FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 1998.
[_] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to .
Commission File Number 333-62077
Jones International Networks, Ltd.
Exact name of registrant as specified in charter
Colorado #84-1250515
State of organization I.R.S. employer I.D.#
9697 East Mineral Avenue, P.O. Box 3309, Englewood, Colorado 80155-3309
Address of principal executive office
(303) 792-3111
Registrant's telephone number
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section l3 or l5(d) of the Securities Exchange Act of l934 during
the preceding l2 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
Shares outstanding of each of the registrant's classes of Common Stock, as of
December 11, 1998.
4,290,714 Class A Common Stock, $.01 par value per share
1,785,120 Class B Common Stock, $.01 par value per share
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
INDEX
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Jones International Networks, Ltd.:
Unaudited Consolidated Statements of Financial Position
as of December 31, 1997 and September 30, 1998.................................................... 2
Unaudited Consolidated Statements of Operations.................................................... 4
for the Three and Nine Months Ended September 30, 1997 and 1998
Unaudited Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1997 and 1998............................................. 5
Notes to Unaudited Consolidated Financial Statements............................................... 6
Jones/Owens Radio Programming, LLC:
Unaudited Statements of Financial Position
as of December 31, 1997 and September 30, 1998.................................................... 19
Unaudited Statements of Operations
for the Three and Nine Months Ended September 30, 1997 and 1998................................... 20
Unaudited Statements of Cash Flows
for the Nine Months Ended September 30, 1997 and 1998............................................. 21
Notes to Unaudited Financial Statements............................................................ 22
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations.................................................. 24
PART II. OTHER INFORMATION
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................... 33
Item 5. Other Materially Important Events............................................................. 33
Item 6. Exhibits and Reports on Form 8-K.............................................................. 33
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
ASSETS
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
CURRENT ASSETS:
Cash and cash equivalents................................. $ 3,717,169 $ 12,499,209
Restricted cash (Note 1).................................. -- 10,000,000
Available for sale securities (Note 1).................... -- 2,181,020
Accounts receivable, net of allowance
for doubtful accounts of $157,405 and
$535,513, respectively................................... 1,454,763 10,562,411
Receivables from affiliates............................... -- 201,993
Prepaid expenses.......................................... 54,870 228,705
Deferred commissions, current............................. 222,302 259,410
Interest receivable....................................... -- 42,385
Other current assets...................................... 263,267 8,242
------------ -------------
Total current assets............................... 5,712,371 35,983,375
------------ -------------
PROPERTY, PLANT AND EQUIPMENT:
Land...................................................... 1,395,592 1,395,592
Building.................................................. 2,321,463 2,321,463
Satellite transponders.................................... 35,010,454 35,680,188
Furniture, fixtures and equipment......................... 10,457,665 12,151,122
Leasehold improvements.................................... 374,643 703,843
------------ -------------
Total property, plant and
equipment......................................... 49,559,817 52,252,208
Less accumulated depreciation and
amortization............................................. (20,784,095) (24,422,308)
------------ -------------
Net property, plant and equipment.................. 28,775,722 27,829,900
------------ -------------
OTHER ASSETS:
Goodwill, net of accumulated amortization of
$171,795 and $472,732, respectively...................... 3,125,567 33,040,430
Other intangible assets, net of accumulated
amortization of $733,428 and $925,421,
respectively............................................. 1,063,888 2,073,761
Subscriber incentive payments, net of
accumulated amortization of $0 and $152,767,
respectively............................................. -- 2,689,081
Investment in programming, net of accumulated
amortization of $0 and $65,149, respectively............. -- 2,153,490
Investment in affiliates.................................. 577,264 260,601
Income tax benefit receivable from Jones
International, Ltd....................................... 1,342,111 1,363,551
Capitalized loan fees (Note 8)............................ 50,000 --
Deferred commissions, long-term........................... 478,676 444,207
Debt offering costs, net of accumulated amortization
of $0 and $120,050, respectively......................... 174,744 4,764,843
Other assets.............................................. 57,785 369,451
------------ -------------
Total other assets................................. 6,870,035 47,159,415
------------ -------------
Total assets....................................... $ 41,358,128 $ 110,972,690
============ =============
The accompanying notes to these unaudited consolidated financial statements
are an integral part of these unaudited consolidated financial statements.
2
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
LIABILITIES AND SHAREHOLDERS' DEFICIT
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------- -------------
CURRENT LIABILITIES:
Accounts payable--trade................................... $ 1,438,602 $ 2,922,908
Producers' fees payable................................... -- 5,516,023
Subscriber incentive payments payable..................... -- 1,712,404
Accrued liabilities....................................... 1,300,516 1,654,977
Accounts payable--Jones International, Ltd................ 9,814,874 2,519,926
Accrued interest.......................................... 53,619 2,643,750
Deferred revenues......................................... 13,554 592,406
Capital lease obligations (Note 6)........................ 2,422,022 --
------------- -------------
Total current liabilities.......................... 15,043,187 17,562,394
------------- -------------
LONG-TERM LIABILITIES:
Customer deposits and deferred revenues................... 38,532 366,417
Capital lease obligation, net of
current portion (Note 6)................................. 26,335,186 --
Long-term debt--affiliated entities
(Note 7)................................................. 16,554,500 --
Senior secured notes (Note 6)............................. -- 100,000,000
------------- --------------
Total long-term liabilities........................ 42,928,218 100,366,417
------------- --------------
MINORITY INTERESTS IN
CONSOLIDATED SUBSIDIARIES........................... 1,593,168 556,983
------------- --------------
COMMITMENTS AND CONTINGENCIES (Note 10)
COMMON STOCK SUBJECT TO PUT, Class A Common Stock,
$.01 par value: 101,124 shares issued and outstanding,
respectively (Note 10).................................. -- 1,213,488
SHAREHOLDERS' DEFICIT:
Class A Common Stock, $.01 par value: 50,000,000 shares
authorized; 2,980,953 and 4,189,590 shares issued
and outstanding, respectively........................... 29,810 41,896
Class B Common Stock, $.01 par value: 1,785,120 shares
authorized, issued and outstanding...................... 17,851 17,851
Additional paid-in capital................................ 9,143,375 27,261,829
Accumulated other comprehensive income (Note 4)........... -- 16,898
Accumulated deficit....................................... (27,397,481) (36,065,066)
------------- --------------
Total shareholders' deficit........................ (18,206,445) (8,726,592)
------------- --------------
Total liabilities and shareholders' deficit........ $ 41,358,128 $ 110,972,690
============= ==============
The accompanying notes to these unaudited consolidated financial statements
are an integral part of these unaudited consolidated financial statements.
3
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------- --------------------------------
1997 1998 1997 1998
------------ ------------- ------------- -----------------
REVENUES:
Radio programming....................... $ 2,749,834 $ 2,883,794 $ 7,839,507 $ 6,622,987
Radio advertising representation........ -- 2,362,091 -- 2,362,091
Television programming
Non-affiliated entities......... 3,486,963 3,868,134 6,813,609 11,168,280
Affiliated entities (Note 2).... 251,241 259,110 822,961 823,526
------------ ------------- ------------- -----------------
Total television programming.. 3,738,204 4,127,244 7,636,570 11,991,806
Satellite delivery and production support
Non-affiliated entities......... 780,000 678,193 2,340,000 678,193
Affiliated entities (Note 2).... 920,782 1,103,440 3,279,177 3,309,854
------------ ------------- ------------- -----------------
Total satellite delivery and
production support............. 1,700,782 1,781,633 5,619,177 3,988,047
------------ ------------- ------------- -----------------
Total revenues.................. 8,188,820 11,154,762 21,095,254 24,964,931
------------ ------------- ------------- -----------------
OPERATING EXPENSES:
Radio programming....................... 1,543,434 2,129,965 4,347,035 5,468,660
Radio advertising representation........ -- 481,914 -- 481,914
Television programming
Non-affiliated entities......... 2,711,323 2,347,855 3,479,761 5,675,572
Affiliated entities (Note 2).... 118,232 1,243,802 2,355,627 4,742,764
------------ ------------- ------------- -----------------
Total television programming.. 2,829,555 3,591,657 5,835,388 10,418,336
Satellite delivery and production
support (Note 2)....................... 1,169,022 1,391,719 3,774,157 3,790,908
Selling and marketing................... 867,890 1,325,074 2,134,428 3,072,305
General and administrative (Note 2)..... 1,084,745 1,959,673 2,947,479 4,052,370
------------ ------------- ------------- -----------------
Total operating expenses...... 7,494,646 10,880,002 19,038,487 27,284,493
------------ ------------- ------------- -----------------
OPERATING INCOME (LOSS).................. 694,174 274,760 2,056,767 (2,319,562)
------------ ------------- ------------- -----------------
OTHER (INCOME) EXPENSE:
Interest expense (Note 2)............... 1,450,502 3,166,559 4,317,527 5,806,819
Interest income......................... (19,569) (338,572) (41,804) (437,597)
Write-off of deferred offering costs.... -- -- 938,000 --
Equity in (income) loss of subsidiaries (78,107) 72,664 (364,841) (337)
Other expense (Note 8).................. 70,625 663,198 70,625 926,963
------------ ------------- ------------- -----------------
Total other expense, net...... 1,423,451 3,563,849 4,919,507 6,295,848
------------ ------------- ------------- -----------------
LOSS BEFORE INCOME TAXES
AND MINORITY INTERESTS.................. (729,277) (3,289,089) (2,862,740) (8,615,410)
Income tax provision (benefit).......... -- (252,625) (355,548) 14,950
------------ ------------- ------------- -----------------
LOSS BEFORE MINORITY INTERESTS........... (729,277) (3,036,464) (2,507,192) (8,630,360)
Minority interests in net income (loss)
of consolidated subsidiaries............ 43,434 (31,752) 461,286 37,225
------------ ------------- ------------- -----------------
NET LOSS................................. $ (772,711) $ (3,004,712) $ (2,968,478) $ (8,667,585)
============ ============= ============= =================
ADJUSTMENTS TO ARRIVE AT COMPREHENSIVE
LOSS -- 16,898 -- 16,898
------------ ------------- ------------- -----------------
COMPREHENSIVE LOSS....................... $ (772,711) $ (2,987,814) $ (2,968,478) $ (8,650,687)
============ ============= ============= =================
LOSS PER COMMON SHARE.................... $ (0.18) $ (0.57) $ (0.69) $ (1.75)
============ ============= ============= =================
LOSS PER COMMON SHARE--assuming
dilution ............................... $ (0.18) $ (0.57) $ (0.69) $ (1.75)
============ ============= ============= =================
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING............................. 4,366,073 5,317,182 4,278,573 4,949,776
============ ============= ============= =================
The accompanying notes to these unaudited consolidated financial statements
are an integral part of these unaudited consolidated financial statements.
4
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-----------------------------------
1997 1998
------------------ ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................. $(2,968,478) $ (8,667,585)
Adjustment to reconcile net
loss to net cash provided by
(used in)
operating activities:
Depreciation and amortization....... 3,877,946 4,484,275
Equity in income of
subsidiaries....................... (364,841) (337)
Distributions received.............. -- 350,000
Write-off of deferred
offering costs..................... 938,000 --
Write-off of capitalized
loan fees.......................... -- 569,647
Minority interest in net loss....... 461,286 37,225
Loss on sale of equipment........... 36,579 2,145
Net change in assets and
liabilities:
Increase in receivables............ (853,271) (2,861,984)
Decrease (increase) in
receivables from affiliates....... 803,162 (223,433)
Decrease in prepaid
expenses and other
current assets................... 577,283 331,386
Decrease (increase) in
deferred commissions.............. 33,600 (2,639)
Increase in deferred
offering costs.................... (494,696) --
Increase in other assets........... (325,965) (303,856)
Increase in accounts payable....... 960,380 1,484,306
Increase in producer's fees
payable........................... -- 1,637,321
Increase (decrease) in
accounts payable to Jones
International..................... 2,888,890 (7,294,948)
Increase (decrease) in
accrued interest.................. (215,524) 2,590,131
Increase in deferred
revenues.......................... 254,500 578,885
Increase (decrease) in
accrued and other
liabilities....................... 1,798,530 (455,220)
Increase (decrease) in
customer deposits................. (803,899) 207,479
----------- ------------
Net cash provided by (used
in) operating activities.......... 6,603,482 7,537,202
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant
and equipment....................... (1,156,805) (1,915,756)
Purchase of investments.............. -- (2,164,122)
Restricted cash (Note 1)............. -- (10,000,000)
Sale of property, plant and
equipment........................... 261,975 43,196
Subscriber incentive payments........ -- (1,129,444)
Purchases of intangible
assets and programming.............. (51,110) (199,719)
Purchase of MediaAmerica,
Inc. (Note 9)....................... -- (26,700,000)
----------- ------------
Net cash used in investing
activities........................ (945,940) (42,065,845)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in debt offering
costs............................... -- (4,710,149)
Increase in capitalized loan
fees................................ (50,000) (519,646)
Repayment of borrowings (Note
7).................................. -- (6,554,500)
Repayment of capital lease
obligations (Note 6)................ (1,432,942) (28,757,208)
Proceeds from issuance of
senior secured notes (Note 6)....... -- 100,000,000
Distributions paid to
minority interests.................. -- (1,073,410)
----------- ------------
Net cash provided by (used
in) financing activities.......... (1,482,942) 58,385,087
----------- ------------
INCREASE IN CASH AND CASH EQUIVALENTS.. 4,174,600 8,782,040
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD................................ 3,892 3,717,169
----------- ------------
CASH AND CASH EQUIVALENTS, END OF
PERIOD................................ $ 4,178,492 $ 12,499,209
=========== ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid...................... $ 4,316,161 $ 3,216,688
=========== ============
Income tax benefit................. $ 461,286 $ 37,225
=========== ============
SUPPLEMENTAL NON-CASH DISCLOSURES:
Goodwill........................... $ 3,036,923 $ --
=========== ============
Conversion of Jones Global
Group note to Class A common
Stock.............................. $ 6,000,000 $ 10,000,000
=========== ============
Issuance of Class A common
stock for GAC equity
agreements........................ $ -- $ 1,213,488
=========== ============
Issuance of Class A common
stock for the acquisition of
MediaAmerica, Inc.................. $ -- $ 8,129,550
=========== ============
The accompanying notes to these unaudited consolidated financial statements
are an integral part of these unaudited consolidated financial statements.
5
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION AND SUMMARY OF SIGNICANT ACCOUNTING POLICIES
This Form 10-Q is being filed by Jones International, Networks, Ltd. and
its subsidiaries (the "Company"). The accompanying consolidated statements of
financial position as of December 31, 1997 and September 30, 1998, the
consolidated statements of operations for the three and nine months ended
September 30, 1997 and 1998, and the statements of cash flows for the nine
months ended September 30, 1997 and 1998, are unaudited. This Form 10-Q is
being filed in conformity with the SEC requirements for unaudited financial
statements and does not contain all of the necessary footnote disclosures
required for a complete presentation of the consolidated statements of financial
position, consolidated statements of operations and consolidated statements of
cash flows in conformity with generally accepted accounting principles.
However, in the opinion of management, these statements include all adjustments,
consisting of normal recurring adjustments, necessary for the fair presentation
of results for these interim periods. The results of operations for the three
and nine months ended September 30, 1998 are not necessarily indicative of
results to be expected for the entire year, or for any other interim period.
Restricted Cash--$10.0 million of the proceeds from the Notes (see Note 6)
was deposited into a Reserve Account. Cash balances in the Reserve Account are
restricted to use for only acquisitions and payment of principal of or interest
on the Senior Secured Notes Offering.
Available for Sale Securities--Available for sale marketable securities are
carried at fair value, with unrealized holding gains and losses carried as a
separate component of shareholders' deficit. The cost of securities sold is
determined using the first in, first-out method. At September 30, 1998, the
Company held marketable securities available for sale with an aggregate cost of
$2,164,122, and a net unrealized gain of $16,898.
Use of Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires the Company to make
estimates and assumptions that affect the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Reclassifications--Certain prior period amounts have been reclassified to
conform to the current year presentation.
New Accounting Pronouncements--In June 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards 131
("SFAS No. 131"), "Disclosure About Segments of an Enterprise and Related
Information," which is effective for the year ending December 31, 1998. This
statement changes the requirements under which publicly held companies report
disaggregated information. The Company will adopt SFAS No. 131 on its required
adoption date. Management of the Company does not expect that the adoption of
this statement will have a material impact on the financial statements.
(2) TRANSACTIONS WITH AFFILIATED ENTITIES
The Company is a subsidiary of Jones International, Ltd. ("Jones
International"), a holding company with ownership 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
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 Superaudio, are
described below.
Television Programming Revenues--The Company earns up to a three percent
commission on the sale of airtime for informational programming on Jones
Education Company ("Jones Education") and its affiliates. For the nine months
ended September 30, 1997 and 1998, the Company received approximately $164,000
and $135,000, respectively, for this service.
6
JONES INTERNATIONAL NETWORKS, LTD AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Prior to the consolidation of the Product Information Network (the "PIN
Venture"), which was effective April 1, 1997, the Company received from the PIN
Venture approximately $8,000 for the three months ended March 31, 1997 for
commissions on the sale of airtime for informational programming.
The Company distributes Great American Country to certain cable television
systems owned or managed by Jones Intercable. Great American Country, 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 $652,000 and $688,000 for the nine months ended September 30, 1997
and 1998, respectively.
Satellite Delivery and Production Support Revenues--Jones Earth Segment,
Inc. ("Earth Segment"), a subsidiary of the Company, 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 nine months ended September 30, 1997 and 1998, Earth
Segment charged Jones International and its affiliates approximately $1,618,000
and $1,925,000, respectively, for these services.
Prior to the consolidation of the PIN Venture, Earth Segment charged the
PIN Venture approximately $201,000 for the three months ended March 31, 1997,
for these services.
In addition, Jones Space Holdings ("Space Holdings"), a subsidiary of the
Company, subleases two digitally compressed channels on a non-preemptible
satellite transponder to Jones Education and its affiliates. Satellite
transponder lease revenues of approximately $672,000 and $822,000, were received
from Jones Education for the nine months ended September 30, 1997 and 1998,
respectively.
Prior to the consolidation of the PIN Venture, satellite transponder lease
revenues of approximately $224,000 for the three months ended March 31, 1997
were received from the PIN Venture.
Television Programming Expenses--From February 1995 through March 31, 1997,
the Company owned 50% or less of the PIN Venture, the entity that owns and
operates the Product Information Network. Effective April 1, 1997, the Company
acquired from Adelphia Communications ("Adelphia") an 8.35% equity interest in
the PIN Venture. As a result of this transaction, which was accounted for as a
purchase, the Company now owns approximately 54% of the PIN Venture and,
effective April 1, 1997 consolidated the results of operations of the PIN
Venture for financial reporting purposes. During the nine months ended September
30, 1997 and 1998, the PIN Venture paid approximately 60% and 75%, respectively,
of the revenues generated by its infomercial programming in the form of rebates
to all cable systems which enter into agreements to air such programming.
Amounts paid by the PIN Venture to Jones Intercable and its affiliated
partnerships, Cox and Adelphia were approximately $2,356,000 for the six months
ended September 30, 1997 and $4,063,000 for the nine months ended September 30,
1998.
An affiliate of the Company began providing cable affiliate sales services
to the Company in the fourth quarter of 1997. This affiliate charged the
Company approximately $680,000 for the nine months ended September 30, 1998.
Satellite Delivery and Production Support Expenses--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-preemptible satellite transponder. This agreement allows Galactic Radio to
use a portion of the transponder to distribute its audio programming. Satellite
Holdings has the right to terminate the license agreement at any time upon 30
days written notice to Galactic Radio. The Company agreed to pay Satellite
Holdings approximately $58,000 per month. This agreement will expire May 7,
2004. The Company paid Satellite Holdings fees of approximately $522,000 for the
nine months ended September 30, 1997 and 1998 for this service.
General and Administrative Expenses--The Company subleases office space in
Englewood, Colorado from affiliates of Jones International. Rent and associated
expenses are allocated to the Company based on the amount of square footage it
occupies. Affiliates of Jones International charged the Company approximately
$58,000 and $110,000, for the nine months ended September
7
JONES INTERNATIONAL NETWORKS, LTD AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
30, 1997 and 1998, respectively, for rent and associated expenses.
An affiliate of Jones International provides computer hardware and software
support services to the Company. This subsidiary charged the Company
approximately $366,000 and $506,000, for the nine months ended September 30,
1997 and 1998, respectively, for such services.
An affiliate of the Company charged the Company approximately $197,000 for
the nine months ended September 30, 1998 for the allocated costs of its airplane
which was used by the Company in connection with the Notes offering. No such
services were provided for the nine months ended September 30, 1997.
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 $408,000 and $825,000, for the nine months ended September
30, 1997 and 1998, respectively, for these administrative expenses.
To assist funding its operating and investing activities, the Company has
borrowed funds from Jones International. Jones International's interest rate is
calculated using the published prime rate plus two percent. Jones International
charged interest on its advances to the Company at rates of approximately 10
percent per annum for the nine months ended September 30, 1997 and 1998. Jones
International charged the Company interest of approximately $602,000 and
$436,000, for the nine months ended September 30, 1997 and 1998, respectively.
The Company anticipates it will repay these advances from operating cash flow
and/or available cash balances.
(3) NET LOSS PER COMMON SHARE
Net loss per common share in the accompanying consolidated financial
statements is based on the weighted average number of common shares outstanding
during the respective periods. In February 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards 128
("SFAS 128") entitled, "Earnings per Share." SFAS 128 is effective for fiscal
years ending after December 15, 1997; early adoption is not permitted. SFAS 128
replaces primary and fully diluted earnings per share with basic and diluted
earnings per share, respectively. Under SFAS 128, diluted net income (loss) per
share for the periods reported would be the same as the basic earnings per share
presented in the accompanying consolidated financial statements.
(4) COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards No. 130
("SFAS 130") "Reporting Comprehensive Income" in the first quarter of 1998.
SFAS 130 establishes standards for the reporting and display of comprehensive
income and its components. An unaudited reconciliation of the Company's net
loss and comprehensive loss follows.
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
1997 1998
----------------------------------
Net Loss, as reported..................... $(2,968,000) $ (8,668,000)
Adjustments to arrive at
comprehensive net loss...................
Change in unrealized holding gain on
marketable securities................. -- 17,000
--------- ---------
Comprehensive net loss.................... $(2,968,000) $ (8,651,000)
========= =========
8
JONES INTERNATIONAL NETWORKS, LTD AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(5) UNAUDITED CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY
GUARANTORS
In July 1998, the Company issued $100 million of Senior Secured Notes (the
"Notes"). The Notes are senior obligations of the Company. The Notes rank pari
passu in right of payment with all existing and future senior indebtedness of
the Company and rank senior to all existing and future subordinated obligations
of the Company. The Notes are secured by the capital stock of the Company's
subsidiary, JPN, Inc., and its direct subsidiaries. The Notes are fully and
unconditionally guaranteed, jointly and severally, on a senior unsecured basis
by the following wholly-owned subsidiaries of the Company: JPN, Inc., Jones
Space Holdings, Inc., Jones Earth Segment, Inc., Jones Infomercial Networks,
Inc., Jones Radio Holdings, Inc., Great American Country, Inc., Jones Galactic
Radio, Inc., Jones Infomercial Network Ventures, Inc., Jones Galactic Radio
Partners, Inc., Jones Radio Network, Inc., Jones Audio Services, Inc., Jones
Radio Network Ventures, Inc., MediaAmerica, Inc. and Jones MAI Radio, Inc., and
by its 90%-owned subsidiary, Jones/Owens Radio Programming LLC, ("JORP")
(collectively, the "Subsidiary Guarantors"). The only existing subsidiaries of
the Company that did not guarantee the Notes are the following three entities:
the PIN Venture, a general partnership in which the Company, through a
Subsidiary Guarantor, owns a 54% interest; Galactic Tempo, d/b/a Superaudio
("Superaudio"), a general partnership in which the Company, through a Subsidiary
Guarantor, owns a 50% interest and Jones/Capstar Venture Radio Programming LLC,
a recently formed limited liability company in which the Company, through a
Subsidiary Guarantor, owns a 50% interest (collectively, the "Non-Guarantor
Subsidiaries"). The Company has not presented separate financial statements and
other disclosures concerning the Subsidiary Guarantors that are wholly owned
because management has determined that such information is not material to
investors. In lieu thereof, the Company is providing, under Section 13 and 15
(d) of the Securities Exchange Act of 1934, presentation of the following
supplemental condensed consolidating financial statements.
9
JONES INTERNATIONAL NETWORKS, LTD AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Presented below is condensed unaudited consolidating financial information for
the Company and its subsidiaries as of and for the nine months ended September
30, 1997 and 1998.
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION - AS
OF SEPTEMBER 30, 1998:
(IN THOUSANDS)
SUBSIDIARY
GUARANTORS
-----------------------
NON-
THE EXCLUDING GUARANTOR ELIMINATION
COMPANY JORP JORP SUBSIDIARIES ENTRIES REPORTED
-------- --------- ---------- ------------ ----------- ---------
ASSETS:
Cash and cash equivalents............... $ 10,042 $ 1,315 $ 104 $1,038 $ -- $ 12,499
Restricted cash......................... 10,000 -- -- -- -- 10,000
Available for sale securities........... 2,181 -- -- -- -- 2,181
Accounts receivable..................... -- 9,450 451 776 -- 10,677
Other current assets.................... 1,177 (636) 43 42 -- 626
-------- -------- ------ ------ ----------- --------
Total current assets........... 23,400 10,129 598 1,856 -- 35,983
-------- -------- ------ ------ ----------- --------
Property, plant and equipment........... 7 27,513 -- 310 -- 27,830
Goodwill................................ -- 33,041 -- -- -- 33,041
Intangible assets....................... 2 6,231 680 3 -- 6,916
Other long-term assets.................. 33,033 (23,890) -- -- (1,940) 7,203
-------- -------- ------ ------ ----------- --------
Total assets................... $ 56,442 $ 53,024 $1,278 $2,169 $(1,940) $110,973
======== ======== ====== ====== =========== ========
LIABILITIES AND SHAREHOLDERS'
INVESTMENT (DEFICIT):
Accounts payable........................ $ 1,310 $ 841 $ -- $ 772 $ -- $ 2,923
Producers' fees payable................. -- 5,516 -- -- -- 5,516
Accrued liabilities..................... 3,229 2,578 (1) 39 -- 5,845
Other current liabilities............... (40,258) 43,396 -- 141 3,279
-------- -------- ------ ------ ----------- --------
Total current liabilities...... (35,719) 52,331 (1) 952 -- 17,563
-------- -------- ------ ------ ----------- --------
Senior secured notes.................... 100,000 -- -- -- -- 100,000
Other long-term liabilities............. -- 366 -- -- -- 366
-------- -------- ------ ------ ----------- --------
Total long-term liabilities.... 100,000 366 -- -- -- 100,366
-------- -------- ------ ------ ----------- --------
Minority interests...................... -- -- -- -- 557 557
Common stock subject to put............. 1,213 -- -- -- -- 1,213
Shareholders' investment (deficit):
Class A Common Stock............. 42 -- -- -- -- 42
Class B Common Stock............. 18 -- -- -- -- 18
General Partners'
Contributions................... -- -- 1,000 350 (1,350) --
Additional paid-in capital....... 27,262 -- -- -- -- 27,262
Other comprehensive income....... 17 -- -- -- -- 17
Retained earnings (accumulated
deficit)......................... (36,391) 327 279 867 (1,147) (36,065)
-------- -------- ------ ------ ----------- --------
Total shareholders'
investment (deficit)........... (9,052) 327 1,279 1,217 (2,497) (8,726)
-------- -------- ------ ------ ----------- --------
Total liabilities and
shareholders'
investment (deficit)........... $ 56,442 $ 53,024 $1,278 $2,169 $(1,940) $110,973
======== ======== ====== ====== =========== ========
10
JONES INTERNATIONAL NETWORKS, LTD AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS - FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998:
(IN THOUSANDS)
SUBSIDIARY
GUARANTORS
-----------------------
NON-
THE EXCLUDING GUARANTOR ELIMINATION
COMPANY JORP JORP SUBSIDIARIES ENTRIES REPORTED
-------- --------- ---------- ------------ ----------- ---------
INCOME STATEMENT DATA:
REVENUES:
Radio programming.................. $ -- $ 5,900 $723 $ -- $ -- $ 6,623
Radio advertising representation... -- 2,362 -- -- -- 2,362
Television programming............. 173 1,705 -- 10,114 -- 11,992
Satellite delivery and production
support........................... -- 5,352 -- -- ( 1,364) 3,988
------- ------- ---- ------- -------- -------
Total revenues.................. 173 15,319 723 10,114 (1,364) 24,965
------- ------- ---- ------- -------- -------
OPERATING EXPENSES:
Radio programming.................. -- 4,890 578 -- -- 5,468
Radio advertising representation... -- 482 -- -- -- 482
Television programming............. 81 2,132 -- 9,569 (1,364) 10,418
Satellite delivery and production
support........................... -- 3,791 -- -- -- 3,791
Selling and marketing.............. 58 2,659 110 246 -- 3,073
General and administrative......... 812 2,833 96 311 -- 4,052
------- ------- ---- ------- -------- -------
Total operating expenses........ 951 16,787 784 10,126 (1,364) 27,284
------- ------- ---- ------- -------- -------
OPERATING LOSS.................. (778) (1,468) (61) (12) -- (2,319)
------- ------- ---- ------- -------- -------
OTHER EXPENSE (INCOME):
Interest expense................... 4,009 1,798 -- -- -- 5,807
Interest income.................... (247) (77) -- (114) -- (438)
Equity share of loss (income) of
subsidiaries...................... 3,567 (3,562) -- -- (5) --
Other expense (income), net........ 881 36 -- 10 -- 927
------- ------- ---- ------- -------- -------
Total other expense............. 8,210 (1,805) -- (104) (5) 6,296
------- ------- ---- ------- -------- -------
Income (loss) before income taxes
and minority
interests......................... (8,988) 337 (61) 92 5 (8,615)
Income tax provision (benefit)..... 1 14 -- -- -- 15
------- ------- ---- ------- -------- -------
Income (loss) before minority
interests......................... (8,989) 323 (61) 92 5 (8,630)
Minority interests in net income
of consolidated
subsidiaries...................... -- -- -- -- 38 38
------- ------- ---- ------- -------- -------
NET INCOME (LOSS).................. $(8,989) $ 323 $(61) $ 92 $ (33) $(8,668)
======= ======= ==== ======= ======== =======
11
JONES INTERNATIONAL NETWORKS, LTD AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
UNAUDITED CONDENSED CONSOLIDATING CASH FLOWS - FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998:
(IN THOUSANDS)
SUBSIDIARY
GUARANTORS
-----------------------
NON-
THE EXCLUDING GUARANTOR ELIMINATION
COMPANY JORP JORP SUBSIDIARIES ENTRIES REPORTED
-------- --------- ---------- ------------ ----------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................... $ (8,989) $ 323 $ (61) $ 92 $ (33) $ (8,668)
Adjustment to reconcile net income
(loss) to net cash provided
(used in) by operating activities:
Non-cash expenses (income)........ 204 4,796 (130) 69 33 4,972
Distributions received............ -- 350 -- -- -- 350
Net change in assets and
liabilities...................... 2,277 (6,034) 221 (655) -- (4,191)
-------- -------- ---------- ------------ ----------- --------
Net cash provided by (used in)
operating activities........... (6,508) (565) 30 (494) -- (7,537)
-------- -------- ---------- ------------ ----------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and
equipment.......................... -- (1,818) -- (98) -- (1,916)
Purchases of intangible assets...... -- (1,329) -- -- -- (1,329)
Purchase of MediaAmerica, Inc....... (26,700) -- -- -- -- (26,700)
Dividend from joint venture......... 960 -- -- -- (960) --
Sale of property, plant and
equipment.......................... -- 43 -- -- -- 43
Other............................... (12,164) -- -- -- -- (12,164)
-------- -------- ---------- ------------ ----------- --------
Net cash used in investing
activities..................... (37,904) (3,104) -- (98) (960) (42,066)
-------- -------- ---------- ------------ ----------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in debt offering costs..... (4,710) -- -- -- -- (4,710)
Increase in capitalized loan fees... (520) -- -- -- -- (520)
Advances to/from affiliates......... (40,291) 40,291 -- -- -- --
Repayment of borrowings............. -- (6,555) -- -- -- (6,555)
Repayment of capital lease
obligations........................ -- (28,757) -- -- -- (28,757)
Proceeds from borrowings............ 100,000 -- -- -- -- 100,000
Distributions paid to partners...... -- -- -- (2,033) 2,033 --
Distributions paid to minority
interests.......................... -- -- -- -- (1,073) (1,073)
-------- -------- ---------- ------------ ----------- --------
Net cash provided by (used in)
financing activities........... 54,479 4,979 -- (2,033) 960 58,385
-------- -------- ---------- ------------ ----------- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................. 10,067 1,310 30 (2,625) -- 8,782
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD.................................. (25) 5 74 3,663 -- 3,717
-------- -------- ---------- ------------ ----------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD. $ 10,042 $ 1,315 $ 104 $ 1,038 $ -- $ 12,499
======== ======== ========== ============ =========== ========
12
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS-(CONTINUED)
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS-FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997:
(IN THOUSANDS)
SUBSIDIARY
GUARANTORS
---------------------- NON-
THE EXCLUDING GUARANTOR ELIMINATION
COMPANY JORP JORP SUBSIDIARIES ENTRIES REPORTED
-------- ---------- ---------- ------------- ------------ ---------
INCOME STATEMENT DATA:
REVENUES:
Radio programming...................................$ -- $ 6,873 967 $ -- $ -- $ 7,840
Television programming.............................. 204 907 -- 9,384 (2,858) 7,637
Satellite delivery and production
support............................................. -- 6,911 -- -- (1,293) 5,618
------- ------- ---- ------ ------- -------
Total revenues...................................... 204 14,691 967 9,384 (4,151) 21,095
------- ------- ---- ------ ------- -------
OPERATING EXPENSES:
Radio programming................................... -- 3,835 512 -- -- 4,347
Television programming.............................. 101 2,000 -- 7,202 (3,468) 5,835
Satellite delivery and production
support............................................. -- 3,774 -- -- -- 3,774
Selling and marketing............................... 106 1,691 -- 441 (104) 2,134
General and administrative.......................... 821 1,674 96 560 (203) 2,948
------- ------- ---- ------ ------- -------
Total operating expenses............................ 1,028 12,974 608 8,203 (3,775) 19,038
------- ------- ---- ------ ------- -------
OPERATING INCOME (LOSS)............................. (824) 1,717 359 1,181 (376) 2,057
------- ------- ---- ------ ------- -------
OTHER EXPENSE (INCOME):
Interest expense.................................... 1,592 2,726 -- 16 (16) 4,318
Interest income..................................... (2) (24) -- (23) 7 (42)
Write-off of deferred offering costs ............... 938 -- -- -- -- 938
Equity share of loss (income) of subsidiaries....... (139) (901) -- -- 675 (365)
Other expense (income), net......................... -- 33 -- 38 -- 71
------- ------- ---- ------ ------- -------
Total other expense (income), net............... 2,389 1,834 -- 31 666 4,920
------- ------- ---- ------ ------- -------
Income (loss) before income taxes
and minority interests..........................(3,213) (117) 359 1,150 (1,042) (2,863)
Income tax benefit.................................. (288) (68) -- -- -- (356)
------- ------- ---- ------ ------- -------
Income (loss) before minority interests.............(2,925) (49) 359 1,150 (1,042) (2,507)
Minority interests in net income
of consolidated subsidiaries.................... -- -- -- -- 461 461
------- ------- ---- ------ ------- -------
NET INCOME (LOSS)................................. $(2,925) $ (49) $359 $ 1,150 $ (1,503) $ (2,968)
======= ======= ==== ======= ========= ========
13
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
UNAUDITED CONDENSED CONSOLIDATING CASH FLOWS - FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997:
(IN THOUSANDS)
SUBSIDIARY
GUARANTORS
----------------------
NON-
THE EXCLUDING GUARANTOR ELIMINATION
COMPANY JORP JORP SUBSIDIARIES ENTRIES REPORTED
-------- --------- ---------- ------------ ----------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (income) loss...................... $(2,925) $ (49) $ 359 $1,150 $(1,503) $(2,968)
Adjustment to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Non-cash expense....................... 204 4,356 123 49 217 4,949
Net change in assets and
liabilities........................... 3,357 (1,877) (461) 2,262 1,341 4,622
------- ------- ----- ------ ------- -------
Net cash provided by operating
activities........................... 636 2,430 21 3,461 55 6,603
------- ------- ----- ------ ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and
equipment............................. -- (1,038) -- (119) -- (1,157)
Sale of property, plant and equipment.. -- 88 -- 174 -- 262
Purchases of intangible assets......... -- (49) -- (2) -- (51)
------- ------- ----- ------ ------- -------
Net cash provided by (used in)
investing activities................. -- (999) -- 53 -- (946)
------- ------- ----- ------ ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in capitalized loan fees...... (50) -- -- -- -- (50)
Repayment of capital lease obligations. -- (1,433) -- -- -- (1,433)
------- ------- ----- ------ ------- -------
Net cash used in financing activities. (50) (1,433) -- -- -- (1,483)
------- ------- ----- ------ ------- -------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................ 586 (2) 21 3,514 55 4,174
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD................................. -- 4 -- 55 (55) 4
------- ------- ----- ------ ------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 586 $ 2 $ 21 $3,569 $ -- $ 4,178
======= ======= ===== ====== ======= =======
(6) SENIOR SECURED NOTES
In July 1998, the Company issued $100 million of 11 3/4% Senior Secured
Notes (the "Notes"). The Company used the proceeds from the Notes offering (i)
to finance the cash consideration of the acquisition of MediaAmerica, Inc.
("MediaAmerica"), (ii) to prepay the capital lease obligation relating to the
satellite transponders, (iii) to repay the Radio Holdings credit facility and
(iv) for general corporate purposes, including the payment of fees and expenses.
Interest on the Notes is payable semi-annually on January 1 and July 1 of
each year, commencing January 1, 1999. The Notes will mature on July 1, 2005.
Except as described below, the Company may not redeem the Notes prior to July 1,
2003. On or after such date, the Company may redeem the Notes, in whole or in
part, at any time, at a redemption price of 105.875% of the principal amount to
be redeemed for the 12 month period commencing July 1, 2003 and declining to
100% of the principal amount to be redeemed for the period after July 1, 2004,
together with accrued and unpaid interest, if any, to the date of redemption.
In addition, at any time and from time to time on or prior to July 1, 2001, the
Company may, subject to certain requirements, redeem up to 35% of the aggregate
principal amount of the Notes with the cash proceeds of one or more Equity
Offerings (as defined) at a redemption price equal to 111.75% of the principal
amount to be redeemed, together with accrued and unpaid interest, if any, to the
date of redemption, provided, that at least 65% of the aggregate principal
amount of the Notes remains outstanding immediately after each such redemption.
The Notes will not be subject to any sinking fund requirement. Upon the
occurrence of a Change of Control (as defined), the Company will be required to
make an offer to repurchase the Notes at a price equal to 101% of the principal
amount thereof, together with accrued and unpaid interest, if any, to the date
of repurchase.
The Notes are senior obligations of the Company. The Notes rank pari passu
in right of payment with all existing and future Senior Indebtedness (as
defined) of the Company and rank senior to all existing and future Subordinated
Obligations (as defined) of the Company. The Notes are secured by the capital
stock of JPN, Inc., the Company's wholly-owned intermediate holding company and
JPN's direct subsidiaries. The Notes are unconditionally guaranteed (the
"Guarantees") by each of the Subsidiary Guarantors. The
14
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Guarantees are senior obligations of the Subsidiary Guarantors and rank pari
passu in right of payment with all existing and future Senior Indebtedness of
the Subsidiary Guarantors, other than Bank Indebtedness (as defined) and
Capitalized Lease Obligations (as defined) of the Subsidiary Guarantors, and are
ranked senior in right of payment to all existing and future Subordinated
Obligations of the Subsidiary Guarantors. The Guarantees are not secured. The
Guarantees are full and unconditional.
(7) NOTES PAYABLE
In December 1994, Earth Segment entered into a promissory note with Jones
Intercable. As of December 31, 1996 and 1997, the principal amount of the note
was $6,554,500, which approximates fair market value. The note was secured by
all of Earth Segment's present and future tangible and intangible property and
bore interest at one percent over the published prime rate (9.5% at December 31,
1997). Interest expense totaled approximately $468,000 and $156,000 for the nine
months ended September 30, 1997 and 1998, respectively. This note and accrued
interest were repaid on March 31, 1998.
Effective August 15, 1996, the Company purchased all of the outstanding
common stock of Galactic Radio from Jones Global Group, Inc. ("Global Group"),
an affiliate of the Company, for $17.2 million. Global Group had acquired
Galactic Radio from Jones Intercable, a related party, for $17.2 million on
September 14, 1996. The Company paid the purchase price to Global Group using
$1.2 million in cash, which was advanced to the Company by Jones International,
with the balance paid in the form of a $16.0 million note.
Effective September 30, 1997, the Company and Global Group agreed to
convert $6 million of the $16 million note payable to Global Group into 400,000
shares of the Company's Class B Common Stock. Effective upon the closing of the
Notes offering, the remaining $10 million of the Global Group note was converted
into 666,667 shares of the Company's Class A Common Stock valued at $15 per
share.
(8) REVOLVING CREDIT FACILITY
On March 31, 1998, Jones Radio Holdings, Inc. ("Radio Holdings") entered
into a $30 million revolving credit facility with a commercial bank with a five-
year term. In July 1998, the Company repaid the credit facility using the
proceeds from the Notes offering and all capitalized debt offering costs related
to the credit facility were written off.
(9) ACQUISITION OF MEDIAAMERICA
On July 10, 1998, the Company acquired substantially all assets and assumed
certain liabilities of MediaAmerica, Inc. ("MediaAmerica") for $32.7 million
plus a working capital adjustment (as defined). MediaAmerica provides radio
advertising sales representation services and also owns syndicated radio
programming. MediaAmerica received $26.7 million in cash and $6.0 million in
shares of Class A Common Stock of the Company valued at $15 per share.
MediaAmerica also received 141,970 shares of Class A Common Stock as an
estimated working capital adjustment. In addition, MediaAmerica may receive up
to $5 million in shares of Class A Common Stock, with the excess, if any, to be
paid in cash if certain multiples of "EBITDA" (earnings before interest, taxes,
depreciation and amortization) for the twelve-month period following the closing
are achieved. The acquisition was accounted for by the purchase method of
accounting, under which the purchase price of MediaAmerica was allocated to the
tangible and intangible assets and liabilities of MediaAmerica.
MediaAmerica has the right to cause the Company to purchase the shares of
the Company owned by MediaAmerica at any time after three years from the July
10, 1998 closing. The price would be the fair market value of the Class A
Common Stock on the date of exercise of the put, as determined by agreement or
by an independent investment banking firm. The Company has a correlative right
to require that MediaAmerica sell such shares to the Company at fair market
value. Such rights terminate upon an initial public offering by the Company.
Before MediaAmerica can require the Company to buy its shares, the Company must
have available cash (as defined). This condition lapses after seven and one
quarter years from the date of closing. If the Company has exercised its
15
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
purchase right and there is a change of control involving a higher price within
nine months of the exercise of the call, the Company must pay specified
additional consideration.
Certain condensed pro forma financial information of the Company assuming the
acquisition of MediaAmerica and the Notes offering were completed as of January
1 of the applicable period is as follows:
SEPTEMBER 30,
1997 1998
---------------------------
(UNAUDITED)
Revenues..................... $31,633,000 $ 31,317,000
Operating expenses........... 27,398,000 33,440,000
Operating income (loss)...... 4,235,000 (2,123,000)
Net (loss)................... (7,237,000) (11,957,000)
Net loss per common share.... $ (1.50) $ (2.24)
(10) COMMITMENTS AND CONTINGENCIES
Satellite Delivery and Production Support agreements--The Company has
financed its ownership of two analog satellite transponders through a capital
lease that was fully prepaid with a portion of the proceeds of the Notes
offering. The channel capacity on one satellite transponder has been digitally
compressed to seven channels, four of which are currently leased to Product
Information Network, Great American Country and two related parties. The other
three channels were recently leased to a third party. The other satellite
transponder is an analog channel which the Company recently leased to a third
party.
GAC Equity Agreements--In the first quarter of 1998, Great American Country
and the Company entered into equity affiliate agreements with two multiple cable
system operators ("MSOs"). Pursuant to the terms of such agreements, the
Company agreed to issue shares of Class A Common Stock to the MSOs in return for
the MSOs providing Great American Country's programming to no less than 550,000
of their subscribers by May 31, 1998, an additional 500,000 subscribers by
December 31, 1998 and an additional 150,000 subscribers by December 31, 1999.
The total number of shares of Class A Common Stock to be issued is based on the
number of subscribers provided by the MSOs. If all the subscribers as described
above receive Great American Country's programming by the specified dates, the
Company will be required to issue a total of 175,000 shares of Common Stock on
specified dates through February 2000. As of September 30, 1998, 101,124 shares
of Class A Common Stock had been issued to one of the MSOs. Pursuant to the
guidelines of SFAS 123 "Accounting for Stock-Based Compensation," the value of
the Class A Common Stock was recorded as an intangible asset upon execution of
the affiliate agreements and upon issuance of the Class A Common Stock. This
intangible will be amortized over the life of the contract (approximately 10
years). Because of a put option granted to one of the MSOs, the shares issued
to that MSO are presented above the Shareholders' Deficit section of the
Statements of Financial Position . The amount of accretion from the value of
the shares issued to the put option at the exercise date is not significant.
As noted above, one of the MSOs was granted a put option on the Common
Stock issued, whereby, if as of December 31, 2001, the Company or its successor
has not completed a public offering of its securities, the MSO would have the
option within 60 days of such date to require the Company to buy back its Class
A Common Stock at a price equal to all or a portion of the license fees that
would have been paid during the period between the date of the agreement and the
exercise date of the put option. The purchase price would be based on the total
number of MSO subscribers receiving the Great American Country service as of
December 31, 1998. In the event the MSO provides the full number of subscribers
committed under the agreement by December 31, 1998, the estimated purchase price
of the Class A Common Stock in the event the put option is exercised would be
approximately $1,300,000.
16
JONES INTERNATIONAL NETWORKS, LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(11) STOCK OPTION PLAN
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 of 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 terms and provisions of stock options as it may determine
form time to time, subject only to the provisions of the Plan. The Plan covers
an aggregate of up to 400,000 shares of the Company's Class A Common Stock. As
of September 30, 1998, the Company had granted options for 275,000 shares of
Class A Common Stock at fair market value.
(12) SUBSEQUENT EVENTS
In May 1998, BCI Telecom Holding Inc. ("BTH") announced its intention to
sell approximately half of its shares of Intercable's Class A Common Stock to
Comcast Corporation ("Comcast"). BTH also announced its intention to grant to
Comcast the right to acquire all of the Common Stock held by International and
its affiliates from BTH if and when BTH exercises its option to purchase such
shares in 2001. BTH also announced its intention to sell to Comcast at the time
that the option is exercised its remaining holdings of Class A Common Stock of
Intercable.
On August 12, 1998, Intercable, International, BTH and Comcast announced
that agreements had been entered into that accelerated the exercise of the
option by Comcast, and allow for the early closing of the transaction between
Comcast and BTH. Upon the transfer of a controlling interest in Intercable from
International and its affiliates to Comcast, Jones Intercable will no longer
share in many of the administrative and related expenses which have historically
been shared by the various entities affiliated with Mr. Jones, including the
Company. Because Jones Intercable is the largest of such sharing entities, its
exclusion from the allocation process will cause the Company to incur material
increases beginning in the second quarter of 1999 in certain overhead and
related costs, including computer services, insurance, and personnel costs for
accounting, legal, risk management and human resources services.
17
JONES/OWENS RADIO PROGRAMMING, LLC
UNAUDITED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
AND FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1998
18
JONES/OWENS RADIO PROGRAMMING, LLC
UNAUDITED STATEMENTS OF FINANCIAL POSITION
December 31, September 30,
1997 1998
--------------- ---------------
CURRENT ASSETS:
Cash $ 74,294 $ 103,703
Accounts receivable 220,270 472,323
Allowance for (17,272) (21,754)
doubtful accounts ---------- ----------
Net accounts
receivable 202,998 450,569
Advances to Jones
Radio Network
Ventures, Inc. (Note 2) 243,105 2,990
Prepaid expenses 11,724 44,107
---------- ----------
Total current
assets 532,121 601,369
---------- ----------
INTANGIBLE ASSETS:
Intangible assets 1,000,000 1,000,000
Accumulated
amortization (189,980) (319,964)
---------- ----------
Net intangible
assets 810,020 680,036
---------- ----------
Total assets $1,342,141 $1,281,405
========== ==========
CURRENT LIABILITIES:
Accounts payable and
accrued liabilities $ 2,000 $ 2,125
Advances from Jones
Radio Network
Ventures, Inc. (Note 2) - -
---------- ----------
Total current
liabilities 2,000 2,125
---------- ----------
MEMBERS' EQUITY:
Member contributions 1,000,000 1,000,000
Retained earnings 340,141 279,280
---------- ----------
Total members'
equity 1,340,141 1,279,280
---------- ----------
Total liabilities
and members' equity $1,342,141 $1,281,405
========== ==========
The accompanying notes to these unaudited financial statements
are in integral part of these statements.
19
JONES/OWENS RADIO PROGRAMMING, LLC
UNAUDITED STATEMENTS OF OPERATIONS
For the Three For the Nine
Months Ended September 30, Months Ended September 30,
1997 1998 1997 1998
------------- ------------ ------------ ------------
REVENUE :
Radio programming revenue:
Advertising net of commissions, $ 400,058 $ 268,895 $ 936,607 $ 696,023
Licensing fees 9,312 3,442 30,808 27,325
------------- ------------ ------------ ------------
Total radio programming revenue 409,370 272,337 967,415 723,348
------------- ------------ ------------ ------------
OPERATING EXPENSES:
Radio programming expenses:
Non-affiliated entities 102,503 176,280 237,286 404,597
Affiliated entities (Note 2) 74,105 12,056 274,832 173,294
------------- ------------ ------------ ------------
Total radio programming expenses 176,608 188,336 512,118 577,891
Selling and marketing - 13,215 - 110,174
General and administrative expenses (Note 2) 30,827 30,891 95,815 96,144
------------- ------------ ------------ ------------
Total operating expenses 207,435 232,442 607,933 784,209
------------- ------------ ------------ ------------
NET INCOME (LOSS) $ 201,935 $ 39,895 $ 359,482 $ (60,861)
============= ============ ============ ============
The accompanying notes to these unaudited financial statements
are an integral part of these statements.
20
JONES/OWENS RADIO PROGRAMMING, LLC
UNAUDITED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30,
1997 1998
--------- ---------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ 359,482 $ (60,861)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Amortization expense 123,315 129,984
Net change in assets and liabilities:
Increase in net accounts receivable (543,029) (247,571)
Decrease (increase) in prepaid expenses 21,566 (32,383)
Increase (decrease) in accounts payable and accrued liabilities (750) 125
Net change in advances to/from Jones Radio Network Ventures, Inc. 60,501 240,115
--------- ---------
Net cash provided by operating activities 21,085 29,409
--------- ---------
CASH, BEGINNING OF PERIOD - 74,294
--------- ---------
CASH, END OF PERIOD $ 21,085 $ 103,703
========= =========
The accompanying notes of these unaudited financial statements
are an integral part of these statements.
21
JONES/OWENS RADIO PROGRAMMING, LLC
NOTES TO UNAUDITED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
(1) ORGANIZATION AND BUSINESS AND BASIS OF PRESENTATION
Jones/Owens Radio Programming, LLC (the "JORP") is a limited liability company
which is owned by Jones Radio Network Ventures, Inc. ("JRNV"), an indirect
wholly-owned subsidiary of Jones International Networks, Ltd.("JIN"), and Jim
Owens and Associates, Inc. ("Owens"). JORP is in the business of developing,
producing and distributing short-form and long-form syndicated radio programs.
JORP commenced operations on October 1, 1996. JIN contributed $1 million for
the purchase of certain intangible assets from Owens (Note 2) and certain of
their affiliation agreements to JORP for a 70 percent ownership interest
in JORP. Owens contributed certain rights in the Crook and Chase Country
CountDown show for a 30 percent ownership interest in JORP. In August 1997,
Owens contributed 2/3 of its ownership interest in JORP to JRNV in payment of
certain programming and production costs for which Owens was responsible under
the original agreement. After this contribution, JRNV and Owens had a 90% and
10% ownership interest, respectively, in JORP. Profits, losses and
distributions of JORP have been and will be allocated in accordance with the
respective ownership interests of the members.
In July 1998, JIN issued $100 million of 11 3/4% Senior Secured Notes due 2005
(the "Notes"), which were fully and unconditionally guaranteed on a joint and
several basis by certain of JIN's subsidiaries, including the Company.
These financial statements are being filed as part of the Form 10-Q
filed by Jones International, Networks, Ltd. and its subsidiaries (the
"Company"). These financial statements are filed in accordance with the
requirements of the Securities with Exchange Commission pronouncements
relating to the obligations of subsidiary guarantors of publicly traded debt
securities that are not wholly-owned to file periodic reports under the
Securities Exchange Act of 1934. The accompanying statements of financial
position as of December 31, 1997 and September 30, 1998, the statements of
operations for the three and nine months ended September 30, 1997 and 1998,
and the statements of cash flows for the nine months ended September 30, 1997
and 1998, are unaudited. This Form 10-Q is being filed in conformity with the
SEC requirements for unaudited financial statements and does not contain all
of the necessary footnote disclosures required for a complete presentation of
the statements of financial position, statements of operations and statements
of cash flows in conformity with generally accepted accounting principles.
However, in the opinion of management, these statements include all
adjustments, consisting of normal recurring adjustments, necessary for the
fair presentation of results for these interim periods. The results of
operations for the three and nine months ended September 30, 1998 are not
necessarily indicative of results to be expected for the entire year, or for
any other interim period.
(2) TRANSACTIONS WITH AFFILIATED ENTITIES
JRNV is an indirect subsidiary of Jones International, Ltd. ("International").
Certain members of management of the Company are also officers or directors of
other affiliated entities and, from time to time, JORP may have transactions
with these entities. Certain expenses are paid by affiliated entities on
behalf of JORP and are allocated at cost based on specific identification or
other reasonable methods. Significant transactions with affiliated entities
are described below.
Radio Programming Expense - Jones Radio Network, Inc. ("JRN") distributes
radio programming for JORP. For the nine months ended September 30, 1997, JRN
charged JORP a fee of approximately $96,000, for radio programming
distribution services. The fee represents approximately 10% of JORP's net
revenues for the nine months ended September 30, 1997. Beginning in November
1997, this distribution fee was no longer charged by JRN to JORP due to an
amendment to the original agreement.
In addition, Owens produces radio programming for JORP. For the nine months
ended September 30, 1997
22
and 1998, respectively, Owens charged JORP approximately $179,000 and
$120,000, respectively, for radio programming services.
On July 10, 1998, the Company purchased MediaAmerica, Inc. ("MediaAmerica").
MediaAmerica provided advertising representation services to JORP and was paid
of approximately $53,000, for the period from July 10, 1998 to September 30,
1998.
General and Administrative Expenses - JORP reimburses 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
JORP. International and its affiliates charged JORP approximately $15,000 and
$11,000 for the nine months ended September 30, 1997 and 1998, respectively,
for these administrative expenses.
Periodically, in the normal course of business, JRNV (1) remits funds on
behalf of JORP to third parties and affiliates in payment for products and
services purchased by JORP and/or (2) receives funds on behalf of JORP,
primarily from affiliates, in payment for products and services provided by
JORP. These amounts are then subsequently reimbursed from/to JRNV on a timely
basis. Due to their short-term nature, such amounts outstanding with JRNV are
classified as a current asset or liability in the accompanying financial
statements.
(3) DEFERRED COMMISSIONS
Sales commissions are amortized over the life of the corresponding agreements
from which the sales commission was paid.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of results of the Company's financial condition
and results of operations contains, in addition to historical information,
forward-looking statements that are based upon certain assumptions and are
subject to a number of risks and uncertainties. The Company's actual results may
differ significantly from the results predicted in such forward-looking
statements.
RESULTS OF OPERATIONS
The following table sets forth the amount of, and percentage relationship
to total net revenues of, certain items included in the Company's historical
unaudited consolidated statements of operations for the three and nine months
ended September 30, 1997 and 1998, respectively:
REPORTED RESULTS:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30, SEPTEMBER 30,
------------ ------------
1997 1998 1997 1998
-------- -------- -------- --------
REVENUES:
Radio programming............. $2,750 33% $ 2,884 26% $ 7,840 37% $ 6,623 27%
Radio advertising
representation............... -- -- 2,362 21 -- -- 2,362 9
Television programming........ 3,738 46 4,127 37 7,637 36 11,992 48
Satellite delivery and
production support........... 1,701 21 1,782 16 5,618 27 3,988 16
------ ---- ------- ---- ------- --- ------- ---
Total revenues............... 8,189 100 11,155 100 21,095 100 24,965 100
------ ---- ------- ---- ------- --- ------- ---
OPERATING EXPENSES:
Radio programming............. 1,543 19 2,130 19 4,347 21 5,468 22
Radio advertising
representation............... -- -- 482 4 -- -- 482 2
Television programming........ 2,830 35 3,592 32 5,835 28 10,418 42
Satellite delivery and
production support........... 1,169 14 1,392 12 3,774 18 3,791 15
Selling and marketing......... 868 11 1,325 12 2,134 10 3,073 12
General and administrative.... 1,085 13 1,959 18 2,948 14 4,052 16
------ ---- ------- ---- ------- --- ------- ---
Total operating expenses..... 7,495 92 10,880 97 19,038 91 27,284 109
------ ---- ------- ---- ------- --- ------- ---
OPERATING INCOME (LOSS)........... 694 8 275 3 2,057 9 (2,319) (9)
------ ---- ------- ---- ------- --- ------- ---
OTHER EXPENSE..................... 1,423 17 3,564 32 4,920 23 6,296 25
INCOME TAX PROVISION (BENEFIT) AND
MINORITY INTERESTS.............. 43 1 (284) (3) 105 - 53 -
------ ---- ------- ---- ------- --- ------- ---
NET LOSS.......................... $ (772) (10%) $(3,005) (26%) $(2,968) (14%) $(8,668) (34%)
====== ==== ======= ==== ======= === ======= ===
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
Total Revenues--Total revenues increased $3.0 million, or 36%, from $8.2
million as reported for the three months ended September 30, 1997 to $11.2
million for the three months ended September 30, 1998. This increase was due
primarily to increases in radio advertising representation revenues, television
programming revenues and satellite delivery and production support revenues. On
July 10, 1998, the Company acquired substantially all the assets and assumed
certain of the liabilities of MediaAmerica, Inc. ("MediaAmerica"). MediaAmerica
provides advertising sales representation services and also owns syndicated
radio programming. As a result of the acquisition, the Company generated $2.4
million in radio advertising representation revenues for the three months ended
September 30, 1998. The increase in television programming revenues was due to
an increase in the number of subscribers receiving both Great American Country
and Product Information Network.
Radio Programming Revenues--Radio programming revenues increased $0.1
million, or 5%, from $2.8 million for the three months ended September 30, 1997
to $2.9 million for the three months ended September 30, 1998. The increase in
radio revenue is due primarily to the elimination of $0.4 million of advertising
sales
24
representation selling commission costs (contra revenues) charged to the Company
by MediaAmerica. The increase was offset by a decrease of $0.3 million, or 12%,
in advertising revenue. Sales of radio advertising for the first nine months of
1998 have been adversely affected by the January 1998 entry of AMFM into the
market, which added approximately 20% more radio advertising inventory to the
marketplace, thereby increasing competition for network radio advertising
dollars. Additionally, AMFM has been able to shift the focus of network radio
advertisers to its radio network which delivers larger market radio stations as
compared to the radio stations delivered by the Company's radio network. During
the third quarter of 1998, the Company continued to sell advertising spots at
lower rates, as compared to 1997. AMFM's entry into the marketplace, as well as
the increased amount of advertising inventory in the marketplace, will continue
to have a negative impact on the Company's advertising sellout percentage and
its advertising spot rates in the fourth quarter of 1998. There is no assurance
that these factors will not materially adversely affect the Company's 1999 radio
programming operations.
As a result of the changes occurring in the marketplace, the Company is
focusing on increasing the amount it receives per radio advertising spot.
Historically, the Company has sold its advertising to traditional network
advertisers. With the recent shift in the radio advertising market, the Company
is concentrating its efforts on advertisers that have targeted the specific
demographics that the Company serves.
Radio Representation Revenues--As a result of the acquisition of
MediaAmerica, the Company generated radio representation revenue of $2.4 million
for the three months ended September 30, 1998.
On a historical basis, MediaAmerica's revenue decreased $0.7 million, or
18%, from $3.8 million for the three months ended September 30, 1997 to $3.1
million for the three months ended September 30, 1998. In December 1997,
MediaAmerica's agreement with its largest radio advertising representation
customer was terminated, and a termination fee was paid to MediaAmerica in the
first half of 1998. MediaAmerica has continued to provide radio advertising
representation services to such customer in 1998, but the level of advertising
sales has declined substantially from that provided in 1997. AMFM's entry into
the marketplace has also negatively affected MediaAmerica's revenues from
representation clients. These factors have resulted in lower commission revenue
generated by MediaAmerica, and therefore its revenues, for the third quarter of
1998 were lower than the 1997 comparable period.
Television Programming Revenues--Television programming revenues increased
$0.4 million, or 10%, from $3.7 million for the three months ended September 30,
1997 to $4.1 million for the three months ended September 30, 1998, due
primarily to: (i) an increase of $0.3 million in Great American Country
advertising revenues due to higher advertising rates being charged for airtime
as a result of an increase in the number of subscribers receiving Great American
Country and (ii) an increase of $0.1 million in Great American Country affiliate
fees due to an increase in the number of subscribers paying affiliate fees.
Satellite Delivery and Production Support Revenues--Satellite delivery and
production support revenues increased $0.1 million, or 5%, from $1.7 million for
the three months ended September 30, 1997 to $1.8 million for the three months
ended September 30, 1998 due to new agreements that the Company entered into to
provide satellite transponder and related services. The Company recently leased
three digital channels on its C-3 satellite transponder and started to provide
certain related services to an unaffiliated third party beginning August 15,
1998 through August 31, 1999, subject to early termination at the option of the
Company. The revenues from this lease and service agreement are $138,000 per
month. In addition, the Company leased the C-4 satellite transponder to a third
party beginning July 1998 through December 31, 2002. The Company also leased one
digital channel and provides certain related services to an affiliate beginning
July 1998 through July 1, 2001. These agreements generate revenues of
approximately $160,000 and $97,000 per month, respectively. The increase in
revenue was partially offset by a reduction of $0.8 million in satellite
delivery and product support revenues due to the expiration of a third party
agreement in October 1997.
Total Operating Expenses--Total operating expenses increased $3.4 million,
or 45%, from $7.5 million for the three months ended September 30, 1997 to $10.9
million for the three months ended September 30, 1998. This increase was due
primarily to an increase in radio programming expenses, radio advertising
representation expenses, television programming expenses, selling and marketing
expenses and general and administrative expenses. As a
25
percentage of total revenues, total operating expenses increased from 92% for
the three months ended September 30, 1997 to 97% for the three months ended
September 30, 1998.
Radio Programming Expenses--Radio programming expenses increased $0.6
million, or 38%, from $1.5 million for the three months ended September 30, 1997
to $2.1 million for the three months ended September 30, 1998 due primarily to
the purchase of MediaAmerica. As a percentage of radio programming revenues,
radio programming expenses increased from 56% for the three months ended
September 30, 1997 to 74% for the three months ended September 30, 1998.
Radio Advertising Representation Expenses--As the result of the acquisition
of MediaAmerica, the Company generated radio representation expenses of $0.5
million for the three months ended September 30, 1998.On a historical basis,
MediaAmerica's operating expenses increased $0.1 million, or 3%, from $2.8
million for the three months ended September 30, 1997 to $2.9 million for the
three months ended September 30, 1998 due to an increase in the number of radio
programs offered by MediaAmerica.
Television Programming Expenses--Television programming expenses increased
$0.8 million, or 27%, from $2.8 million for the three months ended September 30,
1997 to $3.6 million for the three months ended September 30, 1998, due
primarily to an increase in amounts paid to cable systems receiving the Product
Information Network. For the three months ended September 30, 1997 and 1998, the
PIN Venture made incentive payments of approximately 60% and 76%, respectively,
of its advertising revenues to these systems. As a percentage of television
programming revenues, television programming expenses increased from 76% for the
three months ended September 30, 1997 to 87% for the three months ended
September 30, 1998.
Satellite Delivery and Production Support Expenses--Satellite delivery and
production support expenses increased $0.2 million, or 19%, from $1.2 million
for the three months ended September 30, 1997 to $1.4 million for the three
months ended September 30, 1998. The increase is due primarily to additional
third party and affiliated usage of the C-3 satellite transponder. As a
percentage of satellite delivery and production support revenues, satellite
delivery and production support expenses increased from 69% for the three months
ended September 30, 1997 to 78% for the three months ended September 30, 1998.
Selling and Marketing Expenses--Selling and marketing expenses increased
$0.4 million, or 53%, from $0.9 million for the three months ended September 30,
1997 to $1.3 million for the three months ended September 30, 1998 due to (i) an
increase of $0.5 million in selling and marketing expenses from the acquisition
of MediaAmerica and (ii) an increase of $0.2 million in marketing expenses due
to the increased marketing efforts undertaken to increase the distribution of
Great American Country. The increase was offset by a decrease of $0.3 million in
Product Information Network marketing expenses. As a percentage of total
revenues, selling and marketing expenses increased from 11% for the three months
ended September 30, 1997 to 12% for the three months ended September 30, 1998.
General and Administrative Expenses--General and administrative expenses
increased $0.9 million, or 81% from $1.1 million for the three months ended
September 30, 1997 to $2.0 million for the three months ended September 30,
1998. The increase is due to (i) an increase of $0.7 million due to the
acquisition of MediaAmerica and (ii) an increase of $0.4 million in amortization
expenses related to the amortization of subscriber incentive payments and
goodwill related to the acquisition of MediaAmerica. The increase was partially
offset by a decrease in general and administrative expenses due to Company cost
reduction efforts. As a percentage of total revenues, general and administrative
expenses increased from 13% for the three months ended September 30, 1997 to 18%
for the three months ended September 30, 1998.
Total Other Expense--Total other expense increased $2.1 million, or 150%,
from $1.4 million as reported for the three months ended September 30, 1997 to
$3.5 million for the three months ended September 30, 1998. This increase is due
primarily to (i) a $0.6 million write off of capitalized loan fees related to
the credit facility, (ii) an increase of $2.6 million in interest expense
related to the offering by the Company of $100 million of 11 3/4% Senior Secured
Notes in July 1998 (the "Notes"), an increase of $0.2 million related to the
amortization of deferred debt offering costs, (iii) an increase of $0.2 million
in interest expense related to other debts and (vi) and increase of $0.3
26
million of non-recurring expenses related to the Notes offering. This increase
was offset by a decrease of $1.3 million in interest expense related to the
prepayment of capital leases and other debt.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Total Revenues--Total revenues increased $3.9 million, or 18%, from $21.1
million for the nine months ended September 30, 1997 to $25.0 million for the
nine months ended September 30, 1998. This increase was due primarily to (i) the
acquisition of MediaAmerica, (ii) an increase in Great American Country
advertising revenues and (iii) revenues resulting from the consolidation of the
PIN Venture.
Radio Programming Revenues--Radio programming revenues decreased $1.2
million, or 16%, from $7.8 million for the nine months ended September 30, 1997
to $6.6 million for the nine months ended September 30, 1998, due to a $1.7
million, or 24%, decrease in advertising revenues. Sales of radio advertising
for the first nine months of 1998 have been adversely affected by the January
1998 entry of AMFM into the market, which added approximately 20% more radio
advertising inventory to the marketplace, thereby increasing competition for
network radio advertising dollars. Additionally, AMFM has been able to shift the
focus of network radio advertisers to its radio network which delivers larger
market radio stations as compared to the radio stations delivered by the
Company's radio network. During the first nine months of 1998, the Company
realized lower rates, as compared to 1997. AMFM's entry into the marketplace, as
well as the increased amount of advertising inventory in the marketplace, will
continue to have a negative impact on the Company's advertising spot rates in
the fourth quarter of 1998 and into 1999. The decrease was partially offset by
the elimination of $0.4 million in advertising sales representation selling
commission costs (contra revenues) charged by MediaAmerica. Licensing revenues
remained relatively stable reflecting the Company's strategy to focus on radio
station affiliates with significant audiences, which are generally not charged a
license fee.
As a result of the changes occurring in the marketplace, the Company is
focusing on increasing the amount it receives per radio advertising spot and its
sellout percentage. Historically, the Company has sold its advertising to
traditional network advertisers. With the recent shift in the radio advertising
market, the Company is concentrating its efforts on advertisers that have
targeted the specific demographics that the Company's programming serves. There
can be no assurance that this strategy will be successful in increasing radio
programming revenues.
Radio Advertising Representation Revenues--As the result of the acquisition
of MediaAmerica, the Company generated radio representation revenues of $2.4
million for the three months ended September 30, 1998. On a historical basis,
MediaAmerica's revenues decreased $1.4 million, or 13%, from $10.5 million for
the nine months ended September 30, 1997 to $9.1 million for the nine months
ended September 30, 1998. In December 1997, MediaAmerica's agreement with its
largest radio advertising representation customer was terminated, and a
termination fee was paid to MediaAmerica in the first half of 1998. MediaAmerica
has continued to provide radio advertising representation services to such
customer in 1998, but the level of advertising sales has declined substantially
from that provided in 1997. AMFM's entry into the marketplace has also
negatively affected MediaAmerica's revenues from representation clients. These
factors have resulted in lower commission revenue generated by MediaAmerica, and
therefore its revenues, for the first nine months of 1998 were lower that than
1997 comparable period.
Television Programming Revenues--Television programming revenues increased
$4.4 million, or 57%, from $7.6 million for the nine months ended September 30,
1997 to $12.0 million for the nine months ended September 30, 1998, due
primarily to: (i) the consolidation of the PIN Venture which for financial
statements reporting purposes resulted in an increase of $3.3 million in
advertising revenues, (ii) an increase of $0.3 million in advertising revenues
on the Product Information Network as a result of the increase in the number of
subscribers receiving its programming, (iii) an increase of $0.6 million in
Great American Country advertising revenues due to higher advertising rates
being charged for airtime as a result of an increase in the number of its
subscribers, and (iv) an increase of $0.2 million in Great American Country
affiliate fees due to an increase in the number of its subscribers paying
affiliate fees.
Satellite Delivery and Production Support Revenues--Satellite delivery and
production support revenues
27
decreased $1.6 million, or 29%, from $5.6 million for the nine months ended
September 30, 1997 to $4.0 million for the nine months ended September 30, 1998
due to (i) the expiration in October 1997 of a third party satellite delivery
and production support services agreement, resulting in a reduction of $2.1
million in satellite delivery revenues, and (ii) the consolidation of the PIN
Venture which for financial statement reporting purposes resulted in the
elimination of $0.4 million in satellite delivery revenues. This decrease was
partially offset by satellite agreement the Company entered into to provide
three digital channels and certain related services to a third party from August
15, 1998 through August 31, 1999, subject to early termination at the option of
the Company. The revenues from this lease and service agreement are $138,000 per
month. In addition, the Company leased the C-4 satellite transponder to a third
party from July 1998 through December 31, 2002. The Company also leased one
digital channel and certain related services to an affiliate from July 1998
through July 1, 2001. These agreements generate revenues of approximately
$160,000 and $97,000 per month, respectively.
Total Operating Expenses--Total operating expenses increased $8.2 million,
or 43%, from $19.0 million for the nine months ended September 30, 1997 to $27.2
million as reported for the nine months ended September 30, 1998. This increase
was due primarily to an increase in radio programming, radio advertising
representation, television programming expenses, selling and marketing expenses
and general and administrative expenses. As a percentage of total revenues,
total operating expenses increased from 90% for the nine months ended September
30, 1997 to 109% for the nine months ended September 30, 1998.
Radio Programming Expenses--Radio programming expenses increased $1.1
million, or 26%, from $4.4 million for the nine months ended September 30, 1997
to $5.5 million for the nine months ended September 30, 1998, due primarily to
an increase in programming production expenses. Programming production expenses
increased approximately $1.1 million due to an increase in the number of formats
and syndicated programs offered by the Company. The Company will be implementing
cost reductions such as consolidating its programming, using voice tracking and
other technologies to reduce programming costs, and reducing overhead. As a
percentage of radio programming revenues, radio programming expenses increased
from 55% for the nine months ended September 30, 1997 to 83% for the nine months
ended September 30, 1998.
Radio Advertising Representation Expenses--As the result of the acquisition
of MediaAmerica, the Company generated radio representation expenses of $0.5
million for the nine months ended September 30, 1998.On a historical basis,
MediaAmerica's operating expenses increased $0.5 million, or 7%, from $7.8
million for the nine months ended September 30, 1997 to $8.3 million for the
nine months ended September 30, 1998 due to an increase in the number of radio
programs offered by MediaAmerica.
Television Programming Expenses--Television programming expenses increased
$4.6 million, or 79%, from $5.8 million for the nine months ended September 30,
1997 to $10.4 million for the nine months ended September 30, 1998, due to the
consolidation of the PIN Venture and the increase in amounts paid to cable
systems receiving the Product Information Network. For the nine months ended
September 30, 1997 and 1998, the PIN Venture made incentive payments of
approximately 60% and 75%, respectively, of its advertising revenues to these
systems. The increase was offset by the decrease in allocation of the satellite
delivery and production support expenses attributable to the Production
Information and the Great American Country Networks. As a percentage of
television programming revenues, television programming expenses increased from
76% for the nine months ended September 30, 1997 to 87% for the nine months
ended September 30, 1998.
Satellite Delivery and Production Support Expenses--Satellite delivery and
production support expenses remained relatively flat at $3.8 million for the
nine months ended September 30, 1997 and 1998. As a percentage of satellite
delivery and production support revenues, satellite delivery and production
support expenses increased from 67% for the nine months ended September 30, 1997
to 95% for the nine months ended September 30, 1998 due to the expiration in
October 1997 of a third party satellite delivery and product support service
agreement. Which Satellite capacity became available due to the expiration of
this agreement was not released until July 1998.
Selling and Marketing Expenses--Selling and marketing expenses increased
$1.0 million, or 44%, from $2.1 million for the nine months ended September 30,
1997 to $3.1 million for the nine months ended September 30, 1998 due to an
increase of $0.6 million in marketing expenditures to increase Great American
Country's
28
distribution, an increase of $0.1 million due to the consolidation of the PIN
Venture and an increase of $0.3 million due to the acquisition of MediaAmerica.
As a percentage of total revenues, selling and marketing expenses increased from
10% for the nine months ended September 30, 1997 to 12% for the nine months
ended September 30, 1998.
General and Administrative Expenses--General and administrative
expenses increased $1.1 million or 37% from $3.0 million for the nine months
ended September 30, 1997 to $4.1 million for the nine months ended September 30,
1998, due primarily to (i) an increase in non-recurring expenses related to the
Notes offering and an (ii) increase of $0.7 million due to the acquisition of
MediaAmerica. As a percentage of total revenues, general and administrative
expenses increased from 14% for the nine months ended September 30, 1997 to 16%
for the nine months ended September 30, 1998.
Total Other Expense--Total other expense increased $1.4 million, or
28%, from $4.9 million for the nine months ended September 30, 1997 to $6.3
million for the nine months ended September 30, 1998. The increase was due to a
write-off of deferred offering costs of $0.9 million in 1997 for which no
similar expense was incurred in the first nine months of 1998, $0.3 million of
expenses incurred in the first half of 1998 related to the MediaAmerica
acquisition and the Notes offering and an increase of $2.4 million in interest
expense related to the Notes.
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. Following the completion of a $100 million Notes
financing in July 1998, the Company had cash and cash equivalents and available
for sale securities of $24.7 million (as of September 30, 1998), including $10.0
million of cash set aside in the Reserve Account to be used solely for payment
of interest on the Notes and acquisitions. The Company will be limited in its
ability to incur additional debt by the terms of the indenture (the "Indenture")
entered into in connection with the offering of the Notes. There can be no
assurance that the Company will have sufficient cash flow from operations after
debt service to support its growth strategies. In addition, there can be no
assurance that the capital resources necessary to accomplish the Company's
growth strategies over the long term will be available, or if available, will be
on terms and conditions acceptable to the Company.
Since its inception, the Company has incurred net losses primarily as
a result of expenses associated with developing and launching its programming
networks. For the nine months ended September 30, 1998, the Company incurred
net losses of $(8.7) million. Net cash used in operating activities for the
nine-month period ended September 30, 1998 was ($7.5) million, as compared with
net cash provided by operations of $6.6 million for the nine months ended
September 30, 1997. Net cash used in operating activities increased for the
nine-month period ended September 30, 1998 because of modest revenue growth and
significantly higher expenses during the period, as described above. Net cash
used in operating activities for the nine month period ended September 30, 1998
includes the net repayment of $7.3 million of advances from Jones International.
Net cash used in financing activities for the nine month period ended
September 30, 1998 was $58.4 million. The Company's financing activities have
consisted primarily of issuance of the Notes ($100 million) and repayments of a
capital lease obligation ($28.8 million) and loans from related parties ($6.6
million).
Effective August 15, 1996, the Company purchased all of the
outstanding common stock of Galactic Radio from Jones Global Group, Inc.
("Global Group"), an affiliate of the Company, for $17.2 million. Global Group
had acquired Galactic Radio from Jones Intercable, a related party, for $17.2
million on September 14, 1996. The Company paid the purchase price to Global
Group using $1.2 million in cash, which was advanced to the Company by Jones
International, with the balance paid in the form of a $16.0 million note.
Effective September 30, 1997, $6.0 million of the $16.0 million note payable to
Global Group was converted into 400,000 shares of the Company's Class B Common
Stock at $15 per share. Effective upon the closing of the offering of the Notes,
the Jones Global Group Note was converted into 666,667 shares of Class A Common
Stock valued at $15 per share.
In July 1998, the Company acquired substantially all of the assets and
liabilities of MediaAmerica. Pursuant to
29
the Acquisition, MediaAmerica received $26.7 million in cash and $6.0 million in
shares of Class A Common Stock of the Company valued at $15 per share.
MediaAmerica also received approximately 142,000 additional shares of Class A
Common Stock, valued at $15 per share, as the estimated working capital
adjustment. calculated on the date of closing In addition, MediaAmerica may
receive as additional consideration in the acquisition up to $5 million in
additional shares of Class A Common Stock, with the excess, if any, to be paid
in cash, pursuant to the terms of an earnout provision.
In March 1998, Radio Holdings entered into a five year $30 million
secured revolving credit facility with a commercial bank. Borrowings of $16.3
million under the credit facility were used to repay a $6.6 million note payable
to Jones Intercable and to repay $9.7 million in advances from Jones
International. In July 1998, the Company terminated this credit facility and
repaid outstanding borrowings using the proceeds from the Notes offering.
The Company has received advances and loans from Jones International
and related companies to fund its operating and investing activities in the
past, but anticipates that Jones International will not make additional advances
to the Company in the future. Outstanding advances from Jones International and
related parties at September 30, 1998 were approximately $2.5 million. The
Company expects to repay these advances with cash flow from operations and/or
available cash balances. Jones International and such related companies are
under no obligation to provide additional advances or loans to the Company.
Until July 1997, the Company had financed its ownership of two analog
satellite transponders through a capital lease agreement that was fully prepaid
in July 1997 with $27.6 million of the proceeds of the Notes offering. The
channel capacity on one satellite transponder has been digitally compressed to
seven channels, four of which are currently leased to Product Information
Network, Great American Country and two related parties. This transponder could
now be digitally compressed into additional channels if demand warranted. The
Company recently leased the other three digital channels and certain related
services until August 31, 1999, subject to early termination at the option of
the Company. The revenues from this lease and service agreement are $138,000 per
month. In addition, the Company has leased the C-4 satellite transponder to a
third party beginning July 1998, and one digital channel and certain related
services to an affiliate beginning July 1998. These agreements generate
revenues of approximately $160,000 and $97,000 per month, respectively.
Pursuant to the terms of one GAC Equity Agreement, an MSO was granted
a put option in respect of the shares of Class A Common Stock that may be issued
to it under such agreement. The put option provides that, if as of December 31,
2001, the Company or its successor has not completed a public offering of its
securities, the MSO may, within 60 days of such date require the Company to
purchase its Class A Common Stock at a price equal to all or a portion of the
license fees that would have been paid during the period between the date of the
agreement and the exercise date of the put option. The purchase price would be
based on the total number of MSO subscribers receiving Great American Country as
of December 31, 1998. In the event the MSO provides the full number of
subscribers committed under the agreement by December 31, 1998, the estimated
purchase price of the Class A Common Stock in the event the put option is
exercised would be approximately $1,300,000. The Company intends to continue to
enter into similar arrangements in the future, to the extent permitted under the
terms of the Indenture.
The Company depends, and will continue to depend, significantly upon
the earnings and cash flows of, and dividends and distributions from, its
subsidiaries to pay its expenses, meet its obligations and pay interest and
principal on the Notes and its other indebtedness. While the terms of the
Company's joint ventures (including the PIN Venture) generally require the
mutual consent of the Company and its joint venture partners to distribute or
advance funds to the Company, there are no significant contractual restrictions
on distributions from each of the Subsidiary Guarantors (as defined in the
Indenture) to the Company. Management believes that the proceeds from the Notes
and operating cash flow, including the cash flows of, and dividends and
distributions from its subsidiaries, will be sufficient to fund the Company's
cash flow requirements through December 31, 1999. The Company deposited $10.0
million of the proceeds of the offering of the Notes in a Reserve Account which
will be used for payment of principal of and interest on the Notes ($11.8
million per year) and for acquisitions. However, payment of interest for the
full term of the Notes will require an increase in cash flows from operations,
which will continue to be affected by various factors discussed herein.
30
In May 1998, BCI Telecom Holding Inc. ("BTH") announced its intention
to sell approximately half of its shares of Intercable's Class A Common Stock to
Comcast Corporation ("Comcast"). BTH also announced its intention to grant to
Comcast the right to acquire all of the Common Stock held by International and
its affiliates from BTH if and when BTH exercises its option to purchase such
shares in 2001. BTH also announced its intention to sell to Comcast at the time
that the option is exercised its remaining holdings of Intercable's Class A
Common Stock.
On August 12, 1998, Intercable, International, BTH and Comcast
announced that agreements had been entered into that accelerated the exercise of
the option by Comcast, and allow for the early closing of the transaction
between Comcast and BTH. Upon the transfer of a controlling interest in
Intercable from International and its affiliates to Comcast, Jones Intercable
will no longer share in many of the administrative and related expenses which
have historically been shared by the various entities affiliated with Mr. Jones,
including the Company. Because Jones Intercable is the largest of such sharing
entities, its exclusion from the allocation process will cause the Company to
incur material increases beginning in the second quarter of 1999 in certain
overhead and related costs, including computer services, insurance, and
personnel costs for accounting, legal, risk management and human resources
services.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is the result of many computer programs being
written such that they will malfunction when reading a year of "00." This
problem could cause system failure or miscalculations causing disruptions of
business processes.
Jones Intercable initiated an assessment of how the Year 2000 problem
could affect its operations and the operations of related companies in the
summer of 1997 and established a Y2K Office to manage the process for all Jones
companies. A subsidiary of the Company provides computer hardware and software
services to the Company and related parties, including Jones Intercable, which
is the largest user of these services. The Y2K Office meets regularly with a
review committee that includes the Controller of the Company.
During 1997, the Y2K Office conducted Year 2000 awareness sessions
within the Company and developed a comprehensive inventory of computer systems
and computer-controlled devices that are potentially affected by the Year 2000
issue. Then, the Y2K Office prepared a risk assessment profile to identify Year
2000 priorities by analyzing and determining whether the Year 2000 related risks
were low, medium or high and whether the business impact would be marginal,
manageable, critical or fatal for each system and device that may be affected by
the Year 2000 issue. Based on its risk assessment profile, the Y2K Office
analyzed the various systems and devices and determined whether to retire,
repair/correct, replace/upgrade or ignore those that posed Year 2000 issues.
The Company determined that its first priority would be operational
support/facility systems and then all other systems thought to be non-compliant.
31
The Y2K Office is currently implementing the steps needed to address
the Year 2000 problem based upon its set priorities and is testing the
implemented solutions. The Y2K Office's schedule for implementing and testing
its Year 2000 solutions for systems that have been determined to be first
priority for the Company is as follows:
Expected
Completion
Project Description Date
- ------- ----------- ----------
Financial Information Management
System.................................... Test for Y2K compliance 1Q99
Human Resources Information
System.................................... Test for Y2K compliance 2Q99
Unix Hardware and Software................. Upgrade to Y2K compliant releases
and test for compliance 1Q99
Local Area Network ("LAN") and
Wide Area Network ("WAN")
Components................................ Determine which components are not Y2K
compliant 1Q99
LAN/WAN Hardware and
Software.................................. Upgrade to Y2K compliant releases and
test for compliance 2Q99
Telephony Systems.......................... Upgrade to Y2K compliant releases and
test for compliance 1Q99
PIN Network Traffic and Billing
System.................................... Y2K certification testing 1Q99
In 1999, the Y2K Office will focus on Year 2000 compliance issues with
respect to other systems, such as desktop hardware and software, data archiving
systems, traffic and billing reconciliation applications and other record
management systems. The Company has not used, and does not plan to employ,
unaffiliated third party verification and validation processes to assure the
reliability of its risk and cost estimates. The Company has not deferred any
other information technology projects due to Year 2000 efforts.
The Y2K Office commenced contacting vendors of application and
operation system software in 1997 and continues to work with vendors through
industry groups focused on Year 2000 issues. The Company has not yet determined
the extent to which it is vulnerable to the failure by vendors and customers
that have a material relationship with the Company to remediate Year 2000
compliance issues. Management believes, but makes no assurance, that the
Company does not supply to third parties systems or equipment that may cause a
Year 2000 problem.
The Company has not incurred any material historical Year 2000 costs
to date. Management does not have an estimate for future Year 2000 project
costs that may be incurred. Management expects, but makes no assurance that,
future Year 2000 project costs will not have a material adverse effect on its
financial condition and results of operations.
The Company has not yet formulated contingency plans in the event that
systems are not Year 2000 compliant. The Company recognizes the need for a
contingency plan and plans to develop one by the first quarter of 1999. There
can be no assurance that the Company's systems will be Year 2000 compliant in
time. The Year 2000 issue poses many risks for the Company and could materially
adversely affect its financial condition and results of operations.
32
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Market Risk Exposure
Market risk represents the risk of loss that may impact the financial
position, results of operations, or cash flows of the Company due to adverse
changes in financial market prices. The Company is exposed to market risk
through interest rates. This exposure is directly related to its normal funding
and investing activities.
Approximately 2.5 million of the Company's borrowed debt is subject to changes
in interest rates; however, the Company does not use derivatives to manage this
risk. This exposure is linked primarily to the prime rate. The Company
believes that a moderate change in the prime rate would not materially affect
operating results or financial condition of the Company.
Item 5: Other Materially Important Events.
Eric Hauenstein, formerly President/General Manager of the Company's Radio
Network, left the Company on December 4, 1998. His responsibilities will be
assumed by Ron Hartenbaum and others within the Company's Radio Network.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
None
b) Reports on Form 8-K
None
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JONES INTERNATIONAL NETWORKS, LTD.
By: /s/ Jay B. Lewis
Jay B. Lewis
Group Vice President/Finance
(Principal Financial Officer)
Dated: December 15, 1998