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:
JUNE 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 June 30, 1999, there were 36,935,970 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 JUNE 30, 1999
TABLE OF CONTENTS
Page
Number
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements
Review Report of Independent Public Accountants...........2
Condensed Consolidated Balance Sheet
as of June 30, 1999 and December 31, 1998 (Unaudited).....3
Condensed Consolidated Statement of Operations
and Accumulated Deficit for the Six and Three Months
Ended June 30, 1999 and 1998 (Unaudited)..................4
Condensed Consolidated Statement of
Cash Flows for the Six Months Ended
June 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
-----------------------------------
This Quarterly Report on Form 10-Q is for the three months ended June 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 June
30, 1999, the related condensed consolidated statement of operations and
accumulated deficit for the six and three months ended June 30, 1999 and 1998
and the condensed consolidated statement of cash flows for the six months ended
June 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
August 9, 1999
2
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 1999
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands, except share data)
June 30, December 31,
1999 1998
---------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents....................................................... $53,152 $2,586
Accounts receivable, less allowance for doubtful
accounts of $3,241 and $2,822................................................. 29,378 32,452
Other current assets............................................................ 47,184 48,973
---------- ----------
Total current assets........................................................ 129,714 84,011
---------- ----------
INVESTMENTS........................................................................ 26,499 19,724
---------- ----------
PROPERTY AND EQUIPMENT............................................................. 861,330 818,871
Accumulated depreciation........................................................ (280,723) (244,631)
---------- ----------
Property and equipment, net..................................................... 580,607 574,240
---------- ----------
DEFERRED CHARGES AND OTHER......................................................... 1,584,074 1,500,083
Accumulated amortization........................................................ (522,662) (446,965)
---------- ----------
Deferred charges and other, net................................................. 1,061,412 1,053,118
---------- ----------
$1,798,232 $1,731,093
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses........................................... $84,417 $89,516
Accrued interest................................................................ 19,974 23,265
Current portion of long-term debt............................................... 1,980 2,237
Due to affiliates............................................................... 45,346
---------- ----------
Total current liabilities................................................... 151,717 115,018
---------- ----------
LONG-TERM DEBT, less current portion............................................... 1,623,577 1,460,470
---------- ----------
OTHER LIABILITIES.................................................................. 15,938
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Class A common stock, $.01 par value - authorized, 60,000,000 shares;
issued, 36,935,970 and 36,143,054............................................. 369 361
Common stock, $.01 par value - authorized, 5,550,000 shares; issued, 5,113,021.. 51 51
Additional capital.............................................................. 504,461 495,116
Accumulated deficit............................................................. (491,547) (339,923)
Accumulated other comprehensive loss............................................ (6,334)
---------- ----------
Total stockholders' equity.................................................. 7,000 155,605
---------- ----------
$1,798,232 $1,731,093
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 1999
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
(Unaudited)
<TABLE>
<CAPTION>
(Amounts in thousands, except per share data)
Six Months Ended Three Months Ended
June 30, June 30,
1999 1998 1999 1998
--------- --------- --------- --------
<S> <C> <C> <C> <C>
REVENUES
Cable Communications Revenues
Subscriber service fees................................... $258,649 $188,704 $131,070 $94,837
Management fees........................................... 957 7,634 77 3,685
Distributions and brokerage fees.......................... 3,966 4,745 773 1,038
Non-cable revenue........................................... 1,651 3,675 784 1,662
--------- --------- --------- --------
265,223 204,758 132,704 101,222
--------- --------- --------- --------
COSTS AND EXPENSES
Cable Communications Expenses
Operating................................................. 156,294 98,901 89,566 49,216
Selling, general and administrative....................... 13,909 11,421 6,356 5,933
Non-cable operating, selling, general and administrative.... 1,381 4,200 670 1,997
Restructuring charges....................................... 55,400 55,400
Depreciation and amortization............................... 124,404 91,840 65,779 47,085
--------- --------- --------- --------
351,388 206,362 217,771 104,231
--------- --------- --------- --------
OPERATING LOSS................................................. (86,165) (1,604) (85,067) (3,009)
OTHER (INCOME) EXPENSE
Interest expense............................................ 55,081 44,184 27,245 22,816
Equity in net losses of affiliates.......................... 3,958 2,892 2,477 1,599
Investment expense (income)................................. 291 (747) 594 (440)
Other expense............................................... 6,129 5,458 5,329 5,660
--------- --------- --------- --------
65,459 51,787 35,645 29,635
--------- --------- --------- --------
LOSS BEFORE INCOME TAXES....................................... (151,624) (53,391) (120,712) (32,644)
INCOME TAXES...................................................
--------- --------- --------- --------
NET LOSS....................................................... (151,624) (53,391) (120,712) (32,644)
ACCUMULATED DEFICIT
Beginning of period......................................... (339,923) (259,505) (370,835) (280,252)
--------- --------- --------- --------
End of period...............................................($491,547) ($312,896) ($491,547) ($312,896)
========= ========= ========= ========
BASIC LOSS FOR COMMON STOCKHOLDERS
PER COMMON SHARE............................................ ($3.64) ($1.31) ($2.88) ($.80)
========= ========= ========= ========
BASIC WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING.......................................... 41,634 40,730 41,968 40,768
========= ========= ========= ========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 1999
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands)
Six Months Ended June 30,
1999 1998
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss......................................................................... ($151,624) ($53,391)
Adjustments to reconcile net loss to net cash (used in) provided
by operating activities:
Depreciation and amortization.................................................. 124,404 91,840
Loss on sale of assets......................................................... 3,616
Noncash interest expense....................................................... 93
Equity in net losses of affiliates............................................. 3,958 2,892
--------- ---------
(23,169) 44,957
Changes in working capital and other liabilities............................... (4,444) (13,840)
--------- ---------
Net cash (used in) provided by operating activities...................... (27,613) 31,117
--------- ---------
FINANCING ACTIVITIES
Proceeds from borrowings......................................................... 162,779 477,213
Repayments of long-term debt..................................................... (212,000)
Proceeds from Class A Common Stock options exercised............................. 9,353 1,536
Net transactions with affiliates................................................. 45,346 450
--------- ---------
Net cash provided by financing activities................................ 217,478 267,199
--------- ---------
INVESTING ACTIVITIES
Acquisitions, net of cash acquired............................................... (10,720) (214,846)
Capital expenditures............................................................. (57,482) (54,049)
Additions to deferred charges.................................................... (70,863) (25,726)
Proceeds from the sale of assets................................................. 350
Other, net....................................................................... (234) (453)
--------- ---------
Net cash used in investing activities.................................... (139,299) (294,724)
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS............................................... 50,566 3,592
CASH AND CASH EQUIVALENTS, beginning of period...................................... 2,586 3,595
--------- ---------
CASH AND CASH EQUIVALENTS, end of period............................................ $53,152 $7,187
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 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 June 30, 1999, the
condensed consolidated statement of operations and accumulated deficit
for the six and three months ended June 30, 1999 and 1998 and the
condensed consolidated statement of cash flows for the six months ended
June 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 June 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 results of operations for the
periods ended June 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 six and three months ended June 30, 1999 and 1998, the Company's
potential common shares of 18,000 shares, 392,000 shares, 17,000 shares
and 461,000 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. Comcast acquired an additional 1.0
million shares of the Company's Class A Common Stock on June 29, 1999 for
$50.0 million in a private transaction. Upon completion of these
transactions, 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
6
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 1999
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
to elect approximately 75% of the Board of Directors of the Company. The
Company is now a consolidated public company subsidiary of Comcast Cable.
On August 9, 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 Securities and Exchange Commission 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 three
months ended June 30, 1999, the Company incurred expense relating to the
severance of approximately 350 corporate and field office employees
totaling $39.1 million, of which $31.6 million had been paid and $7.5
million was accrued at June 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 three
months ended June 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, $8.0
million had been paid and $8.3 million was accrued at June 30, 1999. Such
costs were included in restructuring charges in the Company's condensed
consolidated statement of operations and accumulated deficit.
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 $39.4 million in cash,
subject to customary closing adjustments, from Cable TV Fund 14-A, Ltd.,
a partnership managed by the Company. The acquisition was accounted for
under the purchase method of accounting. As such, the operating results
of the Calvert County System will be 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 JUNE 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 quarter 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 June 30, 1999, the Company had recorded
an unrealized loss of $6.3 million related to this investment.
5. LONG-TERM DEBT
Interest Rates
As of June 30, 1999 and December 31, 1998, the Company's effective
weighted average interest rate on its long-term debt outstanding was
7.14% and 6.76%, respectively.
Lines of Credit
As of June 30, 1999, certain subsidiaries of the Company had unused lines
of credit of $301.9 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 six and three months ended June 30, 1999, Comcast
charged the Company management fees of $5.8 million.
8
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 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 $38.3 million,
including $37.5 million of Programming Charges, during the six and three
months ended June 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 three months ended June 30,
1999, the Company made payments to E! Entertainment Television totaling
$158,000 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 three months
ended June 30, 1999, the Company's subscriber service fees revenue
includes approximately $500,000 relating to QVC.
9
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 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 $58.3 million, $41.6
million, $31.0 million and $17.7 million during the six and three months
ended June 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 three lawsuits pending that have been filed against
the Company relating to the sale of the Tampa, Palmdale and Littlerock
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. 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 the
Company and its subsidiaries, as the general partners of the managed
partnerships, withheld information, including lists of limited partners,
from the plaintiffs. The plaintiffs had planned to tender offers to
purchase limited partnership interests from the limited partners. The
plaintiffs allege that they were injured by not receiving the information
and not being able to tender 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 JUNE 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 June 30, 1999 were $53.2 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 June 30, 1999 and December 31, 1998, our long-term debt, including
current portion, was $1.626 billion and $1.463 billion, respectively, of which
53.7% 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. No such distributions
were received during the six and three months ended June 30, 1999. 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 six and three months ended June 30, 1999 and 1998, we earned
brokerage fees, net of expenses, of $4.0 million, $4.7 million, $0.8 million and
$1.0 million, respectively. Upon the sale 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:
11
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 1999
o Assessment Phase. Structured evaluation, including a detailed
inventory outlining the impact that the Year 2000 Issue may have on
current operations.
o Detailed Planning Phase. Establishment of priorities, development of
specific action steps and allocation of resources to address the
issues identified in the Assessment Phase.
o Conversion Phase. Implementation of the necessary system modifications
as outlined in the Detailed Planning Phase.
o 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.
o Implementation Phase. Final roll-out of fully tested components into
an operational unit.
Based on an inventory conducted in 1997, we have identified computer
systems that will require modification or replacement so that they will properly
utilize dates beyond December 31, 1999. Many of our critical systems are new and
are already Year 2000 compliant as a result of our recent rebuild of many of our
cable communications systems. In addition, we have initiated communications with
all of 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 June 30, 1999, we are in the Conversion Phase and the Testing Phase
of our Year 2000 remediation program with respect to certain of our key systems.
Through June 30, 1999, we have incurred approximately $2.0 million in connection
with our Year 2000 remediation program. We estimate that we will incur between
approximately $1.0 million to $1.5 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.
We plan to complete the Year 2000 mitigation in November 1999. Our management
has investigated and may consider potential contingency plans in the event that
our Year 2000 remediation program is not completed by that date.
The costs of the project and the date on which we plan to complete the Year
2000 modifications and replacements are based on management's 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 JUNE 30, 1999
Statement of Cash Flows
Cash and cash equivalents increased $50.6 million as of June 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 used in operating activities amounted to $27.6 million for the six
months ended June 30, 1999, due principally to the restructuring charges and the
decrease in our operating income before depreciation and amortization (see
"Results of Operations").
Net cash provided by financing activities was $217.5 million for the six
months ended June 30, 1999. During the six months ended June 30, 1999, we
borrowed $162.8 million under subsidiary credit facilities, primarily for
capital expenditures, to fund restructuring costs and to fund the acquisition of
the cable communications system serving areas in and around Littlerock,
California (the "Littlerock System"). In addition, during the six months ended
June 30, 1999, affiliates advanced $45.3 million to us for working capital
purposes.
Net cash used in investing activities was $139.3 million for the six months
ended June 30, 1999. Net cash used in investing activities includes the
acquisition of the Littlerock System, net of cash acquired, of $10.7 million,
capital expenditures of $57.5 million and additions to deferred charges of $70.9
million.
13
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 1999
Results of Operations
Our summarized consolidated financial information for the six and three
months ended June 30, 1999 and 1998 is as follows (dollars in millions, "NM"
denotes percentage is not meaningful):
<TABLE>
<CAPTION>
Six Months Ended
June 30, Increase
1999 1998 $ %
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues................................................... $265.2 $204.7 $60.5 29.5%
Operating, selling, general and administrative expenses.... 171.6 114.5 57.1 49.9
-------- --------
Operating income before depreciation and
amortization (1)........................................ 93.6 90.2 3.4 3.8
Restructuring charges...................................... 55.4 55.4 NM
Depreciation and amortization.............................. 124.4 91.8 32.6 35.5
-------- --------
Operating loss............................................. (86.2) (1.6) 84.6 NM
-------- --------
Interest expense........................................... 55.1 44.2 10.9 24.7
Equity in net losses of affiliates......................... 3.9 2.9 1.0 34.5
Investment expense (income)................................ 0.3 (0.7) 1.0 NM
Other expense.............................................. 6.1 5.4 0.7 13.0
-------- --------
Net loss................................................... ($151.6) ($53.4) $98.2 NM
======== ========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
June 30, Increase / (Decrease)
1999 1998 $ %
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues................................................... $132.7 $101.2 $31.5 31.1%
Operating, selling, general and administrative expenses.... 96.6 57.1 39.5 69.2
-------- --------
Operating income before depreciation and
amortization (1)........................................ 36.1 44.1 (8.0) (18.1)
Restructuring charges...................................... 55.4 55.4 NM
Depreciation and amortization.............................. 65.8 47.1 18.7 39.7
-------- --------
Operating loss............................................. (85.1) (3.0) 82.1 NM
-------- --------
Interest expense........................................... 27.2 22.8 4.4 19.3
Equity in net losses of affiliates......................... 2.5 1.6 0.9 56.3
Investment expense (income)................................ 0.6 (0.4) 1.0 NM
Other expense.............................................. 5.3 5.6 (0.3) (5.4)
-------- --------
Net loss................................................... ($120.7) ($32.6) $88.1 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 receive management fees generally equal to 5% of gross operating revenues of
our managed limited
14
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 1999
partnerships. Upon the completion of the sale of the remaining cable
communications systems owned by 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 $60.5 million and $31.5 million increases in revenues for
the six and three month periods from 1998 to 1999, $69.9 million and $36.3
million are attributable to increases in subscriber service fees, offset by $6.7
million and $3.6 million decreases in management fees, $2.0 million and $0.9
million decreases in non-cable revenue and $0.7 million and $0.3 million
decreases in distributions and brokerage fees. Of the $69.9 million and $36.3
million increases in subscriber service fees, $51.7 million and $28.7 million
are attributable to the effects of the acquisitions of cable communications
systems, $3.6 million and $2.1 million are attributable to subscriber growth,
$6.1 million and $2.7 million relate to changes in rates, $1.4 million and $0.2
million are attributable to growth in cable advertising sales and $7.1 million
and $2.6 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 $57.1 million and $39.5 million increases in operating,
selling, general and administrative expenses for the six and three month periods
from 1998 to 1999, $30.8 million and $17.9 million are attributable to the
effects of the acquisitions of cable communications systems, $13.9 million and
$13.9 million are 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, $6.8 million and $4.0 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 $5.6
million and $3.7 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. 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 $32.6 million and $18.7 million increases in depreciation
and amortization expense for the six 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 $10.9 million and $4.4 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 six and three months ended June 30, 1999 and 1998, our losses
before income taxes, equity in net losses of affiliates and fixed charges
(interest expense) were $92.6 million, $91.0 million, $6.3 million and $8.2
million, respectively. Such losses were not adequate to cover our fixed charges
of $55.1 million, $27.2 million, $44.2 million and $22.8 million for the six and
three months ended June 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 six and three months ended June 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 JUNE 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 business. In the opinion of management,
the amount of ultimate liability with respect to these actions 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 that have been recently
filed or in which there have been material developments:
Tampa Litigation
The Company is 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, styled 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 alleges 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 television system (the "Tampa
System") to a subsidiary of the Company and the subsequent trade of
the Tampa System and other cable systems owned by the Company in
exchange for cable television systems owned by an unaffiliated cable
system operator. The consolidated complaint also sets 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
have 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 have challenged the adequacy
and independence of the appraisals. The consolidated complaint seeks
damages in an unspecified amount and an award of attorneys' fees, and
the complaint also seeks punitive damages and certain equitable
relief.
In August 1997, the Company moved for summary judgment in its favor
on the ground that the plaintiffs did not make demand on the Company
for the relief they seek before commencing their lawsuits or show
that such a demand would have been futile. In January 1998, the
district court (i) held that the plaintiffs did not make demand
before commencing their lawsuits or show that such demand would have
been futile; (ii) stayed the consolidated case and vacated the
original trial date, (iii) ordered that the plaintiffs make a demand
on the Company and that the Company appoint an independent counsel to
review, consider and report on that demand, (iv) ordered that the
independent counsel be appointed at the March 1998 meeting of the
Company's Board of Directors; and (v) ordered that the independent
counsel be subject to the approval of the district court.
In March 1998, the Company's Board of Directors appointed an
independent counsel. The plaintiffs did not object to the Company's
choice of independent counsel and the district court approved the
Company's choice of independent counsel. During the period March
through May 1998, the independent counsel met several times with the
attorneys representing the plaintiffs and the Company and he also
reviewed a great quantity of written materials. The independent
counsel issued his report in August 1998, which concluded that the
plaintiffs' claims are not meritorious and are not supported by a
preponderance of the evidence. The independent counsel further
determined that the Company "did not breach a fiduciary duty" owed to
the plaintiffs or to the named partnerships or to the Venture, and
that the Company "did not commit any impropriety in connection with"
the Venture's sale of the Tampa System. The independent counsel
specifically found that the three appraisals of the Tampa System were
independent and objective and met the requirements of the limited
partnership agreements. The independent counsel further noted that
the
16
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 1999
Company had met its fiduciary duties of fairness and full disclosure
to the named partnerships and to the Venture.
In August 1998, the Company moved to dismiss or for summary judgment
in its favor based on the report of the independent counsel, a motion
that the plaintiffs opposed. In September 1998, the district court
denied the Company's motion to dismiss or for summary judgment based
on the report of independent counsel and the district court set a new
trial date for May 1999. The Company subsequently submitted a motion
for reconsideration of the district court's denial of the Company's
motion to dismiss or for summary judgment based on the report of
independent counsel, which the district court also denied.
The Company then filed an interlocutory appeal of the district
court's rulings to the Colorado Supreme Court. In February 1999, the
Colorado Supreme Court issued an order requiring the plaintiffs to
show cause why the Company's request for dismissal or for summary
judgment should not be granted and the Colorado Supreme Court stayed
all proceedings in the district court until the Company's
interlocutory appeal could be resolved. In June 1999, the Colorado
Supreme Court issued its rulings, concluding that the district court
did not err in its initial decision refusing to dismiss the
plaintiffs' complaint because of the plaintiffs' failure to make
demand. The Colorado Supreme Court went on to hold, however, that the
district court did err in disregarding the independent counsel's
decision that the litigation should not proceed without first
addressing whether the independent counsel lacked the authority or
the ability to make a disinterested and independent decision on
behalf of the Company. The Colorado Supreme Court remanded the case
to the district court and directed the district court to determine
whether the independent counsel had the authority, independence and
good faith to entitle his decision to deference. Based on this ruling
of the Colorado Supreme Court, in July 1999, the Company renewed its
motion to dismiss or for summary judgment based on the report of the
independent counsel, arguing that because the independent counsel was
independent, because he employed reasonable and good faith procedures
in his analysis of the transaction and because he was acting with
both the Company's and the district court's authority, the case
should not proceed and the district court should defer to the
independent counsel's business judgment that the plaintiffs' claims
are meritless.
Palmdale Litigation
In June 1999, the Company was named a defendant in a case styled 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) 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 television 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 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 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. 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.
In July 1999, the Company filed motions to dismiss the plaintiff's
claims for relief arising from the allegations of false and
misleading proxy statements under Section 14(a) of the Securities
Exchange Act of
17
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JONES INTERCABLE, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 1999
1934 and for breach of fiduciary duty on the grounds that Colorado
law does not permit these types of tort claims that are based on the
same essential averments that support the plaintiff's claim of breach
of contract or tort claims for purely economic loss caused by an
alleged breach of contract. The Company also asked the court to
dismiss the entire action on the grounds that the court lacks
jurisdiction over the subject matter. 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.
Littlerock Litigation
In June 1999, the Company was named a defendant in a case styled 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) 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 television 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
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. 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.
In July 1999, the Company filed motions to dismiss the plaintiff's
claims for relief arising from the allegations of a false and
misleading proxy statement under Section 14(a) of the Securities
Exchange Act of 1934 and for breach of fiduciary duty on the grounds
that Colorado law does not permit these types of tort claims that are
based on the same essential averments that support the plaintiff's
claim of breach of contract or tort claims for purely economic loss
caused by an alleged breach of contract. The Company also asked the
court to dismiss the entire action on the grounds that the court
lacks jurisdiction over the subject matter. 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.
Limited Partnership Tender Offer Litigation
In July 1999, the Company, each of its subsidiaries that serve as
general partners of managed public partnerships and each of its
managed public partnerships were named defendants in a case styled
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. C213638). Plaintiffs, all of
which are affiliated with each other, are in the business of, among
other things, investing in limited partnerships that own and operate
cable television systems. Plaintiffs allege that one of the
plaintiffs has been a limited partner or has obtained a valid
power-of-attorney from a
18
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 1999
limited partner in each of the Company's managed public partnerships
and that they had formed a coordinated plan amongst themselves to
acquire up to 4.9% of the limited partnership interests in each of
the Company's managed public partnerships during the latter half of
1996. Plaintiffs' complaint alleges that they 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 the Company's
managed public partnerships. The complaint alleges that the Company's
actions constituted a breach of contract, a breach of the Company's
implied covenant of good faith and fair dealing owed to the
plaintiffs as limited partners, a breach of the Company's fiduciary
duty owed to the plaintiffs as limited partners 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 the plaintiffs
claim that they have been injured by such action in an amount to be
proved at trial, but not less than $17 million. Given the fact that
this case was only recently filed and that the time for the Company's
response to the complaint has not yet expired, the Company has not
yet responded to this complaint. The Company believes, however, that
it and the defendant subsidiaries and managed public partnerships
have defenses to the plaintiffs' claims for relief, and the Company
intends to defend this lawsuit vigorously both on its own behalf and
on behalf of its subsidiaries and its managed public partnerships.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required to be filed by Item 601 of Regulation S-K:
10.1 Management Agreement dated as of April 7, 1999 between
Jones Intercable, Inc. and Comcast Corporation
(incorporated by reference to Exhibit 9 of Comcast
Corporation's Schedule 13D Amendment No. 4 filed on
August 10, 1999).
15.1 Letter Regarding Unaudited Interim Financial Statements.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
(i) We filed a Current Report on Form 8-K under Item 5 on
April 16, 1999 relating to our announcement that Comcast
Corporation had completed the acquisition of a
controlling interest in Jones Intercable, Inc. on April
7, 1999.
(ii) We filed a Current Report on Form 8-K under Item 5 on
May 27, 1999 relating to our announcement that we had
entered into an agreement with Adelphia Communications
to exchange certain cable systems.
19
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 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: August 16, 1999
20
August 16, 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 Nos. 333-40147, and 333-40149 its Form 10-Q for the quarter ended
June 30, 1999, which includes our report dated August 9, 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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