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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1998
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[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to ___________
Commission File Number 1-9953
JONES INTERCABLE, INC.
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Exact name of registrant as specified in charter
Colorado #84-0613514
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State of incorporation I.R.S. employer I.D.#
9697 East Mineral Avenue, Englewood, Colorado 80112
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Address of principal executive office
(303) 792-3111
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Registrant's telephone number
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section l3 or l5(d) of the Securities Exchange Act of l934 during
the preceding l2 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Shares outstanding of each of the registrant's classes of Common Stock, as of
November 2, 1998.
5,113,021 - Common Stock, $.01 par value per share
36,021,411 - Class A Common Stock, $.01 par value per share
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JONES INTERCABLE, INC. AND SUBSIDIARIES
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I N D E X
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Page
Number
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PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets
September 30, 1998 and December 31, 1997 3
Unaudited Consolidated Statements of Operations
Three and Nine Months Ended September 30, 1998 and 1997 5
Unaudited Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1998 and 1997 6
Notes to Unaudited Consolidated Financial Statements
September 30, 1998 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II. OTHER INFORMATION.
Item 6. Exhibits and Reports on Form 8-K 18
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UNAUDITED CONSOLIDATED Jones Intercable, Inc.
BALANCE SHEETS and Subsidiaries
As of September 30, 1998 and December 31, 1997
<TABLE>
<CAPTION>
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September 30, 1998 December 31, 1997
ASSETS (Stated in Thousands)
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CASH AND CASH EQUIVALENTS $ 2,932 $ 3,595
RECEIVABLES:
Trade receivables, net of allowance for
doubtful accounts of $2,656,000 in September 1998
and $1,692,000 in December 1997 17,946 28,686
Affiliated entities 4,114 7,783
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property, plant and equipment, at cost 924,308 745,115
Less-accumulated depreciation (296,337) (224,893)
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627,971 520,222
Franchise costs and other intangible assets, net of
accumulated amortization of $354,336,000 in September 814,132 721,336
1998 and $285,212,000 in December 1997
Investments in cable television
partnerships and affiliates 20,964 24,568
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TOTAL INVESTMENT IN CABLE TELEVISION PROPERTIES 1,463,067 1,266,126
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DEFERRED TAX ASSET, net of valuation
allowance of $80,833,000 in September 1998 and
$84,473,000 in December 1997 7,137 7,137
DEPOSITS, PREPAID EXPENSES AND OTHER ASSETS 61,958 58,044
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TOTAL ASSETS $ 1,557,154 $ 1,371,371
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</TABLE>
The accompanying notes to unaudited consolidated financial
statements are an integral part of these balance sheets.
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UNAUDITED CONSOLIDATED Jones Intercable, Inc.
BALANCE SHEETS and Subsidiaries
As of September 30, 1998 and December 31, 1997
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<CAPTION>
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September 30, 1998 December 31, 1997
LIABILITIES AND SHAREHOLDERS' INVESTMENT (Stated in Thousands)
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LIABILITIES:
Accounts payable and accrued liabilities $ 110,972 $ 115,189
Subscriber prepayments and deposits 3,197 2,932
Subordinated debentures and other debt 752,487 553,732
Credit facilities 524,000 471,000
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TOTAL LIABILITIES 1,390,656 1,142,853
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SHAREHOLDERS' INVESTMENT:
Class A Common Stock, $.01 par value, 60,000,000 shares
authorized; 36,005,339 and 35,554,223 shares issued
at September 30, 1998 and December 31, 1997,
respectively 360 356
Common Stock, $.01 par value, 5,550,000 shares
authorized; 5,113,021 shares issued at September 30,
1998 and December 31, 1997 51 51
Additional paid-in capital 493,387 487,616
Accumulated deficit (327,300) (259,505)
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TOTAL SHAREHOLDERS' INVESTMENT 166,498 228,518
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TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $ 1,557,154 $ 1,371,371
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</TABLE>
The accompanying notes to unaudited consolidated financial
statements are an integral part of these balance sheets.
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UNAUDITED CONSOLIDATED Jones Intercable, Inc.
STATEMENTS OF OPERATIONS and Subsidiaries
For the three and nine months ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
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For the Three Months Ended For the Nine Months Ended
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Sept. 30, 1998 Sept. 30, 1997 Sept. 30, 1998 Sept. 30, 1997
(Stated in Thousands Except Per Share Data)
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REVENUES FROM OPERATIONS:
Cable Television Revenue
Subscriber service fees $ 108,014 $ 85,201 $ 292,138 $ 243,513
Management fees 2,446 4,201 10,080 13,236
General partner distributions and brokerage fees 18,304 - 23,049 2,768
Non-cable Revenue 809 2,543 4,484 6,864
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TOTAL REVENUES 129,573 91,945 329,751 266,381
COSTS AND EXPENSES:
Cable Television Expenses
Operating expenses 53,906 44,424 148,227 127,170
General and administrative expenses * 6,396 4,697 17,817 14,780
Non-cable operating, general and administrative 887 2,567 5,087 7,261
Depreciation and amortization 52,310 36,147 144,150 106,580
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OPERATING INCOME 16,074 4,110 14,470 10,590
OTHER INCOME (EXPENSE):
Interest expense (25,215) (21,605) (69,399) (65,308)
Equity in losses of affiliated entities (1,066) (809) (3,958) (3,562)
Gain (loss) on sale of assets - 1,854 (3,616) 49,396
Interest income - 292 747 1,095
Other, net (4,197) (1,138) (6,039) (2,794)
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LOSS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM (14,404) (17,296) (67,795) (10,583)
Income tax benefit - - - -
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LOSS BEFORE EXTRAORDINARY ITEM (14,404) (17,296) (67,795) (10,583)
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt,
net of related income tax - (13,459) - (13,459)
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NET LOSS $ (14,404) $ (30,755) $ (67,795) $ (24,042)
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LOSS PER SHARE: $ (.35) $ (.88) $ (1.66) $ (.74)
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LOSS PER SHARE - assuming dilution $ (.35) $ (.88) $ (1.66) $ (.74)
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AVERAGE NUMBER OF CLASS A COMMON AND
COMMON SHARES OUTSTANDING 41,088 34,920 40,849 32,571
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</TABLE>
* Of the total general and administrative expenses, approximately $1,992,000 and
$1,681,000 for the three months ended September 30, 1998 and 1997, respectively,
and approximately $5,314,000 and $4,369,000 for the nine months ended September
30, 1998 and 1997, respectively, represent related party expenses.
The accompanying notes to unaudited consolidated financial
statements are an integral part of these statements.
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UNAUDITED CONSOLIDATED STATEMENTS OF Jones Intercable, Inc.
CASH FLOWS and Subsidiaries
For the nine months ended September 30, 1998 and 1997
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For the Nine Months Ended
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Sept. 30, 1998 Sept. 30, 1997
(Stated in Thousands)
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (67,795) $ (24,042)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 144,150 106,580
Loss (gain) on sale of assets 3,616 (49,396)
Loss on early extinguishment of debt - 13,459
Equity in losses of affiliates 3,958 3,562
Class A Common Stock option expense 195 195
Decrease in restricted cash - 1,016
Decrease (increase) in trade receivables 9,322 (5,184)
Increase in other receivables, prepaid
expenses and other assets (9,583) (234)
Increase (decrease) in accounts payable, accrued
liabilities and subscriber prepayments and deposits (3,952) 3,958
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Net cash provided by operating activities 79,911 49,914
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of cable television systems (214,846) (388,483)
Deposit on cable television system - 12,000
Purchase of property and equipment (125,934) (89,475)
Proceeds from sale of assets 350 111,276
Other, net (1,148) 841
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Net cash used in investing activities (341,578) (353,841)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 285,000 537,500
Repayment of borrowings (232,000) (395,500)
Redemption of 11.5% Debentures - (170,800)
Proceeds from the sale of Senior Notes, net 196,346 244,102
Proceeds from issuance of Class A Common Stock, net - 91,554
Decrease (increase) in accounts receivable from affiliated entities 3,669 (1,871)
Proceeds from exercise of Class A Common stock options 5,580 448
Other, net 2,409 1,413
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Net cash provided by financing activities 261,004 306,846
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Increase (decrease) in Cash and Cash Equivalents (663) 2,919
Cash and Cash Equivalents, beginning of period 3,595 1,671
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Cash and Cash Equivalents, end of period $ 2,932 $ 4,590
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</TABLE>
The accompanying notes to unaudited consolidated financial
statements are an integral part of these statements.
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NOTES TO UNAUDITED CONSOLIDATED Jones Intercable, Inc.
FINANCIAL STATEMENTS and Subsidiaries
(1) This Form 10-Q is being filed by Jones Intercable, Inc. and its
subsidiaries (the "Company"). The majority of the Company's cable television
systems are owned by two of the Company's wholly owned subsidiaries, Jones Cable
Holdings, Inc. ("JCH") and Jones Cable Holdings II, Inc. ("JCH II"). This Form
10-Q is being filed in conformity with the SEC requirements for unaudited
financial statements and does not contain all of the necessary footnote
disclosures required for a complete presentation of the Consolidated Balance
Sheets, Consolidated Statements of Operations and Consolidated Statements of
Cash Flows in conformity with generally accepted accounting principles. However,
in the opinion of management, this data includes all adjustments, consisting
only of normal recurring accruals, necessary to present fairly the Company's
financial position at September 30, 1998 and December 31, 1997 and its results
of operations and cash flows for the three and nine months ended September 30,
1998 and 1997. Results of operations for these periods are not necessarily
indicative of results to be expected for the full year.
(2) In June 1998, the Company purchased from Cable TV Fund 12-BCD Venture (the
"Venture"), a venture comprised of three managed partnerships, the cable
television system serving areas in and around Albuquerque, New Mexico (the
"Albuquerque System") for $222,963,267, subject to customary closing
adjustments. The purchase price represented the average of three independent
appraisals of the fair market value of the Albuquerque System. Upon closing, the
Company received, from the three partnerships that comprise the Venture, general
partner distributions totaling approximately $8,100,000, which reduced the
Company's basis in the assets of the Albuquerque System. Funding for this
transaction was provided by borrowings from JCH II's credit facility.
The pro forma effect of the purchase of the Albuquerque System on the
Company's results of operations for the nine months ended September 30, 1998,
assuming acquisition of the Albuquerque System on January 1, 1998, is presented
in the following unaudited tabulation:
As Pro Forma
Reported Adjustments Pro Forma
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Revenues $ 329,751 $ 26,022 $ 355,773
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Operating Income $ 14,470 $ 387 $ 14,857
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Net Loss $ (67,795) $ (6,596) $ (74,391)
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The pro forma effect of the purchase of the Albuquerque System as well as
(a) the acquisitions of the cable television systems serving North Prince
Georges County, Maryland (the "North Prince Georges County System") on January
31, 1997, Annapolis, Maryland (the "Annapolis System") on April 15, 1997,
Manitowoc, Wisconsin (the "Manitowoc System") on June 30, 1997 and Independence,
Missouri (the "Independence System") on August 31, 1997, (b) the sale of the
cable television system serving Walnut Valley, California (the "Walnut Valley
System") and (c) the sale of shares of Cable & Wireless Communications plc in
the first half of 1997 on the Company's results of operations for the nine
months ended September 30, 1997 assuming all transactions had occurred as of
January 1, 1997 is presented in the following unaudited tabulation:
As Pro Forma
Reported Adjustments Pro Forma
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Revenues $ 266,381 $ 55,904 $ 322,285
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Operating Income (Loss) $ 10,590 $ (11,481) $ (891)
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Net Loss $ (24,042) $ (73,080) $ (97,122)
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(3) In March 1998, the Company entered into an agreement with the Venture to
purchase the cable television systems serving areas in and around Palmdale and
Lancaster, California (the "Palmdale/Lancaster System") for a purchase price of
$138,205,200, subject to customary closing adjustments. The purchase price
represents the average of three independent appraisals of the fair market value
of the Palmdale/Lancaster System. Upon closing, the Company anticipates that it
will receive, from the three partnerships that comprise the Venture, general
partner distributions totaling approximately $24,000,000, which will reduce the
Company's basis in the assets of the Palmdale/Lancaster System. Funding for this
transaction is expected to be provided by borrowings available under JCH II's
credit facility. The closing of this transaction, which is expected to occur in
December of 1998, is subject to a number of conditions including the approval of
the transaction by the holders of a majority of the limited partnership
interests of each of the three partnerships that comprise the Venture and the
receipt of consents of governmental authorities and other third parties.
Also in March 1998, the Company entered into an agreement with Cable TV
Fund 14-B, Ltd. ("Fund 14-B"), a managed partnership, to purchase the cable
television system serving areas in and around Littlerock, California (the
"Littlerock System") for a purchase price of $10,720,400, subject to customary
closing adjustments. The Littlerock System is contiguous to the
Palmdale/Lancaster System. The purchase price represents the average of three
independent appraisals of the fair market value of the Littlerock System.
Funding for this transaction is expected to be provided by borrowings available
under JCH II's credit facility. The closing of this transaction, which is
expected to occur in December of 1998, is subject to a number of conditions
including the approval of the transaction by the holders of a majority of the
limited partnership interests of Fund 14-B.
In June 1998, the Company entered into an agreement with Cable TV Fund 14-
A, Ltd. ("Fund 14-A"), a managed partnership, to purchase the cable television
system serving areas in and around Calvert County, Maryland (the "Calvert County
System") for a purchase price of $39,388,667, subject to customary closing
adjustments. The purchase price represents the average of three independent
appraisals of the fair market value of the Calvert County System. The Calvert
County System is contiguous to the Company's Virginia/Maryland cluster of cable
television systems. Funding for this transaction is expected to be provided by
borrowings available under JCH's credit facility. The closing of this
transaction, which is expected to occur in the first quarter of 1999, is subject
to a number of conditions including the approval of the transaction by the
holders of a majority of the limited partnership interests of Fund 14-A; the
expiration or termination of all waiting periods under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 applicable to the agreement or the
transactions contemplated thereby; and the receipt of consents of governmental
authorities and other third parties.
In June 1998, the Company entered into agreements with Spacelink Fund 3,
Ltd., a managed partnership, to purchase the cable television systems serving
areas in and around Socorro, New Mexico (the "Socorro System") and Grants, New
Mexico (the "Grants System"), for purchase prices of $3,638,791 and $6,420,806,
respectively. The purchase prices represent the average of three independent
appraisals of the fair market values of the Socorro System and the Grants
System, respectively. The Socorro System and the Grants System are in
relatively close proximity to the Company's Albuquerque System. Funding for
these transactions is expected to be provided by borrowings available under JCH
II's credit facility. The closing of these transactions is expected to occur in
the fourth quarter of 1998.
In August 1998, the Company entered into an agreement with an unaffiliated
party to purchase the cable television system serving areas in and around
Hinesville, Georgia (the "Hinesville System") for $48,000,000. The Hinesville
System is contiguous to the Company's Savannah, Georgia system. Closing of this
transaction is expected to occur in the fourth quarter of 1998. The Company will
pay Jones Financial Group, Ltd. ("Financial Group"), a subsidiary of Jones
International, Ltd., a fee of $756,000 upon closing of this transaction for
acting as the Company's financial advisor in connection with this transaction.
All fees paid to Financial Group by the Company are based upon 90% of the
estimated commercial rate charged by unaffiliated financial advisors.
(4) The Company is in the process of liquidating its managed partnerships and
all of the remaining partnership-owned cable television systems, serving 395,000
basic subscribers, are currently in various stages of
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being sold. These systems include seven systems, serving 250,000 basic
subscribers, in suburban Chicago which are to be sold to TCI Communications,
Inc. These systems also include five systems in California, New Mexico and
Maryland, serving 96,000 basic subscribers, which are to be purchased by the
Company. See Note 3. The pending sales of partnership-owned systems are expected
to be completed by the end of the first quarter of 1999, and all of the
Company's managed partnerships are expected to be liquidated and dissolved by
the end of 1999.
(5) Glenn R. Jones, the Chairman of the Board of Directors and Chief Executive
Officer of the Company, beneficially owns approximately 57% of the Common Stock
of the Company. Through this ownership of the Company's supervoting Common
Stock, Mr. Jones is entitled to elect a majority of the members of the Company's
Board of Directors and he otherwise controls the Company. The Company's current
other major shareholder is BCI Telecom Holding Inc. ("BTH"). BTH owns an
approximate 31% economic interest in the Company through its ownership of
approximately 36% of the Class A Common Stock of the Company. Through rights
granted to it under a shareholders agreement among Mr. Jones and his affiliates,
BTH and the Company, BTH has the ability to nominate several persons to the
Company's Board of Directors. In addition, BTH holds an option to purchase Mr.
Jones' Common Stock of the Company.
In May 1998, BTH announced its intention to sell approximately half of its
shares of the Company's Class A Common Stock to Comcast Corporation ("Comcast").
Comcast ranks among the top ten multiple system cable television operators in
the United States serving approximately 4 million basic subscribers. BTH also
announced its intention to grant to Comcast the right to acquire all of the
Common Stock held by Jones International, Ltd. and its affiliates
("International") from BTH if and when BTH exercises its option to purchase such
shares. Except in limited circumstances, such option would only be exercisable
during the 12-month period following December 20, 2001. BTH also announced its
intention to sell to Comcast at the time that the option is exercised its
remaining holdings of the Company's Class A Common Stock.
On August 12, 1998, the Company, International, BTH and Comcast announced
that agreements have been entered into that accelerated the exercise of the
option by Comcast, and allow for the early closing of the transaction between
Comcast and BTH. In connection with the early exercise of the option, Comcast
will pay to International and certain of its affiliates $200,000,000 for the
approximately 2.9 million shares of Common Stock of the Company held by them.
In addition, the Company has agreed to make certain payments to International
and its affiliates in connection with the termination, effective as of the
closing of the option exercise, of certain related party agreements between the
Company, International, and its affiliates, including the termination of Mr.
Jones' employment agreement with the Company and the termination of certain
programming rights held by International pursuant to the Shareholders Agreement
between the Company, International, Mr. Jones and BTH entered into in 1994.
Also, in connection with the closing of the option exercise, and conditioned
upon such closing occurring, the pending litigation between BTH, International,
Mr. Jones and the Company will be dismissed and International and certain of its
affiliates will dismiss the appeal which is pending of the Order entered against
them in such litigation.
To facilitate an orderly change in control to Comcast, the Company has
initiated a retention and severance program for its corporate associates. The
program provides incentives to corporate associates to remain with the Company
until the change in control and through the subsequent 90-day transition period.
The program provides for cash severance payments to associates that are
terminated due to the change in control. If the change in control does not
occur, no payments will be made under this program. As a result of this
program, the Company expects to recognize a one-time charge of approximately
$30,000,000 in the first half of 1999.
The closing of the exercise of the option is expected to occur in the first
quarter of 1999. All necessary regulatory filings associated with this
transaction have been made. Following such closing, Comcast would own
approximately 12.8 million shares of Class A Common Stock, and approximately 2.9
million shares of Common Stock of the Company, representing approximately 37% of
the economic and 47% of the voting interest in the Company. In addition, the
Common Stock held by Comcast will allow it to elect 75% of the Board of
Directors
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of the Company, and Comcast is expected to replace the existing Board of
Directors with nominees of their choice effective as of the closing of the
option exercise.
(6) In May 1998, the Company sold the contract manufacturing business owned by
Jones Futurex, Inc. ("Futurex") to a third party for $350,000 in cash. In
addition, the buyer entered into a sublease arrangement for certain facilities
leased by Futurex. Payments under the sublease agreement total approximately
$1.8 million over the next 4 years. In connection with this transaction, the
Company recognized a loss of approximately $3,616,000. The Company continues to
own and operate Futurex's encryption business.
(7) In June 1998, the Company entered into a Distribution Agreement with At
Home Corporation ("@Home"), which provides for the distribution of high speed
internet services to the Company's cable television systems. Deployment is
expected to begin by the end of 1998. In conjunction with this agreement, the
Company received a stock warrant from @Home.
(8) In July 1998, Cable TV Fund 12-A, Ltd. ("Fund 12-A"), one of the Company's
managed partnerships, sold the cable television system serving areas in and
around Fort Myers, Florida (the "Fort Myers System") to an unaffiliated third
party. The Company received a general partner distribution of $13,713,600 and a
brokerage fee of $2,750,000 from Fund 12-A as a result of this transaction.
In September 1998, Jones Cable Income Fund 1-A, Ltd. ("Income Fund 1-A"),
one of the Company's managed partnerships, sold the cable television system
serving areas in and around Owatonna, Minnesota (the "Owatonna System") to an
unaffiliated third party. The Company received a general partner distribution
of $1,976,400 and a brokerage fee of $293,750 from Income Fund 1-A as a result
of this transaction.
(9) On April 6, 1998, the Company issued and sold $200,000,000 of its 7 5/8%
Senior Notes due April 15, 2008. Proceeds from the sale of the Senior Notes were
used to repay a portion of the amounts outstanding under the revolving credit
facilities of the Company's subsidiaries.
(10) In August 1998, the Company sold its 75% interest in Jones Customer Service
Management, LLC to Jones Cyber Solutions, Ltd., an affiliated company, for
$3,150,000. The purchase price was paid $2,000,000 in cash and $1,150,000 in a
note receivable. The note receivable bears interest at prime +2%, and is payable
in 36 months or upon a change in control of the Company. The proceeds from this
transaction were used to offset the remaining assets related to the Company's
customer billing venture.
(11) Net loss per share of Class A Common Stock and Common Stock is based on
the weighted average number of shares outstanding during the periods.
Approximately 498,000 and 424,000 common stock equivalents, respectively, were
not included in the computation of loss per share assuming dilution for the
three and nine months ended September 30, 1998, because the effect of such
common stock equivalents was antidilutive.
(12) For purposes of the Consolidated Statements of Cash Flows, the Company
considers all highly liquid investments purchased with a maturity of six months
or less to be cash equivalents. No amounts were paid or received relating to
income taxes during the nine months ended September 30, 1998 and 1997.
Approximately $63,459,000 and $68,718,000 of interest expense was paid during
the nine months ended September 30, 1998 and 1997, respectively. No material
non-cash investing or financing transactions were recorded during the first nine
months of fiscal 1998 and 1997.
(13) Certain prior period amounts have been reclassified to conform to the
current period presentation.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
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CONDITION AND RESULTS OF OPERATIONS
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The following discussion of the Company's financial condition and results
of operations contains, in addition to historical information, forward-looking
statements that are based upon certain assumptions and are subject to a number
of risks and uncertainties. The Company's actual results may differ
significantly from the results predicted in such forward-looking statements.
Financial Condition
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The Company is engaged primarily in the cable television business,
operating cable systems for itself and for its managed partnerships. The
Company owns and manages cable television systems totaling approximately
1,300,000 basic subscribers. As of September 30, 1998, on a pro forma basis for
all pending acquisitions of cable television systems by the Company and pending
sales of cable television systems owned by managed partnerships, the Company
served approximately 1,007,000 basic subscribers. The pending sales and
acquisitions are expected to be completed by the end of the first quarter of
1999. Key elements of the Company's operating strategy include increasing the
number of owned subscribers clustered in attractive demographic areas and
increasing penetration and revenues per subscriber by targeted marketing,
superior customer service and the maintenance of high technical standards.
Over the last several years, the Company has taken significant steps to
simplify its corporate structure. This process has included the sale of cable
television systems owned by certain managed partnerships to either the Company
or to third parties and the divestiture of certain of the Company's non-
strategic assets. As a result of this strategy, on a pro forma basis for all
pending cable television system acquisitions and sales, 100% of total
subscribers would have been owned by the Company as of September 30, 1998,
compared to 23% in June 1995. During this process, the Company has also made
significant progress in clustering its owned subscribers in two primary groups
of cable systems. The Company's Virginia/Maryland cluster, owned by JCH, is
based primarily on geography. The Company's suburban cluster, owned by JCH II,
is based on similar market and operating characteristics, rather than geography.
These clusters represent approximately 95% of Company-owned subscribers. The
Company believes that its clustering strategy should allow it to obtain both
economies of scale and operating efficiencies, for example in areas such as
marketing, administrative and capital expenditures.
The Company is liquidating its managed partnerships as such partnerships
achieve their investment objectives and as opportunities for sales of
partnership cable television systems arise in the marketplace. In accordance
with this strategy, eleven partnership-owned cable television systems serving
approximately 309,000 subscribers were sold during the first nine months of 1998
(including the Albuquerque System which was purchased by the Company). In
addition, all remaining partnership-owned cable television systems serving
approximately 395,000 subscribers (including the Palmdale System, the Littlerock
System, the Calvert County System, the Socorro System and the Grants System
which are to be purchased by the Company) are currently in various stages of
being sold. The Company expects to complete its transformation from a
management company to an operating company by the first quarter of 1999.
The Company also intends to maintain and enhance the value of its current
cable television systems through capital expenditures. Such expenditures will
include, among others, cable television plant extensions and the upgrade and
rebuild of certain systems. The Company also intends to institute new services
as they are developed and become economically viable.
In implementing the Company's acquisition strategy, the Company acquired
the Albuquerque System in June 1998 for $214,863,267, which was funded from
borrowings under JCH II's credit facility. The Albuquerque System's operating
characteristics are similar to the other systems owned by JCH II. The Company
has also entered into several additional strategic agreements as follows:
First, the Company has entered into an agreement to acquire the Palmdale System
for $138,205,200 because its operating characteristics are similar to the other
systems owned by JCH II. Second, the Company has entered into an agreement to
purchase the Calvert County
-11-
<PAGE>
System for $39,388,667 because it is contiguous to the Company's
Virginia/Maryland Cluster. Third, the Company has entered into an agreement to
purchase the Littlerock System for $10,720,400 because it is contiguous to the
Palmdale System. Fourth, the Company has entered into agreements to purchase the
Grants System for $6,420,806 and the Socorro System for $3,638,791 because they
are in relatively close proximity to the Albuquerque System. Fifth, the Company
has entered into an agreement to purchase the Hinesville System for $48,000,000
because it is contiguous to the Company's Savannah, Georgia System. These
transactions are expected to close either in the fourth quarter of 1998 or the
first quarter of 1999. Funding for these acquisitions is expected to be provided
by borrowings under the Company's credit facilities. These transactions are
described in detail in Note 3 of the Notes to Unaudited Consolidated Financial
Statements.
From time to time, the Company makes loans to its managed partnerships,
although it is not required to do so. As of September 30, 1998, the Company had
advanced funds to various managed partnerships totaling approximately
$4,114,000, a decrease of approximately $3,669,000 over the amount advanced at
December 31, 1997. These advances represent funds for capital expansion and
improvements of properties owned by the Company's managed partnerships where
additional credit sources were not then available to the partnerships. None of
these advances are individually significant. These advances reduce the
Company's available cash and its liquidity. The Company anticipates the
repayment of these advances as the partnership systems are sold. The Company
does not anticipate significant increases in the amount advanced to its managed
partnerships during 1998. These advances bear interest at rates equal to the
Company's weighted average cost of borrowing.
The Company purchased property, plant and equipment totaling approximately
$125,934,000 during the first nine months of 1998. Of the capital expenditures,
$115,551,000 is principally for the upgrade and rebuild of the cable plant in
the Company's cable television systems in Virginia/Maryland; Savannah, Georgia;
Independence, Missouri and Oxnard, California and new extension projects, drop
materials, converters and various maintenance projects in all of the Company's
cable television systems. Approximately $10,383,000 of the expenditures was for
the deployment of telephone service in the Virginia/Maryland Cluster. Funding
for these capital expenditures was provided by cash generated from operations
and borrowings available under the Company's credit facilities. Estimated
capital expenditures for the remainder of 1998 are approximately $40,000,000.
Funding for such expenditures is expected to be provided by cash generated from
operations and borrowings available under the Company's credit facilities, as
discussed below.
Sources of Funds
----------------
The Company's main sources of capital consist of cash generated from
operations and borrowings available under two revolving credit facilities, one
for JCH and one for JCH II. Each revolving credit facility has maximum
available borrowings of $600 million.
The $600 million JCH revolving credit facility is a reducing revolving
credit facility. The entire $600 million commitment is available through March
31, 1999, at which time the commitment will be reduced quarterly with a final
maturity date of December 31, 2004. The balance outstanding on JCH's revolving
credit facility at September 30, 1998 was $254,000,000.
The $600 million JCH II Revolving Credit Facility consists of a $300
million reducing revolving credit facility and a $300 million 364-day revolving
credit facility. The reducing revolving credit facility allows for borrowings
through the final maturity date of December 31, 2005. The maximum amount
available reduces quarterly beginning March 31, 2000 through the final maturity
date of December 31, 2005. The 364-day revolving credit facility allows for
borrowings through October 1998, at which time any outstanding borrowings
convert to a term loan payable in semi-annual installments commencing June 30,
2001 with a final maturity date of December 31, 2005. The balance outstanding
on the JCH II Revolving Credit Facility at September 30, 1998 was $270,000,000.
This amount was borrowed under the reducing revolving credit facility. In
October 1998, the Company borrowed $300 million under 364-day revolving credit
facility to repay the amount then outstanding on the reducing revolving credit
facility and for working capital purposes. The 364-day revolving credit
facility converted to a term loan on October 31, 1998.
-12-
<PAGE>
In April 1998, the Company issued and sold $200,000,000 of its 7 5/8%
Senior Notes due April 15, 2008. Proceeds from the sale of the Senior Notes
were used to repay amounts then outstanding under the revolving credit
facilities of the Company's subsidiaries.
The Company, in its capacity as the general partner of its managed
partnerships, may from time to time receive general partner distributions upon
the sale of cable television systems owned by such partnerships. The Company
received distributions totaling $8,100,000 from Cable TV Funds 12-B, 12-C and
12-D related to the sale of the Venture's Albuquerque system in June 1998. In
July 1998, the Company received a general partner distribution of $13,713,600
from Fund 12-A related to the sale of the Fort Myers System by Fund 12-A. In
September 1998, the Company received a general partner distribution of
$1,976,400 from Income Fund 1-A related to the sale of the Owatonna System by
Income Fund 1-A. In addition, the Company, through The Jones Group, Ltd., a
wholly owned subsidiary, may earn brokerage fees upon the sale of the managed
partnerships' cable television systems to third parties. During the first nine
months of 1998, the Company earned brokerage fees, net of expenses, of
$7,359,000.
The Company has sufficient sources of capital available, consisting of cash
generated from operations and available borrowings from its credit facilities,
to fund its committed acquisition requirements and to meet its operational
needs.
Anticipated Change In Control
-----------------------------
On August 12, 1998, the Company, International, BTH and Comcast announced
that agreements have been entered into that accelerate the exercise of the
option to purchase controlling interest in the Company by Comcast. Details of
these agreements are described in Note 5 of the Notes to Unaudited Consolidated
Financial Statements. The closing of the exercise of the option is expected to
occur in the first quarter of 1999.
Impact of the Year 2000 Issue
-----------------------------
The Year 2000 issue is the result of many computer programs being written
such that they will malfunction when reading a year of "00". This problem could
cause system failure or miscalculations causing disruptions of business
processes.
The Company has initiated an assessment of its computer applications to
determine the extent of the problem. Based on this assessment, the Company has
determined that the majority of its computer applications supporting business
processes, including accounting and billing, are designed to handle the Year
2000 appropriately.
The Company is currently focusing its efforts on the impact of the Year
2000 issue on service delivery. The Company has established an internal team to
address this issue. The Company is identifying and testing all date-sensitive
equipment involved in delivering service to its customers. In addition, the
Company will assess its options regarding repair or replacement of affected
equipment during this testing. The Company believes that the financial impact
from the year 2000 issue will be less than $3,000,000.
RESULTS OF OPERATIONS
Revenues
--------
The Company derives its revenues from four sources: subscriber fees from
Company-owned cable television systems, management fees from managed
partnerships, fees and distributions paid upon the sale of cable television
properties owned by managed partnerships and revenues from a non-cable
television subsidiary.
-13-
<PAGE>
Total revenues for the three months ended September 30, 1998 were
$129,573,000, an increase of $37,628,000, or 41%, over the total of $91,945,000
for the three months ended September 30, 1997. This increase in revenues
reflects the Company's acquisition of the Independence System on August 31, 1997
and the Albuquerque System on June 30, 1998, as well as the receipt of
$15,690,000 in general partner distributions. The increase in revenues would
have been greater but for a decrease in management fees due to the sales of
certain cable television systems owned by managed partnerships, the sale of a
business segment of Futurex in May 1998 and the sale of the Walnut Valley System
in October 1997. Adjusting for the foregoing acquisitions and sales, total
revenues would have increased $7,288,000, or 7%.
Total revenues for the nine months ended September 30, 1998 were
$329,751,000, an increase of $63,370,000, or 24%, over the total of $266,381,000
for the nine months ended September 30, 1997. This increase reflects the
Company's acquisition of the following cable television systems: the North
Prince Georges County System on January 31, 1997, the Annapolis System on April
15, 1997, the Manitowoc System on June 30, 1997, the Independence System and the
Albuquerque System (collectively, the "Acquired Systems"). The increase in
revenues also reflects the receipt of the general partner distributions
discussed above. The increase in revenues would have been greater but for a
decrease in management fees due to the sales of certain cable television systems
owned by managed partnerships, the sale of a business segment of Futurex in May
1998 and the sale of the Walnut Valley System in October 1997. Adjusting for
the effect of the Acquired Systems, brokerage fees earned and distributions
received, the decrease in management fees, the Futurex sale and the sale of the
Walnut Valley System (collectively, the "Pro Forma Adjustments"), total revenues
would have increased $13,882,000, or 5%.
The Company's subscriber service fees for the three months ended September
30, 1998 totaled $108,014,000, an increase of $22,813,000, or 27%, over the
total of $85,201,000 for the three months ended September 30, 1997. Subscriber
service fees for the nine months ended September 30, 1998 totaled $292,138,000,
an increase of $48,625,000, or 20%, over the total of $243,513,000 for the nine
months ended September 30, 1997. The acquisition of the Acquired Systems
accounted for $15,639,000, or 69%, and $32,772,000, or 67%, respectively, of the
increases in subscriber service fees for the three and nine month periods. With
the Pro Forma Adjustments, subscriber service fees would have increased
$7,174,000, or 7%, and $15,853,000, or 6%, respectively, for the three and nine-
month periods ended September 30, 1998. These increases were due primarily to
increases in the number of basic subscribers and basic service rate adjustments
in the cable television systems owned by the Company. Such increases would have
been greater but for a decrease in pay-per-view revenue and a decrease in
revenue in the Oxnard, California system due to competition from an overbuilder.
Disregarding the effect of acquisitions, basic subscribers increased 12,200, an
increase of 1.6%, since September 30, 1997.
The Company receives management fees generally equal to 5% of the gross
operating revenues of its managed partnerships. Management fees totaled
$2,446,000 for the three months ended September 30, 1998, a decrease of
$1,755,000, or 42%, over the total of $4,201,000 reported for the three months
ended September 30, 1997. For the nine months ended September 30, 1998,
management fees totaled $10,080,000, a decrease of $3,156,000, or 24%, over the
total of $13,236,000 for the nine months ended September 30, 1997. These
decreases in management fees were the result of the continued sales of cable
television systems owned by managed partnerships in 1997 and 1998. As the
Company liquidates its managed partnerships, management fees will continue to
decrease and ultimately cease when the partnerships are fully liquidated, which
is expected by the end of the first quarter of 1999. On a pro forma basis,
management fees would have increased $48,000, or 2%, and $409,000, or 4%,
respectively, for the three and nine months ended September 30, 1998.
In its capacity as the general partner of its managed partnerships, the
Company may receive general partner distributions upon the sale of cable
television properties owned by such partnerships. The Company received general
partner distributions related to the sale of the Fort Myers System and the
Owatonna System totaling $15,690,000 during the third quarter of 1998. The
$8,100,000 general partner distribution received as a result of the sale of the
Albuquerque System reduced the basis in the assets acquired. No such revenue
was recognized during the three and nine-month periods ended September 30, 1997.
In addition, The Jones Group,
-14-
<PAGE>
Ltd., a wholly owned subsidiary of the Company, may earn brokerage fees upon the
sale of certain managed cable television systems to third parties. The Company
earned brokerage fees, net of expenses, of $2,614,000 and $7,359,000,
respectively, during the three and nine months ended September 30, 1998. The
Company earned no brokerage fees during the three months ended September 30,
1997. The Company earned brokerage fees, net of expenses, of $2,768,000 during
the nine months ended September 30, 1997. As the Company liquidates its managed
partnerships, the Company will receive general partner distributions and
brokerage fees. Once the liquidations are complete, which is expected by the end
of the first quarter of 1999, these revenues will cease.
The Company also operates Futurex. Futurex revenues totaled $809,000 for
the three months ended September 30, 1998, a decrease of $1,734,000, or 68%,
over the $2,543,000 recorded for the three months ended September 30, 1997. For
the nine months ended September 30, 1998, Futurex revenues totaled $4,484,000, a
decrease of $2,380,000, or 35%, over the total of $6,864,000 for the nine months
ended September 30, 1997. These decreases were due primarily to the sale of
the contract manufacturing division of Futurex in May 1998.
Costs and Expenses
------------------
Operating, general and administrative expenses consist primarily of costs
associated with the operation and administration of Company-owned cable
television systems, the administration of managed partnerships and the operation
and administration of Futurex. The Company is reimbursed by its managed
partnerships for costs associated with the administration of the partnerships.
The principal cost components are salaries paid to corporate and system
personnel, programming expenses, consumer marketing expenses, professional fees,
subscriber billing costs, data processing costs, rent for leased facilities and
cable system maintenance expenses.
Cable operating expenses totaled $53,906,000 for the three months ended
September 30, 1998, an increase of $9,482,000 or 21%, over the total of
$44,424,000 for the three months ended September 30, 1997. The acquisition of
the Acquired Systems accounted for $8,893,000, or 94%, of this increase. With
the Pro Forma Adjustments, cable operating expenses would have increased
$589,000, or 1%. This increase is due primarily to increases in basic and tier
programming costs. For the nine months ended September 30, 1998, cable
operating expenses totaled $148,227,000, an increase of $21,057,000 or 17%, over
the total of $127,170,000 for the nine months ended September 30, 1997. The
acquisition of the Acquired Systems accounted for $19,030,000, or 90%, of the
increase. With the Pro Forma Adjustments, cable operating expenses would have
increased $2,027,000, or 1%, for the nine months ended September 30, 1998. This
increase was due primarily to increases in basic and tier programming costs.
Cable general and administrative expenses totaled $6,396,000 for the three
months ended September 30, 1998, an increase of $1,699,000, or 36%, over the
total of $4,697,000 for the three months ended September 30, 1997. For the nine
months ended September 30, 1998 cable general and administrative expenses
totaled $17,817,000, an increase of $3,037,000 or 21%, over the total of
$14,780,000 for the nine months ended September 30, 1997. With the Pro Forma
Adjustments, cable general and administrative expenses would have increased
$885,000, or 16%, and $1,068,000, or 6%, respectively, for the three and nine
month periods ended September 30, 1998. As the Company acquires cable
television systems on its own behalf and sells cable television systems owned by
managed partnerships, and completes the transition from a management company to
an operating company, the Company's proportionate percentage of total general
and administrative expenses will increase.
Non-cable operating, general and administrative expenses totaled $887,000
for the three months ended September 30, 1998, a decrease of $1,680,000 or 65%,
over the total of $2,567,000 for the three months ended September 30, 1997. For
the nine months ended September 30, 1998, non-cable operating, general and
administrative expense totaled $5,087,000, a decrease of $2,174,000, or 30%,
over the total of $7,261,000 for the nine months ended September 30, 1997.
These decreases were due primarily to the sale of Futurex's contract
manufacturing business.
-15-
<PAGE>
Depreciation and amortization expense totaled $52,310,000 for the three
months ended September 30, 1998, an increase of $16,163,000 or 45%, over the
total of $36,147,000 for the three months ended September 30, 1997. For the
nine months ended September 30, 1998, depreciation and amortization expense
totaled $144,150,000, an increase of $37,570,000 or 35%, over the total of
$106,580,000 for the nine months ended September 30, 1997. Depreciation and
amortization relating to the Acquired Systems, as well as depreciation of recent
capital additions, were responsible for these increases.
Operating Income
----------------
Operating income totaled $16,074,000 for the three months ended September
30, 1998 compared to $4,110,000 for the three months ended September 30, 1997.
For the nine months ended September 30, 1998, the Company reported operating
income of $14,470,000 compared to $10,590,000 in 1997. These increases were due
primarily to the general partner distributions received in the third quarter of
1998.
The cable television industry generally measures the performance of a cable
television company in terms of cash flow or operating income before depreciation
and amortization. The value of a cable television company is often expressed
using multiples of cable television system cash flow. This measure is not
intended to be a substitute or improvement upon the items disclosed on the
financial statements, rather it is included because it is an industry standard.
Operating income before depreciation and amortization totaled $68,384,000 for
the three months ended September 30, 1998, an increase of $28,127,000 or 70%,
over the total of $40,257,000 for the three months ended September 30, 1997.
For the nine months ended September 30, 1998, operating income before
depreciation and amortization totaled $158,620,000, an increase of $41,450,000
or 35%, over the total of $117,170,000 for the six months ended June 30, 1997.
With the Pro Forma Adjustments, operating income before depreciation and
amortization would have increased $5,694,000, or 13%, and $12,961,000, or 11%,
respectively for the three and nine-month periods ended September 30, 1998.
Other Income (Expense)
----------------------
Interest expense totaled $25,215,000 for the three months ended September
30, 1998, an increase of $3,610,000, or 17%, over the total of $21,605,000 for
the three months ended September 30, 1997. For the nine months ended September
30, 1998, interest expense totaled $69,399,000, an increase of $4,091,000, or
6%, over the total of $65,308,000 for the nine months ended September 30, 1997.
These increases are due to higher outstanding balances on interest bearing
obligations and were offset, in part, by lower effective interest rates. The
current effective rate on all outstanding interest bearing obligations is
approximately 7.5%.
Equity in losses of affiliated entities totaled $1,066,000, an increase of
$257,000 or 32%, over the total of $809,000 for the three months ended September
30, 1997. For the nine months ended September 30, 1998, equity in losses of
affiliated entities totaled $3,958,000, an increase of $396,000, or 11%, over
the total of $3,562,000 for the nine months ended September 30, 1997. These
increases are due to an increase in the recognition of losses of Jones Education
Company.
The Company recognized a loss of $3,616,000 related to the sale of the
contract manufacturing portion of Futurex in the second quarter of 1998. The
Company recognized gains totaling $49,396,000 during the nine months ended
September 30, 1997 from the insurance proceeds and sale of its company aircraft
in the third quarter, the sale of 25,017,385 Cable & Wireless Communications plc
shares in the second quarter and from the redemption of a portion of its Global
Group shares in the first quarter.
The Company recognized a loss on the early extinguishment of debt of
$13,459,000 in the third quarter of 1997 related to the redemption of its 11.5%
Debentures. No similar losses were recorded in the nine months ended September
30, 1998.
-16-
<PAGE>
Net loss totaled $14,404,000 for the three months ended September 30, 1998
compared to $30,755,000 for the three months ended September 30, 1997. This
decrease is due to the general partner distributions received in the third
quarter of 1998 and the loss on early extinguishment of debt in the third
quarter of 1997. Net loss totaled $67,795,000 for the nine months ended
September 30, 1998, compared to $24,042,000 for the nine months ended September
30, 1997. This increase is due primarily to the gains recognized in 1997 as
discussed above and the increases in depreciation and amortization expense.
The Company anticipates the continued recognition of operating income prior
to depreciation and amortization charges, but net losses resulting from
depreciation, amortization and interest expenses are expected occur in the
future. To the extent the Company recognizes general partner distributions from
its managed partnerships and/or gains on the sale of Company-owned systems in
the future, such losses may not occur; however, there is no assurance as to the
timing or recognition of these distributions or sales.
-17-
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 10-K.
a) Exhibits
15) Letter Regarding Unaudited Interim Financial Statements.
23) Consents of Experts and Counsel
27) Financial Data Schedule
b) Reports on Form 8-K
Report on Form 8-K dated August 12, 1998, describing the agreements
between the Company, International, BTH and Comcast that accelerate
exercise of the option to purchase controlling interest in the Company
by Comcast.
-18-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
JONES INTERCABLE, INC.
/S/Kevin P. Coyle
-----------------------------------
Kevin P. Coyle
(Group Vice President/Finance)
Dated: November 6, 1998
-19-
<PAGE>
Exhibit 15
REVIEW REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------------
To Jones Intercable, Inc.:
We have made a review of the accompanying condensed consolidated balance sheet
of JONES INTERCABLE, INC. (a Colorado corporation) and subsidiaries as of
September 30, 1998, and the related condensed consolidated statements of
operations and cash flows for the three and nine-month periods ended September
30, 1998 and 1997. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists primarily of applying analytical review procedures to the
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Jones Intercable, Inc., and
subsidiaries as of December 31, 1997 (not presented herein), and, in our report
dated March 10, 1998, we expressed an unqualified opinion on that statement. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1997, is fairly stated in all
material respects in relation to the consolidated balance sheet from which it
has been derived.
ARTHUR ANDERSEN LLP
DENVER, COLORADO
OCTOBER 30, 1998
<PAGE>
Exhibit 23
October 30, 1998
Jones Intercable, Inc. and Subsidiaries:
We are aware that Jones Intercable, Inc. has incorporated by reference in
its Registration Statements on Form S-8, File Nos. 33-52813 and 33-54596, and on
Form S-3, File Nos. 333-40147, and 333-40149 its Form 10-Q for the quarter ended
September 30, 1998, which includes our report dated October 30, 1998 covering
the unaudited interim financial information contained therein. Pursuant to
Regulation C of the Securities Act of 1933, that report is not considered a part
of the registration statements or a report prepared or certified by our firm
within the meaning of Sections 7 and 11 of the Securities Act of 1933.
Very truly yours,
ARTHUR ANDERSEN LLP
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