SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) of the
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): February 29, 2000
JONES INTERCABLE, INC.
--------------------------------------------------
(Exact name of registrant as specified in charter)
Colorado 1-9953 84-0613514
- ------------------------ ------------------------ -------------
(State of Incorporation) (Commission File Number) (IRS Employer
Identification No.)
c/o Comcast Corporation
1500 Market Street, Philadelphia, Pennsylvania 19102-2148
- ---------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (215) 665-1700
--------------
<PAGE>
ITEM 5. Other Events
The audited consolidated balance sheet of Jones Intercable, Inc. and
subsidiaries as of December 31, 1999 and 1998, and the related audited
consolidated statements of operations, stockholders' equity (deficiency) and
cash flows for each of the three years in the period ended December 31, 1999 are
included in this report under Item 7 and are listed in the index to the audited
financial statements.
ITEM 7. Financial Statements and Exhibits.
Exhibit No.
99.1 Report of Independent Public Accountants.
99.2 The audited consolidated balance sheet of Jones Intercable, Inc. and
subsidiaries as of December 31, 1999 and 1998, and the related audited
consolidated statements of operations, stockholders' equity
(deficiency) and cash flows for each of the three years in the period
ended December 31, 1999.
<PAGE>
SIGNATURE
---------
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.
Dated: February 29, 2000 JONES INTERCABLE, INC.
By: /s/ Joseph J. Euteneuer
-----------------------
Vice President
(Authorized Officer)
<PAGE>
EXHIBIT INDEX
99.1 Report of Independent Public Accountants.
99.2 The audited consolidated balance sheet of Jones Intercable, Inc. and
subsidiaries as of December 31, 1999 and 1998, and the related audited
consolidated statements of operations, stockholders' equity
(deficiency) and cash flows for each of the three years in the period
ended December 31, 1999.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
BOARD OF DIRECTORS AND STOCKHOLDERS
JONES INTERCABLE, INC.:
We have audited the accompanying consolidated balance sheets of JONES
INTERCABLE, INC. (a Colorado corporation) and subsidiaries as of December 31,
1999 and 1998, and the related consolidated statements of operations,
stockholders' equity (deficiency) and cash flows for each of the three years in
the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Jones Intercable, Inc. and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado
February 18, 2000
JONES INTERCABLE
INDEX TO AUDITED FINANCIAL STATEMENTS
Consolidated Balance Sheet as of December 31, 1999 and 1998 F-1
Consolidated Statement of Operations for each of the three
years ended December 31, 1999 F-2
Consolidated Statement of Cash Flows for each of the three
years ended December 31, 1999 F-3
Consolidated Statement of Stockholders' Equity (Deficiency)
for each of the three years ended December 31, 1999 F-4
Notes to Consolidated Financial Statements for each of the
three years ended December 31, 1999 F-5
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents....................................................... $23,027 $2,586
Accounts receivable, less allowance for doubtful
accounts of $5,265 and $4,039................................................. 40,137 32,452
Inventories, net................................................................ 15,524 20,239
Other current assets............................................................ 6,502 28,734
---------- ----------
Total current assets...................................................... 85,190 84,011
---------- ----------
INVESTMENTS........................................................................ 54,525 19,724
---------- ----------
PROPERTY AND EQUIPMENT............................................................. 946,623 818,871
Accumulated depreciation........................................................ (303,875) (244,631)
---------- ----------
Property and equipment, net..................................................... 642,748 574,240
---------- ----------
DEFERRED CHARGES
Franchise acquisition costs..................................................... 979,757 932,358
Excess of cost over net assets acquired and other............................... 671,092 567,725
---------- ----------
1,650,849 1,500,083
Accumulated amortization........................................................ (597,060) (446,965)
---------- ----------
Deferred charges, net........................................................... 1,053,789 1,053,118
---------- ----------
$1,836,252 $1,731,093
========== ==========
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses........................................... $120,326 $89,516
Accrued interest................................................................ 25,892 23,265
Current portion of long-term debt............................................... 2,460 2,237
Due to affiliates............................................................... 67,375
---------- ----------
Total current liabilities................................................. 216,053 115,018
---------- ----------
LONG-TERM DEBT, less current portion............................................... 1,672,716 1,460,470
---------- ----------
OTHER LIABILITIES.................................................................. 29,837
---------- ----------
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............................................................. (588,227) (339,923)
Accumulated other comprehensive income.......................................... 981
---------- ----------
Total stockholders' (deficiency) equity................................... (82,354) 155,605
---------- ----------
$1,836,252 $1,731,093
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-1
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
----------- ---------- -----------
<S> <C> <C> <C>
REVENUES
Cable Communications Revenues
Subscriber service fees...................................... $533,180 $412,977 $345,154
Management fees.............................................. 957 12,284 17,253
Distributions and brokerage fees............................. 3,966 41,780 2,768
Non-cable revenue.............................................. 2,890 5,294 8,741
-------- -------- --------
540,993 472,335 373,916
-------- -------- --------
COSTS AND EXPENSES
Cable Communications Expenses
Operating.................................................... 211,800 128,503 111,104
Selling, general and administrative.......................... 129,422 109,685 94,833
Non-cable operating, selling, general and administrative....... 2,883 6,009 9,297
Restructuring charges.......................................... 55,400
Depreciation and amortization.................................. 264,996 206,202 175,839
-------- -------- --------
664,501 450,399 391,073
-------- -------- --------
OPERATING (LOSS) INCOME........................................... (123,508) 21,936 (17,157)
OTHER (INCOME) EXPENSE
Interest expense............................................... 119,012 94,291 86,764
Investment income.............................................. (2,064) (3,258) (50,847)
Equity in net losses (income) of affiliates.................... 3,883 (1,372) 3,804
Other expense (income)......................................... 3,965 12,693 (15,114)
-------- -------- --------
124,796 102,354 24,607
-------- -------- --------
LOSS BEFORE INCOME TAX BENEFIT AND
EXTRAORDINARY ITEM............................................. (248,304) (80,418) (41,764)
INCOME TAX BENEFIT................................................ 3,275
-------- -------- --------
LOSS BEFORE EXTRAORDINARY ITEM.................................... (248,304) (80,418) (38,489)
EXTRAORDINARY ITEM................................................ (13,459)
-------- -------- --------
NET LOSS.......................................................... ($248,304) ($80,418) ($51,948)
========= ======== ========
BASIC AND DILUTED LOSS FOR COMMON
STOCKHOLDERS PER COMMON SHARE
Loss before extraordinary item................................. ($5.93) ($1.96) ($1.11)
Extraordinary item............................................. (.39)
-------- -------- --------
Net loss....................................................... ($5.93) ($1.96) ($1.50)
========= ======== ========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING...................................... 41,854 40,933 34,610
========= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss....................................................... ($248,304) ($80,418) ($51,948)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation and amortization................................ 264,996 206,202 175,839
Equity in net losses (income) of affiliates.................. 3,883 (1,372) 3,804
Noncash interest expense..................................... 362 286 67
Amortization of deferred revenue............................. (6,319)
(Gain) loss on sale of assets................................ (994) 3,616 (70,232)
Extraordinary item........................................... 13,459
Deferred income tax benefit.................................. (3,275)
--------- -------- --------
13,624 128,314 67,714
Changes in working capital and other liabilities............. 46,878 (19,708) 11,347
--------- -------- --------
Net cash provided by operating activities............. 60,502 108,606 79,061
--------- -------- --------
FINANCING ACTIVITIES
Proceeds from borrowings....................................... 213,427 991,689 816,587
Retirement and repayment of debt............................... (1,462) (554,000) (613,300)
Proceeds from issuance of Class A Common Stock................. 91,602
Proceeds from Class A Common Stock options..................... 9,364 7,505 829
Net transactions with affiliates............................... 68,399 2,215 (3,787)
--------- -------- --------
Net cash provided by financing activities............. 289,728 447,409 291,931
--------- -------- --------
INVESTING ACTIVITIES
Acquisitions, net of cash acquired............................. (50,213) (387,646) (379,393)
Proceeds from sales of assets.................................. 6,187 350 142,991
Capital expenditures........................................... (175,185) (116,234) (95,585)
Additions to deferred charges.................................. (110,776) (57,865) (38,013)
Other, net..................................................... 198 4,371 932
--------- -------- --------
Net cash used in investing activities................. (329,789) (557,024) (369,068)
--------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................. 20,441 (1,009) 1,924
CASH AND CASH EQUIVALENTS, beginning of year...................... 2,586 3,595 1,671
--------- -------- --------
CASH AND CASH EQUIVALENTS, end of year............................ $23,027 $2,586 $3,595
========= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Amounts in thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Class A Common Stock Common Stock Paid-In Accumulated Comprehensive
Shares Amount Shares Amount Capital Deficit Income Total
--------- --------- ---------- ---------- ----------- ------------ -------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
JANUARY 1, 1997............. 26,264 $263 5,113 $51 $395,278 ($207,557) $47,272 $235,307
Proceeds from stock
options exercised........... 90 1 567 568
Proceeds from Class A
Common Stock offering....... 9,200 92 91,510 91,602
Class A Common Stock
option grants............... 261 261
Gains realized on
marketable securities....... (47,272)
Net loss....................... (51,948)
Total comprehensive loss....... (99,220)
-------- -------- --------- --------- ---------- ----------- ------------- ----------
BALANCE,
DECEMBER 31, 1997........... 35,554 356 5,113 51 487,616 (259,505) 228,518
Proceeds from stock
options exercised........... 589 5 7,283 7,288
Class A Common Stock
option grants............... 217 217
Net loss....................... (80,418)
Total comprehensive loss....... (80,418)
-------- -------- --------- --------- ---------- ----------- ------------- ----------
BALANCE,
DECEMBER 31, 1998........... 36,143 361 5,113 51 495,116 (339,923) 155,605
Proceeds from stock
options exercised........... 794 8 9,356 9,364
Unrealized gains on
marketable securities, net
of deferred taxes........... 981
Net loss....................... (248,304)
Total comprehensive loss....... (247,323)
-------- -------- --------- --------- ---------- ----------- ------------- ----------
BALANCE,
DECEMBER 31, 1999........... 36,937 $369 5,113 $51 $504,472 ($588,227) $981 ($82,354)
======== ======== ========= ========= ========== =========== ============= ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. BUSINESS
Jones Intercable, Inc. and its subsidiaries (the "Company") is principally
engaged in the development, management and operation of broadband cable
networks. The Company served approximately 1.1 million subscribers and
passed approximately 1.7 million homes as of December 31, 1999.
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 December 31, 1999, Comcast owned 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 approximately 75% of the board of directors of
the Company. The Company is now a consolidated public company subsidiary of
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 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 year
ended December 31, 1999, the Company incurred expense relating to the
severance of approximately 350 corporate and field office employees
totaling $39.1 million, of which $37.5 million had been paid and $1.6
million was accrued at December 31, 1999. Such costs were included in
restructuring charges in the Company's consolidated statement of
operations.
In addition to the severance expense described above, during the year ended
December 31, 1999, the Company incurred an additional $16.3 million of
restructuring costs related to the change in control including 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 December 31, 1999. Such costs were
included in restructuring charges in the Company's consolidated statement
of operations.
In December 1999, the Company entered into a definitive merger agreement
with Comcast whereby all of the Company's stockholders will receive 1.4
shares of Comcast's Class A Special Common Stock for each share of the
Company's Class A Common Stock and Common Stock. The transaction will
result in the Company being a 100% owned subsidiary of Comcast. A special
meeting of the stockholders of the Company is scheduled for March 2, 2000
to vote on the merger agreement. The Company expects that the merger, which
is subject to shareholder approval, will close in the first quarter of
2000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts of the Company
and all wholly owned subsidiaries. All significant intercompany accounts
and transactions among consolidated entities have been eliminated.
F-5
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (Continued)
Management's Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Fair Values
The estimated fair value amounts presented in these notes to consolidated
financial statements have been determined by the Company using available
market information and appropriate methodologies. However, considerable
judgment is required in interpreting market data to develop the estimates
of fair value. The estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value
amounts. Such fair value estimates are based on pertinent information
available to management as of December 31, 1999 and 1998, and have not been
comprehensively revalued for purposes of these consolidated financial
statements since such dates.
Cash Equivalents
Cash equivalents consist principally of US Government obligations,
commercial paper, repurchase agreements and certificates of deposit with
maturities of three months or less when purchased. The carrying amounts of
the Company's cash equivalents approximate their fair values.
Investments
Investments in entities in which the Company has the ability to exercise
significant influence over the operating and financial policies of the
investee are accounted for under the equity method. Equity method
investments are recorded at original cost and adjusted periodically to
recognize the Company's proportionate share of the investees' net income or
losses after the date of investment, additional contributions made and
dividends received. Unrestricted publicly traded investments are classified
as available for sale and recorded at their fair value, with unrealized
gains or losses resulting from changes in fair value between measurement
dates recorded as a component of other comprehensive income. Restricted
publicly traded investments and investments in privately held companies are
stated at cost, adjusted for any known diminution in value.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided by the
straight-line method over estimated useful lives as follows:
Buildings and improvements...................... 10-30 years
Operating facilities............................ 5-15 years
Other equipment................................. 3-5 years
Improvements that extend asset lives are capitalized; other repairs and
maintenance charges are expensed as incurred. The cost and related
accumulated depreciation applicable to assets sold or retired are removed
from the accounts and the gain or loss on disposition is recognized as a
component of depreciation expense.
Capitalized Costs
The costs associated with the construction of cable transmission and
distribution facilities and new cable service installations are
capitalized. Costs include all direct labor and materials as well as
certain indirect costs.
Deferred Charges
Franchise and license acquisition costs are amortized on a straight-line
basis over their legal or estimated useful lives of 1 to 14 years. The
excess of cost over the fair value of net assets acquired is being
amortized on a straight-line basis over an estimated useful life of 40
years.
Valuation of Long-Lived Assets
The Company periodically evaluates the recoverability of its long-lived
assets, including property and equipment and deferred charges, using
objective methodologies whenever events or changes in circumstances
indicate that the carrying amounts may not be recoverable. Such
methodologies include evaluations based on
F-6
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (Continued)
the cash flows generated by the underlying assets, profitability
information, including estimated future operating results, trends or other
determinants of fair value. If the total of the expected future
undiscounted cash flows is less than the carrying amount of the asset, a
loss is recognized for the difference between the fair value and the
carrying value of the asset. The Company incurred a charge of $14.2 million
in the fourth quarter of 1997 related to the write-off of a subscriber
billing and management system that was to have been implemented in
Company-owned cable systems. Such write-off was included in depreciation
and amortization expense.
Revenue Recognition
Subscriber service fees are recognized as service is provided. Credit risk
is managed by disconnecting services to cable customers who are delinquent.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations, as permitted by Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation".
Compensation expense for stock options is measured as the excess, if any,
of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock (see Note 6).
Investment Income
Investment income includes interest income and gains, net of losses, on the
sales of marketable securities and long-term investments. Gross realized
gains are recognized using the specific identification method (see Note 4).
Investment income also includes impairment losses resulting from
adjustments to the net realizable value of certain of the Company's
long-term investments.
Income Taxes
The Company recognizes deferred tax assets and liabilities for temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities and expected benefits of utilizing net
operating loss carryforwards. The impact on deferred taxes of changes in
tax rates and laws, if any, applied to the years during which temporary
differences are expected to be settled, are reflected in the consolidated
financial statements in the period of enactment.
Derivative Financial Instruments
The Company uses derivative financial instruments, including interest rate
exchange agreements ("Swaps"), to manage its exposure to fluctuations in
interest rates. Swaps are matched with either fixed or variable rate debt
and periodic cash payments are accrued on a settlement basis as an
adjustment to interest expense. Any premiums associated with these
instruments are amortized over their term and realized gains or losses as a
result of the termination of the instruments are deferred and amortized
over the remaining term of the underlying debt. Unrealized gains and losses
as a result of these instruments are recognized when the underlying hedged
item is extinguished or otherwise terminated.
Those instruments that have been entered into by the Company to hedge
exposure to interest rate risks are periodically examined by the Company to
ensure that the instruments are matched with underlying liabilities, reduce
the Company's risks relating to interest rates and, through market value
and sensitivity analysis, maintain a high correlation to the interest
expense of the hedged item. For those instruments that do not meet the
above criteria, variations in their fair value are marked-to-market on a
current basis in the Company's consolidated statement of operations.
The Company does not hold or issue any derivative financial instruments for
trading purposes and is not a party to leveraged instruments (see Note 5).
The credit risks associated with the Company's derivative financial
instruments are controlled through the evaluation and monitoring of the
creditworthiness of the counterparties. Although the Company may be exposed
to losses in the event of nonperformance by the counterparties, the Company
does not expect such losses, if any, to be significant.
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement establishes the accounting and reporting
F-7
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (Continued)
standards for derivatives and hedging activities. 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 on a basic and diluted basis.
For the years ended December 31, 1999, 1998 and 1997, the Company's
potential common shares of 16,000 shares, 400,000 shares and 71,000 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.
Distributions from Managed Partnerships
Distributions earned by the Company as general partner of its managed
partnerships from cable communications properties sold by such partnerships
to unaffiliated parties are recorded as revenue when received.
Distributions earned by the Company as general partner of its managed
partnerships from cable communications properties sold by such partnerships
to the Company are treated as a reduction of the basis in the assets
acquired. Distributions earned by the Company as general partner of its
managed partnerships from cable communications properties sold by such
partnerships to entities in which the Company has a continuing equity
interest are treated as a reduction in the basis of the investment in the
cable communications system.
Treasury Stock
Shares held in treasury have been retired and classified as authorized but
unissued shares in accordance with the Colorado Business Corporation Act.
Reclassifications
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to those classifications used in 1999.
F-8
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (Continued)
3. ACQUISITIONS, EXCHANGES AND SALES
Acquisitions of Cable Communications Systems
During the years ended December 31, 1999, 1998 and 1997, the Company
acquired cable communications systems as summarized below. All of the
acquisitions were acquired from affiliates of the Company (see Note 4) with
the exception of the Hinesville, Georgia and North Prince Georges County,
Maryland acquisitions. The acquisitions were accounted for under the
purchase method of accounting. As such, the operating results of the
acquired systems have been included in the Company's consolidated statement
of operations from the dates of acquisition. In general, the acquisitions
were funded with borrowings under the Company's existing credit facilities.
Month Purchase
Acquired Price
-------- --------
(in millions)
1999
Calvert County, Maryland.................... July $39.5
Littlerock, California...................... January 10.7
1998
Palmdale, California........................ December $138.2
Hinesville, Georgia......................... December 48.0
Socorro and Grants, New Mexico.............. December 10.1
Albuquerque, New Mexico..................... June 223.0
1997
Independence, Missouri...................... August $171.2
Manitowoc, Wisconsin........................ June 16.1
North Prince Georges County, Maryland....... January 231.4
Exchanges 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 cable
communications systems serving approximately 103,000 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 systems involved in the
systems exchanges will be valued based upon independent appraisals with any
difference in relative value to be funded with cash or additional cable
communications systems. The transaction is subject to customary closing
conditions and regulatory approvals and is expected to close in the third
quarter of 2000.
In April 1997, the Company, through a wholly owned subsidiary, acquired the
cable communications system serving areas in and around Annapolis, Maryland
and received cash of $2.5 million, from an unaffiliated party, in exchange
for the cable communications systems serving areas in and around Evergreen,
Idaho Springs and portions of Jefferson County, Colorado. This transaction
was accounted for as a non-monetary exchange of similar productive assets.
The Annapolis system was recorded at the historical cost of the assets
exchanged, net of cash received.
Sales of Cable Communications Systems
In October 1997, the Company sold the cable communications system serving
areas in and around Walnut Valley, California for $32.5 million to an
unaffiliated party and recognized a pre-tax gain of $20.8 million.
F-9
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (Continued)
Proceeds from the sale were used to reduce outstanding indebtedness under
the Company's credit facilities. Such gain is included in other income in
the Company's consolidated statement of operations.
4. INVESTMENTS
Knowledge TV, Inc.
In November 1999, the Company sold its 32% interest in Knowledge TV, Inc.
("Knowledge TV") to its former affiliate Jones International, Ltd.
("International") (see Note 7) for $6.2 million and recognized a pre-tax
gain of $1.0 million. Such gain is included in investment income in the
Company's consolidated statement of operations.
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 in 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 584,172 shares of @Home Series A Common Stock were
exercisable. No additional warrants became exercisable in 1999.
Accordingly, the Company recorded an investment in @Home warrants of $44.2
million and deferred revenue of an equal amount. During 1999, the Company
recognized $6.3 million as a reduction of operating expenses. Due to
restrictions on the stock underlying the warrants, the Company's investment
is not adjusted to fair value. As of December 31, 1999, the fair value of
the investment was $23.3 million.
Cable & Wireless Communications plc
In April 1997, the Company tendered all of its shares of Bell Cablemedia
plc to Cable & Wireless Communications plc ("CWC") in exchange for
approximately 25.0 million shares of CWC. During April and May 1997, the
Company sold all of its shares of CWC for $109.3 million and recognized a
pre-tax gain of $44.6 million. Such gain is included in investment income
in the Company's consolidated statement of operations. Proceeds from the
sale were used to reduce outstanding indebtedness under the Company's
credit facilities.
Managed Partnerships
The Company is general partner for 13 Colorado limited partnerships formed
to acquire, construct, develop and operate cable communications systems.
Partnership capital was raised principally through a series of public
offerings of limited partnership interests. The Company generally made a
capital contribution of $1,000 to each partnership and is allocated 1% of
all partnership profits and losses. The Company also purchased limited
partner interests in certain of the partnerships and generally participates
with respect to such interests on the same basis as other limited partners.
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
10). The managed partnerships that are involved in this litigation will not
be dissolved until such litigation is finally resolved and terminated.
As general partner, the Company manages the managed partnerships and
received a fee for its services generally equal to 5% of the gross revenues
of the managed partnerships, excluding proceeds from the sale of cable
communications systems or franchises. Upon the completion of the sale of
the remaining cable communications systems owned by managed partnerships,
in July 1999, management fees ceased to be a source of revenue.
For the managed partnerships formed by the Company, any partnership
distributions made from cash flow, as defined, are generally allocated 99%
to the limited partners and 1% to the general partner. The general partner
is
F-10
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (Continued)
also entitled to partnership distributions other than from cash flow, such
as from the sale or refinancing of cable communications systems or upon
dissolution of the partnership, generally equal to 25% of the net remaining
assets of the partnership after payment of the partnership's debts and
after investors have received an amount equal to their original capital
contributions plus, in many cases, a preferential return on their
investments. Upon the completion of the sale of the remaining cable
communications systems owned by managed partnerships in July 1999, such
distributions ceased to be a source of revenue.
The Company received distributions from managed partnerships totaling $64.7
million and $4.6 million for the years ended December 31, 1998 and 1997,
respectively. Distributions totaling $32.1 million received during 1998
were recorded as reductions in the Company's cost basis of cable systems
acquired from managed partnerships. The $4.6 million distribution received
during 1997 was recorded as a reduction in the Company's cost basis in the
assets of the Manitowoc, Wisconsin system.
The Company's managed limited partnerships reimburse the Company for
certain allocated overhead and administrative expenses. These expenses
generally consist of salaries and related benefits paid to corporate
personnel. The Company provides engineering, marketing, administrative,
accounting, information management, legal, investor relations and other
services to the partnerships. Amounts charged to managed partnerships and
other affiliated companies have directly offset the Company's general and
administrative expenses by $1.6 million, $15.2 million and $21.1 million
for the years ended December 31, 1999, 1998 and 1997, respectively.
The Company has made advances to certain of the managed partnerships
primarily to accommodate expansion and other financing needs of the
partnerships. Such advances bear interest at rates equal to the Company's
weighted average cost of borrowing which, for the year ended December 31,
1999 was 7.18%. Interest charged to the limited partnerships for the years
ended December 31, 1999, 1998 and 1997 was $615,000, $212,000 and $363,000,
respectively.
Certain condensed financial information regarding managed partnerships, on
a combined basis, is as follows:
<TABLE>
<CAPTION>
December 31,
1999 1998
------- --------
(Dollars in thousands)
<S> <C> <C>
Total assets........................................... $42,687 $250,211
Debt................................................... 172,126
Amounts due general partner............................ 12,616 5,568
Partners' capital (net of accumulated deficit)........ 21,082 72,426
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31,
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues................................................ $21,412 $244,357 $343,655
Depreciation and amortization........................... 7,037 70,532 106,130
Operating (loss) income................................. (2,873) 4,447 7,261
Net income.............................................. 245,063 666,897 190,227
</TABLE>
The amount reported as combined net income for all managed partnerships for
the years ended December 31, 1999, 1998 and 1997 included gains on sales
and liquidations recognized by certain partnerships which totaled $253.6
million, $689.5 million and $228.9 million, respectively.
F-11
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (Continued)
5. LONG-TERM DEBT
<TABLE>
<CAPTION>
December 31,
1999 1998
------------ ------------
(Dollars in thousands)
<S> <C> <C>
JCH Revolving Credit Facility..................................... $388,000 $340,000
JCH II Credit Facility ........................................... 534,000 370,000
Senior Notes due April 15, 2008, interest payable
semi-annually at 7 5/8%......................................... 196,787 196,533
Senior Notes due April 1, 2007, interest payable
semi-annually at 8 7/8% ........................................ 248,873 248,766
Senior Notes due March 15, 2002, interest payable
semi-annually at 9 5/8%......................................... 200,000 200,000
Senior Subordinated Debentures due March 1, 2008, interest
payable semi-annually at 10.5%, redeemable
at the Company's option on or
after March 1, 2000 at 105.25%
of par, declining to par by March 1, 2005....................... 100,000 100,000
Other debt due in installments through 2002....................... 7,516 7,408
---------- ----------
1,675,176 1,462,707
Less current portion.............................................. 2,460 2,237
---------- ----------
$1,672,716 $1,460,470
========== ==========
</TABLE>
Maturities of long-term debt outstanding as of December 31, 1999 for the
four years after 2000 are as follows (dollars in thousands):
2001...................................... $93,056
2002...................................... 404,000
2003...................................... 240,000
2004...................................... 240,000
Credit Facilities
The Company, through Jones Cable Holdings, Inc. ("JCH"), a wholly owned
subsidiary, has a $600.0 million reducing revolving credit facility with a
group of commercial banks (the "JCH Credit Facility"). As of December 31,
1999, the total amount available was $551.1 million. Interest on
outstanding obligations range from Base Rate (which generally approximates
the prime rate) or London Interbank Offered Rate ("LIBOR") plus 1/2% to
LIBOR plus 1% based on certain financial covenants. In addition, a
commitment fee of 3/16% to 3/8% on the unused commitment is also required.
The effective interest rate on amounts outstanding at December 31, 1999 was
6.83%.
The Company, through Jones Cable Holdings II, Inc. ("JCH II"), a wholly
owned subsidiary, has an additional $600.0 million credit facility with a
group of commercial banks. The credit facility consists of a $300.0 million
reducing revolving credit facility and a $300.0 million term loan
(together, the "JCH II Credit Facility"). The reducing revolving credit
facility allows for borrowing through the final maturity date of December
31, 2005. The maximum amount available reduces quarterly beginning March
31, 2000 through the final maturity date of December 31, 2005. The term
loan is payable in semi-annual installments commencing June 30, 2001 with a
final maturity date of December 31, 2005. The total amount available as of
December 31, 1999 was $599.5 million. Interest on amounts outstanding
varies from the Base Rate (which generally approximates the prime rate) to
Base Rate plus 1/4% or LIBOR plus 1/2% to 1 1/4%, depending on certain
financial covenants. A commitment fee of 1/8% to 3/8% per year on the
unused commitment is also required. The effective interest rate on amounts
outstanding at December 31, 1999 was 6.57%.
F-12
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (Continued)
Senior Notes
In April 1998, the Company sold $200.0 million principal amount of its 7
5/8% Senior Notes. Interest is payable on April 15 and October 15 of each
year. The notes mature on April 15, 2008 and are not redeemable prior to
maturity.
In March 1997, the Company sold $250.0 million principal amount of its 8
7/8% Senior Notes. Interest is payable on April 1 and October 1 of each
year. The notes mature on April 1, 2007 and are redeemable on or after
April 1, 2004 at the option of the Company.
Extraordinary Item
In July 1997, the Company redeemed its $160.0 million 11.5% Subordinated
Debentures due 2004 at 106.75% of par value, plus accrued interest. The
Company recognized an extraordinary loss, net of tax, of $13.5 million
related to this redemption.
Debt Covenants
The Company's subsidiaries' loan agreements contain restrictive covenants
which limit the subsidiaries' ability to enter into arrangements for the
acquisition of property and equipment, investments, mergers and the
incurrence of additional debt. These agreements require that certain ratios
and cash flow levels be maintained and contain certain restrictions on
dividend payments and advances of funds to the Company. The Company and its
subsidiaries were in compliance with such restrictive covenants for all
periods presented. In addition, the stock of certain subsidiary companies
is pledged as collateral for the notes payable to banks.
Interest Rate Risk Management
The Company has entered into various Swaps in order to manage interest
costs on its outstanding debt. The Company has entered into such Swaps in
order to fix the interest rate for the duration of the contract as a hedge
against volatility in interest rates. Any amounts paid or received due to
the Swaps are recorded as an adjustment to interest expense. As of December
31, 1999, the Company had entered into Swaps with notional principal
totaling $300.0 million that fixed the interest rate in a range of 5.3% to
6.5% and mature between July 2000 and January 2003. The estimated fair
value approximates the proceeds (costs) to settle the Swaps. While Swaps
represent an integral part of the Company's interest rate and risk
management program, their incremental effect on interest expense for the
years ended December 31, 1999, 1998 and 1997 was not significant.
Estimated Fair Value
The Company's long-term debt had estimated fair values of $1.691 billion
and $1.518 billion as of December 31, 1999 and 1998, respectively. The
estimated fair value of the Company's publicly traded debt is based on the
quoted market prices for that debt. Interest rates that are currently
available to the Company for issuance of debt with similar terms and
remaining maturities are used to estimate fair value for debt issues for
which quoted market prices are not available.
6. STOCKHOLDERS' EQUITY (DEFICIENCY)
In general, with respect to the election of directors, the holders of Class
A Common Stock, voting as a separate class, are entitled to elect that
number of directors which constitutes 25% of the total membership of the
board of directors. Holders of Common Stock, voting as a separate class,
are entitled to elect the remaining directors. In all other matters not
requiring a class vote, the holders of Common Stock and the holders of
Class A Common Stock vote as a single class provided that holders of Class
A Common Stock have one-tenth of a vote for each share held and the holders
of Common Stock have one vote for each share held.
The Class A Common Stock has certain preferential rights with respect to
cash dividends and upon liquidation of the Company. In the case of cash
dividends, the holders of the Class A Common Stock will be paid one-half
cent per share per quarter in addition to any amount payable per share for
each share of Common Stock. In the event of liquidation, holders of the
Class A Common Stock are entitled to a preference of $1 per share. After
such amount is paid, holders of the Common Stock are entitled to receive $1
per share for each share of Common Stock outstanding. Any remaining amount
would be distributed to the holders of the Class A Common Stock and the
Common Stock on a pro rata basis.
F-13
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (Continued)
The Company has a stock option plan, the 1992 Stock Option Plan (the "1992
Plan"). In accordance with SFAS 123, the fair value of each option grant
has been estimated as of the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions for
the year ended December 31, 1997: risk-free interest rate of 5.68%;
expected dividend yield of 0%; expected option lives of 7 years; and
expected volatility of 45%. There were no stock options granted during the
years ended December 31, 1999 and 1998. As discussed below, the vesting of
all options was accelerated to September 1998. Accordingly, the remaining
expense related to the options issued in 1997 and prior was included in the
pro forma net loss for 1998. Had compensation expense for this plan been
determined consistent with SFAS 123, the Company's net loss and net loss
per share would have changed to the following pro forma amounts:
<TABLE>
<CAPTION>
For the Year Ended December 31,
1999 1998 1997
--------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net loss: As Reported ($248,304) ($80,418) ($51,948)
Pro Forma ($248,304) ($83,908) ($53,820)
Basic and diluted loss
for common stockholders
per common share As Reported ($5.93) ($1.96) ($1.50)
Pro Forma ($5.93) ($2.05) ($1.57)
</TABLE>
The pro forma effect on net loss and net loss for common stockholders per
common share for the years ended December 31, 1999, 1998 and 1997 by
applying SFAS 123 may not be indicative of the pro forma effect on net loss
in future years since SFAS 123 does not take into consideration pro forma
compensation expense related to awards made prior to January 1, 1995.
The 1992 Plan was approved by the Company's shareholders in August 1992.
Under the terms of the 1992 Plan, as amended in 1997, a maximum of
2,583,455 shares of Class A Common Stock and 200,000 shares of Common Stock
are available for grant. All employees of the Company, its parent or any
participating subsidiary, including directors of the Company who are also
employees, are eligible to participate in the 1992 Plan. Options generally
become exercisable in equal installments over a four-year period commencing
on the first anniversary of the date of grant. In August 1998, the board of
directors, in conjunction with the anticipated change in control of the
Company to Comcast and consistent with the terms of the 1992 Plan, voted to
accelerate the vesting of all options granted under the 1992 Plan to
September 1998. The options expire, to the extent not exercised, on the
tenth anniversary of the date of grant, or upon the recipient's earlier
termination of employment with the Company. Options may be incentive stock
options or non-qualified stock options. The exercise price may not be less
than 100% of the fair market value for incentive stock options, but may be
less than fair market value for non-qualified options. Stock appreciation
rights may be granted in tandem with the grant of stock options. The board
of directors may, in its discretion, establish provisions for the exercise
of options different from those described above. In 1998 and 1997, the
Company recognized $217,000 and $261,000, respectively, of non-cash
compensation expense related to stock options granted in November 1993
under the 1992 Plan.
F-14
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (Continued)
Information concerning Class A Common Stock options is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------
1999 1998 1997
--------------------- ----------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- ---------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year........ 801,541 $11.99 1,449,848 $12.08 1,329,162 $12.19
Granted...................... 365,433 9.27
Exercised.................... (780,316) 12.00 (602,881) 12.30 (89,700) 6.34
Canceled..................... (45,426) 10.79 (155,047) 11.88
------- ------ --------- ------ --------- ------
Outstanding at end of year... 21,225 $11.39 801,541 $11.99 1,449,848 $12.08
======= ====== ========= ====== ========= ======
Exercisable at end of year... 21,225 801,541 820,290
Range of exercise prices..... $9.25-$13.81 $9.00-$13.81 $9.25-$13.81
Weighted-average fair
value of options granted
during the year.......... $5.26
</TABLE>
7. RELATED PARTY TRANSACTIONS
Management Agreement
Effective April 7, 1999, the Company and Comcast entered into a management
agreement pursuant to which Comcast manages 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 year ended December 31,
1999, Comcast charged the Company management fees of $18.1 million.
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 consolidated statement of operations.
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 $112.8 million,
including $110.1 million of Programming Charges, during the year ended
December 31, 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
F-15
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (Continued)
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 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.
E! Entertainment Television, Inc.
E! Entertainment Television, Inc. ("E! Entertainment") is an affiliate of
Comcast that provides cable television programming. During the year ended
December 31, 1999, the Company made payments to E! Entertainment totaling
$0.6 million 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 year ended December 31,
1999, the Company's subscriber service fees revenue includes $1.2 million
relating to QVC.
Transactions with International and BTH
The Company and the managed partnerships for which the Company is general
partner (see Note 4) had certain transactions with International and its
subsidiaries through April 7, 1999. Principal transactions were as follows:
In April 1999, the Company paid Glenn R. Jones, the former Chief Executive
Officer of the Company, and International $25.0 million to relinquish their
rights to place new programming channels on the Company's cable
communications systems. Such payment is being 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 1).
Jones Interactive, Inc., a wholly owned subsidiary of International,
provided information management and data processing services for operating
companies affiliated with International. Charges to the various operating
companies are based on usage of computer time by each entity. Amounts
charged to the Company and its managed partnerships for the period from
January 1, 1999 through April 7, 1999 and for the years ended December 31,
1998 and 1997 totaled $1.2 million, $6.1 million and $5.5 million,
respectively.
The Company was party to a lease with Jones Properties, Inc., a wholly
owned subsidiary of International, under which the Company had leased a
101,500 square foot office building in Englewood, Colorado. The lease
agreement was terminated in July 1999 (see Note 1). The Company subleased
approximately 44% of the building to International and certain affiliates
of International on the same terms and conditions as the above described
lease. Rent payments to Jones Properties, Inc., net of subleasing
reimbursements, for the period from January 1, 1999 to April 7, 1999 and
for the years ended December 31, 1998 and 1997 were $0.5 million, $1.4
million and $1.3 million, respectively.
F-16
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (Continued)
The Company entered into a Secondment Agreement with BCI Telecom Holding,
Inc. ("BTH") in December 1994. Pursuant to the Secondment Agreement, BTH
provided secondees who worked for the Company and its managed partnerships.
The Company reimbursed BTH for the full employment costs of such
individuals. The Company reimbursed BTH $0.2 million, $0.7 million and $1.2
million during the period from January 1, 1999 to April 7, 1999 and for the
years ended December 31, 1998 and 1997, respectively.
The Company paid approximately 84%, 63% and 47% of the above-described data
processing, rental and secondment expenses during the period from January
1, 1999 to April 7, 1999, and for the years ended December 31, 1998 and
1997, respectively. The remainder of the expenses were allocated to and
paid by the managed partnerships (see Note 4).
The Company received satellite programming from Knowledge TV (see Note 4).
Payments made to Knowledge TV for programming provided to the Company's
owned cable communications systems for the period from January 1, 1999
through April 7, 1999 and for the years ended December 31, 1998 and 1997
totaled approximately $0.2 million, $0.6 million and $0.4 million,
respectively.
The Company received satellite programming from Jones Computer Network,
Ltd., an affiliate of International, through April 1997. Payments made to
Jones Computer Network, Ltd. for programming provided to the Company's
owned cable communications systems for the year ended December 31, 1997
totaled approximately $0.2 million.
The Company received satellite programming from Great American Country,
Inc., an affiliate of International. Payments made to Great American
Country, Inc. for programming provided to the Company's owned cable
communications systems for the period from January 1, 1999 through April 7,
1999 and for the years ended December 31, 1998 and 1997 totaled
approximately $0.2 million, $0.5 million and $0.3 million, respectively.
The Company received satellite programming from Superaudio, an affiliate of
Galactic Radio. The Company sold Galactic Radio to an affiliate of
International in June 1996. Payments made to Galactic Radio for programming
provided to the Company's owned cable communications systems for the period
from January 1, 1999 through April 7, 1999 and for the years ended December
31, 1998 and 1997 totaled approximately $0.1 million, $0.3 million and $0.2
million, respectively.
The Product Information Network Venture ("PIN") is an affiliate of
International that provides a satellite programming service. PIN airs
product infomercials 24 hours a day, seven days a week. A portion of the
revenues generated by PIN are paid to the cable communications systems that
carry PIN's programming. Most of the Company's owned cable communications
systems carry PIN for all or part of each day. Aggregate payments received
by the Company from PIN relating to the Company's owned cable
communications systems totaled approximately $0.5 million, $1.0 million and
$0.7 million for the period from January 1, 1999 through April 7, 1999 and
for the years ended December 31, 1998 and 1997, respectively.
Effective upon the closing of BTH's investment in the Company in December
1994, the Company entered into a Supply and Services Agreement with BTH.
Pursuant to the Supply and Services Agreement, BTH provided the Company
with access to the expert advice of personnel from BTH and its affiliates
for the equivalent of three man-years on an annual basis. The Company paid
an annual fee of $2.0 million to BTH during the term of the agreement.
Payments to BTH under the Supply and Services Agreement during the period
from January 1, 1999 through April 7, 1999 and the years ended December 31,
1998 and 1997 totaled $0.5 million, $2.0 million and $2.0 million,
respectively.
Jones Financial Group. Ltd., a subsidiary of International, performed
services for the Company as its agent in connection with negotiations
regarding various financial arrangements of the Company. The Company paid
fees totaling $0.8 million in 1998 relating to the purchase of the
Hinesville, Georgia system. The Company paid fees totaling $3.5 million in
1997 related to the acquisition of the North Prince Georges County,
Maryland system, the acquisition of the Annapolis, Maryland system and the
sale of the Walnut Valley, California system.
F-17
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (Continued)
8. INCOME TAXES
Deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. Deferred tax expense
or benefit is the result of changes in the liability or asset recorded for
deferred tax purposes.
During 1999, 1998 and 1997, changes in the Company's temporary differences
and losses from operations, which result primarily from depreciation and
amortization, resulted in deferred tax benefits which were offset, in part,
by a valuation allowance. A deferred income tax benefit of $3.3 million was
recognized for the year ended December 31, 1997. No current or deferred
federal income tax expense or benefit was recorded from continuing
operations during the year ended December 31, 1999 and 1998.
The effective income tax expense of the Company differs from the statutory
amount because of the effect of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Federal tax benefit at statutory rate............................. ($86,906) ($28,146) ($13,471)
State and local taxes, net of federal income
tax benefit.................................................... (3,396) (2,614) (1,688)
Dividends excluded for income tax purposes........................ (138) (102)
Stock option exercises deductible for tax purposes................ (11,333)
Amortization not deductible for tax purposes...................... 512 942 876
Adjustment to book/tax difference of intangible assets............ 25,836
Other............................................................. 115 157 116
-------- -------- --------
Total income tax benefit from operations.......................... (101,008) (3,963) (14,269)
Tax effect of extraordinary operations............................ (4,711)
Valuation allowance............................................... 101,008 3,963 15,705
-------- -------- --------
Total income tax benefit.......................................... $ $ ($3,275)
======== ======== ========
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1999 and 1998 are presented below:
<TABLE>
<CAPTION>
December 31,
1999 1998
----------- ---------
(Dollars in thousands)
<S> <C> <C>
Deferred Tax Assets
Net operating loss carryforwards............................................. $183,160 $96,522
Investment tax credit carryforwards.......................................... 461 1,013
Alternative minimum tax credit carryforwards................................. 2,517 1,116
Investment in affiliates and partnerships.................................... 31,574 11,464
Future deductible amounts associated with other assets and liabilities....... 6,237 5,027
-------- -------
Total gross deferred tax assets................................................. 223,949 115,142
Valuation allowance on deferred tax assets...................................... (189,444) (88,436)
Deferred Tax Liabilities
Property and equipment, due to differences in depreciation
methods for financial statement and tax purposes........................... (27,368) (19,569)
-------- -------
Net deferred tax asset.......................................................... $7,137 $7,137
======== =======
</TABLE>
F-18
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (Continued)
At December 31, 1999, the Company has net operating loss carryforwards
("NOLs") for income tax purposes aggregating approximately $257.0 million
for alternative minimum tax and $478.9 million for regular tax which expire
$21.3 million in 2005, $25.5 million in 2007, $40.8 million in 2008, $30.2
million in 2009, $15.0 million in 2010, $12.6 million in 2011, $25.5
million in 2012, $1.1 million in 2013 and $306.9 million in 2014. The
Company also had investment tax credit carryforwards of $3.0 million.
Transactions by Company shareholders occurred during 1999, which resulted
in greater than a 50% change of the ownership interest of the Company
shares. Tax statutes limit the utilization of existing tax NOLs when this
occurs to a specified amount each year plus the amount of existing built-in
gain in corporate assets at the ownership change. Management believes that
the application of the limitation will not likely cause taxable income to
occur in a future period due to unavailability of limited NOLs.
Management has established a valuation allowance for all net operating
losses and for all investment tax credits and alternative minimum tax
credit carryforwards.
9. STATEMENT OF CASH FLOWS - SUPPLEMENTAL INFORMATION
The Company made cash payments for interest of $116.0 million, $90.0
million and $86.5 million during the years ended December 31, 1999, 1998
and 1997, respectively.
10. COMMITMENTS AND CONTINGENCIES
Minimum annual rental commitments for office space and equipment under
noncancelable operating leases as of December 31, 1999 are as follows
(dollars in thousands):
2000................................................. $4,147
2001................................................. 3,570
2002................................................. 2,537
2003................................................. 2,222
2004................................................. 2,002
Thereafter........................................... 4,292
Rent, net of sublease reimbursements, paid during the years ended December
31, 1999, 1998 and 1997, totaled $6.4 million, $5.6 million and $4.5
million, respectively.
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.
A consolidated case representing seven lawsuits filed by limited partners
of five of the Company's managed partnerships is pending in federal court
against the Company relating to the sales 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 marketplace. The Company has filed motions to
dismiss this case and discovery is stayed pending the Court's decision on
these motions. The Company intends to continue to vigorously defend this
case.
The Company and certain of its subsidiaries and managed partnerships are
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 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.
F-19
<PAGE>
JONES INTERCABLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (Concluded)
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.
11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
------------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
1999 (3)
Revenues................................. $132,519 $132,704 $136,085 $139,685 $540,993
Operating income before depreciation
and amortization (1)(2)................ 57,527 36,112 52,918 50,331 196,888
Operating loss........................... (1,098) (85,067) (22,346) (14,997) (123,508)
Loss before extraordinary item........... (30,912) (120,712) (49,486) (47,194) (248,304)
Basic and diluted loss for common
stockholders........................... ($.75) ($2.88) ($1.18) ($1.12) ($5.93)
1998 (3)
Revenues................................. $103,536 $101,222 $132,963 $134,614 $472,335
Operating income before depreciation
and amortization (1)................... 46,160 44,076 68,384 69,518 228,138
Operating income (loss).................. 1,405 (3,009) 15,616 7,924 21,936
Loss before extraordinary item........... (20,747) (32,644) (14,404) (12,623) (80,418)
Basic and diluted loss for common
stockholders........................... ($.51) ($.80) ($.35) ($.31) ($1.96)
<FN>
- ------------
(1) Operating income before depreciation and amortization is commonly referred
to in the Company's 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 our businesses 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 Company's industries, although the Company's 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 the Company's
management to measure the operating performance of our businesses. 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 the Company's performance.
(2) Excludes $55.4 million of restructuring charges recorded in the second
quarter (see Note 1).
(3) See Note 3 for a summary of acquisitions, exchanges and sales of cable
communications systems.
</FN>
</TABLE>
F-20
