**FORM 10-Q**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

| **(Mark One)** |                                                                                         |   |
|----------------|----------------------------------------------------------------------------------------------|--------|
| **ý**     | **Quarterly  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|                |                                                                                              |        |  |

 

**For the quarterly period ended March31, 2002.**

 

| **o** | **Transition  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|-------|-----------------------------------------------------------------------------------------------|

 

**For the transition periodfrom                       to                       .**

 

**Commission File Number 333-62077**

 

**Jones MediaNetworks, Ltd.**

Exact name of registrant as specified in charter

 

| **Colorado**                                  |   | **#84-1470911**       |
|-----------------------------------------------|--------|-----------------------|
| State of organization                         |   | I.R.S. employer I.D.# |
|                                          |   |                  |
| **9697 East Mineral Avenue, Colorado  80112** |
| Address of principal executive office         |
|                                          |   |                  |
| **(303) 792-3111**                            |
| Registrant’s telephone number            |

 

Indicate by check mark whether the registrant (l) hasfiled all reports required to be filed by Section l3 or l5(d) of the SecuritiesExchange Act of l934 during the preceding l2 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

 

| Yes   ý |   | No   o |
|------------------------|--------|------------------|

 

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**JONES MEDIA NETWORKS, LTD. ANDSUBSIDIARIES**

** **

**INDEX**

** **
| PART I. FINANCIAL INFORMATION                                                                                  |
|----------------------------------------------------------------------------------------------------------------|
|                                                                                                           |
| Item 1. Financial  Statements                                                                                  |
|                                                                                                           |
| Unaudited  Consolidated Statements of Financial Position as of December 31, 2001 and  March 31, 2002 |
|                                                                                                           |
| Unaudited  Consolidated Statements of Operations for the Three Months Ended  March 31, 2001 and 2002 |
|                                                                                                           |
| Unaudited  Consolidated Statements of Cash Flows for the Three Months Ended  March 31, 2001 and 2002 |
|                                                                                                           |
| Notes  to Unaudited Consolidated Financial Statements                                                          |
|                                                                                                           |
| Item  2. Management’s Discussion and Analysis of Financial Condition and Results of  Operations           |
|                                                                                                           |
| PART II. OTHER INFORMATION                                                                                     |
|                                                                                                           |
| Item  3. Quantitative and Qualitative Disclosures About Market Risk                                            |
| Item 5.  Other Materially Important Events                                                                     |
| Item 6.  Exhibits and Reports on Form 8-K                                                                      |

 

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**JONESMEDIA NETWORKS, LTD. AND SUBSIDIARIES**

 

**UNAUDITED CONSOLIDATED STATEMENTS OFFINANCIAL POSITION**

** **
|                                                                                                                         |   | **December  31,  2001** |        | **March 31,  2002** |       |
|------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|-------------|---------------------|------------|
|                                                                                                                         |   |                    |        |
| **ASSETS**                                                                                                                   |   |                    | ** **  |                | ** ** |
| CURRENT ASSETS:                                                                                                              |   |                    |        |                |       |
| Cash and cash  equivalents                                                                                                   |   | $                       | 7,641,473   |                | $          | 2,454,071 |   |
| Accounts receivable,  net of allowance for doubtful accounts of $2,040,884 and $1,580,825,  respectively                     |   | 14,071,525              |        | 12,462,298          |       |
| Prepaid expenses                                                                                                             |   | 537,690                 |        | 506,091             |       |
| Other current assets                                                                                                         |   | 1,151,923               |        | 1,226,215           |       |
| Total current assets                                                                                                         |   | 23,402,611              |        | 16,648,675          |       |
| Property and equipment,  net                                                                                                 |   | 17,558,521              |        | 16,412,927          |       |
| Goodwill (Note 6)                                                                                                            |   | 31,561,735              |        | 20,828,763          |       |
| Other intangible  assets, net                                                                                                |   | 27,305,422              |        | 29,201,817          |       |
| Deferred financing  costs, net of accumulated amortization of $2,482,950 and $2,669,831,  respectively                       |   | 2,615,826               |        | 2,428,945           |       |
| Other long-term assets                                                                                                       |   | 1,870,736               |        | 2,021,766           |       |
| Total assets                                                                                                                 |   | $                       | 104,314,851 |                | $          | 87,542,893 |   |
|                                                                                                                         |   |                    |        |                |       |
| **LIABILITIES  AND SHAREHOLDERS’ DEFICIT**                                                                              |   |                    |        |                |       |
| CURRENT LIABILITIES:                                                                                                         |   |                    |        |                |       |
| Accounts payable-trade                                                                                                       |   | $                       | 5,889,768   |                | $          | 5,189,210 |   |
| Producers’ fees payable                                                                                                 |   | 5,964,409               |        | 5,033,354           |       |
| Cable programming  distribution payments payable                                                                             |   | 3,681,921               |        | 6,470,054           |       |
| Accounts payable-Jones  International, Ltd. (Note 2)                                                                         |   | 744,720                 |        | 723,766             |       |
| Accrued liabilities and  other current liabilities                                                                           |   | 1,957,616               |        | 1,289,978           |       |
| Interest payable                                                                                                             |   | 5,882,587               |        | 3,021,342           |       |
| Capital lease  obligations                                                                                                   |   | 29,106                  |        | 24,498              |       |
| Customer deposits and  deferred revenues                                                                                     |   | 962,433                 |        | 883,660             |       |
| Total current  liabilities                                                                                                   |   | 25,112,560              |        | 22,635,862          |       |
| LONG-TERM LIABILITIES:                                                                                                       |   |                    |        |                |       |
| Customer deposits and  deferred revenues                                                                                     |   | 626,314                 |        | 566,759             |       |
| Capital lease  obligations                                                                                                   |   | 112,170                 |        | 111,543             |       |
| Notes payable to  related parties (Note 5)                                                                                   |   | 1,173,642               |        | 1,316,465           |       |
| Other long-term  liabilities                                                                                                 |   | 1,317,301               |        | 1,467,390           |       |
| Senior secured notes                                                                                                         |   | 100,000,000             |        | 100,000,000         |       |
| Total long-term  liabilities                                                                                                 |   | 103,229,427             |        | 103,462,157         |       |
| MINORITY INTEREST IN  CONSOLIDATED SUBSIDIARY                                                                                |   | (836,615                | )           | (761,580            | )          |
| COMMITMENTS AND  CONTINGENCIES:                                                                                              |   |                    |        |                |       |
| Class A Common Stock  subject to put, $0.01 par value, 136,540 shares authorized and outstanding  (Note 4)                   |   | 951,220                 |        | 951,220             |       |
| SHAREHOLDERS’ DEFICIT:                                                                                                  |   |                    |        |                |       |
| Series A Preferred  Stock, $.01 par value: 1,918,000 shares authorized, issued and outstanding                               |   | 23,975,000              |        | 23,975,000          |       |
| Class A Common Stock,  $.01 par value: 100,000,000 shares authorized; 5,329,463 shares issued and  outstanding, respectively |   | 53,295                  |        | 53,295              |       |
| Class B Common Stock,  $.01 par value: 2,231,400 shares authorized, issued and outstanding                                   |   | 22,314                  |        | 22,314              |       |
| Additional paid-in  capital                                                                                                  |   | 30,147,564              |        | 30,219,502          |       |
| Accumulated deficit                                                                                                          |   | (78,339,914             | )           | (93,014,877         | )          |
| Total shareholders’  deficit                                                                                            |   | (24,141,741             | )           | (38,744,766         | )          |
| Total liabilities and  shareholders’ deficit                                                                            |   | $                       | 104,314,851 |                | $          | 87,542,893 |   |

 

The accompany notes are an integral part ofthese unaudited consolidated financial statements.

 

2

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**JONES MEDIA NETWORKS, LTD. ANDSUBSIDIARIES**

 

**UNAUDITED CONSOLIDATED STATEMENTS OFOPERATIONS**

** **
|                                                                                                                  |   | **Three  Months Ended  March 31,** |       |
|-----------------------------------------------------------------------------------------------------------------------|--------|------------------------------------|------------|
|                                                                                                                  |   |                               |
|                                                                                                                  |   | **2001**                           |       | **2002** |   |
| Revenues, including  revenues from affiliated entities of $344,124 and $424,512, respectively  (Note 2)               |   | $                                  | 18,576,929 |   | $ | 18,625,791 |   |
| Operating expenses,  including charges from affiliated entities of $1,648,411 and $1,043,775,  respectively (Note 2): |   |                               |       |   |   |
| Operations                                                                                                            |   | 15,547,820                         |       | 14,246,886 |   |
| Selling and marketing                                                                                                 |   | 2,609,872                          |       | 1,941,314 |   |
| General and  administrative                                                                                           |   | 595,715                            |       | 464,551 |   |
| Depreciation and  amortization                                                                                        |   | 2,871,447                          |       | 2,596,299 |   |
| Total operating  expenses                                                                                             |   | 21,624,854                         |       | 19,249,050 |   |
| OPERATING LOSS                                                                                                        |   | (3,047,925                         | )          | (623,259 | ) |
| OTHER EXPENSE (INCOME):                                                                                               |   |                               |       |   |   |
| Interest expense (Note  5)                                                                                            |   | 3,124,380                          |       | 3,284,635 |   |
| Interest income                                                                                                       |   | (230,284                           | )          | (19,159 | ) |
| Other expense (income)                                                                                                |   | 167,718                            |       | (19,246 | ) |
| Total other expense,  net                                                                                             |   | 3,061,814                          |       | 3,246,230 |   |
| LOSS BEFORE INCOME  TAXES AND MINORITY INTEREST                                                                       |   | (6,109,739                         | )          | (3,869,489 | ) |
| Income tax provision  (benefit)                                                                                       |   | 26,843                             |       | (2,533 | ) |
| LOSS BEFORE MINORITY  INTEREST, CHANGE IN ACCOUNTING PRINCIPLE AND DISCONTINUED OPERATIONS                            |   | (6,136,582                         | )          | (3,866,956 | ) |
| Minority interest in  net income (loss) of consolidated subsidiaries                                                  |   | (433,231                           | )          | 75,035 |   |
| NET LOSS BEFORE CHANGE  IN ACCOUNTING PRINCIPLE AND DISCONTINUED OPERATIONS                                           |   | (5,703,351                         | )          | (3,941,991 | ) |
| Loss from discontinued  operations                                                                                    |   | (648,816                           | )          | — |   |
| NET LOSS BEFORE CHANGE  IN ACCOUNTING PRINCIPLE                                                                       |   | (6,352,167                         | )          | (3,941,991 | ) |
| Cumulative effect of  change in accounting principle — impairment of goodwill (Notes 1 and 6)                    |   | —                             |       | (10,732,972 | ) |
| NET LOSS                                                                                                              |   | $                                  | (6,352,167 | ) | $ | (14,674,963 | ) |
|                                                                                                                  |   |                               |       |   |   |
| ADJUSTMENTS TO ARRIVE  AT COMPREHENSIVE LOSS                                                                          |   | 3,827                              |       | — |   |
| COMPREHENSIVE LOSS                                                                                                    |   | $                                  | (6,348,340 | ) | $ | (14,674,963 | ) |
|                                                                                                                  |   |                               |       |   |   |
| BASIC LOSS PER COMMON  SHARE:                                                                                         |   |                               |       |   |   |
| Loss from continuing  operations                                                                                      |   | $                                  | (0.74      | ) | $ | (0.51 | ) |
| Loss from discontinued  operations                                                                                    |   | (0.09                              | )          | — |   |
| Cumulative effect of  change in accounting principle                                                                  |   | —                             |       | (1.40 | ) |
| Net loss                                                                                                              |   | $                                  | (0.83      | ) | $ | (1.91 | ) |
| DILUTED LOSS PER COMMON  SHARE:                                                                                       |   |                               |       |   |   |
| Loss from continuing  operations                                                                                      |   | $                                  | (0.74      | ) | $ | (0.51 | ) |
| Loss from discontinued  operations                                                                                    |   | (0.09                              | )          | — |   |
| Cumulative effect of  change in accounting principle                                                                  |   | —                             |       | (1.40 | ) |
| Net loss                                                                                                              |   | $                                  | (0.83      | ) | $ | (1.91 | ) |
| WEIGHTED AVERAGE COMMON  SHARESOUTSTANDING:                                                                           |   |                               |       |   |   |
| Basic                                                                                                                 |   | 7,697,403                          |       | 7,697,403 |   |
| Fully diluted                                                                                                         |   | 7,670,095                          |       | 7,679,766 |   |

 

The accompany notes are an integral part ofthese unaudited consolidated financial statements.

 

3

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**JONES MEDIA NETWORKS, LTD. ANDSUBSIDIARIES**

 

**UNAUDITED CONSOLIDATED STATEMENTS OFCASH FLOWS**

** **
|                                                                                      |   | **For the  Three Months Ended  March 31,** |       |
|-------------------------------------------------------------------------------------------|--------|--------------------------------------------|------------|
|                                                                                      |   |                                       |
|                                                                                      |   | **2001**                                   |       | **2002** |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                    |   |                                       |       |   |   |
| Net loss                                                                                  |   | $                                          | (6,352,167 | ) | $ | (14,674,963 | ) |
| Adjustment to reconcile  net loss to net cash provided by (used in) operating activities: |   |                                       |       |   |   |
| Depreciation and  amortization                                                            |   | 2,880,724                                  |       | 2,596,299 |   |
| Amortization of cable  programming distribution payments                                  |   | 692,629                                    |       | 1,021,513 |   |
| Amortization of  deferred financing costs                                                 |   | 186,881                                    |       | 186,881 |   |
| Accretion of notes  payable                                                               |   | —                                     |       | 79,761 |   |
| Impairment of goodwill                                                                    |   | —                                     |       | 10,732,972 |   |
| Write-off of equipment  and intangible assets                                             |   | 205,376                                    |       | — |   |
| Minority interest in  net income (loss) of consolidated subsidiary                        |   | (433,231                                   | )          | 75,035 |   |
| Net change in assets  and liabilities:                                                    |   |                                       |       |   |   |
| Decrease in accounts  receivables, net                                                    |   | 1,815,532                                  |       | 1,578,548 |   |
| Increase in prepaid  expenses and other current assets                                    |   | (371,520                                   | )          | (51,834 | ) |
| Increase in other  assets                                                                 |   | (30,730                                    | )          | (2,688 | ) |
| Decrease in accounts  payable                                                             |   | (105,513                                   | )          | (700,558 | ) |
| Decrease in producers’  fees payable                                                 |   | (288,788                                   | )          | (931,055 | ) |
| Increase (decrease) in  accounts payable to Jones International, Ltd.                     |   | 228,274                                    |       | (20,954 | ) |
| Decrease in interest  payable                                                             |   | (2,937,500                                 | )          | (2,861,245 | ) |
| Increase (decrease) in  deferred revenues                                                 |   | 410,312                                    |       | (78,773 | ) |
| Decrease in accrued and  other liabilities                                                |   | (1,331,973                                 | )          | (667,638 | ) |
| Increase  (decease) in customer deposits                                             |   | 21,232                                     |       | (59,555 | ) |
| Net cash used in  operating activities                                                    |   | (5,410,462                                 | )          | (3,778,254 | ) |
|                                                                                      |   |                                       |       |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                    |   |                                       |       |   |   |
| Purchase of property  and equipment                                                       |   | (616,692                                   | )          | (252,397 | ) |
| Proceeds from sale of available  for sale securities                                      |   | 2,224,779                                  |       | — |   |
| Cable programming  distribution agreement payments                                        |   | (1,289,760                                 | )          | (1,286,306 | ) |
| Purchase of intangible  assets and programming                                            |   | (79,633                                    | )          | (210 | ) |
| Net cash provided by  (used in) investing activities                                      |   | 238,694                                    |       | (1,538,913 | ) |
|                                                                                      |   |                                       |       |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                    |   |                                       |       |   |   |
| Repayment of capital  lease obligations                                                   |   | —                                     |       | (5,235 | ) |
| Proceeds from notes  payable to related parties                                           |   | —                                     |       | 135,000 |   |
| Net cash provided by  financing activities                                                |   | —                                     |       | 129,765 |   |
|                                                                                      |   |                                       |       |   |   |
| DECREASE IN CASH AND  CASH EQUIVALENTS                                                    |   | (5,171,768                                 | )          | (5,187,402 | ) |
|                                                                                      |   |                                       |       |   |   |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD                                           |   | 14,900,333                                 |       | 7,641,473 |   |
|                                                                                      |   |                                       |       |   |   |
| CASH AND CASH  EQUIVALENTS, END OF PERIOD                                                 |   | $                                          | 9,728,565  |   | $ | 2,454,071 |   |
|                                                                                      |   |                                       |       |   |   |
| SUPPLEMENTAL CASH FLOW DISCLOSURES:                                                       |   |                                       |       |   |   |
| Interest paid                                                                             |   | $                                          | 5,875,000  |   | $ | 5,875,000 |   |
| Income tax provision  (benefit)                                                           |   | $                                          | 26,843     |   | $ | (2,533 | ) |

 

The accompany notes are an integral part ofthese unaudited consolidated financial statements.

 

4

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**JONES MEDIA NETWORKS, LTD. ANDSUBSIDIARIES**

 

**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

 

**(1) BASIS OF PRESENTATION AND SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

 

This Form 10-Q is being filed by Jones Media Networks,Ltd. and its subsidiaries (collectively the “Company”).  The accompanying consolidated statements offinancial position as of December 31, 2001 and March 31, 2002, theconsolidated statements of operations for the three months ended March31, 2001 and 2002, and the statements of cash flows for the three monthsended March 31, 2001 and 2002, are unaudited.  This Form 10-Q is being filed in conformity with the SECrequirements for unaudited financial statements and does not contain all of thenecessary footnote disclosures required for a complete presentation of theconsolidated statements of financial position, consolidated statements ofoperations and consolidated statements of cash flows in conformity withgenerally accepted accounting principles. However, in the opinion of management, these statements include alladjustments, consisting of normal recurring accruals and adoption of newaccounting pronouncements, necessary for the fair presentation of results forthese interim periods. The results of operations for the three months endedMarch 31, 2002 are not necessarily indicative of results to beexpected for the entire year, or for any other interim period.

 

*New Accounting Pronouncements*— In June 2001, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 141, “Business Combinations” and SFASNo. 142, “Goodwill and Other Intangible Assets.”  These Statements prohibit pooling-of-interests accounting fortransactions initiated after June 30, 2001, require the use of the purchasemethod of accounting for all combinations after June 30, 2001, and establishnew standards for accounting for goodwill and other intangibles acquired inbusiness combinations.  Goodwillcontinues to be recognized as an asset, but is not being amortized aspreviously required by APB Opinion No. 17, “Intangible Assets.”  Certain other intangible assets withindefinite lives, if present, may also be exempt from amortization.  Under SFAS No. 142, goodwill is assessed forimpairment on an annual basis using a fair value approach and impairments,measured as the excess of carrying value over estimated fair value, areexpensed.  The revised standard includestransition rules and requirements for identification, valuation and recognitionof a much broader list of intangibles as part of business combinations thanprior practice, most of which will continue to be amortized.  The Company’s prospective financialstatements could be significantly affected by the results of future periodictests for impairment.  The Companyadopted the new standards on January 1, 2002 by using the newmethodology for measuring impairment prescribed by these pronouncements. As aresult of its adoption of these new standards, the Company recognized anon-cash charge of approximately $10.7 million in the first quarter of 2002relating to a partial write-down of the goodwill recorded as part of theMediaAmerica acquisition in 1998. See Note 6.

 

In April 2001, the Financial Accounting StandardsBoard’s (“FASB”) Emerging Issues Task Force (“EITF”) reached a final consensusEITF Issue No. 00-25, “Vendor Income Statement Characterization ofConsideration Paid to a Reseller of the Vendor’s Products” (“EITF 00-25”),which was codified in EITF Issue No. 01-9, “Accounting for Consideration Givenby a Vendor to a Customer (Including a Reseller of the Vendor’s Products),”(“EITF 01-9”) in November 2001. EITF 01-9 is effective for the Company onJanuary 1, 2002.  EITF 01-9 clarifiesthe statement of operations classification of costs incurred by a vendor inconnection with the reseller’s purchase or promotion of the vendor’sproducts.  The Company adopted the newstandard on January 1, 2002, the effect of which resulted in theamortization of a portion of certain cable programming distribution paymentspreviously classified as amortization expense, to be reflected as a reductionof revenues earned from that activity. For the three months ended March 31, 2001 and 2002, the Companyreflected approximately $147,000 and $150,000, respectively, of cableprogramming distribution payments previously classified as amortization expenseas reduction of revenues.  In addition,amortization of the balance of the amortization of certain cable programmingdistribution payments has been reclassified to operations expense fromdepreciation and amortization.  For thethree months ended March 31, 2001 and 2002, the Company reclassifiedapproximately $546,000 and $872,000, respectively, from depreciation andamortization expense to operations expense.

 

*Useof Estimates*—The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesrequires the Company to make estimates and assumptions that affect the reportedamounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

*Reclassifications*—Certainprior period amounts have been reclassified to conform to the currentpresentation.

 

5

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**(2) TRANSACTIONS WITH AFFILIATEDENTITIES**

 

The Company is a subsidiary of Jones International,Ltd. (“Jones International”), a holding company with ownership in severalcompanies involved in various industries. Jones International is wholly ownedby the Company’s Chairman, Glenn R. Jones, who is Chairman and Chief ExecutiveOfficer of Jones International and various of its subsidiaries. Certainofficers or directors of the Company are also officers or directors of theseaffiliated entities and, from time to time, the Company may have transactionswith these entities. Certain expenses are paid by affiliated entities on behalfof the Company and are allocated at cost based on specific identification orother methods which management believes are reasonable.  Principal recurring transactions withaffiliates are described below.

 

*Revenues*—JonesEarth Segment, Inc. (“Earth Segment”), a wholly owned subsidiary of theCompany, provides playback, editing, duplication, trafficking and uplinkingservices to its cable programming network affiliates and to third parties.   Earth Segment charges affiliates for itsservices using rates which are calculated to achieve a specified rate of returnon its investment.  For the three monthsended March 31, 2001 and 2002, Earth Segment charged Jones Internationaland its affiliates approximately $143,000 and $146,000 respectively, for theseservices.

 

In addition, Jones Space Holdings (“Space Holdings”),a subsidiary of the Company, subleases satellite transponder capacity to JonesInternational and certain of its affiliates. Satellite transponder lease revenues of approximately $201,000 and$279,000, were received from Jones International and its affiliates for thethree months ended March 31, 2001 and 2002, respectively.

 

*OperatingExpenses*—The Product Information Network Venture, (“PINVenture”), a joint venture which is owned approximately 55 percent by theCompany and 45 percent by Cox Consumer International Networks, Inc., asubsidiary of Cox Communications, Inc. (“Cox”), pays out a significant portionof the revenues generated by its infomercial programming in the form of systemrebates to cable systems which enter into agreements to air suchprogramming.  For the three months endedMarch 31, 2001 and 2002, the PIN Venture paid rebates to Cox ofapproximately $1,143,000 and $649,000, respectively, for system rebates.

 

The Company leases office space in Englewood, Coloradofrom affiliates of Jones International. For the three months ended March 31, 2001 and 2002, theCompany paid these affiliates approximately $96,000 and $72,000, respectively,for rent and associated expenses.

 

An affiliate of Jones International provides computerhardware and software support services to the Company.  For the three months endedMarch 31, 2001 and 2002, the Company paid the affiliate approximately$199,000 and $151,000, respectively, for such services.

 

The Company and its consolidated subsidiariesreimburse Jones International and its affiliates for certain allocatedadministrative expenses. These expenses generally consist of salaries, relatedbenefits and other related costs. Allocations of personnel costs are generallybased on actual time spent by employees of these affiliates with respect to theCompany. For the three months ended March 31, 2001 and 2002, theCompany reimbursed Jones International and its affiliates approximately$210,000 and $172,000, respectively.

 

In the normal course of business, Jones International(1) remits funds on behalf of the Company to third parties and affiliates inpayment of products and services purchased by the Company, and (2) receivesfunds on behalf of the Company in payment for products and services provided bythe Company.  These amounts arereimbursed from or to Jones International on a monthly basis.  The outstanding payable to JonesInternational and its affiliates at March 31, 2002 was approximately$724,000.

 

In the second quarter of 2002, the Company sold anunutilized tract of land to Jones International and received approximately$1,000,000 in cash proceeds.  Thistransaction is conditioned upon receipt of certain subdivision approvals, whichwe anticipate will be granted.

 

6

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**(3) NET LOSS PER COMMON SHARE**

 

Basic earnings per share (“EPS”) is computed bydividing the net earnings applicable to common shares by the weighted averagenumber of common shares outstanding during the period. Diluted EPS adjusts thebasic weighted average of common shares outstanding by the assumed redemptionof shares subject to put in the periods in which such effect would have beendilutive.  The table below presents areconciliation of weighted average shares used in the calculation of basic anddiluted EPS:

 

|                                      |   | **For the Three Months  March 31,** |       |
|-------------------------------------------|--------|-------------------------------------|------------|
|                                      |   | **2001**                            |       | **2002** |   |
| Loss from continuing  operations          |   | $                                   | (5,703,351 | ) | $ | (3,941,991 | ) |
| Loss from discontinued  operations        |   | (648,816                            | )          | — |   |
| Loss from change in  accounting principle |   | —                              |       | (10,732,972 | ) |
| Net loss                                  |   | $                                   | (6,352,167 | ) | $ | (14,674,963 | ) |
|                                      |   |                                |       |   |   |
| Basic per share amount:                   |   |                                |       |   |   |
| Continuing operations                     |   | $                                   | (0.74      | ) | $ | (0.51 | ) |
| Discontinued operations                   |   | (0.09                               | )          | — |   |
| Change in accounting  principle           |   | —                              |       | (1.40 | ) |
| Total                                     |   | $                                   | (0.83      | ) | $ | (1.91 | ) |
|                                      |   |                                |       |   |   |
| Diluted per share  amount:                |   |                                |       |   |   |
| Continuing operations                     |   | $                                   | (0.74      | ) | $ | (0.51 | ) |
| Discontinued operations                   |   | (0.09                               | )          | — |   |
| Change in accounting  principle           |   | —                              |       | (1.40 | ) |
| Total                                     |   | $                                   | (0.83      | ) | $ | (1.91 | ) |
|                                      |   |                                |       |   |   |
| Weighted average shares  for basic EPS    |   | 7,697,403                           |       | 7,697,403 |   |
| Less: shares subject to  put              |   | 27,308                              |       | 17,637 |   |
| Weighted average shares  for diluted EPS  |   | 7,670,095                           |       | 7,679,766 |   |

 

**(4) COMMITMENTS AND CONTINGENCIES**

 

*GACEquity Agreement*—In 1998, Great American Country and theCompany entered into an equity affiliate agreement with a multiple cable systemoperator (“MSO”).  Pursuant to the termsof the agreement, the Company agreed to issue shares of Class A Common Stock tothis MSO in return for this MSO providing Great American Country’s programmingto no less than 550,000 of their subscribers by May 31, 1998 and an additional150,000 subscribers by December 31, 1999.  The total number of shares of Class A Common Stock issued wasbased on the number of subscribers provided by this MSO.  As of December 31, 2000, 136,540shares of Class A Common Stock had been issued.  No additional shares of Class A Common Stock are required to beissued to this MSO.   The value of theClass A Common Stock was recorded as an intangible asset upon execution of theaffiliate agreement and upon issuance of the Class A Common Stock.  This intangible asset is being amortizedusing the straight-line method over the life of the contract (approximately 10years).  Because of a put option grantedto this MSO, the shares issued to this MSO are presented above theshareholders’ deficit section of the consolidated statements of financialposition.

 

As noted above, this MSO was granted a put option onthe Class A Common Stock issued, whereby, if as of December 31, 2001,the Company or its successor has not completed a public offering of itssecurities, the MSO would have the option to require the Company to buy backits Class A Common Stock.  As ofMarch 31, 2002, the exercise price of the put option of approximately$951,000 is reflected

 

7

----

 

above the shareholders’ deficit section of the consolidated statementsof financial position.

 

In February 2002, this MSO exercised its put optionand the Company purchased back the Class A Common Stock subject to put in thesecond quarter of 2002 for a price of approximately $951,000.

 

**(5)NOTES PAYABLE TO RELATED PARTIES**

 

On December 21, 2001, the Company issued an unsecurednote to Jones International evidencing a loan to the Company in the amount of$2,500,000 that matures on December 21, 2004. On January 28, 2002, the Company issued additional unsecured notes tocertain officers of the Company for loans in the total amount of $135,000 thatmature on January 28, 2005.  All ofthese unsecured notes bear interest at a fixed annual rate of 113⁄4 percent.  Interest on these notes is compoundedquarterly and is payable in arrears at the end of each calendar quarter.  The Company may prepay all or a portion ofthese unsecured notes at any time without penalty.  The interest and principal outstanding on these unsecured notesas of March 31, 2002 were approximately $84,000 and $2,635,000,respectively.

 

In connection with the issuance of these unsecurednotes, the Company also issued warrants to purchase the Company’s Class ACommon Stock.  Warrants were issued toJones International and certain officers of the Company to purchase 350,000 and18,900 shares, respectively, of the Company’s Class A Common Stock at anexercise price of $6.50 per share. These warrants will expire in December 2006 and January 2007,respectively.  The collective estimatedfair value of the warrants was approximately $1,229,000 on the issuance dateand was accounted for as a debt discount which reduced the carrying value ofthe debt.  The carrying value of theseunsecured notes payable will accrete to its face value over the life of thenotes using the effective interest method, which results in an effective annualrate of interest of approximately 37 percent. For the period ended March 31, 2002, the Company recorded $80,000in interest expense related to the accretion of this debt discount.

 

**(6) NEW ACCOUNTING PRONOUNCEMENTS**

 

Effective January 1, 2002, the Company adopted thefull provisions of SFAS No. 141 and SFAS No. 142. SFAS No. 141 requiresbusiness combinations initiated after June 30, 2001 to be accounted for usingthe purchase method of accounting, and broadens the criteria for recordingintangible assets apart from goodwill. The Company evaluated its goodwill andintangibles acquired prior to June 30, 2001 using the criteria of SFAS No. 141,which did not result in any reclassification between other intangible assetsand goodwill at January 1, 2002. SFAS No. 142 requires that purchased goodwill and certainindefinite-lived intangibles no longer be amortized, but instead be tested forimpairment at least annually. The Company evaluated its intangible assets andbelieves that all such assets have determinable lives.

 

SFAS No. 142 prescribes a two-phase process forimpairment testing of goodwill. The first phase, required to be completed byJune 30, 2002, screens for impairment; while the second phase, required to becompleted by December 31, 2002, measures the impairment.  The Company completed both phases during thecurrent quarter and as a result, the Company recognized a non-cash charge ofapproximately $10.7 million in the first quarter of 2002 relating to apartial write-down of the goodwill recorded as part of the MediaAmericaacquisition in 1998.  The fair value ofMediaAmerica was estimated based on a number of factors including a multiple ofEBITDA, prices of similar businesses and other factors. The charge reflectsoverall market changes since the acquisition in 1998, is non-operational innature and is reflected as a cumulative effect of an accounting change in theaccompanying consolidated financial statements.

 

8

----

 

In accordance with SFAS No. 142, the effect of theaccounting change for goodwill amortization is reflected prospectively.Supplemental comparative disclosure as if the change had been retroactivelyapplied to the prior year period is as follows:

 

|                    |   | **Three Months Ended March 31,**             |   |
|-------------------------|--------|----------------------------------------------|--------|
|                    |   | **2001**                                     |   | **2002** |   |
|                    |   | **(in thousands, except per share amounts)** |   |
| Net Loss:               |   |                                         |   |   |   |
| Reported net loss       |   | $                                            | (6,352 | ) | $ | (14,675 | ) |
| Goodwill amortization   |   | 248                                          |   | — |   |
| Adjusted net loss       |   | $                                            | (6,104 | ) | $ | (14,675 | ) |
| Basic loss per share:   |   |                                         |   |   |   |
| Reported loss per share |   | $                                            | (0.83  | ) | $ | (1.91 | ) |
| Goodwill amortization   |   | 0.03                                         |   | — |   |
| Adjusted net loss       |   | $                                            | (0.80  | ) | $ | (1.91 | ) |
| Diluted loss per share: |   |                                         |   |   |   |
| Reported loss per share |   | $                                            | (0.83  | ) | $ | (1.91 | ) |
| Goodwill amortization   |   | 0.03                                         |   | — |   |
| Adjusted net loss       |   | $                                            | (0.80  | ) | $ | (1.91 | ) |

 

For the three months ended March 31, 2002 no goodwillor other intangibles were acquired. The changes in the carrying amount ofgoodwill for the three months ended March 31, 2002, are as follows:

 
|                           |   | **Network  Radio** |   | **Cable  Television  Programming** |   | **Satellite  Services** |   | **Corporate** |   | **Total** |   |
|--------------------------------|--------|--------------------|--------|------------------------------------|--------|-------------------------|--------|---------------|--------|-----------|--------|
|                           |   | **(in thousands)** |   |
| Balance as of January  1, 2002 |   | $                  | 29,045 |                               | $      | 2,517                   |   | $             | — |      | $      | — |   | $ | 31,562 |   |
| Impairment losses              |   | (10,733            | )      | —                             |   | —                  |   | —        |   | (10,733   | )      |
| Balance as of March 31,  2002  |   | $                  | 18,312 |                               | $      | 2,517                   |   | $             | — |      | $      | — |   | $ | 20,829 |   |

 

As of December 31, 2001 and March 31, 2002, theCompany’s intangible assets and related accumulated amortization consisted ofthe following:

 
|                                              |   | **As of December 31, 2001** |   | **As of March 31, 2002**      |   |
|---------------------------------------------------|--------|-----------------------------|--------|-------------------------------|--------|
|                                              |   | **Gross**                   |   | **Accumulated  Amortization** |   | **Net** |   | **Gross** |   | **Accumulated  Amortization** |   | **Net** |   |
|                                              |   | **(in thousands)**          |   |
| Cable programming distribution agreement payments |   | $                           | 21,687 |                          | $      | (6,431 | ) | $ | 15,256 |   | $ | 25,761 |   | $ | (7,422 | ) | $ | 18,339 |   |
| Personal service and  consulting agreements       |   | 12,663                      |   | (6,680                        | )      | 5,983 |   | 12,663 |   | (7,247 | ) | 5,416 |   |
| Investment in  programming                        |   | 2,369                       |   | (1,658                        | )      | 711 |   | 2,369 |   | (1,771 | ) | 598 |   |
| Other                                             |   | 10,598                      |   | (5,243                        | )      | 5,355 |   | 10,598 |   | (5,749 | ) | 4,849 |   |
| Net intangible assets                             |   | $                           | 47,317 |                          | $      | (20,012 | ) | $ | 27,305 |   | $ | 51,391 |   | $ | (22,189 | ) | $ | 29,202 |   |

 

Based on the current amount of intangible assetssubject to amortization, the estimated amortization expense for each of thesucceeding 5 years is approximately $8,700,000, $8,400,000, $6,900,000,$3,900,000 and $1,300,000 respectively.

 

**(7) UNAUDITED CONDENSED CONSOLIDATINGFINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS**

 

The Senior Secured Notes are fully and unconditionallyguaranteed, jointly and severally, on a senior unsecured basis by the followingwholly owned subsidiaries of the Company: JPN, Inc., Jones Direct, Ltd., JonesSpace Holdings, Inc., Jones Earth

 

9

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Segment, Inc., Jones Infomercial Networks, Inc., Jones Radio Holdings,Inc., Great American Country, Inc., Jones Galactic Radio, Inc., JonesInfomercial Network Ventures, Inc., Jones Galactic Radio Partners, Inc., Jones RadioNetworks, Inc., Jones Audio Services, Inc., Jones Radio Network Ventures, Inc.,Jones MediaAmerica, Inc., Jones Broadcast Programming, Inc., Jones MatchMedia,Inc.,  and Jones MAI Radio, Inc.  The only existing subsidiary of the Companythat did not guarantee the Notes is the PIN Venture (the “Non-GuarantorSubsidiary”).

 

Investments insubsidiaries are required to be accounted for by investors on the equity methodfor purposes of the supplemental condensed consolidating financial statementpresentation.  Under this method,investments are recorded at cost and adjusted for the investor company’sownership share of the subsidiaries’ cumulative results of operations.  In addition, investments increase by theamount of contributions to subsidiaries and decrease by the amount ofdistributions from subsidiaries.  Theelimination entries necessary for consolidation purposes eliminate the equitymethod accounting for the investment in subsidiaries and the equity in earningsof subsidiaries, intercompany payables and receivables and other transactionsbetween subsidiaries including contributions and distributions.

 

Sections 13 and 15(d) ofthe Securities Exchange Act of 1934 require presentation of the followingsupplemental condensed consolidating financial statements.  Presented below is condensed consolidatingfinancial information for the Company and its subsidiaries as of and for thethree months ended March 31, 2001 and 2002.

 

**UnauditedCondensed Consolidating Statements of Operations – For the Three Months EndedMarch 31, 2001:**

**(in thousands)**

 
|                                                        |   | **The****Company** |   | **Subsidiary  Guarantors** |   | **Non-  Guarantor  Subsidiaries** |   | **Elimination  Entries** |   | **Reported** |   |
|-------------------------------------------------------------|--------|--------------------|--------|----------------------------|--------|-----------------------------------|--------|--------------------------|--------|--------------|--------|
| Revenues                                                    |   | $                  | — |                       | $      | 13,302                            |   | $                        | 5,776  |         | $      | (501 | ) | $ | 18,577 |   |
| Operating expenses:                                         |   |               |   |                       |   |                              |   |                     |   |         |   |
| Operations                                                  |   | —             |   | 9,407                      |   | 6,642                             |   | (501                     | )      | 15,548       |   |
| Selling and marketing                                       |   | —             |   | 2,515                      |   | 95                                |   | —                   |   | 2,610        |   |
| General and  administrative                                 |   | 596                |   | —                     |   | —                            |   | —                   |   | 596          |   |
| Depreciation and  amortization                              |   | 31                 |   | 2,802                      |   | 38                                |   | —                   |   | 2,871        |   |
| Total operating  expenses                                   |   | 627                |   | 14,724                     |   | 6,775                             |   | (501                     | )      | 21,625       |   |
| OPERATING INCOME (LOSS)                                     |   | (627               | )      | (1,422                     | )      | (999                              | )      | —                   |   | (3,048       | )      |
| OTHER EXPENSE (INCOME):                                     |   |               |   |                       |   |                              |   |                     |   |         |   |
| Interest expense                                            |   | 3,124              |   | —                     |   | —                            |   | —                   |   | 3,124        |   |
| Interest income                                             |   | (165               | )      | (34                        | )      | (31                               | )      | —                   |   | (230         | )      |
| Equity share of loss  (income) of subsidiaries              |   | 2,766              |   | (2,231                     | )      | —                            |   | (535                     | )      | —       |   |
| Other expense (income),  net                                |   | —             |   | 168                        |   | —                            |   | —                   |   | 168          |   |
| Total other expense  (income)                               |   | 5,725              |   | (2,097                     | )      | (31                               | )      | (535                     | )      | 3,062        |   |
| Income (loss) before  income taxes and minority interest    |   | (6,352             | )      | 675                        |   | (968                              | )      | 535                      |   | (6,110       | )      |
| Income tax provision                                        |   | —             |   | 26                         |   | —                            |   | —                   |   | 26           |   |
| Income (loss) before  minority interest                     |   | (6,352             | )      | 649                        |   | (968                              | )      | 535                      |   | (6,136       | )      |
| Minority interest in  net loss of consolidated subsidiaries |   | —             |   | —                     |   | —                            |   | (433                     | )      | (433         | )      |
| NET INCOME (LOSS)  BEFORE DISCONTINUED OPERATIONS           |   | (6,352             | )      | 649                        |   | (968                              | )      | 968                      |   | (5,703       | )      |
| Income from  discontinued operations                        |   | —             |   | (649                       | )      | —                            |   | —                   |   | (649         | )      |
| NET INCOME (LOSS)                                           |   | $                  | (6,352 | )                          | $      | —                            |   | $                        | (968   | )            | $      | 968 |   | $ | (6,352 | ) |

 

10

----

 

**Unaudited Condensed ConsolidatingCash Flows – For the Three Months Ended March 31, 2001:**

**(in thousands)**

** **
|                                                                                               |   | **The****Company** |   | **Subsidiary  Guarantors** |   | **Non-  Guarantor  Subsidiaries** |   | **Elimination  Entries** |   | **Reported** |   |
|----------------------------------------------------------------------------------------------------|--------|--------------------|--------|----------------------------|--------|-----------------------------------|--------|--------------------------|--------|--------------|--------|
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                             |   |               |   |                       |   |                              |   |                     |   |         |   |
| Net income (loss)                                                                                  |   | $                  | (6,352 | )                          | $      | —                            |   | $                        | (968   | )            | $      | 968 |   | $ | (6,352 | ) |
| Adjustment to reconcile  net income (loss) to net cash provided by (used in) operating activities: |   |               |   |                       |   |                              |   |                     |   |         |   |
| Non-cash expenses                                                                                  |   | 3,159              |   | 1,303                      |   | 38                                |   | (968                     | )      | 3,532        |   |
| Net change in assets  and liabilities                                                              |   | (3,463             | )      | 634                        |   | 239                               |   | —                   |   | (2,590       | )      |
| Net cash provided by  (used in) operating activities                                               |   | (6,656             | )      | 1,937                      |   | (691                              | )      | —                   |   | (5,410       | )      |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                             |   |               |   |                       |   |                              |   |                     |   |         |   |
| Purchase of property  and equipment                                                                |   | (8                 | )      | (594                       | )      | (15                               | )      | —                   |   | (617         | )      |
| Proceeds from the sale  of available for sale securities                                           |   | 1,821              |   | 4                          |   | 400                               |   | —                   |   | 2,225        |   |
| Cable programming  distribution agreements payments                                                |   | —             |   | (1,289                     | )      | —                            |   | —                   |   | (1,289       | )      |
| Purchase of intangible  assets                                                                     |   | —             |   | (80                        | )      | —                            |   | —                   |   | (80          | )      |
| Net cash provided by  (used in) investing activities                                               |   | 1,813              |   | (1,959                     | )      | 385                               |   | —                   |   | 239          |   |
| INCREASE (DECREASE) IN  CASH AND CASH EQUIVALENTS                                                  |   | (4,843             | )      | (22                        | )      | (306                              | )      | —                   |   | (5,171       | )      |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD                                                    |   | 12,178             |   | 1,127                      |   | 1,595                             |   | —                   |   | 14,900       |   |
| CASH AND CASH  EQUIVALENTS, END OF PERIOD                                                          |   | $                  | 7,335  |                       | $      | 1,105                             |   | $                        | 1,289  |         | $      | — |   | $ | 9,729 |   |

 

11

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**Unaudited Condensed ConsolidatingStatements of Financial Position – As of March 31, 2002:**

**(in thousands)**

 
|                                                         |   | **The****Company** |       | **Subsidiary  Guarantors** |       | **Non-  Guarantor  Subsidiaries** |       | **Elimination  Entries** |       | **Reported** |       |
|--------------------------------------------------------------|--------|--------------------|------------|----------------------------|------------|-----------------------------------|------------|--------------------------|------------|--------------|------------|
| **ASSETS:**                                                  |   |               | ** ** |                       | ** ** |                              | ** ** |                     | ** ** |         | ** ** |
| Cash and cash  equivalents                                   |   | $                  | 891        |                       | $          | 1,196                             |       | $                        | 367        |         | $          | — |   | $ | 2,454 |   |
| Accounts receivable,  net                                    |   | —             |       | 11,269                     |       | 1,193                             |       | —                   |       | 12,462       |       |
| Other current assets                                         |   | 56                 |       | 1,676                      |       | —                            |       | —                   |       | 1,732        |       |
| Total current assets                                         |   | 947                |       | 14,141                     |       | 1,560                             |       | —                   |       | 16,648       |       |
| Property and equipment                                       |   | 60                 |       | 16,121                     |       | 232                               |       | —                   |       | 16,413       |       |
| Intangible assets                                            |   | 2,431              |       | 47,600                     |       | —                            |       | —                   |       | 50,031       |       |
| Other long-term assets                                       |   | 14,180             |       | (8,739                     | )          | —                            |       | (990                     | )          | 4,451        |       |
|                                                         |   |               |       |                       |       |                              |       |                     |       |         |       |
| Total assets                                                 |   | $                  | 17,618     |                       | $          | 69,123                            |       | $                        | 1,792      |         | $          | (990 | ) | $ | 87,543 |   |
| **LIABILITIES AND SHAREHOLDERS’****EQUITY  (DEFICIT):** |   |               | ** ** |                       | ** ** |                              | ** ** |                     | ** ** |         | ** ** |
| Accounts payable                                             |   | $                  | 236        |                       | $          | 1,764                             |       | $                        | 3,189      |         | $          | — |   | $ | 5,189 |   |
| Cable programming  distribution payments payable             |   | —             |       | 6,470                      |       | —                            |       | —                   |       | 6,470        |       |
| Producers’ fees payable                                 |   | —             |       | 5,033                      |       | —                            |       | —                   |       | 5,033        |       |
| Accrued liabilities                                          |   | 3,220              |       | 1,738                      |       | 102                               |       | —                   |       | 5,060        |       |
| Other current  liabilities                                   |   | (50,769            | )          | 51,449                     |       | 204                               |       | —                   |       | 884          |       |
| Total current  liabilities                                   |   | (47,313            | )          | 66,454                     |       | 3,495                             |       | —                   |       | 22,636       |       |
| Senior secured notes                                         |   | 100,000            |       | —                     |       | —                            |       | —                   |       | 100,000      |       |
| Other long-term  liabilities                                 |   | 2,725              |       | 737                        |       | —                            |       | —                   |       | 3,462        |       |
| Total long-term  liabilities                                 |   | 102,725            |       | 737                        |       | —                            |       | —                   |       | 103,462      |       |
| Minority interest                                            |   | —             |       | —                     |       | —                            |       | (761                     | )          | (761         | )          |
| Class A Common Stock  subject to put                         |   | 951                |       | —                     |       | —                            |       | —                   |       | 951          |       |
| Shareholders’ equity  (deficit):                        |   |               |       |                       |       |                              |       |                     |       |         |       |
| Series A Preferred  Stock                                    |   | 23,975             |       | —                     |       | —                            |       | —                   |       | 23,975       |       |
| Class A Common Stock                                         |   | 53                 |       | —                     |       | —                            |       | —                   |       | 53           |       |
| Class B Common Stock                                         |   | 22                 |       | —                     |       | —                            |       | —                   |       | 22           |       |
| General Partners’  Contributions                        |   | —             |       | —                     |       | 1,350                             |       | (1,350                   | )          | —       |       |
| Additional paid-in  capital                                  |   | 30,220             |       | —                     |       | —                            |       | —                   |       | 30,220       |       |
| Retained earnings  (deficit)                                 |   | (93,015            | )          | 1,932                      |       | (3,053                            | )          | 1,121                    |       | (93,015      | )          |
| Total shareholders’  equity (deficit)                   |   | (38,745            | )          | 1,932                      |       | (1,703                            | )          | (229                     | )          | (38,745      | )          |
| Total liabilities and  shareholders’ equity (deficit)   |   | $                  | 17,618     |                       | $          | 69,123                            |       | $                        | 1,792      |         | $          | (990 | ) | $ | 87,543 |   |

 

12

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**Unaudited Condensed ConsolidatingStatements of Operations – For the Three Months Ended March 31, 2002:**

**(in thousands)**

 
|                                                        |   | **The****Company** |    | **Subsidiary  Guarantors** |   | **Non-  Guarantor  Subsidiaries** |   | **Elimination  Entries** |   | **Reported** |   |
|-------------------------------------------------------------|--------|--------------------|---------|----------------------------|--------|-----------------------------------|--------|--------------------------|--------|--------------|--------|
| Revenues                                                    |   | $                  | —  |                       | $      | 12,823                            |   | $                        | 6,268  |         | $      | (465 | ) | $ | 18,626 |   |
| Operating expenses:                                         |   |               |    |                       |   |                              |   |                     |   |         |   |
| Operations                                                  |   | —             |    | 8,848                      |   | 5,864                             |   | (465                     | )      | 14,247       |   |
| Selling and marketing                                       |   | —             |    | 1,736                      |   | 205                               |   | —                   |   | 1,941        |   |
| General and  administrative                                 |   | 465                |    | —                     |   | —                            |   | —                   |   | 465          |   |
| Depreciation and  amortization                              |   | 37                 |    | 2,527                      |   | 32                                |   | —                   |   | 2,596        |   |
| Total operating  expenses                                   |   | 502                |    | 13,111                     |   | 6,101                             |   | (465                     | )      | 19,249       |   |
| OPERATING INCOME (LOSS)                                     |   | (502               | )       | (288                       | )      | 167                               |   | —                   |   | (623         | )      |
| OTHER EXPENSE (INCOME):                                     |   |               |    |                       |   |                              |   |                     |   |         |   |
| Interest expense                                            |   | 3,280              |    | 5                          |   | —                            |   | —                   |   | 3,285        |   |
| Interest income                                             |   | (12                | )       | (7                         | )      | —                            |   | —                   |   | (19          | )      |
| Equity share of loss  (income) of subsidiaries              |   | 10,905             |    | (10,997                    | )      | —                            |   | 92                       |   | —       |   |
| Other expense (income),  net                                |   | —             |    | (19                        | )      | —                            |   | —                   |   | (19          | )      |
| Total other expense  (income)                               |   | 14,173             |    | (11,018                    | )      | —                            |   | 92                       |   | 3,247        |   |
| Income (loss) before  income taxes and minority interest    |   | (14,675            | )       | 10,730                     |   | 167                               |   | (92                      | )      | (3,870       | )      |
| Income tax provision                                        |   | —             |    | (3                         | )      | —                            |   | —                   |   | (3           | )      |
| Income (loss) before  minority interest                     |   | (14,675            | )       | 10,733                     |   | 167                               |   | (92                      | )      | (3,867       | )      |
| Minority interest in  net loss of consolidated subsidiaries |   | —             |    | —                     |   | —                            |   | 75                       |   | 75           |   |
| NET INCOME (LOSS)  BEFORE CHANGE IN ACCOUNTING PRINCIPLE    |   | (14,675            | )       | 10,733                     |   | 167                               |   | (167                     | )      | (3,942       | )      |
| Loss from change in  accounting principle                   |   | —             |    | (10,733                    | )      | —                            |   | —                   |   | (10,733      | )      |
| NET INCOME (LOSS)                                           |   | $                  | (14,675 | )                          | $      | —                            |   | $                        | 167    |         | $      | (167 | ) | $ | (14,675 | ) |

 

**Unaudited Condensed ConsolidatingCash Flows – For the Three Months Ended March 31, 2002:**

**(in thousands)**

** **
|                                                                                               |   | **The****Company** |    | **Subsidiary  Guarantors** |   | **Non-  Guarantor  Subsidiaries** |   | **Elimination  Entries** |   | **Reported** |   |
|----------------------------------------------------------------------------------------------------|--------|--------------------|---------|----------------------------|--------|-----------------------------------|--------|--------------------------|--------|--------------|--------|
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                             |   |               |    |                       |   |                              |   |                     |   |         |   |
| Net income (loss)                                                                                  |   | $                  | (14,675 | )                          | $      | —                            |   | $                        | 167    |         | $      | (167 | ) | $ | (14,675 | ) |
| Adjustment to reconcile  net income (loss) to net cash provided by (used in) operating activities: |   |               |    |                       |   |                              |   |                     |   |         |   |
| Non-cash expenses                                                                                  |   | 10,179             |    | 4,315                      |   | 32                                |   | 167                      |   | 14,693       |   |
| Net change in assets  and liabilities                                                              |   | (1,417             | )       | (2,253                     | )      | (126                              | )      | —                   |   | (3,796       | )      |
| Net cash provided by  (used in) operating activities                                               |   | (5,913             | )       | 2,062                      |   | 73                                |   | —                   |   | (3,778       | )      |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                             |   |               |    |                       |   |                              |   |                     |   |         |   |
| Purchase of property  and equipment                                                                |   | —             |    | (253                       | )      | —                            |   | —                   |   | (253         | )      |
| Cable programming  distribution agreements payments                                                |   | —             |    | (1,286                     | )      | —                            |   | —                   |   | (1,286       | )      |
| Net cash provided by  (used in) investing activities                                               |   | —             |    | (1,539                     | )      | —                            |   | —                   |   | (1,539       | )      |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                             |   |               |    |                       |   |                              |   |                     |   |         |   |
| Proceeds from  borrowings                                                                          |   | 135                |    | —                     |   | —                            |   | —                   |   | 135          |   |
| Repayment of capital  lease obligations                                                            |   | —             |    | (6                         | )      | —                            |   | —                   |   | (6           | )      |
| Net cash provided by  (used in) financing activities                                               |   | 135                |    | (6                         | )      | —                            |   | —                   |   | 129          |   |
| INCREASE (DECREASE) IN  CASH AND CASH EQUIVALENTS                                                  |   | (5,778             | )       | 517                        |   | 73                                |   | —                   |   | (5,188       | )      |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD                                                    |   | 6,669              |    | 679                        |   | 294                               |   | —                   |   | 7,642        |   |
| CASH AND CASH  EQUIVALENTS, END OF PERIOD                                                          |   | $                  | 891     |                       | $      | 1,196                             |   | $                        | 367    |         | $      | — |   | $ | 2,454 |   |

 

13

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**(8) REPORTABLE SEGMENTS**

 

The Company currently has four reportable segments: network radio,cable television programming, satellite services and general andadministrative-corporate.  OnSeptember 30, 2001, the Company ceased all operations of the Internetadvertising sales services business and wound up all aspects of this segment asof December 31, 2001.  The historicaloperating results have been segregated as “Discontinued Operations” below.

 

The Company’s reportablesegments have been determined in accordance with the Company’s internalmanagement structure.  The Companyevaluates performance based on many factors, one of the primary measures is EBITDA.  Consolidated EBITDA represents operatingincome (loss) plus depreciation and amortization, plus amortization of cableprogramming distribution payments and excluding the EBITDA attributable to theminority interest in the PIN Venture, a consolidated 55.3%-owned subsidiary.

 

The following tables setforth the Company’s financial results by operating segments.

 

|                                                     |   | **Three Months Ended  March 31,** |   |
|----------------------------------------------------------|--------|-----------------------------------|--------|
|                                                     |   | **2001**                          |   | **2002** |   |
|                                                     |   | **(in thousands)**                |   |
| Revenues:                                                |   |                              |   |   |   |
| Network radio                                            |   | $                                 | 9,918  |   | $ | 9,385 |   |
| Cable television  programming                            |   | 7,845                             |   | 8,345 |   |
| Satellite  services                                      |   | 814                               |   | 896 |   |
| Total revenues                                           |   | $                                 | 18,577 |   | $ | 18,626 |   |
|                                                     |   |                              |   |   |   |
| EBITDA:                                                  |   |                              |   |   |   |
| Network radio                                            |   | $                                 | 905    |   | $ | 1,710 |   |
| Cable television  programming                            |   | (497                              | )      | 937 |   |
| Satellite  services                                      |   | 704                               |   | 813 |   |
| Segment EBITDA                                           |   | 1,112                             |   | 3,460 |   |
| Reconciliation  to operating income:                     |   |                              |   |   |   |
| General and  administrative — Corporate             |   | (596                              | )      | (465 | ) |
| Depreciation and  amortization                           |   | (2,871                            | )      | (2,596 | ) |
| Amortization of  cable programming distribution payments |   | (693                              | )      | (1,022 | ) |
|                                                     |   |                              |   |   |   |
| Total operating  income (loss)                           |   | $                                 | (3,048 | ) | $ | (623 | ) |
|                                                     |   |                              |   |   |   |
| Reconciliation of segment EBITDA to total EBITDA:        |   |                              |   |   |   |
| Segment total                                            |   | $                                 | 1,112  |   | $ | 3,460 |   |
| General and  administrative — Corporate             |   | (596                              | )      | (465 | ) |
| Adjustment  related to minority interest EBITDA          |   | 433                               |   | (89 | ) |
| Total EBITDA  before discontinued operations             |   | 949                               |   | 2,906 |   |
| Discontinued  operations                                 |   | (640                              | )      | — |   |
| Total EBITDA                                             |   | $                                 | 309    |   | $ | 2,906 |   |

 

14

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|                                                           |   | **Three Months  Ended  March 31,** |       |
|----------------------------------------------------------------|--------|-----------------------------------------|------------|
|                                                           |   | **2001**                                | ** ** | **2002** |   |
|                                                           |   | **(in thousands)**                      |       |
| Depreciation and amortization:                                 |   |                                    |       |   |   |
| Network radio                                                  |   | $                                       | 1,717      |   | $ | 1,558 |   |
| Cable television  programming                                  |   | 166                                     |       | 105 |   |
| Satellite  services                                            |   | 957                                     |       | 896 |   |
|                                                           |   |                                    |       |   |   |
| Segment total                                                  |   | 2,840                                   |       | 2,559 |   |
| General and  administrative — Corporate                   |   | 31                                      |       | 37 |   |
| Segment total  before discontinued operations                  |   | 2,871                                   |       | 2,596 |   |
| Discontinued  operations                                       |   | 9                                       |       | — |   |
|                                                           |   |                                    |       |   |   |
| Total  depreciation and amortization                           |   | $                                       | 2,880      |   | $ | 2,596 |   |
|                                                           |   |                                    |       |   |   |
| Amortization of cable programming distribution  payments:      |   |                                    |       |   |   |
| Amortization  reflected as a reduction of revenues             |   | $                                       | 147        |   | $ | 150 |   |
| Amortization  reported as operations expense                   |   | 546                                     |       | 872 |   |
| Total  amortization of cable programming distribution payments |   | $                                       | 693        |   | $ | 1,022 |   |
|                                                           |   |                                    |       |   |   |
| Capital expenditures:                                          |   |                                    |       |   |   |
| Network radio                                                  |   | $                                       | 192        |   | $ | 119 |   |
| Cable television  programming                                  |   | 64                                      |       | 131 |   |
| Satellite  services                                            |   | 339                                     |       | 3 |   |
|                                                           |   |                                    |       |   |   |
| Segment total                                                  |   | 595                                     |       | 253 |   |
| General and  administrative — Corporate                   |   | 8                                       |       | — |   |
|                                                           |   |                                    |       |   |   |
| Total before  discontinued operations                          |   | 603                                     |       | 253 |   |
| Discontinued  operations                                       |   | 14                                      |       | — |   |
| Total capital  expenditures                                    |   | $                                       | 617        |   | $ | 253 |   |
|                                                           |   |                                    |       |   |   |
| Cable television programming distribution agreements  payments |   |                                    |       |   |   |
| Cable television  programming                                  |   | $                                       | 1,289      |   | $ | 1,286 |   |

 

|                                         |   | **As of March 31,** |    |
|----------------------------------------------|--------|--------------------------|---------|
|                                         |   | **2001**                 |    | **2002** |   |
|                                         |   | **(in thousands)**       |    |
| Total assets:                                |   |                     |    |   |   |
| Network radio                                |   | $                        | 38,032  |   | $ | 32,060 |   |
| Cable television  programming                |   | 17,369                   |    | 25,934 |   |
| Satellite  services                          |   | 15,443                   |    | 11,931 |   |
| Segment total                                |   | 70,844                   |    | 69,925 |   |
| General and  administrative — Corporate |   | 38,096                   |    | 17,618 |   |
| Total assets  before discontinued operations |   | 108,940                  |    | 87,543 |   |
| Discontinued  operations                     |   | 246                      |    | — |   |
| Total assets                                 |   | $                        | 109,186 |   | $ | 87,543 |   |

 

SegmentEBITDA excludes intersegment transactions between the satellite services andcable programming segments for the satellite services provided to the PINVenture and Great American Country for $1,046,000, and $1,302,000, for thethree months

 

15

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ended March 31, 2001and 2002, respectively.  Segment EBITDAdiffers from operating income (loss) of each of the segments by the amount ofdepreciation and amortization expenses of each segment.

 

16

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**ITEM2**.  **MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following discussion of results of the Company’sfinancial condition and results of operations contains, in addition tohistorical information, forward-looking statements that are based upon certainassumptions and are subject to a number of risks and uncertainties.  The Company’s actual results may differsignificantly from the results described in such forward-looking statements.

 

**Resultsof Operations**

 

The following table sets forth the amount of, andpercentage relationship to total net revenues of, certain items included in theCompany’s historical unaudited consolidated statements of operations for thethree months ended March 31, 2001 and 2002:

** **

|                                                                    |   | **Three Months Ended March 31,** |     |
|-------------------------------------------------------------------------|--------|---------------------------------------|----------|
|                                                                    |   | **2001**                              |     | **2002** |   |
|                                                                    |   | **(in thousands)**                    | * * |
| Revenues:                                                               |   |                                  | * * |   | * * |   | * * |   | * * |
| Network radio                                                           |   | $                                     | 9,918    |   | *53* | *%* | $ | 9,385 |   | *50* | *%* |
| Cable television programming                                            |   | 7,845                                 |     | *43* | * * | 8,345 |   | *45* | * * |
| Satellite services                                                      |   | 814                                   |     | *4* | * * | 896 |   | *5* | * * |
|                                                                         |   |                                  |     |   | * * |   |   |   | * * |
| Total revenues                                                          |   | 18,577                                |     | *100* | * * | 18,626 |   | *100* | * * |
|                                                                         |   |                                  |     |   | * * |   |   |   | * * |
| Operating expenses:                                                     |   |                                  |     |   | * * |   |   |   | * * |
| Network radio                                                           |   | 10,730                                |     | *57* | * * | 9,233 |   | *49* | * * |
| Cable television programming                                            |   | 9,201                                 |     | *50* | * * | 8,535 |   | *46* | * * |
| Satellite services                                                      |   | 1,067                                 |     | *6* | * * | 979 |   | *5* | * * |
|                                                                         |   |                                  |     |   | * * |   |   |   | * * |
| Segment total                                                           |   | 20,998                                |     | *113* | * * | 18,747 |   | *100* | * * |
| General and administrative                                              |   | 627                                   |     | *3* | * * | 502 |   | *3* | * * |
|                                                                         |   |                                  |     |   | * * |   |   |   | * * |
| Total operating expenses                                                |   | 21,625                                |     | *116* | * * | 19,249 |   | *103* | * * |
|                                                                         |   |                                  |     |   | * * |   |   |   | * * |
| Operating loss                                                          |   | (3,048                                | )        | *(16* | *)* | (623 | ) | *(3* | *)* |
|                                                                         |   |                                  |     |   | * * |   |   |   | * * |
| Interest expense, net                                                   |   | 2,894                                 |     | *16* | * * | 3,266 |   | *18* | * * |
| Other expense (income), net                                             |   | 168                                   |     | *1* | * * | (19 | ) | *—* | * * |
| Income tax provision (benefit)                                          |   | 26                                    |     | *—* | * * | (3 | ) | *—* | * * |
| Minority interest                                                       |   | (433                                  | )        | *(2* | *)* | 75 |   | *—* | * * |
|                                                                         |   |                                  |     |   | * * |   |   |   | * * |
| Loss before  change in accounting principle and discontinued operations |   | (5,703                                | )        | *(31* | *)* | (3,942 | ) | *(21* | *)* |
| Income from  discontinued operations                                    |   | (649                                  | )        | *(3* | *)* | — |   | *—* | * * |
| Loss before  change in accounting principle                             |   | (6,352                                | )        | *(34* | *)* | (3,942 | ) | *(21* | *)* |
| Effect of change  in accounting principle                               |   | —                                |     | *—* | * * | (10,733 | ) | *(58* | *)* |
| Net loss                                                                |   | $                                     | (6,352   | ) | *(34* | *)%* | $ | (14,675 | ) | *(79* | *)%* |

 

17

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The following table sets forth EBITDA for the threemonths ended March 31, 2001 and 2002. EBITDA is unaudited andrepresents operating income (loss) plus depreciation and amortization, plusamortization of cable programming distribution agreement payments and excludingthe EBITDA attributable to the minority interest in the PIN Venture, aconsolidated 55.3%–owned subsidiary. Management acknowledges that EBITDAis not a measure of performance or liquidity calculated in accordance withgenerally accepted accounting principles. However, EBITDA is a measure widelyused by analysts and investors in the media industry to determine a company’soperating performance and ability to service and incur debt. EBITDA should notbe considered in isolation or as a substitute for net income (loss), cash flowsfrom operating activities or other consolidated income or cash flow statementdata prepared in accordance with generally accepted accounting principles or asa measure of profitability or liquidity.

 

|                                           |   | **For the Three Months Ended  March 31,** |   |
|------------------------------------------------|--------|------------------------------------------------|--------|
|                                           |   | **2001**                                       |   | **2002** |   |
|                                           |   | **(in thousands)**                             |   |
| EBITDA:                                        |   |                                           |   |   |   |
| Network radio                                  |   | $                                              | 905    |   | $ | 1,710 |   |
| Cable television programming                   |   | (497                                           | )      | 937 |   |
| Satellite services                             |   | 704                                            |   | 813 |   |
| Segment EBITDA                                 |   | 1,112                                          |   | 3,460 |   |
| General and administrative                     |   | (596                                           | )      | (465 | ) |
| Adjustment related to minority interest EBITDA |   | 433                                            |   | (89 | ) |
| EBITDA before discontinued operations          |   | 949                                            |   | 2,906 |   |
| Discontinued operations                        |   | (640                                           | )      | — |   |
| EBITDA                                         |   | $                                              | 309    |   | $ | 2,906 |   |

 

**Three Months Ended March 31, 2001 to Three Months Ended March 31, 2002**

 

**Total Revenues**.  Total revenueswere flat at $18.6 million for the three months ended March 31, 2001and 2002.

 

**Total Operating Expenses**.  Totaloperating expenses decreased $1.3 million, or 8%, from $15.5 millionfor the three months ended March 31, 2001 to $14.2 million for thethree months ended March 31, 2002. This decrease is due primarily to Company-wide cost-cutting measuresimplemented during the latter part of 2001, including reductions in personnel,travel, and other operating expenses, as well as the elimination of severalnetwork radio programs that no longer fit our longer-term strategy orprofitability requirements.  Thisdecrease was partially offset by an increase in amortization of cableprogramming distribution agreements.  Asa percentage of total revenues, total operating expenses decreased from 84% forthe three months ended March 31, 2001 to 76% for the three months endedMarch 31, 2002.

 

**Selling and Marketing**.  Selling andmarketing expenses decreased $0.7 million, or 26%, from $2.6 millionfor the three months ended March 31, 2001 to $1.9 million for thethree months ended March 31, 2002. Beginning in the third quarter of 2001, steps were taken to decrease ourmarketing and promotional expenditures across all of our business segments.

 

**General and Administrative**.  Generaland administrative expenses decreased $0.1 million, or 22%, from$0.6 million for the three months ended March 31, 2001 to$0.5 million for the three months ended March 31, 2002. The decreaseis due primarily to reductions in personnel expenses of our Internetadministrative support operations.

 

**Depreciation andAmortization**.  Depreciation and amortizationexpenses decreased $0.3 million, or 10%, from $2.9 million for thethree months ended March 31 2001 to $2.6 million for the three monthsended March 31, 2002.   The decrease isdue to the adoption of new accounting rules, the effect of which is that we nolonger record amortization expense related to goodwill starting January 1,2002.

 

**Total Operating Loss**.  Operating lossdecreased $2.4 million, from an operating loss of $(3.0) million forthe three months ended March 31, 2001 to an operating loss of$(0.6) million for the three months ended March 31, 2002, as a resultof the factors stated above.

 

**Total EBITDA from Continuing Operations**.  EBITDA increased $1.9 million, or 206%, from$1.0 million for the three months 

 

18

----

 

ended March 31, 2001, to $2.9 million for the three months endedMarch 31, 2002, as a result of the factors stated above.

 

**Total Other Expense**. Total other expense increased $0.2 million, or6%, from $3.1 million for the three months ended March 31, 2001to $3.3 million for the three months ended March 31, 2002 due to anincrease in interest expense relating to the unsecured loans from JonesInternational, Ltd. and certain of our officers in late 2001 and early 2002 anda decrease in interest income.

** **

**Total Net Loss From Continuing Operations**. Net loss from continuingoperations decreased $1.8 million, or 31%, from $(5.7) million forthe three months ended March 31, 2001 to $(3.9) million for the threemonths ended March 31, 2002, as a result of the factors stated above.

 

**Loss From Discontinued Operations**.  Loss from discontinued operations was $(0.7) million for thethree months ended March 31, 2001.

 

**Loss From Change in Accounting Principle**.  Loss from change in accounting principle was $(10.7) millionfor the three months ended March 21, 2002. In June 2001, the FinancialAccounting Standards Board (“FASB”) issued SFAS No. 142, “Goodwill and OtherIntangible Assets.”   We adopted the newstandard on January 1, 2002 by using the new methodology formeasuring impairment prescribed by this pronouncement.  As a result of its adoption of this newstandard, and based on our evaluation of the MediaAmerica assets we recognizeda non-cash charge of approximately $10.7 million in the first quarter of2002 relating to a partial write-down of the goodwill recorded as part of theMediaAmerica acquisition in 1998.

 

**Total Net Loss**. Net loss increased $8.3 million, or 131%, from$(6.4) million for the three months ended March 31, 2001 to$(14.7) million for the three months ended March 31, 2002, as aresult of the factors stated above.

 

**Network Radio**

 

*Revenues*.  Network radio revenuesdecreased $0.5 million, or 5%, from $9.9 million for the three monthsended March 31, 2001 to $9.4 million for the three months ended March31, 2002.  This decrease inrevenues is due primarily to the elimination in 2001 of certain radio programofferings that no longer fit our longer-term strategy or profitabilityrequirements.  This decrease waspartially offset by an increase in sell-out percentages realized in the firstquarter of 2002 as compared to the same period in 2001 as well as revenuegenerated from the addition of several new radio programs in late 2001.

 

*Expenses.*  Network radioexpenses decreased $1.5 million, or 14%, from $10.7 million for thethree months ended March 31, 2001 to $9.2 million for the threemonths ended March 31, 2002. This decrease was primarily due to:

 

•             $0.6 million decreasein operating expenses from cost saving measures implemented during the latterpart of 2001, including reductions in personnel, travel and other operatingexpenses, as well as the elimination of several unprofitable radio programs.  This decrease was partially offset by anincrease in operating expenses related to addition of several new radioprograms and services;

 

•             $0.5 million decreasein selling and marketing expenses primarily due to the elimination of severalradio programs and cost-cutting measures implemented during the latter part of2001 to decrease marketing and promotional expenditures;

 

•             $0.2 million decreasein depreciation and amortization expenses. Due to the adoption of new accounting rules, we no longer recognizeamortization expense related to goodwill, starting January 1, 2002.  The decrease in amortization expense ofgoodwill was partially offset by an increase in depreciation related topurchase of equipment to upgrade of certain radio programming studios, and newsatellite receivers needed to transition many of our programs to a newsatellite delivery platform; and

 

•             $0.2 million decreasein management, support costs and other.

 

As apercentage of network radio revenues, network radio expenses decreased from108% for the three months ended March 31, 2001 to 98% for the threemonths ended March 31, 2002.  Thedecrease in network radio expenses as a percentage of network radio revenues isdue primarily to a decrease in expenses related the Company-wide cost cuttingmeasures implemented during the latter part of 2001, as well as the result ofthe expense factors stated above.

 

19

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Our networkradio advertising revenues are highly dependent upon the state of theadvertising market and overall economic conditions.  While advertising rates and average sellout ratios for ournetwork radio advertising have not fully recovered from the soft economic andadvertising market conditions existing at the end of 2001, we have beenencouraged by the level of sales activity seen thus far for the first andsecond quarters of 2002.  Based on thissales activity, we continue to be cautiously optimistic that our network radiorevenues will continue to improve in the second half of 2002.  However, this is largely dependent on theadvertising marketplace and overall economy stabilizing and improvingmarginally later in the year.

 

*Operating Income(Loss).*  Operating income (loss)decreased $1.0 million from operating loss of $(0.8) million for thethree months ended March 31, 2001 to operating income of $0.2 millionfor the three months ended March 31, 2002 as a result of the factorsstated above.

 

*Segment EBITDA.*  Segment EBITDA increased $0.8 million, or 89%, from$0.9 million for the three months ended March 31, 2001, to$1.7 million for the three months ended March 31, 2002 as a result ofthe factors stated above.

 

**Cable Television Programming**

 

*Revenues*.  Cable television programmingrevenues increased $0.5 million, or 6%, from $7.8 million for thethree months ended March 31, 2001 to $8.3 million for the threemonths ended March 31, 2002.  Thisincrease was due to the following:

 

•             PIN’s revenues increased$0.5 million, or 9%, due to higher average rates PIN earned for a dailyblock of infomercial inventory sold under a one-year advertising salesagreement entered into in mid-2001 as partially offset by a 2% decrease inPIN’s full-time equivalentsubscribers (“FTRE”).   PIN’s FTRE decreased to 16.2 million FTREs at theend of March 31, 2002 as compared to 16.6 million FTREs at theend of March 31, 2001.

 

•             GAC’s revenues remained flatat $2.2 million for the three months ended March 31, 2001 and 2002.  Advertising revenues for GAC were flat dueto weak national spot advertising conditions existing during the 1st quarter of2002 as compared to 2001, as offset by infomercial advertising revenues earnedduring the quarter as a result of GAC airing infomercials on a limited basisduring its overnight time periods beginning in the second half of 2001.  License fees charged to cable systemoperators who distribute GAC’s programming remain flat for the three monthsended March 31, 2001 and 2002.

 

GAC’s subscribers (as reported by cable system andDBS operators) increased 39% to 17.5 million subscribers at the end ofMarch 31, 2002 as compared to 12.6 million in 2001, an increase of4.9 million subscribers.  Ourability to continue to increase GAC distribution is largely dependent on ourability to provide adequate financial incentives to cable operators, to obtainagreements with cable operators to carry GAC on their digital programming tiersand our ability to secure carriage with another DBS provider on terms that areacceptable to us. We anticipate GAC’s subscriber distribution will increase byapproximately 20% in 2002, assuming there are no material system deletions.

 

*Expenses*.  Cable television programming expenses decreased$0.7 million, or 7%, from $9.2 million for the three months endedMarch 31, 2001 to $8.5 million for the three months ended March31, 2002.  This was primarily dueto:

 

•             a decrease of $0.6 million,or 10%, in rebates paid to cable systems receiving PIN due to a 2% decrease inFTREs, as well as due to PIN's efforts to reduce its affiliate rebate costs;

 

•             a decrease of $0.2 millionin PIN’s programming expenses relating to a short-term agreement to distributePIN’s programming with a DBS provider beginning in March 2001 that wassubsequently terminated in August 2001;

 

•             a decrease of$0.1 million in GAC’s programming expenses;

 

•             a decrease of$0.1 million in Internet programming and content expenses for the GACcompanion website; as partially offset by:

 

•             an increase of$0.2 million in amortization of cable programming distribution agreementspayment caused by an increase in the number of GAC’s subscribers;

 

•             an increase of$0.1 million in PIN’s selling and marketing expenses.

 

20

----

 

As apercentage of cable television programming revenues, cable televisionprogramming expenses decreased from 117% for the three months ended March31, 2001 to 102% for the three months ended March 31, 2002. Thedecrease in cable television programming expenses as a percentage of cabletelevision programming revenues is due primarily to lower PIN rebate costs andan increase in advertising revenues due to higher rates charged by PIN in thefirst quarter of 2002, as compared to same period in 2001.

 

For thethree months ended March 31, 2001 and 2002, PIN paid rebates equivalent toapproximately 99% and 82%, respectively, of its revenues to cable system andDBS operators receiving its programming. This decrease in rebates relative to revenues was due to our continuingeffort to restore PIN to profitability during this difficult advertisingmarket.  PIN has been reducing rebatecosts through negotiating lower rebate rates with PIN’s cable systemaffiliates.  While we are continuing totake certain measures to decrease PIN rebate costs, including negotiating lowerrebates with cable system operators as their carriage agreements come up forrenewal, there can be no assurance that we will be able to reduce these coststo the mid 70% range we have achieved in the past unless and until thelong-form advertising marketing improves significantly or new sources ofrevenues are realized.

 

*Operating Loss*.  Operating lossdecreased $1.2 million, from an operating loss of $(1.4) million for thethree months ended March 31, 2001 to an operating loss of $(0.2)million for the three months ended March 31, 2002 as a result of thefactors stated above.

 

*Segment EBITDA*.  Segment EBITDA before the exclusion of EBITDA attributable to thePIN Venture’s minority interest, increased $1.4 million, from$(0.5) million for the three months ended March 31, 2001, to$0.9 million for the three months ended March 31, 2002 as aresult of the factors stated above.

 

**Satellite Services**

 

*Revenues.*  Satellite services revenues increased $0.1 million, or 10%,from $0.8 million for the three months ended March 31, 2001 to$0.9 million for the three months ended March 31, 2002.  This increase is due primarily to increasedsatellite services fees charged to an affiliated party.

 

*Expenses*.  Satellite services expenses decreased $0.1 million, or 8%,from $1.1 million for the three months ended March 31, 2001 to $1.0million for the three months ended March 31, 2002.  This decrease is primarily due to costsavings realized as a result of the cost-cutting measures implemented in thelatter part of 2001.  As a percentage ofsatellite services revenues, satellite services expenses decreased from 131%for the three months ended March 31, 2001 to 109% for the threemonths ended March 31, 2002.

 

In the second quarter of 2002, we negotiated aone-time termination fee of $3.5 million in payment of all of our parentcompany’sremainingsatellite service commitments.  Weanticipate closing on this transaction in the second quarter of 2002.

 

The leasingof capacity on our C-3 transponder is subject to a numbers of factors,including cable network demand and general availability of transponderspace.  There can be no assurance thatwe will be successful in leasing our excess satellite transponder capacity.

 

*Operating Loss.*  Operating lossdecreased $0.2 million from an operating loss of $(0.3) million forthe three months ended March 31, 2001 to an operating loss of$(0.1) million for the three months ended March 31, 2002 as a resultof the factors stated above.

 

*Segment EBITDA*.  Segment EBITDA increased $0.1 million, or 15%, from$0.7 million for the three months ended March 31, 2001, to$0.8 million for the three months ended March 31, 2002, as a resultof the factors stated above.

 

Oursatellite transponders will be available to allow distribution of televisionprogramming until early 2005, at which time we will be required to migrate ourprogramming over to new satellite transponder space.  During 2002, we will address our future replacement satellitecapacity needs for our cable networks and begin the negotiation process tosecure this replacement satellite capacity.

 

**Discontinued Operations**

 

In 2000, webegan offering Internet advertising sales services with initial focus onstreaming media advertising.  Wedeveloped 

 

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a sales and technology infrastructure to seek togrow this business, as this new advertising medium appeared to gainmomentum.  The success of this businesswas highly dependent upon our ability to reach a sufficient audience and toaggregate, target and accurately measure such audience (through still-emergingtechnologies) in a way that would be attractive to national advertisers.  Due to a number of developments whichadversely affected streaming media advertising, management decided to closedown this business entirely in the third quarter of 2001.  On September 30, 2001, the Companyceased all operations of the Internet Advertising Sales Services business andwound up all aspects of this segment as of December 31, 2001.

 

**Liquidity and Capital Resources**

 

Since ourinception, we have incurred net losses, primarily as a result of expensesassociated with developing and launching our programming networks, as well asfinancing costs. For the three months ended March 31, 2001 and 2002,we incurred net losses of $(6.4) million and $(14.7) million, respectively.  Net cash used in operating activities forthe three months ended March 31, 2001 and 2002 was $(5.4) million and$(3.8) million, respectively.

 

Theimplementation of our growth strategies depends on a number of factors,including the availability of cash generated from operations and available cashbalances, and may require additional equity and/or debt financings. Theindenture which governs our outstanding notes permits secured borrowings of upto $20.0 million.  We do not have acredit facility in place which would make available such borrowings, nor do webelieve such a facility is currently available to us on acceptable terms.  We had cash and cash equivalents of$2.5 million as of March 31, 2002.

 

Ouroperating results and liquidity position were significantly adversely affectedby the unfavorable advertising market conditions existing during 2001 includingthe adverse impact of the events of September 11 and the weakened domesticeconomy, as well as by the substantial cable distribution payments made by GACto drive its significant subscriber growth in 2001.  During 2002, we expect to generate sufficient cash flow to fundour debt service and capital expenditures. However, we do not anticipate generating sufficient cash flow to fundour projected GAC cable programming distribution payments, which includeamounts that we are contractually obligated to pay for certain new incrementalsubscriber growth unless additional steps are taken to improve ourliquidity.  We believe that thesearrangements are critical to future growth in our cable television programmingbusiness.

 

In aneffort to meet these liquidity requirements, we are moving to implement anumber of steps to improve our liquidity position going forward in 2002.  These steps include:

 

•           First, identifying andexploiting new sources of revenue.  Wehave identified new advertising revenue streams in our network radio businesswhich we believe have significant potential. We began deriving revenues from these new sources late in the first quarter.  To develop these revenue streams, we will behiring some additional sales staff within our network radio advertising salesgroup.

 

•                                          Second, continuing toidentify opportunities to further stream-line certain functions of ouroperations, resulting in increased efficiencies and further cost savings.  These cost savings should exceed$1.5 million for 2002.

 

•                                          Third, seeking to sell oneor more assets, which in the aggregate would not constitute a major portion ofthe Company’s total assets,

 

•                                          Fourth, we will alsocontinue to seek additional financing from third parties.

 

To the extent that our liquidity needs are not metby such measures, our parent company has made a limited commitment to provideus with additional cash or cash liquidity through March 31, 2003.  While our parent has significant resources,there is no obligation for it to provide similar assistance to us in thefuture.  To date, the followingtransactions with our parent company have occurred or are anticipated to occur:

 

•                                          Inthe second quarter of 2002, the Company sold an unutilized tract of land to ourparent company for approximately $1.0 million. The transaction is conditionedupon receipt of certain subdivision approvals, which we anticipate will begranted;

 

•                                          Inthe second quarter of 2002, the Company negotiated a one-time termination feeof $3.5 million in payment of all of our parent company’s remaining satelliteservice commitments.  The Companyanticipates closing on this transaction in the second quarter of 2002.  The net revenue and EBITDA effect of thistransaction has been reflected in the guidance below;

 

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•                                          TheCompany anticipates borrowing approximately $2.4 million in the second quarterof 2002 from our parent company under similar terms as the $2.5 millionunsecured loan from our parent company in the fourth quarter of 2001;

 

•                                          Equityand/or debt financing or other transactions with our parent company may also bepursued.

 

We believethat our existing cash balances and cash flow forecasted to be generated by ouroperations and the cash or cash liquidity available under the limitedcommitment from our parent company will be sufficient to fund our operationalneeds, including debt service costs, capital expenditures, and cableprogramming distribution payments, through the end of 2002, including ourJanuary 1, 2003 interest payment. However, in the event economic and advertising conditions during 2002materially fall short of management’s current expectations, there can be noguarantee that these aforementioned courses of action and the cash or cashliquidity available under our parent company’s limited commitment would provideus with sufficient liquidity to meet the funding needs of our operations in2002.

 

**Investing Activities**

 

For thethree months ended March 31, 2001 and 2002, net cash provided by(used in) investing activities was $0.2 million and $(1.5) million,respectively.

 

Ourinvesting activities for the three months ended March 31, 2002consisted primarily of the following:

 

•                  $(1.3) million in cableprogramming distribution agreement payments for GAC; and

 

•                  $(0.2) million for thepurchase of property and equipment.

 

Our investing activities for the three months endedMarch 31, 2001 consisted primarily of the following:

 

•                  $2.2 million proceeds fromthe sale of available for sale securities;

 

•                  $(1.3) million in cableprogramming distribution agreement payments for GAC;

 

•                  $(0.6) million for thepurchase of property and equipment; and

 

•                  $(0.1) million to purchasecertain radio programs and other intangible assets.

 

Totalcapital expenditures for the balance of 2002 are estimated to be approximately$0.7 million, which will be used primarily to upgrade certain cabletelevision and radio related earth station equipment, satellite receivers andto purchase computer hardware and software. Total cable programming distribution agreement payments for GAC for thebalance of 2002 are estimated to be approximately $7.7 million.

 

**Financing Activities**

 

For the three months endedMarch 31, 2001 and 2002, net cash used in financing activities was$0 million and $0.1 million, respectively.

 

On January 28, 2002, we issuedunsecured notes to certain of our officers for cash loans in the total amountof $135,000 maturing on January 28, 2005. These unsecured notes bear interest at a fixed annual rate of 113⁄4percent.  Interest on these unsecurednotes is compounded quarterly and is payable in arrears at the end of eachcalendar quarter.  We may prepay all ora portion of these unsecured notes at anytime without penalty.

 

In connection with the issuanceof these unsecured notes, we also issued warrants to purchase 18,900 shares ofour Class A Common stock at an exercise price of $6.50 per share.  These warrants will expire in January2007.  The estimated fair value ofapproximately $63,000 for these warrants issued in January was accounted for asa debt discount which reduced the carrying value of the related $135,000 debt.  The carrying value of the debt will accreteto its face value over the life of the notes using the effective interestmethod.

 

In the first quarter of 2002, wereceived notification from an MSO affiliate of GAC of its election to exerciseits put option 

 

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under an equity affiliate agreement whereby we will be required topurchase back the shares of Class A Common Stock that were issued to theMSO.  The purchase price of theseshares, which is equivalent to the license fees that otherwise would have beenwaived under a standard GAC distribution agreement, is approximately$951,000.  We paid this amount early inthe second quarter of 2002.

 

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**2002 Guidance for Second Quarter andthe Year**

 

Thefollowing information provided below represents guidance on anticipatedoperating results of the Company and its businesses for the second quarter aswell as revised guidance for the entire year. The following guidance represents“forward-looking statements” within the meaning of the federal securities lawsand is subject to the safe harbor under those laws, and is based onmanagement’s assumption that the current network radio and cable televisionadvertising environments will continue to recover in the second half of 2002and not worsen from current levels.  Theguidance below is also dependent upon the Company’s ability to fund itsoperations and financial commitments in 2002, including the payment of intereston its Senior Secured Notes, by taking one or more additional measures thatmanagement is currently pursuing or has already implemented as described under“Liquidity and Capital Resources.”

|                                     |   | **2nd  Quarter**    |   | **Year 2002** |   |
|------------------------------------------|--------|---------------------|--------|---------------|--------|
|                                     |   | **(in  thousands)** |   |
| **Revenues:**                            |   |                |   |          |   |
| Network Radio                            |   | $                   | 11,500 |          | $      | 43,000 |   |
| Cable Television  Programming            |   | 8,300               |   | 33,000        |   |
| Satellite Services                       |   | 4,200               |   | 6,000         |   |
| Total Revenues                           |   | $                   | 24,000 |          | $      | 82,000 |   |
|                                     |   |                |   |          |   |
| **EBITDA :**                        |   |                |   |          |   |
| Network Radio                            |   | $                   | 3,100  |          | $      | 11,000 |   |
| Cable Television  Programming*           |   | 700                 |   | 3,000         |   |
| Satellite  Services                      |   | 4,100               |   | 5,500         |   |
| Corporate  G&A                       |   | (600                | )      | (2,000        | )      |
| Total EBITDA                             |   | $                   | 7,300  |          | $      | 17,500 |   |
|                                     |   |                |   |          |   |
| **Other 2002 Guidance Disclosures:**     |   |                |   |          |   |
| Capital  expenditures                    |   | $                   | 300    |          | $      | 1,000 |   |
|                                     |   |                |   |          |   |
| Cable  programming distribution payments |   | $                   | 1,900  |          | $      | 9,000 |   |

 

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*Reflects EBITDA effectnet of PIN minority interest

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**ITEM3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

Market risk represents the riskof loss that may impact our financial position, results of operations, or cashflows due to adverse changes in financial market prices. We are exposed tomarket risk through interest rates. This exposure is directly related to ournormal funding and investing activities.

 

As of March 31, 2002,none of our current liabilities was subject to changes in interest rates.

 

**ITEM 5: OTHER MATERIALLY IMPORTANT EVENTS**

 

None

 

**ITEM6: EXHIBITS AND REPORTS ON FORM 8-K**

 

a)        Exhibits

 

None

 

b)       Reportson Form 8-K

 

Form 8-K, Item 5. Other Events, filed on February 1,2002.

 

 

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SIGNATURES

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
| JONES MEDIA NETWORKS, LTD.           |   |   |   |
|--------------------------------------|--------|--------|--------|
|                                 |   |   |   |
| By:                                  |   |   |   |
|                                 |   |   |   |
| /s/ Jeffery C. Wayne                 |   |   |   |
| Jeffery C. Wayne                     |   |   |   |
| President                            |   |   |   |
|                                 |   |   |   |
| Dated:   May 10, 2002 |   |   |   |
|                                 |   |   |   |
| By:                                  |   |   |   |
|                                 |   |   |   |
| /s/ Jay B. Lewis                     |   |   |   |
| Jay B. Lewis                         |   |   |   |
| Group Vice  President/Finance        |   |   |   |
| (Principal  Financial Officer)       |   |   |   |
|                                 |   |   |   |
| Dated:   May 10, 2002 |   |   |   |

 

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