1
FORM 10-K/A NO. 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(x) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED MAY 31, 1991
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
---- ----
Commission File No. 0-8947
JONES SPACELINK, LTD.
(Exact name of registrant as specified in its charter)
Colorado 84-0835095
(State of Organization) (IRS Employer
Identification No.)
P,O. Box 3309, Englewood, Colorado 80155-3309
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (303) 792-9191
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Aggregate Market Value as of August 15, 1991 of voting stock held by
non-affiliates:
Class A Common Stock $10,779,484
Shares outstanding of each of the registrant's classes of common stock, as of
August 15, 1991:
Class A Common Stock: 75,939,689 shares
Class B Common Stock: 415,000 shares
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405) is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. --x--
-----
2
ITEM 3. LEGAL PROCEEDINGS
USA NETWORK V. JONES INTERCABLE, INC., ET AL.
Spacelink and Intercable were parties to litigation entitled USA
Network v. Jones Intercable, Inc. et al., in the United States District Court
for the Southern District of New York. In March 1991, Spacelink, Intercable and
USA Network settled their legal dispute and negotiated a long-term affiliation
agreement. The settlement brought to an end the litigation that began in
September 1988 and included a payment by Spacelink of approximately $468,000
and a payment by Intercable of approximately $6,184,000 and the restoration of
USA Network to the communities served by cable television systems owned or
managed by Spacelink and Intercable.
CHARLES R. MARTZ V. JONES SPACELINK, LTD., ET AL.
On April 3, 1991, Charles R. Martz, a former president of Jones Group,
commenced an action in Denver District Court against Spacelink and
International (91 CV 2414). Mr. Martz alleges, inter alia, that he is entitled
to 100,000 shares of the Class A Common Stock of Spacelink. Mr. Martz alleges
that he is entitled to these shares pursuant to a contract dated April 29, 1981
between himself, Spacelink and International and that these shares were
wrongfully cancelled. In his complaint, plaintiff also requests exemplary
damages. Plaintiff has also sued the transfer agent, American Securities
Transfer, Inc.The case is currently in the discovery stage and Spacelink and
International are vigorously defending it. A settlement conference is scheduled
during September 1991.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Spacelink's Class A Common Stock, par value $.01 per share, is traded
in the over-the-counter market and is authorized for quotation on the automated
quotations system operated by the National Association of Securities Dealers,
Inc. ("NASDAQ") under the symbol SPLKA.
The following table shows the high and low bid prices of Spacelink's
Class A Common Stock as reported on NASDAQ for each of the quarters in
Spacelink's fiscal years 1990 and 1991. There is no established market for
Spacelink's Class B Common Stock, which is unregistered and 100%-owned by
International.
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Quarter Ended
- - -------------
High Low
---- ---
1991 First Quarter 1 3/4 1
Second Quarter 1 9/16
Third Quarter 1 5/8 5/8
Fourth Quarter 1 3/4 1 1/8
1990 First Quarter 3 1/4 2 5/8
Second Quarter 3 1 7/8
Third Quarter 2 1/8 1 3/8
Fourth Quarter 1 3/4 1
At May 31, 1991, the Class A Common Stock of Spacelink was held by
approximately 580 shareholders of record. All of Spacelink's Class B Common
Stock, which is entitled to elect 75% of the Board of Directors, is held by
International, whose sole shareholder is Glenn R. Jones, Chief Executive
Officer and Chairman of the Board of Directors of Spacelink.
Spacelink has never paid a cash dividend with respect to its shares of
Class A Common Stock or Class B Common Stock. The policy of Spacelink's Board
of Directors is to retain earnings to provide funds for the operation and
expansion of its business, and the Board of Directors does not foresee the
payment of cash dividends in the near future. Future dividends, if any, will be
determined by the Board of Directors in light of the circumstances then
existing, including Spacelink's earnings and financial requirements and general
business conditions. Spacelink's credit agreements restrict the right of
Spacelink to declare and pay cash dividends without the consent of the lenders.
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ARTHUR ANDERSEN & CO.
DENVER, COLORADO
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Jones Spacelink, Ltd.:
We have audited the accompanying consolidated balance sheets of JONES
SPACELINK, LTD. (a Colorado corporation and a majority-owned subsidiary of
Jones International, Ltd.) and subsidiaries as of May 31, 1991 and 1990, and
the related consolidated statements of income, shareholders' investment and
cash flows for each of the three years in the period ended May 31, 1991. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Jones Spacelink,
Ltd. and subsidiaries as of May 31, 1991 and 1990, and the results of their
operations and their cash flows for each of the three years in the period ended
May 31, 1991, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSON & CO.
ARTHUR ANDERSEN & CO.
Denver, Colorado,
August 16, 1991
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CONSOLIDATED BALANCE SHEETS Jones Spacelink, Ltd.
As of May 31, 1991 and 1990 and Subsidiaries
ASSETS 1991 1990
-------- --------
(In Thousands)
CASH AND CASH EQUIVALENTS $ 4,101 $ 7,699
RECEIVABLES:
Trade receivables, net of allowance for doubtful accounts of $511,000
in 1991 and $256,000 in 1990 3,982 3,196
Affiliated entities, net of allowance for doubtful accounts of
$814,000 in 1991 and $-0-in 1990 12,093 15,473
Other 2,084 1,812
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property, plant and equipment, at cost, net of accumulated
depreciation of $65,717,000 in 1991 and $41,973,000 in 1990 200,662 190,965
Franchise costs, net of accumulated amortization of $53,984,000 in
1991 and $36,655,000 in 1990 98,538 117,233
Subscriber lists, net of accumulated amortization of $17,035,000 in
1991 and $11,493,000 in 1990 27,627 33,170
Costs in excess of interests in net assets purchased, net of
accumulated amortization of $3,076,000 in 1991 and $1,926,000 in
1990 44,888 48,313
Noncompete agreements, net of accumulated amortization of $971,000 in
1991 and $641,000 in 1990 1,248 1,577
Investments in cable television limited partnerships and corporate
stock 61,109 28,758
-------- --------
Total Investment in Cable Television Properties 434,072 420,016
-------- --------
DEPOSITS, PREPAID EXPENSES AND OTHER ASSETS:
Investment in cable television systems held for resale to managed
limited partnerships 1,544 92,245
Deposits, prepaid expenses and other 16,737 24,617
-------- --------
Total Assets $474,613 $565,058
======== ========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
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CONSOLIDATED BALANCE SHEETS Jones Spacelink, Ltd.
As of May 31, 1991 and 1990 and Subsidiaries
LIABILITIES AND SHAREHOLDERS' INVESTMENT 1991 1990
-------- --------
(In Thousands)
LIABILITIES:
Accounts payable and accrued liabilities $ 32,493 $ 31,620
Subscriber prepayments and deposits 4,596 3,662
Credit facility of Jones Intercable, Inc. 82,300 117,000
Subordinated debentures and other debt of Jones Intercable, Inc. 263,378 295,695
Credit facility and other debt of Jones Spacelink, Ltd. 69,307 60,467
-------- --------
Total Liabilities 452,074 508,444
DEFERRED REVENUE AND INCOME 24,370 4,367
DEFERRED INCOME TAXES -- 862
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES 188 29,456
COMMITMENTS AND CONTINGENCIES (Note 13)
SHAREHOLDERS' INVESTMENT (DEFICIT):
Class A Common Stock, $.01 par value and a $1.00 liquidation
preference, 110,000,000 shares authorized; 75,889,689 and
62,308,460 shares issued and outstanding at May 31, 1991 and
1990, respectively 759 623
Class B Common Stock, $.01 par value and a $1.00 liquidation
preference after liquidation preference to Class A Common Stock,
415,000 shares authorized, issued and outstanding 4 4
Additional paid-in capital 36,513 35,825
Accumulated deficit (35,853) (12,047)
Less: Treasury stock of Jones Intercable, Inc. at cost, net of
minority interests (3,442) (2,476)
-------- --------
Total Shareholders' Investment (Deficit) (2,019) 21,929
-------- --------
Total Liabilities and Shareholders' Investment $474,613 $565,058
======== ========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
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CONSOLIDATED STATEMENTS OF INCOME Jones Spacelink, Ltd.
For the years ended May 31, 1991, 1990 and 1989 and Subsidiaries
1991 1990 1989
-------- -------- --------
(In Thousands, Except Per Share Data)
REVENUES:
Subscriber service fees $ 96,511 $ 80,710 $ 59,402
Management fees 16,153 14,895 12,750
Brokerage fees 2,486 10,362 5,091
Partnership fees, distributions and other 3,471 9,919 954
-------- -------- --------
Total Revenues 118,621 115,886 78,197
COSTS AND EXPENSES:
Operating, general and administrative expenses, including
amounts allocated from Jones International, Ltd. of
$3,177,000, $3,876,000 and $2,719,000 in 1991, 1990
and 1989, respectively (66,517) (55,471) (42,987)
Depreciation and amortization (47,341) (42,043) (34,784)
-------- -------- --------
Operating income 4,763 18,372 426
OTHER INCOME (EXPENSE):
Interest expense (51,393) (59,661) (44,236)
Interest charged to cable television systems held for
resale to managed limited partnerships 4,598 13,897 2,042
Equity in losses of limited partnership and affiliated
companies (12,002) (4,572) (3,101)
Interest income 2,331 2,453 6,686
Litigation settlement (3,413) -- --
Other, net (937) 15 553
-------- -------- --------
Loss Before Income Tax Benefit, Minority
Interests and Extraordinary Item (56,053) (29,496) (37,630)
INCOME TAX BENEFIT 1,112 8,506 13,100
-------- -------- --------
Loss Before Minority Interests and Extraordinary
Item (54,941) (20,990) (24,530)
MINORITY INTERESTS IN NET (INCOME) LOSS OF CONSOLIDATED
SUBSIDIARIES 30,376 15,695 18,153
-------- -------- --------
Loss Before Extraordinary Item (24,565) (5,295) (6,377)
EXTRAORDINARY ITEM:
Gain (loss) on early extinguishment of debt by Jones
Intercable, Inc., net of related income tax
(provision) benefit of $-0-in 1991 and $1,027,000 in
1990, respectively, and net of minority interests 2,789 (457) --
-------- -------- --------
Net Loss $(21,776) $ (5,752) $ (6,377)
======== ======== ========
PER SHARE DATA:
Loss before extraordinary item $ (.32) $ (.07) $ (.09)
Effect of extraordinary item .03 (.01) --
-------- -------- --------
Net Loss Per Common Share $ (.29) $ (.08) $ (.09)
======== ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 76,305 76,262 73,314
======== ======== ========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
-67-
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT Jones Spacelink, Ltd.
For the years ended May 31, 1989, 1990 and 1991 and Subsidiaries
Class A Class B Additional Total Shareholders'
Common Stock Common Stock Paid-in Accumulated Treasury Investment
($.01 par value) ($.01 par value) Capital Deficit Stock (Deficit)
---------------- ---------------- ---------- ----------- -------- -------------------
(In Thousands)
BALANCE, May 31, 1988 $563 $ 4 $ 23,148 $ 5,582 $(2,512) $ 26,785
Issuance of common stock by
Jones Intercable, Inc., net
of minority interests -- -- 149 -- -- 149
Effects of the change in
minority interests -- -- (74) (48) -- (122)
Issuance of Jones Spacelink,
Ltd. Class A Common Stock to
officers, employees and
others 2 -- 128 -- -- 130
Issuance of Jones Spacelink,
Ltd. Class A Common Stock
for Hilo, Hawaii System
merger 30 -- 6,345 -- -- 6,375
Issuance of Jones Spacelink,
Ltd. Class A Common Stock to
Jones International, Ltd.,
in exchange for additional
20.1 percent interest in the
Jones Group, Ltd. 28 -- 5,972 (4,747) -- 1,253
Treasury stock transactions of
Jones Intercable, Inc., net
of minority interests -- -- -- (50) (13) (63)
Net Loss -- -- -- (6,377) -- (6,377)
--
---- --- -------- --------- ------- ---------
BALANCE, May 31, 1989 623 4 35,668 (5,640) (2,525) 28,130
---- --- -------- --------- ------- ---------
Issuance of common stock by
Jones Intercable, Inc., net
of minority interests -- -- 185 -- -- 185
Effects of the change in
minority interests -- -- (78) (11) -- (89)
Issuance of Jones Spacelink,
Ltd. Class A Common Stock to
officers, employees and
others -- -- 50 -- -- 50
Treasury stock transactions of
Jones Intercable, Inc., net
of minority interests -- -- -- (32) 49 17
Dividends paid to Jones
International, Ltd. by The
Jones Group, Ltd. -- -- -- (612) -- (612)
Net Loss -- -- -- (5,752) -- (5,752)
--
---- --- -------- --------- ------- ---------
BALANCE, May 31, 1990 623 4 35,825 (12,047) (2,476) 21,929
---- --- -------- --------- ------- ---------
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT Jones Spacelink, Ltd.
For the years ended May 31, 1989, 1990 and 1991 and Subsidiaries
Total
Class A Class B Additional Shareholders'
Common Stock Common Stock Paid-in Accumulated Treasury Investment
($.01 par value) ($.01 par value) Capital Deficit Stock (Deficit)
---------------- ---------------- ---------- ----------- -------- -------------
(In Thousands)
BALANCE, May 31, 1990 $ 623 $ 4 $ 35,825 $ (12,047) $ (2,476) $ 21,929
Issuance of common stock by
Jones Intercable, Inc., net
of minority interests -- -- 16 -- -- 16
Effects of the change in
minority interests -- -- 421 (252) -- 169
Issuance of Jones Spacelink,
Ltd. Class A Common Stock
for Galactic Radio, Inc.
acquisition 136 -- 251 41 -- 428
Investment in Galactic Radio,
Inc. by Jones Intercable,
Inc., net of minority
interests -- -- -- (1,052) -- (1,052)
Investment in International
Aviation, Inc. by Jones
Intercable, Inc., net of
minority interest -- -- -- (423) -- (423)
Treasury stock transactions of
Jones Intercable, Inc., net
of minority interests -- -- -- -- (966) (966)
Dividends paid to Jones
International, Ltd. by The
Jones Group, Ltd. -- -- -- (344) -- (344)
Net Loss -- -- -- (21,776) -- (21,776)
--
------ --- -------- --------- -------- ---------
BALANCE, May 31, 1991 $ 759 $ 4 $ 36,513 $ (35,853) $ (3,442) $ (2,019)
====== === ======== ========= ======== =========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
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CONSOLIDATED STATEMENTS OF INCOME Jones Spacelink, Ltd.
For the years ended May 31, 1991, 1990 and 1989 and Subsidiaries
1991 1990 1989
--------- --------- ---------
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (21,776) $ (5,752) $ (6,377)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Extraordinary (gain) loss on early extinguishment of debt by Jones
Intercable, Inc., net of related income taxes and minority interests (2,789) 457 --
Minority interests in net income (loss) of consolidated subsidiaries (30,376) (15,695) (18,153)
Depreciation and amortization 47,341 42,043 34,784
Deferred income taxes (862) (2,405) (8,067)
Deferred fees and distributions 20,373 -- 11,654
Recognition of deferred revenue and income (370) (353) (375)
Equity in losses of limited partnerships and affiliated companies 12,002 4,572 3,101
Amortization of discounts on debentures 860 951 1,118
Increase in trade receivables (609) (1,172) (1,205)
Decrease (increase) in other receivables, and deposits, prepaid expenses
and other assets 6,968 2,207 (6,799)
Increase in accounts payable and accrued liabilities and subscriber
prepayments and deposits 581 7,363 6,040
--------- --------- ---------
Net cash provided by operating activities 31,343 32,216 15,721
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of cable television systems by Jones Intercable, Inc. -- (4,139) (101,394)
Purchase of cable television systems by Jones Spacelink, Ltd. -- (37,945) (987)
Purchase of property, plant and equipment, net (30,737) (32,429) (39,945)
Sales of cable television systems held for resale to managed limited
partnerships and other affiliated entities 96,950 164,919 50,064
Sales of cable television systems to managed limited partnerships -- -- 2,420
Investment in cable television systems held for resale to limited
partnerships (6,249) (257,164) (50,064)
Investments in cable television limited partnerships and corporate stock (44,760) (13,806) (3,363)
Investment in International Aviation, Ltd. and Galactic Radio, Inc. by Jones
Intercable, Inc. (5,241) -- --
Increase in deferred revenue and income -- 533 2,371
Other, net 5,985 385 1,143
--------- --------- ---------
Net cash provided by (used in) investing activities 15,948 (179,646) (139,755)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale and issuance of Class A Common Stock of Jones Intercable,
Inc., net of minority interests 16 185 149
Effects on shareholders' investment of changes in minority interests 169 693 1,131
Payment of dividends to Jones International, Ltd. by The Jones Group, Ltd. (344) (612) --
Proceeds from borrowings, primarily by Jones Intercable, Inc. 89,035 307,822 17,600
Proceeds to Jones Intercable, Inc. from issuance of debentures, net -- -- 141,989
Repayment of borrowings, primarily by Jones Intercable, Inc. (115,371) (153,972) (21,080)
Redemption of debentures by Jones Intercable, Inc. including loss on early
extinguishment (20,749) (33,000) --
Decrease (increase) in advances to affiliated entities 2,627 (11,644) 9,880
Decrease (increase) in minority interests in consolidated subsidiaries (3,793) (121) (1,511)
Sale (purchase) of treasury stock by Jones Intercable, Inc., net of minority
interests (966) 49 (18)
Other, net (1,513) 525 (390)
--------- --------- ---------
Net cash provided by (used in) financing activities (50,889) 109,925 147,755
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,598) (37,505) 23,721
CASH AND CASH EQUIVALENTS, AT BEGINNING OF YEAR 7,699 45,204 21,483
--------- --------- ---------
CASH AND CASH EQUIVALENTS, AT END OF YEAR $ 4,101 $ 7,699 $ 45,204
========= ========= =========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
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JONES SPACELINK, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1991, 1990 AND 1989
(1) ORGANIZATION AND BASIS OF PRESENTATION, BUSINESS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES:
Organization and Basis of Presentation
Jones Spacelink, Ltd. ("Spacelink") was incorporated on March 24,
1980, and since its inception has been majority-owned by Jones
International, Ltd. ("International"), whose sole shareholder is Glenn
R. Jones, Chief Executive Officer and Chairman of the Board of
Directors of Spacelink. As of May 31, 1991, International, Glenn R.
Jones and certain of their affiliates owned 66,278,857 shares, or
approximately 87 percent of Spacelink's outstanding Class A Common
Stock and 415,000 shares, or 100 percent, of Spacelink's outstanding
Class B Common Stock.
As of May 31, 1991, Spacelink had authorized 110,000,000 shares of
Class A Common Stock and 415,000 shares of Class B Common Stock. In
July 1991, Spacelink's shareholders approved an amendment to
Spacelink's articles of incorporation to increase the number of
authorized shares of Class A Common Stock from 110,000,000 shares to
220,000,000 shares. Neither class has a preference with respect to
dividends or upon liquidation. At May 31, 1991, certain provisions of
Spacelink's credit agreements restrict it from paying cash dividends.
With respect to voting matters not requiring a class vote, the holders
of the Class A Common Stock and the holders of the Class B Common
Stock vote as a single class provided, however, that holders of Class
B Common Stock have one vote for each share and holders of Class A
Common Stock have one-twentieth of one vote for each share. In
addition, with respect to the election of directors, the holders of
Class A Common Stock, voting as a separate class, are entitled to
elect that number of directors which constitutes 25 percent of the
total membership of the Board of Directors.
Spacelink's consolidated financial statements include the accounts of
Jones Futurex, Inc. ("Futurex") and Spacelink's other wholly owned
subsidiaries, as well as the accounts of its other subsidiaries: The
Jones Group, Ltd. ("Jones Group"), Jones Galactic Radio, Inc.
("Galactic Radio") and Jones Intercable, Inc. ("Intercable"). At May
31, 1991, Spacelink owned directly 80.1 percent and indirectly an
additional 4.9 percent of the Common Stock of Jones Group, 81 percent
of Galactic Radio, and approximately 58 percent of the outstanding
Common Stock (24 percent of both classes of outstanding shares) of
Intercable.
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Spacelink's majority ownership of Intercable's Common Stock enables it
to elect approximately 75 percent of Intercable's Board of Directors.
Although Spacelink effectively controls Intercable through its ability
to control the election of 75 percent of Intercable's Board of
Directors, certain loan agreements of Intercable generally restrict it
from transferring funds to Spacelink in the form of cash dividends,
loans, advances or in any other form. Therefore, as a result of these
restrictions, the net assets of Intercable are not available to
Spacelink to fund its operating or capital needs. In addition,
Spacelink bears no responsibility for the outstanding obligations,
commitments or contingencies of Intercable. However, these
restrictions will not impair the ability of Spacelink to pledge its
equity holdings in Intercable, although any such pledge is subject to
the express approval of Spacelink's and Intercable's Chief Executive
Officer and Chairman of the Board, Glenn R. Jones, or his personal
representative.
During fiscal 1991, Intercable recognized net losses, in part because
of depreciation and amortization expenses and from the deferral of
certain partnership fees and distributions, which at May 31, 1991
caused the minority interests in the net losses of Intercable to
exceed the minority interests in the equity capital of Intercable. As
required by generally accepted accounting principles, the minority
interest in the net losses of Intercable in excess of the minority
interest in the equity capital of Intercable must be charged to
Spacelink. As a result, during fiscal 1991, Spacelink recorded losses
of $7,170,000 in excess of its approximately 24 percent interest in
Intercable's fiscal 1991 net loss.
Spacelink anticipates that during fiscal 1992 Intercable will
recognize net income, primarily as a result of the transactions
described in Note 15. Depending upon the level of net income recorded
by Intercable in 1992, all or a portion of the $7,170,000 of excess
losses recorded by Spacelink in fiscal 1991 may be charged to the
minority interests in Intercable during 1992. Any amounts not charged
to the minority interests in fiscal 1992 may be charged to the
minority interests in future years depending upon the level of net
income, if any, of Intercable.
Business
Spacelink, Intercable and certain of their wholly owned subsidiaries
own and operate cable television systems. These entities also manage
cable television systems owned by private and public limited
partnerships for which they are general partner.
Jones Group is a cable television system brokerage company which
performs brokerage services primarily for Spacelink, Intercable and
their managed limited partnerships. For acting as the broker in
acquisitions for these entities, Jones Group generally earns fees
which range from 1.5 percent to 4 percent of the lower of the purchase
price or appraised value of the properties acquired from unaffiliated
entities. In addition, Jones Group generally earns brokerage fees
which range from 1.25 percent to 2.5 percent of the sales price as
compensation for brokering the sale of cable television systems to
unrelated parties for these entities.
Futurex is engaged in the business of developing and manufacturing
security products which provide encrypt/decrypt and message
authentication capabilities for remote-site personal computers. The
security products are sold primarily to the financial community.
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Galactic Radio, through a subsidiary, is in the audio programming
business. It is in a partnership with an unaffiliated party, which
provides satellite-delivered audio services to cable television system
operators ("Superaudio"). It is also in the business, through Jones
Satellite Audio, an affiliate, of delivering programming to radio
stations throughout the United States via satellite ("Satellite
Audio").
Summary of Significant Accounting Policies
Statements of Cash Flows - For purposes of reporting cash flows, cash
and cash equivalents, which principally relate to Intercable, include
cash on hand, amounts due from banks and all highly liquid debt
instruments purchased with a maturity of three months or less, when
acquired.
Supplemental disclosures of amounts paid for income taxes and interest
during the years ended May 31, 1991, 1990 and 1989 are as follows:
1991 1990 1989
-------- ------- -------
(In Thousands)
Income taxes $ 132 $ 2,062 $ 2,595
======= ======= =======
Interest, net of amounts charged to cable
television systems held for resale $48,214 $43,683 $40,694
======= ======= =======
Supplemental disclosures of noncash investing and financing activities
for the years ended May 31, 1991, 1990 and 1989 are as follows:
As described in Note 4, in July 1990, Spacelink acquired 81 percent of
the Class A and Class B Common Stock of Galactic Radio by issuing
13,581,229 shares of its Class A Common Stock. As a result of the
acquisition, Spacelink acquired assets of $1,019,000, assumed
liabilities totalling $599,000 and acquired equity totalling $428,000.
As described in Note 4, in October 1988, Spacelink consummated a
merger with an unaffiliated cable television company by issuing
approximately 3,000,000 shares of Spacelink's Class A Common Stock to
the existing shareholders of the unaffiliated cable television company
and from borrowings under Spacelink's credit facility. The total
noncash activity for this transaction is as follows:
(In Thousands)
Class A Common Stock issued $ 6,375
Borrowings, brokerage fee and other
merger costs 8,389
-------
Total noncash activity $14,764
=======
Also, as described above and in Note 4, in January 1989, Spacelink
exchanged 2,803,739 of its Class A Common Stock with International for
2,010 shares of common stock of Jones Group.
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Investments in Cable Television Limited Partnerships and Corporate
Stock - Investments in managed limited partnerships and corporate
stock are carried at cost plus equity in profits and losses.
Acquisition Accounting - Spacelink, Intercable and certain of their
wholly owned subsidiaries record the acquisitions of cable television
systems for their own accounts using the purchase method of
accounting.
Plant and Equipment- Prior to receiving the first revenues from
subscribers of a cable television system, all construction costs,
operating expenses and interest related to the system are capitalized.
From the time of such receipt until completion of construction, but no
longer than two years (defined as the "prematurity period"), portions
of certain fixed operating expenses and interest are capitalized in
addition to direct construction costs. The portions capitalized are
decreased as progress is made toward obtaining the subscriber level
expected at the end of the prematurity period, after which no further
expenses are capitalized. No such amounts were capitalized during the
years ended May 31, 1991, 1990 and 1989. In addition, costs (including
labor, overhead and other costs of completion) associated with
installation in homes not previously served by cable television are
capitalized and included as "distribution systems". Replacements,
renewals and improvements are capitalized and maintenance and repairs
are charged to expense as incurred.
Depreciation of property, plant and equipment is provided using the
straight-line method primarily over the following estimated service
lives:
Distribution systems, including capitalized
interest and operating expenses 5-15 years
Buildings 10-20 years
Equipment and tools 3-5 years
Premium service equipment 5 years
Earth receive stations 5-15 years
Vehicles 3-5 years
Leasehold improvements Lesser of term of
lease or 10 years
Other property, plant and equipment 3-15 years
Franchise Costs - Costs incurred in obtaining cable television
franchises and other operating authorities are initially deferred and
amortized using the straight-line method over the life of the
franchises beginning with the dates the related systems become
operational. Franchise rights acquired through purchase of cable
television systems are recorded at estimated fair market value at the
date of the acquisition and are amortized over the remaining terms of
the franchises. Amortization is determined using the straight-line
method over lives of seven to fifteen years.
Costs in Excess of Interests in Net Assets Purchased - The cost of
acquisitions in excess of the fair market values of net assets
acquired is amortized using the straight-line method over a 40-year
life.
Deferred Financing Costs- Costs incurred in connection with the
issuance of subordinated debentures are deferred and amortized using
the effective interest method over the life of such issues.
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Investment in Cable Television Systems Held for Resale to Managed
Limited Partnerships - Revenues and expenses attributable to cable
television systems held on behalf of managed limited partnerships are
not reflected in the consolidated statements of income. Any net cash
deficiency generated by systems held for resale, which is defined as
the excess of operating expenses and interest expense over operating
receipts, is capitalized as carrying costs and included in the amounts
shown as investments in cable television systems held for resale to
managed limited partnerships in the accompanying consolidated balance
sheets.
Recognition of Brokerage Fees - Recognition of brokerage fees earned
upon the acquisition of cable television systems by Spacelink or
Intercable is initially deferred and such fees are recognized as
revenue as the related assets are amortized by Spacelink or
Intercable, or at such time as the cable television systems are
transferred to a non-consolidated entity. Total deferred brokerage
fees at May 31, 1991 and 1990, were approximately $3,827,000 and
$4,197,000, respectively, and are included in deferred revenue and
income in the accompanying consolidated balance sheets. See Note 3 for
further information with respect to brokerage fees earned by Jones
Group.
Recognition of Partnership Fees and Distributions - Partnership fees
and distributions earned by Spacelink or Intercable related to cable
television properties sold to unaffiliated parties are recorded as
revenues when received. Partnership fees and distributions earned by
Spacelink or Intercable as general partner of Spacelink or
Intercable-managed limited partnerships related to cable television
properties purchased by Spacelink or Intercable are treated as a
reduction of the purchase prices of the cable television systems
purchased. Fees and distributions earned by Spacelink or Intercable as
general partner of managed limited partnerships related to cable
television properties sold to entities in which Spacelink or
Intercable have a continuing equity interest are deferred and
recognized as revenue in future periods.
Income Taxes - Spacelink and its consolidated subsidiaries excluding
Intercable are members of a tax allocation agreement with
International and International's other subsidiaries. Pursuant to the
terms of the agreement, tax (provisions) benefits are provided to the
members of the tax sharing group based on their respective pro rata
contribution of taxable (income) loss to International's consolidated
taxable (income) loss.
Intercable files separate Federal and state income tax returns and, as
a result, provides for taxes on a separate-company basis using the
deferred tax method. Amounts shown as deferred income taxes in the
accompanying balance sheets are primarily attributable to Intercable.
Net Loss Per Common Share - Net loss per share is computed based on the
weighted average number of Spacelink's shares of Class A Common Stock
and Class B Common Stock outstanding. Options to purchase shares of
Class A Common Stock have not been included in the computation as the
effect would be either insignificant or anti-dilutive.
Reclassifications - Certain prior year amounts have been reclassified
to conform to fiscal year 1991 presentation.
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(2) TRANSACTIONS WITH AFFILIATED ENTITIES:
International controls various subsidiaries that provide services to
Spacelink and its consolidated subsidiaries and the limited
partnerships for which Spacelink, certain of its wholly owned
subsidiaries and Intercable are general partners (see Note 8). These
entities have had, and will continue to have, certain transactions
with International and its other subsidiaries. Principal recurring
transactions are described below.
Jones Information Management, Inc., a wholly owned subsidiary of
International, provides information management and data processing
services to all entities affiliated with International, including the
entities described above. Charges to the various entities are based on
computer usage by each entity.
International Aviation, Ltd., a wholly owned subsidiary of Intercable,
which was acquired from International in July 1990, owns and operates
the corporate aircraft for all the entities described above and for
International and certain of its subsidiaries. Charges to the various
entities are based on usage of the aircraft by corporate personnel.
Spacelink and certain of its consolidated subsidiaries including
Intercable, are parties to a lease with Jones Properties, Inc., a
wholly owned subsidiary of International, under which they have leased
a 101,500 square foot office building in Englewood, Colorado. The
lease agreement, as amended, has a 15-year term, with three 5-year
renewal options. The annual rent is not to exceed $24.00 per square
foot, plus operating expenses. Spacelink and certain of its
consolidated subsidiaries including Intercable, have subleased
approximately 28 percent of the leased space to International and
certain affiliates of International on the same terms and conditions
as the above-mentioned lease.
The cable television systems owned by Spacelink and Intercable receive
programming from Superaudio, an interest in which was acquired from
International as a part of Spacelink's acquisition of an interest in
Galactic Radio in July 1990 (see Note 4) and from The Mind Extension
University, Inc., which is an 81 percent owned subsidiary of
International. In addition, Spacelink owns the remaining 19 percent of
The Mind Extension University, Inc.
Jones Futura Foundation, Ltd., a wholly owned subsidiary of
International, has licensed to Futurex exclusive rights to
manufacture, market and sell certain data encryption hardware and
software products. The license fee is equal to 10 percent of Futurex's
revenues from the sale of encryption hardware and software products.
Jones International Securities, Ltd., a wholly owned subsidiary of
International ("Jones Securities"), acts as dealer-manager of
substantially all of Spacelink's and Intercable's managed limited
partnership offerings. Generally, the dealer-manager receives fees
which total up to 10 percent of the capital, contributed by the
limited partners, from which all sales commissions of participating
unaffiliated broker-dealers are paid. In addition, Spacelink and its
consolidated subsidiaries including Intercable reimburse Jones
Securities for certain expenses associated with the marketing of
limited partnership interests.
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Certain additional operating, general and administrative expenses
incurred by International and its various subsidiaries, including the
costs of the services described above, are allocated to Spacelink and
its consolidated subsidiaries. A portion of certain of these expenses
are reallocated to managed limited partnerships and the net amounts
are included in operating, general and administrative expenses in the
accompanying consolidated statements of income. Spacelink believes
that the allocation of expenses for services rendered to it by
International are reasonable. Such allocated expenses net of
reimbursements were as follows:
For the Year Ended May 31,
----------------------------------------------
1991 1990 1989
------- ------ ------
(In Thousands)
Jones Information Management, Inc. $ 873 $ 679 $ 551
International Aviation, Ltd. 101 180 142
Jones Properties, Inc., net of
subleasing reimbursements 471 533 481
Superaudio 153 213 168
The Mind Extension University, Inc. 88 80 69
Jones Futura Foundation, Ltd. 163 101 -
Jones International Securities, Ltd. 1,082 2,013 1,304
Other operating, general and
administrative expenses 246 77 4
------ ------ ------
Total allocated expenses net of
reimbursements $3,177 $3,876 $2,719
====== ====== ======
Spacelink and its consolidated subsidiaries including Intercable
reimburse International for certain allocated costs as described
above. In addition, Spacelink and its consolidated subsidiaries
excluding Intercable are allocated tax provisions (benefits) from
International pursuant to a tax allocation agreement with
International. At May 31, 1991 and 1990, amounts due to Spacelink and
its consolidated subsidiaries including Intercable totalled $1,762,000
and $243,000, respectively. The significant increase at May 31, 1991
is primarily the result of 1991 tax benefits due Spacelink totalling
approximately $1,263,000, which benefits will be repaid to Spacelink
subsequent to the filing of International's consolidated income tax
return with the receipt of any income tax refund from the Internal
Revenue Service. While at May 31, 1991 and 1990 amounts were due to
Spacelink from International, generally during fiscal 1991, 1990 and
1989 International had made advances to Spacelink and its consolidated
subsidiaries including Intercable, and in connection with those
advances, during fiscal 1991, 1990 and 1989, Spacelink and its
consolidated subsidiaries including Intercable paid to International
interest in the amount, of $3,000, $159,000 and $47,000, respectively.
Interest was charged on these advances at rates which approximated
International's average borrowing rates during the respective periods.
In January 1991, International borrowed funds from a commercial bank
and secured the borrowing with certain shares of stock of Intercable.
Spacelink and the bank have agreed that in the event of a default by
International under the loan agreement, Spacelink would purchase from
the bank the pledged shares of Intercable at a value equal to the
amount of the default. As consideration for such agreement by
Spacelink, International granted to Spacelink an option to purchase
the shares of Intercable that it had pledged to the bank.
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Also, see Note 8 for other information with respect to transactions
between Spacelink, Intercable and their managed limited partnerships
and see Note 10 for information with respect to income tax provisions
(benefits) between Spacelink and International.
(3) JONES GROUP BROKERAGE FEES AND DIVIDENDS:
As described in Note 1, Jones Group performs brokerage services for
Spacelink, Intercable and their managed limited partnerships.
Brokerage fees earned by Jones Group from these entities are as
follows:
May 31,
-----------------------------------------------
1991 1990 1989
------ ------ ------
(In Thousands)
Earned from Spacelink and Intercable $ 8 $ 541 $2,371
Earned from Managed Limited Partnerships 2,108 10,001 4,717
------ ------- ------
Total Brokerage Fees 2,116 10,542 7,088
Recognition (Deferral) of Brokerage Fees 370 (180) (1,997)
------ ------- ------
Brokerage Fees, net $2,486 $10,362 $5,091
====== ======= ======
During the years ended May 31, 1991, 1990 and 1989, Jones Group paid
dividends to International in the amount of $101,000, $612,000 and
$607,000, respectively.
Jones Group dividends relating to earnings from brokerage fees in
connection with certain purchase and sale transactions which were
pending when Spacelink acquired International's remaining 20.1 percent
interest in the Jones Group in January 1989, will accrue to the
benefit of Spacelink, Intercable and International based on their
respective ownership percentages immediately preceding the January
1989 exchange. All other Jones Group dividends will accrue to the
benefit of Spacelink and Intercable based on their direct equity
ownership of 80.1 and 19.9 percent, respectively.
(4) ACQUISITIONS AND SALES BY SPACELINK:
Acquisition of an 81 Percent Interest in Galactic Radio by Spacelink -
In July 1990, Spacelink issued 13,581,229 shares of its Class A Common
Stock to International in exchange for 51,000 shares of Class A Common
Stock and 51,000 shares of Class B Common Stock of Galactic Radio (the
"Galactic Shares"). The Galactic Shares acquired by Spacelink
represent 81 percent of the outstanding Class A Common Stock and Class
B Common Stock of Galactic Radio. The remaining 19 percent of Galactic
Radio was owned by Glenn R. Jones, Chairman of the Board and Chief
Executive Officer of Spacelink and was transferred to International
and then sold to Intercable on May 31, 1991 (See Note 14). The 81
percent ownership interest in Galactic Radio was valued at
approximately $16,026,000 pursuant to a fair market valuation of
Galactic Radio's properties and business by an independent qualified
appraiser. For purposes of the exchange, the price of Spacelink's
Class A Common Stock was $1.18 per share, which price represented the
average trading price of Spacelink's Class A Common Stock for the
preceding three month period.
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The acquisition of 81 percent of Galactic Radio by Spacelink was
accounted for as a transfer between entities under common control and,
accordingly, the assets transferred are recorded by Spacelink at
International's historical cost. The results of operations of Galactic
Radio are included in Spacelink's Consolidated Statements of Income
for the year ended May 31, 1991, beginning on the July 1, 1990
exchange date. For comparative purposes, the per share data and
weighted average number of common shares outstanding have been
restated to reflect the additional shares outstanding.
Acquisition of Kenosha, Wisconsin Cable Television System
by Spacelink-
In July 1989, Spacelink entered into an agreement with Total TV of
Kenosha, an affiliated partnership managed by Intercable, to acquire
for Spacelink's own account the cable television system serving the
area in and around the municipalities of Kenosha, Pleasant Prairie and
Somers, all in the State of Wisconsin (the "Kenosha System") for
approximately $37,945,000, which price represents the contract
purchase price, the reimbursement of capital expenditures totalling
approximately $74,000 from the contract date to the closing date, a
brokerage fee and certain other acquisition costs. The purchase price
was determined on the basis of the average of three separate
independent appraisals of the fair market value of the Kenosha System
and was the highest bid received in a public bidding process. Closing
of the Kenosha System occurred in September 1989. Jones Group received
a fee from Spacelink of approximately $374,000 for brokering the
acquisition. Spacelink financed the acquisition from the proceeds of
borrowings under its credit facility.
The following reflects the pro forma effect of the acquisition by
Spacelink of the Kenosha System on the consolidated results of
operations of Spacelink and its subsidiaries for the year ended May
31, 1990, assuming the acquisition had occurred as of the beginning of
the period.
For the
year ended
For the year ended May 31, 1990 May 31, 1991
---------------------------------------- ------------
As Pro Forma Pro Forma As
Reported Adjustments Balance Reported
-------- ----------- --------- --------
(In Thousands, except Per Share Data)
Revenues $115,886 $ 2,076 $117,962 $118,621
Depreciation and
Amortization $(42,043) $(1,376) $(43,419) $(47,341)
Operating Income (Loss) $ 18,372 $ (735) $ 17,637 $ 4,763
Net Loss $ (5,752) $(1.856) $ (7,608) $(21,776)
Net Loss per Common Share $ (.08) $ (.02) $ (.10) $ (.29)
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Acquisition of Futurex by Spacelink-
In July 1989, Spacelink issued 1,500,000 shares of Class A Common
Stock to International for all of the outstanding Class A and Class B
Common Stock of Futurex. In addition, the agreement between Spacelink
and International provided that an additional 500,000 shares of
Spacelink's Class A Common Stock will be issued to International on
the fifth anniversary of the date of the agreement if Futurex achieves
certain levels of cash flow. For purposes of the transaction, Futurex
was valued at $6,000,000, which amount was negotiated between
Spacelink's Board of Directors and International and represented a
discount of approximately 28 percent from the estimated fair market
valuation of Futurex's properties and business made by an independent
appraiser. In addition, Spacelink's Class A Common Stock was valued at
$3.00 per share, which represented the approximate market price of
Class A Common Stock prior to the transaction.
The acquisition of Futurex by Spacelink was accounted for as a
transfer between entities under common control, and accordingly, the
assets and liabilities transferred have been recorded by Spacelink at
historical costs.
Acquisition at Additional 20.1 Percent Interest in Jones Group by
Spacelink-
In January 1989, Spacelink exchanged with International 2,803,739
shares of Spacelink's Class A Common Stock for 2,010 shares of Common
Stock of Jones Group held by International, which shares represent a
20.1 percent interest in Jones Group. The acquisition was accounted
for as a transfer between entities under common control, and
accordingly, the assets and liabilities so transferred have been
recorded by Spacelink at historical cost. For financial reporting
purposes, the excess consideration paid over the historical cost of
the assets acquired, totalling approximately $5,997,000, has been
charged to the retained earnings of Spacelink in the accompanying
consolidated balance sheets.
Acquisition of Hilo, Hawaii Cable Television System by Spacelink -
In October 1988, Spacelink consummated a merger with an unaffiliated
cable television company serving the area in and around Hilo, Hawaii
by issuing approximately 3,000,000 shares of Spacelink's Class A
Common Stock to the existing shareholders of the unaffiliated cable
television company and by assuming approximately $6,931,000 in debt.
For financial reporting purposes, the merger was accounted for as a
purchase and totalled approximately $14,764,000, which includes a
$680,000 brokerage fee paid to Jones Group.
Sale of Winnemucca, Nevada Cable Television System by Spacelink -
In May 1989, Spacelink sold the cable television system serving
Winnemucca, Nevada to Jones Spacelink Fund 5, Ltd., a
Spacelink-managed limited partnership for $2,420,000, which price
represents the average of three separate independent appraisals of the
fair market value of the Winnemucca Systems. Spacelink recognized a
gain on the sale of the Winnemucca Systems of approximately $797,000.
Proceeds from the sale were used to reduce Spacelink's indebtedness.
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(5) ACQUISITIONS AND PENDING ACQUISITIONS BY SPACELINK ON BEHALF OF
SPACELINK-MANAGED PARTNERSHIPS:
Pending Acquisition of Cable Television Systems -
In August 1990, Spacelink entered into a purchase and sale agreement
unaffiliated third parties to acquire, for the account of Jones Growth
Partners II L.P. ("Jones Growth Partners II") a Spacelink-managed
limited partnership, the cable television systems serving the areas
in and around the communities of Yorba Linda, Anaheim Hills and Laguna
Niguel, and certain portions of unincorporated Orange County, all in
the State of California (the "Orange County Cluster"). The purchase
price of the Orange County Cluster is expected to be approximately
$29,000,000, subject to certain closing adjustments. Upon execution of
the purchase and sale agreement, Spacelink deposited $1,400,000 in
escrow as provided under the agreement. The closing under the purchase
and sale agreement is currently expected to occur on September 6,
1991. It is anticipated that Jones Growth Partners II will need to
raise approximately $19,000,000 in equity capital to acquire the
Orange County Cluster and that sufficient funds will not be available
to Jones Growth Partners II by the September 6, 1991 closing date.
Therefore, prior to the September 6, 1991 closing date, Spacelink will
assign its purchase rights and obligations under the purchase and sale
agreement to its wholly owned subsidiary, Jones Spacelink Acquisition
Corp. ("Acquisition Corp.") and Acquisition Corp. will acquire the
Orange County Cluster using borrowed funds under Spacelink's
acquisition facility for the purpose of temporarily holding it until
such time as Jones Growth Partners II has sufficient funds and can
otherwise acquire the Orange County Cluster (see Note 9). At May 31,
1991, Spacelink's investment in cable television systems held for
resale to managed limited partnerships totalled $1,544,000, which
includes the escrow deposit described above certain other acquisition
costs.
As of late August 1991, Jones Growth Partners II had raised
approximately $7,000,000 of the $19,000,000 in equity capital required
to acquire the Orange County Cluster. There can be no assurance that
Jones Growth Partners II will raise sufficient equity to acquire the
Orange County Cluster. If Jones Growth Partners II does not have
sufficient debt and equity funds available to it to acquire the Orange
County Cluster within 180 days of the date that the systems are
acquired by Acquisition Corp., the bridge loan will expire and
Spacelink may be required to assign the Orange County Cluster to
another affiliated entity or to find a joint venture partner for Jones
Growth Partners II.
Acquisition of Bluffton, Indiana Cable Television Systems -
In June 1988, Spacelink entered into an agreement with an unaffiliated
party to acquire on behalf of a Spacelink-managed limited partnership
the cable television systems serving the areas in and around the
communities of Bluffton, Decatur, Monroe, Auburn, Butler, Uniondale,
Waterloo and Garrett, and the unincorporated areas of Wells, Allen,
Noble, Adams and Dekalb Counties, all in the State of Indiana (the
"Bluffton Systems") for $17,500,000, subject to certain closing
adjustments. In addition, a fee of $700,000 was paid to Jones Group
for brokering the acquisition. Closing of the Bluffton Systems
occurred in September 1988. Spacelink financed the acquisition from
the proceeds of borrowings under its credit facility. In 1988, the
Bluffton Systems were transferred to Jones Spacelink Income/Growth
Fund 1-A, Ltd. and Spacelink was reimbursed for the original purchase
price plus carrying costs associated with the systems, which in the
aggregate totalled approximately $18,360,000. The proceeds received
from the sale were used to repay indebtedness incurred by Spacelink in
connection with acquisition of the Bluffton Systems.
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(6) ACQUISITIONS BY INTERCABLE:
Acquisitions of Cable Television Systems by Intercable -
Description of Transaction Transaction
Cable Television Systems Closing Date Seller Price
------------------------ ------------ ------ -----------
Walnut Valley System - February 1989 Intercable - $29,028,000
serves certain areas in managed limited
and around the Diamond partnership
Bar area of Los Angeles
County, California
Anne Arundel System - June 1988 Intercable - $65,986,000
serves portions of Anne managed limited
Arundel County, Maryland partnership
(7) ACQUISITIONS BY INTERCABLE ON BEHALF OF INTERCABLE-MANAGED
PARTNERSHIPS:
In March 1989, Intercable, on its own behalf and/or on behalf of one
or more of its affiliates, entered into an agreement with unaffiliated
third parties to purchase certain cable television systems serving
portions of suburban Chicago, Illinois including the communities of
Addison, Glen Ellyn, Wheaton, St. Charles, Geneva, Winfield and West
Chicago ("Wheaton System Cluster"), Barrington, Elgin, South Elgin,
Hawthorne Woods, Kildeer, Indian Creek, Vernon Hills and Lake Zurich
("Barrington System Cluster"), Flossmoor, Riverside, Indianhead Park,
Hazel Crest, Thornton, Lansing, Matteson, Richton Park, University
Park, Crete, LaGrange Park, LaGrange, Olympia Fields and Western
Springs ("South Suburban System Cluster") and Aurora, North Aurora,
Montgomery, Plano, Oswego, Sandwich and Yorkville ("Aurora System
Cluster"), as well as the cluster of cable television systems serving
Cerro Gordo, Clinton, Gibson City, Chatsworth, Tolono, Leroy, Farmer
City, Monticello and Rantoul in central Illinois ("Central Illinois
System Cluster") (collectively, the "Centel Systems"), for a purchase
price of $340,000,000. Included in the purchase price were $1,466,000
of assets relating to a customer service center supporting the Centel
Systems. Closing on this acquisition occurred on October 4, 1989.
Intercable contracted for an independent allocation of the
$340,000,000 aggregate purchase price among the five clusters of
systems by an unaffiliated qualified appraiser, and then allocated the
clusters to various affiliated entities. Prior to closing, Intercable
transferred its rights under the purchase agreement for the Wheaton
System Cluster to Jones Growth Partners L.P., a public limited
partnership sponsored by a wholly owned subsidiary of Spacelink. Jones
Growth Partners L.P. purchased the Wheaton System Cluster directly for
the allocated purchase price of $97,100,000, plus closing adjustments
and brokerage fees. Intercable acquired the other four clusters of
cable systems for its own account or for the account of its managed
limited partnerships for the allocated purchase price of $242,900,000,
plus closing adjustments.
On December 21, 1989, Intercable transferred the Barrington System
Cluster to Cable TV Fund 15-A, Ltd., a public limited partnership
sponsored by Intercable. The sales price for the Barrington System
Cluster was $75,500,000, which represented that portion of the
aggregate purchase price paid by Intercable for the Barrington
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System Cluster when Intercable acquired the Centel Systems in October
1989. Upon the transfer, Intercable was also reimbursed a total of
$2,073,200, which represented net closing adjustments, the costs
incurred by Intercable for capital expenditures during the holding
period and the amount of operating and interest expenses in excess of
operating receipts incurred by Intercable from the date of its
acquisition of the Barrington System Cluster (October 4, 1989) through
December 21, 1989, the date the Barrington Systems were transferred to
Cable TV Fund 15-A, Ltd. Cable TV Fund 15-A, Ltd. also paid a
brokerage fee of $3,020,000 to Jones Group as compensation for
brokering the purchase.
The Aurora System Cluster was transferred in May 1990 to IDS/Jones
Joint Venture Partners (the "Joint Venture"), a Colorado joint venture
between IDS/Jones Growth Partners 89-B, Ltd. and IDS/Jones Growth
Partners II, L.P. ("Partners II") both Intercable-sponsored Colorado
limited partnership. Intercable transferred the Aurora System Cluster
to the Joint Venture for a sales price of $81,100,000, which
represented the allocated purchase price paid by Intercable for the
Aurora System Cluster, plus reimbursement to Intercable of $7,386,000
for the net closing adjustments, the costs incurred by Intercable
during the holding period (October 4, 1989) through May 31, 1990, and
the amount of operating and interest expenses in excess of operating
receipts incurred by Intercable during the holding period. In
connection with the purchase, the Joint Venture obtained a $25,000,000
bridge loan with an original maturity date of May 31, 1991. The
maturity date of the loan has been extended to October 31, 1991. This
loan has been guaranteed in part by Intercable and in part by a letter
of credit arranged by Intercable. A substantial portion of this bridge
loan has been repaid from equity contributions made to the Joint
Venture by Partners II. The ability of Partners II to make sufficient
additional equity contributions to enable the Joint Venture to retire
the bridge loan is conditioned upon, among other things, Partners II's
ability to raise sufficient capital from its ongoing public offering
of limited partnership interests, of which there can be no assurance.
Partners II's offering of interests will continue only through
September 1991. In the event that sufficient equity capital is not
received from Partners II, Intercable may be required to invest its
own funds in the Joint Venture or to make an advance to the Joint
Venture to allow the Joint Venture to repay the bridge loan. As of
August 16, 1991, $6,600,000 was outstanding on the bridge loan. The
Joint Venture also owes acquisition fees to Jones Group ($1,622,000)
and IDS Management Corporation ($1,622,000).
On September 28, 1990, Intercable transferred the South Suburban
System Cluster to Cable TV Fund 15-A, Ltd. The sales price for the
South Suburban System Cluster was $59,960,000, which represented that
portion of the aggregate purchase price paid for the South Suburban
System Cluster by Intercable when Intercable acquired the Centel
Systems in October 1989. Upon the transfer, Intercable was also
reimbursed a total of $8,190,000, which represented net closing
adjustments, the costs incurred by Intercable for capital expenditures
during the holding period and the amount of operating and interest
expenses in excess of operating receipts incurred by Intercable from
the date of its acquisition of the South Suburban System Cluster
(October 4, 1989) through September 28, 1990, the date the South
Suburban System Cluster was transferred to Cable TV Fund 15-A, Ltd.
Cable TV Fund 15-A Ltd. also paid a brokerage fee of $2,398,400 to
Jones Group as compensation for brokering the purchase.
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On May 30, 1991, Intercable transferred the Central Illinois System
Cluster to Cable TV Fund 14-A, Ltd. The sales price for the Central
Illinois System Cluster was $24,974,000, which represented that
portion of the aggregate purchase price paid for the Central Illinois
System Cluster by Intercable when Intercable acquired the Centel
Systems in October 1989. Upon the transfer, Intercable was also
reimbursed a total of $3,826,000, which represented net closing
adjustments, the cost incurred by Intercable for capital expenditures
during the holding period and the amount of operating and interest
expenses in excess of operating receipts incurred by Intercable from
the date of its acquisition of the Central Illinois System Cluster
(October 4, 1989) through May 30, 1991, the date the Central Illinois
System Cluster was transferred to Cable TV Fund 14-A, Ltd. Cable TV
Fund 14-A, Ltd. also paid a brokerage fee of $999,000 to Jones Group
as compensation for brokering the purchase. Upon the transfer of the
Central Illinois System Cluster, all of the Centel Systems which were
held for resale to managed partnerships have been transferred.
Funds necessary for Intercable to complete the acquisition of the
Centel Systems were provided by a $240,000,000 acquisition note
maturing October 1, 1990 and $5,788,000 from Intercable's revolving
credit facility.
In June and July 1988, Intercable entered into agreements with third
parties to purchase for the account of certain Intercable-managed
limited partnerships, the cable television systems in and around the
northern suburban area of Indianapolis, including the communities of
Carmel, Zionsville, Fortville and Ingalls and unincorporated areas of
Hamilton, Boone, Hancock and Madison Counties, all in the State of
Indiana ("Carmel"), and a cable television system serving the city of
Surfside Beach and certain unincorporated portions of Georgetown and
Horry Counties, South Carolina ("Surfside") for a purchase price of
approximately $29,500,000 and $48,000,000, respectively. Closing on
Surfside occurred on September 16, 1988, and the system was
transferred to an Intercable-managed limited partnership on September
23, 1988. Closing on Carmel occurred on September 30, 1988. The Carmel
system was transferred to an Intercable-managed limited partnership in
February 1989, for approximately $31,704,000, which price represents
the original purchase price plus acquisition costs and net carrying
costs of the Carmel system incurred by Intercable during Intercable's
period of ownership.
(8) MANAGED LIMITED PARTNERSHIPS:
Spacelink, certain of its wholly owned subsidiaries and Intercable are
the general partners for a number of limited partnerships formed to
acquire, construct, develop, operate and sell cable television
systems. Partnership capital has been raised through a series of
public and private offerings of limited partnership interests. As
general partner, capital contributions ranging from $500 to $1,000 are
made to each partnership and the general partner is allocated 1
percent of all partnership profits and losses. These entities may also
purchase limited partner interests in the partnerships and, if they do
so, participate with respect to such interests on the same basis as
other limited partners. Subject to certain limitations, Spacelink,
certain of its wholly owned subsidiaries and Intercable are also
reimbursed for offering costs incurred in connection with each
partnership offering. To the extent offering costs are incurred that
are in excess of the specified limits, the excess offering costs are
borne by Spacelink, certain of its wholly owned subsidiaries and
Intercable and are generally expensed. In addition, Spacelink, certain
of its wholly owned subsidiaries and Intercable are allocated expenses
associated with the marketing of limited partnership interests.
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As general partner, Jones Spacelink Funds, Inc., a wholly owned
subsidiary of Spacelink, is contingently liable for recourse debt of a
certain managed limited partnership, which totalled $2,625,000 and
$2,750,000 at May 31, 1991 and 1990, respectively. Spacelink believes
such debt is secured by partnership assets and other collateral with
fair market values in excess of the related obligation.
As general partner, Spacelink, certain of its wholly owned
subsidiaries and Intercable manage the partnerships and receive a fee
for their services ranging from five percent to six percent of the
gross revenues of the partnerships, excluding revenues from the sale
of cable television systems or franchises. Any partnership
distributions made from cash flow, as defined, are generally allocated
99 percent to the limited partners and one percent to the General
Partner. For certain of the managed limited partnerships,
distributions other than from cash flow, such as from the sale or
refinancing of systems or upon dissolution of the partnerships, are
generally made as follows: first, to the limited partners in an amount
which, together with all prior distributions, ranges from 100 to 125
percent of the amount contributed to the partnership capital by the
limited partners; and the balance, in an amount which ranges from 70
percent to 75 percent to the limited partners and from 25 to 30
percent to the General Partner.
Regarding Jones Growth Partners L.P., for which a wholly owned
subsidiary of Spacelink is managing general partner, any partnership
distributions made from cash flow, as defined, are generally allocated
99 percent to the limited partners and one percent to the managing
general partner. Any distributions other than from cash flow are
generally made as follows: first, to the limited partners in an amount
which, together with all prior distributions made from sources other
than cash flow, will equal the amount initially contributed to
partnership capital by the limited partners; second, to the limited
partners an amount equal to 8 percent per annum, cumulative and
noncompounded, on an amount equal to their initial capital
contributions (less any portion of such initial capital contributions
returned by the distribution to limited partners from prior sale or
refinancing proceeds) provided, however, that the 8 percent return
will be reduced by all prior distributions of cash flow from the
partnership and prior distributions of proceeds of sales or
refinancings that exceed an amount equal to the limited partner's
initial capital contributions; and the balance, in an amount of 75
percent to the limited partners, 15 percent to the managing general
partner and 10 percent to the associate general partner which
associate general partner is not affiliated with Spacelink or its
subsidiaries.
Regarding Jones Spacelink Income Partners 87-1, L.P. and Jones
Spacelink Income/Growth Fund 1, for which Spacelink and one of its
wholly owned subsidiaries are general partners, and Jones Cable Income
Funds and Cable TV Fund 15, for which Intercable is general partner,
any distributions other than from cash flow are generally made as
follows: first, to the limited partners in an amount which, together
with all prior distributions made from sources other than cash flow,
will equal the amount initially contributed to partnership capital by
the limited partners; second, to the limited partners in an amount
which, together with all prior distributions from cash flow, will
equal a preferred return ranging from 6 percent to 12 percent per
annum, cumulative and noncompounded, on their adjusted capital
contributions, and the balance, in an amount which ranges from 60
percent to 75 percent to the limited partners and 25 percent to 40
percent to the General Partner.
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26
Any distributions other than from cash flow made by Jones Intercable
Investors, L.P. (see Note 14), for which Intercable is General
Partner, are generally disbursed as follows: first, to the holders of
all Class A Units in an amount which, together with all prior
distributions of cash flow from operations, will equal a preferred
return equal to 10 percent per annum, cumulative and noncompounded, on
an amount equal to $16.00 per Class A Unit, less any portion of such
amount which may have been returned to the unitholders from prior sale
or refinancing proceeds; second, to the holders of Class A Units, an
amount which, together with all prior distributions other than
distributions of cash flow from operations, will equal $16.00 per
Class A Unit; and the remainder, 60 percent to the holders of all
Class A Units and 40 percent to Intercable.
During fiscal years 1991, 1990 and 1989, Intercable received fees and
distributions totalling $4,283,000, $8,736,000 and $11,654,000,
respectively. All of the amounts received in fiscal 1991 and 1989 were
treated as a reduction of the purchase prices of the cable television
systems purchased by Spacelink and Intercable from Intercable-managed
partnerships and therefore are not reflected as revenue in the
consolidated statements of income.
Spacelink's and Intercable's managed limited partnerships reimburse
Spacelink and Intercable for certain allocated overhead and
administrative expenses. These expenses generally consist of salaries
and related benefits, rent, information management services and other
corporate facilities costs. Spacelink and Intercable provide
engineering, marketing, administrative, accounting, information
management and other services to the partnerships. Allocations of
personnel costs are based on total revenues, total assets and actual
time spent by Spacelink and Intercable employees with respect to each
partnership. Remaining overhead costs are allocated based on total
revenues, total assets and the relative cost of partnership assets
managed. Cable television systems owned by Spacelink and Intercable
are also allocated a proportionate share of these expenses under the
allocation formulas described above. Amounts charged partnerships and
other affiliated companies have directly offset operating, general and
administrative expenses by approximately $23,723,000, $21,282,000 and
$18,915,000 for the years ended May 31, 1991, 1990 and 1989,
respectively.
Spacelink and Intercable have made advances to, and have deferred the
collection of management fees and expense reimbursements from, certain
managed limited partnerships primarily to provide funds necessary for
the capital expansion of and improvements to properties owned by such
partnerships and operating and interest expenses paid on behalf of
such partnerships. In addition, Jones Group had deferred the
collection of its brokerage fees from two Intercable-managed
partnerships. Such advances and unpaid brokerage fees, which totalled
$12,093,000 and $15,473,000 at May 31, 1991 and 1990, respectively,
bear interest at rates equal to the lending entity's cost of
borrowing. Interest charged to limited partnerships for the fiscal
years ended May 31, 1991, 1990 and 1989 was $1,462,000, $1,184,000 and
$2,240,000, respectively.
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27
Certain condensed financial information regarding managed limited partnerships
of Spacelink and Intercable are as follows:
Spacelink's Managed Limited Intercable's Managed Limited
Partnerships Partnerships
----------------------------- --------------------------------
As of December 31, As of December 31,
----------------------------- --------------------------------
1990 1989 1988 1990 1989 1988
-------- -------- ------- --------- --------- --------
(In Thousands) (In Thousands)
Total assets $137,291 $149,487 $41,366 $1,313,379 $1,048,809 $952,437
Debt 50,536 56,719 16,531 791,153 515,317 402,855
Amounts due to general partner 2,715 1,545 2,537 9,921 6,392 18,408
Partners' capital (net of
accumulated deficit) 80,843 86,997 21,102 468,073 468,958 509,681
For the Year Ended For the Year Ended
December 31, December 31,
----------------------------- --------------------------------
1990 1989 1988 1990 1989 1988
-------- -------- ------- --------- --------- --------
(In Thousands) (In Thousands)
Revenues $ 24,827 $ 12,639 $ 7,198 $ 311,672 $ 263,619 $231,896
Depreciation and amortization 15,675 7,125 3,574 156,487 121,223 108,408
Operating loss (7,697) (2,501) (1,557) (40,604) (34,758) (35,004)
Gain on sale of assets -- 200 2,655 204,185 26,093 254,290
Net income (loss) (12,699) (4,512) (1,113) 88,162 (61,694) 142,556
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(9) SUBORDINATED DEBENTURES AND OTHER DEBT:
At May 31, 1991 and 1990, Spacelink's and its consolidated subsidiaries'
debt consisted of the following:
1991 1990
-------- --------
(In Thousands)
DEBT OF SPACELINK:
Credit Facility $ 68,650 $ 60,000
Capitalized Lease obligations and non-interest bearing notes 657 467
-------- --------
Total Debt of Spacelink 69,307 60,467
-------- --------
DEBT OF INTERCABLE:
Subordinated Debentures --
Debentures due August 1, 1997, interest payable semi-annually at
12%, redeemable at Intercable's option at 100% of principal,
plus accrued interest, on or after August 1, 1990 net of
unamortized discount of $3,203,100 in 1991 and $4,078,700 in
1990 29,977 35,921
Debentures due February 1, 1998, interest payable semi-annually at
9.75%, redeemable at Intercable's option at 100% of principal,
plus accrued interest, on or after February 1, 1991, net of
unamortized discount of $5,543,700 in 1991 and $6,303,700 in
1990 61,031 63,696
Debentures due May 1, 2000, interest payable semi-annually at 13%,
redeemable at Intercable's option on or after May 1, 1993 at
105.78% of par declining to par on May 1, 1997, net of
unamortized discount of $1,833,900 in 1991 and $1,991,800 in
1990 148,166 148,008
Convertible debentures due June 1, 2007, interest payable
semi-annually at 7.5%, redeemable at Intercable's option on or
after June 1, 1990 at 107.5% of par, declining to par by 1997 19,468 43,200
Credit Facility and Acquisition Note 82,300 117,000
Capitalized lease obligations, installment notes and non-interest
bearing notes 4,736 4,870
-------- --------
Total Debt of Intercable 345,678 412,695
-------- --------
Consolidated Debt $414,985 $473,162
======== ========
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29
In December 1990, Spacelink entered into new credit agreements, which
agreements include a $45,000,000 Revolving Credit Facility and a
$25,000,000 Term Loan. Upon entering into the new credit agreements,
Spacelink borrowed $42,650,000 under the $45,000,000 Revolving Credit
Facility and $25,000,000 under the $25,000,000 Term Loan to repay the
outstanding balances under Spacelink's previous credit agreement.
The $45,000,000 Revolving Credit Facility is secured by all of
Spacelink's cable television system assets, converts to a five and
one-half year term loan on November 30, 1992, and currently bears
interest, at Spacelink's option, at the prime rate plus 5/8 percent,
LIBOR plus 1-5/8 percent or the Certificate of Deposit rate plus 1-3/4
percent. The $25,000,000 Term Loan is secured by all of Spacelink's
assets, except its cable television system assets and its investment
in Intercable. The Term Loan requires principal payments beginning
May 31, 1993, matures on May 31, 1999 and currently bears interest, at
Spacelink's option, at the prime rate plus 7/8 percent, LIBOR plus
1-7/8 percent or the Certificate of Deposit rate plus 2 percent.
Spacelink paid the commercial lenders an origination fee of $525,000
in connection with the $45,000,000 Revolving Credit Facility and
$25,000,000 Term Loan. In addition, Spacelink's credit agreements
restrict the right of Spacelink and its consolidated subsidiaries
except Jones Group and Intercable to declare and pay cash dividends.
In February 1991, Spacelink entered into a $50,000,000 Uncommitted
Acquisition Facility. The $50,000,000 Uncommitted Acquisition Facility
may be used for the purchase of cable television systems to be held by
Spacelink for resale to Spacelink-managed limited partnerships and,
when used, will be secured by such cable television system assets.
Spacelink's ability to utilize the Uncommitted Acquisition Facility
will be at the sole discretion of the commercial bank. In March 1991,
however, Spacelink received a commitment from the commercial bank to
loan Spacelink up to $30,000,000 under the Uncommitted Acquisition
Facility for the purchase of the Orange County Cluster for the account
of Jones Growth Partners II. The $30,000,000 commitment expires on
September 30, 1991, unless Spacelink has consummated the acquisition
of the Orange County Cluster by such date, or the commitment is
extended by the commercial bank.
At May 31, 1991, borrowings outstanding under Spacelink's $45,000,000
Revolving Credit Facility and $25,000,000 Term Loan totalled
$43,650,000 and $25,000,000, respectively. Principal payments under
the terms of Spacelink's credit facility and other debt are due as
follows:
(In Thousands)
1992 $ 349
1993 226
1994 5,911
1995 8,133
1996 10,363
Thereafter 44,325
-------
Total Spacelink Debt $69,307
=======
The following is a description of Intercable's debt which, while
included in the consolidated financial statements, is non- recourse to
Spacelink.
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In addition to the terms described in the above table, Intercable's
Convertible Subordinated Debentures may be converted into its Class A
Common Stock at $15.10 per share, subject to adjustment under certain
conditions. Also, each of the Subordinated Debenture issues described
above provides for annual sinking fund payments which are calculated
to retire 66 2/3 percent to 80 percent of the issues prior to
maturity, as follows:
Annual Sinking Fund Commencement
Debenture Issue Payment Date
--------------- ------------------- ------------
Debentures due August 1997 $ 5,600,000 August 1, 1992
Debentures due February 1998 9,800,000 February 1, 1993
Debentures due May 2000 30,000,000 May 1, 1996
Convertible Debentures 3,000,000 June 1, 1998
During the year ended May 31, 1991, Intercable redeemed $23,732,000 of
its 7.5 percent Convertible Subordinated Debentures due 2007,
$6,820,000 of its 12 percent Subordinated Debentures due 1997 and
$3,425,000 of its 9.75 percent Subordinated Debentures due 1998. The
bonds were redeemed at various amounts less than 100 percent of their
principal amount. Intercable recognized an extraordinary gain of
$11,419,000 related to these transactions. As a result of these
redemptions, and in accordance with the bond indentures, the bonds
redeemed will be used as a credit against the sinking fund payments
required in fiscal 1992, 1993 and 1994. As a result of these credits,
cash required for sinking fund payments in fiscal 1992, 1993 and 1994
will be $-0-, $6,375,000 and $14,180,000, respectively.
On August 31, 1989, Intercable redeemed the remaining $33,000,000
outstanding on its $35,000,000 issue of 14.5 percent Subordinated
Debentures due 1994. The bonds were redeemed at 100 percent of their
principal amount. Intercable recognized an extraordinary loss of
$1,996,000 (net of related income tax benefit of $1,027,000) related
to this transaction.
During the fourth quarter of fiscal 1989, Intercable completed
negotiations for a $150,000,000 revolving credit note and a
$340,000,000 acquisition note maturing December 31, 1991 and October 1,
1990, respectively, the proceeds of which would be used for the
acquisition of cable television systems on its own behalf or on behalf
of certain of its managed limited partnerships and general corporate
purposes. In October 1989, Intercable, on its own behalf and/or on
behalf to one or more of its affiliates, purchased certain cable
television systems serving portions of suburban Chicago and Central
Illinois (See Note 7). Funds necessary to complete this acquisition
were provided by $240,000,000 of the acquisition note and $5,788,000
from Intercable's revolving credit facility. Upon the transfer of the
Barrington System Cluster and Aurora System Cluster to certain of
Intercable's managed partnerships, $163,000,000 was repaid on the
acquisition note. On September 28, 1990, Intercable repaid the
remaining $77,000,000 outstanding on the acquisition note. Funds
necessary to repay the acquisition note were provided by $68,000,000
available upon the transfer of the South Suburban System Cluster to
Cable TV Fund 15-A, Ltd., and $9,000,000 drawn on Intercable's credit
facility. Upon the transfer of the Central Illinois System Cluster to
Cable TV Fund 14-A, Ltd. on May 30, 1991, $29,000,000 was repaid on
Intercable's revolving credit facility. Interest on proceeds
outstanding under Intercable's credit facility is computed, at
Intercable's option varying rates based upon Intercable's ratio of
total debt to annualized adjusted cash flow. A fee of 3/8 percent per
annum is required on the unused portion of the commitment.
Substantially all of Intercable's assets are pledged to secure this
credit facility. In addition, Intercable's credit agreements restrict
the right of Intercable to declare and pay cash dividends without the
consent of the lenders. At May 31, 1991, $82,300,000
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31
was outstanding under Intercable's revolving credit facility leaving
$67,700,000 available under the revolving credit facility.
Prior to the maturity of the revolving credit facility, Intercable
anticipates entering into a new credit arrangement with a group of
commercial banks. Any amounts outstanding under Intercable's revolving
credit facility would be repaid from the proceeds of the new credit
facility.
(10) INCOME TAXES:
Pursuant to the tax allocation agreement with International, Spacelink and
its consolidated subsidiaries excluding Intercable were allocated tax
benefits (provisions) based on their pro rata contribution of taxable loss
(income) to the taxable loss (income) of the consolidated group. For
Spacelink and its consolidated subsidiaries excluding Intercable the tax
allocation resulted in fiscal 1991, 1990 and 1989 tax provisions (benefits)
of $(1,252,000), $1,304,000 and $1,061,000, respectively.
Components of income tax expense (benefit) principally associated with
Intercable for Federal and state income tax purposes are as follows:
Year Ended May 31,
---------------------------------
1991 1990 1989
------- -------- --------
(In Thousands)
Current (benefit) provision --
Federal $ 262 $ (6,353) $ (5,176)
State (168) (775) 143
------- -------- --------
Total current tax provision (benefit) 94 (7,128) (5,033)
------- -------- --------
Deferred benefit --
Federal (1,206) (2,405) (6,999)
State -- -- (1,068)
------- -------- --------
Total deferred tax benefit (1,206) (2,405) (8,067)
------- -------- --------
Total income tax benefit $(1,112) $ (9,533) $(13,100)
======= ======== ========
The (benefit) provision for deferred income taxes is the result of the following
timing differences:
Year Ended May 31,
---------------------------------
1991 1990 1989
------- -------- --------
(In Thousands)
Additional tax depreciation $ 5,511 $ 8,309 $ 5,344
Fund fees and distributions (6,927) 2,970 (9,652)
Recognition (deferral of recognition) of Jones Group
brokerage fees 130 92 (767)
Recognition (deferral) of dividends and fund fees received
by Intercable 10 (175) (150)
Timing of partnership income (5,425) (2,211) (2,356)
Difference in recognition of net operating losses for tax
and financial statement purposes 10,001 (15,354) --
Tax expenses (income) from properties held for resale (4,370) 4,370 --
Other, net (136) (406) (486)
------- -------- --------
Total deferred tax benefit $(1,206) $ (2,405) $ (8,067)
======= ======== ========
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The following table reconciles the statutory Federal income tax rate to the
effective tax rate:
Year Ended May 31,
------------------------------------------
1991 1990 1989
--------- --------- --------
(In Thousands)
Income tax provision (benefit) for Spacelink
and Jones Group from the tax allocation
agreement $ (1,122) $ 1,396 $ 294
Computed "normally expected" income tax
benefit at statutory rates on losses not
subject to the tax allocation agreement,
primarily Intercable (11,418) (11,607) (12,904)
--------- --------- --------
Total "normally expected" income tax benefit (12,540) (10,211) (12,610)
Increase (decrease) in taxes resulting from -
Dividend received deduction (90) (216) (105)
Alternative minimum taxes 957 - -
Non-deductible depreciation 29 71 71
Amortization of costs in excess of interest in
net assets purchased 360 339 197
State income taxes, net of Federal income tax
provision (benefit) 136 323 (646)
Difference in recognition of, net operating losses
for tax and financial statement purposes 10,045 - -
Other, net (9) 161 (7)
--------- --------- --------
Total income tax benefits $ (1,112) $ (9,533) $(13,100)
========= ========= ========
The Financial Accounting Standards Board (FASB) has issued a statement which,
when effective, will change the method of determining reported income tax
expense. Spacelink believes it will have to adapt the proposed method of
determining income tax expense no later than fiscal 1994. Given the nature of
the revisions currently under consideration by the FASB, the ultimate impact of
the final statement on Spacelink's financial statements cannot be determined at
this time.
(11) STOCK OPTIONS:
Incentive Stock 0ptions of Spacelink -
Spacelink has an Incentive Stock Option Plan to provide for the grant
of stock options to key employees. A maximum of 773,500 shares of
Spacelink's Class A Common Stock are available for grant at an option
price not less than the fair market value of the stock at the date of
grant. Options generally become exercisable in cumulative increments
over a four year period from the date of grant or the first
anniversary of the grant date. The stock options expire, to the extent
not exercised, on the fifth anniversary of the date of grant or upon
the earlier termination of the employment of the recipient.
On February 4, 1991, the Spacelink's Board of Directors determined
that the exercise price of certain options granted under the Plan,
representing 4,000 shares of Spacelink's Class A Common Stock, was
above the market price of the shares. Accordingly, the Board of
Directors amended the exercise price of those options to $1.125 per
share, which represented the average of the closing bid and asked
prices, as quoted by the National Association of Securities Dealers
through NASDAQ, for Spacelink's Class A Common Stock, as
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33
of the close of business on February 4, 1991. In all other respects,
including the vesting schedules, the provisions governing the options
granted under the Plan remain the same.
The following table summarizes data concerning options to purchase
shares of Spacelink's Class A Common Stock:
1991 1990 1989
---- ---- ----
Available for grant 472,000 462,000 462,000
Granted during the period - - -
Exercised during the period - - 125,000
Price range, per share - - $.969-1.125
Terminated during the period 10,000 - 131,150
Total outstanding 4,000 14,000 14,000
Price range, per share $1.125 $1.094-3.188 $1.094-3.188
Exercisable at year-end 3,000 9,500 6,000
Price range, per share $1.125 $1.094-3.188 $1.094-3.188
Other Class A Common Stock Options of Spacelink -
On December 2, 1986, an option to purchase 500,000 shares of
Spacelink's Class A Common Stock was granted by action of the Board of
Directors, independent of the Plan, to Glenn R. Jones, Chairman of the
Board of Directors and Chief Executive Officer of Spacelink, for a
purchase price of $.8438 per share, the fair market value as of the
date of grant. The option was granted in consideration of Mr. Jones'
personal guarantee of a portion of a promissory note issued in
connection with Spacelink's acquisition from an unaffiliated party of
certain cable television systems located in the State of Ohio. The
option will continue until fully exercised, or unless sooner
terminated or modified under the provisions of the agreement between
Spacelink and Mr. Jones.
In addition, Spacelink's Board of Directors has issued options,
independent of the Plan, to certain directors, officers and employees
of Spacelink and its affiliates. The following table summarizes data
concerning options, independent of the plan, to purchase shares of
Spacelink's Class A Common Stock. All options were granted at the fair
market value as of the date of the grant.
Number of Purchase Date
Date of Options Price per Option
Grant Granted Share Lapses
------------- --------- -------- -------------
December 1990 35,000 $ .719 December 1995
February 1990 80,000 $1.125 February 1997
December 1988 50,000 $1.125 December 1993
December 1987 250,000 $1.125 December 1992
On February 4, 1991, Spacelink's Board of Directors determined that
the exercise price of all of the foregoing options, except the options
granted to Mr. Jones and the options granted on December 31, 1990,
were above the market price of the shares. Accordingly, Spacelink's
Board of Directors amended the exercise price of the those options to
$1.125 per share, which represented the average of the closing bid and
asked prices, as quoted by the National Association of Securities
Dealers through NASDAQ, for Spacelink's Class A
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34
Common stock, as of the close of business on February 4, 1991. In all
other respects, including the vesting schedules, the provisions
governing the options granted remain the same.
Incentive Stock Options of Intercable -
Intercable has a nonqualified stock option and stock appreciation
rights plan from which 1,500,000 shares of its Class A Common Stock
may be granted to key employees at a price equal to the fair market
value of the stock at the date of grant. Effective December 5, 1990,
all of the outstanding options were terminated and new options were
granted to the holders of the terminated options at the fair market
value on that date. The number of shares subject to the new options
were identical to the number of shares under the former outstanding
options, and the vesting of such new options was in most instances the
same as under the former option agreements. As of May 31, 1991,
options to purchase 1,688,294 shares had been granted, of which
options to purchase 413,148 shares had been exercised and options to
purchase 934,653 shares had been terminated or forfeited upon
resignation of the holders.
Intercable also has a nonqualified stock option plan to provide for
the grant of stock options to purchase 500,000 shares of Intercable's
Class A Common Stock to key contributors to Intercable. Options are
granted at a price equal to the fair market value of the stock at the
date of grant. Effective December 5, 1990 all of the outstanding
options were terminated and new options were granted to the holders of
the terminated options at the fair market value on that date. The
number of shares subject to outstanding options and the vesting of
such new options was in most instances the same as under the former
options agreements. As of May 31, 1991, options to purchase 581,636
shares had been granted, of which 173,831 shares were exercised and
options to purchase 216,005 shares had been terminated or forfeited
upon resignation of the holders.
Intercable's Board of Directors granted options to purchase 100,000
shares of Common Stock on July 14, 1986 and options to purchase
100,000 shares of Common Stock on December 31, 1987 to an officer of
Intercable at a price equal to the fair market value at each
respective date. Effective December 5, 1990 these options were
terminated and a new option to purchase 200,000 shares of Common Stock
was granted at a price equal to the fair market value on that date.
None have been exercised to date.
(12) LITIGATION SETTLEMENT:
In March 1991, Spacelink and Intercable settled their legal dispute
with USA Network and negotiated a long-term affiliation agreement for
carriage of USA Network programming on cable television systems owned
and managed by Spacelink and Intercable. The settlement brought to an
end the litigation that began in September 1988, and included a
payment to the USA Network by Spacelink and Intercable of
approximately $468,000 and $6,184,000, respectively, and the
restoration of USA Network programming to the communities served by
Spacelink and Intercable. During fiscal 1990 and 1991, Spacelink and
Intercable had accrued approximately $468,000 and $2,771,000,
respectively, the provision of which has been included as operating,
general and administrative expense. Spacelink and Intercable will not
seek any indemnification payments from their managed partnerships. In
addition, Intercable has expensed an additional $3,413,000 for this
litigation settlement in fiscal 1991.
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(13) COMMITMENTS AND CONTINGENCIES:
In January 1991, International borrowed funds from a commercial bank
and secured the borrowing with certain shares of stock of Intercable.
Spacelink and the bank have agreed that in the event of a default by
International under the loan agreement, Spacelink would purchase from
the bank the pledged shares of Intercable at a value equal to the
amount of the default. As consideration for such agreement by
Spacelink, International granted to Spacelink an option to purchase
the shares of Intercable that it had pledged to the bank.
Spacelink and its consolidated subsidiaries including Intercable rent
office facilities and certain equipment under various operating lease
arrangements. Future minimum lease payments as of May, 31, 1991, under
noncancelable operating leases, net of amounts received under related
sub-leases, are as follows:
Building Facilities Equipment
Fiscal Year Leases Leases Leases Total
----------- -------- ---------- --------- -----
(In Thousands)
1992 1,918 955 1,185 4,058
1993 1,918 664 703 3,285
1994 1,918 485 433 2,836
1995 1,918 368 107 2,393
1996 1,918 355 19 2,292
Thereafter 7,761 2,896 - 10,657
------- ------ ------ -------
Total future minimum
lease payments $17,351 $5,723 $2,447 $25,521
======= ====== ====== =======
Certain amounts included in lease commitments will be reallocated to
managed limited partnerships using the method described in Note 8.
(14) INVESTMENTS BY SPACELINK AND INTERCABLE:
Investment in The Mind Extension University, Inc. by Spacelink -
In June 1990, Spacelink's Board of Directors authorized the investment
by Spacelink of up to $3,135,000, which represents a 19 percent
interest, in The Mind Extension University, Inc. ("ME/U"), a majority
owned subsidiary of International. The cost of Spacelink's investment
in ME/U was based on an independent third party appraisal of ME/U.
During fiscal 1991, Spacelink invested $3,135,000 in ME/U and received
19 percent of the issued and outstanding common stock of ME/U. The
funds necessary for Spacelink to acquire its 19 percent interest in
ME/U were provided from borrowings under Spacelink's $45,000,000
Revolving Credit Facility. Spacelink's investment in ME/U is accounted
for using the equity method.
ME/U is a basic cable television network providing educational
programming to cable television systems in the United States.
Approximately 9 percent of the basic subscribers receiving ME/U are
served by cable television systems owned by Spacelink and its
affiliates.
Purchase of 19 Percent Interest in Galactic Radio by Intercable -
On May 31, 1991, Intercable purchased from International its 19
percent interest in Galactic Radio for $4,305,000 in cash. The
purchase price was based on an independent third party appraisal.
Intercable has accounted for this acquisition as a purchase, with the
excess consideration paid over the historical cost of the assets
acquired being charged to retained earnings. Spacelink owns the
remaining 81 percent interest in Galactic Radio.
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Purchase of International Aviation, Ltd. by Intercable -
In July 1990, Intercable purchased an aircraft owned by International
Aviation, Ltd. ("Aviation") a subsidiary of International by acquiring
all of the common stock of Aviation for approximately $936,000 and
repaying the remaining approximately $564,000 of debt outstanding on
the aircraft. The purchase price was based on an independent third
party appraisal. The acquisition of Aviation by Intercable was
accounted for as a transfer between entities under common control and,
accordingly, the assets transferred were recorded by Intercable at
historical cost with a corresponding charge against retained earnings.
The results of operations of Aviation are included in the accompanying
consolidated statement of income for the year ended May 31, 1991,
beginning on the July 1990 transfer date.
Investment in Jones Intercable Investors, L.P. by Intercable -
Intercable is the general partner of Jones Intercable Investors, L.P.,
which was formed in September 1986. Intercable has a gross investment
of approximately $22,868,000 in this partnership at May 31, 1991,
which represents an interest of approximately 19 percent. Intercable's
investment is carried at cost plus equity in profits and losses less
any cash distributions, whether accrued or received.
In addition, Intercable has deferred recognition of $1,294,000 of
gains on the sales of the Alexandria, Virginia and Independence,
Missouri cable television systems to Jones Intercable Investors, L.P.
as a result of its continued ownership in the assets of the
partnership.
Investment in East London Telecommunications Joint Venture by
Intercable -
In December 1988, Intercable entered into a joint venture with an
unaffiliated third party to acquire a principal interest in
London-based East London Telecommunications Limited ("ELT"), which
provides cable television and telephone service to an eastern section
of London, England, including the Docklands Development Zone.
Intercable has invested approximately $22,612,000 in the joint venture
as of May 31, 1991 representing an approximate 44 percent interest.
Intercable and its joint venture partner are considering selling all
or part of their interest in ELT. Intercable's investment in this
joint venture is carried at cost plus its proportionate share of
profits and losses to date. At May 31, 1991, Intercable's net
investment in the partnership was $17,270,000.
Investment in Jones Global Funds by Intercable -
Jones Global Funds, Inc. ("Global Funds") is an affiliate indirectly
owned by Intercable and International. Global Funds is the General
Partner of Jones United Kingdom Fund, Ltd., a limited partnership to
be formed if a minimum of $10,000,000 limited partnership interests
are sold in its public offering ("United Kingdom"). As of August 16,
1991, $7,478,000 of limited partnership interests had been sold. The
proposed business of the United Kingdom is the acquisition,
construction, development and operation of cable television
properties. An affiliate of Global Funds has made application for
several franchises, of which franchises have been awarded for the
acquisition, construction, development and operation of cable
television properties in the South Hertfordshire, Leeds and
Aylesbury-Chiltern areas in the United Kingdom. The rights to one
unbuilt franchise area know as South
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Hertfordshire (near London, England) have been designated for
acquisition by United Kingdom. Intercable and International share the
costs of the United Kingdom public offering, as well as the costs of
their other franchise development efforts in the United Kingdom. Such
cost sharing arrangement may result in changes in the ownership of
Global Funds from time to time, depending upon the amounts contributed
by the respective parties. In connection with these franchising
activities, Intercable invested approximately $4,992,000 during fiscal
1991 and has invested an aggregate of approximately $6,192,000 at May
31, 1991.
During the fiscal years ended May 31, 1990 and 1991, Intercable,
through an affiliate indirectly owned by Intercable, began exploring
cable television system acquisition, development and operation
opportunities in Zaragoza and Jerez de la Frontera/Puerto Santa Maria,
Spain. These affiliates currently are seeking to acquire the rights to
develop cable television operations in Spain. During fiscal year 1991,
Intercable invested approximately $2,469,000 for capital expenditures
in its cable television operations and, as of May 31, 1991,
Intercable's aggregate investment in these activities in Spain was
approximately $3,871,200.
Investment in Jones Crown Partners by Intercable -
In October 1989, Intercable entered into an agreement with certain of
its managed partnership entities, to purchase several cable television
systems all in the State of Wisconsin. Intercable assigned its
purchased rights and obligations under this agreement to a partnership
("Jones Crown Partners") formed between an Intercable-owned subsidiary
and an unaffiliated third party. Upon the sale of these systems to
Jones Crown Partners for $265,308,000, Intercable, as general partner
of the various selling entities, earned distribution fees totalling
approximately $20,192,000. Intercable has deferred the recognition of
these distributions and will recognize them as revenue in future
periods based primarily on the financial performance or sale of the
cable television systems owned by Jones Crown Partners (see Note 15).
Of this amount, $18,367,000 was invested in Jones Crown Partners
which, combined with Intercable's previous investment increased
Intercable's investment in Jones Crown Partners to $25,000,000.
Closing on the sale, with the exception of the cable television system
serving the City of Manitowoc, Wisconsin (the "Manitowoc System"),
occurred on June 30, 1990. Transfer of the Manitowoc System is pending
because the City of Manitowoc has not consented to the transfer of the
franchise. The Intercable-managed venture that owns that Manitowoc
System has instituted legal action to cause the City of Manitowoc to
allow the transfer of the franchise. At the time of the transfer, of
which there can be no assurance, Intercable expects to earn an
additional $3,641,000 in distributions. Intercable's investment in
Jones Crown Partners will be carried at cost plus its proportionate
share of profits and losses to date.
(15) SUBSEQUENT EVENT:
On August 13, 1991, Intercable entered into an agreement with an
unaffiliated third party to sell its Onalaska, Wisconsin cable
television system ("Onalaska System") for approximately $15,000,000
and its 20 percent interest in the Jones Crown Partnership systems for
$40,000,000. Closing on this transaction is conditioned upon the
approval of certain of the municipal franchising authorities of the
systems but is expected to occur in fiscal 1992. Based upon
Intercable's investment in these assets as of May 31, 1991,
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Intercable expects to recognize a gain on the sale if its Onalaska
System before income taxes of approximately $5,700,000 and a gain on
the sale of its Jones Crown Partners investment before income taxes of
approximately $20,600,000. In addition, distribution revenues
totalling approximately $20,373,000, which were previously deferred
will be recognized upon closing. Jones Capital Markets, Inc., a
subsidiary of International, will receive a fee totalling $800,000 in
connection with its efforts to arrange this transaction. Of the total
fee, $500,000 will be paid by Intercable and $300,000 will be paid by
the Jones Crown Partnership.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto authorized.
JONES SPACELINK, LTD.
By /s/ ELIZABETH M. STEELE
Elizabeth M. Steele,
Vice President
Dated: July 7, 1994