-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, a5qxtyxq4pt8ZXPOSsEXNnYbokqvpLuz076SNqzT2gHvgslOBWg/5wo6RxPu2Hi4 23tsMUHzyECu34CnfZrjIw== 0000950134-94-001119.txt : 19940926 0000950134-94-001119.hdr.sgml : 19940926 ACCESSION NUMBER: 0000950134-94-001119 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19940531 FILED AS OF DATE: 19940919 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: JONES SPACELINK LTD CENTRAL INDEX KEY: 0000353796 STANDARD INDUSTRIAL CLASSIFICATION: 4841 IRS NUMBER: 840835095 STATE OF INCORPORATION: CO FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-10040 FILM NUMBER: 94549506 BUSINESS ADDRESS: STREET 1: 9697 E MINERAL AVE STREET 2: P O BOX 3309 CITY: ENGLEWOOD STATE: CO ZIP: 80155-3309 BUSINESS PHONE: 3037929191 MAIL ADDRESS: STREET 1: 9697 E MINERAL AVE STREET 2: P O BOX 3309 CITY: ENGLEWOOD STATE: CO ZIP: 80155 10-K/A 1 FORM 10-K/A NO. 2 FOR PERIOD ENDED 5/31/94 1 FORM 10-K/A NO. 2 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED MAY 31, 1994 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from _____ to _____ Commission File No. 0-8947 JONES SPACELINK, LTD. --------------------- (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 l5(d) of the Securities Exchange Act of l934 during the preceding l2 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- Aggregate Market Value as of August 15, 1994 of voting stock held by non-affiliates: Class A Common Stock $12,805,855 Shares outstanding of each of the registrant's classes of common stock, as of August 15, 1994: Class A Common Stock: 77,665,200 shares Class B Common Stock: 415,000 shares Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. --x-- ----- 2 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, 1994 and 1993, and the related consolidated statements of operations, shareholders' investment and cash flows for each of the three years in the period ended May 31, 1994. 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, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended May 31, 1994, in conformity with generally accepted accounting principles. As explained in Note 1 of Notes to Consolidated Financial Statements, effective June 1, 1992, Jones Spacelink, Ltd. changed its method of accounting for income taxes. ARTHUR ANDERSEN & CO. Denver, Colorado, August 29, 1994 -57- 3 JONES SPACELINK, LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS As of May 31, 1994 and 1993
May 31, ------------------------- ASSETS 1994 1993 ---------- ---------- (In Thousands) CASH AND CASH EQUIVALENTS $ 4,892 $ 1,348 RECEIVABLES: Trade receivables, net of allowance for doubtful accounts of $694,000 in 1994 and $577,000 in 1993 8,837 6,687 Affiliated entities, net of allowance for doubtful accounts of $1,580,000 in 1994 and $1,351,000 in 1993 20,936 19,510 Other 715 517 INVESTMENT IN CABLE TELEVISION PROPERTIES: Property, plant and equipment, at cost, net of accumulated depreciation of $138,908,000 in 1994 and $111,155,000 in 1993 201,735 194,942 Franchise costs, net of accumulated amortization of $93,466,000 in 1994 and $76,148,000 in 1993 91,802 94,912 Subscriber lists, net of accumulated amortization of $34,922,000 in 1994 and $27,780,000 in 1993 21,531 23,948 Costs in excess of interests in net assets purchased, net of accumulated amortization of $6,511,000 in 1994 and $5,287,000 in 1993 43,525 41,251 Noncompete agreements, net of accumulated amortization of $1,079,000 in 1994 and $1,722,000 in 1993 566 792 Investments in domestic cable television managed partnerships and corporate stock 38,717 25,501 Investment in foreign cable television properties 57,752 33,560 ---------- ---------- Total Investment in Cable Television Properties 455,628 414,906 ---------- ---------- DEFERRED TAX ASSET, net of valuation allowance of $37,785,000 in 1994 and $26,161,000 in 1993 7,948 6,667 DEPOSITS, PREPAID EXPENSES AND OTHER 27,671 24,334 ---------- ---------- Total Assets $ 526,627 $ 473,969 ========== ==========
The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. -58- 4 JONES SPACELINK, LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS As of May 31, 1994 and 1993
May 31, -------------------------- LIABILITIES AND SHAREHOLDERS' INVESTMENT 1994 1993 ---------- ---------- (In Thousands) LIABILITIES: Accounts payable and accrued liabilities $ 46,334 $ 40,722 Subscriber prepayments and deposits 5,709 5,582 Credit facility and other debt of Jones Spacelink, Ltd. 74,886 69,265 Credit facility of Jones Intercable, Inc. 63,000 46,000 Subordinated debentures and other debt of Jones Intercable, Inc. 280,907 281,214 ---------- ---------- Total Liabilities 470,836 442,783 DEFERRED REVENUE AND INCOME 3,053 2,718 MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES 48,106 21,480 COMMITMENTS AND CONTINGENCIES (Note 12) SHAREHOLDERS' INVESTMENT: Class A Common Stock, $.01 par value, 220,000,000 shares authorized; 77,632,700 and 77,572,700 shares issued and outstanding at May 31, 1994 and 1993, respectively 776 776 Class B Common Stock, $.01 par value, 415,000 shares authorized, issued and outstanding 4 4 Additional paid-in capital 52,653 47,126 Accumulated deficit (46,717) (38,520) Less: Treasury stock of Jones Intercable, Inc. at cost, net of minority interests (2,084) (2,398) ----------- ---------- Total Shareholders' Investment 4,632 6,988 ---------- ---------- Total Liabilities and Shareholders' Investment $ 526,627 $ 473,969 ========== ==========
The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. -59- 5 JONES SPACELINK, LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended May 31, 1994, 1993 and 1992
May 31, ------------------------------------------- 1994 1993 1992 --------- -------- -------- (In Thousands, Except Per Share Data) REVENUES: Subscriber service fees 135,997 125,761 106,274 Management fees 19,435 19,140 17,814 Encryption sales and manufacturing services 6,430 4,048 3,680 Radio programming services 2,726 2,917 2,156 Brokerage fees 345 1,754 1,693 Uplinking fees, partnership fees, distributions and other 1,967 954 27,076 --------- -------- -------- Total Revenues 166,900 154,574 158,693 COSTS AND EXPENSES: Operating expenses Selling, general and administrative expenses (including amounts allocated (88,790) (81,559) (65,843) from Jones International, Ltd. of $4,421,000, $2,551,000, and $2,455,000 (14,208) (11,757) (8,552) in 1994, 1993 and 1992, respectively) Depreciation and amortization (53,397) (51,504) (47,789) --------- -------- -------- Operating Income 10,505 9,754 36,509 OTHER INCOME (EXPENSE): Interest expense (40,454) (47,177) (44,099) Interest charged to cable television systems held for resale to managed limited partnerships - - 1,171 Equity in losses of partnerships and affiliated companies (6,482) (4,209) (8,111) Interest income 4,863 4,346 4,791 Gain (loss) on sale of assets - (5,466) 29,933 Other, net (1,508) (2,258) 607 --------- -------- -------- Income (Loss) Before Income Tax Benefit (Provision), Minority Interests and Extraordinary Items (33,076) (45,010) 20,801 INCOME TAX BENEFIT (PROVISION) 1,281 2,842 (7,554) --------- -------- -------- Income (Loss) Before Minority Interests and Extraordinary Items (31,795) (42,168) 13,247 MINORITY INTERESTS IN NET (INCOME) LOSS OF CONSOLIDATED SUBSIDIARIES 21,386 31,826 (5,119) --------- -------- -------- Income (Loss) Before Extraordinary Items (10,409) (10,342) 8,128 EXTRAORDINARY ITEMS: Loss on early extinguishment of debt by Jones Intercable, Inc., net of related minority interests and income taxes - (3,399) (568) Tax benefit from loss carryforward utilization by Jones Intercable, Inc., net of minority interests - - 1,380 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING METHOD: Change in method of accounting for income taxes, net of minority interests - 329 - --------- -------- -------- Net Income (Loss) $ (10,409) $(13,412) $ 8,940 ========= ======== ======== PER SHARE DATA: Income (Loss) before extraordinary items $ (.13) $ (.13) $.11 Effect of extraordinary items - (.04) .01 Accounting change - - - --------- -------- -------- Net Income (Loss) Per Common Share $ (.13) $ (.17) $ .12 ========= ======== ======== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 78,001 76,793 76,346 ========= ======== ========
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. -60- 6 JONES SPACELINK, LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT For the years ended May 31, 1994, 1993 and 1992
Class A Class B Additional Accumu- Total Share- Common Stock Common Stock Paid-in lated Treasury holders'Invest- ($.01 par value) ($.01 par value) Capital Deficit Stock ment (Deficit) ---------------- ---------------- ----------- ------- -------- -------------- (In Thousands) BALANCE, May 31, 1991 $759 $4 $36,513 $(35,853) $(3,442) $ (2,019) Issuance of common stock by Jones Intercable, Inc., net of minority interests - - 2,255 - - 2,255 Effects of the change in minority interests - - (950) 614 - (336) Issuance of Jones Spacelink, Ltd. Class A Common Stock to employees - - 64 - - 64 Treasury stock transactions of Jones Intercable, Inc., net of minority interests - - - - 268 268 Dividends paid to Jones International, Ltd. by The Jones Group, Ltd. - - - (174) - (174) Net income - - - 8,940 - 8,940 ---- - ------- -------- ------- --------- BALANCE, May 31, 1992 759 4 37,882 (26,473) (3,174) 8,998 ---- -- ------- -------- ------- --------- Issuance of Class A Common Stock by Jones Intercable, Inc., net of minority interests - - 10,390 - - 10,390 Effects of change in minority interests - - (3,077) 2,991 - (86) Treasury stock transactions of Jones Intercable, Inc., net of minority interests - - - - 776 776 Issuance of Jones Spacelink, Ltd. Class A Common Stock for Jones Futura Foundation, Ltd. 11 - 1,282 (1,293) - - Issuance of Jones Spacelink, Ltd. Class A Common Stock to purchase fax encryption assets 6 - 649 - - 655 Purchase of Jones Earth Segment, Inc. - - - (333) - (333) Net loss - - - (13,412) - (13,412) ---- -- ------- -------- ------- --------- BALANCE, May 31, 1993 776 4 47,126 (38,520) (2,398) 6,988 ---- -- ------- -------- ------- ---------
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. -61- 7 JONES SPACELINK, LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT For the years ended May 31, 1994, 1993 and 1992
Class A Class B Additional Accumu- Total Share- Common Stock Common Stock Paid-in lated Treasury holders'Invest- ($.01 par value) ($.01 par value) Capital Deficit Stock ment (Deficit) ---------------- ---------------- ----------- ------- -------- -------------- (In Thousands) BALANCE, May 31, 1993 $776 $4 $47,126 $(38,520) $(2,398) $ 6,988 Issuance of Class A Common Stock by Jones Intercable, Inc., net of minority interests - - 8,068 - - 8,068 Effects of change in minority interests - - (2,753) 2,212 314 (227) Proceeds from stock options exercised - - 63 - - 63 Class A stock option grants - - 149 - - 149 Net loss - - - (10,409) - (10,409) ---- -- ------- -------- ------- -------- BALANCE, May 31, 1994 $776 $4 $52,653 $(46,717) $(2,084) $ 4,632 ==== == ======= ======== ======= ========
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. -62- 8 JONES SPACELINK, LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended May 31, 1994, 1993 and 1992
May 31, ------------------------------------------ 1994 1993 1992 -------- --------- --------- (In Thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(10,409) (13,412) $ 8,940 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Extraordinary tax benefit from loss carryforward utilization net of loss on early extinguishment of debt by Jones Intercable, Inc., and net of minority interests - 3,399 (812) Minority interests in net income (loss) of consolidated subsidiaries (21,386) (31,826) 5,119 Cumulative effect of change in method of accounting for income taxes, net of minority interests - (329) - Loss (gain) on sale of assets - 5,466 (29,933) Class A Common Stock Option expense 171 680 - Depreciation and amortization 53,397 51,504 47,789 Deferred income tax benefit (provision) (1,281) (2,553) 7,554 Deferral (recognition) of distribution revenue - 4,778 (20,373) Deferral (recognition) of deferred revenue and income 335 (849) (431) Equity in losses of limited partnerships and affiliated companies 6,482 4,209 8,111 Amortization of discounts on debentures - 348 808 Write-off of plant - 1,388 - Increase in trade accounts receivable (2,150) (729) (1,976) Decrease (increase) in other receivables, deposits, prepaid expenses and other assets (1,750) (2,276) 1,893 Increase (decrease) in accounts payable and accrued liabilities and subscriber prepayments and deposits 2,885 10,181 (3,807) -------- --------- --------- Net cash provided by operating activities 26,294 29,979 22,882 -------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of cable television systems by Jones Intercable, Inc. (27,880) (72,486) - Purchase of property, plant and equipment (29,150) (29,979) (19,295) Sale of cable television systems by Jones Intercable, Inc. - 18,170 15,000 Liquidation of partnership interest by Jones Intercable, Inc. - - 40,000 Reimbursement of partnership investment - - 7,256 Sales of cable television systems held for resale to managed partnerships and other affiliated entities - - 28,467 Investment in cable television systems held for resale to limited partnerships - - (26,923) Investments in cable television partnerships and corporate stock (28,585) (5,812) (19,534) Investment in Mind Extension University, Inc. by Jones Intercable, Inc. (15,758) (8,349) (1,651) Purchase of fax encryption assets - (393) - Other, net 3,947 3,229 3,128 -------- --------- --------- Net cash provided by (used in) investing activities (97,426) (95,620) 26,448 -------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Effects on shareholders' investment of changes in minority interests 7,505 (86) (336) Payment of dividends to Jones International, Ltd. by The Jones Group, Ltd. - - (174) Proceeds from borrowings, primarily by Jones Intercable, Inc. 89,531 211,472 140,530 Repayment of borrowings, primarily by Jones Intercable, Inc. (67,625) (227,288) (161,139) Redemption of debentures by Jones Intercable, Inc. - (225,557) (33,180) Proceeds from debenture offering by Jones Intercable, Inc. - 253,839 - Proceeds from issuance of Jones Intercable, Inc. Class A Common Stock and Class A Common Stock Options 55,519 58,234 9,949 Increase in advances to affiliated entities (1,426) (3,822) (4,571) Decrease (increase) in minority interests in consolidated subsidiaries (7,688) 4,093 (2,190) Changes in treasury stock of Jones Intercable, Inc., net of minority interests 314 776 268 Other, net (1,454) (7,626) 366 -------- --------- --------- Net cash provided by (used in) financing activities 74,676 64,035 (50,477) -------- --------- --------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,544 (1,606) (1,147) CASH AND CASH EQUIVALENTS, AT BEGINNING OF YEAR 1,348 2,954 4,101 -------- --------- --------- CASH AND CASH EQUIVALENTS, AT END OF YEAR $ 4,892 $ 1,348 $ 2,954 ======== ========= =========
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. -63- 9 JONES SPACELINK, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1994, 1993 AND 1992 (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, 1994, International, Glenn R. Jones and certain of their affiliates owned 65,976,148 shares, or approximately 85 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, 1994, Spacelink had authorized 220,000,000 shares of Class A Common Stock and 415,000 shares of Class B Common Stock. Each share of Spacelink's Class A Common Stock and Spacelink's Class B Common Stock shall have the same rights to dividends and distributions, when and as declared by the board of directors, whether paid in cash, property or stock. At May 31, 1994, 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"), Jones Earth Segment, Inc. ("Earth Segment") and Jones Intercable, Inc. ("Intercable"). At May 31, 1994, Spacelink owned directly 80.1 percent and indirectly an additional 2.8 percent of the Common Stock of Jones Group, 81 percent directly and indirectly 2.8 percent of Galactic Radio, 81 percent of Earth Segment and approximately 58 percent of the outstanding Common Stock (14 percent of the outstanding shares of both the Common Stock and Class A Common Stock combined) of Intercable. Because Intercable's Common Stock has a voting preference over Intercable's Class A Common Stock, 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 provisions of Intercable's loan agreements limit the amount of funds it may loan or advance to its affiliates, including Spacelink. As a result of these limitations, the net assets of Intercable are generally 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 limitations 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 Chairman of the Board and Chief Executive Officer, Glenn R. Jones, or his personal representative. Spacelink's share of the net restricted assets of Intercable, defined as Intercable's total shareholders' investment less related minority interests, included in the accompanying balance sheet was approximately $8,116,000 at May 31, 1994. -64- 10 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 data security products which provide encrypt/decrypt and message authentication capabilities. The security products are sold primarily to the financial community. In addition, Futurex provides high technology contract manufacturing services to the electronics industry. Galactic Radio, through a subsidiary, is in partnership with an unaffiliated company in the joint venture known as "Superaudio." Superaudio is in the audio programming business and provides satellite-delivered audio services to cable television system operators, which in turn provide the audio services to their cable system subscribers. Superaudio's accounts are reflected using the equity method of accounting. Galactic Radio is also in the business, through Jones Satellite Networks, Inc. ("Satellite Networks"), a wholly owned subsidiary, of delivering programming to radio stations throughout the United States via satellite. Satellite Network's accounts are consolidated with Galactic Radio. Earth Segment owns and operates a ground-to-satellite transmission ("Uplink") facility, which currently uplinks programming originated by Mind Extension University, Inc. ("ME/U"), Jones Infomercial Network, Inc. ("PIN"), Satellite Networks and Superaudio. Summary of Significant Accounting Policies Consolidated 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 investments purchased with a maturity of three months or less, when acquired. Supplemental disclosures of amounts paid for consolidated income taxes and interest during the years ended May 31, 1994, 1993 and 1992 are as follows:
1994 1993 1992 ------- -------- ------- (In Thousands) Income taxes received $ - $ - $(2,226) ======= ======== ======= Interest, net of amounts charged to cable television systems held for resale $39,686 $ 42,702 $44,730 ======= ======== =======
Supplemental disclosures of noncash investing and financing activities for the years ended May 31, 1994, 1993 and 1992 are as follows: -65- 11 During fiscal 1994, Spacelink recorded $149,000 of additional paid-in capital related to the Class A Common Stock options granted November 10, 1993. As described in Note 6, Futurex purchased substantially all of the tangible and intangible assets of an encrypted bank credit card draw authorization business for a net purchase price of $843,000 to be paid in quarterly installments beginning August 31, 1994. As a result of this acquisition, during fiscal 1994, Futurex acquired $877,000 of assets and assumed $877,000 of liabilities. As described in Note 6, in June 1992, Futurex purchased substantially all of the assets of a fax encryption business using $393,000 in cash and by issuing to the sellers 606,897 shares of Spacelink's Class A Common Stock. As a result of this acquisition, during fiscal 1993, Futurex acquired $984,000 of assets, assumed $68,000 of liabilities and acquired $654,000 of equity. In July 1992, as described in Note 6, Spacelink acquired 81 percent of the Class A and Class B Common Stock of Earth Segment by issuing one share of its Class A Common Stock. As a result of the Earth Segment acquisition, Spacelink acquired $527,000 of assets and assumed $860,000 of liabilities and acquired $333,000 of equity. In March 1993, as described in Note 6, Spacelink acquired Futura by issuing 1,026,113 shares of its Class A Common Stock to International. As a result of this acquisition, Spacelink acquired equity totalling $11,000. During fiscal 1994 and 1993, Intercable recorded $152,000 and $4,080,000, respectively, of additional paid-in capital related to the Class A Common Stock options granted November 9, 1993 and December 6, 1992, respectively. No material non- cash investing or financing transactions occurred during fiscal 1992. Investments in Cable Television Managed Partnerships and Corporate Stock - Investments in managed 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. Property, 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, 1994, 1993 and 1992. 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 over the lives of the franchises. Franchise rights acquired through purchase of cable television systems are stated 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 one to nineteen years. Cost in Excess of Interests in Net Assets Purchased - The cost of acquisitions in excess of fair values of net assets acquired is being amortized using the straight-line method over a 40-year life. Spacelink assesses the realizability of these assets through periodic independent appraisals and other review processes. Any impairments are recognized as expense in the consolidated statements of operations. -66- 12 Other Intangible Assets Costs assigned to subscriber lists and noncompete agreements are being amortized using the straight-line method over the following estimated useful lives: Subscriber lists 5-7 years Costs in excess of interests in net assets purchased 40 years Noncompete agreements 3-5 years
Deferred Financing Costs - Costs incurred in connection with the issuance of subordinated debentures and the execution of commercial bank credit agreements are deferred and amortized using the effective interest method over the life of such issues and agreements. Investment in Cable Television Systems Held for Resale to Managed Limited Partnerships - Revenues and expenses attributable to cable television systems held by Spacelink or Intercable on behalf of managed limited partnerships are not reflected in the consolidated statements of operations. Only the net cash deficiency generated during the first year of the holding period by systems held for resale, is capitalized as carrying costs and included in investments in cable television systems held for resale to managed limited partnerships. 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, 1994 and 1993 were approximately $2,883,000 and $2,548,000, respectively, and are included in deferred revenue and income in the accompanying consolidated balance sheets. See Note 5 for further information with respect to brokerage fees earned by Jones Group. Recognition of Partnership Fees and Distributions - 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 - Effective June 1, 1992, Spacelink and Intercable adopted Statement of Financial Accounting Standards("SFAS") No. 109, "Accounting for Income Taxes". Under the liability method specified by SFAS No. 109, a deferred tax liability or asset is determined based on the temporary differences between the financial reporting and tax bases of assets and liabilities as measured by the enacted tax rates which are expected to be in effect when these differences reverse. Prior to June 1, 1993, Spacelink and its consolidated subsidiaries excluding Intercable were members of a tax allocation agreement with International and International's other subsidiaries. Pursuant to the terms of the agreement, tax (provisions) benefits were 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. Effective June 1, 1993, International's investment in Spacelink fell below the 80 percent ownership requirement for inclusion in the sharing agreement. Therefore, effective June 1, 1993, Spacelink will file separate Federal and state income tax returns. 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. Net Income (Loss) Per Common Share - Net income (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 1994 presentation. -67- 13 (2) PROPOSED SALE OF SPACELINK'S ASSETS AND LIQUIDATION: On May 31, 1994, Intercable and Spacelink entered into a definitive agreement with respect to the reorganization of such companies. Pursuant to that agreement, Intercable will issue 4,100,000 shares of Class A Common Stock to Spacelink in exchange for substantially all of the assets of Spacelink and the assumption of Spacelink's liabilities. Spacelink would then dissolve and distribute to its shareholders such shares of Class A Common Stock, as well as the Common Stock of Intercable currently held by it. International, the controlling shareholder of Spacelink, has agreed to allocate a portion of the Class A Common Stock of Intercable otherwise allocable to it upon the liquidation of Spacelink to the minority shareholders of Spacelink. After giving effect to this allocation, and assuming the exercise of all outstanding options, each non-dissenting minority shareholder of Spacelink would receive .09629 shares of Intercable Class A Common Stock and .03567 shares of Intercable Common Stock for each share of Spacelink stock held on the closing date. Also on May 31, 1994, Intercable entered into definitive agreements with Bell Canada International Inc. ("BCI") which provide for BCI to invest $206,250,000 in Intercable in return for 7,500,000 shares of Class A Common Stock of Intercable, at a price of $27.50 per share. This is in addition to the $55,000,000 already invested in Intercable by BCI in March 1994 at $22.00 per share which resulted in BCI acquiring an approximate 13 percent interest in Intercable. In addition, BCI has agreed to purchase for cash 30 percent of the Class A Common stock sold by Intercable to third parties in the future at a price per share equal to the price received by Intercable from such third parties until such time as BCI has invested an aggregate of $400 million in Intercable. Further, on May 31, 1994, definitive agreements were entered into between BCI and International and Glenn R. Jones, Chairman and Chief Executive Officer of International, pursuant to which BCI will acquire an option to acquire in the future the shares of Common Stock of Intercable which represent the controlling interest in Intercable. The option will be acquired for a payment of $19 per share. Except in limited circumstances, the option will only be exercisable during the eighth year after closing. If exercised, BCI would then hold a sufficient number of shares of Common Stock of Intercable to enable it to elect seventy-five percent of the Board of Directors of Intercable. The closings of the foregoing transactions are expected to occur simultaneously in late 1994. Closing of the BCI investment in Intercable and closing of the reorganization of Intercable and Spacelink are subject to a number of conditions, including the approval of the shareholders of Intercable, and with respect to the reorganization between Spacelink and Intercable, the approval of the shareholders of Spacelink and the receipt of a favorable tax ruling from the Internal Revenue Service. If such conditions are not waived, the reorganization between Intercable and Spacelink may not occur, and Spacelink would continue to exist as a separate entity and would grant the option to BCI on the 2,859,240 shares of Common Stock of Intercable owned by it, in return for an option payment of $19 per share of Intercable Common Stock or $54,326,000. (3) 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 Interactive, 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. 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 26 percent of the leased space to International and certain affiliates of International on the same terms and conditions as the above-mentioned lease. -68- 14 The cable television systems owned by Spacelink and Intercable receive programming from ME/U, which is 51 percent owned by a subsidiary of International, 25 percent by Intercable, 11 percent by Glenn R. Jones and 13 percent by Spacelink, and from Superaudio, which is owned 50 percent by Galactic Radio and 50 percent by an unaffiliated party. Historically, Jones International Securities, Ltd., a wholly owned subsidiary of International ("Jones Securities"), acted 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. Jones Futura Foundation, Ltd., which was a wholly owned subsidiary of International until March 3, 1993 when it was acquired by Spacelink (See Note 6), has licensed to Futurex exclusive rights to manufacture, market and sell certain data encryption hardware and software products. The license fee was equal to 10 percent of Futurex's revenues from the sale of certain encryption hardware and software products. Jones Infomercial Networks, Inc., ("PIN") provides advertising time for third parties on certain Spacelink, Intercable and their managed partnership cable television systems, using those systems' ad sales slots. In consideration, the revenues generated from the third parties are shared two-thirds and one-third between PIN and the entities owning the cable television systems. Payments made to Intercable by PIN relating to Intercable's owned cable television systems totalled approximately $18,000 for the year ended May 31, 1994. No such payments were made to Spacelink during fiscal 1994 and to Spacelink and Intercable during fiscal 1993 and fiscal 1992. In fiscal 1993, Intercable entered into a license agreement with Jones Space Segment, Inc. ("Space Segment"), a subsidiary of International, to use a non-preemptible transponder on a domestic communications satellite which Space Segment currently leases. Intercable agreed to pay Space Segment $2,400,000 over a twelve-month period beginning on or about December 15, 1992, the delivery date of the transponder. Space Segment has the right to terminate the license at any time upon 30 days written notice to Intercable. On November 9, 1993, Intercable extended the term of the license agreement through December 31, 1994 on the same terms and conditions as the previous agreement. Intercable subsequently terminated the 1993 license agreement and entered into a new license agreement with Space Segment. Under the new license agreement, Intercable, Jones Infomercial Networks, Inc. ("PIN") and Jones Computer Network, Ltd. ("JCN"), affiliates of International, have a license to use the transponder for their respective purposes. Under the terms of the new agreement, Intercable agreed to pay Space Segment $200,000 per month from January 1994 through March 1994 and Intercable and PIN each agreed to pay $100,000 per month beginning April 1994 and until the launch of JCN. Thereafter Intercable, PIN and JCN will each pay $66,667 per month. Intercable recognized $2,300,000 and $700,000 of rental expense related to these lease agreements during the fiscal years ended May 31, 1994 and 1993. Jones Financial Group, Ltd. ("Jones Financial Group") performs services for Intercable as its agent in connection with joint venture and other financial arrangements. Intercable paid an advisory fee of L.414,854 (approximately $632,600) to Jones Financial Group in fiscal 1995 for its services to Intercable in connection with Intercable's transfer of all of its interests in its cable/telephony properties in the United Kingdom to Bell Cablemedia plc (See Note 3). Jones Earth Segment, Inc. ("Earth Segment") provides playback and uplinking services primarily to its programming affiliates. Earth Segment charges these affiliates for its services using rates which are calculated to achieve a specified rate of return on investment. For the fiscal year ending May 31, 1994, Earth Segment charged ME/U and PIN $521,000 and $35,000, respectively. For the fiscal year ended May 31, 1993, Earth Segment charged ME/U $233,000. -69- 15 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 operations. Spacelink believes that the methodology used in the allocation of expenses for services rendered to it by International are reasonable. Such allocated expenses net of reimbursements from managed limited partnerships and other affiliates, on a consolidated basis, were as follows:
For the Year Ended May 31, ---------------------------------- 1994 1993 1992 ------- ------- ------ (In Thousands) Jones Interactive, Inc. $1,240 $ 910 $ 807 Jones Properties, Inc., net of subleasing reimbursements 494 416 511 Superaudio 183 176 157 Mind Extension University, Inc. 125 103 87 Jones Space Segment, Inc. 2,300 700 - Jones Futura Foundation, Ltd. - 100 178 Jones International Securities, Ltd. - 72 645 Other operating, general and administrative expenses 79 74 70 ------ ------- ------ Total allocated expenses, net of reimbursements $4,421 $2,551 $2,455 ====== ====== ======
Spacelink and its consolidated subsidiaries including Intercable reimburse International for certain allocated costs as described above. Through fiscal 1992, Spacelink and its consolidated subsidiaries excluding Intercable were allocated tax provisions (benefits) from International pursuant to a tax allocation agreement with International. Because International's investment in Spacelink fell below the 80 percent ownership requirement for inclusion in the sharing agreement, effective June 1, 1993, Spacelink will file separate Federal and state income tax returns. In August 1992, the tax allocation agreement with International was amended (the "Tax Sharing Agreement") giving International the option to either make a payment of the tax benefits due the subsidiary members of the Tax Sharing Agreement or to defer such payments until a subsequent taxable period in which the subsidiary member generates taxable income and has a tax payment due either to International or to a Federal or state taxing authority. Any deferred amounts will be due and payable no later than five years from the date the deferred amount originates and such deferred amounts will accrue interest at the prime rate in effect at the time the deferred amount originates. These deferral provisions of the Tax Sharing Agreement also apply to the outstanding amounts due Spacelink from International for tax benefits for the fiscal year ended May 31, 1991 of $826,000. For the fiscal years ended May 31, 1993 and 1992, the tax benefits due Spacelink from International totalled $289,000 and $355,000, respectively. Spacelink, International, Glenn R. Jones and Intercable currently own 13 percent, 51 percent, 11 percent and 25 percent, respectively, of the outstanding stock of ME/U, a company engaged in the provision of educational programming to cable operators and others. In September 1991, Spacelink's Board of Directors authorized Spacelink to make advances of up to $2,000,000 to International and/or certain of its affiliates, including ME/U. These amounts accrued interest at Spacelink's weighted average cost of borrowing plus 2 percent, and were due 180 days after demand by Spacelink. These advances to International were repaid in April 1993. -70- 16 At May 31, 1994 and 1993, amounts due from International to Spacelink and its consolidated subsidiaries including Intercable were as follows:
May 31, May 31, 1994 1993 ------- ------- (In Thousands) Spacelink: Amounts due for tax benefits and related interest $2,089 $ 1,481 Other advances 117 (89) ------ ------- Total due Spacelink 2,206 1,392 ------ ------ Intercable: Advances to Mind Extension University, Inc. and accrued interest 2,000 2,000 ------ ------ Total due Intercable 2,000 2,000 ------ ------ Total due from International $4,206 $3,392 ====== ======
In connection with the above advances due Spacelink and its consolidated subsidiaries including Intercable, interest was charged to International on these advances at rates which approximated International's average borrowing rates during the respective periods. For the years ended May 31, 1994, 1993 and 1992 Spacelink and its consolidated subsidiaries recorded interest income totalling $410,000, $462,000, and $374,000, respectively. Also, see Note 8 for other information with respect to transactions between Spacelink, Intercable and their managed limited partnerships. See Note 10 for information with respect to income tax provisions (benefits) between Spacelink and International. (4) INVESTMENTS IN AFFILIATES BY INTERCABLE: Investments in Mind Extension University, Inc. by Intercable - During fiscal 1992 and 1993, Intercable invested $10,000,000 in Mind Extension University, Inc., ("ME/U"), an affiliated company that provides educational programming through affiliated and unaffiliated cable television systems, for 25 percent of the stock of ME/U, which also received certain advertising avails and administrative and marketing considerations from Intercable. The number of shares of Class A Common Stock of ME/U issued to Intercable was based on the average of two separate independent appraisals of ME/U. In May 1993 and December 1993, the Board of Directors of Intercable also approved a $10,000,000 advance and a $5,000,000 advance, respectively, to ME/U on an as-needed basis. Of these advances, one-half will be converted into shares of Class A Common Stock of ME/U at a price per share equal to the value of such shares as established by the next equity investment in ME/U by an unaffiliated party. Any amount not converted into equity will earn interest at Intercable's weighted average cost of borrowing plus two percent. As of May 31, 1994, all of the total $15,000,000 had been advanced. On May 3, 1994, the Board of Directors of Intercable approved an additional $5,000,000 advance to ME/U on an as needed basis, interest accrued at Intercable's weighted average cost of borrowing plus two percent. As of May 31, 1994, $758,000 of the $5,000,000 had been advanced. These advances have been reflected as investment in cable television partnerships and corporate stock in the accompanying consolidated balance sheets due to their expected long-term nature. Jones Intercable Investors, L.P. - Intercable is the general partner of this partnership, which was formed on September 18, 1986 and Intercable owns a one percent general partner interest. In a series of transactions, Intercable purchased an approximate 19 percent -71- 17 ownership interest. Intercable has a gross investment of approximately $18,090,000 in this partnership at May 31, 1994. Intercable's net investment in this partnership totalled approximately $5,130,000 at May 31, 1994. Investment in Jones Global Group by Intercable - Intercable owns a 38 percent interest in Jones Global Group, Ltd. ("Jones Global Group"), a Colorado corporation of which 62 percent is owned by International. On July 22, 1994, Jones Global Group and certain of Jones Global Group's wholly- owned subsidiaries transferred all of their interests in their cable/telephony properties in the United Kingdom to Bell Cablemedia plc, a public limited company incorporated under the laws of England and Wales, in exchange for 3,663,584 American Depository Shares ("ADSs") representing 18,317,920 Ordinary Shares of Bell Cablemedia. At the closing, Jones Global Group transferred its equity interest in the companies that own the Leeds and Aylesbury-Chiltern franchises, its general partner interest in Jones United Kingdom Fund, Ltd. and the assets of its United Kingdom management subsidiary to Bell Cablemedia. Also on July 22, 1994, Intercable and certain of its wholly-owned subsidiaries transferred all of their interests in their cable/telephony properties in the United Kingdom to Bell Cablemedia in exchange for 6,035,648 ADSs representing 30,178,240 Ordinary Shares of Bell Cablemedia. At the closing, Intercable transferred its equity interest in the companies that own the Leeds and South Hertfordshire franchises and Intercable's equity interest in the shareholder loans to ELT Acquisition Company Limited to Bell Cablemedia. In addition, the Norwich, Peterborough Broadland and Fenland franchises, which were acquired by Intercable for $15,500,000 during fiscal 1994, were also transferred. As a result of these transactions, Intercable and Jones Global Group no longer own any direct interest in cable/telephony properties in the United Kingdom. Prior to the closing of these transactions, Bell Cablemedia was indirectly owned 80 percent by Bell Canada International Inc. ("BCI") and 20 percent by Cable and Wireless plc ("C&W"). Intercable and Jones Global Group's agreement to contribute their United Kingdom holdings to Bell Cablemedia was contingent upon the successful completion of Bell Cablemedia's initial public offering, which closed on July 22, 1994. The initial offering price for the ADSs was $17.00 per ADS. As part of the initial offering, Jones Global Group sold 1,100,000 ADSs providing net cash proceeds of $17,547,888. The proceeds from the sale of the ADSs by Jones Global Group are intended to allow it to satisfy expected U. S. Tax liabilities in connection with the transactions. The ADSs received by Intercable are "restricted securities" within the meaning of Rule 144 promulgated under the Securities Act of 1993 (the "Securities Act"), and Intercable will not be able to sell its ADSs unless an exemption from registration under the Securities Act is available or unless its ADSs are registered by a subsequent registration statement. Bell Cablemedia, BCI, C&W, Intercable and Jones Global Group have agreed that, for a period of 180 days after July 15, 1994 (the date of the definitive prospectuses used in Bell Cablemedia's ADS Offerings), they will not sell or otherwise dispose of any ADSs or Ordinary Shares of Bell Cablemedia (except for those ADSs received by Jones Global Group that were sold as part of the ADS Offerings) without prior written consent of the lead U.S. underwriters of the ADS Offerings. After giving effect to Bell Cablemedia's acquisition of the United Kingdom holdings of Intercable and Jones Global Group and the closings of the ADSs Offerings on July 22, 1994, BCI indirectly owns approximately 42.2 percent, C&W indirectly owns approximately 12.8 percent, Intercable owns approximately 9.7 percent and Jones Global Group owns approximately 4.4 percent of the issued and outstanding shares of Bell Cablemedia. Based upon the quoted market price of $21.50 per ADS at August 18, 1994, the quoted market value of Intercable's direct investment totalled approximately $129,766,000. Intercable's indirect investment through its 38 percent ownership of Jones Global Group totalled $20,945,000. Due to the affiliated nature of the transaction and Intercable's indirect continuing interest in the UK properties, the investment in Bell Cablemedia is not reflected at fair market value in accordance with the SFAS #115 "Accounting for Certain Investments in Debt and Equity Securities." At May 31, 1994, Intercable's net investment in these UK properties totalled $50,067,800. Intercable paid an advisory fee of L.414,854 (approximately $632,600) to Jones Financial Group in fiscal 1995 for its services to Intercable in connection with the aforementioned transactions. Jones Global Group paid an advisory fee of L.251,812 (approximately $384,000) to Jones Financial Group for its services to Jones Global Group in connection with the aforementioned transactions. Jones Financial Group is owned by International and Glenn R. Jones. Jones Spanish Holdings - Jones Spanish Holdings, Inc. ("Spanish Holdings") is an affiliate indirectly owned 38 percent by Intercable and 62 percent by International. Spanish Holdings has continued cable television system acquisition, development and operations in Zaragoza, Spain but has discontinued its operations in Jerez de la Frontera/Puerto Santa Maria, Spain. This affiliate currently is seeking to acquire the rights to develop cable television operations in Spain. Intercable has -72- 18 made advances totalling $7,764,000 and $769,000, respectively, at May 31, 1994 and 1993 to fund Spanish Holdings' activities to date. Additional advances may be made in the future. These advances have been reflected as investments in cable television partnerships in the accompanying consolidated balance sheets due to their long-term nature, with interest charged at Intercable's weighted average cost of borrowing. Intercable's net investment in all of its Spanish activities was approximately $7,684,000 at May 31, 1994. Intercable is seeking to sell its Spanish system to Bell Cablemedia in fiscal 1995. (5) 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:
For the Year Ended May 31, ---------------------------------- 1994 1993 1992 ------- ------- ------ (In Thousands) Earned from Spacelink and Intercable $ 680 $ 523 $ 65 Earned from third parties - - 62 Earned from Managed Limited Partnerships - 2,214 1,135 ------ ------ ------ Total Brokerage Fees 680 2,737 1,262 Recognition (Deferral) of Brokerage Fees (335) (983) 431 ------- ------- ------ Brokerage Fees, net $ 345 $1,754 $1,693 ====== ====== ======
(6) ACQUISITIONS BY SPACELINK: On March 11, 1994, Futurex purchased substantially all of the tangible and intangible assets comprising the Excrypt product lines for a net purchase price of $843,000. Futurex shall pay the purchase price in quarterly installments beginning August 31, 1994, which amounts will be based on certain fees generated by the business and collected by Futurex during the preceding quarter subject to certain minimums and maximums. The acquisition was accounted for as a purchase. The Excrypt product line serves the encrypted bank credit card draw authorization market. On June 5, 1992, Futurex purchased from TRW Electronic Products Inc. ("EPI") and TRW Inc. ("TRW"), substantially all of the assets, properties and rights held by EPI or TRW that relate to the manufacture of facsimile encryption devices ("fax encryptors") for the commercial communications security business. EPI and TRW also entered into a covenant not to compete. The $1,046,000 purchase price and the covenant not to compete was paid using $393,000 in cash and by issuing to the sellers 606,897 shares of Spacelink's Class A Common Stock. The acquisition was accounted for as a purchase. In addition, Futurex agreed to pay to TRW a royalty for a period of ten years equal to five percent of certain revenues received by Futurex from the sale of fax encryptors. On July 29, 1992, Spacelink purchased an 81 percent interest in Earth Segment from International in exchange for one share of Spacelink's Class A Common Stock. The remaining 19 percent of Earth Segment is owned by Glenn R. Jones. The estimated replacement cost, net of depreciation, of Earth Segment's assets totalling $1,247,000, which is comprised primarily of studio equipment and the costs incurred through July 29, 1992 to license and design an uplink facility, is approximately equal to the total liabilities of Earth Segment assumed by Spacelink. The acquisition of 81 percent of Earth Segment 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 Earth Segment are included in Spacelink's Consolidated Statements of Operations, beginning on July 29, 1992. During fiscal 1993, Earth Segment purchased four acres of land in the Inverness Business Park area of Englewood, Colorado and constructed a ground-to-satellite transmission ("uplink") facility to permit satellite transmission of programming originated by ME/U, PIN and Spacelink's affiliated audio programming companies. Earth Segment owns an FCC license for the operation of an uplink facility. The design of the uplink facility has been phased to allow expansion from time to time according to Spacelink's needs. The first phase was completed in June 1993 at a cost of approximately $5,022,000. -73- 19 On March 3, 1993, Spacelink issued 1,026,113 shares of its Class A Common Stock to International for all of the outstanding shares of Jones Futura Foundation, Ltd., ("Futura") which is the owner of all rights in and to certain data encryption products (the "Products"), including hardware specifications and designs and software source code. The Products exist in several versions, each version intended to be compatible with a different brand of microcomputer, that encrypt, decrypt and authenticate data stored in and communicated between microcomputers. Historically, Futurex licensed the rights from Futura to manufacture, use, market, sell and otherwise exploit the Products in exchange for the payment of a license fee to Futura of 10 percent of sales from the Products. For the purposes of this transaction, Futura was valued at $844,000, which was based on the discounted value of the estimated future revenues from the sale of the Products. In addition, for purposes of determining the number of shares issued, Spacelink's Class A Stock was valued at $.82 per share, which represented the average trading price of the Class A Stock for the preceding three month period. The acquisition of Futura 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 costs. However, as required by generally accepted accounting principles, the excess of fair market value over Futura's historical cost was recorded using the price of Spacelink's Class A Common Stock as of the date the transaction closed. The price of Spacelink's Class A Common Stock on March 3, 1993 was $1.25, resulting in a $1,293,000 charge to accumulated deficit in the accompanying consolidated financial statements. (7) SALES AND ACQUISITIONS BY INTERCABLE: Sales of Cable Television Systems by Intercable - On August 13, 1991, Intercable entered into an agreement with Crown Cable Wisconsin, Inc. ("Crown"), a subsidiary of Hallmark Cards, Inc., to sell its Onalaska, Wisconsin cable television system (the "Onalaska System") for approximately $15,000,000. Closing on this transaction occurred on December 19, 1991. Intercable recognized a gain on the sale of its Onalaska System before income taxes of approximately $6,400,000 in fiscal 1992. During fiscal 1993, Intercable sold the cable television systems serving a portion of San Diego, California and Riverside, California for $18,170,000. Intercable recognized a loss relating to these transactions of $5,466,000. Jones Group received a brokerage fee totalling $454,000 or 2-1/2 percent of the purchase prices. On January 7, 1994, Intercable entered into an agreement with Bresnan Communications Company ("Bresnan"), to sell its Gaston County, North Carolina cable television system (the "Gaston System") to Bresnan for $36,500,000, subject to normal closing adjustments. Bresnan and Time Warner Cable, a division of Time Warner Entertainment, L.P. ("TWC"), agreed to a like-kind exchange of assets whereby TWC would acquire the Gaston System from Bresnan and Bresnan would acquire from TWC the assets of cable television systems owned by TWC. Closing on this transaction occurred in the first quarter of fiscal 1995. Jones Group received a brokerage fee of $912,500 or 2 - 1/2 percent of the sales price. Proceeds from this sale were used to repay amounts outstanding on Intercable's credit facility. Intercable will recognize a gain before income taxes of $15,433,000 during the first quarter of fiscal 1995. Acquisition of Cable Television Systems by Intercable - On September 29, 1992, Intercable entered into an agreement with Jones Intercable Investors, L.P. (the "Partnership"), a publicly traded master limited partnership for which Intercable is general partner, to acquire from the Partnership the cable television system serving the areas in and around Alexandria, Virginia (the "Alexandria System") for $73,200,000. The purchase price was determined based on the average of three separate, independent appraisals of the Alexandria System. In addition, Jones Group received a brokerage fee of approximately $1,831,000 or 2-1/2 percent of the purchase price. Closing on this transaction occurred on November 2, 1992. Intercable funded this acquisition with $60,000,000 drawn on its revolving credit facility, the $4,778,000 distribution Intercable received from the Partnership's sale proceeds as a Class A unit holder in the Partnership, the $2,832,000 distribution paid to Intercable which represented the accrued but unpaid distributions on Class B units held by Intercable during the first three years of the Partnership's operations, and cash on hand. In addition, Intercable, through its 19 percent ownership interest in the Partnership, realized a $9,018,000 gain upon the sale of the Alexandria System which was recorded as a reduction in the basis of the assets purchased as a result of Intercable's continuing equity interest in the Alexandria System. The system served approximately 35,000 basic subscribers at November 30, 1992. The acquisition was accounted for using the purchase method of accounting. The results of operations of the Alexandria System are included in the accompanying consolidated statements of operations beginning in November 1992. On January 28, 1993, Intercable entered into an agreement with American Cable TV Investors 2 ("ACT 2") (the "Agreement") to acquire for its own account the cable television systems serving North Augusta, South Carolina, and surrounding areas (the "North Augusta System") for $28,500,000 subject to normal closing adjustments. The North Augusta System is contiguous to the Augusta, Georgia cable system managed by Intercable on behalf of one of its -74- 20 partnerships. As a result of renegotiation of the Agreement between Intercable and ACT 2, the purchase price was reduced to $27,200,000, subject to normal closing adjustments. Jones Group received a brokerage fee totalling $680,000 or 2 - 1/2 percent of the purchase price. The transaction closed on December 15, 1993 and was accounted for using the purchase method of accounting. (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 and operate 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 generally allocated one 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, the sponsor is 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 the sponsor and are generally expensed. In addition, the sponsor is allocated expenses associated with the marketing of limited partnership interests. For the fiscal years ended May 31, 1994, 1993 and 1992, the sponsors recognized as "other expense" offering costs in excess of amounts reimbursable by limited partnerships totalling $494,000, $500,000, and $2,046,000, respectively. 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 $1,500,000 and $2,050,000 at May 31, 1994 and 1993, 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 generally of five 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. The general partner is also entitled to partnership distributions other than from cash flow, such as from the sale or refinancing of systems or upon dissolution of the partnerships, which are a portion of the net remaining assets of such partnership ranging from 15 percent to 40 percent after payment of partnership debts and after investors have received an amount equal to their capital contribution plus, in most cases, a preferential return on their investment. -75- 21 Intercable recognized fees and distributions totalling $4,778,000 and $26,790,000, for the years ended May 31, 1993 and 1992, respectively. No such fees and distributions were recognized during fiscal 1994. The $4,778,000 distribution received during fiscal 1993 from Jones Intercable Investors L.P., in which Intercable has a 19 percent limited partner interest, upon the sale to Intercable of the Alexandria System, was recorded as a reduction in Intercable's investment in Jones Intercable Investors, L.P. Approximately $20,373,000 of the distributions recognized during fiscal 1992 were deferred in fiscal 1991 as a result of Intercable's continuing equity interest in Jones Crown Partners, an Intercable- managed partnership. An additional $363,000 of such distributions, relating to the Jones Crown Partners transaction, was received and deferred during fiscal 1992. The total of these two distributions, $20,736,000, was recognized upon the liquidation of Intercable's interest in Jones Crown Partners. The remaining amount recognized in fiscal 1992 represents a distribution received upon the sale of the remaining cable television system owned by Cable TV Fund 11-E/F Joint Venture to an unaffiliated party. 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 paid to corporate personnel, rent, data processing 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 have been based primarily on total revenues, total assets and actual time spent by Spacelink and Intercable employees with respect to each partnership managed. Remaining overhead costs have been allocated based on revenues and/or the relative costs of partnership assets managed. As of December 1993, remaining overhead costs have been allocated based solely on revenues. 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 $28,620,000, $27,371,000, and $25,167,000 for the years ended May 31, 1994, 1993 and 1992, 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 has deferred the collection of a portion of one of its brokerage fees from an Intercable-managed partnership. Such advances and unpaid brokerage fees totalled $18,559,000 and $16,604,000 at May 31, 1994 and 1993, respectively. The advances, excluding the unpaid brokerage fees, bear interest at rates equal to the lending entity's weighted average cost of borrowing. Interest charged to limited partnerships for the fiscal years ended May 31, 1994, 1993 and 1992 was $1,641,000, $1,513,000 and $1,826,000, respectively. 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, ----------------------------------- ------------------------------------ 1993 1992 1991 1993 1992 1991 -------- -------- --------- ---------- -------- ---------- (In Thousands) (In Thousands) Total assets $133,956 $147,478 $ 141,566 $ 852,604 $921,664 $1,017,560 Debt 77,475 74,840 63,035 590,540 590,698 629,194 Amounts due to general partner 4,164 3,319 2,201 16,467 12,690 8,762 Partners' capital (net of accumulated deficit) 48,174 64,847 72,975 214,056 284,058 350,348
-76- 22
Spacelink's Managed Limited Intercable's Managed Limited Partnerships Partnerships ----------------------------------- ------------------------------------ As of December 31, As of December 31, ----------------------------------- ------------------------------------ 1993 1992 1991 1993 1992 1991 -------- -------- --------- ---------- -------- ---------- (In Thousands) (In Thousands) Revenues $ 41,617 $ 37,770 $ 29,629 $ 344,373 $334,948 $ 361,431 Depreciation and amortization 21,907 20,463 17,430 135,736 151,879 187,607 Operating loss (8,529) (8,175) (8,498) (24,458) (29,503) (58,429) Gain on sale of assets - - - 59,939 - Net loss (13,328) (13,108) (13,387) (60,327) (15,945) (126,584)
(9) SUBORDINATED DEBENTURES AND OTHER DEBT: At May 31, 1994 and 1993, Spacelink's and its consolidated subsidiaries' debt consisted of the following:
1994 1993 -------- -------- (In Thousands) DEBT OF SPACELINK: Revolving credit facility and term loan $ 74,000 $ 69,000 Capitalized lease obligations and non-interest bearing notes 886 265 -------- -------- Total Debt of Spacelink 74,886 69,265 -------- -------- DEBT OF INTERCABLE: Subordinated Debentures- Debentures due July 15, 2004, interest payable semi-annually at 11.5%, redeemable at Intercable's option on or after July 15, 1997 at 106.75% of par declining to par by July 15, 2000 160,000 160,000 Debentures due March 1, 2008, interest payable semi-annually at 10.5%, redeemable at Intercable's option on or after March 1, 2000 at 105.25% of par, declining to par by March 1, 2005 100,000 100,000 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 19,368 19,468 Credit facility 63,000 46,000 3.9% to 17% capitalized equipment lease obligations due in installments through 1998 1,136 1,228 Non-interest bearing notes due 1995 through 1999 403 518 -------- -------- Total Debt of Intercable 343,907 327,214 -------- -------- Consolidated Debt $418,793 $396,479 ======== ========
On April 13, 1993, Spacelink entered into new credit agreements, which agreements include a $65,000,000 Revolving Credit Facility (the "Revolving Facility") and a $10,000,000 Term Loan (the "Term Loan"). The Revolving Facility commitment begins to reduce on August 31, 1994, with a final maturity date of February 28, 2001. The Revolving Facility bears interest, at Spacelink's option, at the Base Rate plus 3/4 to 1-3/8 percent, LIBOR plus 1-3/4 to 2-3/8 percent or the Certificate of Deposit rate plus 2 to 2-5/8 percent. For the year ended May 31, 1994, Spacelink's effective interest rate on the Revolving Facility was 6.64 percent. The Term Loan matures May 31, 2001 and requires principal payments beginning May 31, 1995. Borrowings under the Term Loan bear interest at rates consistent with the rates of the Revolving Facility. Both the Revolving Facility and the Term Loan are secured by substantially all of Spacelink's assets with the exception of Spacelink's investment in Intercable. The security is -77- 23 administered pursuant to an intercreditor agreement between the Revolving Facility banks and the Term Loan banks, which agreement specifies the nature and priority of the security interests. 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. Effective November 30, 1993, Spacelink amended its Revolving Facility to increase the allowable ratio of debt to management fees and cable operating income before depreciation and amortization (the "Debt Ratio") from 6.5 to 1.0 to 6.75 to 1.0 in order to make available to it a majority of its Revolving Facility and to mitigate some of the impact of the recent cable reregulation on its liquidity. In August 1994, Spacelink received a waiver for the scheduled Revolving Facility reductions for August 31 and November 30, 1994, which payment will now be due on February 28, 1995. In addition, Spacelink also received a waiver of certain financial covenants for the quarters ending August 31 and November 30, 1994 provided that its Debt Ratio not exceed 8.0 to 1.0 at the end of such fiscal quarters, and a waiver of a financial covenant requiring a certain level of dividends from Jones Group for the year ended May 31, 1994. In consideration for the waivers, Spacelink agreed to pay the banks fees totalling $375,000 payable on the earlier of: (a) the date the Revolving Facility and Term Loan are paid in full, (b) the date Spacelink receives the option payment from BCI, or (c) February 28, 1995. In addition, Spacelink agreed to pay fees of $40,000 per month beginning September 30, 1994 and continuing until one of the following events occurs: (a) the Revolving Facility and Term Loan are paid in full, (b) Spacelink receives the option payment from BCI, or (c) certain interest rate terms of the Revolving Facility and Term Loan are amended. In the event the reorganization between Intercable and Spacelink does not occur, Spacelink would continue to exist as a separate entity and if the Intercable-BCI Agreement is closed, Spacelink would grant an option to BCI on the 2,859,240 shares of Common Stock of Intercable owned by Spacelink, in return for an option payment of $19 per share of Intercable Common Stock, or $54,326,000. The $54,326,000 of proceeds would be used to substantially reduce Spacelink's debt, fund its capital expenditures and its other working capital needs. At May 31, 1994, borrowings outstanding under Spacelink's $65,000,000 Revolving Facility and $10,000,000 Term Loan totalled $64,000,000 and $10,000,000, respectively. Principal payments under the terms of Spacelink's credit facility and other debt are due as follows:
(In Thousands) 1995 $ 7,398 1996 9,047 1997 9,047 1998 8,944 1999 14,000 Thereafter 26,450 ------- Total $74,886 =======
The following is a description of Intercable's debt which, while included in the consolidated financial statements, is non- recourse to Spacelink. In addition to the terms described in the above table describing the Subordinated Debentures and Other Debt of Intercable, 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, the 11.5 percent Senior Subordinated Debentures due 2004 and the Convertible Subordinated Debentures described above provide for annual sinking fund payments which are calculated to retire 62 1/2 percent to 75 percent of the issues prior to maturity after consideration of the debt redemptions discussed below, as follows:
Annual Sinking Fund Commencement Debenture Issue Payment Date ------------------------ ------------------- ------------- Debentures due July 2004 $50,000,000 July 15, 2002 Convertible Debentures 3,000,000 June 1, 1998
Other than the amounts listed above, Intercable has no other significant debt maturities. On June 18, 1993, Intercable filed two shelf registration statements with the Securities and Exchange Commission relating to the offering of $500,000,000 of Senior Debt Securities, Senior Subordinated Debt Securities and Subordinated Debt Securities and the offering of 6,000,000 shares of Class A Common Stock of Intercable. These registration statements are effective, but no securities have been sold except 2,500,000 shares of Class A Common -78- 24 Stock sold to BCI in the fourth quarter of fiscal 1994. The proceeds from these offerings will be added to the general funds of Intercable, and may be used to make acquisitions of domestic cable television systems or interests therein, and for general corporate purposes. On December 8, 1992, Intercable entered into a new $300,000,000 reducing revolving credit agreement with a number of commercial banks. The amount of borrowings available under this agreement remains at $300,000,000 through May 31, 1995, after which the availability is reduced quarterly until expiration on November 30, 2000. Interest on amounts outstanding under the credit facility range from LIBOR plus 1 3/8 percent to LIBOR plus 2 1/2 percent depending upon whether certain financial ratios have been achieved. For the year ended May 31, 1994, Intercable's effective interest rate on the credit facility was 5.6 percent. A fee of 1/2 percent per annum on the unused portion of the new commitment is also required. Substantially all of Intercable's cable television related assets are pledged as security under the agreement. In March 1994, Intercable used $55,000,000 of proceeds received from the sale of 2,500,000 shares of Class A Common Stock to BCI to repay amounts outstanding under the credit facility. At May 31, 1994, Intercable had $63,000,000 outstanding under the credit facility, leaving $237,000,000 of potential availability on this credit facility; however, due to covenant restraints, Intercable can access only approximately $42,000,000 of this availability. At May 31, 1994, the carrying amount of Intercable's long-term debt was $343,907,000 and the estimated fair value was $354,707,000. The fair value of Intercable's long-term debt is estimated based on the quoted market prices for the same issues. (10) INCOME TAXES: Change in Accounting Method Effective June 1, 1992, Spacelink adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". Under the liability method specified by SFAS No. 109, a deferred tax liability or asset is determined based on the temporary differences between the financial reporting and tax bases of assets and liabilities as measured by the enacted tax rates that are expected to be in effect when these differences reverse. A valuation allowance must be established for any portion of a deferred tax asset for which it is more likely than not that a tax benefit will not be realized. The financial effect of the adoption of SFAS No. 109 has been reflected in Spacelink's financial statements in fiscal 1993. The cumulative effect of the change in the method of accounting for income taxes, attributable to fiscal years prior to 1993, was a decrease in net losses of $329,000, or $-0- per share, which has been reflected as a change in accounting method in the accompanying financial statements, net of minority interests. Deferred tax expense or benefit is the result of changes in the liability or asset recorded for deferred taxes. Current period changes in Spacelink's temporary differences and losses from operations, which result primarily from depreciation and amortization, resulted in deferred tax benefits of $45,733,000 and $32,828,000, respectively, which were offset by valuation allowances of $37,785,000 and $26,161,000, respectively, during fiscal 1994 and 1993. Computation of the cumulative and current tax provision under SFAS No. 109 requires recognition of the deferred tax liabilities and assets from the expected future tax consequences of temporary differences. Additionally, recognition is given for the future tax benefits of existing tax basis net operating loss and tax credit carryforwards, after reduction by a valuation allowance determined after evaluation of future factors affecting realization of the carryforwards. Income tax benefits of $2,042,000 and $2,842,000, respectively, were recorded in fiscal 1994 and 1993. -79- 25 Components of income tax expense for Federal and state income tax purposes are as follows:
For the Year Ended May 31, ----------------------------------- 1994 1993 1992 ------- ------- ------ (Stated In Thousands) Current (benefit) provision Federal $ - $ (265) (1,185) State - (24) 1,185 ------- ------- ------ Current (benefit) provision - (289) - ------- ------- ------ Deferred (benefit) provision Federal (1,172) (2,336) 7,554 State (109) (217) - ------- ------- ------ Deferred (benefit) provision (1,281) (2,553) 7,554 ------- ------- ------ Total income tax (benefit) provision on income from operations (1,281) (2,842) 7,554 ------- ------- ------ Total income tax benefit on extraordinary items - - (7,389) ------- ------- ------ Cumulative effect of change in method of accounting for income taxes, net of minority interest - (329) - ------- ------- ------ Total income tax (benefit) provision $(1,281) $(3,171) $ 165 ======= ======= ======
The following table reconciles the statutory Federal income tax rate to the effective tax rate:
For the Year Ended May 31, ----------------------------------- 1994 1993 1992 -------- -------- -------- (Stated In Thousands) Income tax provision (benefit) for Spacelink and Jones Group from the tax sharing agreement $ - $ (289) $ 155 Computed "normally expected" income tax (benefit) provision at statutory rates on income from operations (11,128) (15,852) 7,967 Increase (reductions) in taxes resulting from - Alternative minimum taxes - - (1,183) Amortization of costs in excess of interest in net assets purchased 302 - 355 State income taxes, net of Federal income tax benefit (1,039) (1,512) 643 Change in status of foreign investments (2,505) - - Foreign equity investments 412 - - Tax credits - (591) - Enacted future tax rate changes - (636) - Other, net 1,053 (149) (383) -------- -------- -------- Total income tax (benefit) provision from operations (12,905) (19,029) 7,554 -------- -------- -------- Tax effect of extraordinary items - (7,604) - SFAS 109 valuation allowance - Intercable 11,624 23,791 - Cumulative effect of change in method of accounting for income taxes, net of minority interests - (329) - -------- -------- -------- Total income tax (benefit) provision $ (1,281) $ (3,171) $ 7,554 ======== ======== ========
Deferred tax assets (liabilities) are comprised of the following components at May 31, 1994 and 1993: -80- 26
May 31, ------------------------------------ (Stated in Thousands) 1994 1993 ---------- ---------- Deferred Tax Liabilities: Depreciation and Amortization $(26,682) $ (35,327) Deferred Tax Assets: Regular tax loss carryforwards 60,858 46,041 Investment tax credit carryforwards 1,076 1,076 AMT credit carryforwards 1,116 1,116 Recognition of Partnership items 5,218 15,602 Recognition Jones Group brokerage fees 917 1,539 Intercompany transactions and other 3,230 2,781 ---------- ---------- Total Deferred Tax Assets 72,415 68,155 ---------- ---------- Deferred Tax Asset Valuation Allowance - Intercable (37,785) (26,161) ---------- ---------- Net Deferred Tax Assets $ 7,948 $ 6,667 ========== ==========
As of May 31, 1994, Spacelink had net operating losses ("NOL's") of approximately $7,279,000 for alternative minimum tax ("AMT") and $17,170,000 for regular tax which expire $1,671,000 in 2005, $5,252,000 in 2006, $1,684,000 in 2007 and $2,081,000 in 2008 and $6,482,000 in 2009. As of May 31, 1994, Intercable had net NOL's of approximately $66,347,000 for AMT and $141,937,000 for regular tax which expire $45,191,000 in 2005, $24,138,000 in 2007 and $40,809,000 in 2008 and $31,799,000 in 2009. Intercable also had investment tax credit carryforwards of $1,076,000 expiring 1999 through 2005. The (benefit) provision for deferred income taxes is the result of the following timing differences:
1992 ---------- (Stated In Thousands) Additional tax depreciation $ 4,362 Fund fees and distributions 17,184 Recognition (deferral of recognition) of Jones Group brokerage fees 155 Recognition (deferral) of dividends and fund fees received by Intercable 10 Timing of partnership income (6,309) Difference in recognition of net operating losses for tax and financial statement purposes (15,056) Tax expenses (income) from properties held for resale (590) Other, net 409 -------- Total deferred tax (benefit) provision $ 165 ========
Pursuant to the Tax Sharing Agreement with International, Spacelink and its consolidated subsidiaries 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 the tax allocation resulted in fiscal 1993 and 1992 tax (benefits) provisions of $(289,000) and $-0-, respectively. Effective June 1, 1993, International's ownership in Spacelink fell below the 80 percent ownership requirement for inclusion in the Tax Sharing Agreement. Therefore, effective June 1, 1993, Spacelink will file separate Federal and state income tax returns. -81- 27 (11) STOCK OPTIONS: On May 26, 1992, the Board of Directors and shareholders of Spacelink, adopted Spacelink's 1992 Stock Option Plan (the "1992 Plan"). Under the terms of the 1992 Plan, a maximum of 5,000,000 shares of Class A Common Stock is available for grant. Options generally become exercisable in 25 percent annual cumulative increments over a four-year period commencing from the date of grant or on the first anniversary of the date of grant. The stock options expire, to the extent not exercised, on the fifth anniversary of the date of the grant, or upon the recipient's earlier termination of employment with Spacelink. All of the employees of Spacelink, its parent or any participating subsidiary, including directors of Spacelink who are also employees, are eligible to participate in the 1992 Plan. Stock options granted may be either Incentive Stock Options or Non-statutory Stock Options. Stock Appreciation Rights may be granted in tandem with the grant of stock options. Except with respect to options granted to officers and directors who are employees of Spacelink, the 1992 Plan is administered by the Board of Directors of Spacelink. With respect to options granted to officers and directors who are employees of Spacelink, the Plan is administered by the Board of Directors, if each director is a disinterested person, or by a committee of two or more directors who are disinterested persons. The Board of Directors may, in its discretion, establish provisions for the exercise of options different from those described above, and has the power to grant options under the 1992 Plan that may extend for a period of up to ten years. The Board may from time to time alter, amend, suspend or discontinue the 1992 Plan. The Board of Directors may not, without approval of shareholders, (i) increase the maximum number of shares of Class A Common Stock that may be made subject to options, (ii) materially increase the benefits accruing to participants, or (iii) materially modify the requirements as to eligibility for participation. The following table summarizes data concerning options to purchase shares of Spacelink's Class A Common Stock issued under the 1992 Plan:
1994 1993 ---------------- -------------- Available for grant 3,604,503 4,637,500 Granted during the period 1,032,997 362,500 Exercised during the period 50,000 - Price range, per share $ 1.047 - $1.125 $ - Terminated during the period 83,500 - Total outstanding 1,261,997 362,500 Price range, per share $ .75 - $1.125 $ .75 - $1.047 Exercisable at year-end 179,167 229,167 Price range, per share $ .75 - $1.047 $ .75 - $1.047
On February 2, 1993, Spacelink issued 200,000 options under the 1992 Plan to certain directors, officers and employees of Spacelink and its affiliates, five-year fully vested options to purchase Class A Common Stock. These options replace options granted outside the 1992 Plan, which expired in December 1992. -82- 28 Other Class A Common Stock Options of Spacelink Independent of the 1992 Plan - 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 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 from time to time has issued options to certain directors, officers and employees of Spacelink and its affiliates. The following table summarizes data concerning options 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 ------------- --------- --------- ------------- January 1994 40,000 1.125 August 1994 April 1992 50,000 .813 April 1997 August 1991 80,000 1.090 August 1998 December 1990 35,000 .719 December 1995 February 1990 80,000 1.125 February 1997
On February 4, 1991, Spacelink's Board of Directors determined that the exercise prices of all of the foregoing options, except the options granted to Mr. Jones and the options granted prior to February 4, 1991, were above the market price of the shares. Accordingly, Spacelink's 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 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. (12) COMMITMENTS AND CONTINGENCIES: Spacelink and its consolidated subsidiaries rent office facilities under various operating lease arrangements. Future minimum lease payments as of May 31, 1994, 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) 1995 $ 1,903 $ 2,090 $ 593 $ 4,586 1996 1,903 1,893 254 4,050 1997 1,903 1,476 206 3,585 1998 1,903 1,262 142 3,307 1999 1,903 1,206 21 3,130 Thereafter 1,990 4,279 - 6,269 ------ ------ ------ ------ Total future minimum lease payments $11,505 $12,206 $1,216 $24,927 ====== ====== ===== ======
Rental expense under all noncancelable operating leases was $757,000 and $594,000, respectively, for fiscal 1994 and 1993. On February 22, 1994, Intercable and Jones Group, were named as defendants in a lawsuit brought by three individuals who are Class A Unitholders in Jones Intercable Investors, L.P. (the "Partnership"), a master limited partnership in which Intercable is general partner. The litigation, entitled Luva Vaughan et al vs. Jones Intercable, -83- 29 Inc. et al, Case No. CV 94-3652 was filed in the Circuit Court of Jackson County, Missouri, and purports to be "for the use and benefit of" the Partnership. The suit seeks rescission of the sale of the Alexandria, Virginia cable television system (the "Alexandria System") by the Partnership to Intercable, which sale was completed on November 2, 1992. It also seeks a constructive trust on the profits derived from the operation of the Alexandria System since the date of the sale, and seeks an accounting and other equitable relief. The plaintiffs also allege that the $1,830,850 commission paid to Jones Group by the Partnership in connection with such sale was improper, and ask the Court to order that such commission be repaid to the Partnership. Under the terms of the partnership agreement of the Partnership, Intercable has the right to acquire cable television systems from the Partnership at a purchase price equal to the average of three independent appraisals of the cable television system to be acquired. The plaintiffs claim that the appraisals obtained in connection with the sale of the Alexandria System were improperly obtained, were not made by qualified appraisers and were otherwise improper. The purchase price paid by Intercable upon such sale was approximately $73,200,000. Intercable believes both that the appraisals were properly obtained and that the brokerage commission was properly paid to Jones Group in accordance with the express terms of the partnership agreement. Intercable further believes that its defenses are meritorious and it intends to vigorously defend the litigation. Intercable and Jones Group have filed motions to dismiss this claim. -84- 30 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto authorized. JONES SPACELINK, LTD. By /s/ Elizabeth M. Steele Elizabeth M. Steele, Vice President Dated: September 19, 1994 -----END PRIVACY-ENHANCED MESSAGE-----