UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(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, 1999
OR
( ) 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.
(Exact name of registrant as specified in charter)
COLORADO 84-0613514
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o Comcast Corporation
1500 Market Street, Philadelphia, PA 19102-2148
- -------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (215) 665-1700
------------------------------
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 twelve 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 ___
--------------------------
As of September 30, 1999, there were 36,937,420 shares of Class A Common Stock
and 5,113,021 shares of Common Stock outstanding.
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
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Page
Number
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements
Review Report of Independent Public Accountants................................2
Condensed Consolidated Balance Sheet as of
September 30, 1999 and December 31, 1998 (Unaudited)...........................3
Condensed Consolidated Statement of Operations
and Accumulated Deficit for the Nine and Three Months
Ended September 30, 1999 and 1998 (Unaudited)..................................4
Condensed Consolidated Statement of
Cash Flows for the Nine Months Ended
September 30, 1999 and 1998 (Unaudited)........................................5
Notes to Condensed Consolidated Financial
Statements (Unaudited)................................................... 6 - 10
ITEM 2 Management's Discussion and Analysis of
Financial Condition and Results of
Operations...............................................................11 - 15
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings........................................................16 - 19
ITEM 6 Exhibits and Reports on Form 8-K............................................. 19
SIGNATURES............................................................................. 20
</TABLE>
-----------------------------------
This Quarterly Report on Form 10-Q is for the three months ended September
30, 1999. This Quarterly Report modifies and supersedes documents filed prior to
this Quarterly Report. The SEC allows us to "incorporate by reference"
information that we file with them, which means that we can disclose important
information to you by referring you directly to those documents. Information
incorporated by reference is considered to be part of this Quarterly Report. In
addition, information we file with the SEC in the future will automatically
update and supersede information contained in this Quarterly Report. In this
Quarterly Report, "Jones Intercable," "we," "us" and "our" refer to Jones
Intercable, Inc. and its subsidiaries.
You should carefully review the information contained in this Quarterly
Report and in other reports or documents that we file from time to time with the
SEC. In this Quarterly Report, we state our beliefs of future events and of our
future financial performance. In some cases, you can identify those so-called
"forward-looking statements" by words such as "may," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"potential," or "continue" or the negative of those words and other comparable
words. You should be aware that those statements are only our predictions.
Actual events or results may differ materially. In evaluating those statements,
you should specifically consider various factors, including the risks outlined
below. Those factors may cause our actual results to differ materially from any
of our forward-looking statements.
Factors Affecting Future Operations
The cable communications industry may be affected by, among other things:
o changes in laws and regulations,
o changes in the competitive environment,
o changes in technology,
o franchise related matters,
o market conditions that may adversely affect the availability of
debt and equity financing for working capital, capital
expenditures or other purposes; and
o general economic conditions.
<PAGE>
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, 1999, the related condensed consolidated statement of operations
and accumulated deficit for the nine and three months ended September 30, 1999
and 1998 and the condensed consolidated statement of cash flows for the nine
months ended September 30, 1999 and 1998. 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 condensed 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, 1998 (not presented herein), and, in our report
dated February 17, 1999, 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, 1998, 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
November 4, 1999
2
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
(Dollars in thousands, except share data)
September 30, December 31,
1999 1998
----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents ......................................................... $ 20,788 $ 2,586
Accounts receivable, less allowance for doubtful
accounts of $4,648 and $2,822 .................................................. 30,611 32,452
Inventories, net .................................................................. 20,721 20,239
Other current assets .............................................................. 10,061 28,734
----------- -----------
Total current assets ........................................................ 82,181 84,011
----------- -----------
INVESTMENTS .......................................................................... 23,671 19,724
----------- -----------
PROPERTY AND EQUIPMENT ............................................................... 898,259 818,871
Accumulated depreciation .......................................................... (304,749) (244,631)
----------- -----------
Property and equipment, net ....................................................... 593,510 574,240
----------- -----------
DEFERRED CHARGES AND OTHER ........................................................... 1,631,361 1,500,083
Accumulated amortization .......................................................... (566,875) (446,965)
----------- -----------
Deferred charges and other, net ................................................... 1,064,486 1,053,118
----------- -----------
$ 1,763,848 $ 1,731,093
=========== ===========
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses ............................................. $ 91,993 $ 89,516
Accrued interest .................................................................. 22,681 23,265
Current portion of long-term debt ................................................. 2,460 2,237
Due to affiliates ................................................................. 34,880
----------- -----------
Total current liabilities ................................................... 152,014 115,018
----------- -----------
LONG-TERM DEBT, less current portion ................................................. 1,643,122 1,460,470
----------- -----------
OTHER LIABILITIES .................................................................... 14,485
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' (DEFICIENCY) EQUITY
Class A common stock, $.01 par value - authorized, 60,000,000 shares;
issued, 36,937,420 and 36,143,054 .............................................. 369 361
Common stock, $.01 par value - authorized, 5,550,000 shares; issued, 5,113,021 .... 51 51
Additional capital ................................................................ 504,472 495,116
Accumulated deficit ............................................................... (541,033) (339,923)
Accumulated other comprehensive loss .............................................. (9,632)
----------- -----------
Total stockholders' (deficiency) equity ..................................... (45,773) 155,605
----------- -----------
$ 1,763,848 $ 1,731,093
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(Amounts in thousands, except per share data)
Nine Months Ended Three Months Ended
September 30, September 30,
1999 1998 1999 1998
--------- --------- --------- -----------
REVENUES
Cable Communications Revenues
Subscriber service fees ................................... $ 394,126 $ 300,108 $ 135,477 $ 111,404
Management fees ........................................... 957 10,080 2,446
Distributions and brokerage fees .......................... 3,966 23,049 18,304
Non-cable revenue ............................................ 2,259 4,484 608 809
--------- --------- --------- ---------
401,308 337,721 136,085 132,963
--------- --------- --------- ---------
COSTS AND EXPENSES
Cable Communications Expenses
Operating ................................................. 161,034 94,818 51,032 36,458
Selling, general and administrative ....................... 91,213 79,196 31,012 27,234
Non-cable operating, selling, general and administrative ..... 2,504 5,087 1,123 887
Restructuring charges ........................................ 55,400
Depreciation and amortization ................................ 199,668 144,608 75,264 52,768
--------- --------- --------- ---------
509,819 323,709 158,431 117,347
--------- --------- --------- ---------
OPERATING (LOSS) INCOME ......................................... (108,511) 14,012 (22,346) 15,616
OTHER (INCOME) EXPENSE
Interest expense ............................................. 86,549 68,965 31,468 24,781
Equity in net losses (income) of affiliates .................. 3,026 3,959 (932) 1,067
Investment income ............................................ (679) (1,313) (970) (566)
Other expense (income) ....................................... 3,703 10,196 (2,426) 4,738
--------- --------- --------- ---------
92,599 81,807 27,140 30,020
--------- --------- --------- ---------
LOSS BEFORE INCOME TAXES ........................................ (201,110) (67,795) (49,486) (14,404)
INCOME TAXES ....................................................
--------- --------- --------- ---------
NET LOSS ........................................................ (201,110) (67,795) (49,486) (14,404)
ACCUMULATED DEFICIT
Beginning of period .......................................... (339,923) (259,505) (491,547) (312,896)
--------- --------- --------- ---------
End of period ................................................ ($541,033) ($327,300) ($541,033) ($327,300)
========= ========= ========= =========
BASIC LOSS FOR COMMON STOCKHOLDERS
PER COMMON SHARE ............................................. ($ 4.81) ($ 1.66) ($ 1.18) ($ .35)
========= ========= ========= =========
BASIC WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING ........................................... 41,783 40,849 42,050 41,088
========= ========= ========= =========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
(Dollars in thousands)
Nine Months Ended
September 30,
1999 1998
--------- ---------
OPERATING ACTIVITIES
Net loss ($201,110) ($ 67,795)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 199,668 144,608
Amortization of deferred revenue (1,800)
Loss on sale of assets 3,616
Noncash interest expense 175
Equity in net losses of affiliates 3,026 3,959
--------- ---------
(41) 84,388
Changes in working capital and other liabilities 20,932 (4,477)
--------- ---------
Net cash provided by operating activities 20,891 79,911
--------- ---------
FINANCING ACTIVITIES
Proceeds from borrowings 183,535 481,346
Repayments of long-term debt (978) (232,000)
Proceeds from Class A Common Stock options exercised 9,364 5,580
Net transactions with affiliates 35,904 3,669
--------- ---------
Net cash provided by financing activities 227,825 258,595
--------- ---------
INVESTING ACTIVITIES
Acquisitions, net of cash acquired (50,213) (214,846)
Capital expenditures (91,207) (85,045)
Additions to deferred charges (89,517) (40,889)
Proceeds from the sale of assets 350
Other, net 423 1,261
--------- ---------
Net cash used in investing activities (230,514) (339,169)
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 18,202 (663)
CASH AND CASH EQUIVALENTS, beginning of period 2,586 3,595
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 20,788 $ 2,932
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
The condensed consolidated balance sheet as of December 31, 1998 has
been condensed from the audited consolidated balance sheet as of that
date. The condensed consolidated balance sheet as of September 30,
1999, the condensed consolidated statement of operations and
accumulated deficit for the nine and three months ended September 30,
1999 and 1998 and the condensed consolidated statement of cash flows
for the nine months ended September 30, 1999 and 1998 have been
prepared by Jones Intercable, Inc. (the "Company") and have not been
audited by the Company's independent auditors. In the opinion of
management, all adjustments necessary to present fairly the financial
position, results of operations and cash flows as of September 30, 1999
and for all periods presented have been made.
Certain information and note disclosures normally included in the
Company's annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted. These condensed consolidated financial statements should be
read in conjunction with the financial statements and notes thereto
included in the Company's December 31, 1998 Annual Report on Form 10-K
filed with the Securities and Exchange Commission (the "SEC"). The
results of operations for the periods ended September 30, 1999 are not
necessarily indicative of operating results for the full year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This
statement establishes the accounting and reporting standards for
derivatives and hedging activity. Upon the adoption of SFAS No. 133,
all derivatives are required to be recognized in the statement of
financial position as either assets or liabilities and measured at fair
value. In July 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133 an amendment of FASB Statement
No. 133" deferring the effective date for implementation of SFAS No.
133 to fiscal years beginning after June 15, 2000. The Company is
currently evaluating the impact the adoption of SFAS No. 133 will have
on its financial position and results of operations.
Loss for Common Stockholders Per Common Share
Loss for common stockholders per common share is computed by dividing
net loss by the weighted average number of common shares outstanding
during the period.
For the nine and three months ended September 30, 1999 and 1998, the
Company's potential common shares of 16,000 shares, 424,000 shares,
16,000 shares and 498,000 shares, respectively, have an antidilutive
effect on loss for common stockholders per common share and, therefore,
have not been used in determining the total weighted average number of
common shares outstanding.
Reclassifications
Certain reclassifications have been made to the prior year condensed
consolidated financial statements to conform to those classifications
used in 1999.
3. ACQUISITIONS AND OTHER SIGNIFICANT EVENTS
Closing of Acquisition of Controlling Interest in the Company by
Comcast Corporation On April 7, 1999, Comcast Corporation ("Comcast")
completed the acquisition of a controlling interest in the Company for
aggregate consideration of $706.3 million. In June 1999, Comcast
acquired an additional 1.0 million shares of the Company's Class A
Common Stock for $50.0 million in a private transaction. As of
September 30, 1999, Comcast owns approximately 13.8 million shares of
the Company's Class A Common Stock and approximately 2.9 million shares
of the Company's Common Stock, representing 39.6% of the economic
interest and 48.3% of the voting interest in the Company. Comcast has
contributed its shares in the Company to its wholly owned subsidiary,
Comcast Cable Communications, Inc. ("Comcast Cable"). The approximately
2.9 million shares of Common Stock owned by Comcast Cable represent
shares having the right to elect
6
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
approximately 75% of the Board of Directors of the Company. The Company
is now a consolidated public company subsidiary of Comcast Cable.
In August 1999, Comcast announced its intention to commence an offer to
exchange 1.4 shares of its Class A Special Common Stock for each share
of Class A Common Stock and Common Stock of the Company for up to 79%
of the combined number of shares of the Company's Class A Common and
Common Stock outstanding (subject to certain terms and conditions to be
contained in the offer documents). The offer would commence upon
registration of Comcast's Class A Special Common Stock to be offered in
the exchange offer with the SEC pursuant to an effective registration
statement. Comcast intends to contribute the shares of the Company's
Class A Common Stock and Common Stock received in the exchange offer to
Comcast Cable.
In connection with Comcast's acquisition of a controlling interest in
the Company on April 7, 1999, all of the persons who were executive
officers of the Company as of that date terminated their employment
with the Company. The Company's Board of Directors has elected new
executive officers, each of whom also is an officer of Comcast. As of
July 7, 1999, all persons who were employed at the Company's former
corporate offices in Englewood, Colorado had terminated their
employment with the Company. The Company's corporate offices are now
located at 1500 Market Street, Philadelphia, Pennsylvania 19102-2148.
To facilitate an orderly change in control to Comcast, the Company
established retention and severance programs for its corporate and
field office employees who were to be terminated due to the change in
control. The programs provide for cash severance payments to employees
that have been or will be terminated due to the change in control.
During the nine months ended September 30, 1999, the Company incurred
expense relating to the severance of approximately 350 corporate and
field office employees totaling $39.1 million, of which $34.9 million
had been paid and $4.2 million was accrued at September 30, 1999. Such
costs were included in restructuring charges in the Company's condensed
consolidated statement of operations and accumulated deficit.
In addition to the severance expense described above, during the nine
months ended September 30, 1999, the Company incurred an additional
$16.3 million of restructuring costs related to the change in control
relating to an employment contract termination, costs associated with
the termination of an information technology services agreement with a
former affiliated entity and lease termination costs. Of this total,
$9.5 million had been paid and $6.8 million was accrued at September
30, 1999. Such costs were included in restructuring charges in the
Company's condensed consolidated statement of operations and
accumulated deficit during the nine months ended September 30, 1999.
Littlerock System Acquisition
On January 29, 1999, the Company, through a wholly owned subsidiary,
acquired the cable communications system serving areas in and around
Littlerock, California (the "Littlerock System") for $10.7 million in
cash from Cable TV Fund 14-B, Ltd., a partnership managed by the
Company (see Note 8). The acquisition was accounted for under the
purchase method of accounting. As such, the operating results of the
Littlerock System have been included in the accompanying condensed
consolidated statement of operations and accumulated deficit from the
acquisition date. The acquisition was funded with borrowings under the
subsidiary's existing credit facility.
Calvert County System Acquisition
On July 6, 1999, the Company, through a wholly owned subsidiary,
acquired the cable communications system serving areas in and around
Calvert County, Maryland (the "Calvert County System") for $39.5
million in cash, subject to customary closing adjustments, from Cable
TV Fund 14-A, Ltd., a partnership managed by the Company (see Note 8).
The acquisition was accounted for under the purchase method of
accounting. As such, the operating results of the Calvert County System
have been included in the Company's condensed consolidated statement of
operations and accumulated deficit from the date of acquisition. The
acquisition was funded with borrowings under the subsidiary's existing
credit facility.
Exchange of Cable Communications Systems
In May 1999, the Company entered into an agreement to exchange certain
cable communications systems with Adelphia Communications ("Adelphia").
Under the terms of the agreement, the Company will receive
7
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
approximately 103,000 cable subscribers in Michigan from Adelphia. In
exchange, Adelphia will receive cable communications systems in
California currently owned by the Company serving approximately 108,000
subscribers. All of the cable systems involved in the transaction will
be valued based upon independent appraisals with any difference in
relative value to be funded with cash or additional cable systems. The
system exchange is subject to customary closing conditions and
regulatory approvals and is expected to close by mid-2000.
4. INVESTMENTS
Partnership Liquidations
The sales of all remaining partnership-owned cable communications
systems were completed in July 1999 and the Company is in the final
stages of liquidating its managed partnerships. The Company is a
defendant in litigation filed by limited partners of certain of its
managed partnerships challenging the terms of certain sales of
partnership-owned cable communications systems to the Company and/or
its subsidiaries (see Note 8 and Part II, Other Information, Item 1,
Legal Proceedings). The managed partnerships that are involved in this
litigation will not be dissolved until such litigation is finally
resolved and terminated.
At Home Warrants
In June 1998, the Company entered into a six year Distribution
Agreement with At Home Corporation ("@Home"), which provides for the
distribution of high speed Internet services to the Company's cable
communications systems. Deployment began in December 1998. In
conjunction with the Distribution Agreement, the Company and @Home
entered into a Warrant Purchase Agreement providing for the Company's
purchase of up to a maximum of 4,092,200 shares of @Home Series A
Common Stock at $5.25 per share (as adjusted for @Home's 2-for-1 stock
split in June 1999). The warrants become exercisable after March 31
each year, beginning in 1999, as the Company launches @Home services in
its cable communications systems. As of March 31, 1999, warrants to
purchase 260,000 shares of @Home Series A Common Stock were
exercisable. No additional warrants became exercisable in the second
and third quarters of 1999. Accordingly, as of March 31, 1999, the
Company recorded an investment in @Home warrants of $19.7 million and
deferred revenue of an equal amount. The Company's investment in @Home
warrants is classified as available for sale and recorded at fair
value, with unrealized gains or losses resulting from changes in fair
value between measurement dates recorded as a component of accumulated
other comprehensive loss in the Company's condensed consolidated
balance sheet. As of September 30, 1999, the Company had recorded an
unrealized loss of $9.6 million related to this investment.
5. LONG-TERM DEBT
Interest Rates
As of September 30, 1999 and December 31, 1998, the Company's effective
weighted average interest rate on its long-term debt outstanding was
7.51% and 6.76%, respectively.
Lines of Credit
As of September 30, 1999, certain subsidiaries of the Company had
unused lines of credit of $270.5 million, all of which is restricted by
the covenants of the related debt agreements and to subsidiary general
purposes and dividend declaration.
6. RELATED PARTY TRANSACTIONS
Management Agreement
Effective April 7, 1999, the Company and Comcast entered into a
management agreement pursuant to which Comcast will manage the
operations of the Company and its subsidiaries, subject to such
direction and control of the Company as the Company may reasonably
determine from time to time. The terms of the management agreement were
approved by the independent members of the Company's Board of
Directors. The management agreement generally provides that Comcast
will supervise the management and operations of the Company's cable
systems and arrange for and supervise certain administrative functions.
As compensation for such services the management agreement provides for
Comcast to charge management fees of 4.5% of gross cable communications
revenues (as defined). During the nine and three months ended September
30, 1999, Comcast charged the Company management fees of $11.9 million
and $6.1 million, respectively.
8
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
On behalf of the Company, Comcast seeks and secures long-term
programming contracts that generally provide for payment based on
either a monthly fee per subscriber per channel or a percentage of
certain subscriber revenues. Amounts charged to the Company by Comcast
for programming (the "Programming Charges") are in an amount equal to
the sum of (i) the actual cost incurred by Comcast plus (ii) one-half
of the difference between the cost the Company would pay in an
arms-length transaction if the Company were a stand-alone multiple
cable communications systems operator with a subscriber base equal to
that of the Company's cable systems, and the actual cost incurred by
Comcast. The Programming Charges are included in operating expenses in
the Company's condensed consolidated statement of operations and
accumulated deficit. The Company purchases certain other services,
including insurance, from Comcast under cost-sharing arrangements on
terms that reflect Comcast's actual cost. The Company reimburses
Comcast for certain other costs (primarily salaries) under
cost-reimbursement arrangements. Under all of these arrangements, the
Company incurred total expenses of $74.4 million and $36.1 million,
respectively, including $72.9 million and $35.4 million, respectively
of Programming Charges, during the nine and three months ended
September 30, 1999.
The management agreement also provides that Comcast will not enter into
any agreements or transactions or obtain any services on behalf of the
Company or its cable systems with or from any affiliate of Comcast
other than those specifically provided for in the management agreement
without the prior written consent of the Company, except for agreements
or transactions on terms that are no less favorable to the Company than
those that might be obtained at the time from a person or entity that
is not an affiliate of Comcast in an arms-length transaction. Further,
the management agreement provides that without the prior written
consent of the Company, Comcast will not change the independent auditor
of the Company or change Comcast's independent auditor such that
Comcast and the Company have the same independent auditor.
The Company will have the right to terminate the management agreement
effective as of April 7, 2004 by written notice to Comcast no later
than January 7, 2004, and if no such notice is given, the management
agreement shall automatically terminate on April 7, 2009.
Due to affiliates in the Company's condensed consolidated balance sheet
primarily consists of amounts due to Comcast and its affiliates under
the cost-sharing arrangements described above and amounts payable to
Comcast and its affiliates as reimbursement for payments made, in the
ordinary course of business, by such affiliates on behalf of the
Company.
Other Related Party Transactions
In April 1999, the Company paid Glenn R. Jones, the former Chief
Executive Officer of the Company, and Jones International, Ltd. $25.0
million to relinquish their rights to place new programming channels on
the Company's cable communications systems. Such payments will be
amortized over the period of approximately 10 1/2 years, which is
consistent with the term under which such programming could have been
launched under the original agreement. In addition, the Company paid
Mr. Jones $8.0 million in April 1999 to terminate Mr. Jones' employment
contract with the Company (see Note 3).
E! Entertainment Television
E! Entertainment Television is an affiliate of Comcast that provides
cable television programming. During the nine and three months ended
September 30, 1999, the Company made payments to E! Entertainment
Television totaling $370,000 and $212,000, respectively, for
programming provided to cable systems owned by the Company.
QVC, Inc.
Comcast, on behalf of the Company, has an affiliation agreement with
QVC, Inc. ("QVC"), an electronic retailer and a majority-owned and
controlled subsidiary of Comcast, to carry its programming. In return
for carrying QVC programming, the Company receives an allocated
portion, based upon market share, of a percentage of net sales of
merchandise sold to QVC customers located in the Company's service
area. For the nine and three monthsended September 30, 1999, the
Company's subscriber service fees revenue includes approximately
$808,000 and $308,000, respectively, relating to QVC.
9
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONCLUDED
(Unaudited)
7. STATEMENT OF CASH FLOWS - SUPPLEMENTAL INFORMATION
The Company made cash payments for interest of $87.0 million, $68.7
million, $28.7 million and $27.1 million during the nine and three
months ended September 30, 1999 and 1998, respectively.
The Company's investment in @Home warrants (see Note 4) had no impact
on the Company's condensed consolidated statement of cash flows due to
its non-cash nature.
8. COMMITMENTS AND CONTINGENCIES
The Company is subject to legal proceedings and claims which arise in
the ordinary course of its business. In the opinion of management, the
amount of ultimate liability with respect to these actions will not
materially affect the financial position, results of operations or
liquidity of the Company.
There are currently lawsuits pending in federal courts that have been
filed against the Company relating to the sale of the Palmdale,
Albuquerque, Littlerock and Calvert County cable communications systems
by Company- managed partnerships to the Company or one of its
subsidiaries. The complaints generally allege that the Company acquired
those systems at a price that did not reflect their fair value and that
the proxy statements mailed to the limited partners of the partnerships
that owned these systems were false, misleading and failed to disclose
material facts about the cable communications system market place. The
Company intends to continue to vigorously defend these lawsuits.
In July 1999, the Company and certain of its subsidiaries and managed
partnerships were named defendants in a lawsuit that alleges that they
withheld information, including lists of the names and addresses of
limited partners, from the plaintiffs. The plaintiffs had planned to
conduct tender offers to purchase limited partnership interests from
the limited partners. The plaintiffs allege that they were injured by
not receiving the information and by not being able to conduct tender
offers for the limited partnership interests. The Company intends to
defend this lawsuit vigorously on its own behalf and on behalf of its
subsidiaries and managed partnerships.
In July 1999, the Court of Appeals of Maryland issued a decision in
United Cable Television of Baltimore, Ltd. Partnership v. Burch holding
that to the extent that a charge assessed customers who were delinquent
in payment of their cable bills exceeded the 6% maximum interest rate
prescribed by the Constitution of the State of Maryland, such charge
was not enforceable. The Court ordered the cable company to make
appropriate refunds to subscribers. While the Company was not a party
to that litigation and believes that it has meritorious defenses to
similar actions filed on behalf of Company subscribers in Maryland,
nevertheless a decision by a court in these actions based solely upon
the premise set forth in Burch could have an adverse effect on the
Company.
10
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
We have experienced significant growth in recent years both through
strategic acquisitions and growth in our existing business. We have historically
met our cash needs for operations through our cash flows from operating
activities. Cash requirements for acquisitions and capital expenditures have
been provided through our financing activities, as well as our existing cash and
cash equivalents.
We are engaged primarily in the cable communications business. Over the
last several years, we have taken significant steps to simplify our corporate
structure. This process has included the sale of cable communications systems
owned by certain managed partnerships to either us or to third parties, and the
divestiture of certain of our non-strategic assets. During this process, we have
also made significant progress in clustering our owned subscribers into two
primary groups of cable systems. Our Virginia/Maryland cluster is based
primarily on geography, while our suburban cluster is based on similar market
and operating characteristics rather than geography. These clusters represent
approximately 95% of our owned subscribers.
General Developments of Business
See Note 3 to our condensed consolidated financial statements included in
Item 1.
Liquidity and Capital Resources
See Note 3 to our condensed consolidated financial statements included in
Item 1.
Cash and Cash Equivalents
Cash and cash equivalents as of September 30, 1999 were $20.8 million (see
"Statement of Cash Flows").
Investments
See Note 4 to our condensed consolidated financial statements included in
Item 1.
We do not have any significant contractual funding commitments with
respect to any of our investments. However, to the extent we do not fund our
investees' capital calls, we expose ourselves to dilution of our ownership
interests. We continually evaluate our existing investments as well as new
investment opportunities.
Financing
See Note 5 to our condensed consolidated financial statements included in
Item 1.
As of September 30, 1999 and December 31, 1998, our long-term debt,
including current portion, was $1.646 billion and $1.463 billion, respectively,
of which 54.7% and 48.5%, respectively, was at variable rates.
We may from time to time, depending on certain factors including market
conditions, make optional repayments on our debt obligations.
We, in our capacity as the general partner of our managed partnerships,
have from time to time received general partner distributions upon the sale of
cable communications systems owned by such partnerships. In addition, we,
through a wholly owned subsidiary, have earned brokerage fees upon the sale of
the managed partnerships' cable communications systems to third parties. During
the nine and three months ended September 30, 1999 and 1998, we received
partnership distributions and earned brokerage fees, net of expenses, of $4.0
million, $23.0 million, zero and $18.3 million, respectively. Upon the
distributions from the sales of the remaining cable communications systems owned
by managed partnerships in July 1999, general partner distributions and
brokerage fees ceased to be a source of funds for us.
Year 2000 Readiness Disclosure
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Certain of our
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000 (the "Year 2000 Issue"). If this
situation occurs, the potential exists for computer system failure or
miscalculations by computer programs, which could cause disruption of
operations. We are in the process of evaluating and addressing the impact of the
Year 2000 Issue on our operations to ensure that our information technology and
business systems recognize calendar Year 2000. We are utilizing both internal
and external resources in implementing our Year 2000 program, which consists of
the following phases:
Assessment Phase. Structured evaluation, including a detailed inventory
outlining the impact that the Year 2000 Issue may have on current operations.
11
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
Detailed Planning Phase. Establishment of priorities, development of
specific action steps and allocation of resources to address the issues
identified in the Assessment Phase.
Conversion Phase. Implementation of the necessary system modifications as
outlined in the Detailed Planning Phase.
Testing Phase. Verification that the modifications implemented in the
Conversion Phase will be successful in resolving the Year 2000 Issue so that all
inventory items will function properly, both individually and on an integrated
basis.
Implementation Phase. Final roll-out of fully tested components into an
operational unit.
Based on an inventory conducted in 1997, we identified computer systems
that required modification or replacement so that they will properly utilize
dates beyond December 31, 1999. Many of our critical systems were new and were
already Year 2000 compliant as a result of the recent rebuild of many of our
cable communications systems. In addition, we have communicated with our
significant software suppliers and service bureaus to determine their plans for
remediating the Year 2000 Issue in their software which we use or rely upon.
As of October 31, 1999, we are in the final stages of our Year 2000
program. We believe that all key systems are Year 2000 compliant. Other systems
that required remediation are substantially complete. Further, contingency plans
have been created for our key systems and operations. Additional business
continuity preparations are being implemented to create post-Year 2000 response
teams with a centralized command center to further mitigate Year 2000 risk.
Through September 30, 1999, we have incurred approximately $2.5 million in
connection with our Year 2000 remediation program. We estimate that we will
incur between approximately $0.5 million to $1.0 million of additional expense
through December 1999 in connection with our Year 2000 remediation program. Our
estimate to complete the remediation plan includes the estimated time associated
with mitigating the Year 2000 Issue for third party software. However, there can
be no guarantee that the systems of other companies on which we rely will be
converted on a timely basis, or that a failure to convert by another company
would not have a material adverse effect on us.
Our management will continue to periodically report the progress of our
Year 2000 remediation program to the Audit Committee of our Board of Directors.
The costs of the project and the date on which we plan to complete the
Year 2000 modifications and replacements are based on our best estimates, which
were derived using assumptions of future events including the continued
availability of resources and the reliability of third party modification plans.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those plans. Specific factors that
may cause such material differences include, but are not limited to, the
availability and cost of personnel with appropriate necessary skills and the
ability to locate and correct all relevant computer code and similar
uncertainties.
We believe that with modifications to existing software and conversions to
new software, the Year 2000 Issue can be mitigated. However, if such
modifications and conversions are not made, or are not completed within an
adequate time frame, the Year 2000 Issue could have a material adverse impact on
our operations.
12
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
Statement of Cash Flows
Cash and cash equivalents increased $18.2 million as of September 30, 1999
from December 31, 1998. The increase in cash and cash equivalents resulted from
cash flows from operating, financing and investing activities
which are explained below.
Net cash provided by operating activities amounted to $20.9 million for
the nine months ended September 30, 1999, due principally to our operating
income before depreciation and amortization offset, in part, by the effects of
the $55.4 million of restructuring charges recognized in the second quarter of
1999 (see Note 3 to our condensed consolidated financial statements included in
Item 1).
Net cash provided by financing activities was $227.8 million for the nine
months ended September 30, 1999. During the nine months ended September 30,
1999, we borrowed $183.5 million under subsidiary credit facilities, primarily
for capital expenditures, to fund restructuring costs and to fund the
acquisition of the cable communications systems serving areas in and around
Littlerock, California (the "Littlerock System") and Calvert County, Maryland
(the "Calvert County System"). In addition, during the nine months ended
September 30, 1999, affiliates advanced $35.9 million to us for working capital
purposes.
Net cash used in investing activities was $230.5 million for the nine
months ended September 30, 1999. Net cash used in investing activities includes
the acquisition of the Littlerock System and the Calvert County System, net of
cash acquired, of $50.2 million, capital expenditures of $91.2 million and
additions to deferred charges of $89.5 million.
13
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
Results of Operations
Our summarized consolidated financial information for the nine and three
months ended September 30, 1999 and 1998 is as follows (dollars in millions,
"NM" denotes percentage is not meaningful):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Nine Months Ended
September 30, Increase / (Decrease)
1999 1998 $ %
Revenues .................................................. $ 401.3 $ 337.7 $ 63.6 18.8%
Operating, selling, general and administrative expenses ... 254.7 179.1 75.6 42.2
-------- --------
Operating income before depreciation and
amortization (1) ....................................... 146.6 158.6 (12.0) (7.6)
Restructuring charges ..................................... 55.4 55.4 NM
Depreciation and amortization ............................. 199.7 144.6 55.1 38.1
-------- --------
Operating (loss) income ................................... (108.5) 14.0 (122.5) NM
-------- --------
Interest expense .......................................... 86.6 68.9 17.7 25.7
Equity in net losses of affiliates ........................ 3.0 4.0 (1.0) (25.0)
Investment income ......................................... (0.7) (1.3) (0.6) 46.2
Other expense ............................................. 3.7 10.2 (6.5) (63.7)
-------- --------
Net loss .................................................. ($ 201.1) ($ 67.8) ($ 133.3) NM
======== ========
Three Months Ended
September 30, Increase / (Decrease)
1999 1998 $ %
Revenues .................................................. $ 136.1 $ 133.0 $ 3.1 2.3%
Operating, selling, general and administrative expenses ... 83.2 64.6 18.6 28.8
-------- --------
Operating income before depreciation and
amortization (1) ....................................... 52.9 68.4 (15.5) (22.7)
Depreciation and amortization ............................. 75.3 52.8 22.5 42.6
-------- --------
Operating (loss) income ................................... (22.4) 15.6 (38.0) NM
-------- --------
Interest expense .......................................... 31.4 24.8 6.6 26.6
Equity in net (income) losses of affiliates ............... (0.9) 1.1 (2.0) NM
Investment income ......................................... (1.0) (0.6) (0.4) 66.7
Other (income) expense .................................... (2.4) 4.7 (7.1) NM
-------- --------
Net loss .................................................. ($ 49.5) ($ 14.4) ($ 35.1) NM
======== ========
<FN>
- ------------
(1) Operating income before depreciation and amortization is commonly referred
to in the cable communications business as "operating cash flow."
Operating cash flow is a measure of a company's ability to generate cash
to service its obligations, including debt service obligations, and to
finance capital and other expenditures. In part due to the capital
intensive nature of the cable communications business and the resulting
significant level of non-cash depreciation and amortization expense,
operating cash flow is frequently used as one of the bases for comparing
businesses in the cable communications industry, although our measure of
operating cash flow may not be comparable to similarly titled measures of
other companies. Operating cash flow is the primary basis used by our
management to measure the operating performance of our business. Operating
cash flow does not purport to represent net income or net cash provided by
operating activities, as those terms are defined under generally accepted
accounting principles, and should not be considered as an alternative to
such measurements as an indicator of our performance.
</FN>
</TABLE>
Revenues
We derive our revenues from four sources: subscriber service fees from
owned cable communications systems, management fees from managed partnerships,
brokerage fees and distributions paid upon the sale of cable communications
systems owned by managed partnerships and revenues from a non-cable subsidiary.
We received management fees generally equal to 5% of gross operating revenues of
our managed limited partnerships. Upon the completion of the sale of the
remaining cable communications systems owned by
14
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
managed partnerships in July 1999, management fees, general partner
distributions and brokerage fees ceased to be a source of revenue for us.
Of the respective $63.6 million and $3.1 million increases in revenues for
the nine and three month periods from 1998 to 1999, $94.0 million and $24.1
million are attributable to increases in subscriber service fees, offset by $9.1
million and $2.5 million decreases in management fees, $19.1 million and $18.3
million decreases in distributions and brokerage fees and $2.2 million and $0.2
million decreases in non-cable revenue. Of the $94.0 million and $24.1 million
increases in subscriber service fees, $66.3 million and $14.6 million are
attributable to the effects of the acquisitions of cable communications systems,
$6.9 million and $3.3 million are attributable to subscriber growth, $10.1
million and $4.0 million relate to changes in rates, $2.2 million and $0.8
million are attributable to growth in cable advertising sales and $8.5 million
and $1.4 million relate to other product offerings.
Operating, Selling, General & Administrative Expenses
Operating, selling, general and administrative expenses consist primarily
of costs associated with the operation and administration of owned cable
communications systems, the administration of managed partnerships and the
operation and administration of our non-cable subsidiary. We are reimbursed by
our managed partnerships for costs associated with the administration of the
partnerships.
Of the respective $75.6 million and $18.6 million increases in operating,
selling, general and administrative expenses for the nine and three month
periods from 1998 to 1999, $42.3 million and $11.5 million are attributable to
the effects of the acquisitions of cable communications systems, $12.7 million
and $5.9 million are attributable to increases in the costs of cable programming
as a result of changes in rates, subscriber growth and additional channel
offerings and $6.7 million and $1.2 million result from increases in the cost of
labor, the effects of an adjustment to the cost component factor used to
capitalize indirect costs relating to network construction activity, other
volume related expenses and costs associated with new product offerings. In
addition, $13.9 million of the increase in operating, selling, general and
administrative expenses for the nine month periods from 1998 to 1999 is
attributable to one-time adjustments related to recent court rulings on late
fees (see Note 8 to our condensed consolidated financial statements included in
Item 1), sales and use tax audits and other adjustments recorded in the second
quarter of 1999. It is anticipated that the cost of cable programming will
increase in the future as cable programming rates increase and additional
sources of cable programming become available.
Management Agreement
See Note 6 to our condensed consolidated financial statements included in
Item 1.
Restructuring Charges
See Note 3 to our condensed consolidated financial statement included in
Item 1.
Depreciation and Amortization Expense
The respective $55.1 million and $22.5 million increases in depreciation
and amortization expense for the nine and three month periods from 1998 to 1999
are primarily a result of the effects of our acquisitions of cable
communications systems and of our capital expenditures.
Interest Expense
The respective $17.7 million and $6.6 million increases in interest
expense are due to higher outstanding balances on our long-term debt and to
increases in the effective weighted average interest rate on our long-term debt.
Borrowings were used to fund the acquisitions of cable communications systems,
fund restructuring costs and to fund capital expenditures.
For the nine and three months ended September 30, 1999 and 1998, our
losses before income taxes, equity in net losses (income) of affiliates and
fixed charges (interest expense) were $111.5 million, $5.1 million, $19.0
million and $11.4 million, respectively. Such losses were not adequate to cover
our fixed charges of $86.6 million, $68.9 million, $31.4 million and $24.8
million for the nine and three months ended September 30, 1999 and 1998,
respectively. The inadequacy of these losses to cover fixed charges is primarily
due to the $55.4 million of restructuring charges incurred during the nine
months ended September 30, 1999 and to the substantial non-cash charges for
depreciation and amortization expense in all periods.
We believe that our losses will not significantly affect the performance
of our normal business activities because of our existing cash and cash
equivalents, our ability to generate operating income before depreciation and
amortization and our ability to obtain external financing.
We believe that our operations are not materially affected by inflation.
15
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims that arise
in the ordinary course of its cable communications business. In
the opinion of management, the amount of ultimate liability with
respect to these legal proceedings and claims will not materially
affect the Company's financial position, results of operations or
liquidity.
In addition, the Company is a named defendant in the following
legal proceedings relating to acquisitions by the Company or one
of its subsidiaries of cable communications systems from several
of the Company's managed partnerships or actions taken by the
Company or one of its subsidiaries in their roles as general
partners of the Company's managed partnerships:
Litigation Challenging the Company's Acquisition of the Tampa
System
Since September 1995, the Company has been a defendant in a
consolidated civil action filed by limited partners of Cable TV
Fund 12-D, Ltd., one of the Company's managed limited
partnerships, captioned David Hirsch, Marty, Inc. Pension Plan
(by its trustee and beneficiary, Martin Ury) and Jonathan and
Eileen Fussner, derivatively on behalf of Cable TV Fund 12-B,
Ltd., Cable TV Fund 12-C, Ltd. and Cable TV Fund 12-D, Ltd.,
plaintiffs v. Jones Intercable, Inc., defendant, and Cable TV
Fund 12-BCD Venture, Cable TV Fund 12-B, Ltd., Cable TV Fund
12-C, Ltd. and Cable TV Fund 12-D, Ltd., nominal defendants
(District Court, Arapahoe County, State of Colorado, Case No.
95-CV-1800, Division 3). The consolidated complaint generally
alleged that the Company breached its fiduciary duty to the
plaintiffs and to the other limited partners of the three named
partnerships and to the Cable TV Fund 12-BCD Venture (the
"Venture") in connection with the Venture's sale of the Tampa,
Florida cable communications system (the "Tampa System") to a
subsidiary of the Company and the subsequent trade of the Tampa
System and other cable communications systems owned by the
Company in exchange for cable communications systems owned by an
unaffiliated cable system operator. The consolidated complaint
also set forth a claim for breach of contract and a claim for
breach of the implied covenant of good faith and fair dealing.
Among other things, the plaintiffs asserted that the subsidiary
of the Company that acquired the Tampa System paid an inadequate
price for it. The price paid for the Tampa System was determined
by the average of three separate, independent appraisals of the
Tampa System's fair market value as required by the terms of the
limited partnership agreements of the three named partnerships.
The plaintiffs also challenged the adequacy and independence of
the appraisals. The consolidated complaint sought compensatory
damages, an award of attorneys' fees, punitive damages and
certain equitable relief. On October 25, 1999, the district court
granted the Company's renewed motion to dismiss or for summary
judgment based upon the August 1998 report of independent
counsel, which had concluded that the plaintiffs' claims are not
meritorious. The plaintiffs have the right to appeal this
decision.
Litigation Challenging the Company's Acquisitions of the
Albuquerque, Palmdale, Littlerock and Calvert County Systems
In June 1999, the Company was named a defendant in a case
captioned City Partnership Co., derivatively on behalf of Cable
TV Fund 12-C, Ltd., Cable TV Fund 12-D, Ltd. and Cable TV Fund
12-BCD Venture, plaintiff v. Jones Intercable, Inc., defendant
and Cable TV Fund 12-C, Ltd., Cable TV Fund 12-D, Ltd. and Cable
TV Fund 12-BCD Venture, nominal defendants (U.S. District Court,
District of Colorado, Civil Action No. 99-WM-1151)("City
Partnership I") brought by City Partnership Co., a limited
partner of the named partnerships. The plaintiff's complaint
alleges that the Company breached its fiduciary duty to the
plaintiff and to the other limited partners of the partnerships
and to Cable TV Fund 12-BCD Venture (the "Venture") in connection
with the Venture's sale of the Palmdale, California cable
communications system (the "Palmdale System") to a subsidiary of
the Company in December 1998. The complaint alleges that the
Company acquired the Palmdale System at an unfairly low price
that did not accurately reflect the market value of the Palmdale
System. The plaintiff also alleges that the proxy solicitation
materials delivered to the
16
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
limited partners of the partnerships in connection with the votes
of the limited partners on the Venture's sale of the Palmdale
System contained inadequate and misleading information concerning
the state of the market for cable systems and the fairness of the
transaction, which the plaintiff claims caused the Company to
breach its fiduciary duty of candor to the limited partners and
which the plaintiff claims constituted acts and omissions in
violation of Section 14(a) of the Securities Exchange Act of
1934, as amended. The plaintiff also claims that the Company
breached the contractual provision of the partnerships' limited
partnership agreements requiring that the sale price be
determined by the average of three separate, independent
appraisals, challenging both the independence and the currency of
the appraisals. The complaint finally seeks declaratory
injunctive relief to prevent the Company from making use of the
partnerships' funds to finance the Company's defense of this
litigation. The Company has filed motions to dismiss certain of
the plaintiff's claims for relief. The Company believes that the
procedures followed by it in conducting the votes of the limited
partners of the partnerships on the sale of the Palmdale System,
including the fairness opinion in the proxy statements delivered
to the limited partners of the partnerships, were proper and that
the Venture's sale of the Palmdale System at a price determined
by averaging three separate, independent appraisals was in
accordance with the express provisions of the partnerships'
limited partnership agreements. The Company intends to defend
this lawsuit vigorously.
In June 1999, the Company was named a defendant in a case
captioned City Partnership Co., derivatively on behalf of Cable
TV Fund 14-B, Ltd., plaintiff v. Jones Intercable, Inc.,
defendant and Cable TV Fund 14- B, Ltd., nominal defendant (U.S.
District Court, District of Colorado, Civil Action No.
99-WM-1051)("City Partnership II") brought by City Partnership
Co., a limited partner of Cable TV Fund 14-B, Ltd. ("Fund 14-
B"). The plaintiff's complaint alleges that the Company breached
its fiduciary duty to the plaintiff and to the other limited
partners of Fund 14-B in connection with Fund 14-B's sale of the
Littlerock, California cable communications system (the
"Littlerock System") to a subsidiary of the Company in January
1999. The complaint alleges that the Company acquired the
Littlerock System at an unfairly low price that did not
accurately reflect the market value of the Littlerock System. The
plaintiff also alleges that the proxy solicitation materials
delivered to the limited partners of Fund 14-B in connection with
the vote of the limited partners on Fund 14-B's sale of the
Littlerock System contained inadequate and misleading information
concerning the state of the market for cable systems and the
fairness of the transaction, which the plaintiff claims caused
the Company to breach its fiduciary duty of candor to the limited
partners and which the plaintiff claims constituted acts and
omissions in violation of Section 14(a) of the Securities
Exchange Act of 1934, as amended. Plaintiff also claims that the
Company breached the contractual provision of Fund 14- B's
limited partnership agreement requiring that the sale price be
determined by the average of three separate, independent
appraisals, challenging both the independence and the currency of
the appraisals. The complaint finally seeks declaratory
injunctive relief to prevent the Company from making use of Fund
14-B's funds to finance the Company's defense of this litigation.
The Company has filed motions to dismiss certain of the
plaintiff's claims for relief. The Company believes that the
procedures followed by it in conducting the vote of the limited
partners of Fund 14-B on the sale of the Littlerock System,
including the fairness opinion in the proxy statement delivered
to the limited partners of Fund 14-B, were proper and that Fund
14-B's sale of the Littlerock System at a price determined by
averaging three separate, independent appraisals was in
accordance with the express provisions of Fund 14-B's limited
partnership agreement. The Company intends to defend this lawsuit
vigorously.
In August 1999, the Company was named a defendant in a case
captioned Gramercy Park Investments, LP, Cobble Hill Investments,
LP and Madison/AG Partnership Value Partners II, plaintiffs v.
Jones Intercable, Inc. and Glenn R. Jones, defendants, and Cable
TV Fund 12-B, Ltd., Cable TV Fund 12-C, Ltd., Cable TV Fund 12-D,
Ltd., Cable TV Fund 14-A, Ltd. and Cable TV Fund 14-B, Ltd.,
nominal defendants (U.S. District Court, District of Colorado,
Civil Action No. 99-B-1508)("Gramercy Park") brought as a class
and derivative action by limited partners of the named
partnerships. The plaintiffs' complaint alleges that the
defendants made false and misleading statements to the limited
partners of the named partnerships in connection with the
solicitation of proxies and the votes of the limited partners on
the sales of the Albuquerque, Palmdale, Littlerock and Calvert
County cable communications systems by the named partnerships to
the Company or one of its subsidiaries in violation of Sections
14 and 20 of the Securities Exchange Act of 1934, as amended. The
plaintiffs specifically allege that the proxy statements
delivered to
17
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
the limited partners in connection with the limited partners'
votes on these sales were false, misleading and failed to
disclose material facts necessary to make the statements made not
misleading. The plaintiffs' complaint also alleges that the
defendants breached their fiduciary duties to the plaintiffs and
to the other limited partners of the named partnerships and to
the named partnerships in connection with the various sales of
the Albuquerque, Palmdale, Littlerock and Calvert County cable
communications systems to subsidiaries of the Company. The
complaint alleges that the Company acquired these cable
communications systems at unfairly low prices that did not
accurately reflect the market values of the systems. The
plaintiffs seek on their own behalf and on behalf of all other
limited partners compensatory and nominal damages, the costs and
expenses of the litigation, including reasonable attorneys' and
experts' fees, and punitive and exemplary damages.
In August 1999, the Company was named a defendant in a case
captioned William Barzler, plaintiff v. Jones Intercable, Inc.
and Glenn R. Jones, defendants and Cable TV Fund 14-B, Ltd.,
nominal defendant (U.S. District Court, District of Colorado,
Civil Action No. 99-B-1604)("Barzler") brought as a class and
derivative action by a limited partner of the named partnership.
The substance of the plaintiff's complaint is similar to the
allegations raised in the Gramercy Park case except that it
relates only to the sale of the Littlerock cable communications
system by Cable TV Fund 14-B, Ltd.
In September 1999, the Company was named a defendant in a case
captioned Sheryle Trainer, plaintiff v. Jones Intercable, Inc.
and Glenn R. Jones, defendants, and Cable TV Fund 14-B, Ltd.,
nominal defendant (U.S. District Court, District of Colorado,
Civil Action No. 99-B-1751)("Trainer") brought as a class and
derivative action by a limited partner of the named partnership.
The substance of the plaintiff's complaint is similar to the
allegations raised in the Gramercy Park case except that it
relates only to the sale of the Littlerock cable communications
system by Cable TV Fund 14-B, Ltd.
In September 1999, the Company was named a defendant in a case
captioned Mary Schumacher, Charles McKenzie and Geraldine Lucas,
plaintiffs v. Jones Intercable, Inc. and Glenn R. Jones,
defendants and Cable TV Fund 12-B, Ltd., Cable TV Fund 12-C,
Ltd., Cable TV Fund 12-D, Ltd., Cable TV Fund 14-A, Ltd. and
Cable TV Fund 14-B, Ltd., nominal defendants (U.S. District
Court, District of Colorado, Civil Action No.
99-WM-1702)("Schumacher") brought as a class and derivative
action by three limited partners of the named partnerships. The
substance of the plaintiffs' complaint is similar to the
allegations raised in the Gramercy Park case.
In September 1999, the Company was named a defendant in a case
captioned Robert Margolin, Henry Wahlgren and Joan Wahlgren,
plaintiffs v. Jones Intercable, Inc. and Glenn R. Jones,
defendants and Cable TV Fund 12-B, Ltd., Cable TV Fund 12-C,
Ltd., Cable TV Fund 12-D, Ltd., Cable TV Fund 14-A, Ltd. and
Cable TV Fund 14-B, Ltd., nominal defendants (U.S. District
Court, District of Colorado, Civil Action No.
99-B-1778)("Margolin") brought as a class and derivative action
by three limited partners of the named partnerships. The
substance of the plaintiffs' complaint is similar to the
allegations raised in the Gramercy Park case.
The Company believes that the procedures followed by it in
conducting the votes of the limited partners of the various
partnerships on the sales of the Albuquerque, Palmdale,
Littlerock and Calvert County systems and the disclosures in the
proxy statements delivered to the limited partners in connection
with the limited partners' votes on these sales were proper and
complete, and the Company believes that the various sale
transactions were fair because they were at prices determined by
averaging three separate, independent appraisals of the various
cable communications systems sold in accordance with the express
provisions of the partnerships' limited partnership agreements.
The Company intends to defend the Gramercy Park, Barzler,
Trainer, Schumacher and Margolin lawsuits vigorously.
In September 1999, the Company filed a motion in the United
States District Court for the District of Colorado seeking an
order consolidating all seven of the cases challenging the
Company's acquisitions of the Albuquerque, Palmdale, Littlerock
and Calvert County systems because these seven cases (City
Partnership I, City Partnership II, Gramercy Park, Barzler,
Trainer, Schumacher and Margolin) involve
18
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
common questions of law and fact. A court-mandated settlement
conference relating to all seven of these cases occurred on
November 2, 1999 and another such meeting has been scheduled for
March 14, 2000.
Litigation Relating to Limited Partnership List Requests
In July 1999, the Company, each of its subsidiaries that serve as
general partners of managed partnerships and most of its managed
partnerships were named defendants in a case captioned Everest
Cable Investors, LLC, Everest Properties, LLC, Everest Properties
II, LLC and KM Investments, LLC, plaintiffs v. Jones Intercable,
Inc., et al., defendants (Superior Court, Los Angeles County,
State of California, Case No. BC 213632). Plaintiffs allege that
they had formed a coordinated plan amongst themselves to acquire
up to 4.9% of the limited partnership interests in each of the
partnerships named as defendants, and that plaintiffs were
frustrated in this purpose by the Company's refusal to provide
plaintiffs with lists of the names and addresses of the limited
partners of these partnerships. The complaint alleges that the
Company's actions constituted a breach of contract, a breach of
the implied covenant of good faith and fair dealing, a breach of
the Company's fiduciary duty and tortious interference with
prospective economic advantage. Plaintiffs allege that the
Company's failure to provide them with the partnership lists
prevented them from making their tender offers and that they have
been injured by such action in an amount to be proved at trial,
but not less than $17 million. In September 1999, the Company and
the defendant subsidiaries and managed partnerships filed
demurrers to the plaintiffs' complaint and a hearing on this
matter was held on October 22, 1999. Discovery in the case has
begun. The Company believes that it and the defendant
subsidiaries and managed partnerships have defenses to the
plaintiffs' claims for relief and challenges to the plaintiffs'
claims for damages. The Company intends to defend this lawsuit
vigorously both on its own behalf and on behalf of the defendant
subsidiaries and managed partnerships.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required to be filed by Item 601 of Regulation S-K:
15.1 Letter Regarding Unaudited Interim Financial Statements.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
We filed Current Report on Form 8-K under Item 5 on August
11, 1999 relating to Comcast Corporation's intention to
commence an offer to exchange 1.4 shares of its Class A
Special Common Stock for up to 79% of the combined number of
our Class A Common Stock and Common Stock outstanding.
19
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
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/ LAWRENCE S. SMITH
------------------------------------------
Lawrence S. Smith
Principal Accounting Officer
/S/ JOSEPH J. EUTENEUER
------------------------------------------
Joseph J. Euteneuer
Vice President (Authorized Officer)
Date: November 15, 1999
20
November 12, 1999
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 No. 333-40149 its Form 10-Q for the quarter ended September 30,
1999, which includes our report dated November 4, 1999 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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