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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 June 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
July 31, 1998:
5,113,021 - Common Stock, $.01 par value per share
35,973,892 - 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
June 30, 1998 and December 31, 1997 3
Unaudited Consolidated Statements of Operations
Three and Six Months Ended June 30, 1998 and 1997 5
Unaudited Consolidated Statements of Cash Flows
Six Months Ended June 30, 1998 and 1997 6
Notes to Unaudited Consolidated Financial Statements
June 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 17
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UNAUDITED CONSOLIDATED Jones Intercable, Inc.
BALANCE SHEETS and Subsidiaries
As of June 30, 1998 and December 31, 1997
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June 30, December 31,
1998 1997
ASSETS (Stated in Thousands)
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CASH AND CASH EQUIVALENTS $ 7,187 $ 3,595
RECEIVABLES:
Trade receivables, net of allowance for
doubtful accounts of $2,033,000 in June 1998
and $1,692,000 in December 1997 23,679 28,686
Affiliated entities 7,333 7,783
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property, plant and equipment, at cost 877,180 745,115
Less-accumulated depreciation (268,877) (224,893)
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608,303 520,222
Franchise costs and other intangible assets, net of
accumulated amortization of $329,731,000 in June
1998 and $285,212,000 in December 1997 838,445 721,336
Investments in cable television
partnerships and affiliates 22,162 24,568
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TOTAL INVESTMENT IN CABLE TELEVISION PROPERTIES 1,468,910 1,266,126
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DEFERRED TAX ASSET, net of valuation
allowance of $102,618,000 in June 1998 and
$84,473,000 in December 1997 7,137 7,137
DEPOSITS, PREPAID EXPENSES AND OTHER ASSETS 59,443 58,044
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TOTAL ASSETS $1,573,689 $1,371,371
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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 June 30, 1998 and December 31, 1997
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June 30, December 31,
1998 1997
LIABILITIES AND SHAREHOLDERS' INVESTMENT (Stated in Thousands)
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LIABILITIES:
Accounts payable and accrued liabilities $ 103,850 $ 115,189
Subscriber prepayments and deposits 3,231 2,932
Subordinated debentures and other debt 750,945 553,732
Credit facilities 539,000 471,000
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TOTAL LIABILITIES 1,397,026 1,142,853
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SHAREHOLDERS' INVESTMENT:
Class A Common Stock, $.01 par value, 60,000,000
shares authorized; 35,967,017 and 35,554,223 shares
issued at June 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 June 30, 1998 and December 31, 1997 51 51
Additional paid-in capital 489,148 487,616
Accumulated deficit (312,896) (259,505)
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TOTAL SHAREHOLDERS' INVESTMENT 176,663 228,518
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TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $1,573,689 $1,371,371
========= =========
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 six months ended June 30, 1998 and 1997
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<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
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June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
(Stated in Thousands Except Per Share Data)
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<S> <C> <C> <C> <C>
REVENUES FROM OPERATIONS:
Cable Television Revenue
Subscriber service fees $ 92,463 $ 83,199 $184,124 $158,312
Management fees 3,685 4,589 7,634 9,035
Distributions and brokerage fees 1,038 238 4,745 2,768
Non-cable Revenue 1,662 2,908 3,675 4,321
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TOTAL REVENUES 98,848 90,934 200,178 174,436
COSTS AND EXPENSES:
Cable Television Expenses
Operating expenses 46,842 43,911 94,321 82,746
General and administrative expenses * 5,933 5,242 11,421 10,083
Non-cable operating, general and administrative 1,997 2,784 4,200 4,694
Depreciation and amortization 47,085 34,901 91,840 70,433
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OPERATING INCOME (LOSS) (3,009) 4,096 (1,604) 6,480
OTHER INCOME (EXPENSE):
Interest expense (22,816) (24,038) (44,184) (43,703)
Equity in losses of affiliated entities (1,599) (1,058) (2,892) (2,753)
Gain (loss) on sale of assets (3,616) 44,563 (3,616) 47,542
Interest income 440 421 747 803
Other, net (2,044) (1,430) (1,842) (1,656)
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INCOME (LOSS) BEFORE INCOME TAXES (32,644) 22,554 (53,391) 6,713
Income tax benefit - - - -
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NET INCOME (LOSS) $(32,644) $ 22,554 $(53,391) $ 6,713
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INCOME (LOSS) PER SHARE: $ (.80) $ .72 $ (1.31) $ .21
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INCOME (LOSS) PER SHARE - assuming dilution: $ (.80) $ .72 $ (1.31) $ .21
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AVERAGE NUMBER OF CLASS A COMMON AND
COMMON SHARES OUTSTANDING 40,768 31,378 40,730 31,378
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</TABLE>
* Of the total general and administrative expenses, approximately $1,797,000 and
$1,218,000 for the three months ended June 30, 1998 and 1997, respectively, and
approximately $3,322,000 and $2,688,000 for the six months ended June 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 six months ended June 30, 1998 and 1997
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For the Six Months Ended
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June 30, 1998 June 30, 1997
(Stated in Thousands)
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (53,391) $ 6,713
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 91,840 70,433
(Gain) loss on sale of assets 3,616 (47,542)
Equity in losses of affiliates 2,892 2,753
Class A Stock option expense 130 126
Decrease in restricted cash - 104
Decrease in trade receivables 5,007 1,199
Increase in other receivables, prepaid
expenses and other assets (7,807) (5,311)
Increase (Decrease) in accounts payable,
accrued liabilities and subscriber
prepayments and deposits (11,040) 23,458
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Net cash provided by operating activities 31,247 51,933
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of cable television systems (214,846) (246,682)
Deposit on cable television system - 12,000
Purchase of property and equipment (79,775) (54,447)
Proceeds from sale of assets 350 109,276
Other, net (453) 707
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Net cash used in investing activities (294,724) (179,146)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 280,000 250,000
Repayment of borrowings (212,000) (362,500)
Proceeds from the sale of Senior Notes, net 196,346 244,102
Decrease (Increase) in accounts receivable from
affiliated entities 450 (317)
Proceeds from Class A stock options 1,406 -
Other, net 867 431
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Net cash provided by financing activities 267,069 131,716
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Increase in Cash and Cash Equivalents 3,592 4,503
Cash and Cash Equivalents, beginning of period 3,595 1,671
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Cash and Cash Equivalents, end of period $ 7,187 $ 6,174
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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 fair presentation of the Balance Sheets, Statements
of Operations and 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 June 30, 1998 and December
31, 1997 and its results of operations and cash flows for the six months ended
June 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 represents 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 six months ended June 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 $ 200,178 $ 26,022 $ 226,200
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Operating Income (Loss) $ (1,604) $ 387 $ (1,217)
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Net Loss $ (53,391) $ (6,596) $ (59,987)
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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 in the first half of
1997 on the Company's results of operations 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 $ 174,436 $ 42,147 $ 216,583
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Operating Income (Loss) $ 6,480 $ (2,995) $ 3,485
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Net Income (Loss) $ 6,713 $ (59,573) $ (52,860)
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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
the fourth quarter 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; 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.
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 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 the fourth quarter 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, 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 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 fourth quarter 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 in 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 third or fourth quarter of 1998.
(4) The Company is in the process of liquidating its managed partnerships and
all of the remaining partnership-owned cable television systems, serving 464,000
basic subscribers, are currently in various stages of 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 95,000 basic
subscribers, which are to be purchased by the Company. See Note 3. The
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pending sales of partnership-owned systems are expected to be completed by 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.
The closing of the exercise of the option is expected to occur in the first
quarter of 1999. 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 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 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.
(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) 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 461,000 and 392,000 common stock equivalents, respectively, were
not included in the computation of loss per share assuming dilution for the
three and six months ended June 30, 1998, because the effect of such common
stock equivalents was antidilutive.
(11) 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 six months ended June 30, 1998 and 1997. Approximately
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$41,567,000 and $37,671,000 of interest expense was paid during the six months
ended June 30, 1998 and 1997, respectively. No material non-cash investing or
financing transactions were recorded during the first six months of fiscal 1998
and 1997.
(12) 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
-------------------
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 1.4
million basic subscribers. As of June 30, 1998, on a pro forma basis for all
acquisitions of cable television systems by the Company and pending sales of
cable television systems owned by managed partnerships, the Company served
approximately 985,000 basic subscribers. The pending sales and acquisitions are
expected to be completed by 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 June 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, six partnership-owned cable television systems, serving
237,000 subscribers were sold during the first half of 1998, (including the
Albuquerque System which was purchased by the Company). In addition, all
remaining partnership-owned cable television systems serving 464,000 subscribers
(including the Palmdale System, the Littlerock System, the Calvert County
System, the Soccoro 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 $222,963,267, less a general partner
distribution of $8,100,000, 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 also similar to the other systems owned by JCH II.
Second, the Company has entered into an agreement to purchase the Calvert County
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
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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. Closings for these
transactions are expected in the fourth quarter of 1998. 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 June 30, 1998, the Company had
advanced funds to various managed partnerships totaling approximately
$7,333,000, a decrease of approximately $450,000 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
$79,775,000 during the first six months of 1998. Of the capital expenditures,
$73,698,000 are principally the result of the following: (a) 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 (b) new extension projects, drop materials, converters and
various maintenance projects in all of the Company's cable television systems.
Approximately $6,077,000 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 $85,000,000. 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 June 30, 1998 was $249,000,000.
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 June 30, 1998 was $290,000,000. This
amount was borrowed under the reducing revolving credit facility.
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.
-12-
<PAGE>
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
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 half of 1998, the Company
earned brokerage fees of $5,243,000, less expenses of $498,000.
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.
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 million.
RESULTS OF OPERATIONS
Revenues
--------
The Company derives its revenues from four primary 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.
Total revenues for the three months ended June 30, 1998 totaled
$98,848,000, an increase of $7,914,000, or 9%, over the total of $90,934,000 for
the three months ended June 30, 1997. This increase in revenues reflects the
Company's acquisition of the Manitowoc System on June 30, 1997 and the
Independence System on August 31, 1997. 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 1997 and the sale of the Walnut Valley System in
October 1997. Adjusting for the above transactions, total revenues would have
increased $3,591,000, or 4%.
Total revenues for the six months ended June 30, 1998 totaled $200,178,000,
an increase of $25,742,000, or 15%, over the total of $174,436,000 for the six
months ended June 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 and the Independence System (the "Acquired Systems"). 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 1997 and the sale of the Walnut
Valley System in
-13-
<PAGE>
October 1997. Adjusting for the effect of the Acquired Systems, brokerage fees
earned, the decrease in management fees, the Futurex sale and the sale of the
Walnut Valley System (the "Pro Forma Adjustments"), total revenues would have
increased $10,031,000, or 5%.
The Company's subscriber service fees for the three months ended June 30,
1998 totaled $92,463,000, an increase of $9,264,000, or 11%, over the total of
$83,199,000 for the three months ended June 30, 1997. Subscriber service fees
for the six months ended June 30, 1998 totaled $184,124,000, an increase of
$25,812,000 or 16%, over the total of $158,312,000 for the six months ended
June 30, 1997. The acquisition of the Acquired Systems accounted for
$6,251,000, or 67%, and $17,133,000, or 66%, respectively, of the increases in
subscriber service fees for the three and six month periods. With the Pro Forma
Adjustments, subscriber service fees would have increased $3,013,000, or 3%, and
$8,679,000, or 5%, respectively, for the three and six month periods ended June
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 during the first six months of 1998, basic subscribers
increased 8,578, an annualized increase of 2.25%.
The Company receives management fees generally equal to 5% of the gross
operating revenues of its managed partnerships. Management fees totaled
$3,685,000 for the three months ended June 30, 1998, a decrease of $904,000, or
20%, over the total of $4,589,000 reported for the three months ended June 30,
1997. For the six months ended June 30, 1998, management fees totaled
$7,634,000, a decrease of $1,401,000, or 16% over the total of $9,035,000 for
the six months ended June 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 in the first
quarter of 1999. On a pro forma basis, management fees would have increased
$187,000, or 5%, and $361,000, or 5%, respectively, for the three and six months
ended June 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. No such revenue was
recognized during the three and six month periods ended June 30, 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. In addition, The
Jones Group, 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 of $1,288,000 and $5,243,000, respectively,
less expenses of $250,000 and $498,000, respectively, during the three and six
months ended June 30, 1998. The Company earned brokerage fees of $502,000 and
$3,695,000, respectively, less expenses of $264,000 and $927,000, respectively,
during the three and six months ended June 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 in
the first quarter of 1999, these revenues will cease.
The Company also operates Futurex. Futurex revenues totaled $1,662,000 for
the three months ended June 30, 1998, a decrease of $1,246,000, or 43%, over the
$2,908,000 recorded for the three months ended June 30, 1997. For the six
months ended June 30, 1998, Futurex revenues totaled $3,675,000, a decrease of
$646,000, or 15%, over the total of $4,321,000 for the six months ended June
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
-14-
<PAGE>
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 $46,842,000, an increase of $2,931,000 or
7%, over the total of $43,911,000 for the three months ended June 30, 1997. The
acquisition of the Acquired Systems accounted for this increase. With the Pro
Forma Adjustments, cable operating expenses would have decreased $958,000, or
2%. This decrease was due to a reduction in personnel costs and marketing
costs. For the six months ended June 30, 1998, cable operating expenses
totaled $94,321,000, an increase of $11,575,000 or 14%, over the total of
$82,746,000 for the six months ended June 30, 1997. The acquisition of the
Acquired Systems accounted for $10,137,000, or 88%, of the increase. With the
Pro Forma Adjustments, cable operating expenses would have increased $1,438,000,
or 2%, for the six months ended June 30, 1998. This increase was due primarily
to increases in basic and tier programming costs.
Cable general and administrative expenses totaled $5,933,000 for the six
months ended June 30, 1998, an increase of $691,000, or 13%, over the total of
$5,242,000 for the three months ended June 30, 1997. For the six months ended
June 30, 1998 cable general and administrative expenses totaled $11,421,000, an
increase of $1,338,000 or 13%, over the total of $10,083,000 for the six months
ended June 30, 1997. With the Pro Forma Adjustments, cable general and
administrative expenses would have increased $299,000, or 5%, and $183,000, or
2%, respectively, for the three and six month periods ended June 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 $1,997,000
for the three months ended June 30, 1998, a decrease of $787,000 or 28%, over
the total of $2,784,000 for the three months ended June 30, 1997. For the six
months ended June 30, 1998, non-cable operating, general and administrative
expense totaled $4,200,000, a decrease of $494,000, or 11%, over the total of
$4,694,000 for the six months ended June 30, 1997. These decreases were due
primarily to the sale of Futurex's contract manufacturing business.
Depreciation and amortization expense totaled $47,085,000 for the three
months ended June 30, 1998, an increase of $12,184,000 or 35%, over the total
of $34,901,000 for the three months ended June 30, 1997. For the six months
ended June 30, 1998, depreciation and amortization expense totaled $91,840,000,
an increase of $21,407,000 or 30%, over the total of $70,433,000 for the six
months ended June 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
----------------
The Company reported an operating loss of $3,009,000 for the three months
ended June 30, 1998 compared to operating income of $4,096,000 for the three
months ended June 30, 1997. For the six months ended June 30, 1998, the Company
reported an operating loss of $1,604,000 compared to operating income of
$6,480,000 in 1997. These changes were due primarily to the increase in
depreciation and amortization expense.
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 $44,076,000 for
the three months ended June 30, 1998, an increase of $5,079,000 or 13%, over the
total of $38,997,000 for the three months ended June 30, 1997. For the six
months ended June 30, 1998, operating income before depreciation and
amortization totaled $90,236,000, an increase of $13,323,000 or 17%, over the
total of $76,913,000 for the
-15-
<PAGE>
six months ended June 30, 1997. With the Pro Forma Adjustments, operating income
before depreciation and amortization would have increased $3,822,000, or 10%,
and $7,689,000, or 10%, respectively for the three and six month periods ended
June 30, 1998.
Other Income (Expense)
----------------------
Interest expense totaled $22,816,000 for the three months ended June 30,
1998, a decrease of $1,222,000, or 5%, over the total of $24,038,000 for the
three months ended June 30, 1997. This decrease was due to lower effective
interest rates on interest bearing obligations. For the six months ended June
30, 1998, interest expense totaled $44,184,000, an increase of $481,000, or 1%,
over the total of $43,703,000 for the six months ended June 30, 1997. This
increase is due to higher outstanding balances on interest bearing obligations
and was offset, in part, by lower effective interest rates.
Equity in losses of affiliated entities totaled $1,599,000, an increase of
$541,000 or 51%, over the total of $1,058,000 for the three months ended June
30, 1997. For the six months ended June 30, 1998, equity in losses of
affiliated entities totaled $2,892,000, an increase of $139,000, or 5%, over the
total of $2,753,000 for the six months ended June 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 a gain of $44,563,000 on the sale of its 25,017,385 CWC
shares in the second quarter of 1997. In addition, the Company recognized a
gain of $2,979,000 on the redemption of its Global Group shares in the first
quarter of 1997.
The Company recognized net loss of $32,644,000 for the three months ended
June 30, 1998 compared to net income of $22,554,000 for the three months ended
June 30, 1997. The Company recognized net loss of $53,391,000 for the six months
ended June 30, 1998, compared to net income of $6,713,000 for the six months
ended June 30, 1997. These changes are 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.
-16-
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 10-K.
a) Exhibits
15) Letter Regarding Unaudited Interim Financial Statements.
27) Financial Data Schedule
b) Reports on Form 8-K
Report on Form 8-K dated April 6, 1998, describing the issuance and
sale of $200,000,000 of 7 5/8% Senior Notes on April 6, 1998.
Report on Form 8-K dated June 30, 1998 reported that on that date
the Company purchased the Albuquerque System.
-17-
<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: August 13, 1998
-18-
<PAGE>
Exhibit 15
July 31, 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
June 30, 1998, which includes our report dated July 31, 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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 7,187
<SECURITIES> 0
<RECEIVABLES> 23,679
<ALLOWANCES> 2,033
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 877,180
<DEPRECIATION> (268,877)
<TOTAL-ASSETS> 1,573,684
<CURRENT-LIABILITIES> 107,081
<BONDS> 1,289,945
0
0
<COMMON> 411
<OTHER-SE> 176,252
<TOTAL-LIABILITY-AND-EQUITY> 1,573,689
<SALES> 0
<TOTAL-REVENUES> 200,178
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 209,385
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44,184
<INCOME-PRETAX> (53,391)
<INCOME-TAX> 0
<INCOME-CONTINUING> (53,391)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (53,391)
<EPS-PRIMARY> (1.31)
<EPS-DILUTED> (1.31)
</TABLE>
<PAGE>
Exhibit 28
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 June
30, 1998, and the related condensed consolidated statements of operations and
cash flows for the three and six month periods ended June 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
July 31, 1998
