent, has
continued to pay the Company programming license fees subsequent to the sale
of Mr. Jones' interest in Jones Intercable. For the three months ended
September 30, 1998, Jones Intercable (and its affiliated partnerships) paid
total affiliate license fees to the Company of approximately $221,000 for
this programming service. For the nine months ended September 30, 1998, Jones
Intercable (and its affiliated partnerships) paid total affiliate license fees
to the Company of approximately $688,000
6
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
for this programming service. From January 1, 1999 to April 7, 1999, Jones
Intercable and its affiliated partnerships paid total affiliated fees to the
Company of approximately $322,000 for this programming service.
SATELLITE DELIVERY AND PRODUCTION SUPPORT REVENUES--Jones Earth Segment,
Inc. ("Earth Segment"), a subsidiary of the Company, provides playback,
editing, duplication, trafficking and uplinking services to its cable
programming network affiliates including KTV as well as to a third party. As
a result of the sale of KTV's distribution assets in 1999, KTV will terminate
its use of certain earth station services provided by Earth Segment. It is
estimated that the termination of these services will occur early in the
first quarter of 2000. Earth Segment charges affiliates for its services
using rates which are calculated to achieve a specified rate of return on
investment to Earth Segment. For the three months ended September 30, 1998
and 1999, Jones International and its affiliates paid satellite delivery and
production support charges to Earth Segment of approximately $595,000 and
$696,000, respectively. For the nine months ended September 30, 1998 and
1999, Jones International and its affiliates paid satellite delivery and
production support charges to Earth Segment of approximately $2,013,000 and
$2,197,000, respectively.
In addition, Jones Space Holdings, Inc. ("Space Holdings"), a subsidiary
of the Company, leases two digitally compressed channels on a non-preemptible
satellite transponder to Jones International and its affiliates. For the
three months ended September 30, 1998 and 1999, Jones International and its
affiliates paid satellite delivery charges to Space Holdings of approximately
$352,000 and $369,000, respectively. For the nine months ended September 30,
1998 and 1999, Jones International and its affiliates paid satellite delivery
charges to Space Holdings of approximately $822,000 and $1,106,000.
Also, Jones Galactic Radio ("Galactic Radio"), a subsidiary of the
Company, has a satellite transponder lease agreement with Jones Satellite
Holdings ("Satellite Holdings"), a subsidiary of KTV, and in turn subleases
the audio subcarriers on this satellite transponder to Superaudio, a cable
audio format provider, which is a 50% owned joint venture. For each of the
three months ended September 30, 1998 and 1999, Superaudio paid approximately
$158,000 for this service. For each of the nine months ended September 30,
1999 and 1999, Superaudio paid approximately $474,000 for this service (see
"Satellite Delivery and Production Support Expenses").
TELEVISION PROGRAMMING EXPENSES--The Product Information Network Venture
("PIN Venture") pays a significant portion of the revenues generated by its
infomercial programming in the form of system rebates to all cable systems
which enter into agreements to air such programming. For the three months
ended September 30, 1998, the PIN Venture paid Jones Intercable (and its
affiliated partnerships), Cox Communications and Adelphia Communications
approximately $1,244,000 for system rebates. For the nine months ended
September 30, 1998, the PIN Venture paid Jones Intercable (and its affiliated
partnerships), Cox Communications and Adelphia Communications approximately
$4,063,000 for system rebates. Effective December 31, 1998, the Company
acquired the remaining Adelphia Communications equity interest in the PIN
Venture in exchange for 12,416 shares of the Company's Class A Common Stock.
As a result, Adelphia Communications is no longer an affiliated party to the
PIN Venture as of January 1, 1999. Effective April 7, 1999 Jones Intercable
is no longer an affiliate of the Company due to the sale of Mr. Jones'
interest in Jones Intercable. The PIN Venture has continued to pay rebates to
Jones Intercable (and its affiliated partnerships) and Adelphia
Communications subsequent to the change in the ownership structures. For the
three months ended September 30, 1999, the PIN Venture paid Cox
Communications approximately $715,000 for system rebates. From January 1,
1999 to April 7, 1999, the PIN Venture paid Jones Intercable (and its
affiliated partnerships) approximately $417,000 for system rebates. For the
nine months ended September 30, 1999, the PIN Venture paid Cox Communications
approximately $2,237,000 for system rebates.
Jones Network Sales ("JNS"), a wholly owned subsidiary of Jones
International, provides affiliate sales and certain marketing services to the
Company. As a result of the sale of KTV's distribution assets in 1999, KTV
will terminate its use of JNS services in the fourth quarter of 1999, after
which the Company will incur substantially all operating costs of JNS. For
the three months ended September 30, 1998 and 1999, the Company paid JNS
approximately $247,000 and $318,000, respectively, for these services. For
the nine months ended September 30, 1998 and 1999, the Company paid JNS
approximately $680,000 and $1,020,000, respectively, for these services.
SATELLITE DELIVERY AND PRODUCTION SUPPORT EXPENSES--Galactic Radio has a
transponder lease agreement with Satellite Holdings for the use of the
sub-carriers on a non-preemptible satellite transponder. This agreement
allows Galactic Radio to use a portion of the transponder to distribute
Superaudio audio programming. Galactic Radio agreed to pay Satellite Holdings
approximately $58,000 per month. This agreement will expire May 2004. For
each of the three months ended September 30,
7
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1998 and 1999, Galactic Radio paid Satellite Holdings approximately $174,000
for this service. For each of the nine months ended September 30, 1998 and
1999, Galactic Radio paid Satellite Holdings approximately $522,000 for this
service. Satellite Holdings has the right to terminate the license agreement
at any time upon 30 days written notice to Galactic Radio. Management
anticipates Satellite Holdings will exercise the right to terminate this
license agreement in early 2000 due to the sale of KTV's distribution assets.
At this time, Management has not secured a suitable satellite transponder to
replace the Satellite Holdings transponder currently carrying the Superaudio
service. There can be no assurance that suitable satellite transponder
capacity on acceptable terms will be secured prior to or after Satellite
Holdings exercises its right to terminate its transponder agreement with
Superaudio. In the event suitable satellite transponder capacity cannot be
secured on acceptable terms, Superaudio's ability to distribute its
programming will be severely adversely impacted.
GENERAL AND ADMINISTRATIVE EXPENSES--The Company subleases office space
in Englewood, Colorado from affiliates of Jones International. Rent and
associated expenses are allocated to the Company based on the amount of
square footage it occupies. For the three months ended September 30, 1998 and
1999, the Company paid these affiliates approximately $37,000 and $74,000,
respectively, for rent and associated expenses. For the nine months ended
September, 1998 and 1999, the Company paid these affiliates approximately
$111,000 and $144,000, respectively, for rent and associated expenses.
An affiliate of Jones International provides computer hardware and
software support services to the Company. For the three months ended
September 30, 1998 and 1999, the Company paid the affiliate approximately
$176,000 and $165,000, respectively, for such services. For the nine months
ended September 30, 1998 and 1999, the Company paid the affiliate
approximately $506,000 and $575,000, respectively, for such services.
The Company and its consolidated subsidiaries reimburse Jones
International and its affiliates for certain allocated administrative
expenses. These expenses generally consist of salaries and related benefits
of legal, risk management and human resources service personnel. Allocations
of personnel costs are generally based on actual time spent by affiliated
associates with respect to the Company. For the three months ended September
30, 1998 and 1999, the Company paid Jones International and its affiliates
approximately $291,000 and $224,000, respectively, for these administrative
expenses. For the nine months ended September 30, 1998 and 1999, the Company
paid Jones International and its affiliates approximately $833,000 and
$770,000, respectively, for these administrative expenses.
To assist funding its operating and investing activities, the Company
had historically borrowed funds from Jones International. Jones
International's interest rate was calculated using the published prime rate
plus two percent. Jones International charged interest on its advances to the
Company at rates of approximately 10 percent per annum for the three and nine
months ended September 30, 1998 and 1999. For the three months ended
September 30, 1998 and 1999, the Company paid Jones International interest of
approximately $108,000 and $ 0, respectively. For the nine months ended
September 30, 1998 and 1999, the Company paid Jones International interest of
approximately $436,000 and $38,000, respectively.
Prior to April 2, 1997, The Company joined in filing a consolidated tax
return with Jones International under the terms of a tax allocation agreement
which was terminated subsequent to April 2, 1997. Pursuant to the terms of
the tax allocation agreement, tax benefits were allocated to the Company
based on its pro rata contribution of taxable loss to Jones International's
taxable loss. In 1997 and 1998, Jones International elected to defer the
payments of the tax benefits due to the Company pursuant to the terms of the
tax allocation agreement. In the first quarter of 1999, Jones International
elected to make a $1,335,000 million payment of tax benefits through a
reduction of the intercompany balance between the Company and Jones
International. The remaining intercompany balance was subsequently reimbursed
to Jones International in April 1999.
In the normal course of business, Jones International (1) remits funds
on behalf of the Company to third parties and affiliates in payment for
products and services purchased by the Company, and (2) receives funds on
behalf of the Company in payment for products and services provided by the
Company. Starting in April 1999, these amounts are reimbursed from or to
Jones International on a monthly basis. Due to their short-term nature, such
amounts outstanding with Jones International are classified as a current
asset or liability in the accompanying financial statements.
8
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(3) LOSS PER COMMON SHARE
Basic loss per common share is computed by dividing net loss by the
weighted average number of common shares (Class A and Class B) outstanding
during the respective period. Diluted loss per common share is equal to basic
loss per common share as all potentially dilutive securities are
anti-dilutive.
(4) ACQUISITION OF BROADCAST PROGRAMMING
On August 2, 1999, the Company acquired certain radio programming assets
from Broadcast Electronics, Inc. ("BEI"), a Rhode Island corporation, for $20
million plus estimated closing adjustments of approximately $860,000, in cash
(the "BP Acquisition"). The closing adjustments are subject to final
adjustments. BEI's radio programming business was conducted through its
Broadcast Programming Division ("BP "), which included the following
programs: Delilah, Neon Nights with Lia Knight and TotalRadio music format
services. The acquisition has been accounted for under the purchase method
and accordingly, the purchase price is preliminary and adjustments may be
recorded through August 2000. The Company recorded approximately $9.6 million
in goodwill and $10.0 million in affiliate and personal service agreements in
connection with the BP Acquisition. The affiliate and personal service
agreements are recorded as intangible assets.
On July 29, 1999, the Company entered into a $20 million credit facility
with a commercial bank to finance the BP Acquisition on a short-term basis
(the "Credit Facility"). In order to allow the Company to obtain more
favorable terms, Jones International has guaranteed the loan and provided
certain collateral as security for the guaranty. The Credit Facility bears
interest either at the commercial bank's prime rate minus two percent or a
fixed rate (which is approximately equal to LIBOR) plus one half of one
percent. The interest rate was 5.84% per annum as of September 30, 1999. The
Credit Facility will expire on June 30, 2000, unless extended. On September
30, 1999, the Company used the proceeds from the Series A Preferred equity to
pay down all amounts outstanding under the Credit Facility (see Note 5). The
full amount of the credit facility was available to the Company as of
September 30, 1999.
(5) SERIES A PREFERRED EQUITY
Effective September 1999, the Company issued $24.0 million of Series A
Preferred equity, a portion of which is subject to final documentation. The
issuance of the $20.1 million of the Series A Preferred equity was closed in
September 1999. Of the remaining $3.9 million, $1.9 million was closed in
October 1999. The remaining $2.0 million is anticipated to close in November
1999, subject to documentation. An affiliate of the Company's Chairman and
majority shareholder, Mr. Jones, purchased $20.0 million of the Series A
Preferred equity. The Company used $20.0 million of the proceeds from the
Series A Preferred equity issuance to repay $20.0 million of indebtedness
under the Company's $20.0 million Credit Facility. The balance will be used
to develop the Company's Internet strategy and for general corporate purposes.
The holders of the Series A Preferred equity are entitled to receive
dividends if and when declared by the Board of Directors. No dividends will
be paid on Class A or Class B Common Stock unless equal dividends have been
declared and paid on the Series A Preferred equity. Shareholders will have
the right to convert at any time the Series A Preferred equity into shares of
Class A Common Stock of the company, on a one-for-one basis. The Series A
Preferred equity will be automatically converted into Class A Common Stock of
the Company upon the completion by the Company of a public offering or a
series of public offerings raising aggregate gross proceeds of at least $20
million.
(6) UNAUDITED CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY
GUARANTORS
In 1998, the Company issued $100 million of Senior Secured Notes (the
"Notes"). The Notes are senior obligations of the Company. The Notes rank
pari passu in right of payment with all existing and future senior
indebtedness of the Company and rank senior to all existing and future
subordinated obligations of the Company. The Notes are secured by the capital
stock of the Company's subsidiary, JPN, Inc., and its direct subsidiaries.
The Notes are fully and unconditionally guaranteed, jointly and severally, on
a senior unsecured basis by the following wholly-owned subsidiaries of the
Company: JPN, Inc., Space Holdings, Earth Segment, Jones Infomercial
Networks, Inc., Jones Radio Holdings, Inc., Great American Country, Inc.,
Galactic Radio, Jones Infomercial Network Ventures, Inc., Jones Galactic
Radio Partners, Inc., Jones Radio Network, Inc., Jones Audio Services, Inc.,
Jones Radio Network Ventures, Inc., MediaAmerica, Inc., Jones MAI Radio,
Inc., and Jones/Owens Radio Programming
9
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LLC, ("JORP") (collectively, the "Subsidiary Guarantors"). The only existing
subsidiaries of the Company that did not guarantee the Notes are the
following three entities: the PIN Venture, a general partnership in which the
Company, through a Subsidiary Guarantor, owns a 55.3% interest; Superaudio, a
general partnership in which the Company, through a Subsidiary Guarantor,
owns a 50% interest and Jones/Capstar Venture Radio Programming LLC, a
limited liability company in which the Company, through a Subsidiary
Guarantor, owns a 50% interest (collectively, the "Non-Guarantor
Subsidiaries"). The Company has not presented separate financial statements
and other disclosures concerning the Subsidiary Guarantors that are wholly
owned because management has determined that such information is not material
to investors. In lieu thereof, the Company is providing, under Section 13 and
15 (d) of the Securities Exchange Act of 1934, presentation of the following
supplemental unaudited condensed consolidating financial statements.
Presented below is unaudited condensed consolidating financial information
for the Company and its subsidiaries as of and for the nine months ended
September 30, 1998 and 1999.
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION -
AS OF SEPTEMBER 30, 1999:
(IN THOUSANDS)
NON-
THE SUBSIDIARY GUARANTOR ELIMINATION
COMPANY GUARANTORS SUBSIDIARIES ENTRIES REPORTED
---------- ---------- ------------ ----------- --------
ASSETS:
Cash and cash equivalents............................ $ 5,911 $ 2,684 $ 4,069 $ - $ 12,664
Available for sale securities........................ 4,416 - - - 4,416
Accounts receivable.................................. 1 11,877 285 (1) 12,162
Other current assets................................. 50 1,150 84 - 1,284
---------- --------- --------- ---------- ----------
Total current assets....................... 10,378 15,711 4,438 (1) 30,526
---------- --------- --------- ---------- ----------
Property, plant and equipment........................ 15 23,679 393 - 24,087
Goodwill ........................................... - 41,257 - - 41,257
Intangible assets.................................... 1 23,593 2 - 23,596
Other long-term assets............................... 34,094 (27,527) 288 (1,528) 5,327
---------- --------- --------- ---------- ----------
Total assets............................... $ 44,488 $ 76,713 $ 5,121 $ (1,529) $ 124,793
========== ========= ========= ========== ==========
LIABILITIES AND SHAREHOLDERS'
INVESTMENT (DEFICIT):
Accounts payable..................................... $ 684 $ 2,566 $ 1,344 $ - $ 4,594
Producers' fees payable.............................. - 5,340 - - 5,340
Cable programming distribution payments payable..... - 4,152 - - 4,152
Accrued liabilities.................................. 3,214 1,695 80 (1) 4,988
Other current liabilities............................ (61,576) 62,723 706 - 1,853
---------- --------- --------- ---------- ----------
Total current liabilities.................. (57,678) 76,476 2,130 (1) 20,927
---------- --------- --------- ---------- ----------
Senior secured notes................................. 100,000 - - - 100,000
Other long-term liabilities.......................... - 522 - - 522
---------- --------- --------- ---------- ----------
Total long-term liabilities................ 100,000 522 - - 100,522
---------- --------- --------- ---------- ----------
Minority interests................................... - - - 1,178 1,178
Common stock subject to put.......................... 1,213 - - - 1,213
Shareholders' investment (deficit):
Series A Preferred equity ...................... 20,100 - - - 20,100
Class A Common Stock............................ 42 - - - 42
Class B Common Stock............................ 18 - - - 18
General Partners' Contributions................. - - 350 (350) -
Additional paid-in capital...................... 27,589 - - - 27,589
Other comprehensive income...................... (18) - - - (18)
Retained earnings (accumulated deficit)......... (46,778) (285) 2,641 (2,356) (46,778)
---------- --------- --------- ---------- ----------
Total shareholders' investment (deficit)... 953 (285) 2,991 (2,706) 953
---------- --------- --------- ---------- ----------
Total liabilities and shareholders'
investment (deficit)..................... $ 44,488 $ 76,713 $ 5,121 $ (1,529) $ 124,793
========== ========= ========= ========== ==========
10
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS -
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999:
(IN THOUSANDS)
NON-
THE SUBSIDIARY GUARANTOR ELIMINATION
COMPANY GUARANTORS SUBSIDIARIES ENTRIES REPORTED
---------- ---------- ------------ ----------- --------
INCOME STATEMENT DATA:
REVENUES:
Radio programming.................................. $ - $ 12,353 $ - $ - $ 12,353
Radio advertising representation................... - 6,455 - - 6,455
Television programming............................. - 3,410 15,819 - 19,229
Satellite delivery and production support.......... - 7,741 - (1,174) 6,567
--------- --------- --------- ---------- ---------
Total revenues................................ - 29,959 15,819 (1,174) 44,604
--------- --------- --------- ---------- ---------
OPERATING EXPENSES:
Radio programming.................................. - 8,098 - - 8,098
Radio advertising representation................... - 2,776 - - 2,776
Television programming............................. - 3,015 13,897 (1,174) 15,738
Satellite delivery and production support.......... - 3,921 - - 3,921
Selling and marketing.............................. - 4,553 219 - 4,772
General and administrative......................... 1,036 5,858 418 - 7,312
--------- --------- --------- ---------- ---------
Total operating expenses...................... 1,036 28,221 14,534 (1,174) 42,617
--------- --------- --------- ---------- ---------
OPERATING INCOME (LOSS)....................... (1,036) 1,738 1,285 - 1,987
--------- --------- --------- ---------- ---------
OTHER EXPENSE (INCOME):
Interest expense................................... 9,607 - - - 9,607
Interest income.................................... (568) (67) (91) - (726)
Equity share of loss (income) of subsidiaries ..... (2,239) 865 (85) 1,374 (85)
Other expense (income), net........................ 94 3 2 - 99
--------- --------- --------- ---------- ---------
Total other expense (income).................. 6,894 801 (174) 1,374 8,895
--------- --------- --------- ---------- ---------
Income (loss) before income taxes and minority
Interests....................................... (7,930) 937 1,459 (1,374) (6,908)
Income tax provision............................... - 411 - - 411
--------- --------- --------- ---------- ---------
Income (loss) before minority interests............ (7,930) 526 1,459 (1,374) (7,319)
Minority interests in net income of consolidated
subsidiaries ................................... - (3) - 614 611
--------- --------- --------- ---------- ---------
NET INCOME (LOSS).................................. $ (7,930) $ 529 $ 1,459 $ (1,988) $ (7,930)
--------- --------- --------- ---------- ---------
Adjustments to arrive at comprehensive loss........ 26 - - - 26
--------- --------- --------- ---------- ---------
COMPREHENSIVE INCOME (LOSS)....................... $ (7,956) $ 529 $ 1,459 $ (1,988) $ (7,956)
========= ========= ========= ========== =========
11
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
UNAUDITED CONDENSED CONSOLIDATING CASH FLOWS -
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999:
(IN THOUSANDS)
NON-
THE SUBSIDIARY GUARANTOR ELIMINATION
COMPANY GUARANTORS SUBSIDIARIES ENTRIES REPORTED
---------- ---------- ------------ ----------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................... $ (7,930) $ 529 $ 1,459 $ (1,988) $ (7,930)
Adjustment to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Non-cash expenses.................................. 1,469 4,127 (4) 1,988 7,580
Net change in assets and liabilities............... (23,923) 22,519 977 - (427)
---------- --------- ---------- ---------- --------
Net cash provided by (used in) operating
activities..................................... (30,384) 27,175 2,432 - (777)
---------- --------- ---------- ---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment............ (12) (396) (180) - (588)
Cable programming distribution agreements payments... - (3,761) - - (3,761)
Purchase of investments.............................. (1,674) - - - (1,674)
Purchase of intangible assets........................ - (430) - - (430)
Purchase of Broadcast Programming assets............. - (20,860) - - (20,860)
---------- --------- ---------- ---------- --------
Net cash used in investing activities............. (1,686) (25,447) (180) - (27,313)
---------- --------- ---------- ---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Issuance of Series A Preferred equity. 20,100 - - - 20,100
---------- --------- ---------- ---------- --------
Net cash provided by financing activities......... 20,100 - - - 20,100
---------- --------- ---------- ---------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....... (11,970) 1,728 2,252 - (7,990)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD......... 17,881 956 1,817 - 20,654
---------- --------- ---------- ---------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD............... $ 5,911 $ 2,684 $ 4,069 $ - $ 12,664
========== ========= ========== ========== ========
12
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS - FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1998:
(IN THOUSANDS)
NON-
THE SUBSIDIARY GUARANTOR ELIMINATION
COMPANY GUARANTORS SUBSIDIARIES ENTRIES REPORTED
-------- ---------- ------------ ----------- --------
INCOME STATEMENT DATA:
REVENUES:
Radio programming................................... $ - $ 6,623 $ - $ - $ 6,623
Radio representation ............................... - 2,362 - - 2,362
Television programming.............................. 173 1,705 10,114 - 11,992
Satellite delivery and production support........... - 5,352 - (1,364) 3,988
-------- --------- ---------- ---------- --------
Total revenues................................. 173 16,042 10,114 (1,364) 24,965
-------- --------- ---------- ---------- --------
OPERATING EXPENSES:
Radio programming................................... - 5,468 - - 5,468
Radio representation................................ - 482 - - 482
Television programming.............................. 81 2,132 9,569 (1,364) 10,418
Satellite delivery and production support........... - 3,791 - - 3,791
Selling and marketing............................... 58 2,769 246 - 3,073
General and administrative.......................... 812 2,929 311 - 4,052
-------- --------- ---------- ---------- --------
Total operating expenses....................... 951 17,571 10,126 (1,364) 27,284
-------- --------- ---------- ---------- --------
OPERATING LOSS................................. (778) (1,529) (12) - (2,319)
-------- --------- ---------- ---------- --------
OTHER EXPENSE (INCOME):
Interest expense.................................... 4,009 1,798 - - 5,807
Interest income..................................... (247) (77) (114) - (438)
Write-off of deferred offering costs ............... - - - - -
Equity share of loss (income) of subsidiaries ...... 3,567 (3,562) - (5) -
Other expense (income), net......................... 881 36 10 - 927
-------- --------- ---------- ---------- --------
Total other expense (income)................... 8,210 (1,805) (104) (5) 6,296
-------- --------- ---------- ---------- --------
Income (loss) before income taxes and minority
interests........................................ (8,988) 276 92 5 (8,615)
Income tax provision................................ 1 14 - - 15
-------- --------- ---------- ---------- --------
Income (loss) before minority interests............. (8,989) 262 92 5 (8,630)
Minority interests in net income of consolidated....
subsidiaries .................................... - - - 38 38
-------- --------- ---------- ---------- --------
NET INCOME (LOSS)................................... $ (8,989) $ 262 $ 92 $ (33) $ (8,668)
-------- --------- ---------- ---------- --------
Adjustments to arrive at comprehensive loss......... (17) - - - (17)
-------- --------- ---------- ---------- --------
COMPREHENSIVE INCOME (LOSS)......................... $ (8,972) $ 262 $ 92 $ (33) $ (8,651)
======== ========= ========== ========== ========
13
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
UNAUDITED CONDENSED CONSOLIDATING CASH FLOWS -
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998:
(IN THOUSANDS)
NON-
THE SUBSIDIARY GUARANTOR ELIMINATION
COMPANY GUARANTORS SUBSIDIARIES ENTRIES REPORTED
---------- ---------- ------------ ----------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................... $ (8,989) $ 262 $ 92 $ (33) $ (8,668)
Adjustment to reconcile net loss to net cash provided
(used in) by operating activities:
Non-cash expenses.................................. 325 4,666 69 33 5,093
Distributions received............................. - 350 - - 350
Net change in assets and liabilities............... 2,156 (5,813) (655) - (4,312)
---------- ---------- ----------- ---------- ---------
Net cash provided by (used in) operating activities (6,508) (535) (494) - (7,537)
---------- ---------- ----------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment............ - (1,818) (98) - (1,916)
Purchases of intangible assets....................... - (1,329) - - (1,329)
Purchase of MediaAmerica, Inc........................ (26,700) - - - (26,700)
Dividend from joint venture.......................... 960 - - (960) -
Sale of property, plant, and equipment............... - 43 - - 43
Other................................................ (12,164) - - - (12,164)
---------- ---------- ----------- ---------- ---------
Net cash used in investing activities.................. (37,904) (3,104) (98) (960) (42,066)
---------- ---------- ----------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deferred offering costs.................. (4,710) - - - (4,710)
Increase in capitalized loan fees.................... (520) - - - (520)
Advances to/from affiliates.......................... (40,291) 40,291 - - -
Repayment of borrowings.............................. - (6,555) - - (6,555)
Repayment of capital lease obligations............... - (28,757) - - (28,757)
Proceeds from borrowings............................. 100,000 - - - 100,000
Distributions paid to partners....................... - - (2,033) 2,033 -
Distributions paid to minority interests ............ - - - (1,073) (1,073)
---------- ---------- ----------- ---------- ---------
Net cash provided by (used in) financing activities 54,479 4,979 (2,033) 960 58,385
---------- ---------- ----------- ---------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....... 10,067 1,340 (2,625) - 8,782
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD......... (25) 79 3,663 - 3,717
---------- ---------- ----------- ---------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD............... $ 10,042 $ 1,419 $ 1,038 $ - $ 12,499
========== ========= =========== ========== =========
(7) COMMITMENTS AND CONTINGENCIES
GAC EQUITY AGREEMENT-In the first quarter of 1998, Great American
Country and the Company entered into an equity affiliate agreement with a
multiple cable system operator ("MSO"). Pursuant to the terms of such
agreement, the Company agreed to issue shares of Class A Common Stock to this
MSO in return for this MSO delivering Great American Country's programming.
The total number of shares of Class A Common Stock to be issued is based on
the number of subscribers provided by the MSO as of December 31, 1999. Based
on the number of subscribers receiving Great American Country's programming
as of September 30, 1999, the Company is currently required to issue a total
of 110,719 shares of Common Stock. As of September 30, 1999, 101,124 shares
of Class A Common Stock had been issued to this MSO. The Company anticipates
issuing the remaining shares owed to the MSO in the first quarter of 2000.
SATELLITE TRANSPONDER AND EARTH STATION AGREEMENTS- In the second
quarter of 1999, the Company received notification from a party leasing three
of the company's satellite transponder channels of its election to terminate
the lease of such channels effective August 31, 1999. Also, effective in the
second quarter of 1999, the Company entered into an agreement to lease a
satellite transponder channel to a third party for the remaining life of the
satellite, as well as to provide other uplinking and earth station services.
The Company has obtained a guarantee from a shareholder of the lessee, which
covers lease payments through May 15, 2000. There can be no assurance that
the Company will receive the lease payments for the full term of this lease.
(8) REPORTABLE SEGMENTS
The Company has four reportable segments: radio programming and
representation, television programming, satellite
14
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
delivery and production support, and corporate. The radio programming and
representation segment produces programming that it distributes to radio
stations and sells advertising on nationally syndicated radio programs. The
television programming segment provides cable television programming to cable
television system operators and other video distributors. The satellite
delivery and production support segment provides satellite delivery,
uplinking, trafficking, playback and other services to affiliates and third
parties. The corporate segment includes personnel and associated costs for
the Company's executive and management staff, operational support and other
items such as accounting and financial reporting and debt offering costs.
The Company evaluates performance based on profit or loss from
operations before income taxes not including nonrecurring gains and losses.
The Company's reportable segments are strategic business units that offer
different services and products. They are managed separately because each
business requires different technology and marketing strategies. Reportable
segments are presented as follows in accordance with the requirements of SFAS
131, "Disclosures about Segments of an Enterprise and Related Information":
REPORTED SEGMENT PROFIT OR LOSS,
AND SEGMENT ASSETS
AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999:
Radio Satellite
Programming Delivery and
and Television Production
Representation Programming Support Corporate Total
-------------- ----------- ------- --------- -----
Revenue from external customers..................... $ 18,808,000 $ 19,229,000 $ 6,567,000 $ - $ 44,604,000
Intersegment revenues............................... - - 2,635,000 - 2,635,000
Interest income..................................... (66,000) (91,000) - (569,000) (726,000)
Interest expense.................................... - - - 9,607,000 9,607,000
Depreciation and amortization....................... 2,112,000 1,375,000 3,007,000 5,000 6,499,000
Equity in income of subsidiaries.................... (85,000) - - - (85,000)
Segment income (loss)............................... 286,000 (469,000) 2,597,000 (10,344,000) (7,930,000)
Capital expenditures................................ 232,000 196,000 144,000 16,000 588,000
Segment assets...................................... 65,655,000 20,070,000 20,289,000 105,261,000 211,275,000
RECONCILIATIONS OF REPORTABLE SEGMENT REVENUE AND
ASSETS:
Revenues
- --------
Total revenues for reportable segments.............. $ 47,239,000
Other revenues...................................... -
Elimination of intersegment revenues................ (2,635,000)
---------------
Total consolidated revenues....................... $ 44,604,000
===============
Assets
- ------
Total assets for reportable segments................ $ 211,275,000
Elimination of investment in subsidiaries........... (86,481,000)
----------------
Total consolidated assets......................... $ 124,794,000
===============
15
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
REPORTED SEGMENT PROFIT OR LOSS,
AND SEGMENT ASSETS
AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998:
Radio Satellite
Programming Delivery And
and Television Production
Representation Programming Support Corporate Total
-------------- ------------ ------------ ----------- ------------
Revenue from external customers..................... $ 8,985,000 $ 11,992,000 $ 3,988,000 $ - $ 24,965,000
Intersegment revenues............................... - - 2,779,000 - 2,779,000
Interest income..................................... (12,000) (115,000) - (311,000) (438,000)
Interest expense.................................... - - 1,900,000 3,907,000 5,807,000
Depreciation and amortization....................... 969,000 402,000 2,990,000 3,000 4,364,000
Equity in income of subsidiaries.................... (1,000) - - - (1,000)
Segment loss........................................ (1,293,000) (688,000) (1,718,000) (4,969,000) (8,668,000)
Capital expenditures................................ 1,216,000 1,000 696,000 3,000 1,916,000
Segment assets...................................... 48,477,000 9,741,000 23,823,000 56,425,000 138,466,000
RECONCILIATIONS OF REPORTABLE SEGMENT REVENUE AND
ASSETS:
Revenues
- --------
Total revenues for reportable segments.............. $ 27,744,000
Other revenues...................................... -
Elimination of intersegment revenues................ (2,779,000)
--------------
Total consolidated revenues....................... $ 24,965,000
==============
Assets
- ------
Total assets for reportable segments................ $138,466,000
Elimination of investment in subsidiaries........... (27,493,000)
--------------
Total consolidated assets......................... $110,973,000
==============
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of results of the Company's financial condition
and results of operations contains, in addition to historical information,
forward-looking statements that are based upon certain assumptions and are
subject to a number of risks and uncertainties. The Company's actual results
may differ significantly from the results predicted in such forward-looking
statements.
RESULTS OF OPERATIONS
The following table sets forth the amount of, and percentage
relationship to total net revenues of, certain items included in the
Company's historical unaudited consolidated statements of operations for the
three and nine months ended September 30, 1998 and 1999, respectively:
REPORTED RESULTS:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------- --------------------------------------
1998 1999 1998 1999
----------------- ---------------- ---------------- -------------------
(IN THOUSANDS) (IN THOUSANDS)
REVENUES:
Radio programming..................... $2,884 26% $ 5,488 33% $ 6,623 27% $ 12,353 28%
Radio advertising representation...... 2,362 21 2,597 15 2,362 9 6,455 14
Television programming................ 4,127 37 6,586 39 11,992 48 19,229 43
Satellite delivery and production
support............................ 1,782 16 2,191 13 3,988 16 6,567 15
-------- ------ -------- ----- -------- ----- ---------- -----
Total revenues...................... 11,155 100 16,862 100 24,965 100 44,604 100
-------- ------ -------- ----- -------- ----- ---------- -----
OPERATING EXPENSES:
Radio programming..................... 2,131 19 2,937 17 5,468 22 8,098 18
Radio advertising representation...... 482 4 884 5 482 2 2,776 6
Television programming................ 3,673 33 5,399 32 10,418 42 15,738 36
Satellite delivery and production
support............................. 1,309 12 1,279 8 3,791 15 3,921 9
Selling and marketing................. 1,325 12 2,015 12 3,073 12 4,772 11
General and administrative............ 1,960 18 2,966 18 4,052 16 7,312 16
-------- ------ -------- ----- -------- ----- ---------- -----
Total operating expenses............ 10,880 98 15,480 92 27,284 109 42,617 96
-------- ------ -------- ----- -------- ----- ---------- -----
OPERATING INCOME (LOSS).................. 275 2 1,382 8 (2,319) (9) 1,987 4
-------- ------ -------- ----- --------- ------ ---------- -----
OTHER EXPENSE............................ 3,564 32 3,134 19 6,296 25 8,895 20
INCOME TAX PROVISION (BENEFIT) AND
MINORITY INTERESTS....................... (284) (3) 557 3 53 - 1,022 2
--------- ------- -------- ----- -------- ----- ---------- -----
NET LOSS................................. $ (3,005) (27)% $ (2,309) (14)% $ (8,668) (34)% $ (7,930) (18)%
========= ======= ======== ===== ======== ===== ========== =====
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
TOTAL REVENUES--Total revenues increased $5.7 million, or 51%, from
$11.2 million for the three months ended September 30, 1998 to $16.9 million
for the three months ended September 30, 1999. This increase was due to
strong growth in all of the Company's operations. The increase in radio
programming is due primarily to an increase in advertising revenues resulting
from improved advertising rates and sellout conditions and the acquisition of
Broadcast Programming. On August 2, 1999, the Company acquired certain radio
programming assets from Broadcast Electronics, Inc. ("BEI"). BEI's radio
programming business was conducted through its Broadcast Programming division
("BP Acquisition"). The increase in television programming revenues was due
to an increase in the number of subscribers receiving both Great American
Country and Product Information Network, which resulted in increased
advertising revenue. The increase in satellite delivery and production
support revenue was due to new affiliate and third party transponder and
earth station services agreements that the Company entered into in the third
quarter of 1998 and the second quarter of 1999.
RADIO PROGRAMMING REVENUES-- Radio programming revenues increased $2.6
million, or 90%, from $2.9 million for the three months ended September 30,
1998 to $5.5 million for the three months ended September 30, 1999, due
primarily to an increase in radio advertising revenue and the BP Acquisition.
BP activities following the BP Acquisition generated additional advertising
and programming license fee revenue of $1.5 million for the three months
ended September 30, 1999. Sales of network radio advertising for the first
nine months of 1998 were adversely affected by the January 1998 entry of a
significant
17
competitor into the market, which added approximately 20% more network radio
advertising inventory into the marketplace, thereby increasing competition
for network radio advertising dollars. During late 1998, the Company began to
experience improved advertising rates and sellout conditions and these trends
have continued into 1999. The advertising market has been strong, with
approximately 36% more in gross network radio advertising booked as of late
October 1999, as compared to the amount booked in the comparable period in
the prior year. The Company believes the effect of the entry of the
significant competitor into network radio in early 1998 has been absorbed in
the network radio advertising market, and as a result the Company has seen
significant improvement in the radio segment's financial results. The Company
continues to concentrate on its development of personality driven talk and
other programs, which the Company believes will appeal to both advertisers
on, and listeners to, the Company's radio programs and over the long-term,
contribute to improved financial results.
RADIO REPRESENTATION REVENUES--Radio advertising representation revenues
increased $0.2 million, or 10%, from $2.4 million for the three months ended
September 30, 1998 to $2.6 million for the three months ended September 30,
1999 due to an increase in advertising revenues from both the Company's owned
radio programming as well as the Company's advertising representation
customers. The increase in advertising revenues is due primarily to the
improved advertising rates and sellout conditions.
TELEVISION PROGRAMMING REVENUES--Television programming revenues
increased $2.5 million, or 60%, from $4.1 million for the three months ended
September 30, 1998 to $6.6 million for the three months ended September 30,
1999, due primarily to an increase of $1.9 million in Product Information
Network advertising revenues and an increase of $0.6 million in Great
American Country advertising revenues. This increase was driven by higher
advertising rates being charged for airtime on both the Company's networks as
a result of an increase in the number of subscribers receiving Product
Information Network and Great American Country.
SATELLITE DELIVERY AND PRODUCTION SUPPORT REVENUES--Satellite delivery
and production support revenues increased $0.4 million, or 23%, from $1.8
million for the three months ended September 30, 1998 to $2.2 million for the
three months ended September 30, 1999 due to (i) new third party agreements
that the Company entered into in the second quarter of 1999 to provide
satellite transponder and earth station services (which generated $0.3
million in revenues) and (ii) an increase of $0.1 million in satellite
delivery and production support fees charged to related parties. Effective in
the second quarter of 1999, the Company entered into an agreement to lease a
satellite transponder channel to a third party for the remaining life of the
satellite, as well as to provide other uplinking and earth station services.
The Company has obtained a guarantee from a shareholder of the lessee, which
covers lease payments through May 15, 2000. There can be no assurance that
the Company will receive the lease payments for the full term of this lease.
As a result of the sale of KTV's distribution assets in 1999, KTV will
terminate its use of certain earth station services provided by the Company.
The Company anticipates that the termination of these services will occur
early in the first quarter of 2000. It is estimated that the Company's
monthly loss of revenues as a result of this termination of services will be
approximately $75,000 and approximately $900,000 on an annual basis.
TOTAL OPERATING EXPENSES--Total operating expenses increased $4.6
million, or 42%, from $10.9 million for the three months ended September 30,
1998 to $15.5 million for the three months ended September 30, 1999. As a
percentage of total revenues, total operating expenses decreased from 98% for
the three months ended September 30, 1998 to 92% for the three months ended
September 30, 1999.
RADIO PROGRAMMING EXPENSES--Radio programming expenses increased $0.8
million, or 38%, from $2.1 million for the three months ended September 30,
1998 to $2.9 million for the three months ended September 30, 1999, due to
(i) an increase of $0.5 million related to the BP activities following the BP
Acquisition, (ii) an increase of $0.3 million resulting from an increase in
the number of syndicated radio programs offered by the Company. As a
percentage of radio programming revenues, radio programming expenses
decreased from 74% for the three months ended September 30, 1998 to 54% for
the three months ended September 30, 1999. The decrease in radio programming
expenses as a percentage of radio programming revenues is due primarily to
the increase in radio programming revenues resulting from improved
advertising rates and sellout conditions in 1999. In addition, a significant
portion of the Company's radio programming expenses is fixed costs, such as
transponder and uplinking expenses.
RADIO ADVERTISING REPRESENTATION EXPENSES--Radio advertising
representation expenses increased $0.4 million, or 83%,
18
from $0.5 million for the three months ended September 30, 1998 to $0.9
million for the three months ended September 30, 1999 due primarily to
increases in salary and administrative expense allocations from general and
administrative expenses. As a percentage of radio advertising representation
revenues, radio advertising representation expenses increased from 20% for
the three months ended September 30, 1998 to 34% for the three months ended
September 30, 1999.
TELEVISION PROGRAMMING EXPENSES--Television programming expenses
increased $1.7 million, or 47%, from $3.7 million for the three months ended
September 30, 1998 to $5.4 million for the three months ended September 30,
1999, due (i) to an increase of $1.4 million in the amounts paid in the form
of rebates to cable systems receiving the Product Information Network, (ii)
an increase of $0.2 million in Great American Country affiliate sales costs
due to the sale of KTV's distribution assets which resulted in GAC absorbing
a higher proportion of JNS operating costs and (iii) an increase of $0.1
million in advertising sales costs due to the hiring of Great American
Country national advertising sales personnel in 1999. For the three months
ended September 30, 1998 and 1999, the PIN Venture made rebates of
approximately 75% and 76%, respectively, of its net advertising revenues to
these systems. As a percentage of television programming revenues, television
programming expenses decreased from 89% for the three months ended September
30, 1998 to 82% for the three months ended September 30, 1999.
As a result of the sale of KTV's distribution assets in September 1999,
the Company will absorb substantially all of the costs of JNS, which provided
cable affiliate sales and certain marketing services to the Company and KTV.
Beginning in the fourth quarter of 1999, JNS will provide these services only
to the Company. As a result, management estimates that affiliate sales
operating expenses will increase by approximately $70,000 per month beginning
in the fourth quarter of 1999.
SATELLITE DELIVERY AND PRODUCTION SUPPORT EXPENSES--Satellite delivery
and production support expenses remained relatively flat at $1.3 million for
the three months ended September 30, 1998 and 1999. As a percentage of
satellite delivery and production support revenues, satellite delivery and
production support expenses decreased from 73% for the three months ended
September 30, 1998 to 58% for the three months ended September 30, 1999. The
decrease in satellite delivery and production expenses as a percentage of
satellite delivery and production revenues is due primarily to the
significant increase in satellite delivery and production support revenues
resulting from the new satellite transponder and earth station services
agreements that the Company entered into in the third quarter of 1998 and the
second quarter of 1999. A significant portion of the costs of the Company's
satellite transponder and production of support services is fixed.
Accordingly, since the Company increased its utilization of the excess
capacity on its Satcom C-3 transponder and related services, the percentage
of satellite delivery and production support expenses in relation to the
satellite delivery and production services revenues decreased.
SELLING AND MARKETING EXPENSES--Selling and marketing expenses increased
$0.7 million, or 52%, from $1.3 million for the three months ended September
30, 1998 to $2.0 million for the three months ended September 30, 1999. The
increase is due to (i) an increase of $0.2 million in marketing expenses due
to the increased marketing efforts undertaken to improve the distribution of
Great American Country, (ii) an increase of $0.2 million in marketing
expenditures related to the BP activities following the BP Acquisition and
(iii) an increase of $0.3 million in marketing expenses due to the increased
marketing efforts undertaken to broaden the company's base of radio stations.
As a percentage of total revenues, selling and marketing expenses remained
relatively flat at 12% for the three months ended September 30, 1998 and 1999.
GENERAL AND ADMINISTRATIVE EXPENSES--General and administrative expenses
increased $1.0 million, or 51%, from $2.0 million for the three months ended
September 30, 1998 to $3.0 million for the three months ended September 30,
1999. The increase is due to (i) an increase of $0.6 million in general and
administrative expenses due to the BP Acquisition, (ii) an increase of $0.3
million in amortization expenses related to the amortization of Great
American Country cable programming distribution agreements, (iii) an increase
of $0.4 million in management and operational support expenses and (iv) an
increase of $0.1 million in expenses related to the development of an
e-commerce and Internet advertising business. The increase was partially
offset by an increase in salary and administrative allocations from general and
administrative expenses to operating expenses. As a percentage of total
revenues, general and administrative expenses remained relatively flat at 18%
for the three months ended September 30, 1998 and 1999.
As a result of the transfer of a controlling interest in Jones
Intercable from Jones International and its affiliates to Comcast Corporation
in April 1999, Jones Intercable no longer shares in many of the
administrative and related expenses which have historically been shared by
the various entities affiliated with Mr. Jones, including the Company.
Because Jones Intercable was the largest of such sharing entities, its
exclusion from the allocation process has caused the Company, beginning in
the second half of 1999, to incur increases in certain overhead and related
costs, including rent, computer services, insurance, and personnel costs for
legal, risk management and human resources services. As result, management
estimates when Jones Intercable is
19
excluded from the allocation process of all the above noted costs, which is
expected to be no later than December 31, 1999 the operating expenses will
most likely increase by approximately $35,000 - $50,000 per month beginning
the first quarter of 2000.
Management has taken certain steps and will take additional steps to
mitigate the impact of these divestitures; however, there can be no assurance
that the Company will be able to reduce the level of these costs.
The Company is in the process of developing a broader Internet strategy,
initially by leveraging the Company's existing targeted country music media
to drive visitors to a country lifestyle portal. The Company has also begun
to develop similar Internet portals for the 24-hour radio formats and
syndicated programs that are owned and distributed by the Company. The
Company intends to develop web sites for many of its formats and certain of
its syndicated programming. To develop the Company's Internet strategy,
Internet expenses will increase substantially beginning in the fourth quarter
of 1999 and into 2000.
TOTAL OTHER EXPENSE--Total other expense decreased $0.4 million, or 12%,
from $3.5 million for the three months ended September 30, 1998 to $3.1
million for the three months ended September 30, 1999. In 1998, the Company
incurred $0.6 million of debt offering related costs while no similar expense
was incurred in 1999. The decrease was partially offset by an increase in
interest expense and a decrease in interest income.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1999
TOTAL REVENUES--Total revenues increased $19.6 million, or 79%, from
$25.0 million for the nine months ended September 30, 1998 to $44.6 million
for the nine months ended September 30, 1999. This increase was due to strong
growth in all of the Company's operations as well as the acquisitions of
MediaAmerica and Broadcast Programming. Radio programming revenues increased
due to improved advertising rates and sellout conditions in 1999 and the
acquisitions of the assets of MediaAmerica and Broadcast Programming. The
increase in television programming revenues was due to an increase in the
number of subscribers receiving both Great American Country and Product
Information Network, resulting in increased advertising sales and affiliate
fee revenue. The increase in satellite delivery and production support
revenue was due to new affiliate and third party satellite transponder and
earth station services agreements that the Company entered into in the third
quarter of 1998 and the second quarter of 1999.
RADIO PROGRAMMING REVENUES-- Radio programming revenues increased $5.7
million, or 87%, from $6.6 million for the nine months ended September 30,
1998 to $12.3 million for the nine months ended September 30, 1999, due
primarily to an increase in radio advertising revenue. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
the three months ended September 30, 1998 and 1999.
RADIO REPRESENTATION REVENUES--Radio representation revenues increased
$4.1 million, or 173%, from $2.4 million for the nine months ended September
30, 1998 to $6.5 million for the nine months ended September 30, 1999. Radio
representation revenues for the nine months ended September 30, 1998 do not
include MediaAmerica for the entire period as the MediaAmerica business was
not acquired until July 10, 1998. Accordingly, radio representation revenues
for the nine months ended September 30, 1998 are not comparable to the nine
months ended September 30, 1999. Radio representation revenues increased $0.2
million in the third quarter of 1999 as compared to the comparable period in
1998. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for the three months ended September 30, 1998 and 1999.
TELEVISION PROGRAMMING REVENUES--Television programming revenues
increased $7.2 million, or 60%, from $12.0 million for the nine months ended
September 30, 1998 to $19.2 million for the nine months ended September 30,
1999, due primarily to: (i) an increase of $5.5 million in Product
Information Network advertising revenues and an increase of $1.5 million in
Great American Country advertising revenues due to higher advertising rates
being charged for airtime as a result of an increase in the number of
subscribers receiving the Product Information Network and Great American
Country and (ii) an increase of $0.2 million in Great American Country
programming license fees due to an increase in the number of subscribers
paying affiliate fees.
SATELLITE DELIVERY AND PRODUCTION SUPPORT REVENUES--Satellite delivery
and production support revenues increased $2.6 million, or 65%, from $4.0
million for the nine months ended September 30, 1998 to $6.6 million for the
nine months ended September 30, 1999 due to (i) new third party agreements
that the Company entered into in the second half of 1998 and second
20
quarter of 1999 to provide satellite transponder and earth station services
resulting in $2.1 million in revenues and (ii) and an increase in $0.5
million in satellite delivery and production support fees charged to
affiliated parties.
TOTAL OPERATING EXPENSES--Total operating expenses increased $15.3
million, or 56%, from $27.3 million for the nine months ended September 30,
1998 to $42.6 million for the nine months ended September 30, 1999. As a
percentage of total revenues, total operating expenses decreased from 109%
for the nine months ended September 30, 1998 to 96% for the nine months ended
September 30, 1999.
RADIO PROGRAMMING EXPENSES--Radio programming expenses increased $2.6
million, or 48%, from $5.5 million for the nine months ended September 30,
1998 to $8.1 million for the nine months ended September 30, 1999, due
primarily to an increase in the number of syndicated radio programs offered
by the Company as a result of the acquisitions of the assets of MediaAmerica
and Broadcast Programming and an increase of $0.3 million in fees to license
certain radio programming. As a percentage of radio programming revenues,
radio programming expenses decreased from 83% for the nine months ended
September 30, 1998 to 66% for the nine months ended September 30, 1999. The
decrease in radio programming expenses as a percentage of radio programming
revenues is due primarily to the increase in radio programming revenues
resulting from improved advertising rates and sellout conditions in 1999. In
addition, a significant portion of the Company's radio programming expenses
is fixed costs.
RADIO ADVERTISING REPRESENTATION EXPENSES--Radio representation expenses
increased $2.3 million, or 476%, from $0.5 million for the nine months ended
September 30, 1998 to $2.8 million for the nine months ended September 30,
1999. Radio representation expenses for the nine months ended September 30,
1998 do not include MediaAmerica for the entire period as the MediaAmerica
business was not acquired until July 10, 1998. Accordingly, radio
representation expenses for the nine months ended September 30, 1998 are not
comparable to the nine months ended September 30, 1999. Radio representation
expenses increased $0.4 million in the third quarter of 1999 as compared to
the comparable period in 1998. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for the three months ended
September 30, 1998 and 1999.
TELEVISION PROGRAMMING EXPENSES--Television programming expenses
increased $5.3 million, or 51%, from $10.4 million for the nine months ended
September 30, 1998 to $15.7 million for the nine months ended September 30,
1999, due (i) to an increase of $4.4 million in the amounts paid in the form
of rebates to cable systems receiving the Product Information Network, (ii)
an increase of $0.3 million in Great American Country affiliate sales costs
due to the sale of KTV's distribution assets which resulted in GAC absorbing
a higher proportion of JNS operating costs, (iii) an increase of $0.3 million
in management and television programming support expenses, (iv) an increase
of $0.2 million in advertising sales costs due to hiring of Great American
Country national advertising sales personnel and (v) an increase of $0.1
million in programming expenses incurred to develop or enhance Great American
Country programming. For the each of the nine months ended September 30, 1998
and 1999, the PIN Venture made rebates of approximately 75% of its
advertising revenues to these systems. As a percentage of television
programming revenues, television programming expenses decreased from 87% for
the nine months ended September 30, 1998 to 82% for the nine months ended
September 30, 1999.
SATELLITE DELIVERY AND PRODUCTION SUPPORT EXPENSES--Satellite delivery
and production support expenses increased $0.1 million, or 3%, from $3.8
million for the nine months ended September 30, 1998 to $3.9 million for the
nine months ended September 30, 1999. The increase is due primarily to
additional third party and affiliate usage of the Company's uplinking and
playback services. As a percentage of satellite delivery and production
support revenues, satellite delivery and production support expenses
decreased from 95% for the nine months ended September 30, 1998 to 60% for
the nine months ended September 30, 1999. The decrease in satellite delivery
and production expenses in relation to revenues is due primarily to the
increase in satellite delivery and production support revenues resulting from
the new satellite transponder and earth station services agreements that the
Company entered into in the second half of 1998 and the second quarter of
1999. A significant portion of the costs of the Company's satellite
transponder and production support services is fixed. Accordingly, as the
Company increased its utilization of the excess capacity on its Satcom C-3
transponder and related services, the percentage of satellite delivery and
production support expenses in relation to the satellite delivery and
production services revenues decreased.
SELLING AND MARKETING EXPENSES--Selling and marketing expenses increased
$1.7 million, or 55%, from $3.1 million for the nine months ended September
30, 1998 to $4.8 million for the nine months ended September 30, 1999 due to
(i) an increase of $1.0 million in selling and marketing expenses resulting
from the MediaAmerica acquisition, (ii) an increase of $0.3 million in
21
marketing expenses due to the increased marketing efforts undertaken to
improve the distribution of Great American Country (iii) an increase of $0.2
million in marketing expenses related to the BP activities following the BP
acquisition and (iv) an increase of $0.2 million in marketing expenses due to
the increased marketing efforts undertaken to broaden the Company's base of
radio stations. As a percentage of total revenues, selling and marketing
expenses decreased from 12% for the nine months ended September 30, 1998 to
11% for the nine months ended September 30, 1999. Due to the increase in the
Company's total revenues, selling and marketing expenses as a percentage of
total revenues decreased.
GENERAL AND ADMINISTRATIVE EXPENSES--General and administrative expenses
increased $3.2 million, or 80%, from $4.1 million for the nine months ended
September 30, 1998 to $7.3 million for the nine months ended September 30,
1999. The increase is due to (i) an increase of $1.3 million in amortization
expenses related to the amortization of Great American Country cable
programming distribution payments and goodwill from the acquisition of
MediaAmerica, (ii) an increase of $1.2 million in general and administrative
expenses due to the MediaAmerica Acquisition, (iii) an increase of $0.6
million in general and administrative expenses due to the BP Acquisition,
(iv) an increase of $0.4 million in management and operational support
expenses and (v) an increase of $0.2 million in expenses related to the
development of an e-commerce and internet advertising business. This increase
was offset by an increase in salary and administrative allocations from
general and administrative expenses to operating expenses. As a percentage of
total revenues, general and administrative expenses remained relatively flat
at 16% for the nine months ended September 30, 1998 and 1999.
As a result of the transfer of a controlling interest in Jones
Intercable from Jones International and its affiliates to Comcast Corporation
in April 1999, Jones Intercable no longer shares in many of the
administrative and related expenses which have historically been shared by
the various entities affiliated with Mr. Jones, including the Company.
Because Jones Intercable was the largest of such sharing entities, its
exclusion from the allocation process has caused the Company, beginning in
the second half of 1999, to incur increases in certain overhead and related
costs, including rent, computer services, insurance, and personnel costs for
legal, risk management and human resources services. As result, management
estimates when Jones Intercable is excluded from the allocation process of
all the above noted costs, which expected to be no later than December 31,
1999 the operating expenses will most likely increase by approximately
$35,000 - $50,000 per month beginning the first quarter of 2000.
Management has taken certain steps and will take additional steps to
mitigate the impact of these divestitures; however, there can be no assurance
that the Company will be able to reduce the level of these costs.
TOTAL OTHER EXPENSE--Total other expense increased $2.6 million, or 41%,
from $6.3 million for the nine months ended September 30, 1998 to $8.9
million for the nine months ended September 30, 1999. This increase is due
primarily to an increase of $6.1 million in interest expense related to the
Notes and an increase of $0.7 million in interest expense related to the
amortization of debt offering costs related to the notes. The increase was
partially offset by (i) a decrease of $3.0 million in interest expenses
related to the repayment of debts using the proceeds from the Notes, (ii) a
decrease of $0.9 million in other expenses and (iii) an increase of $0.3
million in interest income earned on cash and cash equivalents and available
for sale securities. In 1998, the Company incurred debt offering related
costs of $0.9 million while no similar expenses were incurred in 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's ability to successfully implement its growth strategies is
subject to the availability of cash generated from operations and equity
and/or debt financing. The Company had cash, cash equivalents, and available
for sale securities of $17.1 million as of September 30, 1999. There can be
no assurance that the Company will have sufficient cash flow from operations
after debt service to support its growth strategies. In addition, there can
be no assurance that the capital resources necessary to accomplish the
Company's growth strategies over the long term will be available, or if
available, will be on terms and conditions acceptable to the Company.
Since its inception, the Company has incurred net losses primarily as a
result of expenses associated with developing and launching its programming
networks. For the nine months ended September 30, 1999, the Company incurred
a net loss of $(7.9) million. Net cash used in operating activities for the
nine months ended September 30, 1999 was $(0.8) million compared with net
cash used in operations of $(7.5) million for the nine months ended September
30, 1998. Net cash used in operating activities for the nine months ended
September 30, 1998 included the net repayment of $7.3 million of advances
from Jones International.
Net cash provided by financing activities for the nine months ended
September 30, 1999 consisted of the issuance of $20.1
22
million of Series A Preferred equity. The issuance of the $20.1 million
Series A Preferred equity was closed in September 1999. Of the remaining $3.9
million, $1.9 million was closed in October 1999. The remaining $2.0 million
is anticipated to close in November 1999, subject to documentation. An
affiliate of the Company's chairman and majority shareholder, Mr. Jones,
purchased $20.0 million. The Company used $20.0 million of the proceeds from
the Series A Preferred equity issuance to repay $20.0 million of indebtedness
under the Company's $20.0 million Credit Facility. The balance will be used
to develop the Company's Internet strategy and for general corporate purposes.
The Company's investing activities in the first nine months of 1999
totaled $27.3 million and consisted of (i) $20.9 million for the BP
Acquisition (ii) $1.7 million for the purchase of available for sale
securities, (iii) $3.7 million of cable programming distribution agreement
payments for Great American Country, (iv) $0.6 million of capital
expenditures and (v) $0.4 million of purchases of programming and other
intangible assets. Total capital expenditures for the balance of 1999 are
estimated to be approximately $0.4 million, which will be used primarily to
purchase equipment for the upgrades of certain radio programming studios and
to purchase satellite receivers. Total cable programming distribution
agreement payments for Great American Country for the balance of 1999 are
estimated to be approximately $2.5 million to $4.0 million.
On August 2, 1999, the Company acquired certain radio programming assets
in the BP Acquisition for $20.0 million plus estimated closing adjustments of
approximately $860,000, in cash. The closing adjustments are subject to final
adjustments. The acquisition has been accounted for under the purchase method
and accordingly, the purchase price allocation is preliminary and adjustments
may be recorded through August 2000. The Company recorded approximately $9.6
million in goodwill and $10.0 million in affiliate and personal service
agreements in connection with the BP Acquisition. The affiliate and personal
service agreements are recorded as intangible assets.
On July 29, 1999, the Company entered into a $20.0 million credit
facility with a commercial bank to finance the BP Acquisition on a short-term
basis (the "Credit Facility"). In order to allow the Company to obtain more
favorable terms, Jones International has guaranteed the loan and provided
certain collateral as security for the guaranty. The Credit Facility bears
interest either at the commercial bank's prime rate minus two percent or a
fixed rate (which is approximately equal to LIBOR) plus one half of one
percent. The interest rate was 5.84% per annum at September 30, 1999. The
Credit Facility will expire on June 30, 2000, unless extended. On September
30, 1999, the Company used a portion of the proceeds from the Series A
Preferred equity to pay down all amounts outstanding under the Credit
Facility. The full amount of the Credit Facility was available to the Company
as of September 30, 1999.
The Company had received advances and loans from Jones International and
related companies to fund its operating and investing activities in the past.
Prior to April 2, 1997, The Company joined in filing a consolidated tax
return with Jones International under the terms of a tax allocation agreement
which was terminated subsequent to April 2, 1997. Pursuant to the terms of
the tax allocation agreement, tax benefits were allocated to the Company
based on its pro rata contribution of taxable loss to Jones International's
taxable loss. In 1997 and 1998, Jones International elected to defer the
payments of the tax benefits due to the Company pursuant to the terms of the
tax allocation agreement. In the first quarter of 1999, Jones International
elected to make a $1.3 million payment of tax benefits through a reduction of
the intercompany balance between the Company and Jones International. The
remaining intercompany balance was subsequently reimbursed to Jones
International in April 1999. In the normal course of business, Jones
International (1) remits funds on behalf of the Company to third parties and
affiliates in payment for products and services purchased by the Company, and
(2) receives funds on behalf of the Company in payment for products and
services provided by the Company. Starting in April 1999, these amounts are
reimbursed from or to Jones International on a monthly basis. Outstanding
advances from Jones International and related parties at September 30, 1999
were approximately $0.3 million.
As a result of the transfer of a controlling interest in Jones
Intercable from Jones International and its affiliates to Comcast Corporation
in April 1999, Jones Intercable no longer shares in many of the
administrative and related expenses which have historically been shared by
the various entities affiliated with Mr. Jones, including the Company.
Because Jones Intercable was the largest of such sharing entities, its
exclusion from the allocation process has caused the Company, beginning in
the second half of 1999, to incur increases in certain overhead and related
costs, including rent, computer services, insurance, and personnel costs for
legal, risk management and human resources services. As result, Management
estimates when Jones Intercable is excluded from the allocation process of
all the above noted costs, which is expected to be no later than December 31,
1999 the operating expenses most likely will increase by approximately
$35,000 - $50,000 per month beginning the first quarter of 2000.
In addition, as a result of the sale of KTV's distribution assets in
September 1999, the Company will absorb substantially
23
all of the costs of JNS, which provided cable affiliate sales and certain
marketing services to the Company and KTV. Beginning in the fourth quarter of
1999, JNS will provide these services only to the Company. As result,
management estimates its operating expenses will increase by approximately
$70,000 per month beginning in the fourth quarter of 1999. Further, KTV will
discontinue the use of certain earth station services provided by the Company
beginning early in the first quarter of 2000. It is estimated that the
Company's loss of revenue as result of the termination of these services to
KTV will be approximately $75,000 per month.
While Management has taken certain steps and will take additional steps
to mitigate the impact of these divestitures, there will be no assurance that
the Company will be able to reduce the level of these costs.
The Company depends, and will continue to depend, significantly upon the
earnings and cash flows of, and dividends and distributions from, its
subsidiaries to pay its expenses, meet its obligations and pay interest and
principal on the Notes and its other indebtedness. While the terms of the
Company's joint ventures (including the PIN Venture) generally require the
mutual consent of the Company and its joint venture partners to distribute or
advance funds to the Company, there are no significant contractual
restrictions on distributions from each of the Subsidiary Guarantors (as
defined in the Indenture for the Company's 11 3/4 percent Senior Secured
Notes) to the Company. Management believes that its cash balances, available
for sale securities, remaining proceeds from the sale of its Series A
Preferred equity and operating cash flow, including the cash flows of, and
dividends and distributions from its subsidiaries, will be sufficient to fund
the Company's cash flow requirements through 2000.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is the result of many computer programs being
written such that they will malfunction when reading a year of "00." This
problem could cause system failure or miscalculations causing disruptions of
business processes.
The Company initiated an assessment of how the Year 2000 problem could
affect its operations in the summer of 1997 and, in conjunction with related
parties, established a Year 2000 Program Office (the "Y2K Office") to manage
the process. The Y2K Office meets periodically with the Company's management
to inform them of its assessment activities, the Year 2000 priorities it has
identified, remediation recommendations and testing and compliance issues. In
addition, the Y2K Office organized and meets regularly with a review
committee comprised of representatives from various departments within the
Company to ensure that management from the affected areas participate in the
decision process.
The Y2K Office is currently working with the Company to implement the
steps needed to address the Year 2000 problem based upon set priorities and
the Company is testing the implemented solutions. The schedule for
implementing and testing Year 2000 solutions for systems that have been
determined to be first priority for the Company is as follows:
24
EXPECTED
PROJECT DESCRIPTION COMPLETION DATE
- ------- ----------- ----------------
Financials Y2K testing Completed
Contingency planning Completed
Unix Hardware Y2K Upgrade/testing Completed
Y2K contingency planning 4Q99
LAN/WAN Remediation/testing Completed
Contingency planning 4Q99
Telephony Systems Y2K testing Completed
Contingency planning 4Q99
GAC/PIN Y2K testing Completed
Contingency planning Completed
Radio Y2K testing 4Q99
Contingency planning 4Q99
Uplink Y2K testing Completed
Contingency planning Completed
In 1999, the Y2K Office will also focus on Year 2000 compliance issues
with respect to other systems, such as desktop hardware and software, data
archiving systems, traffic and billing reconciliation applications and other
record management systems. The Company has not used, and does not plan to
employ, unaffiliated third party verification and validation processes to
assure the reliability of its risk and cost estimates. The Company has not
deferred any other significant information technology projects due to Year
2000 efforts.
Jones International, the Company's parent, has contacted key vendors
of business application and operating software to determine the compliance of
their software. Several key information systems, including the primary
financial software applications, have been tested and have been determined to
be Year 2000 compliant. Additionally, an inventory has been conducted at the
Jones International data center and the Company's Uplink facilities for all
operational support systems and at the corporate office for all desktop
computer hardware and software to ensure all business application and
operating software is identified. The focus during the 4th quarter 1999 will
be on final Y2K testing on the Company's radio studios and on contingency
planning.
The Company has not incurred any material Year 2000 costs to date.
Management does not have an estimate for future Year 2000 project costs;
however, management expects future Year 2000 costs that may be incurred will
not have a material adverse effect on its financial condition and results of
operations.
The Company has not finalized contingency plans in the event that
systems are not Year 2000 compliant. In the event the Company fails to
finalize its contingency plans, which is not expected, the Company may not
resolve its Year 2000 issues, if any, in a timely and efficient manner. This
could heighten the risk that the Year 2000 problem may have a material
adverse effect on the Company's financial condition and results of operations.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which is effective for the
year ending December 31, 1999. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. If certain
conditions are met, a derivative may be specifically designated as (a) a
hedge of the exposure
25
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash
flows of a forecasted transaction or (c) a hedge of the foreign currency
exposure of a net investment in a foreign operation, an unrecognized firm
commitment, an available-for-sale security, or a foreign-currency-denominated
forecasted transaction. The Company will adopt this statement by December 31,
1999. Management of the Company does not expect that the adoption of this
statement will have a material impact on the Company's financial statements.
26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the financial
position, results of operations, or cash flows of the Company due to adverse
changes in financial market prices. The Company is exposed to market risk
through interest rates. This exposure is directly related to its normal
funding and investing activities.
Approximately $0.3 million of the Company's current liabilities is
subject to changes in interest rates; however, the Company does not use
derivatives to manage this risk. This exposure is linked primarily to the
prime rate. The Company believes that a moderate change in the prime rate
would not materially affect operating results of financial condition of the
Company.
ITEM 5: OTHER MATERIALLY IMPORTANT EVENTS
Jeffrey C. Wayne, formerly the President of the cable programming unit
for the Company, has been promoted to President and Chief Operating Officer
of the Company. All the Company's business units will now report to Mr. Wayne.
Glenn R. Jones resigned his position as President on October 12, 1999.
Mr. Jones remains Chairman of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
None
b) Reports on Form 8-K
None
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JONES INTERNATIONAL NETWORKS, LTD.
By:
--------------------------------------------
Jeffery C. Wayne
President/Chief Operating Officer
By:
--------------------------------------------
Jay B. Lewis
Group Vice President/Finance
(Principal Financial Officer)
Dated: November 12, 1999