AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 14, 1997
REGISTRATION NO. 333-15657
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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JONES INTERNATIONAL NETWORKS, LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
COLORADO 7922 84-1250515
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
9697 EAST MINERAL AVENUE
ENGLEWOOD, COLORADO 80112
(303) 792-3111
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
ELIZABETH M. STEELE, VICE PRESIDENT AND SECRETARY
9697 EAST MINERAL AVENUE
ENGLEWOOD, COLORADO 80112
(303) 792-3111
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
----------------
COPIES TO:
PAUL HILTON, ESQ. MARC WEINGARTEN, ESQ.
N. ANTHONY JEFFRIES, ESQ. DEBORAH FREEDMAN, ESQ.
DAVIS, GRAHAM & STUBBS LLP SCHULTE ROTH & ZABEL LLP
370 SEVENTEENTH STREET, SUITE 4700 900 THIRD AVENUE
DENVER, COLORADO 80202 NEW YORK, NEW YORK 10022
(303) 892-9400 (212) 756-2000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after the effective date of this Registration
Statement.
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS
SUBJECT TO COMPLETION, DATED FEBRUARY 14, 1997
3,350,000 SHARES
JONES INTERNATIONAL NETWORKS, LTD.
[LOGO OF
CLASS A COMMON STOCK JONES INTERNATIONAL
NETWORKS, LTD.
---------- APPEARS HERE]
All shares of Class A Common Stock offered hereby are being offered by Jones
International Networks, Ltd. (the "Company"). Prior to this offering, there has
been no public market for the Class A Common Stock of the Company. It is
anticipated that the initial public offering price of the Class A Common Stock
will be between $11.00 and $13.00 per share. See "Underwriting" for a
discussion of the factors considered in determining the initial public offering
price. Approximately $22.8 million of the $35.8 million net proceeds of this
offering will be used to repay debt owed to affiliates of the Company. See "Use
of Proceeds." The Company's Class A Common Stock has been approved for
quotation on the Nasdaq National Market under the trading symbol "JNET."
Holders of Class A Common Stock are entitled to one vote per share and
holders of Class B Common Stock are entitled to ten votes per share, except
that each share of Class B Common Stock is entitled to only one vote with
respect to certain "going private" transactions. Both classes vote together as
a single class on all matters not requiring a class vote under Colorado law.
The shares of Class B Common Stock are convertible into shares of Class A
Common Stock at the election of the holders thereof and automatically convert
into shares of Class A Common Stock upon their transfer to a party unaffiliated
with Glenn R. Jones (unless such transfer is approved by a vote of
disinterested shareholders) or generally upon the death of Mr. Jones. The
holders of the Class A Common Stock shall be entitled to receive the same
consideration on a per share basis (except with respect to per share voting
rights) as the holders of the Class B Common Stock in any merger,
reorganization or recapitalization of the Company. The Company will not support
a tender offer or exchange offer unless the per share consideration (except
with respect to voting rights) to both classes is the same. See "Description of
Capital Stock". Immediately following the offering (assuming no exercise of the
Underwriters' over-allotment option), Glenn R. Jones, the beneficial owner of
all of the Class B Common Stock, will have approximately 86% of the combined
voting power of the Company's total outstanding common stock. See "Principal
Shareholder" and "Risk Factors--Voting Rights; Control by Principal
Shareholder."
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE CLASS A COMMON
STOCK.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
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Per Share................................... $ $ $
Total(3).................................... $ $ $
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(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other information, including the Company's agreement to
grant a warrant to purchase shares of the Class A Common Stock to M. Kane &
Company, Inc. in consideration of certain financial advisory services
provided to the Company.
(2) Before deducting expenses of the offering estimated at $1.6 million payable
by the Company, which includes amounts payable to M. Kane & Company, Inc.
in consideration of certain financial advisory services provided to the
Company. See "Underwriting."
(3) The Company has granted an option to the Underwriters, exercisable within
30 days of the date hereof, to purchase up to 502,500 additional shares of
Class A Common Stock for the purpose of covering over-allotments, if any.
If the Underwriters exercise such option in full, the total Price to
Public, Underwriting Discounts and Commissions and Proceeds to Company will
be $ , $ and $ , respectively. See "Underwriting."
----------
The shares of Class A Common Stock are offered by the Underwriters when, as
and if delivered to and accepted by them, subject to their right to reject any
order in whole or in part and subject to certain other conditions. It is
expected that delivery of certificates representing the shares will be made
against payment on or about , 1997 at the office of Oppenheimer & Co.,
Inc., Oppenheimer Tower, World Financial Center, New York, New York 10281.
OPPENHEIMER & CO., INC.
HAMBRECHT & QUIST
M. KANE & COMPANY, INC.
The date of this Prospectus is , 1997
[The heading on this page is "Jones International Networks, Ltd." The page
is divided into three sections. The first section is labeled "Radio
Programming" which is placed above eleven color logotypes. Each logotype is
the symbol of one of the Company's radio programs. The second section is
labeled "Television Networks" and contains the color logotypes of the
Company's two television networks. The third section is labeled "Distribution
Facilities" and presents a color photograph of the Company's production
facilities and satellite transmission antennae.]
[ART]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A
COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ
NATIONAL MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by and should be read in
conjunction with the more detailed information and the historical and pro forma
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Prospectus. Unless the context requires otherwise, references to the Company
herein include Jones International Networks, Ltd. and its direct and indirect
subsidiaries and references to Common Stock herein refer collectively to the
Class A Common Stock and Class B Common Stock. In addition, unless the context
requires otherwise, all information in this Prospectus, including numbers and
percentages of the Company's Common Stock: (i) assumes that the Underwriters'
overallotment option has not been exercised, (ii) reflects the 220-for-one
stock split of the Class A Common Stock and Class B Common Stock, (iii)
reflects the completion of each of the other transactions (collectively, the
"Pre-Offering Transactions") described herein under "Prospectus Summary--Pre-
Offering Transactions," which are to be effected immediately prior to the
consummation of the offering and (iv) assumes an initial public offering price
of $12.00 per share. Investors should consider carefully the information set
forth under the heading "Risk Factors."
THE COMPANY
Jones International Networks, Ltd. (the "Company") creates, develops,
acquires and produces programming that it distributes to radio stations, cable
television system operators and other video distributors. The Company: (i)
provides radio programming to radio stations in exchange for advertising time
that it resells to national advertisers, (ii) provides television programming
to cable television system operators and other video distributors, sells
advertising time on its two television networks and receives license fees for
its country music television network and (iii) owns and operates playback,
uplink and satellite transmission facilities that are used to distribute the
Company's programming and also are subleased to others for a fee.
The Company launched its first 24-hour satellite delivered radio program in
1989 and, as of December 31, 1996, provided 11 radio programs to 1,273 radio
station affiliates in the United States and Canada. Approximately 64 of these
affiliates received more than one program from the Company. The Company's nine
24-hour music programs include popular music formats such as country and adult
contemporary. The Company also distributes one long-form country music
countdown program and one short-form country music news program. The Company
generally provides its radio programming to radio stations in exchange for
advertising time that the Company resells to national advertisers. In some
cases, the Company also charges radio stations a license fee for radio
programming. The Company, directly and through a joint venture, also provides
audio music and information programming for distribution via cable television
systems and for other applications.
The Company's television programming is distributed through two networks:
Product Information Network ("PIN") and Great American Country ("GAC"). The
Product Information Network Venture (the "PIN Venture"), a joint venture among
the Company, a subsidiary of Cox Communications, Inc. ("Cox") and Adelphia
Communications Corporation ("Adelphia"), operates the PIN network, a 24-hour
television network that airs long-form advertising generally known as
"infomercials." The Company introduced the PIN network in October 1993 to
capitalize on the rapidly growing infomercial industry. The PIN network airs
informational programming from major advertisers that include Ford Motor
Company, State Farm Insurance, Schering-Plough Corporation and Sony
Corporation, among others. In addition, the PIN network airs traditional direct
response infomercials. As of December 31, 1996, the PIN network was available
to
3
approximately 8.1 million households through 172 cable systems. Approximately
2.6 million of these households were located in 12 of the top 25 Designated
Market Areas ("DMAs"). The GAC network is a 24-hour country music video network
that was introduced in December 1995 to capitalize on the popularity of country
music. As of December 31, 1996, the GAC network was available to approximately
1.0 million households through 69 cable systems.
The Company's satellite delivery and production support services provide
reliable and efficient playback, trafficking, uplinking and satellite
transmission services to the Company's networks. The Company believes that
these distribution services allow it to have strict management and quality
control over the distribution of its programming. The Company also sells its
satellite delivery and production support services to certain related companies
and to a third party. For the delivery of television programming, the Company
has a long-term lease for two transponders on strategically positioned
satellites. Through the recent implementation of new digital compression
technologies that are available to the Company for both of its leased satellite
transponders, the Company has an increased amount of transponder capacity for
its own television programming and for sublease to third party television
networks. The Company also subleases space on other satellite transponders for
delivery of its radio programming.
To attract advertisers, radio and television media require programming that
is appealing to listeners and viewers. Given radio's wide reach and relatively
low advertising costs, it is one of the most cost-effective means to reach
targeted demographic groups. The Company believes that most radio stations
utilize some syndicated or network programming, similar to that provided by the
Company, due to the talent, time and expense required to develop a full day of
in-house programming. In addition, the Company believes infomercials provide
television advertisers with a cost-effective medium through which to deliver
sales messages, product introductions or demonstrations to a targeted audience.
The Company believes that as the benefits of infomercial programming become
more widely understood, the number of advertisers and the volume of infomercial
programming will continue to grow. The Company's country music television
network also participates in a growing media sector. According to industry
sources, country music is one of America's most popular music formats and one
of the fastest growing segments of the music industry in the United States.
Finally, the Company also believes that there is growing market demand for
satellite delivery and production support services, which the Company can
provide, to distribute television programming via satellite.
The Company's objective is to increase its revenue and operating cash flow by
employing the following strategies: (i) creating, developing, acquiring,
producing and distributing additional high-quality programming, (ii) increasing
the distribution of its radio and television networks by expanding its
marketing and sales activities directed at radio stations, multiple system
operators ("MSOs") and advertisers, (iii) acquiring and/or creating
complementary businesses and (iv) increasing the utilization of its satellite
transponder capacity and production support facilities.
The Company was founded by Glenn R. Jones. Mr. Jones is the Chairman and
Chief Executive Officer of Jones Intercable, Inc. ("Jones Intercable"), one of
the top ten cable television MSOs serving more than 1.4 million basic
subscribers in 47 cable television systems in the United States. Mr. Jones has
been instrumental in leading the Company's early growth and continues as its
majority shareholder and chairman. Mr. Jones has been a leader in the cable
television business for over 35 years and in 1994 he was inducted into the
Broadcasting and Cable Hall of Fame.
The Company was incorporated as a Colorado corporation in 1993, and it is the
successor to certain affiliated entities that previously conducted certain of
its businesses. The Company's corporate offices are located at 9697 East
Mineral Avenue, Englewood, Colorado 80112, and its telephone number is (303)
792-3111.
4
RECENT DEVELOPMENTS
Effective August 15, 1996, the Company acquired its radio programming
business through the purchase of all of the common stock of Jones Galactic
Radio, Inc. ("Galactic Radio") from Jones Global Group, Inc. ("Global Group"),
an affiliate of the Company, for a purchase price of $1.2 million in cash and a
$16.0 million note payable to Global Group.
Effective September 30, 1996, the Company acquired its playback, trafficking
and uplinking facilities through the purchase of all of the common stock of
Jones Earth Segment, Inc. ("Earth Segment") from Glenn R. Jones and Jones
International, Ltd. ("Jones International"), affiliates of the Company, for
110,833 shares and 472,500 shares, respectively, of the Company's Class A
Common Stock. As a result of this transaction, the Company assumed debt of
approximately $6.6 million owed by Earth Segment to Jones Intercable that was
incurred in connection with the construction of Earth Segment's facilities.
These transactions have been treated as a reorganization of entities under
common control (similar to a pooling of interests) and are included in the
Company's historical and pro forma Consolidated Financial Statements for all
periods presented in such statements. The Company intends to utilize a portion
of the proceeds of this offering to repay the debt incurred and assumed in
connection with the foregoing transactions. See "Use of Proceeds" and "Certain
Relationships and Related Transactions."
PRE-OFFERING TRANSACTIONS
PIN Venture Ownership Change. Since February 1995, the Company has owned 50%
or less of the PIN Venture, the entity that owns and operates the PIN network.
Immediately prior to the consummation of the offering, the Company will acquire
from Adelphia an 8.35% equity interest in the PIN Venture in exchange for
262,500 shares of the Company's Class A Common Stock. As a result of this
transaction, the Company will own approximately 54% of the PIN Venture and,
going forward, will be able to consolidate the operations of the PIN Venture
for financial reporting purposes.
Minority Interests in Jones Infomercial Networks and Great American
Country. Immediately prior to the consummation of the offering, the Company
will acquire Glenn R. Jones' 19% equity interest in Jones Infomercial Networks,
Inc., the subsidiary through which the Company has invested in the PIN Venture,
and Mr. Jones' 19% equity interest in Great American Country, Inc., the
subsidiary through which the Company operates the GAC network, in exchange for
333,333 shares of the Company's Class A Common Stock. Following these
transactions, these subsidiaries will be wholly owned by the Company.
Jones Space Segment Transaction. Immediately prior to the consummation of the
offering, the Company will acquire the satellite transponder leases and related
subleases owned by Jones Space Segment, Inc. ("Space Segment"), an affiliate of
the Company, in exchange for 416,667 shares of the Company's Class A Common
Stock.
Conversion of Jones International Advances. Immediately prior to the
consummation of the offering, the Company will convert all of the approximately
$6.0 million of advances owed to Jones International as of December 31, 1996
into 501,492 shares of the Company's Class B Common Stock.
The foregoing transactions are referred to collectively in this document as
the "Pre-Offering Transactions" and are given effect in the Company's pro forma
Consolidated Financial Statements presented elsewhere in this Prospectus. The
shares of Class A Common Stock and Class B Common Stock to be issued in the
Pre-Offering Transactions are valued at the assumed initial public offering
price of the Class A Common Stock of $12.00 per share. The actual number of
shares to be issued in these transactions will be adjusted, if necessary, to
reflect the actual initial public offering price.
5
THE OFFERING
Class A Common Stock
offered by the Company:.... 3,350,000 shares
Common Stock to be
outstanding after the
offering:
Class A Common Stock...... 6,330,953 shares
Class B Common Stock......
1,886,612 shares
---------
Total................... 8,217,565 shares(1)
=========
Use of proceeds.............
The Company intends to use the net proceeds from
the offering as follows: (i) approximately $16.2
million to repay the debt incurred in connection
with the acquisition of the Company's radio
network business, (ii) approximately $6.6 million
to repay the debt assumed in connection with the
acquisition of the Company's satellite services
facilities, and (iii) approximately $13.0 million
for general corporate purposes, including working
capital and the acquisition and/or creation of
complementary businesses. See "Use of Proceeds."
Voting rights...............
Holders of Class A Common Stock are entitled to
one vote per share and holders of Class B Common
Stock are entitled to ten votes per share, except
that each share of Class B Common Stock is
entitled to only one vote per share with respect
to certain "going private" transactions. Both
classes vote together as a single class on all
matters not requiring a class vote under Colorado
law. The shares of Class B Common Stock are
convertible into shares of Class A Common Stock
at the election of the holders thereof and
automatically convert into shares of Class A
Common Stock upon their transfer to a party
unaffiliated with Glenn R. Jones (unless such
transfer is approved by a vote of disinterested
shareholders) or generally upon the death of Mr.
Jones. See "Description of Capital Stock."
Immediately following the offering, Glenn R.
Jones, the beneficial owner of the Class B Common
Stock, will have approximately 86% of the
combined voting power of the Company's
outstanding Common Stock. See "Principal
Shareholder" and "Risk Factors--Voting Rights;
Control by Principal Shareholder,--Anti-Takeover
Effects, and--Conflicts of Interest; Transactions
with and Reliance on Affiliates."
Nasdaq National Market
symbol..................... JNET
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(1) Excludes: (i) 945,000 shares of Class A Common Stock reserved for issuance
pursuant to the Company's Stock Option Plan, 300,000 of which will be
subject to outstanding options as of the consummation of this offering and
(ii) 14,000 shares of Class A Common Stock issuable under a warrant the
Company has agreed to grant to M. Kane & Company, Inc. with an exercise
price equal to 120% of the initial public offering price. See "Management--
Stock Option Plan" and "Underwriting."
6
SUMMARY CONSOLIDATED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
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(IN THOUSANDS, EXCEPT PER SHARE
AND AFFILIATE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue................................... $ 6,572 $ 9,683 $ 12,682
Operating expense......................... 8,533 10,683 14,400
Operating loss............................ (1,961) (1,000) (1,718)
Net loss before taxes and minority
interests................................ (1,743) (1,720) (2,148)
Net loss.................................. (1,657) (1,382) (1,994)
Net loss per common share(1).............. (.49) (.41) (.59)
Weighted average number of common shares
outstanding.............................. 3,354 3,354 3,354
OTHER DATA:
Cash flows provided by (used in) operating
activities............................... $ (6,933) $ (347) $ 2,336
Cash flows provided by (used in) investing
activities............................... (1,271) (1,698) (3,671)
Cash flows provided by (used in) financing
activities............................... 8,266 1,987 1,334
EBITDA(2)................................. (1,349) 1 644
Radio station AQH(3)(4)................... 670 765 1,090
Radio station affiliates(4)............... 925 929 1,273
PIN network households(4)................. 1,489 4,825 8,111
GAC network households(4)................. -- 14 1,049
DECEMBER 31, 1996
------------------------
ACTUAL AS ADJUSTED(5)
-------- --------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash.................................................. $ 4 $13,066
Working capital....................................... (5,074) 8,204
Total assets.......................................... 14,899 27,962
Long-term debt ....................................... 22,555 --
Total shareholders' investment........................ (15,215) 20,617
- --------
(1) For the years ended December 31, 1995 and 1996, the net loss per common
share would have been $(.22) and $(.23), respectively, had it been
calculated to give effect to: (i) the use of approximately $6.6 million and
$22.6 million of the offering to repay debt (and the related increase of
approximately 546,000 and 1,046,000 in the number of weighted average
common shares outstanding), (ii) the exclusion of the corresponding
interest expense related to such debt of approximately $670,000 and
$1,103,000, net of income taxes of approximately $137,000 and $110,000,
respectively and (iii) the grant of employee stock options to purchase
300,000 shares of Class A Common Stock.
(2) EBITDA is earnings before interest income (expense), provision for income
taxes, depreciation and amortization. EBITDA is not a recognized measure of
performance under generally accepted accounting principles ("GAAP") and
should not be considered in isolation or as a substitute for net income,
cash flows provided by (used in) operating, investing or financing
activities and other income and cash flow statement data prepared in
accordance with GAAP, or as a measure of liquidity or profitability.
(3) Average quarter hour audience ("AQH") represents the average audience
(persons age 12 or older) listening to radio stations broadcasting the
Company's advertising inventory during any 15-minute period from 6 am - 7
pm, Monday through Friday, as measured by the Arbitron rating service.
Radio advertising is generally sold on the basis of the total listening
audience as quantified by the AQH.
(4) Represents amounts at the end of the periods indicated. The GAC network was
launched in December 1995.
(5) Adjusted to give effect to the sale of 3,350,000 shares of Class A Common
Stock offered by the Company hereby, at an assumed offering price of $12.00
per share and after deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company, and the application of
the net proceeds therefrom (as if the offering and the application of the
net proceeds therefrom had occurred on December 31, 1996). See "Use of
Proceeds."
7
PRO FORMA SUMMARY CONSOLIDATED FINANCIAL DATA
The following table gives effect to the Pre-Offering Transactions as if they
had occurred at the beginning of the period indicated for Statement of
Operations Data and at December 31, 1996 for Balance Sheet Data. See
"Prospectus Summary--Pre-Offering Transactions."
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE
AND AFFILIATE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue................................... $ 11,292 $ 16,491 $ 23,114
Operating expense......................... 10,811 15,693 21,420
Operating income.......................... 481 798 1,694
Net loss before taxes and minority
interests................................ (2,692) (2,995) (2,201)
Net loss.................................. (2,303) (2,308) (2,307)
Net loss per common share(1).............. (.50) (.48) (.47)
Weighted average number of common shares
outstanding.............................. 4,605 4,846 4,868
OTHER DATA:
Cash Flows provided by (used in) operating
activities............................... $ (6,164) $ 2,957 $ 4,670
Cash Flows provided by (used in) investing (4,265)
activities............................... (1,271) (4,669)
Cash Flows provided by (used in) financing
activities............................... 7,426 1,028 (368)
EBITDA(2)................................. 3,996 5,402 6,343
Radio station AQH(3)(4)................... 670 765 1,090
Radio station affiliates(4)............... 925 929 1,273
PIN network households(4)................. 1,489 4,825 8,111
GAC network households(4)................. -- 14 1,049
DECEMBER 31, 1996
-------------------------
PRO FORMA,
PRO FORMA AS ADJUSTED(5)
--------- --------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash................................................. $ 59 $13,121
Working capital...................................... 1,929 15,207
Total assets......................................... 42,454 55,517
Long-term debt and capital lease obligation.......... 53,277 30,722
Total shareholders' investment....................... (14,110) 21,722
- --------
(1) For the years ended December 31, 1995 and 1996 the net loss per common
share would have been $(.33) and $(.22), respectively, had it been
calculated to give effect to: (i) the use of approximately $6.6 million and
$22.6 million of the offering to repay debt (and the related increase of
approximately 546,000 and 1,046,000 in the number of weighted average
common shares outstanding), (ii) the exclusion of the corresponding
interest expense related to such debt of approximately $670,000 and
$1,103,000, net of income taxes of approximately $137,000 and $110,000,
respectively and (iii) the grant of employee stock options to purchase
300,000 shares of Class A Common Stock.
(2) EBITDA is earnings before interest income (expense), provision for income
taxes, depreciation and amortization. EBITDA is not a recognized measure of
performance under GAAP and should not be considered in isolation or as a
substitute for net income, cash flows provided by (used in) operating,
investing or financing activities and other income and cash flow statement
data prepared in accordance with GAAP, or as a measure of liquidity or
profitability.
(3) AQH represents the average audience (persons age 12 or older) listening to
radio stations broadcasting the Company's advertising inventory during any
15-minute period from 6 am - 7 pm, Monday through Friday, as measured by
the Arbitron rating service. Radio advertising is generally sold on the
basis of the total listening audience as quantified by the AQH.
(4) Represents amounts at the end of the periods indicated. The GAC network was
launched in December 1995.
(5) Adjusted to give effect to the sale of 3,350,000 shares of Class A Common
Stock offered by the Company hereby, at an assumed offering price of $12.00
per share and after deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company, and the application of
the net proceeds therefrom (as if the offering and the application of the
net proceeds therefrom had occurred on December 31, 1996). See "Use of
Proceeds."
8
RISK FACTORS
An investment in the shares of Class A Common Stock offered hereby involves
a high degree of risk. Prospective investors should consider carefully the
following factors, as well as all of the other information set forth in this
Prospectus, in evaluating an investment in the Class A Common Stock offered
hereby. This Prospectus may contain forward-looking statements that involve
risks and uncertainties. Discussions containing such forward-looking
statements may be found in the material set forth under "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Business," as well as elsewhere in the Prospectus. Actual
events or results may differ materially from those discussed in the forward-
looking statements as a result of various factors, including, without
limitation, the risk factors set forth below and the matters set forth in the
Prospectus generally.
HISTORY OF NET LOSSES; EXPECTED FUTURE NET LOSSES
The Company has sustained net losses of $1.7 million, $1.4 million and $2.0
million, and operating losses of $2.0 million, $1.0 million and $1.7 million,
for the years ended December 31, 1994, 1995 and 1996, respectively. The net
losses have resulted in an accumulated deficit of $15.2 million as of December
31, 1996. Such net losses and accumulated deficit are generally greater when
the pro forma effects of the Pre-Offering Transactions are reflected. There
can be no assurance that the Company will ever generate net income. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
RELIANCE ON AFFILIATES FOR FINANCING; RISKS OF INABILITY TO OBTAIN ADDITIONAL
FINANCING
The Company's cash flow provided by (used in) operating activities was
$(6.9) million, $(0.3) million and $2.3 million for the years ended December
31, 1994, 1995 and 1996, respectively. The Company has relied on advances and
loans from Jones International and related companies to fund a portion of its
cash needs. Jones International and such related companies are under no
obligation to provide, nor does the Company expect them to provide, additional
financial assistance to the Company subsequent to the consummation of this
offering. Although the Company believes that the net proceeds of this
offering, together with its cash flow from operations, will be sufficient to
satisfy the Company's capital requirements through at least December 31, 1997,
there can be no assurance to such effect or that the Company will be able to
meet its longer term capital requirements. The Company has received a
commitment from a commercial bank for a $25 million revolving credit facility.
There can be no assurance, however, that the Company will be able to negotiate
a final agreement for the credit facility, achieve or maintain the financial
ratios or meet the other conditions necessary to enable it to borrow under the
credit facility, or obtain any other sources of financing on acceptable terms,
if at all. Upon the execution of the definitive agreement for such facility,
the Company anticipates being limited to less than $7 million of available
borrowings, subject to the Company's ability to meet certain financial ratios
and other conditions. In addition, future equity financing could have a
dilutive effect on the Company's then existing shareholders. If the Company is
unable to obtain financing on acceptable terms in the future, it could suffer
a material adverse effect. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
RISKS ASSOCIATED WITH DISTRIBUTION OF TELEVISION PROGRAMMING
The Company's business is dependent in part upon the distribution of the PIN
and GAC networks through cable television systems and other video
distributors. In terms of cable distribution, the PIN and GAC networks compete
for a limited number of available cable channels with a large number of well-
established programmers supplying a variety of alternative programming,
including entertainment, sports, news, public affairs and educational
programming. Many of these programmers provide substantial cash incentives to
cable television
9
systems and other video distributors that the Company has not historically
provided. In addition, cable programming distribution is controlled by MSOs,
some of which are affiliated with competing program providers. Also, sales of
cable systems by MSOs that have affiliation agreements with the Company could
result in a loss of subscribers to the Company's television networks if the
new cable system owners do not retain the Company's programming. Because
advertising revenue generated by the PIN and GAC networks is a function of
distribution, the Company's success in the distribution of its television
programming will directly affect the amount of advertising revenue generated
by the Company's television networks. If the Company is unable to maintain or
increase the distribution of the PIN and/or GAC networks, it could suffer a
material adverse effect.
RELIANCE ON AFFILIATED PARTIES FOR DISTRIBUTION OF TELEVISION PROGRAMMING
A significant portion of the PIN network's distribution is on cable systems
owned and/or managed by affiliates of the PIN Venture's three partners. While
the PIN Venture has entered into affiliation agreements with a number of the
largest MSOs in the United States, as well as with a number of small MSOs,
carriage on each of the systems operated by an MSO is not guaranteed by such
agreements and, in many cases, these agreements do not guarantee the
distribution of the PIN network's programming for 24 hours per day. In
addition, the GAC network, which was launched in December 1995, is distributed
primarily on cable television systems owned or managed by Jones Intercable, an
affiliate of the Company. The license fees paid by Jones Intercable may be
reduced on April 1, 1997 if the GAC network has not entered into an
affiliation agreement by that date with another MSO with at least 400,000
basic subscribers on terms, including license fees, comparable to those
between the GAC network and Jones Intercable. It does not appear likely that
the Company will be able to meet these criteria. See "Certain Relationships
and Related Transactions." The Company's expansion plans for the PIN and GAC
networks are dependent, in part, upon its ability to enter into affiliation
agreements with additional MSOs and other video programming distributors and
to renew existing affiliation agreements with current MSOs when such
agreements expire. There can be no assurance that the Company will be able to
successfully negotiate affiliation agreements with any current or new MSO or
other video programming distributor.
RISKS ASSOCIATED WITH ACQUISITION AND DISTRIBUTION OF RADIO PROGRAMMING
The Company's ability to maintain and increase the distribution of its radio
networks and to increase the audience for its radio programming is dependent
upon, among other factors, its ability to assess consumer preferences
accurately, its ability to develop, acquire and distribute radio programming
that is attractive to radio listeners, and the amount of radio programming
produced in-house by radio stations. The Company acquires certain of its radio
programming from third party programmers pursuant to license agreements that
provide that the third party programmers bear the costs incurred in developing
and producing the programming. These license agreements are typically for a
term of three to five years. The Company does not generally retain the rights
to the programming upon the termination of these license agreements. There can
be no assurance that the Company will be able to continue to develop or
acquire radio programming on acceptable terms that will be desirable to its
targeted markets. There can similarly be no assurance that the Company will be
able to enter into new affiliation agreements, or maintain its existing
affiliation agreements, with radio stations.
DEPENDENCE ON ADVERTISING REVENUE
The Company is heavily dependent on advertising revenue. For the year ended
December 31, 1996, advertising revenue comprised 55% of the Company's total
revenue. Attracting advertisers
10
is dependent upon the Company's ability to demonstrate that its networks are
able to deliver the type and quantity of radio listeners and television
viewers that such advertisers seek to target with their advertising. The
Company's success in this endeavor will be affected by a number of factors,
including, among others, the Company's ability to expand the distribution of
its networks, to deliver high quality, entertaining programming that is
appealing to additional listeners and viewers and to increase awareness of its
networks and measure the type and quantity of radio listeners and television
viewers tuned to its networks. There can be no assurance that the Company will
be successful in this endeavor.
The Company's advertising revenue and operating results also may be
adversely affected by economic downturns. Such economic downturns, if
prolonged, might have an adverse impact on radio and television advertising
and on the Company's financial condition and results of operations. In
addition, advertising revenue may be impacted by many other factors beyond the
Company's control, including, but not limited to: (i) the amount of funds that
advertisers dedicate to radio and television advertising in general and to the
Company's networks in particular, (ii) the popularity of programming and
ratings achieved by third party radio station affiliates that broadcast the
Company's radio programming or utilize its services, (iii) the number of
advertisers who seek audiences within the demographic groups to which the
Company's networks target programming, (iv) competition within national and
regional markets from other media and (v) regulatory restrictions on
advertising (e.g., beer, wine, liquor or cigarette advertising). There can be
no assurance that the Company will be able to maintain its existing
advertisers or attract additional advertisers in the future. The Company could
suffer a material adverse effect if it is unable to maintain or increase its
advertising revenue.
DEPENDENCE ON ADVERTISING RELATIONSHIPS
The Company's radio network advertising revenue is highly dependent on the
efforts of its national advertising representation firm, MediaAmerica, Inc.
("MediaAmerica"). In 1996, 97% of the Company's radio advertising revenue was
derived from sales made through MediaAmerica. The Company contracts with
MediaAmerica for the sale of advertising on its 24-hour radio formats and the
Crook & Chase Country CountDown program pursuant to agreements that expire in
May 1998. In addition, the Company contracts with MediaAmerica for the
majority of the GAC network's advertising sales pursuant to a contract that
expires in December 1998. There can be no assurance that MediaAmerica will
continue to be able to sell advertising time on the Company's networks. Nor
can there be any assurance that the Company will be able to renew its
contracts with MediaAmerica, or obtain a suitable replacement, on acceptable
terms.
The Company's television network advertising revenue is highly dependent on
its relationships with National Media Group ("National Media") and Consumer
Resource Network ("CRN"). The Company sells large blocks of airtime on the PIN
network to National Media and CRN. In 1996, 65% of the Company's television
advertising revenue was derived from sales of airtime to these firms. The
rates per one-half hour of airtime that CRN and National Media pay to the PIN
network fluctuate based on, among other things, the number of subscribers to
the PIN network. The Company's contracts with National Media and CRN expire in
April 1997 and December 1997, respectively. The Company believes that National
Media and CRN may consider launching their own infomercial networks in the
future. There can be no assurance that National Media and CRN will continue,
maintain or increase the amount of airtime purchased on the PIN network. Nor
can there be any assurance that the Company will be able to renew its
contracts with these firms, or obtain suitable replacements, on acceptable
terms.
The termination of the Company's relationships with MediaAmerica, National
Media or CRN could have a material adverse effect on the Company.
11
INABILITY TO SUSTAIN OR MANAGE GROWTH
The Company's revenue has grown in recent years primarily as a result of
increased advertising and licensing revenue generated by its programming
networks. The Company's ability to maintain its growth will depend on a number
of factors, many of which are beyond the Company's control, including
maintaining and expanding distribution of the PIN and GAC networks, both
through MSOs, as well as through alternative distribution systems such as
direct broadcast satellite services ("DBS"), multi-system, multi-point
distribution services ("MMDS") and video distribution systems being
established by various telecommunications companies; maintaining and expanding
distribution of its radio networks; developing and acquiring additional
programming for the Company's radio networks that is consistent with listener
preferences; and attracting and maintaining advertisers that are willing to
pay competitive rates. In addition, the Company is subject to a variety of
business risks generally associated with growing companies. Future growth and
expansion could place significant strain on the Company's management personnel
and likely will require the Company to recruit additional management
personnel. As part of its business strategy, the Company will consider
acquiring and/or creating complementary businesses. The success of this
strategy depends not only upon the Company's ability to identify and acquire
suitable businesses, but also upon its ability to integrate acquired
businesses into its organization effectively and to retain and motivate key
personnel of acquired businesses. In addition, the Company may face
competition from other companies for acquisition candidates. There can be no
assurance that the Company will be able to manage its expanding operations
effectively, that it will be able to maintain or accelerate its growth or that
such growth, if achieved, will result in profitable operations, that it will
be able to attract and retain sufficient management personnel necessary for
continued growth, or that it will be able to successfully make strategic
investments or acquisitions. The failure to accomplish any of the foregoing
could have a material adverse effect on the Company.
RISKS ASSOCIATED WITH SUBSTANTIAL LEVERAGE
The Company has historically been highly leveraged. Although a substantial
portion of the proceeds of the offering will be used to repay debt owed to
affiliates and will reduce the Company's leverage, the Company will remain
highly leveraged after such repayment. On a pro forma basis, and after giving
effect to the offering and the use of proceeds therefrom, the Company would
have had total long-term indebtedness of approximately $30.7 million and a
ratio of long-term indebtedness to total capitalization of 59% as of December
31, 1996 (as if the offering and the use of proceeds took place on that date).
Subsequent to this offering, the Company's long-term debt will consist
entirely of capitalized lease obligations acquired from Space Segment. See
"Prospectus Summary--Pre-Offering Transactions." The Company has also received
a commitment from a commercial bank for a revolving credit facility that may
result in the Company incurring debt in an amount up to $25 million. The
degree to which the Company is leveraged will restrict the Company's ability
to obtain additional financing in the future for working capital, capital
expenditures, acquisitions, general corporate purposes or other purposes and
will require the Company to dedicate a significant portion of the Company's
cash flow from operations to payments under its capitalized lease obligations
or the credit facility. The Company would suffer a material adverse effect if
it were unable to meet its capitalized lease or debt obligations.
DEPENDENCE UPON KEY PERSONNEL
The Company is dependent on the efforts and abilities of its senior
management, including those of Glenn R. Jones, its Chairman of the Board,
Gregory J. Liptak, its President, Jay B. Lewis, its Group Vice President/Chief
Financial Officer and Eric Hauenstein, the Vice President/General Manager of
its radio networks. The Company does not have employment agreements with, and
does not carry key life insurance on, any of its employees. The loss or
interruption of the services
12
of key members of management could have a material adverse effect on the
Company. In addition, the Company's success depends in part upon its ability
to attract and retain talented writers, performers and other creative
personnel. Although the Company believes that its relations with its creative
personnel are good and that it will continue to be successful in attracting
and retaining qualified creative personnel, there can be no assurance that the
Company will be able to continue to do so. See "Business--Associates and
Others" and "Management."
RISKS ASSOCIATED WITH THE PIN VENTURE
The PIN network is operated by the PIN Venture, a joint venture among the
Company, Cox and Adelphia. The Company has a majority-ownership interest in
the PIN Venture and manages the day-to-day operations of the PIN Venture. The
other venture partners, however, have certain voting rights with respect to
major decisions concerning the venture. In addition, the PIN Venture may in
the future issue equity to its existing partners or new partners which would
dilute the Company's interest in the PIN Venture and could result in the
venture's operations no longer being consolidated for financial reporting
purposes. If, for any reason, the Company is unable to consolidate the PIN
Venture's results of operations, the presentation of the Company's financial
statements would change because the PIN Venture's revenue and operating
income, if any, would not be included in the Company's consolidated revenue
and operating income. As a result, the market price for the Class A Common
Stock could decline. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Pre-Offering Transactions and Stock
Split" and "Business--Television Programming Networks--The PIN Venture
Agreement."
RISKS ASSOCIATED WITH SATELLITE DELIVERY AND PRODUCTION SUPPORT SERVICES;
TRANSPONDER LEASES
The Company delivers its television programming through its own satellite
delivery and production support facilities, and subleases transponder space
from third parties to deliver its radio programming. The Company also earns
revenue by providing satellite delivery and production support services to the
Company's affiliates and a third party. The Company's satellite delivery and
production support services cause the Company to incur substantial ongoing
fixed costs, particularly the cost of leasing satellite transponders, and,
therefore, the Company must generate significant revenue from these services
in order to generate net income from these services. In addition, on a pro
forma basis, 55% of the Company's satellite delivery and production support
revenue in 1996 was derived from affiliates of the Company. While the Company
has begun to actively market its additional satellite transponder capacity,
there can be no assurance that there will be any customers for such capacity,
or that the Company will be able to maintain or increase the revenue from its
other satellite delivery and production support services.
The Company's satellite transponder lease agreement provides various
protections to the Company in the event of satellite failure and the
transponders are not subject to preemption by third parties in most instances.
Although this agreement provides that the lessor will place the Company's
programming on a replacement satellite, there can be no assurance that this
would occur. There are a limited number of domestic communications satellites
available for the transmission of cable television programming to cable system
operators. The availability of transponders in the future is dependent on a
number of factors over which the Company has no control. These factors
include, primarily, the limited availability of desirable orbital slots for
commercial communications satellites, the successful launches of additional
commercial communications satellites by third parties and competition and
demand for transponder leases on existing and new satellites. If satellite
transmission were interrupted or terminated due to the failure or
unavailability of a transponder, such interruption or termination could have a
material adverse effect on the Company. See "Business--Satellite Delivery and
Production Support Services."
13
COMPETITION
Competition in the radio programming market is intense. The Company's radio
networks compete for both advertising dollars and radio station affiliates
with four major network radio distribution companies in the U.S., as well as
with a larger number of smaller independent producers and distributors. In
addition, the three largest competitors in the industry are affiliated with
major station owners, have recognized brand names and have large networks
which include affiliates to which such competitors pay compensation to
broadcast the network's commercials. There can be no assurance that the
Company will be able to compete successfully for radio advertising revenue.
Radio networks also face competition from improving technologies available
to local radio stations that may enable them to pre-record their local
announcers and automate their operations, thereby allowing them to reduce
costs and operate more efficiently. Another potential technological advance,
Digital Audio Radio Service ("DARS"), may permit national radio stations to
broadcast digital quality radio programming nationwide to homes, automobiles
and other locations via satellite. The Company cannot predict what effect the
potential future development of digital automation or DARS will have on the
radio industry or the Company.
Competition in the television programming market is also intense. The
Company's television networks compete for distribution on cable systems, for
viewers and for advertising revenue with hundreds of cable and broadcast
television networks supplying a variety of infomercial and entertainment
programming. The PIN network competes directly with at least three other
infomercial networks and believes that new infomercial networks are currently
being planned or formed that also will compete directly with the PIN network.
The PIN network also competes with at least 30 cable television networks, many
of which have a substantial number of viewers, that air infomercial
programming. The Company expects to encounter additional competition for
viewers as the implementation of technological advances, including the
deployment of digital compression technology, the deployment of fiber optic
cable and the "multiplexing" of cable services, allow cable systems to greatly
expand their channel capacity and, as a result, their ability to add new
networks. There can be no assurance that the infomercial concept will continue
to be acceptable to advertisers and consumers or that it will be able to
compete against other forms of advertising. The GAC network has one principal
direct competitor, a network that distributes its programming to approximately
half of the cable television subscribers in the United States. There can be no
assurance that the Company will be able to expand the distribution of its
television networks or compete successfully against the other networks.
The Company competes in the delivery of domestic satellite services with
satellite owners, satellite service providers, microwave carriers and full
service teleports, many of which have substantially greater financial and
other resources than the Company.
As there are generally few barriers to entry into the Company's markets, the
Company could in the future face competition from new competitors offering
services similar to those of the Company. The Company's radio and television
networks also compete with other forms of media for advertising dollars, such
as broadcast television, print, outdoor and other media. Many of the Company's
competitors have greater resources than the Company and there can be no
assurance that the Company will be able to compete successfully in the future.
If the Company is unable to compete successfully for distribution of its
networks and advertising revenue, it could suffer a material adverse effect.
See "Business--Competition."
VOTING RIGHTS; CONTROL BY PRINCIPAL SHAREHOLDER
Holders of Class A Common Stock have limited voting rights. Holders of Class
A Common Stock are entitled to one vote per share and holders of Class B
Common Stock are entitled
14
to ten votes per share, except that each share of Class B Common Stock is
entitled to only one vote with respect to certain "going private" transactions.
Both classes vote together as a single class on all matters not requiring a
class vote under Colorado law. The shares of Class B Common Stock are
convertible into shares of Class A Common Stock at the election of the holders
thereof and automatically convert into shares of Class A Common Stock upon
their transfer to a party unaffiliated with Glenn R. Jones (unless such
transfer is approved by a vote of disinterested shareholders) or generally upon
the death of Mr. Jones. See "Description of Capital Stock." Following the
completion of this offering, Glenn R. Jones will beneficially own 100% of the
voting power of the outstanding Class B Common Stock and 86% of the total
voting power of the outstanding Class A Common Stock and Class B Common Stock
combined. Thus, Glenn R. Jones will have the power to elect the entire Board of
Directors (the "Board") and to otherwise control all matters requiring
shareholder approval. See "Certain Relationships and Related Transactions,"
"Principal Shareholder" and "Description of Capital Stock."
ANTI-TAKEOVER EFFECTS
The voting control by the holders of the Class B Common Stock and certain
provisions of the Company's articles of incorporation may be deemed to have
certain anti-takeover effects. This voting control may have the effect of
delaying, deferring or preventing a change of control of the Company, including
any business combination with an unaffiliated party, impeding the ability of
the shareholders to replace management even if factors warrant such a change
and affecting the price that investors might be willing to pay in the future
for shares of the Company's Class A Common Stock. A majority of the directors
then in office, though less than a quorum, or the sole remaining director, will
be empowered to fill any vacancy on the Board. In addition, the Board, without
shareholder approval, will have the ability to cause the Company to issue up to
5,000,000 shares of preferred stock in one or more series with such rights,
obligations and preferences as the Board may provide. The provision for filling
vacancies on the Board and the ability of the Board to issue preferred stock
may discourage a third party from attempting to gain control of the Company and
may maintain the incumbency of the Board. See "Principal Shareholder" and
"Description of Capital Stock."
CONFLICTS OF INTEREST; TRANSACTIONS WITH AND RELIANCE ON AFFILIATES
The Company has engaged in and expects to continue to engage in certain
transactions with its affiliates. To date, these transactions have involved
primarily loans and advances to the Company, affiliation agreements for the
distribution of the Company's television programming, leasing of the Company's
satellite and production support services, lease agreements and service
agreements related to certain technical, computer and administrative services
provided to the Company. For the year ended December 31, 1996, approximately
$4.8 million, or 21%, of the Company's pro forma total revenue and
approximately $3.5 million, or 16%, of its pro forma total operating expenses
involved related party transactions. While Mr. Liptak and Mr. Lewis will devote
all of their time to the Company's business, certain of the Company's other
officers and directors are also officers and directors of the Company's
affiliates and will devote substantial amounts of their time to these
affiliates. Because certain officers and directors of the Company are also
officers and directors of such affiliates, the terms of any distribution,
programming, production, lease or other agreements between the Company and such
affiliates are not and will not be the result of arm's-length negotiations.
Although the Company has adopted a policy that requires any new material
related party transaction to be approved by a majority of the disinterested
members of the Board, there can be no assurance that the terms of any
transactions between the Company and its related companies have been or will be
as favorable as the Company could obtain from unrelated parties. See "--
Dependence upon Key Personnel" and "Certain Relationships and Related
Transactions."
15
SEASONALITY
Advertising revenue in the radio and television industries fluctuates due to
seasonality in such industries. The Company believes that radio network
revenue is typically lowest in the first quarter and television network
revenue is typically lowest in the third quarter. Other than the fees paid by
the Company to third parties for certain of its radio programming and the fees
paid in connection with the distribution of the PIN network, the Company's
costs have not varied significantly with respect to the seasonal fluctuation
of revenue. In the future, the Company's results of operations may fluctuate
from quarter to quarter. See "--Absence of Prior Public Market; Determination
of Offering Price; Possible Volatility of Stock Price," "Selected Consolidated
Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
BROAD DISCRETION AS TO USE OF PROCEEDS AFTER REPAYMENT OF DEBT
The Company intends to use the portion of the net proceeds of the offering
remaining after the repayment of debt owed to affiliates for general corporate
purposes, including the possible acquisition or creation of complementary
businesses. The Company has not entered into any acquisition agreement and has
not yet determined the particular means by which it will seek to expand its
business through acquisitions. As a result, a portion of the net proceeds will
be available for items that are not yet identified and the Company will have
broad discretion with respect to the application of such proceeds. See "Use of
Proceeds."
INTELLECTUAL PROPERTY
The Company regards its original programming as proprietary and relies
primarily on a combination of statutory and common law copyright, trademark
and trade secret laws, customer licensing agreements, nondisclosure agreements
and other methods to protect its proprietary rights. If substantial
unauthorized use of the Company's programming were to occur, the Company's
business and results of operations could be negatively affected. There can be
no assurance that the Company's means of protecting its proprietary rights
will be adequate or that the Company's competitors will not independently
develop similar program content and distribution methods. In addition, there
can be no assurance that third parties will not claim that the Company's
current or future programming infringes on the proprietary rights of others. A
rights infringement claim against the Company could have a material adverse
effect on the Company.
GOVERNMENT REGULATION
Although the Company's radio and television networks are not generally
directly regulated by the Federal Communications Commission ("FCC"), the radio
stations, cable television systems and other video distributors to which the
Company sells its programming are regulated. As a result, the federal laws and
FCC regulations that affect these entities indirectly affect the Company.
The ownership, operation and sale of radio stations are subject to the
jurisdiction of the FCC. Among other things, the FCC adopts and implements
regulations and policies that directly or indirectly affect the ownership,
operations and sale of radio and television stations, and has the power to
impose penalties for violations of its rules or federal statutes. Such
regulation may adversely affect the Company's business. The Telecommunications
Act of 1996 (the "Telecom Act") is significantly changing the radio broadcast
industry by repealing national limits on the number of radio stations that may
be owned by one entity and by relaxing the common ownership rules in a single
market. These measures have led to greater radio industry consolidation. The
effects of the Telecom Act on the broadcasting industry and thus on the
Company's radio networks are uncertain, and there can be no assurance that it
will not negatively impact the Company's
16
operations in the future. There can be no assurance that material adverse
changes in regulations affecting the radio industry, in general, or the
Company, in particular, will not occur in the future.
The cable television industry is subject to extensive federal, state and
local regulation. Regulation can take the form of rate controls, programming
carriage requirements and programming content restrictions. Such regulation
could affect the availability of time on local cable television systems for
sale by the Company as well as the price at which such time is available.
There can be no assurance that material adverse changes in regulations
affecting the cable television industry, in general, or the Company, in
particular, will not occur in the future.
The Company's satellite delivery and production support services are
directly regulated by the FCC. The Company holds FCC microwave and earth
station uplink licenses that it utilizes to provide delivery and support
services. Because the licenses held by the Company relate primarily to the
technical operation of its microwave and uplink facilities, which are used for
internal purposes and program delivery, the Company believes that there are
limited regulatory burdens associated with maintaining these licenses in good
standing. There can be no assurance, however, that the Company will be able to
maintain these licenses or that additional regulatory burdens will not be
imposed upon the Company in the future. See "Business--Government Regulation."
ABSENCE OF PRIOR PUBLIC MARKET; DETERMINATION OF OFFERING PRICE; POSSIBLE
VOLATILITY OF STOCK PRICE
Prior to the offering, there has been no public market for the Class A Common
Stock and there can be no assurance that an active public market will develop
or continue after the offering. The initial public offering price of the Class
A Common Stock was determined through negotiations between the Company and
representatives of the Underwriters and there can be no assurance that the
Class A Common Stock will not trade at a price less than the offering price.
See "Underwriting." The securities markets have experienced significant price
and volume fluctuations from time to time in recent years that have often been
unrelated or disproportionate to the operating performance of particular
companies. These broad fluctuations may adversely affect the market price of
the Class A Common Stock. In addition, the Company's quarterly and annual
results of operations are affected by a wide variety of factors, many of which
are outside the Company's control, which could have a material adverse effect
on the Company and the market price of the Class A Common Stock. These factors
include the timing and volume of advertising on the Company's radio networks
and television networks, the number and the size of the radio stations that
carry the Company's radio programming, the number and the size of cable
systems and other video distributors that carry the PIN and GAC networks, and
general economic conditions. Further, it is possible that in the future the
Company's revenue or operating results will be below the expectations of
public market analysts and investors. In such event, the price of the Class A
Common Stock could be materially adversely affected. In addition, if for any
reason the Company is unable to consolidate the PIN Venture's results of
operations, the presentation of the Company's financial statements would
change because the PIN Venture's revenue and operating income, if any, would
not be included in the Company's consolidated revenue and operating income. As
a result, the market price for the Class A Common Stock could decline.
SHARES ELIGIBLE FOR FUTURE SALE
The market price for the Class A Common Stock could be adversely affected by
the availability of shares of Class A Common Stock for sale or actual sales of
substantial amounts of Class A Common Stock by existing or future
shareholders. Upon completion of the offering, the 3,350,000 shares of Class A
Common Stock sold in the offering will be freely tradeable without restriction
or further registration under the Securities Act, by persons other than
"affiliates" of the Company. The remaining 2,980,953 shares of Class A Common
Stock that will be outstanding
17
immediately following the offering will be "restricted securities" within the
meaning of Rule 144 under the Securities Act ("Rule 144") and may not be sold
in the absence of registration under the Securities Act unless an exemption
from registration is available, including the exemption contained in Rule 144.
The Company and its current shareholders (including Adelphia), directors and
executive officers have agreed that, for a period of 180 days from the date of
this Prospectus, they will not offer to sell, sell, contract to sell, pledge
or otherwise dispose of any shares of Class A Common Stock without the prior
written consent of Oppenheimer & Co., Inc., subject to certain exceptions.
Following the expiration of such lock-up agreements, 2,980,953 shares of Class
A Common Stock will become available for resale in the public market, subject
to the volume limitations, holding period and other restrictions of Rule 144.
In addition, as of February 14, 1997, 945,000 shares of Class A Common Stock
have been reserved for issuance under the Company's Stock Option Plan, 300,000
of which were subject to outstanding options as of that date. See
"Management." Furthermore, each of the 1,886,612 shares of Class B Common
Stock that will be outstanding immediately following the offering will be
convertible at the election of its holder into one share of Class A Common
Stock and will convert automatically into Class A Common Stock upon the
occurrence of certain events. See "Description of Capital Stock." Such shares
of Class B Common Stock, and the shares of Class A Common Stock into which
they may be converted, will also be "restricted securities" within the meaning
of and subject to Rule 144. The Company has also, in connection with this
offering, agreed to grant a warrant to M. Kane & Company, Inc. (the "MKC
Warrant") to purchase 14,000 shares of the Class A Common Stock at an exercise
price equal to 120% of the initial public offering price of the Class A Common
Stock, together with certain registration rights relating to such shares. In
addition, the Company has granted certain registration rights to Adelphia
relating to approximately 262,500 shares of Class A Common Stock that it
issued to Adelphia in exchange for an 8.35% equity interest in the PIN
Venture. Future sales of shares of Class A Common Stock, or the perception
that such sales could occur, could have an adverse effect on the market price
of the Company's Class A Common Stock. See "--Absence of Prior Public Market;
Determination of Offering Price; Possible Volatility of Stock Price,"
"Prospectus Summary--Pre-Offering Transactions," "Description of Capital
Stock," "Shares Eligible for Future Sale" and "Underwriting."
IMMEDIATE AND SUBSTANTIAL DILUTION; ABSENCE OF PAYMENTS OF CASH DIVIDENDS
Purchasers of the Class A Common Stock will experience immediate and
substantial dilution, on a pro forma basis, of $9.83 (at an assumed offering
price of $12.00 per share) in net tangible book value per share. Also, the
Company has not paid any cash dividends since its inception and does not
anticipate paying cash dividends in the future. See "Dilution" and "Dividend
Policy."
18
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,350,000 shares of
Class A Common Stock offered hereby, assuming an initial offering price of
$12.00 per share, are estimated to be approximately $35.8 million ($41.3
million if the Underwriters' overallotment option is exercised in full) after
deduction of the underwriting discounts and commissions and estimated offering
expenses payable by the Company.
The Company intends to use the net proceeds from the offering as follows:
(i) approximately $16.2 million to repay debt owed to Global Group, which is
due December 31, 2003 and bears interest at 8.25% per annum, (ii)
approximately $6.6 million to repay debt owed to Jones Intercable, which is
due December 19, 1999 and bears interest at the prime rate plus 1%
(approximately 9.25% as of December 31, 1996) and (iii) approximately $13.0
million for general corporate purposes, including working capital and the
acquisition and/or creation of complementary businesses. The Company is not
currently engaged in any negotiations concerning such acquisitions. Pending
such uses, the Company intends to invest the net proceeds from the offering in
investment-grade, short-term, interest-bearing securities. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
DIVIDEND POLICY
The Company has never declared or paid a cash dividend on its Common Stock.
The Company intends to retain any earnings for use in the operation and
expansion of its business and therefore does not anticipate paying any cash
dividends in the foreseeable future. In addition, the Company is currently
negotiating a credit agreement that will restrict the Company's ability to pay
dividends. The declaration and payment of dividends in the future will be at
the discretion of the Board and will be dependent upon the Company's financial
condition, results of operations and capital requirements, terms of future
credit agreements or other agreements and such other factors as the Board
deems relevant. Holders of Class A Common Stock and Class B Common Stock are
entitled to share ratably in dividends, if declared by the Board, provided
that a stock dividend to holders of a class of Common Stock is payable only in
shares of that class.
19
CAPITALIZATION
The following table sets forth, as of December 31, 1996, the actual
capitalization of the Company, the pro forma capitalization of the Company to
reflect the Pre-Offering Transactions and the pro forma capitalization of the
Company as further adjusted to reflect the sale of 3,350,000 shares of Class A
Common Stock offered by the Company at an assumed initial offering price of
$12.00 per share and the application of the net proceeds therefrom. See "Use
of Proceeds." This information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the historical and pro forma Consolidated Financial Statements
and Notes thereto included elsewhere herein.
DECEMBER 31, 1996
------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
Long-term debt(1)............................... $22,555 $53,277 $ 30,722
------- ------- --------
Shareholders' equity:
Class A Common Stock, $.01 par value;
50,000,000 shares authorized; 1,968,453
shares issued and outstanding actual;
2,980,953 shares issued and outstanding pro
forma; 6,330,953 shares issued and
outstanding pro forma as adjusted(2)......... 20 30 63
Class B Common Stock, $.01 par value;
1,385,120 shares authorized, issued and
outstanding actual; 1,886,612 shares
authorized, issued and outstanding pro forma
and pro forma as adjusted.................... 14 19 19
Preferred Stock, $.01 par value, no shares
authorized, issued and outstanding actual;
5,000,000 shares authorized, no shares issued
and outstanding pro forma and pro forma
adjusted..................................... -- -- --
Additional paid-in capital...................... -- 9,160 44,959
Accumulated deficit............................. (15,249) (23,319) (23,319)
------- ------- --------
Total shareholders' investment................ (15,215) (14,110) 21,722
------- ------- --------
Total capitalization........................ $ 7,340 $39,167 $ 52,444
======= ======= ========
- --------
(1) Long-term debt consists of notes to Global Group and Jones Intercable and,
on a pro forma basis, a capitalized lease obligation of Space Segment. See
Notes 3 and 5 of Notes to the Consolidated Financial Statements, Note 4 of
Notes to the Space Segment Financial Statements and "Use of Proceeds."
(2) Excludes: (i) 945,000 shares of Class A Common Stock reserved for issuance
under the Company's Stock Option Plan, 300,000 of which will be subject to
outstanding options as of the consummation of this offering and (ii)
14,000 shares of Class A Common Stock issuable under a warrant the Company
has agreed to grant to M. Kane & Company, Inc. with an exercise price
equal to 120% of the initial public offering price of the Class A Common
Stock. See "Management--Stock Option Plan" and "Underwriting."
20
DILUTION
The pro forma net tangible book value of the Company as of December 31, 1996
was approximately $(18.0) million, or $(3.70) per share of Common Stock. Net
tangible book value per share represents the amount of tangible assets of the
Company, less total liabilities, divided by the number of shares of Common
Stock outstanding. After giving effect to the sale by the Company of the
3,350,000 shares of Class A Common Stock offered hereby (at an assumed initial
offering price of $12.00 per share and after deduction of underwriting
discounts and commissions and estimated offering expenses), the pro forma net
tangible book value of the Company at December 31, 1996 would have been $17.8
million, or $2.17 per share of Common Stock. This represents an immediate
increase in pro forma net tangible book value of $5.87 per share of Common
Stock to existing shareholders and an immediate dilution of $9.83 per share to
purchasers of Class A Common Stock. The following table illustrates the per
share dilution to new investors.
Assumed initial public offering price........................ $12.00
Pro forma net tangible book value as of December 31, 1996.. $(3.70)
Increase in pro forma net tangible book value attributable
to the offering........................................... 5.87
------
Pro forma net tangible book value after the offering......... 2.17
------
Dilution to purchasers of Class A Common Stock............... $ 9.83
======
The following table summarizes, on a pro forma basis as of December 31,
1996, and as adjusted to reflect the sale of 3,350,000 shares of Class A
Common Stock by the Company at an assumed initial public offering price of
$12.00 per share, the number of shares of Common Stock purchased from the
Company, the total consideration paid to the Company and the average price per
share paid by the existing shareholders and by the new investors purchasing
shares of Class A Common Stock from the Company in this offering (before
deducting underwriting discounts and commissions and estimated offering
expenses):
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------- ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
Existing shareholders........... 4,867,565 59% $25,195,602 39% $ 5.18
New investors................... 3,350,000 41% 40,200,000 61% $12.00
--------- --- ----------- ---
Total......................... 8,217,565 100% $65,395,602 100%
========= === =========== ===
The preceding table excludes: (i) 945,000 shares of Class A Common Stock
reserved for issuance under the Company's Stock Option Plan, 300,000 of which
will be subject to outstanding options as of the consummation of this offering
and (ii) 14,000 shares of Class A Common Stock issuable under a warrant the
Company has agreed to grant to M. Kane & Company, Inc. with an exercise price
equal to 120% of the initial public offering price of the Class A Common
Stock. See "Management--Stock Option Plan" and "Underwriting."
21
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company are
qualified by reference to and should be read in conjunction with the
historical Consolidated Financial Statements and Notes thereto and other
financial data included elsewhere in this Prospectus. The statement of
operations data set forth below for each of the three years in the period
ended December 31, 1996 and the balance sheet data at December 31, 1994, 1995
and 1996, are derived from the Company's consolidated financial statements for
those years which have been audited by Arthur Andersen LLP, independent
accountants, whose report thereon is included elsewhere in this Prospectus.
The statement of operations data for the year ended December 31, 1992 and the
balance sheet data at December 31, 1992 are derived from unaudited financial
statements, and the statement of operations data for the year ended December
31, 1993 and the balance sheet data at December 31, 1993 are derived from
audited financial statements, of the Company not included in this Prospectus.
These results are not necessarily indicative of the results to be expected in
the future. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
YEAR ENDED DECEMBER 31,
-------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE
AND AFFILIATE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue:
Radio programming............... $ 3,016 $ 3,186 $ 2,541 $ 5,122 $ 6,978
Television programming.......... -- 291 1,946 340 1,153
Satellite delivery and
production support............. 693 1,745 2,085 4,221 4,551
------- ------- ------- ------- -------
Total revenue.................. 3,709 5,222 6,572 9,683 12,682
------- ------- ------- ------- -------
Operating expense:
Radio programming............... 1,786 1,974 2,068 3,068 4,163
Television programming.......... -- 355 1,568 408 1,644
Satellite delivery and
production support............. 786 1,532 1,849 3,512 3,599
Selling and marketing........... 672 955 1,090 1,374 1,738
General and administrative...... 900 1,296 1,958 2,321 3,256
------- ------- ------- ------- -------
Total operating expense......... 4,144 6,112 8,533 10,683 14,400
------- ------- ------- ------- -------
Operating loss................... (435) (890) (1,961) (1,000) (1,718)
Other income (expense)........... 157 108 218 (720) (430)
------- ------- ------- ------- -------
Loss before taxes and minority
interests....................... (278) (782) (1,743) (1,720) (2,148)
Income tax benefits and minority
interests....................... 13 (46) 86 338 154
------- ------- ------- ------- -------
Net loss......................... $ (265) $ (828) $(1,657) $(1,382) $(1,994)
======= ======= ======= ======= =======
Net loss per common share(1)..... $ (.08) $ (.25) $ (.49) $ (.41) $ (.59)
Weighted average number of common
shares outstanding.............. 3,354 3,354 3,354 3,354 3,354
OTHER DATA:
Cash Flows provided by (used in)
operating activities............ $ 1,096 $ 2,938 $(6,933) $ (347) $ 2,336
Cash Flows used in investing
activities...................... (1,189) (4,384) (1,271) (1,698) (3,671)
Cash Flows provided by financing
activities...................... 86 1,444 8,266 1,987 1,334
EBITDA(2)........................ $ 166 $ (345) $(1,349) $ 1 $ 644
Radio station AQH(3)(4).......... -- 516 670 765 1,090
Radio station affiliates(4)...... 479 718 925 929 1,273
PIN network households(4)........ -- 275 1,489 4,825 8,111
GAC network households(4)........ -- -- -- 14 1,049
DECEMBER 31,
---------------------------------------------
1992 1993 1994 1995 1996
------- ------- -------- -------- -------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital........... $(2,331) $(6,042) $ (626) $ (847) $(5,074)
Total assets.............. 3,505 8,051 9,483 10,460 14,899
Long-term debt ........... 9,151 10,968 19,233 21,221 22,555
Total shareholders'
investment............... (8,786) (9,986) (11,840) (13,221) (15,215)
- --------
(1) For the years ended December 31, 1995 and 1996 the net loss per common
share would have been $(.22) and $(.23), respectively, had it been
calculated to give effect to: (i) the use of approximately $6.6 million
and $22.6 million of the offering to repay debt (and the related increase
of approximately 546,000 and 1,046,000 in the number of weighted average
common shares outstanding), (ii) the exclusion of the corresponding
interest expense related to such debt of approximately $670,000 and
$1,103,000, net of income taxes of approximately $137,000 and $110,000,
respectively and (iii) the grant of employee stock options to purchase
300,000 shares of Class A Common Stock.
(2) EBITDA is earnings before interest income (expense), provision for income
taxes, depreciation and amortization. EBITDA is not a recognized measure
of performance under GAAP and should not be considered in isolation or as
a substitute for net income, cash flows provided by (used in) operating,
investing or financing activities and other income and cash flow statement
data prepared in accordance with GAAP, or as a measure of liquidity or
profitability.
(3) AQH represents the average audience (persons age 12 or older) listening to
radio stations broadcasting the Company's advertising inventory during any
15-minute period from 6 am - 7 pm, Monday through Friday, as measured by
the Arbitron rating service. Radio advertising is generally sold on the
basis of the total listening audience as quantified by the AQH. Prior to
1993, the Company did not compile AQH data.
(4) Represents amounts at the end of the periods indicated. The PIN network
was launched in October 1993. The GAC network was launched in December
1995.
22
PRO FORMA SELECTED CONSOLIDATED FINANCIAL DATA
The following pro forma selected consolidated financial data of the Company
reflect the Pre-Offering Transactions and are qualified by reference to and
should be read in conjunction with the pro forma Consolidated Financial
Statements and Notes thereto and other financial data included elsewhere in
this Prospectus. The statement of operations data set forth below for each of
the three years in the period ended December 31, 1996, and the balance sheet
data at December 31, 1994, 1995 and 1996, are derived from the pro forma
Consolidated Financial Statements of the Company. These results are not
necessarily indicative of the results to be expected in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
YEAR ENDED DECEMBER 31,
---------------------------
1994 1995 1996
-------- -------- -------
(IN THOUSANDS, EXCEPT
PER SHARE
AND AFFILIATE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue:
Radio Programming...................... $ 2,541 $ 5,121 $ 6,978
Television programming................. 1,946 4,450 9,192
Satellite delivery and production
support............................... 6,805 6,920 6,944
-------- -------- -------
Total revenue......................... 11,292 16,491 23,114
-------- -------- -------
Operating expense:
Radio programming...................... 2,068 3,068 4,163
Television programming................. 1,043 3,208 6,332
Satellite delivery and production
support............................... 4,652 4,662 4,621
Selling and marketing.................. 1,090 1,488 1,977
General and administrative............. 1,958 3,267 4,327
-------- -------- -------
Total operating expense............... 10,812 15,693 21,420
-------- -------- -------
Operating income........................ 481 798 1,694
Other income (expense).................. (3,173) (3,793) (3,895)
-------- -------- -------
Loss before taxes and minority
interests.............................. (2,692) (2,995) (2,201)
Income tax benefits and minority
interests.............................. 390 687 (106)
-------- -------- -------
Net loss................................ $ (2,302) $ (2,308) $(2,307)
======== ======== =======
Net loss per common share(1)............ $ (.50) $ (.48) $ (.47)
Weighted average number of common shares
outstanding............................ 4,605 4,846 4,868
OTHER DATA:
Cash Flows provided by (used in)
operating activities................... $ (6,164) $ 2,957 $ 4,670
Cash Flows used in investing activities. (1,271) (4,669) (4,265)
Cash Flows provided by financing
activities............................. 7,426 1,028 (368)
EBITDA(2)............................... $ 3,996 $ 5,402 $ 6,343
Radio station AQH(3)(4)................. 670 765 1,090
Radio station affiliates(4)............. 925 929 1,273
PIN network households(4)............... 1,489 4,825 8,111
GAC network households(4)............... -- 14 1,049
DECEMBER 31,
---------------------------
1994 1995 1996
-------- -------- -------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital......................... $ 210 $ (920) $ 1,929
Total assets............................ 39,070 36,643 42,454
Long-term debt and capital lease
obligations............................ 52,648 53,468 53,277
Total shareholders' investment.......... (16,302) (20,362) (14,110)
- --------
(1) For the years ended December 31, 1995 and 1996 the net loss per common
share would have been $(.33) and $(.22), respectively, had it been
calculated to give effect to: (i) the use of approximately $6.6 million
and $22.6 million of the offering to repay debt (and the related increase
of approximately 546,000 and 1,046,000 in the number of weighted average
common shares outstanding), (ii) the exclusion of the corresponding
interest expense related to such debt of approximately $670,000 and
$1,103,000, net of income taxes of approximately $137,000 and $110,000,
respectively and (iii) the grant of employee stock options to purchase
300,000 shares of Class A Common Stock.
(2) EBITDA is earnings before interest income (expense), provision for income
taxes, depreciation and amortization. EBITDA is not a recognized measure
of performance under GAAP and should not be considered in isolation or as
a substitute for net income, cash flows provided by (used in) operating
investing or financing activities and other income and cash flow statement
data prepared in accordance with GAAP, or as a measure of liquidity or
profitability.
(3) AQH represents the average audience (persons age 12 or older) listening to
radio stations broadcasting the Company's advertising inventory during any
15-minute period from 6 am - 7 pm, Monday through Friday, as measured by
the Arbitron rating service. Radio advertising is generally sold on the
basis of the total listening audience as quantified by the AQH.
(4) Represents amounts at the end of the periods indicated. The PIN Network
was launched in October 1993. The GAC network was launched in December
1995.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of results of operations and financial condition
should be read in conjunction with the Company's historical and pro forma
Consolidated Financial Statements and Notes thereto appearing elsewhere in
this Prospectus. This Prospectus contains forward-looking statements that
involve risks and uncertainties. See "Risk Factors." The Company's actual
results may differ materially from the results discussed in any forward-
looking statement.
PRE-OFFERING TRANSACTIONS AND STOCK SPLIT
The following transactions, which are to be effective immediately prior to
the consummation of the offering, are collectively referred to in this
document as the "Pre-Offering Transactions." The completion of the Pre-
Offering Transactions will significantly affect the composition of the Company
following the consummation of the offering for financial reporting purposes
and have been given effect in the unaudited pro forma Consolidated Financial
Statements contained herein.
Immediately prior to the consummation of the offering, the Company will
acquire from Adelphia an 8.35% equity interest in the PIN Venture, the entity
that owns and operates the PIN network, in exchange for 262,500 shares of the
Company's Class A Common Stock. As a result of this transaction, the Company
will own approximately 54% of the PIN Venture and, going forward, will be able
to consolidate the operations of the PIN Venture for financial reporting
purposes. Immediately prior to the consummation of the offering, the Company
will acquire Glenn R. Jones' 19% equity interest in Jones Infomercial
Networks, Inc., the subsidiary through which the Company has invested in the
PIN Venture, and Mr. Jones' 19% equity interest in Great American Country,
Inc., the subsidiary through which the Company operates the GAC network, in
exchange for 333,333 shares of the Company's Class A Common Stock. Immediately
prior to the consummation of the offering, the Company will acquire the
transponder leases and related subleases owned by Space Segment, an affiliate
of the Company, in exchange for 416,667 shares of the Company's Class A Common
Stock. Immediately prior to the consummation of the offering, the Company will
convert all of the approximately $6.0 million of advances owed to Jones
International as of December 31, 1996 into 501,492 shares of the Company's
Class B Common Stock. In addition, the Company has effected a 220-for-one
stock split of the Class A Common Stock and Class B Common Stock.
The PIN Venture may in the future issue equity to its existing partners or
new partners which would dilute the Company's interest in the PIN Venture and
could result in the venture's operations no longer being consolidated for
financial reporting purposes. If, for any reason, the Company is unable to
consolidate the PIN Venture's results of operations, the presentation of the
Company's financial statements would change because the PIN Venture's revenue
and operating income, if any, would not be included in the Company's
consolidated revenue and operating income. As a result, the market price of
the Class A Common Stock could decline.
Prior to organization of the PIN Venture in 1995, the Company wholly owned
the PIN network, and the Company's historical Consolidated Financial
Statements reflected 100% of the PIN network's results of operations. Between
the start of the PIN Venture in February 1995 and the offering, the Company
owned 50% or less of the PIN Venture and, accordingly, did not consolidate the
results of operations for the PIN Venture. As a result, the Company's 1994
historical financial statements are not comparable to those for 1995. As a
result of the acquisition of Adelphia's interest in the PIN Venture, the
Company will consolidate the results of operations of the PIN Venture for
financial reporting purposes following the consummation of the offering. The
pro forma Consolidated Financial Statements assume the historical
consolidation of the
24
results of operations of the PIN Venture to provide a basis of comparison
consistent with the financial reporting treatment to be effective upon
consummation of the offering. As a result of the acquisition of the satellite
transponder lease agreements from Space Segment, the Company's historical
results will differ significantly from the results of operations related to
the satellite transponder lease and sub-lease agreements upon consummation of
the offering. As a result, the pro forma Consolidated Financial Statements
assume the historical consolidation of the results of operations of the
satellite transponder lease and sub-lease agreements to provide a basis of
comparison consistent with the financial reporting treatment to be effective
upon consummation of this offering. The acquisition of the minority interests
of Mr. Jones also is given effect in the pro forma Consolidated Financial
Statements and will not have a material impact on the Company's financial
reporting upon consummation of the offering.
The pro forma effects of the Pre-Offering Transactions primarily: (i)
increase television programming revenue and expense and minority interest as a
result of the increase in the Company's equity interest in the PIN Venture,
(ii) increase satellite delivery and production support revenue and expense as
a result of the Company's acquisition of satellite transponder lease
agreements from Space Segment, (iii) decrease minority interest as a result of
the Company's acquisition of minority equity interests in certain subsidiaries
from Mr. Jones and (iv) reduce debt and increase shareholders' equity as a
result of the conversion of the Jones International advances into shares of
Class B Common Stock. These effects are explained in more detail in the
period-to-period comparisons that follow.
OVERVIEW
The Company creates, develops, acquires and produces programming which it
distributes to radio stations, cable television system operators and other
video distributors. The Company: (i) provides radio programming to radio
stations in exchange for advertising time that it resells to national
advertisers, (ii) provides television programming to cable television system
operators and other video distributors, sells advertising time on its two
television networks and receives license fees for its country music television
network and (iii) owns and operates playback, uplink and satellite
transmission facilities that are used to distribute the Company's programming
and also are subleased to others for a fee.
The Company's revenue consists of radio programming revenue, television
programming revenue and satellite delivery and production support revenue.
Radio programming revenue consists primarily of advertising revenue and, to a
lesser extent, licensing fees paid by smaller radio station affiliates.
License fees from radio stations decreased in 1994 and have remained flat in
later periods. This reflects the Company's decision to focus on obtaining
advertising time, instead of license fees, from its affiliated radio stations.
Television programming revenue consists primarily of advertising revenue from
the sale of infomercial time on the PIN network and advertising time on the
GAC network, as well as licensing fees relating to the GAC network. Satellite
delivery and production support revenue consists of satellite transponder
lease fees, uplinking fees and other services fees.
Radio programming revenue includes advertising and licensing fees. The
Company generates radio advertising revenue by selling airtime to advertisers
who advertise their products or services on the Company's radio networks. The
Company recognizes advertising revenue upon airing of the advertisements. Any
amounts received from customers for radio advertisements that have not been
aired during the period are recorded as unearned revenue until such time as
the advertisements are aired. The Company delivers its programming to radio
stations for distribution to their listeners. Radio station licensing fees are
earned monthly based on the radio station's contractual agreement.
25
Television programming revenue includes advertising and licensing fees. The
Company generates television advertising revenue by selling airtime to
advertisers who advertise their products or services on the Company's
television networks. The Company recognizes advertising revenue upon airing of
the advertisements. Any amounts received from customers for television
advertisements that have not been aired during the period are recorded as
unearned revenue until such time as the advertisement is aired. The Company
delivers its programming to cable television systems for distribution to their
viewers. Licensing fees are earned monthly based on a per subscriber rate set
pursuant to the cable operator's agreement with the Company and the number of
subscribers that are receiving the Company's programming during the respective
month.
Satellite delivery and production support revenue includes revenue from
satellite delivery, uplinking, trafficking, playback and other services. The
Company generates revenue by providing such services to affiliates and to a
third party. The Company recognizes satellite delivery and production support
revenue upon completion of the services or as provided in contractual
arrangements.
Radio advertising is generally sold on the basis of the total listening
audience as measured by the average number of listeners in the quarter hour,
or AQH, and the time of day when the advertisement is run. The AQH can range
from zero for a small-market radio station to greater than 50,000 for a large-
market radio station, with the majority of large-market stations in the range
of 10,000-20,000. In order to increase advertising rates, it is necessary to
increase the size (or rating) of the audience the program provider delivers to
national advertisers.
The Company's historical and pro forma revenue has grown in recent years due
primarily to increased advertising revenue generated by its radio networks.
The Company's objective is to increase its revenue and operating cash flow by
employing the following strategies: (i) creating, developing, acquiring,
producing and distributing additional high-quality programming, (ii)
increasing the distribution of its radio and television networks by expanding
its marketing and sales activities directed at radio stations, MSOs and
advertisers, (iii) acquiring and/or creating complementary businesses and (iv)
increasing the utilization of its satellite transponder capacity and
production support facilities. The Company's ability to successfully implement
its strategy and maintain or accelerate its growth will depend on a number of
factors, many of which are beyond the Company's control, including expanding
distribution for its radio and television programming networks, developing and
licensing additional programming for the Company's radio and television
networks that is consistent with listener and viewer preferences, attracting
additional advertisers and expanding its third party customer base for its
satellite delivery and production services. There can be no assurance that the
Company will be successful in these endeavors.
In 1995 and 1996, radio programming revenue accounted for 53% and 55% of the
Company's total revenue, respectively, television programming revenue
accounted for 3% and 9% of total revenue, respectively, and satellite delivery
and production support revenue accounted for 44% and 36% of total revenue,
respectively. On a pro forma basis in 1995 and 1996, radio programming revenue
accounted for 31% and 30% of the Company's total revenue, respectively,
television programming revenue accounted for 27% and 40% of total revenue,
respectively, and satellite delivery and production support revenue accounted
for 42% and 30% of total revenue, respectively.
The Company's operating expenses consist of: (i) radio programming expenses,
(ii) television programming expenses, (iii) satellite delivery and production
support expenses, (iv) selling and marketing expenses and (v) general and
administrative expenses.
Radio programming expenses consist of program licensing, programming
development and production costs, distribution and delivery costs and other
costs related to the operation of the
26
Company's radio networks. Program licensing, programming development and
production costs include the costs of researching, designing, producing, and
licensing programs for the Company's radio networks and other associated
programming costs. Radio distribution and delivery costs include the satellite
transponder expense, uplinking charges and other associated costs.
Television programming expenses consist primarily of distribution and
delivery costs and other costs related to the operation of the Company's
television networks. Since substantially all of the programming is made
available to the Company at no cost by third parties and requires limited
additional production effort by the Company, programming and production costs
are not significant. Television program distribution and delivery costs
include satellite transponder expenses, uplinking charges and other associated
costs.
Satellite delivery and production support expenses include a portion of the
satellite transponder expenses, uplinking charges and other associated
operating costs to provide these services to affiliates and third parties.
Selling and marketing expenses include salaries, travel and other associated
expenses related to the Company's sales and marketing activities, as well as
the costs of designing, producing and distributing marketing, advertising and
promotional materials.
General and administrative expenses include personnel and associated costs
for the Company's executive and management staff and operational support.
Many of the costs associated with program distribution and delivery, such as
satellite transponder expense and uplinking charges, are relatively fixed with
respect to each of the Company's radio and television networks; as a result,
an increase in the Company's radio or television programming revenue should
not result in a proportionate increase in program distribution and delivery
costs. The Company charges satellite transponder and uplinking fees to its own
subsidiaries as well as to affiliates and a third party. The portions of these
expenses related to subsidiary activities are included in radio or television
programming expense as appropriate.
To date, the Company has sustained operating and net losses, including
operating losses of $2.0 million, $1.0 million and $1.7 million and net losses
of $1.7 million, $1.4 million and $2.0 million for the years ended December
31, 1994, 1995 and 1996, respectively. On a pro forma basis, the Company had
operating income of $0.5 million, $0.8 million and $1.7 million and net losses
of $2.3 million, $2.3 million and $2.3 million for the years ended December
31, 1994, 1995 and 1996, respectively.
27
RESULTS OF OPERATIONS
The following table sets forth the amount of, and percentage relationship to
total net revenue of, certain items included in the Company's historical
Consolidated Statements of Operations for the years ended December 31, 1994,
1995 and 1996:
YEAR ENDED
DECEMBER 31,
-------------------------------------------
1994 1995 1996
------------- ------------- -------------
(AUDITED AND IN THOUSANDS)
REVENUE:
Radio programming................ $ 2,541 39% $ 5,122 53% $ 6,978 55%
Television programming........... 1,946 29% 340 3% 1,153 9%
Satellite delivery and production
support......................... 2,085 32% 4,221 44% 4,551 36%
------- ---- ------- ---- ------- ----
Total revenue.................... 6,572 100% 9,683 100% 12,682 100%
------- ---- ------- ---- ------- ----
OPERATING EXPENSES:
Radio programming................ 2,068 31% 3,068 32% 4,163 33%
Television programming........... 1,568 24% 408 4% 1,644 13%
Satellite delivery and production
support......................... 1,849 28% 3,512 36% 3,599 28%
Selling and marketing............ 1,090 17% 1,374 14% 1,738 14%
General and administrative....... 1,958 30% 2,321 24% 3,256 26%
------- ---- ------- ---- ------- ----
Total operating expenses......... 8,533 130% 10,683 110% 14,400 114%
------- ---- ------- ---- ------- ----
OPERATING LOSS.................... (1,961) (30%) (1,000) (10%) (1,718) (14%)
------- ---- ------- ---- ------- ----
OTHER INCOME (EXPENSE)............ 218 3% (720) (7%) (430) (3%)
INCOME TAX BENEFITS AND MINORITY
INTEREST......................... 86 1% 338 3% 154 1%
------- ---- ------- ---- ------- ----
NET LOSS.......................... $(1,657) (25%) $(1,382) (14%) $(1,994) (16%)
======= ==== ======= ==== ======= ====
The following table sets forth the amount of, and percentage relationship to
total net revenue of, certain items included in the Company's pro forma
Consolidated Statements of Operations for the years ended December 31, 1994,
1995 and 1996.
YEARS ENDED
DECEMBER 31,
-------------------------------------------
1994 1995 1996
------------- ------------- -------------
(UNAUDITED AND IN THOUSANDS)
REVENUE:
Radio programming................ $ 2,541 23% $ 5,121 31% $ 6,978 30%
Television programming........... 1,946 17% 4,450 27% 9,192 40%
Satellite delivery and production
support......................... 6,805 60% 6,920 42% 6,944 30%
------- ---- ------- ---- ------- ----
Total revenue.................... 11,292 100% 16,491 100% 23,114 100%
------- ---- ------- ---- ------- ----
OPERATING EXPENSES:
Radio programming................ 2,068 19% 3,068 19% 4,163 18%
Television programming........... 1,043 9% 3,208 19% 6,332 27%
Satellite delivery and production
support......................... 4,652 41% 4,662 28% 4,621 20%
Selling and marketing............ 1,090 10% 1,488 9% 1,977 9%
General and administrative....... 1,958 17% 3,267 20% 4,327 19%
------- ---- ------- ---- ------- ----
Total operating expenses......... 10,811 96% 15,693 95% 21,420 93%
------- ---- ------- ---- ------- ----
OPERATING INCOME.................. 481 4% 798 5% 1,694 7%
------- ---- ------- ---- ------- ----
OTHER INCOME (EXPENSE)............ (3,173) (28%) (3,793) (23%) (3,895) (17%)
INCOME TAX BENEFITS AND MINORITY
INTEREST......................... 390 3% 687 4% (106) (1%)
------- ---- ------- ---- ------- ----
NET LOSS.......................... $(2,303) (20%) $(2,308) (14%) $(2,307) (10%)
======= ==== ======= ==== ======= ====
28
YEAR ENDED DECEMBER 31, 1996 COMPARED TO DECEMBER 31, 1995
TOTAL REVENUE. Total revenue increased $3.0 million, or 31%, from $9.7
million for the year ended December 31, 1995 to $12.7 million for the year
ended December 31, 1996. This increase was due primarily to an increase in
radio programming revenue and, to a lesser extent, television programming
revenue. On a pro forma basis, total revenue increased $6.6 million, or 40%,
from $16.5 million for the year ended December 31, 1995 to $23.1 million for
the year ended December 31, 1996, due primarily to an increase in television
programming revenue and, to a lesser extent, radio programming revenue.
Radio Programming Revenue. Radio programming revenue increased $1.9 million,
or 36%, from $5.1 million for the year ended December 31, 1995 to $7.0 million
for the year ended December 31, 1996, due primarily to a $1.9 million, or 44%,
increase in advertising revenue. Advertising revenue increased due primarily
to: (i) an increase in the rates charged by the Company for its advertising
spots as a result of a 23% increase in the AQH, which accounted for $1.2
million of the increase, and (ii) the launch of the Crook and Chase Country
CountDown program in January 1996, which accounted for $0.7 million of the
increase. Licensing revenue was flat as compared to the prior period,
reflecting the Company's strategy to focus on radio station affiliates with
significant audiences. These affiliates are generally not charged a license
fee.
Television Programming Revenue. Television programming revenue increased
$0.9 million, or 239%, from $0.3 million for the year ended December 31, 1995
to $1.2 million for the year ended December 31, 1996, due primarily to a $0.7
million increase in licensing revenue and $0.1 million increase in advertising
revenue. Licensing and advertising revenue increased due primarily to the
launch of the GAC network on Jones Intercable systems in December 1995. On a
pro forma basis, television programming revenue increased by $4.7 million, or
107%, from $4.5 million for the year ended December 31, 1995 to $9.2 million
for the year ended December 31, 1996, due primarily to an increase in
advertising rates on the PIN network as a result of an increase in the number
of households receiving the PIN network's programming.
Satellite Delivery and Production Support Revenue. Satellite delivery and
production support revenue increased $0.4 million, or 8%, from $4.2 million
for the year ended December 31, 1995 to $4.6 million for the year ended
December 31, 1996, due primarily to an increase in satellite production
support fees from affiliates of the Company. On a pro forma basis, satellite
delivery and production support revenue remained relatively flat at $6.9
million for the years ended December 31, 1995 and 1996.
TOTAL OPERATING EXPENSES. Total operating expenses increased $3.7 million,
or 35%, from $10.7 million for the year ended December 31, 1995 to $14.4
million for the year ended December 31, 1996. This increase was due primarily
to increases in radio programming expenses, television programming expenses
and general and administrative expenses. As a percentage of total revenue,
total operating expenses increased from 110% for the year ended December 31,
1995 to 113% for the year ended December 31, 1996. On a pro forma basis, total
operating expenses increased $5.7 million, or 36%, from $15.7 million for the
year ended December 31, 1995 to $21.4 million for the year ended December 31,
1996, due primarily to an increase in television programming expenses and, to
a lesser extent, radio programming expenses and general and administrative
expenses. As a percentage of total pro forma revenue, total pro forma
operating expenses decreased from 95% for the year ended December 31, 1995 to
92% for the year ended December 31, 1996.
Radio Programming Expenses. Radio programming expenses increased $1.1
million, or 36%, from $3.1 million for the year ended December 31, 1995 to
$4.2 million for the year ended December 31, 1996, due primarily to an
increase in programming production expenses. Programming production expenses
increased $0.4 million due to an increase in the number of formats offered by
the Company and $0.7 million due to the launch of the Crook and Chase
29
Country CountDown program in January 1996. Programming distribution expenses
did not increase significantly as a result of the relatively fixed nature of
many of the costs, such as the satellite transponder expense. As a percentage
of radio programming revenue, radio programming expenses remained consistent
at 60% for the years ended December 31, 1995 and 1996.
Television Programming Expenses. Television programming expenses increased
$1.2 million, or 303%, from $0.4 million for the year ended December 31, 1995
to $1.6 million for the year ended December 31, 1996, due primarily to an
increase in programming distribution expenses. Programming distribution
expenses increased as a result of the launch of the GAC network in December
1995. As a percentage of television programming revenue, television
programming expenses increased from 120% for the year ended December 31, 1995
to 143% for the year ended December 31, 1996. This increase was due to the
substantial start-up costs, relative to revenue, related to the launch of the
GAC network. On a pro forma basis, television programming expenses increased
by $3.1 million, or 97%, from $3.2 million for the year ended December 31,
1995 to $6.3 million for the year ended December 31, 1996, due primarily to an
increase in amounts paid to distributors of the PIN network as a result of
increased revenue. As a percentage of pro forma television programming
revenue, pro forma television programming expenses decreased from 72% for the
year ended December 31, 1995 to 69% for the year ended December 31, 1996.
Satellite Delivery and Production Support Expenses. Satellite delivery and
production support expenses increased $0.1 million, or 2%, from $3.5 million
for the year ended December 31, 1995 to $3.6 million for the year ended
December 31, 1996. As a percentage of satellite delivery and production
support revenue, satellite delivery and production support expenses were 83%
for the year ended December 31, 1995 and 79% for the year ended December 31,
1996. On a pro forma basis, satellite delivery and production support expenses
remained relatively flat at $4.6 million for the years ended December 31, 1995
and 1996. As a percentage of pro forma satellite delivery and production
revenue, pro forma satellite and production support expenses remained
relatively flat at 67% for the years ended December 31, 1995 and 1996.
Selling and Marketing Expenses. Selling and marketing expenses increased
$0.3 million, or 26%, from $1.4 million for the year ended December 31, 1995
to $1.7 million for the year ended December 31, 1996. Selling and marketing
expenses increased due primarily to: (i) an increase of $0.2 million due to
the launch of the GAC network in December 1995 and (ii) an increase of $0.1
million due to the launch of the Crook and Chase Country CountDown program in
January 1996. As a percentage of total revenue, selling and marketing expenses
remained at 14% for the years ended December 31, 1995 and 1996. On a pro forma
basis, selling and marketing expenses increased by $0.5 million, or 33%, from
$1.5 million for the year ended December 31, 1995 to $2.0 million for the year
ended December 31, 1996. As a percentage of total pro forma revenue, total pro
forma selling and marketing expenses decreased from 9% for the year ended
December 31, 1995 to 8% for the year ended December 31, 1996.
General and Administrative Expenses. General and administrative expenses
increased $1.0 million, or 40%, from $2.3 million for the year ended December
31, 1995 to $3.3 million for the year ended December 31, 1996. Approximately
$0.7 million of the increase was due to an increase in management and
operational support expenses as a result of the launch of the GAC network,
approximately $0.2 million of the increase was due to an increase in the
Company's radio operations and approximately $0.1 million of the increase was
due to administrative costs relating to this offering. As a percentage of
total revenue, general and administrative expenses increased from 24% for the
year ended December 31, 1995 to 26% for the year ended December 31, 1996. On a
pro forma basis, general and administrative expenses increased by $1.0
million, or 32%, from $3.3 million for the year ended December 31, 1995 to
$4.3 million for the year ended December 31, 1996, due to the reasons noted
above. As a percentage of total pro forma revenue, total pro
30
forma general and administrative expenses decreased from 20% for the year
ended December 31, 1995 to 19% for the year ended December 31, 1996.
OTHER INCOME (EXPENSE). Other income (expense) changed $0.3 million, or 40%,
from $(0.7) million for the year ended December 31, 1995 to $(0.4) million for
the year ended December 31, 1996, due primarily to the increased profitability
of the PIN Venture, which was partially offset by an increase in interest
expense. On a pro forma basis, other income (expense) changed by $0.1 million,
or 3%, from $(3.8) million for the year ended December 31, 1995 to $(3.9)
million for the year ended December 31, 1996, due primarily to an increase in
interest expense related to debt associated with the purchase of the Company's
radio programming business.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
TOTAL REVENUE. Total revenue increased $3.1 million, or 47%, from $6.6
million for the year ended December 31, 1994 to $9.7 million for the year
ended December 31, 1995. This increase was due to an increase in both radio
programming revenue and satellite delivery and production support revenue,
which was partially offset by a decrease in television programming revenue. On
a pro forma basis, total revenue increased $5.2 million, or 46%, from $11.3
million for the year ended December 31, 1994 to $16.5 million for the year
ended December 31, 1995, due primarily to increases in radio and television
programming revenue.
Radio Programming Revenue. Radio programming revenue increased $2.6 million,
or 102%, from $2.5 million for the year ended December 31, 1994 to $5.1
million for the year ended December 31, 1995, due primarily to a $2.2 million
increase in advertising revenue and secondarily to a $0.3 million increase in
licensing revenue. Advertising revenue increased due primarily to: (i) growth
in the number of advertising spots sold and (ii) increases in advertising
rates on the Company's radio networks as a result of a 29% increase in the
AQH. Licensing revenue increased $0.3 million, or 79%, from $0.5 million for
the year ended December 31, 1994 to $0.8 million for the year ended December
31, 1995, due primarily to an increase in the number of the Company's radio
affiliates, primarily smaller affiliates upon renewal, paying a license fee.
Television Programming Revenue. Television programming revenue decreased
$1.6 million, or 83%, from $1.9 million for the year ended December 31, 1994
to $0.3 million for the year ended December 31, 1995, due primarily to a $1.6
million, or 83%, decrease in advertising revenue. Advertising revenue
decreased due to the effects of the deconsolidation of the PIN Venture for
financial reporting purposes. This revenue had been consolidated in 1994. The
Company had no licensing revenue in either period. On a pro forma basis,
television programming revenue increased by $2.5 million, or 129%, from $1.9
million for the year ended December 31, 1994 to $4.4 million for the year
ended December 31, 1995, due primarily to an increase in advertising rates on
the PIN network as a result of an increase in the number of subscribers
receiving the PIN network's programming.
Satellite Delivery and Production Support Revenue. Satellite delivery and
production support revenue increased $2.1 million, or 102%, from $2.1 million
for the year ended December 31, 1994 to $4.2 million for the year ended
December 31, 1995. Approximately $1.1 million of this increase was due to the
results of the PIN Venture transaction and approximately $1.0 million of the
increase was due to an increase in uplinking and other revenue primarily as a
result of an increase in the volume of services provided by the Company to
affiliates and secondarily to increases in rates charged by the Company for
trafficking, playback and other services. Approximately $1.3 million of the
increase was a result of the PIN Venture transaction; this revenue had been
eliminated in consolidation in 1994. On a pro forma basis, satellite delivery
and production support revenue increased by $0.1 million, or 2%, from $6.8
million for the year ended
31
December 31, 1994 to $6.9 million for the year ended December 31, 1995, due
primarily to an increase in uplinking and other revenue as mentioned above.
TOTAL OPERATING EXPENSES. Total operating expenses increased $2.2 million,
or 25%, from $8.5 million for the year ended December 31, 1994 to $10.7
million for the year ended December 31, 1995. This increase was due primarily
to an increase in radio programming expenses and satellite delivery and
production support expenses, which was partially offset by a decrease in
television programming expenses. As a percentage of total revenue, total
operating expenses decreased from 130% for the year ended December 31, 1994 to
110% for the year ended December 31, 1995. On a pro forma basis, total
operating expenses increased $4.9 million, or 45%, from $10.8 million for the
year ended December 1994 to $15.7 million for the year ended December 1995,
due to an increase in radio programming, television programming and general
and administrative expenses. As a percentage of total pro forma revenue, total
pro forma operating expenses decreased from 96% for the year ended December
31, 1994 to 95% for the year ended December 31, 1995.
Radio Programming Expenses. Radio programming expenses increased $1.0
million, or 48%, from $2.1 million for the year ended December 31, 1994 to
$3.1 million for the year ended December 31, 1995, due to increases in both
programming production and programming distribution expenses. Approximately
$0.4 million of the increase was due to an increase in programming production
expenses as a result of an increase in the number of formats offered by the
Company and an increase in salaries of existing radio on-air talent in order
to attract and retain quality personalities. The remaining $0.6 million of the
increase was due to an increase in programming distribution expenses resulting
from increased satellite rental and uplinking fees. As a percentage of radio
programming revenue, radio programming expenses decreased from 81% for the
year ended December 31, 1994 to 60% for the year ended December 31, 1995, due
to the relatively fixed nature of many of the program distribution costs.
Television Programming Expenses. Television programming expenses decreased
$1.2 million, or 74%, from $1.6 million for the year ended December 31, 1994
to $0.4 million for the year ended December 31, 1995, due primarily to a
decrease in programming distribution expenses. Programming distribution
expenses decreased primarily as a result of the effects of the PIN Venture
transaction. As a percentage of television programming revenue, television
programming expenses increased from 81% for the year ended December 31, 1994
to 120% for the year ended December 31, 1995. On a pro forma basis, television
programming expenses increased by $2.2 million, or 208%, from $1.0 million for
the year ended December 31, 1994 to $3.2 million for the year ended December
31, 1995, due to an approximately $2.1 million increase in in amounts paid to
distributors of the PIN network and an approximately $0.1 million increase in
satellite transponder expenses. As a percentage of pro forma television
revenue, pro forma television programming expenses increased from 54% for the
year ended December 31, 1994 to 72% for the year ended December 31, 1995, due
to an increase in the relative amounts paid to distributors of the PIN
network.
Satellite Delivery and Production Support Expenses. Satellite delivery and
production support expenses increased $1.7 million, or 90%, from $1.8 million
for the year ended December 31, 1994 to $3.5 million for the year ended
December 31, 1995. Approximately $1.1 million of this increase was due to the
effects of the PIN Venture transaction and approximately $0.6 million was due
to an increase in depreciation expense as a result of increased capital
expenditures for uplinking, playback and other equipment and an increase in
the volume of services provided and rates charged for playback, production,
editing and other services. As a percentage of satellite delivery and
production support revenue, satellite delivery and production support expenses
decreased from 89% for the year ended December 31, 1994 to 83% for the year
32
ended December 31, 1995. On a pro forma basis, satellite delivery and
production support expenses were flat at $4.7 million for the years ended
December 31, 1994 and 1995 in accordance with the small increase in overall
demand. As a percentage of pro forma satellite delivery and production support
revenue, pro forma satellite delivery and production support expenses
decreased from 68% for the year ended December 31, 1994 to 67% for the year
ended December 31, 1995.
Selling and Marketing Expenses. Selling and marketing expenses increased
$0.3 million, or 26%, from $1.1 million for the year ended December 31, 1994
to $1.4 million for the year ended December 31, 1995, due primarily to
increased marketing expenditures related to the Company's radio programming
distribution. As a percentage of total revenue, selling and marketing expenses
decreased from 17% for the year ended December 31, 1994 to 14% for the year
ended December 31, 1995. On a pro forma basis, selling and marketing expenses
increased by $0.4 million, or 37%, from $1.1 million for the year ended
December 31, 1994 to $1.5 million for the year ended December 31, 1995, due to
the reasons noted above. As a percentage of total pro forma revenue, pro forma
selling and marketing expenses decreased from 10% for the year ended December
31, 1994 to 9% for the year ended December 31, 1995.
General and Administrative Expenses. General and administrative expenses
increased $0.3 million, or 19%, from $2.0 million for the year ended December
31, 1994 to $2.3 million for the year ended December 31, 1995, due primarily
to an increase in management and operational support expenses as a result of
growth in the Company's radio operations and new business development
activities by the Company. As a percentage of total revenue, general and
administrative expenses decreased from 30% for the year ended December 31,
1994 to 24% for the year ended December 31, 1995. On a pro forma basis,
general and administrative expenses increased by $1.3 million, or 67%, from
$2.0 million for the year ended December 31, 1994 to $3.3 million for the year
ended December 31, 1995. Approximately $0.8 million of the increase was due to
increased management and operational support as a result of the growth of the
PIN network and approximately $0.5 million of the increase was due to
increased support as a result of the growth of the Company's radio operations.
As a percentage of total pro forma revenue, pro forma general and
administrative expenses increased from 17% for the year ended December 31,
1994 to 20% for the year ended December 31, 1995.
OTHER INCOME (EXPENSE). Other income (expense) changed $0.9 million from
$0.2 million for the year ended December 31, 1994 to ($0.7) million for the
year ended December 31, 1995, due primarily to an change in interest expense
as a result of an increase in debt related to the Company's satellite delivery
and production support operations. On a pro forma basis, other income
(expense) changed $0.6 million, or 20%, from ($3.2) million for the year ended
December 31, 1994 to ($3.8) million for the year ended December 31, 1995 for
the reasons noted above.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Advertising revenue in the radio and television industries fluctuates due to
seasonality in such industries. The Company believes that radio network
revenue is typically lowest in the first quarter and television network
revenue is typically lowest in the third quarter. Other than the fees paid by
the Company to third parties for certain of its radio programming and the fees
paid in connection with the distribution of the PIN network, the Company's
costs have not varied significantly with respect to the seasonal fluctuation
of revenue. The Company's quarterly and annual results of operations are
affected by a wide variety of factors, many of which are outside the Company's
control, which could materially and adversely affect profitability. These
factors include the timing and volume of advertising on the Company's radio
networks and television networks, the number and size of the radio stations
that carry the Company's radio programming, the number and size of cable
systems and other video distributors that carry the PIN and GAC networks, and
general economic conditions.
33
The Company's unaudited quarterly operating results for each quarter of
1994, 1995 and 1996 are shown below. The historical quarterly results are not
necessarily indicative of the results to be expected in the future.
QUARTERS ENDED IN 1994 QUARTERS ENDED IN 1995 QUARTERS ENDED IN 1996
--------------------------------- --------------------------------- ----------------------------------
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
Total revenue........ $ 834 $1,823 $2,113 $1,802 $2,267 $2,467 $2,319 $2,629 $2,565 $3,213 $3,321 $3,583
Total operating
expenses............ 1,557 2,110 2,529 2,337 2,590 2,407 2,756 2,929 3,056 3,277 3,900 4,167
Operating income
(loss).............. (723) (287) (416) (535) (323) 60 (437) (300) (491) (64) (519) (644)
Net income (loss).... (587) (345) (369) (356) (206) 47 (745) (480) (349) (210) (554) (881)
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 capital resources to fund these strategies are
expected to be provided in the short-term by proceeds from this offering and
the Company's cash flow from operations. There can be no assurance, however,
that the Company will have sufficient cash flow from operations to support
these 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 on terms and conditions acceptable to the Company,
if at all.
Since its inception, the Company has incurred net losses primarily as a
result of expenses associated with developing and launching its programming
networks. Net cash provided by (used in) operating activities for the years
ended December 31, 1994, 1995 and 1996, was $(6.9) million, $(0.3) million and
$2.3 million, respectively.
For the years ended December 31, 1994, 1995 and 1996, net cash used in
investing activities was $1.3 million, $1.7 million and $3.7 million,
respectively. The Company's investing activities in 1994 consisted primarily
of the purchase of land for future expansion of the Company's facilities to
deliver its programming and additional equipment for this facility. The
Company's investing activities in 1995 consisted primarily of: (i) purchases
of equipment for the Company's satellite delivery and production facility,
(ii) purchases of equipment for the radio programming networks and (iii) the
acquisition of certain radio programming network assets. The Company's
investing activities were principally to convert the delivery system of its
radio programming networks to a digital satellite delivery system, for
playback and other equipment for the GAC network and for other miscellaneous
equipment. In addition, the Company invested $1.0 million in a radio
programming venture in October 1996. The Company's 1996 capital expenditures
of approximately $3.0 million were primarily related to the completion of the
conversion to a digital satellite delivery system and to the purchase of the
equipment to effect the digital compression of one of the Company's satellite
transponders.
Net cash provided by financing activities for the years ended December 31,
1994, 1995 and 1996 were $8.3 million, $2.0 million and $1.3 million,
respectively. The Company's financing activities have consisted primarily of
borrowings from affiliates. In 1994, $6.6 million of borrowings were used to
finance the construction of Earth Segment's satellite delivery and production
support facilities.
34
Effective August 15, 1996 the Company purchased all of the outstanding
common stock of Galactic Radio from Global Group for $17.2 million. Global
Group had acquired Galactic Radio from Jones Intercable, an affiliate of the
Company, for $17.2 million on June 14, 1996. The purchase price was paid using
$1.2 million in cash, which was advanced to the Company by Jones
International, and with the balance in the form of a $16.0 million note.
The Company intends to use a portion of the net proceeds of this offering to
repay, with interest, the $16.0 million note to Global Group and the $6.6
million note to Jones Intercable. In addition, concurrent with this offering,
the Company will convert all of the approximately $6.0 million in advances
owed to Jones International as of December 31, 1996 into 501,492 shares of
Class B Common Stock.
The Company has received a commitment from a commercial bank for a $25
million revolving credit facility with a five year term. Borrowings under the
credit agreement are expected to bear interest at a maximum of LIBOR plus 3.0%
(currently approximately 8.5%), subject to reduction should the Company's
financial ratios improve. The credit facility will be secured by substantially
all of the assets of the Company. The amount of available borrowings under the
credit facility will be based on certain ratios of debt to operating cash flow
as defined in the credit agreement. The Company does not expect to be able to
access the entire credit facility until at least late 1997 or early 1998 and
there can be no assurance the Company will ever achieve the ratios of debt to
operating cash flow required to access a meaningful portion, if any, of the
credit facility. Upon the execution of the definitive agreement for such
facility, the Company anticipates being limited to less than $7 million of
available borrowings, subject to the Company's ability to meet certain
financial ratio provisions and other conditions. The credit facility may also
limit the Company's ability to incur additional indebtedness, enter into new
capitalized lease obligations and pay dividends to its shareholders. The
commercial bank's commitment is contingent on the consummation of this
offering. The Company anticipates that it will enter into a definitive credit
agreement for this credit facility late in the first quarter of 1997; however,
there can be no assurance that it will be able to negotiate a definitive
agreement or obtain alternative financing on acceptable terms, if at all. The
Company has received advances and loans from Jones International and related
companies to fund its operating and investing activities in the past and
anticipates that Jones International will make additional advances to the
Company prior to the consummation of the offering. Jones International and
such related companies are under no obligation to provide, nor does the
Company expect them to provide, additional advances or loans to the Company
subsequent to the consummation of the offering. Management believes that the
net proceeds from this offering and operating cash flow will be sufficient to
fund the Company's capital needs through at least December 31, 1997. However,
there can be no assurance to such effect or that the Company will be able to
meet its longer term capital requirements.
NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" ("SFAS 121"), effective January 1, 1996. SFAS 121
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill. Implementation of SFAS 121 had
no material effect on the Company's financial position or results of
operations. The Company adopted Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") effective
January 1, 1996. SFAS 123 recommends a fair-value-based method of accounting
for employee stock compensation, including stock options. However, companies
may choose to account for stock compensation using the intrinsic-value-based
method as prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and provide pro forma disclosures
of net income and earnings per share as if the fair-value-based method had
been applied. The Company elected to account for stock compensation using the
intrinsic-value-based method, and thus SFAS 123 will not have any impact on
reported operating results.
35
BUSINESS
OVERVIEW
The Company creates, develops, acquires and produces programming that it
distributes to radio stations, cable television system operators and other
video distributors. The Company: (i) provides radio programming to radio
stations in exchange for advertising time that it resells to national
advertisers, (ii) provides television programming to cable television system
operators and other video distributors, sells advertising time on its two
television networks and receives license fees for its country music television
network and (iii) owns and operates playback, uplink and satellite
transmission facilities that are used to distribute the Company's programming
and also are subleased to others for a fee.
The Company launched its first 24-hour satellite delivered radio program in
1989 and, as of December 31, 1996, provided 11 radio programs to 1,273 radio
station affiliates in the United States and Canada. Approximately 64 of these
affiliates received more than one program from the Company. The Company's nine
24-hour music programs include popular music formats such as country and adult
contemporary. The Company also distributes one long-form country music
countdown program and one short-form country music news program. The Company
generally provides its radio programming to radio stations in exchange for
advertising time that the Company resells to national advertisers. In some
cases, the Company also charges radio stations a license fee for radio
programming. The Company, directly and through a joint venture, also provides
audio music and information programming for distribution via cable television
systems and for other applications.
The Company's television programming is distributed through two networks:
PIN and GAC. The PIN Venture, a joint venture among the Company, Cox and
Adelphia, operates the PIN network, a 24-hour television network that airs
long-form advertising generally known as "infomercials." The Company
introduced the PIN network in October 1993 to capitalize on the rapidly
growing infomercial industry. The PIN network airs informational programming
from major advertisers that include Ford Motor Company, State Farm Insurance,
Schering-Plough Corporation and Sony Corporation, among others. In addition,
the PIN network airs traditional direct response infomercials. As of December
31, 1996, the PIN network was available to approximately 8.1 million
households through 172 cable systems. Approximately 2.6 million of these
households were located in 12 of the top 25 DMAs. The GAC network is a 24-hour
country music video network that was introduced in December 1995 to capitalize
on the popularity of country music. As of December 31, 1996, the GAC network
was available to approximately 1.0 million households through 69 cable
systems.
The Company's satellite delivery and production support services provide
reliable and efficient playback, trafficking, uplinking and satellite
transmission services to the Company's networks. The Company believes that
these distribution services allow it to have strict management and quality
control over the distribution of its programming. The Company also sells its
satellite delivery and production support services to certain related
companies and to a third party. For the delivery of television programming,
the Company has a long-term lease for two transponders on strategically
positioned satellites. Through the recent implementation of new digital
compression technologies that are available to the Company for both of its
leased satellite transponders, the Company has an increased amount of
transponder capacity for its own television programming and for sublease to
third party television networks. The Company also subleases space on other
satellite transponders for delivery of its radio programming.
The Company was founded by Glenn R. Jones. Mr. Jones is the Chairman and
Chief Executive Officer of Jones Intercable, one of the top ten cable
television MSOs serving more than
36
1.4 million basic subscribers in 47 cable television systems in the United
States. Mr. Jones has been instrumental in leading the Company's early growth
and continues as its majority shareholder and chairman. Mr. Jones has been a
leader in the cable television business for over 35 years and in 1994 he was
inducted into the Broadcasting and Cable Hall of Fame.
STRATEGY
The Company's objective is to increase its revenue and operating cash flow
by employing the following strategies:
Create, Develop, Acquire and Produce Additional High-Quality Programming. The
Company believes that there is market demand for additional long-form and short-
form radio programming in both larger and smaller markets due to the financial
and creative constraints of many radio stations and their need to improve
operating efficiencies. In addition, the Company believes there is a market for
various 24-hour music and information programs that the Company does not
currently distribute, such as classic country, talk radio and urban
contemporary formats. The Company intends to develop and acquire radio
programming addressing these market demands. In addition to creating,
developing and producing its own programming, to reduce its financial exposure
and to supplement its creative talent, the Company has and will continue to
seek programming through agreements with third party programmers who bear the
costs associated with developing and producing radio programming and who have
special expertise in these markets.
Increase the Distribution of its Programming by Expanding its Marketing and
Sales Activities Directed at Radio Stations, MSOs and Advertisers. To increase
its revenue, the Company must increase the distribution of and audience for
its programming. The Company plans to market its television networks primarily
to cable television systems in the top 25 DMAs. The Company relies on
financial incentives and its established relationships with MSOs to market
these networks. The Company may also seek to increase the distribution of the
PIN network by offering enhanced financial incentives to MSOs. The Company
intends to promote the benefits of long-form infomercial programming to major
advertisers, with the goal of attracting more advertising from such
advertisers and enhancing the quality of the PIN network's programming. The
Company plans to increase its radio network marketing and sales activities in
an effort to increase the number of its radio station affiliates and the size
of its audience.
Acquire or Create Complementary Businesses. The Company intends to expand
its business by acquiring and/or creating businesses complementary to its
business. Such complementary businesses could include competitors of the
Company that create, produce and distribute programming or other companies
that offer related services.
Increase the Utilization of its Satellite Transponder Capacity and
Production Support Facilities. The Company's satellite delivery and production
support facilities provide reliable and efficient playback, trafficking,
uplinking and satellite transmission services to the Company. The Company's
satellite facilities are strategically located on the 105th meridian which
enables the Company to uplink its television programming to satellites serving
international markets. The Company believes that through the recent
implementation of new digital compression technologies that are available to
the Company for both of its leased satellite transponders, it will be able to
sublease an increasing amount of its transponder capacity to third parties.
Although the Company intends to actively pursue these strategies, there can
be no assurance that it will be successful in these endeavors.
RADIO NETWORKS
The Radio Programming Market
According to the FCC, there are approximately 10,000 commercial radio
stations in the United States. Radio is a popular medium for advertising due
to the short lead time between
37
commercial production and broadcast, the relative ease and low cost of
producing radio commercials and the fact that more than half of all radio
listening occurs away from the home, closer to the point of purchase.
Advertisers consider radio to be one of the most effective media to reach
target audiences. Radio reaches its targeted demographics by using specific-
format programming. According to industry sources, total radio advertising
revenue was $11.3 billion in 1995.
Radio stations compete for advertising revenue in their respective markets.
To be competitive, radio stations are continuously seeking the highest quality
programming at the lowest cost. Radio stations develop formats, such as music,
news/talk or various types of entertainment programming, intended to appeal to
a target listening audience with demographic characteristics that will attract
national, regional and local commercial advertisers. However, limited
financial and creative resources, among other things, prevent most radio
stations from producing national quality programming. Accordingly, radio
stations rely on network programming from independent producers or
"syndicators", such as the Company, to enhance or provide their radio
programming. By placing a program with radio stations throughout the United
States, the syndicator creates a "network" of stations that carry its
programming. A radio network typically provides programming to radio stations
in exchange for a contractual amount of commercial broadcast time, usually
expressed as a number of minutes per hour, which is then resold to
advertisers. The Company believes that most commercial radio stations utilize
radio network or syndicated third party programming. The commercial broadcast
time for such programs may vary from market to market within a specified time
period, depending upon the requirements of the particular radio station
affiliate.
The Telecom Act significantly changed the radio broadcast industry by
repealing national limits on the number of radio stations that may be owned by
one entity and by relaxing the common ownership rules in a single market. As a
result, the Telecom Act has created a wave of radio station acquisitions and
increased consolidation in the industry. This, in turn, has led many ownership
groups to seek ways to cut costs, better manage their operations and improve
their efficiencies. Radio networks, such as the Company's, may address these
needs by providing quality programming to radio stations and reducing their
personnel costs.
Network radio programming is generally grouped into three formats:
24-Hour Programming. This full-time programming is aired live and hosted by
announcers. Examples of this type of programming include popular formats such
as country, adult contemporary and oldies.
Long-Form Programming. This type of programming is less than 24 hours in
duration and is designed to fill, on a daily or weekly basis, one day part,
generally a four to six-hour time period of the day such as mornings--6 a.m.
to 10 a.m., middays--10 a.m. to 3 p.m., afternoons--3 p.m. to 7 p.m.,
evenings--7 p.m. to midnight, and overnights--midnight to 6 a.m. Examples of
this type of programming include talk shows hosted by nationally known
personalities and popular countdown shows hosted by nationally known disc
jockeys.
Short-Form Programming. This type of programming generally is less than 15
minutes in duration. Examples of this type of programming include news and
commentary radio shows.
Radio advertising is generally sold on the basis of a radio program's AQH.
The AQH can range from zero for a small-market radio station to greater than
50,000 for a large-market radio station, with the majority of large-market
stations in the range of 10,000-20,000. In order to increase advertising
rates, it is necessary to increase the size (or rating) of the audience the
program provider delivers to national advertisers.
38
The Company's Radio Networks
As of December 31, 1996, the Company distributed radio programming to 1,273
radio stations throughout the United States and Canada. In addition,
approximately 64 of these stations received more than one program. The
Company's high-quality, distinctive programming is designed to enable radio
stations to improve and differentiate their on-air presentations and increase
their ratings, thereby increasing advertising revenue for both the radio
stations and the Company.
The Company currently delivers nine 24-hour music programs, one long-form
program and one short-form program. The Company's long-form program, the Crook
& Chase Country CountDown, is a weekly, four-hour country music countdown
show. The Company's short-form program, The Nashville News Source, is a
package of three country music news features distributed Monday through Friday
via satellite and facsimile. The service includes a ninety-second news report
and a commentary by Nashville entertainment reporter Jimmy Carter. Seven of
the 24-hour formats were developed by the Company and two, Z-Spanish(TM) and
The New Music of Your Life(TM), were developed by third party programmers. The
Company's 24-hour formats generally are targeted at stations in all market
sizes, while its long-form and short-form formats generally are targeted
toward radio stations in larger markets.
The following table summarizes the Company's radio programming:
YEAR
NAME OF PROGRAM LAUNCHED
- --------------- --------
24-HOUR
US Country(TM)......................................................... 1989
Adult Hit Radio(TM).................................................... 1989
Soft Hits(TM).......................................................... 1989
Good-Time Oldies(TM)................................................... 1990
CD Country(TM)......................................................... 1993
NAC (New Adult Contemporary)........................................... 1994
Z-Spanish(TM).......................................................... 1994
Rock Alternative(TM)................................................... 1996
The New Music of Your Life(TM)......................................... 1996
LONG-FORM
The Crook & Chase Country CountDown.................................... 1996
SHORT-FORM
The Nashville News Source.............................................. 1996
The Company's radio network has 80 on-air personalities, the majority of
whom have extensive top 25 market experience. To supplement its in-house
programming expertise, from time to time the Company enters into agreements
with third party programmers that develop and produce distinctive, high
quality programming. These programmers have expertise in developing
programming for specific targeted audiences (e.g. ethnic, mature) and
typically employ recognized talent. An example of such a relationship is The
New Music Of Your Life(TM) program hosted by Gary Owens, Wink Martindale and
other well-known radio personalities.
The Company's agreements with third party programmers typically provide that
the Company and the third party programmer each receive 50% of the net
advertising and affiliate fee revenue generated by the programming. The
programmer creates and develops the radio program and the Company markets the
program to radio station affiliates, manages the relationship with the radio
station affiliates, manages the sale of national advertising, provides
technical support and provides other services. As a result, the programmer
typically bears the
39
costs associated with developing and producing the programming. The term of
these license agreements is usually three to five years. The Company does not
generally retain the rights to the programming upon the termination of these
license agreements.
The Company markets its radio programming directly to radio stations through
its eight person affiliate sales group. The affiliate sales group utilizes
industry market research and databases to identify prospective radio station
affiliates and advertises in trade publications and attends industry
conventions and trade shows to increase awareness of its radio networks.
The Company's Other Audio Services
The Company provides music and information audio programming designed to
complement the video offerings of cable television system operators. The
Company provides these services directly and through a joint venture
("Superaudio"), which is owned 50% by the Company and 50% by a third party,
that also programs and sells premium music programming directly to cable
television operators and other video distributors. Superaudio offers nine
formats of 24-hour programming that consist of six stereo music formats and
three information and entertainment formats. Superaudio programming is
distributed to cable systems serving approximately seven million households.
The Company also provides unobtrusive background music to cable operators to
program behind a cable television system's text and classified advertising
channels.
TELEVISION PROGRAMMING NETWORKS
Market Overview--Long-Form Advertising
The Company believes that, during recent years, advertisers evaluating the
benefits of television and cable advertising have recognized the effectiveness
and reasonable cost of long-form, informational programming, commonly known as
infomercials. An infomercial is an advertisement, usually approximately one
half-hour in length and often produced in an entertainment format, that is
paid for by the advertiser on the basis of the time of day the infomercial is
aired, market size and in certain cases past results from airing on a
particular television station or cable television network. Regardless of the
presentation format, the viewers are provided information that can be used to
make informed purchasing decisions from their homes.
Increasingly, advertisers are recognizing the benefits of infomercials as an
effective marketing tool. The Company believes that infomercials provide
advertisers with a cost-effective medium through which to deliver sales
messages, product introductions or demonstrations to an interested target
audience. Advertisers are recognizing that infomercials can increase a
company's or product's brand awareness while educating potential new
customers. The viewer or potential consumer is provided information that can
be used to make more informed purchasing decisions. Unlike most traditional
television advertising, the direct response nature of many infomercials
provide advertisers with the ability to evaluate the differences in the
effectiveness of their expenditures on an immediate basis.
The Company believes that the infomercial industry has grown rapidly during
the past several years. Historically, infomercials occupied time slots that
were less profitable for broadcasters. Increasingly, infomercials are being
placed in more expensive and attractive time periods such as daytime, early
fringe and prime time, and are becoming a more widely accepted form of
advertising.
The production quality of infomercial programming by major advertisers has
also increased the credibility of the infomercial industry. In addition,
infomercials have recently been
40
successfully utilized to promote newly introduced network television series
and full length feature movies. The Company believes that as the benefits of
infomercial programming become more widely understood, the number of
advertisers and the volume of infomercial programming will continue to grow.
In terms of demand for airtime, major corporate advertisers who use long-form
programming for image building rather than direct selling messages may
ultimately surpass infomercial programmers who rely on immediate sales to
viewers via telephone response. Currently, major advertisers spend only a
relatively small part of their overall advertising budget on infomercials. The
Company believes that such advertising expenditures will continue to increase.
According to industry sources, total infomercial advertising expenditures
totalled $806 million, and infomercial sales totaled $1.6 billion in 1995, up
from $663 million and $1.3 billion, respectively, in 1994.
Product Information Network
The PIN network is a satellite-delivered, long-form informational
programming service. The audience for the programming is television viewers,
primarily consisting of subscribers to cable television systems that air the
programming. The PIN network programming is provided to cable system operators
on its own dedicated channel 24-hours per day, seven days per week. As of
December 31, 1996, the PIN network was distributed on either a full or part-
time basis on cable television systems representing approximately 8.1 million,
or 12%, of the nation's cable television households.
The Company developed and tested the concept of a 24 hour, long-form
advertising network in 1993. The Company launched the PIN network in October
1993 on cable television systems owned and/or managed by Jones Intercable. To
broaden the PIN network's distribution, the Company formed the PIN Venture
with Cox and Adelphia to own and operate the PIN network. Both Cox and
Adelphia distribute the PIN network on a number of their cable television
systems.
The PIN network airs a variety of infomercials. From 8:00 a.m. to midnight,
the majority of the infomercials feature the products of major companies such
as Ford Motor Company, State Farm Insurance, Schering-Plough Corporation and
Sony Corporation. The balance of the programming time, most of which occupies
the overnight time periods, is dedicated to traditional direct-response
infomercial programming, usually featuring low cost household or personal use
items. The Company believes that the PIN network's attractive mix of Fortune
500 advertising and traditional infomercial programs, which airs 24 hours per
day, provides the PIN network with a competitive advantage.
Advertising Customers. The PIN network's programming is produced and
provided by its advertisers at no cost to the network. The PIN network's
primary customers are major companies and their representative advertising
agencies that advertise their products or services in the long-form format.
The PIN network has developed the acceptance of long-form advertising by major
companies through its agreement with CRN. The CRN relationship has helped to
build the network's reputation as a vehicle for long-form advertising from
Fortune 500 and other large companies. CRN purchases advertising time on the
PIN network to air the long-form advertising of its clients. The PIN network
now televises eight hours per day of programming created by CRN's clients.
National Media currently purchases approximately six hours of airtime a day on
the PIN network. The PIN Venture has long-term agreements with its two largest
customers, CRN and National Media, that secure air time purchases through
December 1997 and April 1997, respectively. See "Risk Factors--Dependence on
Advertising Relationships."
Distribution. As of December 31, 1996, the PIN network's programming was
available to approximately 8.1 million households in the United States on
either a full or part-time basis. The PIN network is distributed principally
through cable television systems, with a focus on those
41
systems in the top 25 DMAs. This focus is generally a requirement for major
companies that are considering or currently using long-form advertising. As of
December 31, 1996, the PIN network provided programming to 172 cable
television systems. The MSOs that carry the network on a portion of their
cable systems include nine of the ten largest MSOs, including Tele-
Communications, Inc., Time Warner, Inc., Comcast Corporation, Cablevision
Systems Corporation, Continental Cablevision, Marcus Cable, Cox, Jones
Intercable and Adelphia. The majority of the PIN network's present subscriber
base is provided by Cox, Jones Intercable and Adelphia. The standard PIN
network affiliation agreement generally requires a two-year commitment of
carriage. In the case of cable systems that are owned or operated by Jones
Intercable, Cox or Adelphia, the affiliation agreements are for terms of ten
years, five years and ten years, respectively, and expire on February 1, 2005,
February 1, 2000 and October 1, 2006, respectively. See "Risk Factors--Risks
Associated with Distribution of Television Programming."
Incentive Program. The PIN Venture compensates cable operators for carriage
of the PIN network through an incentive program. The PIN Venture currently
pays cable operators 60% of the PIN network's adjusted net advertising revenue
(which is revenue less agency commissions and bad debt expenses) attributable
to the time that the system carries the network's programming. For 1997, the
PIN Venture estimates it will pay its full-time (24 hours per day) affiliates
an affiliate fee of $1.50 per subscriber per year. In addition to these
incentives, under certain conditions, the PIN Venture provides co-op
advertising payments to cable operators that carry the PIN network.
The PIN Venture Agreement. The three partners in the PIN Venture are the
Company, Cox and Adelphia. Immediately prior to the consummation of the
offering, the Company will acquire from Adelphia an 8.35% equity interest in
the PIN Venture, in exchange for 262,500 shares of the Company's Class A
Common Stock. Following this transaction, the Company, Cox and Adelphia will
own approximately 54%, 46% and .001%, respectively, of the PIN Venture.
Adelphia can increase its equity interest in the PIN Venture in the future by
providing additional subscribers to the PIN network on Adelphia's cable
television systems.
Pursuant to the PIN Venture Agreement, the Company manages the day-to-day
operations of the PIN Venture. The PIN Venture has an Executive Committee
consisting of five persons, two of whom are appointed by the Company, two by
Cox, and one by Adelphia. The PIN Venture Agreement contains a number of
provisions that either allow or require a partner to withdraw from the PIN
Venture. The Company or Cox could be required to withdraw if the number of
subscribers provided by either of them falls below a certain level. Such a
withdrawal would cause a dissolution of the partnership. Additionally, Cox can
withdraw from the PIN Venture after December 31, 1999. Such a withdrawal would
cause Cox to lose its equity interest in the PIN Venture. The PIN Venture
Agreement terminates on December 31, 2004, unless extended by the parties.
Market Overview--Country Music
According to industry sources, country music is one of the most popular
music formats in the United States. Every week, approximately 44 million
Americans listen to country music radio. With 2,528 radio stations programming
country music, representing approximately 24% of all commercial radio
stations, it has become the dominant radio format in the United States.
Country music radio reaches seven million more listeners a week than adult
contemporary, the next most popular format. In 1995, country music was the
top-rated format in 32 of the nation's top 100 markets.
Great American Country
The GAC network is a 24-hour country music video network featuring a mix of
current top country hits and the best of past country hits. The GAC network
was launched in December 1995
42
and, as of December 31, 1996, it was distributed to approximately 1.0 million
households on 69 cable television systems, most of which are owned or managed
by Jones Intercable, an affiliate of the Company. The Company believes that
the GAC network offers a programming mix with fewer commercials and more
attractive economic carriage terms for cable system operators, including more
local advertising spots, than its principal competitor. Since its debut, GAC
has concentrated on refining its programming and on-air presentation in order
to broaden its carriage. The Company acquires the music videos that it airs on
the GAC network at no cost from record companies, which use this medium to
promote their performing artists. The Company produces the other programming
on the GAC network. The GAC network targets the largest, most influential and
affluent market segment of the country music audience--the 25-54 age group.
The GAC network's music video mix is geared toward this segment's preference
for familiar country music artists. The Company believes that the GAC network
benefits from the Company's experience in the country music radio programming
business.
SATELLITE DELIVERY AND PRODUCTION SUPPORT SERVICES
The Company transmits its radio and television programming directly to radio
stations, cable system operators and other video distributors. The programming
is distributed via satellite transponders leased from third parties. The
Company provides playback services, trafficking and ground-to-satellite
transmission of its programming services from its uplink facility in
Englewood, Colorado. The Company's satellite facilities are strategically
located on the 105th meridian which enables the Company to uplink programming
to satellites serving international markets. The Company leases one full
satellite transponder on each of two strategically positioned GE Americom
satellites, Satcom C-3 and Satcom C-4, which deliver a variety of popular
cable television programming. The Company utilizes advanced technology in
providing uplink, playback and trafficking services. The Company recently
installed General Instrument Corporation's DigiCipher II (MPEG-2) compression
equipment. This technology allows the Company to increase the compression of
its leased Satcom C-3 satellite transponder from 4:1 compression to 6:1
compression initially, and possibly higher levels in the future. This
technology is also available for use on the Company's leased Satcom C-4
satellite transponder. Any excess capacity created by this new technology will
be used for the distribution of the Company's programming, its affiliates'
programming or third party programming. The Company subleases transponder
space to the Company's affiliates and a third party. The Company's Satcom C-3
and Satcom C-4 transponder lease expires in 2004. The Company's subleases with
its affiliate and the third party expire in 2004 and October 1997,
respectively.
COMPETITION
Competition in the radio and television network markets is intense. The
Company's radio network competes for advertising dollars and radio station
affiliates with four major network radio distribution companies in the United
States, as well as with a larger number of smaller independent producers and
distributors. In addition, the dominant competitors in the industry are
affiliated with major station owners, have recognized brand names and have
large networks which include affiliates to which such competitors pay
compensation to broadcast the network's commercials.
The Company's largest direct competitors include ABC Radio Networks,
Westwood One Radio Networks, CBS Radio Networks and Premiere Radio Networks.
The Company estimates that these networks received a majority of total network
radio advertising revenue in 1995. The principal competitive factors in the
radio industry are the quality and creativity of programming and the ability
to provide advertisers with a cost-effective method of delivering commercial
advertisements. There can be no assurance that the Company will be able to
compete successfully for radio advertising revenue.
43
Radio networks also face competition from improving technologies available
to local radio stations that may enable them to pre-record their local
announcers and automate their operations, thereby allowing them to reduce
costs and operate more efficiently. Another potential technological advance,
DARS, may permit national radio stations to broadcast digital quality radio
programming nationwide to homes, automobiles and other locations via
satellite. The Company cannot predict what effect the potential future
development of digital automation or DARS will have on the radio industry or
the Company.
The Company's television networks compete for distribution on cable systems,
viewers and advertising revenue with hundreds of cable and broadcast
television networks supplying a variety of infomercial and entertainment
programming. The PIN network competes directly with at least three other
infomercial networks: Infomall TV, Access Television Network and GRTV, certain
of which have greater distribution than the Company. Infomall TV is an
infomercial network carried by its affiliated broadcast television stations.
Access Television Network delivers infomercial programming for use during
"remnant time." Remnant time is time that is made available by "rolling-over"
infomercials contained in other network programming or time that is not used
by the cable operator such as blacked out programming and unused leased access
time. GRTV, is a new infomercial network that was recently launched. Also,
Spice Entertainment Co. and Williams Worldwide have recently announced that
they have formed a joint venture to develop an infomercial network that they
expect will be launched in 1997. In addition, the Company believes that new
infomercial networks are currently being planned or formed that will compete
directly with the PIN network. The PIN network also competes with at least 30
cable television networks, many of which have a substantial number of
subscribers, that air infomercial programming.
The GAC network's principal direct competitor is Country Music Television
("CMT"), an advertiser-supported basic cable network that delivers country
music videos 24-hours per day. The Company believes that CMT's programming is
driven by the most current country music releases and is targeted to a younger
audience than the GAC network. The GAC network also competes with The
Nashville Network, which plays country music videos during a portion of the
broadcast week. Most of its music programming is focused on theater-style
music concert programming such as the Grand Ole Opry. Westinghouse Electric
Corp., which owns CBS, also owns approximately one-third of CMT and has
recently announced plans to acquire the remaining two-thirds of CMT and The
Nashville Network.
The Company expects to encounter additional competition for viewers as
technological advances, such as the deployment of digital compression
technology, the deployment of fiber optic cable and the "multiplexing" of
cable services, allow cable systems to greatly expand their channel capacity
and, as a result, their ability to add new networks. In addition, there can be
no assurance that the infomercial concept will continue to be acceptable to
advertisers and consumers or that it will be able to compete against other
forms of advertising.
The Company competes in the delivery of domestic satellite services with
satellite owners, satellite service providers, microwave carriers and full
service teleports. Some of the Company's principal competitors, many of which
have substantially greater financial and other resources, include Vyvx
Teleport, MicroNet Inc., ID/B Keystone, Rainbow Network Communications,
Washington International Teleport, Inc. and Brewster Teleport. The Company
believes that transmission quality, reliability, price and the location of
uplink facilities are the key competitive factors in this market.
As there are generally few legal barriers or proprietary rights to prevent
entry into the Company's markets, the Company could in the future face
competition from new competitors offering services similar to that of the
Company. The Company's radio and television networks
44
also compete with other forms of media for advertising dollars, such as
broadcast television, print, outdoor and other media. Many of the Company's
competitors have greater resources than the Company and there can be no
assurance that the Company will be able to compete successfully in the future.
If the Company is unable to compete successfully for distribution of its
networks and advertising revenue, it could suffer a material adverse effect.
See "Risk Factors--Competition."
GOVERNMENT REGULATION
Although the Company's radio and television networks are not generally
directly regulated by the FCC, the radio stations and cable television systems
and other video distributors to which the Company sells its programming are
regulated. As a result, the federal laws and FCC regulations that affect these
entities indirectly affect the Company.
The ownership, operation and sale of radio stations are subject to the
jurisdiction of the FCC. Among other things, the FCC adopts and implements
regulations and policies that directly or indirectly affect the ownership,
operations and sale of radio and television stations, and has the power to
impose penalties for violations of its rules or federal statutes. Such
regulation may adversely affect the Company's business. The Telecom Act is
significantly changing the radio broadcast industry by repealing national
limits on the number of radio stations that may be owned by one entity and by
relaxing the common ownership rules in a single market. These measures have
led to greater radio industry consolidation. The effects of the Telecom Act on
the broadcasting industry and thus on the Company's radio networks are
uncertain, and there can be no assurance that it will not negatively impact
the Company in the future.
The cable television industry is subject to extensive federal, state and
local regulation. Regulation can take the form of price controls, programming
carriage requirements and programming content restrictions. Such regulation
could affect the availability of time on local cable television systems for
sale by the Company as well as the price at which such time is available.
There can be no assurance that material adverse changes in regulations
affecting the cable television industry, in general, or the Company, in
particular, will not occur in the future.
The Company's satellite delivery and production support services are
directly regulated by the FCC. The Company holds FCC microwave and earth
station uplink licenses, which it utilizes to provide delivery and support
services. Because the licenses held by the Company relate primarily to the
technical operation of its microwave and uplink facilities, which are used for
internal purposes and program delivery, there are only limited regulatory
burdens associated with maintaining these licenses in good standing. See "Risk
Factors--Government Regulation."
FACILITIES
All of the Company's facilities are located in Englewood, Colorado. The
Company subleases office space from Jones Intercable, an affiliate of the
Company, as well as office space and studio space from third parties. See
"Certain Relationships and Related Transactions." The Company also leases
satellite transponder capacity from a third party. In addition, the Company
owns 8.4 acres of land and a satellite uplink facility. The Company believes
its office space, studio space, satellite uplink facility and transponder
capacity are adequate to meet its current needs.
ASSOCIATES AND OTHERS
The Company refers to its employees as associates. As of February 1, 1997,
the Company had 105 full-time associates and 53 part-time associates. In
addition, the Company maintains relationships with independent writers,
program hosts, technical personnel and producers. None of the Company's
associates are covered by a collective bargaining agreement and the Company
believes its employee relations to be good.
45
LEGAL PROCEEDINGS
The Company is involved in routine legal proceedings incident to the
ordinary course of its business. The Company believes that the outcome of all
such routine legal proceedings in the aggregate will not have a material
adverse effect on the Company.
46
MANAGEMENT
DIRECTORS, PROPOSED DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The Company currently has three directors: Glenn R. Jones, Chairman of the
Board, Gregory J. Liptak, President of the Company, and Jay B. Lewis, Group
Vice President/Chief Financial Officer of the Company. Concurrent with the
consummation of this offering, the Board will be expanded to consist of five
directors and the then-existing Board will fill the vacancies created by such
expansion by appointing the two nominees named below.
Set forth below is certain information concerning each person who is
presently an executive officer or director of the Company. Information is also
provided for certain key employees and director nominees. All directors hold
office for a period of one year or until their respective successors are
elected and qualified, or until their earlier resignation or removal.
NAME POSITION AGE
---- -------- ---
Glenn R. Jones................ Chairman of the Board 66
Gregory J. Liptak............. President and Director 57
Jay B. Lewis.................. Group Vice President/Chief Financial Officer 38
and Director
Elizabeth M. Steele........... Vice President and Secretary 45
Keith D. Thompson............. Chief Accounting Officer 29
Eric Hauenstein............... Vice President/General Manager--Radio 48
Networks (1)
Phillip H. Baykian............ Vice President of Programming and 43
Operations--Radio Networks (1)
Charles Price................. Vice President/General Manager--PIN (1) 43
Gary D. Edens................. Director Nominee 54
Michael L. Pandzik............ Director Nominee 51
- --------
(1)An officer of a subsidiary of the Company, but not of the Company itself.
The Company's bylaws provide that the Company shall have no fewer than one
director and no more than ten directors. Subject to such limitation, the
number of directors may be fixed from time to time by the Board. Executive
officers of the Company hold office until their successors are chosen and
qualified, subject to earlier removal by the Board. The Company expects to use
its best efforts, as soon as practicable after April 1, 1998, to nominate a
person selected by Adelphia to the Company's Board.
The principal occupations for at least the past five years of each of the
directors, proposed directors, executive officers and certain key employees of
the Company are as follows:
GLENN R. JONES has served as Chairman of the Board of the Company since it
was founded in 1993 and served as its President from 1993 to October 1996. Mr.
Jones has been involved in the cable television business in various capacities
since 1961 and currently serves as a director and/or executive officer of many
of the Company's affiliates, including Chief Executive Officer and a director
of Jones Intercable, one of the ten largest MSOs in the United States. Mr.
Jones will continue to devote a substantial amount of his time to the
Company's affiliates. Mr. Jones received a B.S. in Economics from Allegheny
College and a J.D. from the University of Colorado School of Law. In 1994, Mr.
Jones was inducted into the Broadcasting and Cable Hall of Fame.
47
GREGORY J. LIPTAK has served as a director of the Company since 1993, was
elected an Assistant Vice President in January 1996 and was elected as
President in October 1996. Mr. Liptak has been associated with the Jones
International group of companies since March 1985. He has served as Vice
President of Operations, Group Vice President of Operations and President of
Jones Intercable from 1985 to 1989, as President of Mind Extension University,
Inc., a subsidiary of Jones Education, and President of Jones Spacelink, Ltd.,
from 1989 to 1995. From 1975 to 1985, Mr. Liptak served as an executive
officer of Times Mirror Cable Television, Inc. Mr. Liptak received a B.S. and
M.S. in Marketing and Communications from the University of Illinois. Mr.
Liptak was also the co-founder and first president of CTAM, the Cable
Television Marketing Society, and has also served as Chairman of the Cable
Television Advertising Bureau.
JAY B. LEWIS has served as Vice President/Finance and as Chief Financial
Officer of the Company since July 1996 and was elected Group Vice
President/Finance, and appointed as a director, in October 1996. Mr. Lewis has
also served as Treasurer of the Company since September 1994. From January
1995 until October 1996, Mr. Lewis was Vice President of Finance and Treasurer
of Jones International, the parent of the Company, and certain of its
subsidiaries. From February 1986 to December 1994, Mr. Lewis was employed in
various capacities, including Controller and Treasurer, by Jones Spacelink,
Ltd., a former affiliate of the Company. Prior to joining the Jones
International group of companies, Mr. Lewis was employed by Arthur Young & Co.
(now Ernst & Young LLP), a public accounting firm. Mr. Lewis received a B.S.
in Accounting from the University of Wyoming in 1980.
ELIZABETH M. STEELE has served as Secretary of the Company since it was
founded in 1993 and as Vice President of the Company since November 1995. Ms.
Steele has also served as Vice President and Secretary of Jones Education
since it was founded in 1990. Ms. Steele has also served as Vice
President/General Counsel and Secretary of Jones Intercable, as well as
general counsel to certain of Jones Intercable's and the Company's affiliates
since 1987. Ms. Steele will continue to devote a significant amount of her
time to these affiliates. From 1980 through 1987, Ms. Steele practiced law
with the Denver law firm of Davis, Graham & Stubbs LLP, where she was elected
a partner in 1985. Ms. Steele received a B.A. in History from Hamilton College
and J.D. from the University of New Mexico.
KEITH D. THOMPSON has served as Chief Accounting Officer of the Company
since October 1996. Mr. Thompson has also served as Chief Accounting Officer
of Jones Education since August 1996, a position he continues to hold. Mr.
Thompson has also been associated with Jones International since October 1994,
serving as Senior Accountant from October 1994 to April 1995, as Accounting
Manager from April 1995 to January 1996 and as Director of Accounting from
January 1996 to the present. Mr. Thompson will continue to devote a
substantial amount of his time to Jones International and its affiliates. From
July 1989 to October 1994, Mr. Thompson was an auditor for Deloitte & Touche
LLP. Mr. Thompson received a B.S. in Accounting from Oral Roberts University
and is a Certified Public Accountant in the State of Colorado.
ERIC HAUENSTEIN has served as Vice President/General Manager--Radio Networks
since 1994. During his twenty-five years of radio station management and
ownership, he has been responsible for the operation of over twenty radio
stations, including KDKB in Phoenix and KBPI in Denver. From 1991 to 1994, he
was the General Manager of three radio stations in Richmond, Virginia. He has
also served on state and national boards of directors for the radio industry
including the National Association of Broadcasters, the National Radio
Broadcasters Association, the Arizona Broadcasters Association and the
Virginia Association Broadcasters. He attended St. Louis University and the
University of Cincinnati.
48
PHILLIP H. BAYKIAN has served as Vice President of Programming and
Operations--Radio Networks since 1991. Mr. Baykian has nearly 25 years in on-
air and programming experience. He served as Vice President of Programming for
Drake Chenault Radio Consultants in Albuquerque, New Mexico from 1986 to 1991.
Previously, he was Operations Consultant for TM Programming, a radio industry
programming consultant company, from 1981 to 1986. Mr. Baykian attended Delta
College at University Center.
CHARLES PRICE joined the PIN Venture as its Vice President and General
Manager in February 1996. Prior to serving as an independent consultant from
September 1995 to February 1996, Mr. Price served as President of Infomall
Cable Network, a planned subsidiary of Paxson Communications, from April 1995
to September 1995. Mr. Price served as Executive Vice President of "S'--The
Shopping Network from June 1994 to December 1994, as Vice President, Western
Division of QVC, Inc. from 1989 to 1994, and as Vice President of Affiliate
Relations for the Cable Value Network from 1986 until 1989. Mr. Price began
his career in the cable television industry by working in management posts
with Saticom Enterprises, Inc., Warner Amex Satellite Entertainment Company
and Showtime Network, Inc. from 1980 to 1986. Mr Price received a B.A. in
Business Management and Communications from Southwest Texas State University
in 1976.
GARY D. EDENS has agreed to serve as a director of the Company upon
consummation of this offering. Mr. Edens has been President of The Hanover
Companies, Inc. since 1994. From 1984 to 1994, he served as Chairman and Chief
Executive Officer of Edens Broadcasting, Inc., the owner of nine radio
stations in four states. Mr. Edens served in various positions in the radio
business from 1964 to 1984, including President of Southern Broadcasting
Company from 1981 to 1984. Mr. Edens serves as a director of Inter-Tel, Inc.
Mr. Edens received a B.S. from the University of North Carolina.
MICHAEL L. PANDZIK has agreed to serve as a director of the Company upon
consummation of this offering. Mr. Pandzik has served as President of the
National Cable Television Cooperative since 1985. From 1966 to 1985, Mr.
Pandzik held various positions in the communications industry. Mr. Pandzik
received an M.S. from the University of Kansas and a B.S. from the University
of Nebraska.
COMMITTEES
The Company's Board currently has no committees. The Board intends to
establish an executive committee, a compensation committee and an audit
committee immediately after the completion of this offering. The membership of
such committees will be established after the offering.
The executive committee will consist of two directors and will be
responsible for acting in the Board's stead, except where action by the full
Board is required by law or by the Company's articles of incorporation or
bylaws. The compensation committee will consist of three directors, two of
whom will be independent directors. The compensation committee will determine
compensation, excluding awards under the Company's 1996 Stock Option Plan, for
the Company's executive officers and other employees. The audit committee will
consist of three directors, two of whom will be independent directors. The
audit committee will be established to make recommendations concerning the
engagement of independent public accountants, review with the independent
public accountants the plans and results of the audit engagement, approve
professional services provided by the independent public accountants, review
the independence of the independent public accountants, consider the range of
audit and non-audit fees and review the adequacy of the Company's internal
accounting controls.
49
COMPENSATION OF DIRECTORS
The Company intends to pay its directors who are not officers of the Company
for their services as directors. Directors who are not officers of the Company
will receive $2,500 per quarter for services rendered as a director and $500
for attending each meeting of the Board or one of its committees. Directors
who are also officers of the Company will not be paid any director fees. All
directors will be reimbursed for their expenses in attending Board and
committee meetings.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the
compensation for services in all capacities to the Company for the years ended
December 31, 1995 and 1996 for the President of the Company and the other
executive officers and key employees of the Company and its subsidiaries whose
annual salary and bonus exceeded $100,000 during such period (collectively,
the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
YEAR ANNUAL COMPENSATION
---- ----------------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(1)
--------------------------- ---------- ---------- ---------------
Glenn R. Jones 1996 $ -- $ -- $ --
Chairman of the Board(2) 1995 -- -- --
Gregory J. Liptak(3) 1996 156,134 46,750 8,561
President 1995 156,134 46,750 21,843
Eric Hauenstein 1996 139,006 13,900 8,340
Vice President /General Manager-- 1995 125,000 20,000 25,083
Radio Networks
- --------
(1) The Company's employees are entitled to participate in a 401(k) profit
sharing plan and/or a deferred compensation plan. The amounts shown in
this column represent the Company's contributions to the 401(k) profit
sharing plan and/or the deferred compensation plan for the benefit of the
named person's account and, with respect to Mr. Hauenstein, include
$17,713 reimbursed to him for moving expenses in 1995.
(2) Mr. Jones was President of the Company during 1995 and through October
1996, but did not receive any compensation for services rendered to the
Company during those years.
(3) Mr. Liptak became President of the Company in October 1996. Mr. Liptak's
total compensation for services rendered to the Company during 1995 and
1996 represents an allocation to the Company of the total compensation
paid to Mr. Liptak by Jones International for these years based upon the
time allocated to the Company's business. Mr. Liptak served as an
executive officer of certain of the Company's affiliates during 1995 and
1996. Subsequent to the consummation of this offering, Mr. Liptak will
devote all of his time to the business of the Company.
The Company expects to pay annual compensation in excess of $100,000 to each
of Messrs. Liptak, Lewis, Price, Hauenstein and Baykian in 1997.
None of the officers, directors or employees of the Company has an
employment contract with the Company.
STOCK OPTION PLAN
The Company has adopted an employee stock option plan (the "Plan") that
provides for the grant of stock options and stock appreciation rights ("SARs")
to employees or individuals providing services to the Company. The Plan is
construed, interpreted and administered by the Board or a committee of two or
more non-employee directors. The committee or the Board determines the
individuals to whom options are granted, the number of shares subject to the
options, the exercise price of the options (which may be below fair market
value of the stock on the date of grant), the period over which the options
become exercisable and the term of the options. The committee or the Board has
the discretion to set other terms and provisions of stock options as it may
determine from time to time, subject only to the provisions of the Plan.
50
The Plan covers an aggregate of up to 945,000 shares of the Company's Class
A Common Stock. The number of shares available for grant of options under the
Plan and the number of shares included in each outstanding option are subject
to adjustment upon recapitalizations, stock splits or other similar events
that cause changes in the Company's Class A Common Stock. Shares of Class A
Common Stock underlying options that expire unexercised are available for
future option grants under the Plan.
The Plan provides for the grant of incentive stock options ("Incentive
Options") within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), and non-statutory stock options that do not
qualify as incentive stock options under Section 422 of the Code ("Non-
Qualified Options"). Options granted may be either Incentive Options or Non-
Qualified Options or a combination of the two. The exercise price of each
Incentive Option granted must be at least equal to the fair market value of
the Class A Common Stock on the date the Incentive Option is granted. The
exercise price of Non-Qualified Options may be less than the fair market value
of the Class A Common Stock on the date the Non-Qualified Option is granted.
If an Incentive Option is granted to an employee who then owns stock
possessing 10% of the total combined voting power of all classes of stock of
the Company, the exercise price of the Incentive Option must be at least equal
to 110% of the fair market value of the Class A Common Stock on the date the
Incentive Option is granted.
The maximum term of options granted under the Plan is generally ten years,
but with respect to an Incentive Option granted to an employee who then owns
stock possessing 10% of the total combined voting power of all classes of
stock of the Company, the maximum term of the option is five years. Subject to
the foregoing limitation, the Committee or the Board determines the term of
the options and the period over which they vest and become exercisable.
SARs may be granted in tandem with options granted under the Plan. Each SAR
entitles the participant, upon the exercise of the SAR, to receive the excess
of the fair market value of a share of Class A Common Stock on the exercise
date over the fair market value of the share on the date the SAR was granted.
An SAR is exercisable only to the extent the associated stock option is
exercisable. To the extent the option is exercised, the accompanying SAR will
cease to be exercisable, and vice versa. An SAR may be exercised only when the
market price of Class A Common Stock subject to the option exceeds the
exercise price of such option.
Options and associated SARs are not transferable, except by will or pursuant
to the laws of descent and distribution, and are exercisable only by the
option holder during his lifetime or, in the event of disability or
incapacity, by the option holder's guardian or legal representative.
The vesting of options and associated SARs is accelerated upon a "Change in
Control" of the Company. A Change in Control is deemed to have occurred if:
(i) a person (as such term is used in Section 13(d) of the Exchange Act)
becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, in one or more transactions, of shares of Class
A Common Stock and/or Class B Common Stock of the Company representing 35% or
more of the total number of votes that may be cast by all shareholders of the
Company voting as a single class, without the approval or consent of the
Company's Board of Directors, (ii) there is a consolidation or merger of the
Company in which the Company is not the surviving corporation or (iii) a plan
or proposal for the liquidation or dissolution of the Company is adopted.
The Board may amend the Plan at any time or may terminate it without the
approval of the shareholders; provided, however, that shareholder approval is
required for any amendment to the Plan that increases the number of shares for
which options may be granted, materially increases the benefits accruing to
participants in the plan or materially modifies the eligibility requirements
for participation in the Plan. However, no action by the Board or shareholders
may alter or impair any option previously granted without the consent of the
optionee.
51
As of February 14, 1997, the Company has granted, subject to the
consummation of this offering, options to purchase 100,000, 70,000, 50,000,
50,000, 15,000 and 15,000 shares of Class A Common Stock to Messrs. Jones,
Liptak, Lewis, Hauenstein, Baykian and Price, respectively. These options will
have an exercise price equal to the initial public offering price of the Class
A Common Stock, vest in four equal annual installments beginning one year from
the date of the offering and have a term of ten years. The Company has not
granted any SARs.
Certain Federal Income Tax Consequences. The following discussion, which is
based on the law as in effect on February 14, 1997, summarizes certain federal
income tax consequences of participation in the Plan. The summary does not
purport to cover federal employment tax or certain other federal tax
consequences that may be associated with the Plan, nor does it cover state,
local or non-U.S. taxes.
In general, an optionee realizes no taxable income upon the grant or
exercise of an Incentive Option. The exercise of an Incentive Option may
result in an alternative minimum tax liability to the optionee. With certain
exceptions, a disposition of shares purchased under an Incentive Option within
two years from the date of grant or within one year after exercise produces
ordinary income to the optionee (and a corresponding deduction is available to
the Company) equal to the value of the shares at the time of exercise less the
exercise price. Any additional gain recognized in the disposition is treated
as a capital gain for which the Company is not entitled to a deduction. If the
optionee does not dispose of the shares until after the expiration of these
one- and two-year holding periods, any gain or loss recognized upon a
subsequent sale is treated as a long-term capital gain or loss for which the
Company is not entitled to a deduction.
In general, in the case of a Non-Qualified Option, the optionee has no
taxable income at the time of grant. Instead, the optionee realizes ordinary
income in connection with exercise of the option in an amount equal to the
excess (at the time of exercise) of the fair market value of the shares
acquired upon exercise over the option price and a corresponding deduction is
available to the Company. Upon a subsequent sale or exchange of the shares,
appreciation or depreciation after the date of exercise is treated as capital
gain or loss for which the Company is not entitled to a deduction. In general,
an Incentive Option that is exercised more than three months after termination
of employment (other than termination by reason of death) is treated as a Non-
Qualified Option. Incentive Options are also treated as Non-Qualified Options
to the extent they first become exercisable by an individual in any calendar
year for shares having a fair market value (determined as of the date of
grant) in excess of $100,000.
The grant of SARs has no federal income tax consequences at the time of
grant. Upon the exercise of SARs, the amount received is generally taxable as
ordinary income, and the Company is entitled to a corresponding deduction.
Under the so-called "golden parachute" provisions of the Code, the vesting
or accelerated exercisability of awards in connection with a Change in Control
of the Company may be required to be valued and taken into account in
determining whether participants have received compensatory payments,
contingent on the Change in Control, in excess of certain limits. If these
limits are exceeded, a substantial portion of amounts payable to the
participant, including income recognized by reason of the grant, vesting or
exercise of awards under the Plan, may be subject to an additional 20% federal
tax and may be nondeductible to the Company.
The foregoing constitutes a brief summary of the principal federal income
tax consequences related to the grant and exercise of stock options and SARs
based on current federal income tax laws. This summary is not intended to be
exhaustive and does not describe state, local or foreign tax consequences.
Recipients of stock options or SARs under the Plan are urged to consult their
own tax advisors with respect to the consequences of their participation in
the Plan.
52
EMPLOYEE INVESTMENT 401(K) PLAN
The Company's employees are eligible to participate in an Employee Profit
Sharing/Retirement Savings Plan (the "401(k) Plan"). Under the 401(k) Plan,
eligible employees are permitted to defer receipt of up to 16% of their annual
compensation, subject to a limit prescribed by statute. The Company currently
matches 50% of the employees' deferrals up to a maximum of 6% of their annual
compensation. The Company's contribution vests immediately. Subject to certain
restrictions, contributions to the 401(k) Plan are invested by the trustees of
the 401(k) Plan in accordance with the directions of each participant. All
employees of the Company who earn 1,000 hours of credited service over one
year are eligible to participate in the 401(k) Plan on the first day of the
January or July next following the date that the eligibility requirement has
been met.
Participants or their beneficiaries are entitled to payment of benefits: (i)
upon retirement either at or after age 65, (ii) upon death or disability or
(iii) upon termination of employment, if the participant elects to receive a
distribution of his account balance. In addition, hardship distributions and
loans to participants from the 401(k) Plan are available under certain
circumstances. The amount of benefits ultimately payable to a participant
under the 401(k) Plan will depend on the performance of the investments to
which contributions are made on the participant's behalf. During 1996, the
Company contributed approximately $62,000 to the 401(k) Plan on behalf of its
employees.
DEFERRED COMPENSATION PLAN
Certain of the Company's key employees are eligible to participate in a
Deferred Compensation Plan (the "Deferred Compensation Plan"). Key employees
eligible to participate in the Deferred Compensation Plan constitute a select
group of highly compensated or management personnel and are selected by the
Company's Board. Under the Deferred Compensation Plan, key employees are
permitted to defer receipt of up to 100% of their annual compensation. The
Company currently matches the key employees' deferrals up to a maximum of 6%
of their contributions. The funds are deposited with Norwest Bank Colorado,
NA, as Trustee of the Deferred Compensation Plan's Public Trust, and they are
invested in a number of pre-selected investment funds. Both the key employees'
contributions and the Company's contributions are at all times subject to the
claims of the Company's general creditors.
Key employees who participate in the Deferred Compensation Plan receive a
distribution of their contributions, the Company's contributions, and earnings
attributable to those contributions on their separation from employment with
the Company or their death. The Deferred Compensation Plan also permits
hardship distributions in certain circumstances. The amount of benefits
ultimately payable to a key employee participant depends upon the performance
of the investment funds held by the trust. During 1996, the Company
contributed approximately $23,000 to the Deferred Compensation Plan on behalf
of its key employees.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1996, the Company's Board set the compensation of the Company's
executive officers and was comprised of Mr. Jones and Mr. Liptak and
additionally, beginning in October 1996, Mr. Lewis. Messrs. Jones, Liptak and
Lewis served as executive officers of the Company and certain of its
subsidiaries, and also served as directors and officers of a number of the
Company's affiliates, during 1996. As individuals, the Company's executive
officers and directors had no transactions with the Company. See "Certain
Relationships and Related Transactions" for a discussion of certain
transactions between the Company and its affiliates.
53
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In the following transactions no third party bids or appraisals were
obtained. In addition, certain of these transactions are by their nature
unique to the companies involved. Although the Company believes that these
transactions were fair to the Company, no assurance can be given that the
terms of these transactions were generally as favorable to the Company as
could have been obtained from unaffiliated third parties. The transactions
described below, other than the loans and advances, are expected to continue
subsequent to the offering and additional agreements and transactions with
affiliated parties may occur in the future. Prior to September 30, 1996, the
Company also engaged in certain transactions with Earth Segment, as well as
the entities it acquired in the Pre-Offering Transactions, which are not
described below.
Effective upon, and subject to, the consummation of this offering, any new
material related party transaction will be subject to the approval of a
majority of the disinterested members of the Board.
Where applicable, references in this section to amounts paid to or by the
Company include amounts paid to or by the PIN Venture and Superaudio as well
as the Company.
CERTAIN PRE-OFFERING TRANSACTIONS
Immediately prior to the consummation of the offering, the Company will
acquire Glenn R. Jones' 19% equity interest in Jones Infomercial Networks,
Inc., the subsidiary through which the Company has invested in the PIN
Venture, and Mr. Jones' 19% equity interest in Great American Country, Inc.,
the subsidiary through which the Company operates the GAC network, in exchange
for 333,333 shares of the Company's Class A Common Stock. Also immediately
prior to the consummation of the offering, the Company will acquire the
transponder leases and related subleases owned by Space Segment, an affiliate
of the Company, in exchange for 416,667 shares of the Company's Class A Common
Stock. Also, immediately prior to the consummation of the offering, the
Company will convert all of the approximately $6.0 million of advances owed to
Jones International as of December 31, 1996 into 501,492 shares of the
Company's Class B Common Stock. The shares of Class A Common Stock and Class B
Common Stock to be issued in the Pre-Offering Transactions are valued at the
assumed initial public offering price of the Class A Common Stock of $12.00
per share. The actual number of shares to be issued in these transactions will
be adjusted, if necessary, to reflect the actual initial public offering
price.
ADVANCES
Since its inception, the Company has received advances from Jones
International to fund its activities. These advances have no maturity date and
accrue interest at the published prime rate plus 2% (approximately 9%, 11% and
10% in 1994, 1995, and 1996, respectively). The Company paid interest on these
advances of approximately $8,000, $175,000 and $274,000 for the years ended
December 31, 1994, 1995 and 1996, respectively. The largest total amount of
outstanding advances from Jones International in 1995 was approximately $2.2
million in December 1995. These advances totalled approximately $6.0 million
as of December 31, 1996. Immediately prior to the consummation of the
offering, the Company will convert these advances owed to Jones International
into 501,492 shares of the Company's Class B Common Stock. Jones International
is under no obligation to provide, nor does the Company expect it to provide,
additional financial assistance to the Company subsequent to the consummation
of this Offering. See "Use of Proceeds."
PURCHASE OF JONES GALACTIC RADIO, INC. AND JONES EARTH SEGMENT, INC.
Effective August 15, 1996, the Company purchased all of the common stock of
Galactic Radio from Global Group, an affiliate of the Company, for $17.2
million. Galactic Radio is a holding
54
company that owns a 100% interest in Jones Radio Network, Inc. and,
indirectly, a 50% interest in Superaudio. Global Group had acquired Galactic
Radio from Jones Intercable, another affiliate of the Company, for a $17.2
million purchase price on June 14, 1996. The $17.2 million purchase price paid
by the Company for Galactic Radio consisted of $1.2 million in cash and a
$16.0 million note payable to Global Group. The note payable to Global Group
bears interest at 8.25% per annum and is payable quarterly. Principal payments
are due in quarterly installments beginning May 15, 2000. The note is secured
by certain of the assets of the Company's radio network programming business.
The Company intends to repay the note in full from the proceeds of the
offering.
Effective September 30, 1996, the Company purchased all of the common stock
of Earth Segment from Mr. Jones and Jones International for 110,833 shares and
472,500 shares, respectively, of the Company's Class A Common Stock. In
connection with this transaction, the Company assumed Earth Segment's
obligations under an approximately $6.6 million promissory note payable to
Jones Intercable. The note is secured by all of Earth Segment's present and
future tangible and intangible property and bears interest at one percent over
the published prime rate. Approximately $670,000 and $608,000 of interest was
paid on the note for the years ended December 31, 1995 and 1996, respectively.
The note matures on December 19, 1999. The Company intends to repay the note
in full from the proceeds of the offering. Earth Segment, now a wholly owned
subsidiary of the Company, owns the real and personal assets through which the
Company provides playback, trafficking and uplinking services.
TAX SHARING AGREEMENT
The Company joins in filing a consolidated tax return as provided for under
the terms of a tax allocation agreement with Jones International and certain
of Jones International's subsidiaries. Pursuant to the terms of the tax
allocation agreement, tax provisions (benefits) are allocated to the members
of the tax sharing group based on their respective pro rata contribution of
taxable income (loss) to Jones International's consolidated taxable income
(loss).
The tax allocation agreement gives Jones International the option to either
make a payment of the tax benefits due to the members of the tax sharing group
or to defer such payments until a subsequent taxable period in which the
member generates taxable income and has a tax payment due either to Jones
International or to a federal or state taxing authority. Such payments may be
deferred by Jones International for a period not to exceed five years from the
date the tax benefits were incurred and will accrue interest at the prime rate
in effect at the time the deferred amounts originate.
In 1994, 1995 and 1996, the Company recognized income tax benefits as a
result of the tax sharing arrangement of approximately $73,000, $303,000 and
$190,000, respectively. Upon the consummation of this offering, less than 80%
of the Company's outstanding Common Stock will be owned by Jones International
and, therefore, the Company will no longer be included in the Jones
International tax allocation agreement.
UPLINKING AND OTHER SERVICES
The Company has agreements to provide uplinking, playback, trafficking and
related services to Jones Education, an affiliate of the Company, that
terminate on December 31, 2004. The Company has the right to terminate the
uplinking agreement upon 30-days written notice. The Company received
approximately $1.4 million, $1.9 million and $2.2 million from Jones Education
for these services in 1994, 1995 and 1996, respectively.
TRANSPONDER AGREEMENTS
The Company subleases to Jones Education a non-preemptible transponder on a
domestic communications satellite that the Company currently leases from a
third party. The Company has
55
the right to terminate the sublease at any time upon 30-days written notice.
The monthly payments under the sublease may be adjusted periodically through
the December 2004 expiration date based on the number of customers using the
transponder. The Company received lease payments of approximately $0.3
million, $1.2 million and $0.9 million for the years ended December 31, 1994,
1995 and 1996, respectively.
The Company subleases from Jones Satellite Holdings, Inc. ("Satellite
Holdings"), an affiliate of the Company, an audio channel on a non-preemptible
satellite transponder on the Galaxy V communications satellite for
approximately $58,000 per month. Satellite Holdings has the right to terminate
the sublease prior to its May 2004 expiration date upon 30-days written
notice. Satellite Holdings leases the transponder from a third party pursuant
to a lease that terminates in 2004. Satellite Holdings charged the Company
lease payments of approximately $633,000, $696,000 and $696,000 for the years
ended December 31, 1994, 1995 and 1996, respectively.
SALES COMMISSIONS
The Company earns up to a 3% commission on its sale of airtime for
informational programming on certain network subsidiaries of Jones Education.
The Company received commissions from Jones Education of approximately $52,000
and $241,000 for the years ended December 31, 1995 and 1996, respectively.
AFFILIATE FEES
The Company licenses the GAC network to certain cable television systems
owned or managed by Jones Intercable. Jones Intercable and its affiliated
partnerships paid total license fees to the Company of approximately $719,000
for year ended December 31, 1996. This affiliation agreement expires on
December 31, 2010. See "Risk Factors--Risks Associated with Distribution of
Television Programming." Superaudio also licenses its audio services to these
systems. Jones Intercable and its affiliated partnerships paid Superaudio
approximately $720,000 for each of the years ended December 31, 1994, 1995 and
1996, respectively.
The PIN network is distributed to Jones Intercable and its affiliated
parnerships and to Cox and Adelphia, both partners in the PIN Venture. The
current affiliation agreement with Jones Intercable expires on February 1,
2005. Under the terms of the affiliation agreements with these MSOs, the
Company made incentive payments of approximately 33% of its net advertising
revenue to the cable systems that carry its programming. The PIN Venture
currently makes incentive payments of approximately 60% of its net advertising
revenue to these systems. For the years ended December 31, 1994, 1995 and
1996, Jones Intercable and its affilated partnerships received incentive
payments totaling approximately $238,000, $1,056,000 and $1,212,000.
COMPUTER SERVICES
A subsidiary of Jones International provides computer hardware and software
services and miscellaneous related support services to the Company and other
Jones International affiliates. This subsidiary charged service fees to the
Company of approximately $125,000, $493,000 and $563,000 for the years ended
December 31, 1994, 1995 and 1996, respectively.
OFFICE LEASE AND SUBLEASE
The Company leases and subleases office space in Englewood, Colorado from
affiliates of Jones International on a month-to-month basis. The Company paid
rent and associated expenses under these leases and subleases of approximately
$0, $32,000 and $55,000 for the years ended December 31, 1994, 1995 and 1996,
respectively.
56
ADMINISTRATIVE SERVICES
The Company reimburses Jones International and its affiliates for certain
administrative services provided by these companies, such as legal,
accounting, purchasing and human resources services. Jones International and
its affiliates charge the Company for these services based upon an allocation
of its personnel expense associated with providing these services. These
allocated expenses totaled approximately $110,000, $190,000 and $1,008,000,
for the years ended December 31, 1994, 1995 and 1996, respectively. The
Company believes that a significant portion of the administrative expenses for
1996 are non-recurring in nature or will be paid directly by the Company as a
result of organizational changes which have been effected in 1997.
CONFLICTS OF INTEREST OF MANAGEMENT
Messrs. Jones and Thompson and Ms. Steele, who are officers and/or directors
of the Company, are also officers and/or directors of certain affiliated
entities and, from time to time, the Company may enter into transactions with
these entities. Consequently, such officers and/or directors may have
conflicts of interest with respect to matters potentially or actually
involving or affecting the Company and such affiliates. In addition, such
directors and/or officers may have such conflicts of interest with respect to
corporate opportunities suitable for both the Company and such affiliates.
Under the Colorado Business Corporation Act, as amended (the "Colorado
Act"), no conflicting interests transaction shall be void or voidable or give
rise to an award of damages in a proceeding by a shareholder or by or in the
right of the corporation, solely because the conflicting interest transaction
involves a director of the corporation or an entity in which a director of a
corporation is a director or officer or has a financial interest or solely
because the director is present at or participates in the meeting of the
corporation's board of directors or of a committee of the board of directors
which authorizes, approves, or ratifies the conflicting interest transaction
or solely because the directors' vote is counted for such purpose, if: (i) the
material facts as to the directors relationship or interest and as to the
conflicting interest transaction are disclosed or known to the board of
directors or the committee and said board of directors or committee
authorizes, approves, or ratifies in good faith the conflicting interest
transaction, (ii) the material facts as to the director's relationship or
interest and as to the conflicting interest transaction are disclosed or known
to the shareholders entitled to vote thereon and said shareholders
specifically authorize, approve or ratify in good faith the conflicting
interest transaction, or (iii) the conflicting interest transaction is fair as
to the corporation.
Conflicts of interest also may arise in managing the operations of more than
one entity with respect to allocating time, personnel and other resources
between entities. To the extent deemed appropriate by the Company, such
conflicts would be resolved by employing additional personnel as necessary.
See "Risk Factors--Conflicts of Interest; Transactions with and Reliance on
Affiliates."
57
PRINCIPAL SHAREHOLDER
The following table sets forth certain information with respect to the
beneficial ownership of the Class A Common Stock and Class B Common Stock
immediately prior to the consummation of the offering and as adjusted to
reflect the sale of shares offered hereby by: (i) each person known by the
Company to be the beneficial owner of more than 5% of the Class A Common Stock
or Class B Common Stock, (ii) certain of the Company's directors, and (iii)
all directors and executive officers of the Company as a group. Directors and
Named Executive Officers of the Company who do not beneficially own any shares
of Class A Common Stock or Class B Common Stock have been omitted from the
following table. Except as otherwise indicated, each person named in the table
has informed the Company that such person has sole voting and investment power
with respect to all shares beneficially owned by such person.
CLASS A COMMON STOCK CLASS B
--------------------------------------- COMMON STOCK
OWNED BEFORE OWNED AFTER OWNED BEFORE AND
OFFERING OFFERING AFTER OFFERING PERCENT OF
------------------- ------------------- ----------------- VOTE OF ALL CLASSES
NUMBER PERCENT NUMBER PERCENT NUMBER OF COMMON STOCK
BENEFICIAL OWNER OF SHARES OF SHARES OF SHARES OF SHARES OF SHARES PERCENT AFTER OFFERING
-------------------- --------- --------- --------- --------- --------- ------- -------------------
Glenn R. Jones(1)(3).... 2,718,453 91% 2,718,453 43% 1,886,612 100% 86%
All executive officers
and directors as a
group (7 persons)
(2)(3)................. 2,718,453 91% 2,718,453 43% 1,886,612 100% 86%
- --------
(1) Glenn R. Jones is the Chairman of the Board and Chief Executive Officer of
Jones International and owns all of the outstanding shares of Jones
International which, in turn, owns all the outstanding common stock of
Space Segment. He is therefore deemed to be the beneficial owner of the
1,594,500 shares of Class A Common Stock and 1,623,492 shares of Class B
Common Stock owned by Jones International and the 416,667 shares of Class
A Common Stock owned by Space Segment. Glenn R. Jones', Jones
International's and Space Segment's address is 9697 East Mineral Avenue,
Englewood, Colorado 80112.
(2) Consists solely of shares beneficially owned by Glenn R. Jones.
(3) Does not include any shares of Class A Common Stock underlying stock
options granted to executive officers of the Company.
58
DESCRIPTION OF CAPITAL STOCK
Immediately prior to the consummation of the offering, the Company's
authorized capital stock will consist of 50,000,000 shares of Class A Common
Stock, $.01 par value per share, of which 2,980,953 shares will be
outstanding, 2,000,000 shares of Class B Common Stock, $.01 par value per
share, of which 1,886,612 shares will be outstanding, and 5,000,000 shares of
preferred stock, $.01 par value per share, none of which will be outstanding.
Upon the consummation of this offering, the Company will amend its articles of
incorporation to reduce the number of authorized shares of Class B Common
Stock to equal the number of such shares issued and outstanding at such time.
COMMON STOCK
The holders of the Class A Common Stock and Class B Common Stock are
entitled to vote as separate classes with respect to those matters requiring a
class vote under Colorado law, such as certain amendments to the Company's
articles of incorporation which affect a class and certain mergers or share
exchanges. On all matters requiring a class vote under Colorado law, passage
will require the affirmative vote of the holders of a majority of the shares
of each class, voting separately, and of the total shares entitled to vote
thereon. The holders of Class A Common Stock and Class B Common Stock vote
together as a single class on all matters not requiring a class vote under
Colorado law. Holders of the Common Stock are not entitled to cumulate their
votes in the election of directors. Any vacancies on the Board may be filled
by the remaining directors.
The holders of Common Stock vote as a single class with respect to any
"going private" transaction, with each share of each class of Common Stock
entitled to one vote per share with respect to such a transaction. A "going
private" transaction is any "Rule 13e-3 Transaction," as such term is defined
in Rule 13e-3 promulgated under the Securities Exchange Act of 1934, as
amended, between the Company and: (i) Glenn R. Jones, (ii) any "Affiliate" of
Mr. Jones, as defined below, or (iii) any group including Mr. Jones or
Affiliates of Mr. Jones where the participation of such person or persons in
such group would cause the transaction to be deemed to be a "Rule 13e-3
Transaction." An "Affiliate" of Mr. Jones shall mean: (i) any individual or
entity who or that, directly or indirectly, controls, is controlled by, or is
under common control with Mr. Jones and (ii) a child or grandchild of Mr.
Jones, or any trust for their benefit.
Holders of Class A Common Stock and Class B Common Stock are entitled to
share ratably in all dividends (provided that a stock dividend to holders of a
class of Common Stock is payable only in shares of that class) if declared by
the Company's Board out of any funds legally available therefor and in assets
available for distribution upon any liquidation of the Company, subject to the
prior rights of creditors or holders of preferred stock, if any. The Company
does not currently anticipate paying any dividends. See "Dividend Policy."
The shares of Common Stock are not subject to redemption or to any liability
for further calls or assessments, and the holders of such shares do not have
preemptive or other rights to subscribe for additional shares of the Company.
The Company's articles of incorporation provide that the holders of the
Class A Common Stock are entitled to receive the same consideration on a per
share basis (except with respect to per share voting rights) as the holders of
the Class B Common Stock in any merger, reorganization or recapitalization of
the Company. The Company will not support a tender offer or exchange offer
unless the per share consideration (except with respect to voting rights) to
both classes is the same. The Company shall not in any manner subdivide (by
any stock split, reclassification, stock dividend, recapitalization, or
otherwise) or combine the outstanding shares of one class of Common Shares
unless the outstanding shares of all classes of Common Shares shall be
proportionately subdivided or combined.
59
CLASS A COMMON STOCK
Holders of Class A Common Stock are entitled to one vote per share. Upon the
completion of this offering, the outstanding shares of Class A Common Stock
will constitute approximately 77% of the total outstanding shares of capital
stock of the Company and will be entitled to cast approximately 25% of the
votes to be cast in matters to be acted upon by shareholders of the Company
not requiring a class vote.
CLASS B COMMON STOCK
Holders of Class B Common Stock are entitled to ten votes per share, except
that each share of Class B Common Stock is entitled to only one vote with
respect to any proposed "going private" transaction described above.
Each share of Class B Common Stock is convertible, at the option of its
holder, into one share of Class A Common Stock at any time. Each share of
Class B Common Stock converts automatically and without the requirement of any
further action into one share of Class A Common Stock upon its sale or other
transfer to a party that is not an Affiliate of Mr. Jones. All shares of Class
B Common Stock convert automatically into shares of Class A Common Stock upon
the death of Mr. Jones. Notwithstanding the foregoing, if a holder of shares
of Class B Common Stock desires to transfer such shares to a party that is not
an Affiliate of Mr. Jones and have such shares retain their Class B status,
such shareholder must receive a vote of a majority of the shares of Class A
Common Stock held by disinterested shareholders and represented at a
shareholders meeting called for such purpose. If such vote is received, the
transferred shares would not thereafter be subject to any involuntary
conversion.
Upon the completion of this offering, the outstanding shares of Class B
Common Stock will constitute approximately 23% of the total outstanding shares
of capital stock of the Company and will be entitled to cast approximately 75%
of the votes to be cast in matters to be acted upon by shareholders of the
Company not requiring a class vote.
PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of preferred stock, par
value $.01 per share. The Board is authorized, without shareholder approval,
to establish from time to time one or more series of preferred stock and to
determine the rights, preferences and privileges of any such series, including
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, liquidation preferences, sinking fund terms and the name,
description and number of shares constituting any such series. The issuance of
preferred stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes could, among other things, adversely
affect the voting power of the holders of Common Stock and, under certain
circumstances, have the effect of making it more difficult for a third party
to acquire, or discouraging a third party from acquiring, a majority of the
outstanding voting stock of the Company, or otherwise adversely affect the
market price of the Class A Common Stock. The Company has no current plans to
issue any preferred stock.
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION
In accordance with the Colorado Act, the Company's articles of incorporation
eliminate in certain circumstances the liability of directors of the Company
for monetary damages for breach of their fiduciary duty as directors. This
provision does not eliminate the liability of a director: (i) for a breach of
the director's duty of loyalty to the Company or its shareholders, (ii) for
acts or omissions by the director not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) for a willful or
negligent declaration of an unlawful distribution or (iv) for transactions
from which the director derived an improper personal benefit. This provision
has no
60
effect on the availability of equitable remedies, such as injunction or
rescission. In addition, this provision does not modify or limit the
directors' fiduciary duties to the Company.
The Company's articles of incorporation also provide that the Company shall
indemnify any person and his or her estate and personal representatives
against all liability and expense incurred by reason of the person being or
having been a director or officer of the Company or, while serving as a
director or officer of the Company, is or was serving at the request of the
Company or any of its subsidiaries as a director, an officer, an agent, an
associate, an employee, a fiduciary, a manager, a member, a partner, a
promoter, or a trustee of, or to hold any similar position with, another
domestic or foreign corporation or other individual or entity or of an
employee benefit plan, to the full extent permitted under the Colorado Act.
The Colorado Act requires a corporation to indemnify its officers and
directors against reasonable expenses incurred in any proceeding to which the
officer or director is a party and was wholly successful, on the merits or
otherwise, in defense of the proceeding. In addition to this mandatory
indemnification, the Colorado Act provides that a corporation may indemnify
its officers and directors against liability and reasonable expenses if the
officer or director acted in good faith and in a manner reasonably believed to
be in the best interests of the corporation in the case of conduct in an
official capacity, in a manner he or she reasonably believed was at least not
opposed to the corporation's best interests in all other cases, or in a manner
he or she had no reasonable cause to believe was unlawful in the case of
criminal proceedings. In actions by or in the name of the corporation, the
Colorado Act provides the same standard but limits indemnification to
reasonable expenses incurred by the director and prohibits any indemnification
if the director was adjudged liable to the corporation. The Colorado Act also
prohibits indemnification of a director in connection with actions charging
improper personal benefit to the director if the director is adjudged liable
on that basis.
The Company's ability to indemnify its directors pursuant to the foregoing
may be limited in certain circumstances. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to directors of
the Company, the Company has been advised that in the opinion of the
Securities and Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
Certain provisions of the Company's articles of incorporation and bylaws may
have the effect of preventing, discouraging or delaying any change in the
control of the Company and may maintain the incumbency of the Board and
management. Under the Company's articles of incorporation, a majority of the
directors then in office, though less than a quorum, or the sole remaining
director, will be empowered to fill any vacancy on the Board. A majority vote
of the shares of Common Stock will be required to alter, amend or repeal the
foregoing provisions. This provision for filling vacancies on the Board may
discourage a third party from attempting to gain control of the Company and
may maintain the incumbency of the Board. The Company is not aware of any
plans by a third party to seek control of the Company. See "Risk Factors--
Voting Rights; Control by Principal Shareholder and--Anti-Takeover Effects."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Class A Common Stock will be
American Securities Transfer & Trust, Incorporated, Denver, Colorado.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, the Company will have outstanding 6,330,953
shares (6,833,453 shares if the Underwriters' over-allotment option is
exercised in full) of Class A Common Stock. Of these shares, all 3,350,000
shares (3,852,500 shares if the Underwriters' over-
61
allotment option is exercised in full) sold by the Company in this offering
will be freely transferable by persons other than "affiliates" of the Company
without restriction under the Securities Act.
The remaining 2,980,953 shares of Class A Common Stock that will be
outstanding immediately following the offering will be held by Glenn R. Jones,
Jones International, Space Segment and Adelphia, and will be "restricted
securities" within the meaning of Rule 144 under the Securities Act and may
not be sold in the absence of registration under the Securities Act unless an
exemption from registration is available, including the exemption contained in
Rule 144. Adelphia has received certain customary registration rights in
connection with the 262,500 shares of Class A Common Stock received in the PIN
Venture transaction. The Company and its current shareholders (including
Adelphia), officers and directors have agreed not to offer to sell, sell,
contract to sell, pledge or otherwise dispose of such shares for at least 180
days after the date of this Prospectus without the prior written consent of
Oppenheimer & Co., Inc., subject to certain exceptions. Oppenheimer & Co.,
Inc., may, in its discretion, waive these agreements at any time. Following
the expiration of such lock-up agreements, 2,980,953 shares will become
available for resale in the public market, all of which are subject to the
volume limitations, holding period and other restrictions of Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned his or her shares of
Class A Common Stock for at least two years, including an "affiliate" of the
Company (as that term is defined under the Securities Act), is entitled to
sell, within any three-month period, a number of shares that does not exceed
the greater of: (i) 1% of the then outstanding shares of Class A Common Stock
of the Company or (ii) the average weekly trading volume of the then
outstanding shares of Class A Common Stock during the four calendar weeks
preceding each such sale. A person (or persons whose shares are aggregated)
who is not deemed an "affiliate" of the Company and who has beneficially owned
shares for at least three years is entitled to sell such shares under Rule 144
without regard to the volume limitations described above. Affiliates,
including members of the Company's Board of Directors and executive officers,
continue to be subject to such limitations.
As compensation for services rendered in connection with this offering, the
Company has agreed to grant a warrant to M. Kane & Company, Inc. ("MKC") to
purchase 14,000 shares of the Class A Common Stock at an exercise price equal
to 120% of the initial public offering price of the Class A Common Stock. In
connection with the MKC Warrant, MKC also received certain registration rights
relating to the shares of Class A Common Stock underlying the warrant. See
"Underwriting."
In addition, upon the consummation of this offering, 945,000 shares of Class
A Common Stock will be reserved for issuance under the Company's Stock Option
Plan, 300,000 of which will be subject to outstanding options. Furthermore,
each of the 1,886,612 shares of Class B Common Stock that will be outstanding
immediately following the offering will be convertible at the election of its
holder into one share of Class A Common Stock and will convert automatically
into Class A Common Stock upon the occurrence of certain events. See
"Description of Capital Stock." Such shares of Class B Common Stock, and the
shares of Class A Common Stock into which they may be converted, will also be
"restricted securities" within the meaning of and subject to Rule 144.
Prior to this offering, there has been no market for the Class A Common
Stock of the Company, and the amount, timing and nature of any future sale of
Class A Common Stock will depend upon market conditions, the personal
circumstances of the sellers and other factors. No predictions can be made as
to the effect, if any, that public sales of shares or the availability of
shares for sale will have on the market price prevailing from time to time.
Nevertheless, sales of substantial amounts of the Class A Common Stock in the
public market, pursuant to Rule 144 or otherwise, or the perception that such
sales could occur, could have an adverse impact on the market price of the
Class A Common Stock. See "Risk Factors--Shares Eligible for Future Sale."
62
UNDERWRITING
Subject to the terms and conditions in the Underwriting Agreement among the
Company and the Underwriters named below, for whom Oppenheimer & Co., Inc.,
Hambrecht & Quist LLC and MKC are acting as representatives (the
"Representatives"), each of the Underwriters named below have severally agreed
to purchase from the Company, and the Company has agreed to sell to the
Underwriters, the shares of Class A Common Stock set forth opposite its name:
UNDERWRITER NUMBER OF SHARES
----------- ----------------
Oppenheimer & Co., Inc......................................
Hambrecht & Quist LLC.......................................
M. Kane & Company, Inc......................................
---------
Total..................................................... 3,350,000
=========
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other conditions. The nature of the Underwriters'
obligations is such that they are committed to purchase all of the above
shares of Class A Common Stock if any are purchased.
The Underwriters propose to offer the shares of Class A Common Stock
directly to the public at the public offering price set forth on the cover
page of this Prospectus, and at such price less a concession not in excess of
$ per share to certain securities dealers, of which a concession of not in
excess of $ per share may be reallowed to certain other dealers. After this
offering, the public offering price, allowances, concessions, and other
selling terms may be changed by the Representatives.
The Underwriters have advised the Company that they do not intend to confirm
sales of Class A Common Stock offered hereby to accounts over which they
exercise discretionary authority.
The Company has granted to the Underwriters an option, exercisable within 30
days after the date of this Prospectus, to purchase from the Company up to an
aggregate of 502,500 additional shares of Class A Common Stock to cover over-
allotments, if any, at the public offering price less the underwriting
discount set forth on the cover page of this Prospectus. If the Underwriters
exercise their over-allotment option, then each of the Underwriters will have
a firm commitment, subject to certain conditions, to purchase approximately
the same percentage thereof as the number of shares of Class A Common Stock to
be purchased by it, as shown on the above table, bears to the 3,350,000 shares
of Class A Common Stock offered hereby. The Company will be obligated,
pursuant to the over-allotment option, to sell such shares to the Underwriters
to the extent such over-allotment option is exercised. The Underwriters may
exercise such over-allotment option only to cover over-allotments made in
connection with the sale of the shares of Class A Common Stock offered hereby.
The shareholders, executive officers and directors of the Company have
agreed that for a period of 180 days after the date of this Prospectus they
will not offer to sell, sell, contract to sell, pledge or otherwise dispose of
any equity securities of the Company after the date hereof, without the prior
written consent of Oppenheimer & Co., Inc., except for the shares offered
hereby. In addition, the Company has agreed that for a period of 180 days from
the date of this Prospectus it will not, without the prior written consent of
Oppenheimer & Co., Inc., offer to sell, sell, contract to sell, or otherwise
dispose of, any shares of Class A Common Stock or any other equity securities
of the Company, subject to certain exceptions.
63
The Company has agreed to indemnify the Underwriters against certain
liabilities, losses and expenses, including liabilities under the Securities
Act and to contribute to payments that the Underwriters may be required to
make in respect thereof.
On August 14, 1996, the Company and MKC entered into an agreement pursuant
to which MKC agreed to provide financial advice and assistance to the Company
about strategic alternatives, including financial structuring and valuation-
related analyses, and in the event that the Company elected to execute an
initial public offering, to assist the Company with its structure and conduct.
In consideration for such services, MKC has received a $110,000 fee and,
beginning as of July 1996, a retainer of $20,000 per month. MKC is also
entitled to advisory fees equal to 1.875% of the gross proceeds of this
offering, which fees are estimated to be $753,750 and will be offset by any
fees previously paid by the Company to MKC. MKC will also receive the MKC
Warrant. In addition, the Company is required to reimburse MKC for its
reasonable out-of-pocket fees and expenses. This agreement will terminate upon
the consummation of this offering.
The Company has also agreed to issue to MKC the MKC Warrant which grants the
right for five years to purchase 14,000 shares of the Class A Common Stock at
an exercise price equal to 120% of the initial public offering price set forth
on the cover page of this Prospectus. The MKC Warrant will be exercisable one
year after the effective date of the Registration Statement relating to this
offering and carries one demand and unlimited "piggyback" registration rights.
The MKC Warrant is not transferable (except to certain officers and partners
of MKC). The exercise price and the number of shares may, under certain
circumstances, be subject to adjustment pursuant to anti-dilution provisions.
MKC was first registered as a broker-dealer in July 1994. Its president,
Michael W. Kane, previously worked as an investment banker on underwritten
public offerings.
Prior to this offering, there has been no public market for the Class A
Common Stock. Consequently, the initial public offering price will be
determined through negotiations between the Company and the Representatives.
Among the factors considered in such negotiations will be the history of, and
prospects for, the Company and the industry in which it competes, an
assessment of the Company's management, the Company's past and present
operations and financial performance, its past and present earnings and the
trend of such earnings, the prospects for future earnings of the Company, the
present state of the Company's development, the general condition of the
securities markets at the time of this offering and the market prices of
publicly traded common stocks of comparable companies in recent periods.
64
LEGAL MATTERS
The validity of the shares of Class A Common Stock being sold in this
offering will be passed upon for the Company by Davis, Graham & Stubbs LLP,
Denver, Colorado. Certain legal matters in connection with the offering will
be passed upon for the Underwriters by Schulte Roth & Zabel LLP, New York, New
York.
EXPERTS
The historical consolidated financial statements of the Company at December
31, 1995 and 1996, and for each of the three years in the period ended
December 31, 1996; the historical financial statements of the PIN Venture at
December 31, 1995, 1996 and for the eleven months ended December 31, 1995 and
for the year ended December 31, 1996; the historical financial statements of
the Net Assets to Be Acquired from Jones Space Segment, Inc. at December 31,
1995 and 1996 and the three years in the period ended December 31, 1996;
appearing in this Prospectus and the Registration Statement have been audited
by Arthur Andersen LLP, independent public accountants, as set forth in their
reports thereon appearing elsewhere herein and in the Registration Statement,
and are included herein in reliance upon the authority of said firm as experts
in accounting and auditing in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (including all amendments
thereto) under the Securities Act with respect to the shares of Class A Common
Stock offered hereby. As permitted by the rules and regulations of the
Commission, this Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. Statements
contained in this Prospectus as to the contents of any agreement or other
document to which reference is made are not necessarily complete. With respect
to each such agreement or other document filed as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified by such reference.
The Registration Statement, including the exhibits and schedules thereto,
may be inspected at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the following regional offices of the Commission: Seven
World Trade Center, New York, New York 10048, and 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such materials may be obtained
from the public reference section of the Commission at its Washington, D.C.
address upon payment of the prescribed fees. The Commission also maintains a
World Wide Web site that contains reports, proxy statements and information
statements of registrants (including the Company) that file electronically
with the Commission at http://www.sec.gov.
Upon completion of this offering, the Company will be subject to the
informational reporting requirements of the Securities Exchange Act of 1934,
as amended, and in accordance therewith will file reports, proxy statements
and other information with the Commission.
The Company intends to furnish its shareholders with annual reports
containing audited financial statements and a report of independent certified
public accountants. The Company will make available quarterly reports for each
of the first three quarters of each fiscal year containing unaudited summary
financial information.
65
INDEX TO PRO FORMA FINANCIAL STATEMENTS
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
Overview................................................................... P-2
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of December 31,
1996...................................................................... P-3
Unaudited Pro Forma Consolidated Statements of Operations for the Year
ended December 31, 1996................................................... P-4
Unaudited Pro Forma Consolidated Statements of Operations for the Year
ended December 31, 1995................................................... P-5
Unaudited Pro Forma Consolidated Statements of Operations for the Year
ended December 31, 1994................................................... P-6
Notes to Unaudited Pro Forma Consolidated Financial Statements............. P-7
P-1
JONES INTERNATIONAL NETWORKS, LTD.
PRO FORMA FINANCIAL STATEMENTS
OVERVIEW
The following unaudited pro forma condensed consolidated balance sheet as of
December 31, 1996, and pro forma consolidated statements of operations for the
years ended December 31, 1994, 1995 and 1996, adjust the historical financial
information of the Company to reflect the Company's acquisition of (i) an
8.35% interest in the PIN Venture from Adelphia (the "PIN Venture
Transaction"), (ii) Mr. Jones' 19% interest in each of Jones Infomercial
Networks, Inc. and Great American Country, Inc. (the "GRJ Transaction"), and
(iii) the transponder leases and related subleases owned by Jones Space
Segment, Inc. (the "Space Segment Acquisition," and, together with the PIN
Venture Transaction and the GRJ Transaction, collectively, the
"Acquisitions"). In addition, the Company's conversion of all of the
approximately $6.0 million of advances from Jones International as of December
31, 1996 into 501,492 shares of Class B Common Stock (the "Conversion") are
reflected in the accompanying pro forma financial statements. See "Prospectus
Summary--Pre-Offering Transactions." The pro forma balance sheet as of
December 31, 1996 was prepared as if the Acquisitions and Conversion were
consummated on December 31, 1996. The pro forma statements of operations were
prepared as if the GRJ Transaction, Space Segment Transaction and Conversion
were consummated on January 1 of each period presented and as if the PIN
Venture Transaction was consummated on February 1, 1995.
The shares of Class A Common Stock and Class B Common Stock to be issued in
the foregoing transactions are valued at the assumed initial public offering
price of the Class A Common Stock of $12.00 per share. The actual number of
shares to be issued in these transactions will be adjusted, if necessary, to
reflect the actual initial public offering price.
Due to the affiliated relationship of the Company to Jones Infomercial
Networks, Inc., Great American Country, Inc. and Jones Space Segment, Inc.,
for pro forma purposes the GRJ Transaction and the Space Segment Acquisition
have been treated as a reorganization of entities under common control
(similar to a pooling of interests) and as such are reflected in the following
unaudited pro forma condensed consolidated financial statements for all
periods.
As of December 31, 1996, the Company owned a 46% interest in the PIN Venture
and as such accounted for its share of the revenues and expenses of the PIN
Venture on the equity method. Upon consummation of the PIN Venture
Transaction, the Company will own approximately 54% of the PIN Venture and,
going forward, will be able to consolidate the operations of the PIN Venture
for financial reporting purposes. The purchase of the additional 8.35%
interest from Adelphia is estimated to have a value of approximately
$3,150,000. The impact of this purchase is reflected in the accompanying pro
forma financial statements for the periods ended December 31, 1995 and 1996.
The unaudited pro forma financial statements should be read in conjunction
with the related historical financial statements and related notes thereto.
The pro forma information presented is not necessarily indicative of the
financial position or results that would have actually occurred had the
Acquisitions and Conversion been consummated on the dates indicated or which
may occur in the future.
P-2
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
JONES COMPANY
COMPANY AS PIN SPACE PRO FORMA PRO FORMA
REPORTED VENTURE (1) SEGMENT (2) ADJUSTMENTS (3) COMBINED
------------ ----------- ----------- --------------- ------------
ASSETS:
Current assets........... $ 2,095,425 $1,894,645 $ 423,500 $ (781,937)(f) $ 3,631,633
Property, plant
and equipment, net...... 9,122,746 448,236 22,975,071 -- 32,546,053
Intangible assets, net... 1,568,303 -- -- 3,065,388 (g) 4,633,691
Other assets............. 2,112,632 3,039 -- (472,856)(h) 1,642,815
------------ ---------- ----------- ----------- ------------
Total assets............. $ 14,899,106 $2,345,920 $23,398,571 $ 1,810,595 $ 42,454,192
============ ========== =========== =========== ============
LIABILITIES AND
SHAREHOLDERS' INVESTMENT:
Current liabilities...... $ 7,169,410 $1,332,604 $ -- $(6,799,746)(f) $ 1,702,268
Long-term debt........... 22,554,500 -- 30,722,162 -- 53,276,662
Other liabilities........ 49,962 -- 780,000 -- 829,962
Minority interests....... 340,799 -- 414,502 (h) 755,301
Shareholders' investment
(deficit)............... (15,215,565) 1,013,316 (8,103,591) 8,195,839 (h) (14,110,001)
------------ ---------- ----------- ----------- ------------
Total liabilities and
shareholders'
investment.............. $ 14,899,106 $2,345,920 $23,398,571 $ 1,810,595 $ 42,454,192
============ ========== =========== =========== ============
The accompanying notes to unaudited pro forma consolidated financial statements
are an integral part of these pro forma consolidated financial statements.
P-3
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
JONES COMPANY
COMPANY AS PIN SPACE PRO FORMA PRO FORMA
REPORTED VENTURE(1) SEGMENT(2) ADJUSTMENTS(3) COMBINED
----------- ---------- ----------- -------------- -----------
REVENUES:
Radio programming....... $ 6,978,303 -- -- -- $ 6,978,303
Television programming:
Non-affiliated
entities.............. 193,204 8,037,944 -- -- 8,231,148
Affiliated entities.... 960,254 -- -- -- 960,254
----------- ---------- ----------- ----------- -----------
Total television
programming........... 1,153,458 8,037,944 -- -- 9,191,402
----------- ---------- ----------- ----------- -----------
Satellite delivery and
production support:
Non-affiliated
entities.............. -- -- 3,120,000 -- 3,120,000
Affiliated entities.... 4,550,524 -- 2,556,468 (3,282,949)(a) 3,824,043
----------- ---------- ----------- ----------- -----------
Total satellite
delivery and product
support............... 4,550,524 -- 5,676,468 (3,282,949) 6,944,043
----------- ---------- ----------- ----------- -----------
Total revenue.......... 12,682,285 8,037,944 5,676,468 (3,282,949) 23,113,748
----------- ---------- ----------- ----------- -----------
OPERATING EXPENSES:
Radio programming....... 4,162,634 -- -- -- 4,162,634
Television programming
expenses:
Non-affiliated
entities.............. 1,644,144 1,221,003 -- -- 2,865,147
Affiliated entities.... -- 4,701,540 -- (1,235,074)(j) 3,466,466
Satellite delivery and
production support..... 3,599,587 -- 3,069,469 (3,282,949)(a) 4,621,181
1,235,074 (j)
Selling and marketing
expenses............... 1,737,566 239,709 -- -- 1,977,275
General and
administrative
expenses............... 3,256,035 751,129 13,588 306,539 (e) 4,327,291
----------- ---------- ----------- ----------- -----------
Total operating
expenses.............. 14,399,966 6,913,381 3,083,057 (2,976,410) 21,419,994
----------- ---------- ----------- ----------- -----------
OPERATING INCOME
(LOSS)................. (1,717,681) 1,124,563 2,593,411 (306,539) 1,693,754
----------- ---------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income......... 72,151 1,973 -- (30,096)(b) 44,028
Interest expense........ (1,342,929) (30,096) (3,156,969) 30,096 (b) (4,256,581)
243,317 (k)
Other expense........... 11,660 (20,444) -- -- (8,784)
Equity share of income
(loss) of
subsidiaries........... 828,992 -- -- (502,717)(d) 326,275
----------- ---------- ----------- ----------- -----------
Total other income
(expense)............. (430,126) (48,567) (3,156,969) (209,400) (3,895,062)
----------- ---------- ----------- ----------- -----------
Income (loss) before
income tax benefit and
minority interests..... (2,147,807) 1,075,996 (563,558) (565,939) (2,201,308)
Income tax benefit ..... 190,476 -- 196,436 -- 386,912
----------- ---------- ----------- ----------- -----------
Net income (loss) before
minority interest...... (1,957,331) 1,075,996 (367,122) (565,939) (1,814,396)
Minority interests in
net income (loss) of
consolidated
subsidiaries........... (37,082) -- -- (493,075)(d) (493,075)
37,082 (c)
----------- ---------- ----------- ----------- -----------
NET INCOME (LOSS)....... $(1,994,413) $1,075,996 $ (367,122) $(1,021,932) $(2,307,471)
=========== ========== =========== =========== ===========
NET LOSS PER COMMON
SHARE.................. $ (.59) $ (.47)
=========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING..... 3,353,573 4,867,565 (i)
=========== ===========
The accompanying notes to unaudited pro forma consolidated financial statements
are an integral part of these pro forma consolidated financial statements.
P-4
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
COMPANY
COMPANY AS PIN JONES PRO FORMA PRO FORMA
REPORTED VENTURE (1) SPACE SEGMENT (2) ADJUSTMENTS(3) COMBINED
----------- ----------- ----------------- -------------- -----------
REVENUES:
Radio programming....... $ 5,121,310 -- -- -- $ 5,121,310
Television programming:
Non-affiliated
entities.............. 288,591 4,110,025 -- -- 4,398,616
Affiliated entities.... 51,574 -- -- -- 51,574
----------- ---------- ----------- ----------- -----------
Total television
programming........... 340,165 4,110,025 -- -- 4,450,190
----------- ---------- ----------- ----------- -----------
Satellite delivery and
production support:
Non-affiliated
entities.............. 9,844 -- 3,120,000 -- 3,129,844
Affiliated entities.... 4,211,454 -- 2,425,344 (2,846,672)(a) 3,790,126
----------- ---------- ----------- ----------- -----------
Total satellite
delivery and product
support............... 4,221,298 -- 5,545,344 (2,846,672) 6,919,970
----------- ---------- ----------- ----------- -----------
Total revenue.......... 9,682,773 4,110,025 5,545,344 (2,846,672) 16,491,470
----------- ---------- ----------- ----------- -----------
OPERATING EXPENSES:
Radio programming....... 3,067,745 -- -- -- 3,067,745
Television programming
expenses:
Non-affiliated
entities.............. 298,158 380,288 -- -- 678,446
Affiliated entities.... 109,333 3,339,011 -- (919,084)(j) 2,529,260
Satellite delivery and
production support..... 3,512,001 -- 3,077,441 (2,846,672)(a) 4,661,854
919,084 (j)
Selling and marketing
expenses............... 1,374,368 113,775 -- -- 1,488,143
General and
administrative
expenses............... 2,320,760 661,768 1,020 284,025 (e) 3,267,573
----------- ---------- ----------- ----------- -----------
Total operating
expenses.............. 10,682,365 4,494,842 3,078,461 (2,562,647) 15,693,021
----------- ---------- ----------- ----------- -----------
OPERATING INCOME
(LOSS)................. (999,592) (384,817) 2,466,883 (284,025) 798,449
----------- ---------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income......... 63,792 -- -- (21,890)(b) 41,902
Interest expense........ (778,246) (33,043) (3,291,591) 21,890 (b) (4,046,121)
34,869 (k)
Other income (expense),
net.................... (16,276) 5,528 -- -- (10,748)
Equity share of income
(loss) of
subsidiaries........... 10,886 -- -- 210,877 (d) 221,763
----------- ---------- ----------- ----------- -----------
Total other income
(expense)............. (719,844) (27,515) (3,291,591) 245,746 (3,793,204)
----------- ---------- ----------- ----------- -----------
Income (loss) before
income tax benefit and
minority interests..... (1,719,436) (412,332) (824,708) (38,279) (2,994,755)
Income tax benefit...... 302,632 -- 195,107 -- 497,739
----------- ---------- ----------- ----------- -----------
Net loss before minority
interests.............. (1,416,804) (412,332) (629,601) (38,279) (2,497,016)
Minority interests in
net income (loss) of
consolidated
subsidiaries........... 35,237 -- -- 188,951 (d) 188,951
(35,237)(c)
----------- ---------- ----------- ----------- -----------
NET LOSS................ $(1,381,567) $ (412,332) $ (629,601) $ 115,435 $(2,308,065)
=========== ========== =========== =========== ===========
NET LOSS PER COMMON
SHARE.................. $ (.41) $ (.48)
=========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING .... 3,353,573 4,845,690 (i)
=========== ===========
The accompanying notes to unaudited pro forma consolidated financial statements
are an integral part of these pro forma consolidated financial statements.
P-5
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
JONES COMPANY
COMPANY AS SPACE PRO FORMA PRO FORMA
REPORTED SEGMENT (2) ADJUSTMENTS(3) COMBINED
----------- ----------- -------------- -----------
REVENUES:
Radio programming...... $ 2,541,221 $ -- $ -- $ 2,541,221
Television programming:
Non-affiliated
entities.............. 1,945,790 -- -- 1,945,790
Affiliated entities.... -- -- -- --
----------- ----------- --------- -----------
Total television
programming........... 1,945,790 -- -- 1,945,790
----------- ----------- --------- -----------
Satellite delivery and
production support:
Non-affiliated
entities.............. 15,392 3,120,000 -- 3,135,392
Affiliated entities.... 2,069,942 2,399,965 (800,001)(a) 3,669,906
----------- ----------- --------- -----------
Total satellite
delivery and product
support............... 2,085,334 5,519,965 (800,001) 6,805,298
----------- ----------- --------- -----------
Total revenue.......... 6,572,345 5,519,965 (800,001) 11,292,309
----------- ----------- --------- -----------
OPERATING EXPENSES:
Radio programming....... 2,068,239 -- -- 2,068,239
Television programming
expenses:
Non-affiliated
entities.............. 530,129 -- -- 530,129
Affiliated entities.... 1,037,817 -- (525,486)(j) 512,331
Satellite, delivery and
production............. 1,849,291 3,077,469 (800,001)(a) 4,652,245
525,486 (j)
Selling and marketing
expenses............... 1,090,254 -- -- 1,090,254
General and
administrative
expenses............... 1,957,716 667 -- 1,958,383
----------- ----------- --------- -----------
Total operating
expenses.............. 8,533,446 3,078,136 (800,001) 10,811,581
----------- ----------- --------- -----------
OPERATING INCOME
(LOSS)................. (1,961,101) 2,441,829 -- 480,728
----------- ----------- --------- -----------
OTHER INCOME (EXPENSE):
Interest income......... 57,947 -- -- 57,947
Interest expense........ (68,082) (3,390,780) -- (3,458,862)
Other income (expense),
net.................... (8,963) -- -- (8,963)
Equity share of income
(loss) of
subsidiaries........... 236,811 -- -- 236,811
----------- ----------- --------- -----------
Total other income
(expense)............. 217,713 (3,390,780) -- (3,173,067)
----------- ----------- --------- -----------
Loss before income tax
benefit and minority
interests.............. (1,743,388) (948,951) -- (2,692,339)
Income tax benefit...... 73,408 316,311 -- 389,719
----------- ----------- --------- -----------
Net loss before minority
interests.............. (1,669,980) (632,640) -- (2,302,620)
Minority interests in
net income (loss) of
consolidated
subsidiaries........... 12,900 -- (12,900)(c) --
----------- ----------- --------- -----------
NET LOSS................ $(1,657,080) $ (632,640) $ (12,900) $(2,302,620)
=========== =========== ========= ===========
NET LOSS PER COMMON
SHARE.................. $ (.49) $ (.50)
=========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING..... 3,353,573 4,605,065 (i)
=========== ===========
The accompanying notes to unaudited pro forma consolidated financial statements
are an integral part of these pro forma consolidated financial statements.
P-6
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(1) To reflect the historical operating results and balance sheet information
on a consolidated basis of the PIN Venture as a result of the ownership of
a majority interest.
(2) To reflect the operating results and balance sheet information on a
consolidated basis as a result of the Space Segment Transaction.
(3) To reflect the following pro forma adjustments:
(a) To eliminate intercompany satellite delivery and production support
charges as a result of the ownership of a majority interest in PIN
Venture and the Space Segment Transaction.
(b) To eliminate intercompany interest income and expense relating to the
ownership of a majority interest in PIN Venture.
(c) To reflect the elimination of minority interests as a result of the GRJ
Transaction.
(d) Adjustment to: (i) eliminate the Company's equity share of income
(loss) of the PIN Venture prior to the Pre-Offering Transactions and
(ii) reflect the minority interest (i.e., Cox) in the PIN Venture when
consolidated on a pro forma basis.
(e) To reflect amortization of goodwill pertaining to the PIN Venture.
(f) To eliminate intercompany receivables and payables, including the
elimination of the advances owed to Jones International, Ltd., pursuant
to the Conversion.
(g) To establish goodwill associated with the PIN Venture Transaction.
(h) To: (i) eliminate the Company's equity investment in the PIN Venture,
(ii) reflect the minority interest (i.e., Cox Consumer Information
Networks, Inc.) in the net assets of the PIN Venture, (iii) reflect
equity issued by the Company to Adelphia in exchange for an 8.35%
interest in the PIN Venture and (iv) reflect the Conversion.
(i) To reflect the issuance of Class A Common Stock and Class B Common
Stock in connection with the Pre-Offering Transactions.
(j) To reclassify the portion of satellite transponder and production
support expenses that the Company charged its own subsidiaries to
television programming expenses as a result of the pro forma effects of
the Space Segment Transaction and the PIN Venture.
(k) To eliminate the interest expense related to the advances from Jones
International, Ltd. that were eliminated in the Conversion.
P-7
INDEX TO HISTORICAL FINANCIAL STATEMENTS
PAGE
----
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES CONSOLIDATED FINANCIAL
STATEMENTS
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996.............. F-3
Consolidated Statements of Operations for the Three Years Ended December
31, 1994, 1995 and 1996.................................................. F-4
Consolidated Statements of Shareholders' Investment for the Three Years
Ended December 31, 1996.................................................. F-5
Consolidated Statements of Cash Flows for the Three Years Ended December
31, 1996................................................................. F-6
Notes to Consolidated Financial Statements................................ F-7
PRODUCT INFORMATION NETWORK VENTURE
Report of Independent Public Accountants.................................. F-18
Balance Sheets as of December 31, 1995 and 1996........................... F-19
Statements of Operations for the Eleven Months ended December 31, 1995 and
for the Year ended December 31, 1996..................................... F-20
Statements of Partners' Capital (Deficit)................................. F-21
Statements of Cash Flows for the Eleven Months ended December 31, 1995 and
for the Year ended December 31, 1996..................................... F-22
Notes to Financial Statements............................................. F-23
JONES SPACE SEGMENT
Report of Independent Public Accountants.................................. F-27
Statements of Net Assets to Be Acquired from Jones Space Segment, Inc. as
of December 31, 1995 and 1996............................................ F-28
Statements of Revenues and Direct Costs for the years ended December 31,
1994, 1995 and 1996...................................................... F-29
Statements of Cash Flows for the years ended December 31, 1994, 1995 and
1996 .................................................................... F-30
Notes to Financial Statements............................................. F-31
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Jones International Networks, Ltd.:
We have audited the accompanying consolidated balance sheets of Jones
International Networks, Ltd. (a Colorado corporation) and subsidiaries
(collectively, "the Company") as of December 31, 1995 and 1996, and the
related consolidated statements of operations, shareholders' investment and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 1995 and 1996, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Denver, Colorado
February 5, 1997.
F-2
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
CURRENT ASSETS:
Cash.............................................. $ 5,400 $ 3,892
Accounts receivable, net of allowance for doubtful
accounts of $224,808 and $286,562, respectively.. 857,183 851,866
Receivable from affiliates........................ 441,353 803,162
Prepaid expenses.................................. 109,758 113,572
Deferred commission, current (Note 2)............. 148,770 248,286
Other current assets.............................. 6,244 74,647
------------ ------------
Total current assets.............................. 1,568,708 2,095,425
------------ ------------
PROPERTY, PLANT AND EQUIPMENT (Note 2):
Land and building................................. 3,714,715 3,717,055
Furniture, fixtures and equipment................. 6,621,293 9,090,374
Leasehold improvements............................ 185,544 258,908
------------ ------------
Total property, plant and equipment............... 10,521,552 13,066,337
Less accumulated depreciation..................... (2,935,987) (3,943,591)
------------ ------------
Net property, plant and equipment................. 7,585,565 9,122,746
------------ ------------
OTHER ASSETS (Note 2):
Intangible assets................................. 786,513 2,088,180
Less amortization................................. (393,517) (519,877)
------------ ------------
Net intangible assets............................. 392,996 1,568,303
------------ ------------
Investment in affiliates.......................... 393,143 922,135
Deferred commission, long-term (Note 2)........... 491,884 496,572
Deferred offering costs........................... -- 607,505
Other assets...................................... 27,437 86,420
------------ ------------
Total other assets................................ 912,464 2,112,632
------------ ------------
Total assets..................................... $ 10,459,733 $ 14,899,106
============ ============
CURRENT LIABILITIES:
Accounts payable.................................. $ 16,479 $ 239,872
Accrued liabilities............................... 613,422 686,131
Accounts payable--Jones International (Note 4).... 1,755,723 6,017,809
Interest payable (Note 3)......................... -- 215,524
Other liabilities................................. 29,911 10,074
------------ ------------
Total current liabilities......................... 2,415,535 7,169,410
------------ ------------
LONG-TERM LIABILITIES:
Customer deposits (Note 2)........................ 41,110 49,962
Long-term debt--third parties..................... 7,991 --
Long-term debt--affiliated entities (Notes 3 and
5)............................................... 21,212,532 22,554,500
------------ ------------
Total long-term liabilities....................... 21,261,633 22,604,462
------------ ------------
MINORITY INTEREST (Note 2)......................... 3,717 340,799
------------ ------------
SHAREHOLDERS' INVESTMENT:
Class A Common Stock; $.01 par value; 50,000,000
shares authorized;
1,385,120 and 1,968,453 shares issued and
outstanding, respectively........................ 13,851 19,685
Class B Common Stock; $.01 par value; 1,385,120
shares authorized,
issued and outstanding........................... 13,851 13,851
Accumulated deficit............................... (13,248,854) (15,249,101)
------------ ------------
Total shareholders' investment.................... (13,221,152) (15,215,565)
------------ ------------
Total liabilities and shareholders' investment... $ 10,459,733 $ 14,899,106
============ ============
The accompanying notes to these consolidated financial statements are
an integral part of these consolidated financial statements.
F-3
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------------
1994 1995 1996
----------- ----------- -----------
REVENUES: (Notes 2 and 4}
Radio programming...................... $ 2,541,221 $ 5,121,310 $ 6,978,303
Television programming:
Non-affiliated entities............... 1,945,790 288,591 193,204
Affiliated entities................... -- 51,574 960,254
----------- ----------- -----------
Total television programming.......... 1,945,790 340,165 1,153,458
----------- ----------- -----------
Satellite delivery and production
support:
Non-affiliated entities............... 15,392 9,844 --
Affiliated entities................... 2,069,942 4,211,454 4,550,524
----------- ----------- -----------
Total satellite delivery and
production support................... 2,085,334 4,221,298 4,550,524
----------- ----------- -----------
Total revenue......................... 6,572,345 9,682,773 12,682,285
----------- ----------- -----------
OPERATING EXPENSES:
Radio programming...................... 2,068,239 3,067,745 4,162,634
Television programming:
Non-affiliated entities............... 530,129 298,158 1,644,144
Affiliated entities (Note 4).......... 1,037,817 109,333 --
Satellite delivery and production
support (Note 4)...................... 1,849,291 3,512,001 3,599,587
Selling and marketing.................. 1,090,254 1,374,368 1,737,566
General and administrative (Note 4).... 1,957,716 2,320,760 3,256,035
----------- ----------- -----------
Total operating expenses.............. 8,533,446 10,682,365 14,399,966
----------- ----------- -----------
OPERATING LOSS......................... (1,961,101) (999,592) (1,717,681)
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income ....................... 57,947 63,792 72,151
Interest expense (Note 4).............. (68,082) (778,246) (1,342,929)
Other income (expense), net............ (8,963) (16,276) 11,660
Equity share of income of
subsidiaries.......................... 236,811 10,886 828,992
----------- ----------- -----------
Total other income (expense).......... 217,713 (719,844) (430,126)
----------- ----------- -----------
Loss before income tax benefit and
minority interests.................... (1,743,388) (1,719,436) (2,147,807)
Income tax benefit (Notes 2 and 8)..... 73,408 302,632 190,476
----------- ----------- -----------
Loss before minority interests......... (1,669,980) (1,416,804) (1,957,531)
Minority interests in net income (loss)
of consolidated subsidiaries.......... 12,900 35,237 (37,082)
----------- ----------- -----------
NET LOSS............................... $(1,657,080) $(1,381,567) $(1,994,413)
=========== =========== ===========
NET LOSS PER COMMON SHARE.............. $ (.49) $ (.41) $ (.59)
=========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING........................... 3,353,573 3,353,573 3,353,573
=========== =========== ===========
PRO FORMA INCOME TAX BENEFIT (Note 8) $ -- $ -- $ --
=========== =========== ===========
PRO FORMA NET LOSS (Note 8)............ $(1,730,488) $(1,684,199) $(2,184,889)
=========== =========== ===========
PRO FORMA NET LOSS PER COMMON SHARE
(Note 8).............................. $ (.52) $ (.50) $ (.65)
=========== =========== ===========
The accompanying notes to these consolidated financial statements are
an integral part of these consolidated financial statements.
F-4
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
COMMON STOCK
-----------------------------------
CLASS A CLASS B ADDITIONAL TOTAL
----------------- ----------------- PAID-IN ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT INVESTMENT
--------- ------- --------- ------- ---------- ------------ -------------
Balance, January 1,
1993.................. 1,385,120 $13,851 1,385,120 $13,851 $ -- $ (9,382,074) $ (9,354,372)
Net Loss............... -- -- -- -- -- (828,133) (828,133)
--------- ------- --------- ------- ----- ------------ ------------
Balance, December 31,
1993.................. 1,385,120 13,851 1,385,120 13,851 -- (10,210,207) (10,182,505)
Net Loss............... -- -- -- -- -- (1,657,080) (1,657,080)
--------- ------- --------- ------- ----- ------------ ------------
Balance, December 31,
1994.................. 1,385,120 13,851 1,385,120 13,851 -- (11,867,287) (11,839,585)
Net Loss............... -- -- -- -- -- (1,381,567) (1,381,567)
--------- ------- --------- ------- ----- ------------ ------------
Balance, December 31,
1995.................. 1,385,120 13,851 1,385,120 13,851 -- (13,248,854) (13,221,152)
Issuance of Common
Stock in exchange for
Earth Segment......... 583,333 5,834 -- -- -- (5,834) --
Net loss............... -- -- -- -- -- (1,994,413) (1,994,413)
--------- ------- --------- ------- ----- ------------ ------------
Balance, December 31,
1996.................. 1,968,453 $19,685 1,385,120 $13,851 $ -- $(15,249,101) $(15,215,565)
========= ======= ========= ======= ===== ============ ============
The accompanying notes to these consolidated financial statements are
an integral part of these consolidated financial statements.
F-5
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------------
1994 1995 1996
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................ $(1,657,080) $(1,381,567) $(1,994,413)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization......... 370,943 970,681 1,558,558
Equity in income of subsidiary........ (236,811) (10,886) (828,992)
Minority interest in net loss
(income)............................. (12,900) (35,237) 37,082
Net change in assets and liabilities:
Decrease (increase) in receivables... (105,566) (32,068) 5,317
Increase in receivables from
affiliates.......................... (95,791) (316,052) (361,809)
Increase in prepaid expenses......... (513) (8,180) (3,814)
Decrease (increase) in other current
assets.............................. 53,857 6,647 (68,403)
Decrease (increase) in deferred
commission.......................... (171,877) 49,377 (104,204)
Increase in deferred offering costs.. -- -- (607,505)
Decrease (increase) in other assets.. 85,599 4,462 (58,983)
Increase (decrease) in accounts
payable............................. (16,231) 8,054 223,393
Increase in accrued liabilities...... 37,148 327,874 72,709
Increase (decrease) in accounts payable
to Jones International.............. (5,029,881) 68,606 4,262,086
Increase in interest payable......... -- -- 215,524
Increase (decrease) in other
liabilities......................... (31,261) 27,175 (19,837)
Increase (decrease) in customer
deposits............................ (123,104) (25,827) 8,852
----------- ----------- -----------
Net cash provided by (used in)
operating activities.................. (6,933,468) (346,941) 2,335,561
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment..... (1,641,039) (1,261,669) (2,969,379)
Purchases of intangible assets.......... (5,160) (436,519) (1,001,667)
Investment in joint venture............. -- (174,826) --
Distributions received.................. 375,000 175,000 300,000
----------- ----------- -----------
Net cash used in investing activities.. (1,271,199) (1,698,014) (3,671,046)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings................ 8,316,448 1,997,916 1,341,968
Repayment of borrowings................. (50,850) (10,642) (7,991)
----------- ----------- -----------
Net cash provided by financing
activities............................ 8,265,598 1,987,274 1,333,977
----------- ----------- -----------
INCREASE (DECREASE) IN CASH............. 60,931 (57,681) (1,508)
----------- ----------- -----------
CASH, BEGINNING OF PERIOD............... 2,150 63,081 5,400
----------- ----------- -----------
CASH, END OF PERIOD..................... $ 63,081 $ 5,400 $ 3,892
=========== =========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid.......................... $ 68,082 $ 778,246 $ 1,342,929
=========== =========== ===========
Allocated income tax benefit .......... $ 73,408 $ 302,632 $ 190,476
=========== =========== ===========
Goodwill/minority interests from
creation of a joint venture........... $ -- $ -- $ 300,000
=========== =========== ===========
The accompanying notes to these consolidated financial statements are
an integral part of these consolidated financial statements.
F-6
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(1) ORGANIZATION AND BUSINESS
Jones International Networks, Ltd. (the "Company") was incorporated in
November 1993 as a subsidiary of Jones International, Ltd. ("Jones
International"). In connection with a contemplated initial public offering of
the Company's Class A Common Stock, the Company acquired certain other
subsidiaries of Jones International whose businesses are complementary to the
Company's business. The accompanying financial statements have been prepared
on a basis of reorganization accounting of entities under common control
(similar to pooling of interests) as though the Company has made the
acquisitions of these Jones International subsidiaries at inception.
The Company creates, develops, acquires and produces programming that it
distributes to radio stations, cable television system operators and other
video distributors. The Company: (i) provides radio programming to radio
stations in exchange for advertising time that it resells to national
advertisers, (ii) provides television programming to cable television system
operators and other video distributors, sells advertising time on its two
television networks and receives license fees for its country music television
network and (iv) owns and operates playback, uplink and satellite transmission
facilities that are used to distribute the Company's programming and are also
subleased to others for a fee.
The Company has received advances and loans from Jones International and
related companies to fund its operating and investing activities in the past
and anticipates that Jones International will make additional advances to the
Company prior to the consummation of the offering. Jones International and
such related companies are under no obligation to provide, nor does the
Company expect them to provide, additional advances or loans to the Company
subsequent to the consummation of the offering. Management believes that the
net proceeds from this offering and operating cash flow will be sufficient to
fund the Company's capital needs through at least December 31, 1997. However,
if the offering is not completed, other equity and/or debt financing is not
obtained and if the Company's operating cash flow is not sufficient to meet
its needs, Jones International anticipates that it will continue to make
advances to the Company as necessary, through December 31, 1997.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation--The consolidated financial statements include
the accounts of all majority-owned and controlled subsidiaries. Investments in
entities which are not majority-owned and controlled by the Company are
accounted for under the equity method. All significant intercompany balances
and transactions have been eliminated in consolidation.
Minority Interest--The minority interest in the net income or loss of the
Company's consolidated subsidiaries is reflected in the statement of
operations. To the extent the minority interest in the net losses of the
Company's consolidated subsidiaries exceeds the minority investment in those
subsidiaries, such excess losses are charged to the Company. These excess
losses are recovered against any future earnings. The Company recorded losses
of approximately $0, $71,000 and $277,000 in excess of the Company's ownership
interest in its consolidated subsidiaries during the years ended December 31,
1994, 1995 and 1996, respectively.
Property, Plant and Equipment--Property, plant and equipment is depreciated
using the straight-line method over the estimated useful lives of 5 to 15
years. Leasehold improvements are depreciated over the lesser of five years or
the term of the lease.
F-7
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Intangible Assets--Intangible assets consist primarily of radio programming
licensing agreements obtained from a third party in October 1996. Intangible
assets are amortized over the lesser of 15 years or the term of the affiliate
agreements.
Deferred Commissions--Sales commissions are amortized over the life of the
corresponding affiliate agreements from which the sales commission was paid.
The current amount represents the portion to be amortized within the next 12
months. The remaining portion is classified as long-term.
Deferred Offering Costs--Deferred offering costs consist primarily of
financial advisory, legal and accounting fees incurred in connection with the
initial public offering. These costs will be charged against the gross
proceeds of the initial public offering.
Customer Deposits--Customer deposits consist of unearned revenue associated
with affiliate fees and refundable advance payments received from radio
stations.
Income Taxes--The Company joins in filing a consolidated tax return as
provided for under the terms of a tax sharing agreement with Jones
International and Jones International's other subsidiaries. Pursuant to the
terms of the tax allocation agreement, tax provisions (benefits) are allocated
to the members of the tax sharing group based on their respective pro rata
contribution of taxable income (loss) to Jones International's consolidated
taxable income (loss).
The tax allocation agreement with Jones International gives Jones
International the option to either make a payment of the tax benefits due to
the subsidiary members of the tax sharing group or to defer such payments
until a subsequent taxable period in which the subsidiary member generates
taxable income and has a tax payment due either to Jones International or to a
federal or state taxing authority. Such payments may be deferred by Jones
International for a period not to exceed five years from the date the tax
benefits were incurred and will accrue interest at the prime rate in effect at
the time the deferred amounts originate.
The Company accounts for deferred tax liabilities or assets based on the
temporary differences between the financial reporting and tax bases of assets
and liabilities as measured by the enacted tax rates which are expected to be
in effect when these differences reverse. Deferred tax assets are reduced, if
deemed necessary, by a valuation allowance for the amount of any tax benefits
which, based upon current circumstances, are not expected to be realized.
Revenue Recognition--The Company's revenue consists of radio programming
revenue, television programming revenue and satellite delivery and production
support revenue.
Radio programming revenue includes advertising and licensing fees. The
Company generates radio advertising revenue by selling airtime to advertisers
who advertise their products or services on the networks. The Company
recognizes advertising revenue upon airing of the advertisements. Any amounts
received from customers for radio advertisements that have not been aired
during the period are recorded as unearned revenue until such time as the
advertisement is aired. The Company delivers its programming to radio stations
for distribution to their listeners. Radio station licensing fees are earned
monthly based on the radio station's contractual agreement.
Television programming revenue includes advertising and licensing fees. The
Company generates television advertising revenue by selling airtime to
advertisers who advertise their
F-8
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
products or services on the networks. The Company recognizes advertising
revenue upon the airing of the advertisements. Any amounts received from
customers for television advertisements that have not been aired during the
period are recorded as unearned revenue until such time as the advertisement
is aired. The Company delivers its programming to cable television systems for
distribution to their viewers. Cable television system licensing fees are
earned monthly based on a per subscriber fee set under the terms of the cable
operator's contractual agreement and the number of subscribers that are
receiving the Company's programming during the respective month.
Satellite delivery and production support revenue includes revenue from
satellite delivery, uplinking, trafficking, playback and other services. The
Company generates revenue by providing such services to affiliates and a third
party. The Company recognizes satellite delivery and production support
revenue upon completion of the services or upon contractual arrangements.
Net Loss per Share--Net loss per share of Class A and Class B Common Stock
is based on the weighted average number of shares outstanding during the
respective periods. Pro forma net loss per share reflects the impact of the
Company not recording any tax benefits as if it had filed its income tax
return on a separate company basis and was not a part of the tax allocation
agreement with affiliated entities.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires the Company to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
New Accounting Pronouncements--The Company adopted Statement of Financial
Accounting Standards No. 121, (Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be Disposed Of, "SFAS 121"), effective
January 1, 1996. SFAS 121 establishes accounting standards for the impairment
of long-lived assets, certain identifiable intangibles and goodwill.
Implementation of SFAS 121 had no material effect on the Company's financial
position or results of operations.
The Company adopted Statement of Financial Accounting Standards No. 123,
(Accounting for Stock-Based Compensation, "SFAS 123") effective January 1,
1996. SFAS 123 recommends a fair value based method of accounting for employee
stock compensation, including stock options. However, companies may choose to
account for stock compensation using the intrinsic value based method as
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and provide pro forma disclosures of net income and
earnings per share as if the fair value based method had been applied. The
Company elected to account for stock compensation using the intrinsic value
based method, and thus SFAS 123 will not have any impact on reported operating
results.
(3) ACQUISITION OF JONES GALACTIC RADIO, INC. AND JONES EARTH SEGMENT, INC.
Effective August 15, 1996, the Company purchased all of the common stock of
Jones Galactic Radio ("Galactic Radio") from Jones Global Group, Inc. ("Global
Group"), an affiliate of the Company, for $17,200,000. Galactic Radio is a
holding company which owns 100% of the Company's radio network programming
business and through a subsidiary, a 50% interest in the
F-9
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Galactic/Tempo Venture ("Superaudio," See Note 7). The purchase price was
paid using $1,200,000 in cash with the balance in the form of a $16,000,000
note that bears interest at 8.25 percent per annum and is payable quarterly.
Principal payments are due in quarterly installments beginning May 15, 2000.
The note is included in long-term debt to affiliated entities in the
accompanying financial statements. It matures December 31, 2003. The note is
secured by certain of the assets of the Company's radio network programming
business. This transaction was treated as a reorganization of entities under
common control and is included in the Company's historical financial
statements for all periods presented. The Company intends to repay the note in
full from the proceeds of the offering.
The net assets of Galactic Radio as of the purchase date totaled
approximately $5.1 million. In accordance with generally accepted accounting
principles for a transfer of entities under common control, the amount of
purchase price paid by the Company in excess of Galactic Radio's net assets
(approximately $12.1 million) was charged to shareholders' investment.
Effective September 30, 1996, the Company acquired all of the common stock
of Jones Earth Segment, Inc. ("Earth Segment") from Mr. Jones and Jones
International for 110,833 shares and 472,500 shares, respectively, of the
Company's Class A Common Stock. Earth Segment, now a wholly owned subsidiary
of the Company, owns the assets through which the Company provides playback,
editing, duplication and uplinking services. This transaction was treated as a
reorganization of entities under common control and is included in the
Company's historical financial statements for all periods presented.
(4) TRANSACTIONS WITH AFFILIATED ENTITIES
The Company is a subsidiary of 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 Mr. Jones,
Chairman and Chief Executive Officer of Jones Intercable, Inc. ("Jones
Intercable") and various other subsidiaries of Jones International. Certain
members of management of the Company are also officers or directors of these
affiliated entities and, from time to time, the Company may have transactions
with these entities. Certain expenses are paid by affiliated entities on
behalf of the Company and are allocated at cost based on specific
identification or other methods which management believes are reasonable.
Principal recurring transactions with affiliates, excluding the PIN Venture
and Superaudio, are described below. See Note 7 for transactions with
affiliates related to the PIN Venture and Superaudio.
Television Programming Revenue--The Company earns up to a three percent
commission on the sale of airtime for informational programming on Mind
Extension University and Jones Computer Network, which are subsidiaries of
Jones Education Company ("Jones Education") and affiliates of the Company.
Prior to October 1, 1995, the Company did not provide this service to Jones
Education. For the year ended December 31, 1995 and 1996, the Company received
approximately $52,000 and $241,000, respectively, for this service.
The Company distributes its Great American Country ("GAC") network primarily
to cable television systems owned or managed by Jones Intercable. The GAC
network, a 24-hour country music video network, was launched on December 31,
1995. Jones Intercable and its affiliated partnerships paid total license fees
to the Company of approximately $719,000 for the year ended December 31, 1996.
F-10
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Satellite Delivery and Production Support Revenue--Earth Segment provides
playback, editing, duplication and uplinking services primarily to its cable
programming network affiliates. Earth Segment charges affiliates for its
services using rates which are calculated to achieve a specified rate of
return on investment to Earth Segment. For the years ended December 31, 1994,
1995 and 1996, Earth Segment charged Jones Education and its affiliates
approximately $1,409,000, $1,885,000 and $2,248,000, respectively, for these
services.
Television Programming Expense--Jones Infomercial Networks, Inc.
("Infomercial Networks"), a subsidiary of the Company, provided programming to
Jones Intercable prior to the PIN Venture and, as required under the terms of
the affiliate agreement, paid a fee of approximately 33% of the net revenue
generated to the affiliates which aired the infomercial programming. For the
years ended December 31, 1994, 1995 and 1996, Infomercial Networks paid cable
system rebates to Jones Intercable or its systems totaling approximately
$238,000, $109,000 and $-0-, respectively.
Satellite Delivery and Production Support Expense--Galactic Radio has a
transponder lease agreement with Jones Satellite Holdings ("Satellite
Holdings"), an affiliate of the Company, for the use of the sub-carriers on a
non-preemtible satellite transponder. This agreement allows Galactic Radio to
use a portion of the transponder to distribute its audio programming.
Satellite Holdings has the right to terminate the license agreement at any
time upon 30 days written notice to Galactic Radio. Satellite Holdings charged
approximately $633,000, $696,000 and $696,000 for the years ended December 31,
1994, 1995 and 1996, respectively, for this service.
General and Administrative Expenses--The Company leases and 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. Jones International and its affiliates charged the
Company approximately $-0-, $14,000 and $32,000, for the years ended December
31, 1994, 1995 and 1996, respectively.
A subsidiary of Jones International provides computer hardware and software
support services to the Company. This subsidiary charged the Company
approximately $118,000, $306,000 and $385,000, for the years ended December
31, 1994, 1995 and 1996, respectively, for computer services.
The Company and its consolidated subsidiaries reimburse Jones International
and its affiliates for certain allocated administrative expenses. These
expenses generally consist of salaries and related benefits. Allocations of
personnel costs are generally based on actual time spent by affiliated
associates with respect to the Company. Jones International and its affiliates
charged the Company approximately $91,000, $163,000 and $861,000 for the years
ended December 31, 1994, 1995 and 1996, respectively, for these administrative
expenses.
To assist funding its operating and investing activities, the Company has
borrowed funds from Jones International. Jones International charged interest
on its advances to the Company at rates of approximately 9, 11 and 10 percent
per annum in 1994, 1995 and 1996, respectively. Jones International's interest
rate is calculated using the published prime rate plus two percent. Jones
International charged the Company interest of approximately $8,000, $142,000
and $243,000, for the years ended December 31, 1994, 1995 and 1996,
respectively.
Periodically, Jones International remits funds on behalf of the Company and
its subsidiaries to third parties and affiliates in payment of products and
services purchased by the Company and
F-11
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
its subsidiaries in their normal course of business. These advances are then
subsequently reimbursed to Jones International on a timely basis as revenue
proceeds are received by the Company. Due to their short-term nature, such
amounts payable to Jones International are classified as a current liability
in the accompanying financial statements.
In addition, the Company incurred certain expenses related to its satellite
transponder leases with Jones Space Segment, Inc. ("Space Segment"). The
Company entered into a renewable transponder lease agreement with Space
Segment to use a portion of a satellite transponder to distribute television
programming. Space Segment has the right to terminate the agreement at any
time upon 30 days written notice to the Company. Space Segment charged the
Company approximately $800,000, $1,213,000 and $1,704,000, for the years ended
December 31, 1994, 1995 and 1996, respectively, for this service. Upon
consummation of the offering, these transactions will no longer be affiliated
in nature because the Company is acquiring the satellite transponder leases
and subleases as one of the Pre-Offering Transactions.
(5) NOTE PAYABLE
In December 1994, Earth Segment entered into a promissory note with Jones
Intercable. As of December 31, 1996, the principal amount of the note was
$6,554,500. The note is secured by all of Earth Segment's present and future
tangible and intangible property and bears interest at one percent over the
published prime rate. Interest expense, which is payable quarterly, totaled
approximately $-0-, $670,000 and $608,000 for the years ended December 31,
1994, 1995 and 1996, respectively. The note matures on December 19, 1999. The
Company intends to repay this note in full from the proceeds of the offering.
(6) COMMON STOCK
Voting Rights--Holders of Class A Common Stock are entitled to one vote per
share and holders of Class B Common Stock are entitled to ten votes per share,
except that each share of Class B Common Stock is entitled to only one vote
with respect to certain "going private" transactions. Both classes vote
together as a single class on all matters not requiring a class vote under
Colorado law. The shares of Class B Common Stock are convertible into shares
of Class A Common Stock at the election of the holders thereof and
automatically convert into shares of Class A Common Stock upon their transfer
to a party unaffiliated with Glenn R. Jones (unless such transfer is approved
by a vote of disinterested shareholders) or generally upon the death of Mr.
Jones. Mr. Jones directly or beneficially owns all of the Class B Common
Stock.
Stock Split--The Board of Directors has approved a stock split whereby each
share of the Company's Class A Common Stock was exchanged into 220 shares of
Class A Common Stock and each share of Class B Common Stock was exchanged into
220 shares of Class B Common Stock. These stock splits have been reflected
retroactively in the accompanying financial statements.
Stock Option Plan--The Company has adopted an employee stock option plan
(the "Plan") that provides for the grant of stock options and stock
appreciation rights ("SARs") to employees or individuals providing service to
the Company. The Plan covers an aggregate of up to 945,000 shares of the
Company's Class A Common Stock. As of February 1997, the Company has granted,
subject to the consummation of the Company's initial public offering, options
to purchase 300,000 shares of its Class A Common Stock to certain of its
officers and key employees. These options will
F-12
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
have an exercise price equal to the initial public offering price of the Class
A Common Stock, vest in four equal annual installments beginning one year from
the date of the Company's initial public offering and have a term of ten
years. No SARs have been granted under the Plan.
(7) JOINT VENTURES
The Company is a partner in two joint ventures, the PIN Venture and
Superaudio. The PIN Venture was organized in January 1995 and commenced
operations on February 1, 1995. The PIN Venture owns and operates a 24-hour-a-
day cable television network for the airing of long-form advertising
("infomercials"). Superaudio commenced operations in July 1990 and is a joint
venture which is owned 50 percent by the Company and 50 percent by a third
party. Superaudio provides audio programming services to cable television
system operators and direct broadcast satellite services companies.
Certain condensed financial information for the PIN Venture is as follows:
FOR THE
ELEVEN MONTHS FOR THE
ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------- -----------------
Total assets............................... $ 703,179 $2,345,920
Liabilities................................ 765,859 1,332,604
Partners' capital (net of accumulated defi-
cit)...................................... (62,680) 1,013,316
Revenues................................... 4,110,025 8,037,944
Operating expenses......................... 4,494,842 6,913,381
Operating income (loss).................... (384,817) 1,124,563
Net income (loss).......................... (412,332) 1,075,996
Certain condensed financial information for Superaudio is as follows:
DECEMBER 31,
-------------------------------
1994 1995 1996
---------- ---------- ---------
Total assets................................... $1,081,144 $1,156,253 $ 950,393
Liabilities.................................... 316,282 309,949 51,815
Partners' capital (net of accumulated
deficit)...................................... 764,862 846,304 898,578
Revenues....................................... 1,795,968 1,898,304 2,379,238
Operating expenses............................. 1,334,704 1,479,730 1,735,352
Operating income............................... 461,264 418,574 643,886
Net income..................................... 473,622 431,442 652,274
The PIN Venture and Superaudio reimburse the Company and its affiliates for
certain allocated overhead and administrative expenses. These expenses
generally consist of salaries and related benefits, rent, data processing
services and other corporate facilities costs. The Company and its affiliates
provide engineering, marketing, administrative, accounting, information
management, and legal services to the PIN Venture and Superaudio. Allocations
of personnel costs have been based primarily on actual time spent by the
Company and its affiliates' employees.
Significant transactions for the PIN Venture and Superaudio with affiliated
entities are described below:
F-13
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Audio Programming Revenue--Superaudio delivers its audio programming to
cable television systems owned by Jones Intercable and its affiliated
partnerships for a monthly fee of $60,000. For the years ended December 31,
1994, 1995 and 1996, Jones Intercable and its affiliates paid Superaudio
$720,000, $720,000 and $720,000, respectively, for audio programming.
Audio Programming Expense--The Company sells certain audio programming to
Superaudio. For the years ended December 31, 1994, 1995 and 1996, the Company
charged Superaudio approximately $48,000, $55,000 and $48,000, respectively,
for audio programming.
Television Programming Expense--The Company charges the PIN Venture a
commission on the sale of airtime for informational programming. For the year
ended December 31, 1996, the Company charged the PIN Venture approximately
$35,000 for this service.
Prior to January 1, 1997, the PIN Venture generally paid one-half of the
revenues generated by its infomercial programming in the form of cable system
rebates to all Systems which enter into agreements to air such programming.
Amounts paid by the PIN Venture to Jones Intercable and its affiliated
partnerships were approximately $946,000 and $1,212,000 for the years ended
December 31, 1995 and 1996, respectively. Beginning on January 1, 1997, the
PIN Venture will generally pay 60% of these revenues to such Systems.
Satellite Delivery and Production Support Expense--Earth Segment provides
playback, editing, duplication and uplinking services to the PIN Venture.
Earth Segment charged the PIN Venture approximately $522,000 and $726,000 for
the years ended December 31, 1995 and 1996, respectively, for these services.
The Company has satellite transponder lease agreements with Space Segment
and Satellite Holdings and in turn sub-leases these satellite transponders to
the PIN Venture and Superaudio. The Company charged the PIN Venture
approximately $1,112,000 and $852,000 for the years ended December 31, 1995
and 1996, respectively, for this service. The Company charged Superaudio
$633,000 for each of the three years in the period ended December 31, 1996 for
this service.
General and Administrative Expenses--The Company leases office space in
Englewood, Colorado from affiliates of Jones International. Rent and
associated expenses are allocated to the PIN Venture based on the amount of
square footage it occupies. Jones International and its affiliates charged the
PIN Venture approximately $18,000 and $23,000, for the years ended December
31, 1995 and 1996, respectively.
A subsidiary of Jones International provides computer hardware and software
support services to the PIN Venture and Superaudio. The subsidiary charged the
PIN Venture approximately $146,000 and $138,000 for the years ended December
31, 1995 and 1996, respectively, for computer services. Superaudio was charged
approximately $7,000, $41,000 and $40,000, for the years ended December 31,
1994, 1995 and 1996, respectively, for computer services.
The Company and its subsidiaries reimburse Jones International for certain
allocated administrative expenses. These expenses generally consist of
salaries and related benefits. Allocations of personnel costs are generally
based on actual time spent by affiliated associates with respect to the
Company. Jones International and its affiliates charged the PIN Venture
approximately $21,000 and $124,000, for the years ended December 31, 1995 and
1996,
F-14
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
respectively, for these administrative expenses. Jones International and its
affiliates charged the Superaudio approximately $18,000, $6,000 and $23,000,
for the years ended December 31, 1994, 1995 and 1996, respectively, for these
administrative expenses.
To assist funding its operating and investing activities, the PIN Venture
has borrowed funds from Jones International and its affiliates. Jones
International charged interest on its advances to the Company at rates of
approximately 9, 11 and 10 percent per annum in 1994, 1995, and 1996
respectively. Jones International's interest rate is calculated using the
published prime rate plus 2 percent. Jones International charged the PIN
Venture interest of approximately $33,000 and $31,000 for the years ended
December 31, 1995 and 1996, respectively.
(8) INCOME TAXES
The Company and certain of its subsidiaries joined in filing a consolidated
tax return as provided for under the terms of a tax sharing agreement with
Jones International and Jones International's other subsidiaries. Pursuant to
the terms of the agreement, tax (provisions) benefits are allocated to members
of the tax sharing group based on their respective pro rata contribution of
taxable income (loss) to Jones International's consolidated taxable income
(loss). Income tax benefits recognized as a result of the tax sharing
arrangement were approximately $73,000, $303,000 and $190,000 for the years
ended December 31, 1994, 1995 and 1996. Pro forma information is presented on
the face of the Statement of Operations as if the Company had filed its tax
returns on a separate company basis.
The difference between the statutory federal income tax rate and effective
rate is summarized as follows:
DECEMBER 31,
-------------------
1994 1995 1996
----- ----- -----
(IN THOUSANDS)
Computed "expected tax benefit"............................ $ 610 $ 602 $ 743
State taxes, net of federal benefit........................ 57 56 72
Other...................................................... 10 10 20
----- ----- -----
677 668 835
Change in valuation allowance.............................. (677) (668) (835)
----- ----- -----
Tax benefit before impact of tax sharing agreement......... 0 0 0
Impact of tax sharing agreement............................ 73 303 190
----- ----- -----
Total income tax benefit................................... $ 73 $ 303 $ 190
===== ===== =====
F-15
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are as follows:
DECEMBER 31,
----------------
1995 1996
------- -------
(IN THOUSANDS)
DEFERRED TAX ASSETS:
Net operating loss carryforwards............................. $ 312 $ 1,415
Future deductible amounts associated with other assets and
liabilities................................................. 4,314 4,881
------- -------
4,626 6,296
DEFERRED TAX LIABILITIES:
Investments in property and equipment........................ (327) (450)
VALUATION ALLOWANCE.......................................... (4,299) (5,846)
------- -------
Net deferred tax asset....................................... $ -- $ --
======= =======
At December 31, 1996, the Company had net tax operating loss carryforwards
("NOLs") of approximately $3.7 million which expire between 2004 and 2010.
Although management expects future results of operations to improve, it
emphasizes the Company's past performance rather than growth projections when
determining the valuation allowance. Any subsequent adjustment to the valuation
allowance, if deemed appropriate due to changed circumstances, will be
recognized as a separate component of the provision for income taxes.
If the Company successfully completes its proposed offering of Class A Common
Stock, a change of greater than 50 percent of the ownership interest of the
Company's shares may occur. Tax statutes limit the utilization of existing tax
NOLs when a change greater than 50 percent occurs to a specified amount each
year. The Company believes that the application of the limitation will not
likely cause taxable income to occur in the near term due to unavailability of
limited NOLs.
(9) EMPLOYEE INVESTMENT AND DEFERRED COMPENSATION PLANS
The Company's employees are eligible to participate in an Employee Profit
Sharing/Retirement Savings Plan (the "401(k) Plan"). Under the 401(k) Plan,
eligible employees are permitted to defer up to 16% of their annual
compensation. The Company currently matches 50% of the employees' deferrals up
to a maximum of 6% of their annual compensation, with the Company's
contribution vesting immediately. Contributions to the 401(k) Plan are invested
by the trustees of the 401(k) Plan in accordance with the directions of each
participant. Participants or their beneficiaries are entitled to payment of
benefits (i) upon retirement either at or after age 65, (ii) upon death or
disability or (iii) upon termination of employment, unless the participant
elects to receive payment prior to one of the events previously listed. For the
years ended December 31, 1994, 1995 and 1996, the Company contributed
approximately $33,000, $51,000 and $62,000, respectively, to the 401(k) Plan on
behalf of its employees.
Certain of the Company's key management personnel are eligible to participate
in a Deferred Compensation Plan (the "Deferred Compensation Plan"). Under the
Deferred Compensation Plan, key employees are permitted to defer receipt of
100% of their annual compensation. The Company currently matches the key
employees' deferrals up to a maximum of 6% of their contributions. The
contributed funds are deposited with an independent trustee and are invested in
a number of pre-
F-16
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
selected investment funds. Both the key employees' and the Company's
contributions are subject to the claims of the Company's creditors.
Participants in the Deferred Compensation Plan or their beneficiaries receive
a distribution of their contributions, the Company's contributions, and
earnings attributable to those contributions on their separation from
employment with the Company or their death. Contributions made by the Company
to the Deferred Compensation Plan on behalf of key employees totaled
approximately $25,000, $11,000 and $23,000 for the years ended December 31,
1994, 1995 and 1996, respectively.
(10) COMMITMENTS
On August 14, 1996, the Company and M. Kane & Company, Inc. ("MKC") entered
into an agreement pursuant to which MKC agreed to provide financial advice and
assistance to the Company about strategic alternatives, including financial
structuring and valuation-related analyses, and in the event that the Company
elected to execute an initial public offering, to assist the Company with its
structure and conduct. In consideration for such services, MKC has received a
$110,000 fee and, beginning as of July 1996, a retainer of $20,000 per month.
MKC is also entitled to advisory fees equal to 1.875% of the gross proceeds of
the Company's initial public offering, which fees are estimated to be $753,750
and will be offset by any fees previously paid by the Company to MKC, as well
as a warrant (the "MKC Warrant") to purchase shares of Class A Common Stock,
as described below. In addition, the Company is required to reimburse MKC for
its reasonable out-of-pocket fees and expenses. This agreement will terminate,
if not extended, on the later of December 31, 1996 or the consummation of the
Company's initial public offering.
The Company has also agreed to issue to MKC the MKC Warrant, which grants
the right for five years to purchase 14,000 shares is of the Class A Common
Stock at an exercise price equal to 120% of the initial public offering price.
The MKC Warrant will be exercisable one year after the effective date of the
registration statement relating to the Company's initial public offering. The
exercise price and the number of shares may, under certain circumstances, be
subject to adjustment pursuant to anti-dilution provisions.
(11) SUBSEQUENT EVENTS
The Company has filed a registration statement with the Securities and
Exchange Commission. Currently, the Company owns less than 50 percent of PIN.
Immediately prior to the consummation of the offering, the Company will
acquire from Adelphia an 8.35% percent equity interest in PIN in exchange for
262,500 shares of the Company's Class A Common Stock. As a result of this
transaction, the Company will own a majority equity interest in the PIN
Venture and will consolidate the PIN Venture for financial reporting purposes.
Immediately prior to the consummation of the offering, the Company will
acquire Mr. Jones' 19% equity interest in JINI, the subsidiary through which
the Company has invested in the PIN Venture and Mr. Jones' 19% equity interest
in GAC, the subsidiary through which the Company operates the GAC network, in
exchange for 333,333 shares of the Company's Class A Common Stock. Immediately
prior to the consummation of the offering, the Company will acquire the
transponder leases and related subleases owned by Space Segment, an affiliate
of the Company, in exchange for 416,667 of the Company's Class A Common Stock.
Immediately prior to the consummation of the Company's initial public
offering, the Company will convert all of the approximately $6.0 million of
advances owed to Jones International as of December 31, 1996 into 501,492
shares of the Company's Class B Common Stock.
F-17
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has received a commitment from a commercial bank for a $25
million revolving credit facility with a term of five years. Borrowings under
the credit agreement are expected to bear interest at a maximum of LIBOR plus
3.0% (currently approximately 8.5%), subject to reduction should the Company's
financial ratios improve. The credit facility will be secured by substantially
all of the assets of the Company. The amount of available borrowings under the
credit facility will be based on certain ratios of debt to operating cash flow
as defined in the credit agreement. The credit facility may also limit the
Company's ability to incur additional indebtedness, enter into new capitalized
lease obligations and pay dividends to its shareholders. The commercial bank's
commitment is contingent on the consummation of the Company's planned initial
public offering. The Company anticipates it will enter into a definitive
credit agreement for this credit facility late in the first quarter of 1997.
F-18
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Jones International Networks, Ltd.:
We have audited the accompanying balance sheets of Product Information
Network Venture (the "Partnership") as of December 31, 1995 and 1996, and the
related statements of operations, partners' capital (deficit) and cash flows
for the eleven months ended December 31, 1995, and the year ended December 31,
1996. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Partnership as of
December 31, 1995 and 1996, and the results of its operations and its cash
flows for the eleven months ended December 31, 1995, and the year ended
December 31, 1996, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Denver, Colorado
February 5, 1997.
F-19
PRODUCT INFORMATION NETWORK VENTURE
BALANCE SHEETS
DECEMBER 31,
--------------------
1995 1996
-------- ----------
CURRENT ASSETS:
Cash................................................... $ 16,248 $ 54,688
Accounts receivable.................................... 545,522 1,820,148
Allowance for doubtful accounts........................ (55,861) (41,822)
-------- ----------
Net accounts receivable.............................. 489,661 1,778,326
Prepaid expenses....................................... 8,540 12,575
Other current assets................................... -- 49,056
-------- ----------
Total current assets................................. 514,449 1,894,645
-------- ----------
PROPERTY, PLANT, AND EQUIPMENT (Notes 2 and 5):
Property, plant and equipment.......................... 202,258 502,371
Accumulated depreciation and amortization.............. (17,768) (54,135)
-------- ----------
Net property, plant, and equipment................... 184,490 448,236
-------- ----------
OTHER ASSETS............................................. 4,240 3,039
-------- ----------
Total assets......................................... $703,179 $2,345,920
======== ==========
CURRENT LIABILITIES:
Accounts payable--trade................................ $ 10,940 $ 4,251
Accounts payable--cable system rebates (Note 2)........ 130,032 374,912
Advances from Jones Infomercial Network Ventures (Note
3).................................................... 388,733 781,937
Unearned revenue (Note 2).............................. 218,976 27,602
Accrued liabilities.................................... 17,178 143,902
-------- ----------
Total current liabilities............................ 765,859 1,332,604
-------- ----------
PARTNERS' CAPITAL (DEFICIT) (Note 4):
General partners' contribution......................... 349,652 349,652
Retained earnings (accumulated deficit)................ (412,332) 663,664
-------- ----------
Total general partners' capital (deficit)............ (62,680) 1,013,316
-------- ----------
Total liabilities and partners' capital................ $703,179 $2,345,920
======== ==========
The accompanying notes to these financial statements
are an integral part of these financial statements.
F-20
PRODUCT INFORMATION NETWORK VENTURE
STATEMENTS OF OPERATIONS
FOR THE
ELEVEN MONTHS FOR THE
ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------- -----------------
REVENUES:
Television programming revenues.......... $4,110,025 $8,037,944
OPERATING EXPENSES:
Television programming expenses
Non-affiliated entities................. 380,288 1,221,003
Affiliated entities..................... 3,339,011 4,701,540
---------- ----------
Total television programming expenses.. 3,719,299 5,922,543
---------- ----------
Selling and marketing.................... 113,775 239,709
General and administrative expenses (Note
3)...................................... 661,768 751,129
---------- ----------
Total operating expenses............... 4,494,842 6,913,381
---------- ----------
OPERATING INCOME (LOSS).................... (384,817) 1,124,563
---------- ----------
OTHER INCOME (EXPENSE):
Interest income.......................... -- 1,973
Interest expense (Note 3)................ (33,043) (30,096)
Other income (loss)...................... 5,528 (20,444)
---------- ----------
Total other income (expense)........... (27,515) (48,567)
---------- ----------
NET INCOME (LOSS).......................... $ (412,332) $1,075,996
========== ==========
The accompanying notes to these financial statements are an integral part of
these financial statements.
F-21
PRODUCT INFORMATION NETWORK VENTURE
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
RETAINED TOTAL
EARNINGS PARTNERS'
CAPITAL (ACCUMULATED CAPITAL
CONTRIBUTIONS DEFICIT) (DEFICIT)
------------- ------------ ----------
BALANCE, FEBRUARY 1, 1995................ $ -- $ -- $ --
Contributions.......................... 349,652 -- 349,652
Net loss............................... -- (412,332) (412,332)
-------- --------- ----------
BALANCE, DECEMBER 31, 1995............... 349,652 (412,332) (62,680)
Net income............................. -- 1,075,996 1,075,996
-------- --------- ----------
BALANCE, DECEMBER 31, 1996............... $349,652 $ 663,664 $1,013,316
======== ========= ==========
The accompanying notes to these financial statements
are an integral part of these financial statements.
F-22
PRODUCT INFORMATION NETWORK VENTURE
STATEMENTS OF CASH FLOWS
FOR THE
ELEVEN MONTHS FOR THE
ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ....................... $(412,332) $1,075,996
Adjustments to reconcile net (loss) in-
come to net cash provided by (used in)
operating activities:
Loss (gain) on sale of assets........... (5,528) 20,444
Depreciation and amortization........... 23,187 42,304
Net change in assets and liabilities:
Increase in advances from Jones
Infomercial
Network Ventures....................... 388,733 393,204
Increase in accounts receivable......... (489,661) (1,288,665)
Increase in prepaid expenses and other
assets................................. (12,780) (51,890)
Increase in accounts payable--cable
system rebates......................... 130,032 244,880
Increase (decrease) in unearned revenue
....................................... 218,976 (191,374)
Increase in accounts payable and accrued
liabilities............................ 28,118 120,035
--------- ----------
Net cash provided by (used in)
operating activities.................. (131,255) 364,934
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment.................... (326,203) (341,495)
Proceeds from the sale of equipment...... 124,054 15,001
--------- ----------
Net cash used in investing activities.. (202,149) (326,494)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributed capital from general part-
ners.................................... 349,652 --
--------- ----------
Net cash provided by financing
activities............................ 349,652 --
--------- ----------
INCREASE IN CASH........................... 16,248 38,440
--------- ----------
CASH, BEGINNING OF PERIOD.................. -- 16,248
--------- ----------
CASH, END OF PERIOD........................ $ 16,248 $ 54,688
========= ==========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid............................ $ 33,043 $ 30,096
========= ==========
The accompanying notes to these financial statements
are an integral part of these financial statements.
F-23
PRODUCT INFORMATION NETWORK VENTURE
NOTES TO FINANCIAL STATEMENTS
FOR THE ELEVEN MONTHS ENDED DECEMBER 31, 1995
AND THE YEAR ENDED DECEMBER 31, 1996
(1) ORGANIZATION AND BUSINESS
Product Information Network Venture (the "Partnership"), a partnership
formed under Colorado law, was organized in January 1995 and commenced
operations on February 1, 1995. Jones Infomercial Network Ventures, Inc., a
Colorado corporation ("Network Ventures"), Cox Consumer Information Networks
Inc., a Delaware corporation ("Cox"), and Adelphia Communications Corporation,
a Delaware corporation ("Adelphia") are partners of the Partnership.
The Partnership owns and operates a 24-hour-a-day cable television network
for the promotion and exhibition of informational advertising
("Infomercials"). Short-form Infomercials range from 30 seconds to 2 minutes
in length and long-form Infomercials are approximately 30 minutes in length.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Property, Plant and Equipment--Property, plant and equipment is depreciated
using the straight-line method over the estimated useful life of five years.
Leasehold improvements are depreciated over the lesser of 5 years or the term
of the lease.
Accounts Payable--Cable System Rebates--Prior to January 1, 1997, the
Partnership generally paid one-half of its net revenues generated from the
airing of Infomercial programming in the form of cable system rebates to the
cable television systems ("Systems") which have entered into agreements to air
the Partnership's programming. Cable system rebates are calculated based on a
number of factors including: numbers of subscriber hours, channel position,
and peak and non-peak carriage. Cable system rebates are payable to the
Systems, on or before the fifteenth day following each month in which the
revenues were earned. Cable system rebates are accrued as revenues are earned
by the Partnership. Beginning on January 1, 1997, rebates paid by the PIN
Venture generally increased to 60% of net revenues to such Systems.
Revenue Recognition--The Partnership generates advertising revenue by
selling airtime to Infomercial providers, advertising agencies and other
organizations who advertise their products or services on the network. The
Partnership recognizes revenue upon airing of the advertisements. The airtime
is sold generally for a fixed amount for a certain block of airtime or on a
per-inquiry basis. Any amounts paid by a customer for an Infomercial that has
not aired during the period is recorded as unearned revenue until such time as
the Infomercial has aired.
The Partnership had three major customers purchasing airtime on the
Partnership's cable television network during the eleven months ended December
31, 1995 and the year ended December 31, 1996. The related percentages and
total gross revenue are as follows:
FOR THE ELEVEN
MONTHS ENDED FOR THE YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
------------------- ---------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
-------- ---------- ---------- ----------
Customer A............................ $ -- -- $3,869,000 46%
Customer B............................ 997,000 22% 1,360,000 16%
Customer C............................ 599,000 13% 938,000 11%
Customer D............................ 688,000 15% -- --
F-24
PRODUCT INFORMATION NETWORK VENTURE
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In November 1995, the Partnership entered into an agreement to provide a
block of airtime to a new customer (CRN) starting January 1, 1996. The
Partnership agreed to provide, under certain conditions, up to 12 hours a day
of airtime to this new customer for the year ending December 31, 1996, though
initially providing only 6 hours. At December 31, 1996, the Partnership was
providing this customer 8 hours of airtime daily. In August 1996, the
Partnership and this customer entered into a new agreement which specifies the
rates to be charged for 1997. Under certain conditions, the Partnership may be
required to air up to 12 hours per day of the new customer's programming
during 1997.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
New Accounting Pronouncements--The Financial Accounting Standards Board has
issued Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed
Of" (SFAS 121), which establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles and goodwill. The Company
adopted SFAS 121 effective January 1, 1996. Implementation of SFAS 121 had no
material effect on the Company's financial position or results of operations.
(3) TRANSACTIONS WITH AFFILIATED ENTITIES
Network Ventures is an indirectly owned subsidiary of Jones International,
Ltd. ("Jones International"). Certain members of management of the Partnership
are also officers or directors of other affiliated entities and, from time to
time, the Partnership may have transactions with these entities. Certain
expenses are paid by affiliated entities on behalf of the Partnership and are
allocated at cost based on specific identification or other reasonable
methods. Significant transactions with affiliated entities are described
below.
Television Programming Revenue--The Partnership pays a commission of up to
three percent commission to a subsidiary of Jones International Networks, for
the sale of airtime for informational programming. For the eleven months ended
December 31, 1995 and the year ended December 31, 1996, the Partnership paid
commissions of approximately $0 and $35,000, respectively, to this subsidiary.
Television Programming Expenses--Jones Earth Segment, Inc. ("Earth
Segment"), a subsidiary of Jones International Networks, provides playback,
editing, duplication, trafficking and uplinking services primarily to its
programming affiliates. Earth Segment charges affiliates for its services
using rates which are calculated to achieve a specified rate of return on
investment to Earth Segment. For the eleven months ended December 31, 1995 and
the year ended December 31, 1996, Earth Segment charged the Partnership
approximately $522,000 and $726,000, respectively, for these services.
Effective February 1, 1995, the Partnership agreed to pay Jones
International Networks a monthly fee of approximately $101,000 for the use of
a non-preemptible transponder on a domestic communications satellite. The
monthly rate decreased approximately $71,000 in 1996. For the eleven months
ended December 31, 1995 and the year ended December 31, 1996, the Partnership
was charged $1,112,000 and $852,000, respectively, for the transponder.
F-25
PRODUCT INFORMATION NETWORK VENTURE
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Prior to January 1, 1997, the Partnership generally paid one-half of the
revenues generated by its infomercial programming in the form of cable system
rebates to all Systems which enter into agreements to air such programming.
Total cable system rebates paid by the Partnership to Jones Intercable a
subsidiary of Jones International, and its affiliated partnerships, Cox and
Adelphia Systems were approximately $946,000, $670,000 and $89,000,
respectively, for the eleven months ended December 31, 1995. For the year
ended December 31, 1996, the Partnership paid Jones Intercable and its
affiliated partnerships, Cox and Adelphia Systems approximately $1,212,000,
$1,214,000 and $697,000, respectively. Effective January 1, 1997, the PIN
Venture will generally pay 60% of these revenues to such Systems.
General and Administrative--An affiliate of Jones International Networks
provides computer support services to the Partnership. Computer expenses of
$146,000 and $138,000 were charged to the Partnership for the eleven months
ended December 31, 1995 and the year ended December 31, 1996, respectively.
Jones Intercable leases an office building in Englewood, Colorado from an
affiliate of Jones International Networks which it subleases to Jones
International Networks and its affiliates. Jones Intercable allocates rent to
Jones International Networks and its affiliates based on square footage
occupied by each affiliated entity. Rent expense of approximately $18,000 and
$23,000 was charged to the Partnership for the eleven months ended December
31, 1995 and the year ended December 31, 1996, respectively.
The Partnership reimburses Network Ventures for certain allocated
administrative expenses. These expenses consist primarily of salaries and
related benefits. Allocations of personnel costs are based on actual time
spent by affiliated associates with respect to the Partnership. Such allocated
expenses totaled approximately $21,000 and $124,000 for the eleven months
ended December 31, 1995 and the year ended December 31, 1996, respectively.
To assist in funding its continuing operations, the Partnership has received
advances from Network Ventures. Network Ventures charged interest in 1995 and
1996 on its advances to the Partnership at a rate of approximately 11 and 10
percent per annum, respectively, based on the preceding month's balance. Such
rate is calculated using the published prime rate plus 2 percent. Interest
charged by Network Ventures totaled approximately $33,000 and $31,000 for the
eleven months ended December 31, 1995 and the year ended December 31, 1996,
respectively.
(4) CONTRIBUTED CAPITAL
The capitalization of the Partnership is set forth in the accompanying
Statement of Partners' Capital (Deficit). The Partnership was initially formed
with Network Ventures and Cox as general partners. Network Ventures and Cox
purchased their interests in the Partnership by each contributing $174,826 and
certain cable television affiliate agreements to the Partnership.
In October 1995, Adelphia joined the Partnership as a general partner and
entered into an affiliate agreement with the Partnership. Initially, Adelphia
launched the Partnership's programming on cable systems representing
approximately 400,000 subscribers. In exchange, Adelphia received a 4 percent
interest in the Partnership, thereby reducing Network Ventures' and Cox's
interests to 48 percent each, and is entitled to receive an increasing
ownership interest in the Partnership. Under the terms of the amended
Partnership Agreement (the "Agreement"), when additional Adelphia cable
systems launch of the Partnership's programming prior to October 1, 1996,
Adelphia received an additional one percent for each 100,000 subscribers, up
to
F-26
PRODUCT INFORMATION NETWORK VENTURE
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
a total of 10 percent. Between October 2, 1996 and April 2, 1998, Adelphia is
also entitled to an additional one-half of one percent ownership interest in
the Partnership for each 100,000 subscribers over and above 835,133
subscribers, but not to exceed 15 percent in the aggregate. At December 31,
1996, Adelphia's, Network Ventures' and Cox's ownership interests were
approximately 8 percent, 46 percent and 46 percent, respectively.
Profits, losses and distributions of the Partnership will be allocated in
accordance with their respective ownership interests.
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
Leasehold improvements............................. $ 5,052 $ 5,052
Office furniture, fixtures and equipment........... 9,023 13,453
Computer hardware and software..................... 49,247 60,590
Satellite receivers and other equipment............ 138,936 423,276
-------- --------
Total property, plant and equipment................ 202,258 502,371
Accumulated depreciation and amortization.......... (17,768) (54,135)
-------- --------
Net property, plant and equipment.................. $184,490 $448,236
======== ========
(6) INCOME TAXES
Income taxes are not reflected in the accompanying financial statements as
such amounts accrue directly to the partners. The federal and state income tax
returns of the Partnership will be prepared and filed by the General Partners.
The Partnership's tax returns and the amount of distributable Partnership
income or loss are subject to examination by federal and state taxing
authorities. If such examinations result in changes with respect to the
Partnership's tax status, or the Partnership's recorded income or loss, the
tax liability of the General Partners would be adjusted accordingly.
(7) SUBSEQUENT EVENT
Since February 1995, Jones International Networks, through a subsidiary, has
owned 50% or less of the Partnership. Immediately prior to the consummation of
the offering, Jones International Networks will acquire from Adelphia an 8.35%
equity interest in the Partnership in exchange for 262,500 shares of Jones
International Networks Class A Common Stock. As a result of this transaction,
Jones International Networks will own approximately 54% of the Partnership
and, going forward, will be able to consolidate the operations of the
Partnership for financial reporting purposes.
F-27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Jones International Networks, Ltd.:
We have audited the accompanying statements of net assets to be acquired
from Jones Space Segment, Inc., (the "Space Segment Assets"), as of December
31, 1995 and 1996, and the related statements of revenues and direct costs and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of Jones Space Segment,
Inc.'s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the Space Segment Assets as of December 31, 1995 and
1996, and their revenues and direct costs and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Denver, Colorado February 5, 1997.
F-28
STATEMENTS OF NET ASSETS TO BE ACQUIRED FROM
JONES SPACE SEGMENT, INC.
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
CURRENT ASSETS:
Prepaid expenses.................................. $ -- $ 423,500
----------- ------------
Total current assets............................ -- 423,500
----------- ------------
PROPERTY AND EQUIPMENT (Notes 2 and 4):
Leased satellite transponders..................... 35,010,454 35,010,454
Less accumulated amortization.................... (9,117,914) (12,035,383)
----------- ------------
Total net property and equipment................ 25,892,540 22,975,071
----------- ------------
Total assets.................................... $25,892,540 $ 23,398,571
=========== ============
LIABILITIES:
Capital lease obligations (Note 4)................ $32,255,193 $ 30,722,162
Unearned revenue (Note 2)......................... 780,000 780,000
----------- ------------
Total liabilities............................... 33,035,193 31,502,162
NET ASSETS: (7,142,653) (8,103,591)
----------- ------------
Total liabilities and net assets................ $25,892,540 $ 23,398,571
=========== ============
The accompanying notes to these financial statements are an integral part of
these financial statements.
F-29
STATEMENTS OF REVENUES AND DIRECT COSTS ASSOCIATED WITH THE NET ASSETS TO BE
ACQUIRED FROM JONES SPACE SEGMENT, INC.
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------------
1994 1995 1996
----------- ----------- -----------
REVENUES:
Satellite, delivery and
production support
Non-affiliated entities (Note
3).......................... $ 3,120,000 $ 3,120,000 $ 3,120,000
Affiliated entities
(Note 3).................... 2,399,965 2,425,344 2,556,468
----------- ----------- -----------
Total revenues.............. 5,519,965 5,545,344 5,676,468
----------- ----------- -----------
OPERATING EXPENSES:
Satellite, delivery and
production support expenses.. 3,077,469 3,077,441 3,069,469
General and administrative
expenses (Note 3)............ 667 1,020 13,588
----------- ----------- -----------
Total operating expenses.... 3,078,136 3,078,461 3,083,057
----------- ----------- -----------
OPERATING INCOME................ 2,441,829 2,466,883 2,593,411
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense.............. (3,390,780) (3,291,591) (3,156,969)
----------- ----------- -----------
Total other expense, net.... (3,390,780) (3,291,591) (3,156,969)
----------- ----------- -----------
Loss before income tax benefit.. (948,951) (824,708) (563,558)
Income tax benefit.............. 316,311 195,107 196,436
----------- ----------- -----------
NET LOSS........................ $ (632,640) $ (629,601) $ (367,122)
=========== =========== ===========
The accompanying notes to these financial statements are an integral part of
these financial statements.
F-30
STATEMENTS OF CASH FLOWS ASSOCIATED WITH THE NET ASSETS TO BE ACQUIRED FROM
JONES SPACE SEGMENT, INC.
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------------
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.............................. $ (632,640) $ (629,601) $ (367,122)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation expense................. 2,917,469 2,917,470 2,917,469
Net change in assets and liabilities:
Decrease in accounts receivable..... -- 260,000 --
Increase in prepaid expenses........ -- -- (423,500)
----------- ----------- -----------
Net cash provided by operating
activities......................... 2,284,829 2,547,869 2,126,847
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of capital lease
obligations.......................... (839,220) (1,178,408) (1,533,031)
Advances to the parent company........ (1,515,657) (2,011,829) (593,816)
----------- ----------- -----------
Net cash used in financing
activities......................... (2,354,877) (3,190,237) (2,126,847)
----------- ----------- -----------
DECREASE IN CASH........................ (70,048) (642,368) --
----------- ----------- -----------
CASH, BEGINNING OF PERIOD............... 712,416 642,368 --
----------- ----------- -----------
CASH, END OF PERIOD..................... $ 642,368 $ -- $ --
=========== =========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Allocated income tax benefit ......... $ 316,311 $ 195,107 $ 196,436
=========== =========== ===========
The accompanying notes to these financial statements are
an integral part of these financial statements.
F-31
NET ASSETS TO BE ACQUIRED FROM
JONES SPACE SEGMENT, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(1) ORGANIZATION AND BUSINESS
Jones Space Segment, Inc., a wholly-owned subsidiary of Jones International,
Ltd. ("Jones International"), was incorporated on October 16, 1987. Jones Space
Segment, Inc. leases two domestic communications satellite transponders from a
third party and in turn subleases the satellite transponders to several
affiliated entities and to a third party. In connection with an initial public
offering of its Common Stock, Jones International Networks, Ltd. ("Jones
International Networks"), a subsidiary of Jones International, intends to
acquire the satellite transponder leases and related subleases (Such leases and
subleases are referred to as the "Space Segment Assets") owned by Jones Space
Segment Inc. The accompanying financial statements have been derived from the
historical financial statements of Jones Space Segment, Inc.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Property and Equipment--Leased satellite transponders are capitalized and
depreciated, using the straight-line method, over the term of leases, which is
12 years.
Unearned Revenue--Unearned revenue consists of advance payments and a
security deposit on the leased transponders.
Revenue Recognition--The Space Segment Assets generate revenue by leasing
space on two domestic satellite transponders to several affiliated entities and
to a third party. Revenue is recognized as lease payments are earned.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
New Accounting Pronouncements--Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed Of " (SFAS 121), was adopted effective January 1, 1996 as
to the Space Segment Assets. SFAS 121 establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles and goodwill.
Implementation of SFAS 121 had no material effect on the financial position or
results of operations of the Space Segment Assets.
(3) TRANSACTIONS WITH AFFILIATED ENTITIES
Jones Space Segment, Inc. is a subsidiary of 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.
Jones International and Glenn R. Jones own a controlling interest in Jones
Intercable, Inc. ("Jones Intercable") and in a number of other subsidiaries.
Certain members of management of Jones Space Segment, Inc. are also officers or
directors of these affiliated entities and, from time to time, Jones Space
Segment, Inc. may have transactions with these entities. Certain expenses are
paid by affiliated entities on behalf of Jones Space Segment, Inc., and are
allocated at cost based on specific identification or other methods which
management believes are reasonable.
F-32
NET ASSETS TO BE ACQUIRED FROM
JONES SPACE SEGMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Jones International Networks and Jones Computer Network, Ltd. sublease a non-
preemptible transponder, which sublease is part of the Space Segment Assets.
Transponder lease revenue of approximately $2,400,000, $2,425,000, and
$2,556,000, was received from affiliates for the years ended December 31, 1994,
1995, and 1996, respectively.
(4) CAPITAL LEASE
The Space Segment Assets are comprised, in part, of a lease agreement which
provides two non-preemptible satellite transponders, one on each of two
satellites launched in 1992. The lease provides for full time usage of two
transponders for 12 years. These satellite transponders are subleased to
affiliated entities and to a third party.
Future minimum payments under this capital lease, together with the present
value of the minimum lease payments, are as follows:
1997.......................................................... $ 4,950,000
1998.......................................................... 5,190,000
1999.......................................................... 5,430,000
2000.......................................................... 5,670,000
2001.......................................................... 5,910,000
Thereafter.................................................... 18,315,000
-----------
Future minimum payments....................................... 45,465,000
Less amount representing interest............................. 14,743,000
-----------
Present value of minimum lease payments....................... $30,722,000
===========
(5) INCOME TAXES
The Space Segment Assets are included as part of a consolidated tax return,
as provided for under the terms of a tax sharing agreement with Jones
International and Jones International's other subsidiaries. Pursuant to the
terms of the agreement, tax (provisions) benefits are allocated to members of
the tax sharing group based on their respective pro rata contribution of
taxable income (loss) to Jones International's consolidated taxable income
(loss). Income tax benefit recognized as a result of the tax sharing
arrangement was approximately $201,000, $78,000 and $196,000 for the years
ended December 31, 1994, 1995 and 1996, respectively.
F-33
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURI-
TIES OTHER THAN THE SHARES OF CLASS A COMMON STOCK TO WHICH IT RELATES OR AN
OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN
OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPEC-
TUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IM-
PLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
----------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 9
Use of Proceeds........................................................... 19
Dividend Policy........................................................... 19
Capitalization............................................................ 20
Dilution.................................................................. 21
Selected Consolidated Financial Data...................................... 22
Pro Forma Selected Consolidated Financial Data ........................... 23
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 24
Business.................................................................. 36
Management................................................................ 47
Certain Relationships and Related Transactions............................ 54
Principal Shareholder..................................................... 58
Description of Capital Stock.............................................. 59
Shares Eligible for Future Sale........................................... 61
Underwriting.............................................................. 63
Legal Matters............................................................. 65
Experts................................................................... 65
Additional Information.................................................... 65
Index to Pro Forma Financial Statements................................... P-1
Index to Historical Financial Statements.................................. F-1
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL DEALERS
EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK, WHETHER OR NOT PARTICIPAT-
ING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,350,000 SHARES
[LOGO OF JONES INTERNATIONAL NETWORK APPEARS HERE]
CLASS A COMMON STOCK
----------------
PROSPECTUS
----------------
OPPENHEIMER & CO., INC.
HAMBRECHT & QUIST
M. KANE & COMPANY, INC.
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions and the $753,750 payable to M. Kane &
Company, Inc. for financial advisory services, payable by the Company in
connection with the sale of Class A Common Stock being registered (all amounts
are estimated except the SEC Registration Fee and the NASD Filing Fee).
SEC Registration Fee............................................ $ 15,177
National Association of Securities Dealers, Inc. Filing Fee..... 5,509
Nasdaq Listing Application Fee.................................. 33,500
Blue Sky Fees and Expenses (including legal fees)............... 25,000
Printing Expenses............................................... 175,000
Legal Fees and Expenses......................................... 150,000
Accountants' Fees and Expenses.................................. 170,000
Transfer Agent and Registrar Fees............................... 20,000
Miscellaneous Expenses.......................................... 205,814
---------
Total......................................................... $ 800,000
=========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
In accordance with the Colorado Act, the Company's articles of incorporation
eliminate in certain circumstances the liability of directors of the Company
for monetary damages for breach of their fiduciary duty as directors. This
provision does not eliminate the liability of a director for: (i) a breach of
the director's duty of loyalty to the Company or its shareholders, (ii) acts
or omissions by the director not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) a willful or negligent
declaration of an unlawful distribution or (iv) transactions from which the
director derived an improper personal benefit.
The Company's articles of incorporation also provide that the Company shall
indemnify any person and his or her estate and personal representatives
against all liability and expenses incurred by reason of the person being or
having been a director or officer of the Company or, while serving as a
director or officer of the Company, is or was serving at the request of the
Company or any of its subsidiaries as a director, an officer, an agent, an
associate, an employee, a fiduciary, a manager, a member, a partner, a
promoter, or a trustee of, or to hold any similar position with, another
domestic or foreign corporation or other individual or entity or of an
employee benefit plan, to the full extent permitted under the Colorado Act.
The Colorado Act requires a corporation to indemnify its officers and
directors against reasonable expenses incurred in any proceeding to which the
officer or director is a party and was wholly successful, on the merits or
otherwise, in defense of the proceeding. In addition to this mandatory
indemnification, the Colorado Act provides that a corporation may indemnify
its officers and directors against liability and reasonable expenses if the
officer or director acted in good faith and in a manner reasonably relieved to
be in the best interests of the corporation in the case of conduct in an
official capacity, in a manner he or she reasonably believed was at least not
opposed to the corporation's best interests in all other cases, or in a manner
he or she had no reasonable cause to believe was unlawful in the case of
criminal proceedings. In actions by or in the name of the corporation, the
Colorado Act provides the same standard but limits indemnification to
reasonable expenses incurred by the director and prohibits any indemnification
if the director was adjudged liable to the corporation. The Colorado Act also
prohibits indemnification of a director in connection with actions charging
improper personal benefit to the director if the director is adjudged liable
on that basis.
II-1
Section 7 of the Underwriting Agreement (to be filed as Exhibit 1.1 hereto)
provides that the Underwriters will indemnify and hold harmless the Company
and its directors, officers and controlling persons from and against certain
liabilities, including any liability caused by any statement or omission in
the Registration Statement or Prospectus based on certain information
furnished to the Company by the Underwriters for use in the preparation
thereof.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In the three years preceding the filing of this registration statement, the
Company has issued the following securities that were not registered under the
Securities Act of 1933, as amended (the "Securities Act") (all share amounts
reflect the proposed 220-for-1 stock-split):
Effective September 30, 1996, the Company acquired its playback, trafficking
and uplinking facilities through the purchase of all of the outstanding common
stock of Jones Earth Segment, Inc. from Glenn R. Jones and Jones
International, Ltd. for 110,833 shares and 472,500 shares, respectively, of
Class A Common Stock.
In August 1996, the Company agreed to grant a warrant to M. Kane & Company,
Inc. ("MKC") to purchase 14,000 shares of the Class A Common Stock at an
exercise price equal to 120% of the initial public offering price of the Class
A Common Stock. In connection with the warrant, MKC will receive certain
registration rights that provide, among other things, that MKC will have one
demand registration right and unlimited piggy-back registration rights
relating to the shares of Class A Common Stock underlying the warrant.
Immediately prior to the consummation of this offering, the Company will
acquire: (i) an 8.35% equity interest in the PIN Venture from Adelphia
Communications Corporation in exchange for 262,500 shares of Class A Common
Stock, (ii) Glenn R. Jones' 19% equity interests in Jones Infomercial
Networks, Inc. and Great American Country, Inc. in exchange for 333,333 shares
of Class A Common Stock and (iii) certain transponder leases and related
subleases owned by Space Segment in exchange for 416,667 shares of Class A
Common Stock. Also immediately prior to the consummation of this offering, the
Company will issue 501,492 shares of its Class B Common Stock as repayment of
all of the approximately $6.0 million in advances owed to Jones International
as of December 31, 1996. The shares of Class A Common Stock and Class B Common
Stock to be issued in the transactions described in this paragraph are valued
at the assumed initial public offering price of the Class A Common Stock of
$12.00 per share. The actual number of shares to be issued in these
transactions will be adjusted, if necessary, to reflect the actual initial
public offering price.
The Company issued (or will issue) all of the foregoing shares of Class A
Common Stock and Class B Common Stock in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
1.1** Form of Underwriting Agreement
3.1* Articles of Incorporation of the Company
3.2* Bylaws of the Company
3.3** Restated Articles of Incorporation of the Company
4.1* Form of Class A Common Stock Certificate
4.2** Form of Warrant Purchase Agreement between the Company and M. Kane &
Company, Inc.
5.1** Form of Opinion of Davis, Graham & Stubbs LLP as to the legality of
issuance of the Company's Class A Common Stock
10.1* Promissory Note, dated December 19, 1994, in the amount of
$6,554,500 from Jones Earth Segment, Inc. to Jones Spacelink, Ltd.
(assumed by the Company on September 30, 1996)
10.2* Letter Agreement dated August 14, 1996, between the Company and M.
Kane & Company, Inc.
10.3* The Company's 1996 Stock Option Plan
10.4*+ Cable Sales Representation Agreement dated April 15, 1996, between
MediaAmerica, Inc. and Great American Country, Inc.
10.5+ Sales Representation Agreement dated November 1, 1995, between
MediaAmerica, Inc. and the Company
10.6*+ Sales Representation Agreement dated December 1, 1995, between
MediaAmerica, Inc. and Jones Satellite Networks, Inc.
II-2
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
10.7 Purchase and Sale Agreement dated August 9, 1996, between Jones
Global Group, Inc. and the Company
10.8*+ Partnership Agreement of Galactic/Tempo dated May 7, 1990, between
Tempo Sound, Inc. and Galactic Radio Partners, Inc.
10.9+ Amended and Restated Partnership Agreement of Product Information
Network Venture dated October 1, 1995, among Jones Infomercial
Network Ventures, Inc., Cox Consumer Information Network, Inc. and
Adelphia Communications Corporation
10.10*+ Affiliate Agreement dated January 1, 1996, among Great American
Country, Inc., Jones Programming Services, Inc. and Jones
Intercable, Inc.
10.11* Galaxy V Satellite Transponder Agreement, dated January 1, 1995,
among Jones Satellite Holdings, Jones Galactic Radio and Mind
Extension University
10.12* Amended and Restated Affiliate Agreement dated August 1, 1994,
between Jones Infomercial Networks, Inc. and Jones Intercable,
Inc.
10.13*+ Affiliate Agreement dated January 31, 1995, between Product
Information Network Venture and Cox Communications, Inc.
10.14*+ Agreement dated May 1, 1995, between Product Information Network
and National Media Corporation
10.15*+ Letter Agreement dated August 23, 1996, between Product
Information Network and Seventh Medium, Inc.
10.16* License Agreement dated January 31, 1995, between Jones
International, Ltd. and Product Information Network Venture
10.17* Uplink Services Agreement dated January 1, 1995, among Jones Earth
Segment, Inc., Jones Infomercial Networks, Inc., Jones Computer
Network, Ltd., Mind Extension University, Inc. and Jones Galactic
Radio, Inc.
10.18* Transponder License Agreement dated January 1, 1995, among Jones
Space Segment, Inc., Jones Infomercial Networks, Inc. and Jones
Computer Network, Ltd.
10.19*+ Satellite Transponder Service Agreement dated July 28, 1989,
entered into by Jones Space Segment, Inc.
10.20*+ Transponder License Agreement dated October 28, 1992, between
Jones Space Segment, Inc. and Deutsche Welle
10.21* Tax Allocation Agreement dated August 28, 1992, among Jones
International, Ltd. and certain of its subsidiaries
10.22* Exchange Agreement relating to Jones Earth Segment, Inc. dated
September 30, 1996, between Glenn R. Jones, Jones International,
Ltd. and the Company
10.23* Agreement dated November 6, 1996, between Jones Space Segment,
Inc. and the Company
10.24* Agreement dated November 6, 1996, between Glenn R. Jones and the
Company
10.25* Agreement dated January 7, 1997, between Adelphia Communications
Corporation and the Company
10.26* Services Agreement dated January 1, 1995, among Jones Earth
Segment, Jones Infomercial Networks, Jones Computer Network and
Mind Extension University
10.27 Commitment Letter, dated January 29, 1997, between NationsBank of
Texas, N.A. and the Company
21 * Subsidiaries
23.1 Consent of Arthur Andersen LLP
23.2 ** Consent of Davis, Graham & Stubbs LLP (See Exhibit 5.1)
23.3 * Consent of Gary D. Edens
23.4 * Consent of Michael L. Pandzik
24 * Power of Attorney
27 * Financial Data Schedule
- --------
*Filed previously.
**To be filed by amendment.
+ Portions of this exhibit have been omitted pending a determination by the
Securities and Exchange Commission that certain information contained therein
shall be afforded confidential treatment.
II-3
Schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions, are inapplicable and therefore have been omitted or
the information required by the applicable schedule is included in the notes
to the financial statements.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act,
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the Company's bylaws, articles of incorporation or the
Underwriting Agreement, the registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 2 TO A REGISTRATION STATEMENT ON
FORM S-1 (FILE NO. 333-15657) TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN THE CITY OF ENGLEWOOD, STATE OF COLORADO, ON
FEBRUARY 14, 1997.
Jones International Networks, Ltd.
/s/ Gregory J. Liptak
By: _________________________________
GREGORY J. LIPTAK
PRESIDENT
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT NO. 2 TO A REGISTRATION STATEMENT ON FORM S-1 (FILE NO. 333-15657)
HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES
INDICATED.
SIGNATURES TITLE DATE
/s/ Glenn R. Jones* Chairman of the February 14, 1997
- ------------------------------------- Board of Directors
GLENN R. JONES
/s/ Gregory J. Liptak President and February 14, 1997
- ------------------------------------- Director (Principal
GREGORY J. LIPTAK Executive Officer)
/s/ Jay B. Lewis* Group Vice February 14, 1997
- ------------------------------------- President/Chief
JAY B. LEWIS Financial Officer
and Director
(Principal
Financial Officer)
/s/ Keith D. Thompson* Chief Accounting February 14, 1997
- ------------------------------------- Officer (Principal
KEITH D. THOMPSON Accounting Officer)
/s/ Gregory J. Liptak
*By: ________________________________
GREGORY J. LIPTAK
ATTORNEY-IN-FACT
II-5