10-Q 1 e10-q.txt FORM 10-Q 1 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, 2000 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 numbers 333-35183 and 333-35183-01 JAMES CABLE PARTNERS, L.P. JAMES CABLE FINANCE CORP. (Exact name of each Registrant as specified in its charter) Delaware 38-2778219 Michigan 38-3182724 (State or Other Jurisdiction of Incorporation or (I.R.S. Employer Identification No. of each Organization of each Registrant) Registrant)

38710 Woodward Avenue, Suite 180 48304 Bloomfield Hills, Michigan (Zip Code) (Address of principal executive offices) Registrants' telephone number, including area code: (248) 647-1080 Former address of principal executive offices: 710 N. Woodward Ave., Suite 180 Bloomfield Hills, MI 48304 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 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. [X] [ ] Yes No Number of shares of common stock of James Cable Finance Corp. outstanding as of August 10, 2000: 1,000. * James Cable Finance Corp. meets the conditions set forth in General Instruction H(1)(a) and (b) to the Form 10-Q and is therefore filing with the reduced disclosure format. 1 2 TABLE OF CONTENTS

2 3 PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements JAMES CABLE PARTNERS, L.P. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements. 3 4 JAMES CABLE PARTNERS, L.P. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS

See notes to consolidated financial statements. 4 5 JAMES CABLE PARTNERS, L.P. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF PARTNERS' DEFICIT

See notes to consolidated financial statements. 5 6 JAMES CABLE PARTNERS, L.P. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS

See notes to consolidated financial statements. 6 7 JAMES CABLE PARTNERS, L.P. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES GENERAL - James Cable Partners, L.P. (the "Partnership") was organized as a Delaware limited partnership in 1988. James Cable Finance Corp., a Michigan corporation ("Finance Corp."), was organized on June 19, 1997 and is a wholly-owned subsidiary of the Partnership. References to the "Company" herein are to the Partnership and Finance Corp. consolidated, or to the Partnership prior to the organization of Finance Corp., as appropriate. UNAUDITED INTERIM STATEMENTS - The accompanying interim financial statements and related notes are unaudited, and reflect all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations of the Company for the interim periods. The December 31, 1999 balance sheet data is derived from audited financial statements, but the notes do not include all disclosures required for audited statements by generally accepted accounting principles. These interim financial statements should be read in conjunction with the audited financial statements and related notes for the year ended December 31, 1999 included in the Company's 1999 Form 10-K filed with the Securities and Exchange Commission. The results for interim periods are not necessarily indicative of the results for a full year. IMPACT OF RECENTLY ADOPTED ACCOUNTING PRINCIPLES - In June 1998, Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The standard is effective for the first quarter of the Company's fiscal year beginning January 1, 2001. The Company does not anticipate that the adoption of SFAS No. 133 will have a material impact on its financial position or results of operations. (2) REGULATORY MATTERS The cable television industry is subject to extensive governmental regulation on the federal, state and local levels (but principally by the Federal Communications Commission ("FCC") and by local franchising authorities). Many aspects of such regulation have recently been extensively revised and are currently the subject of judicial proceedings and administrative rulemakings, which are potentially significant to the Company. In this regard, the Company believes that the regulation of cable television systems, including the rates charged for cable services, remains a matter of interest to Congress, the FCC and local regulatory officials. Critics of the cable television industry continue to seek to maintain or even tighten cable rate regulation in the absence of widespread effective competition. Accordingly, no assurance can be given as to what future actions such parties or the courts may take or the effect thereof on the Company. The Company, in addition to providing cable television services, also provides Internet access services, both dial-up and high-speed, to a portion of its subscriber base. While there is no significant federal regulation of cable system delivery of Internet services at the current time, and even though the FCC recently issued a report to Congress finding no immediate need to impose such regulation, this 7 8 could change in the future as cable systems expand their broadband delivery of Internet services. In particular, there have been proposals made to Congress and the FCC which would allow unaffiliated Internet service providers and online service providers access to a cable systems distribution network and the FCC has announced its intention to examine this issue. Thus, while no significant regulations exist at the current time, there can be no assurances as to what future actions will be taken or the effects of such actions on the Company. 8 9 JAMES CABLE FINANCE CORP. (A WHOLLY OWNED SUBSIDIARY OF JAMES CABLE PARTNERS, L.P., A DELAWARE LIMITED PARTNERSHIP) BALANCE SHEETS

See notes to balance sheets. 9 10 JAMES CABLE FINANCE CORP. (A wholly owned subsidiary of James Cable Partners, L.P., a Delaware Limited Partnership) NOTES TO THE BALANCE SHEETS (UNAUDITED) (1) ORGANIZATION James Cable Finance Corp. ("Finance Corp."), a Michigan corporation, is a wholly-owned subsidiary of James Cable Partners, L.P., a Delaware limited partnership (the "Partnership"), and was organized on June 19, 1997 for the sole purpose of acting as co-issuer with the Partnership of $100 million aggregate principal amount of the 10-3/4% Senior Notes. Finance Corp. has nominal assets and currently does not have (and it is not expected to have) any material operations. (2) STATEMENTS OF OPERATIONS, SHAREHOLDER'S EQUITY AND CASH FLOWS Since there were no operations in the Finance Corp. from the date of inception through June 30, 2000, a Statement of Operations, a Statement of Shareholder's Equity and a Statement of Cash Flows have not been presented. 10 11 PART I. FINANCIAL INFORMATION Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion of the financial condition and results of operations of the Company contains certain forward-looking statements relating to anticipated future financial conditions and operating results of the Company and its current business plans. In the future, the financial condition and operating results of the Company could differ materially from those discussed herein and its current business plans could be altered in response to market conditions and other factors beyond the Company's control. Important factors that could cause or contribute to such differences or changes include those discussed in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." OVERVIEW Revenues. The Company's revenues are primarily attributable to subscription fees charged to subscribers to the Company's basic and premium cable television programming services. Basic revenues consist of monthly subscription fees for all services (other than premium programming and Internet service) as well as monthly charges for customer equipment rental. Premium revenues consist of monthly subscription fees for programming provided on a per-channel basis. Internet revenues consist of monthly subscription fees for Internet access, modem installation fees and fees for leased lines. Other revenues are derived from installation and reconnection fees charged to subscribers to commence cable service, late payment fees, franchise fees, advertising revenues and commissions related to the sale of goods by home shopping services. At June 30, 2000, the Company had 69,905 basic subscribers and 22,014 premium subscriptions, representing basic penetration of 53.9% and premium penetration of 31.5% as compared to December 31, 1999 at which time the Company had 71,864 basic subscribers and 23,001 premium subscriptions which represented basic penetration of 55.5% and premium penetration of 32.0%. As of June 30, 2000 the Company was offering its high-speed Internet service to approximately 40% of its cable subscribers and currently has in excess of 1,950 high-speed Internet customers. In addition, the Company was offering its dial-up Internet services to approximately 50% of its cable subscribers and currently has in excess of 3,200 dial-up Internet customers. System Operating Expenses. System operating expenses are comprised of variable operating expenses and fixed selling, service and administrative expenses directly attributable to the Company's systems. Variable operating expenses consist of costs directly attributable to providing cable services to customers and therefore generally vary directly with revenues. Variable operating expenses include programming fees paid to suppliers of programming the Company includes in its basic and premium cable television services, as well as expenses related to copyright fees, franchise operating fees and bad debt expenses. Selling, service and administrative expenses directly attributable to the Company's systems include the salaries and wages of the field and office personnel, plant operating expenses, office and administrative expenses and sale costs. Non-System Operating Expenses. Non-system operating expenses consist primarily of general overhead expenses which are not directly attributable to any one of the Company's systems. These expenses include legal, audit and tax fees, an incentive bonus accrual for the general managers of the Company's systems and amounts paid to its general partner for management expenses. 11 12 LIQUIDITY AND CAPITAL RESOURCES General. Liquidity describes the ability to generate sufficient cash flows to meet the cash requirements of continuing operations and to pay obligations as they mature. Liquidity, in the context of the Company's operations, is typically determined by cash flows from operating activities (e.g. initial installation charges and monthly service fees paid by subscribers) and the cash flows used in investing activities (e.g. spending associated with capital projects). The Company continuously monitors its available cash and cash equivalents in relation to projected cash needs to maintain adequate balances for current payments. Cash Flows from Operating Activities. Net cash from operating activities was $1.4 million for the six months ended June 30, 2000 as compared to $1.3 million for the six months ended June 30, 1999. Cash Flows used in/from Investing Activities. Net cash used in investing activities was $4.9 million for the six months ended June 30, 2000 as compared to net cash from investing activities of $12.5 million for the six months ended June 30, 1999. This change in investing cash flow is primarily attributable to the $16.8 million of net proceeds received upon the sales of the Tennessee and Forsyth and Monroe County, Georgia cable systems, both of which occurred during the first quarter of 1999. Cash Flows from/used in Financing Activities. There were no cash flows from or used in financing activities for the six months ended June 30, 2000 while the cash flows used in financing activities for the six months ended June 30, 1999 amounted to $3.5 million of principal payments on debt. Balance Sheet. Cash decreased by $3.4 million from $5.3 million at December 31, 1999 to $1.9 million at June 30, 2000. The primary reason for this decrease was the $5.4 million interest payment made on February 15, 2000. Property & Equipment increased by $4.8 million during the first six months of 2000 primarily due to capital spending made as a part of the Company's ongoing selective system upgrade and rebuild program. The Notes. The Company has outstanding an aggregate principal amount of $100 million of its 10-3/4% Series B Senior Notes due 2004 (the "Notes"). The Notes are general senior unsecured obligations of the Company that mature on August 15, 2004 and rank equally in right of payment with all other existing and future unsubordinated indebtedness of the Company and senior in right of payment to any subordinated obligations of the Company. The Notes are subordinated in right of payment to all secured indebtedness of the Company. Interest on the Notes accrues at the rate of 10-3/4% per annum and is payable semi-annually in cash arrears on February 15 and August 15, which commenced on February 15, 1998, to holders of record on the immediately preceding February 1 and August 1. Interest on the Notes accrues from the most recent date to which interest has been paid. Interest is computed on the basis of a 360-day year comprised of twelve 30-day months. There is no public market for the Notes. The Company has not and does not intend to list the Notes on any securities exchange or to seek approval for quotation through any automated quotation system. The Credit Facility. The Company has a Credit Facility with two independent banks acting as the lenders. The Credit Facility is a $20 million revolving credit facility (with an option to increase the amount of credit available thereunder to $30 million) that matures on August 15, 2002. Proceeds under the Credit Facility will be available (i) to provide for working capital and general corporate purposes, (ii) to fund certain permitted acquisitions of cable television systems, (iii) to provide for certain permitted repurchases of up to $5 million in the aggregate of limited partnership interests in the Company, and (iv) to pay transaction fees 12 13 and expenses. The Credit Facility currently requires the Company to maintain the ratio of its total debt to annualized six-month EBITDA at no more than 7.5 to 1. As of June 30, 2000, this covenant limited the Company's maximum borrowings thereunder to approximately $4 million. The Credit Facility requires payments of accrued interest on a monthly basis throughout the term, with principal payment due at maturity. While there was no indebtedness outstanding under the Credit Facility at June 30, 2000, the Company did borrow $4 million on August 4, 2000. The Credit Facility is secured by a first priority lien on and security interest in substantially all of the assets of the Company. The Credit Facility contains certain covenants and provides for certain events of default customarily contained in facilities of a similar type. The financial covenants which the Company considers most significant require it to: (a) maintain an interest coverage ratio (that is, the ratio of annualized six-month EBITDA to interest expense) of at least 1.1 to 1; (b) maintain a senior debt ratio (that is, the ratio of debt under the Credit Facility to annualized six-month EBITDA) of no more than 1.75 to 1; and (c) maintain the total debt ratio described above. In addition, the second amendment to the Credit Facility, dated December 31, 1999, added certain restrictions to the amount of capital expenditures that the Company can make for the remainder of the Credit Facility term. The Company is currently in compliance with each of these covenants. At June 30, 2000, the Company's total indebtedness was $100.0 million, its total assets were $48.5 million and its partners' deficit was $61.1 million. On July 21, 2000 the Company's corporate credit rating and bank loan rating, as well as the rating on its Notes, were downgraded. According to the rating agency's press release, the downgraded ratings, which remain on credit watch with negative implications, are based on a "very tight liquidity situation, subscriber and EBITDA declines and a challenging competitive environment." The Company is more highly leveraged than many cable television companies and certain of its competitors. A substantial portion of its cash flow from operations must be committed to the payment of its interest expense and is not available for other purposes. Because of its high degree of leverage, the Company's flexibility in reacting to changes in its business and its cash flows, and its ability to obtain additional financing for working capital and general corporate purposes, are limited. Consequently, the Company's liquidity is highly dependent upon it ability to maintain its current subscriber base and EBITDA. Declines in the Company's current subscriber base and EBITDA will negatively impact the Company's liquidity. 13 14 RESULTS OF OPERATIONS The following table sets forth the percentage relationship that the various items bear to revenues for the periods indicated:

(1) EBITDA represents operating income before depreciation and amortization. The Company has included EBITDA data (which are not a measure of financial performance under Generally Accepted Accounting Principles ("GAAP")) because it understands such data are used by certain investors to determine a company's historical ability to service its indebtedness. EBITDA should not be considered as an alternative to net income as an indicator of the Company's performance or as an alternative to cash flow as a measure of liquidity as determined in accordance with GAAP. 14 15 THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999 Revenues. Revenues for the three months ended June 30, 2000 increased by $400,000, or 4.3%, to $9.5 million from $9.1 million for the three months ended June 30, 1999. This increase is primarily due an increase of $300,000 in the Company's Internet revenues for the same periods. The Company's basic revenues for the second quarter of 2000 remained consistent with the second quarter of 1999 as the loss in its basic subscriber base was offset by rate increases implemented since June 30, 1999. Average monthly total revenues per subscriber for the three months ended June 30, 2000 were $45.14, as compared to $41.41 for the same period last year. Subscribers. At June 30, 2000 the Company had 69,905 subscribers which represents a decrease of 2,991 from the 72,896 subscribers at June 30, 1999. Included in the 69,905 subscribers at June 30, 2000 were 829 subscribers that the Company purchased from a franchised cable service competitor in Lafayette, Alabama in November of 1999. Thus, without this purchase the Company's subscriber base fell by 3,820 from June 30, 1999 to June 30, 2000. The Company believes that this decrease is a result of the increased availability and affordability of competitive video services from satellite dishes and other alternatives to traditional hard-line cable services. The Company continues to respond to this competition with the introduction of advanced telecommunications services and aggressive marketing campaigns. In addition, the Company has recently restructured its service level offerings in some of its larger systems in order to become more competitive. System Operating Expenses. System operating expenses for the three months ended June 30, 2000 were $5.4 million, an increase of $400,000, or 8.4%, over the three months ended June 30, 1999. As a percentage of revenues, system operating expenses increased 2.1% from 54.8% in 1999 to 56.9% in 2000. Approximately 50% of this increase in system operating expenses is a result of variable cost increases associated with higher programming rates and new programming launched in conjunction with rate increases. The remaining increase is attributable to various fixed operating expenses. Non-System Operating Expenses. Non-system operating expenses decreased by $100,000, or 18.2%, from $600,000 for the three months ended June 30, 1999 to $500,000 for the three months ended June 30, 2000. The reason for this decrease was due to a $100,000 reduction in the management fees paid to the Company's general partner for the three months ended June 30, 2000. EBITDA. As a result of the foregoing, EBITDA increased from $3.5 million for the three months ended June 30, 1999 to $3.6 million for the three months ended June 30, 2000. Depreciation and Amortization. Depreciation and amortization increased by $400,000, or 23.1%, from the three months ended June 30, 1999 to the three months ended June 30, 2000. This increase is primarily due to the capital expenditures made as a part of the Company's ongoing selective upgrade program. Interest Expense, Net. Interest expense, net remained consistent at $2.8 million for the three months ended June 30, 1999 and 2000. Net Loss. As a result of the foregoing factors, the Company's net loss was $1.5 million for the three months ended June 30, 2000 as compared to $1.2 million for the three months ended June 30, 1999. 15 16 SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999 Revenues. Revenues for the six months ended June 30, 1999 and 2000 remained consistent at $18.9 million. Increases in the Company's Internet revenues of $500,000 from the six months ended June 30, 1999 to the six months ended June 30, 2000 were offset by a decrease in the Company's basic revenues for the same periods. As a result of rate increases implemented by the Company since June 30, 1999, average monthly total revenues per subscriber for the six months ended June 30, 2000 were $44.70, as compared to $40.78 for the same period last year. System Operating Expenses. System operating expenses for the six months ended June 30, 2000 were $10.8 million, an increase of $600,000, or 6.2%, over the six months ended June 30, 1999. As a percentage of revenues, system operating expenses increased 3.3% from 53.8% in 1999 to 57.1% in 2000. The primary reason for this increase are expenses associated with the launching of the Company's Internet services in many of its systems as well as variable cost increases associated with higher programming rates and new programming launched in conjunction with rate increases. Non-System Operating Expenses. Non-system operating expenses decreased from $1.4 million for the six months ended June 30, 1999 to $1.2 million for the six months ended June 30, 2000. This decrease was due to a reduction in legal fees as well as a $100,000 reduction in the second quarter management fees paid to the Company's general partner. EBITDA. As a result of the foregoing, EBITDA decreased from $7.3 million for the six months ended June 30, 1999 to $7.0 million for the six months ended June 30, 2000. Depreciation and Amortization. Depreciation and amortization increased from $3.7 million for the six months ended June 30, 1999 to $4.4 million for the six months ended June 30, 2000. This increase is primarily the result of the capital expenditures made as a part of the Company's ongoing selective upgrades. Interest Expense, Net. Interest expense, net decreased from $5.7 million for the six months ended June 30, 1999 to $5.5 million for the six months ended June 30, 2000. This decrease was a result of $200,000 of interest which the Company capitalized during the first six months of 2000. The Company did not capitalize any interest during the first six months of 1999. Loss before Gains on Sales of Cable Systems. As a result of the foregoing factors, the Company's loss before gains on sales of cable systems increased from $2.2 million for the six months ended June 30, 1999 to $2.9 million for the six months ended June 30, 2000. Net income / (loss). During the six months ended June 30, 1999, the Company realized $15.9 million in gains on the sales of its Tennessee and Forsyth and Monroe County, Georgia cable systems, which resulted in net income of $13.7 million as compared to a net loss of $2.9 million for the six months ended June 30, 2000. EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS In June 1998, Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either 16 17 assets or liabilities in the balance sheet and measure those instruments at fair value. The standard is effective for the first quarter of the Company's fiscal year beginning January 1, 2001. The Company does not anticipate that the adoption of SFAS No. 133 will have a material impact on its financial position or results of operations. YEAR 2000 COMPLIANCE The Year 2000 issue had the potential of impacting the Company in three different areas: (1) The technical aspects of the Company's business, (2) the Company's accounting and billing and (3) programming reception. However, the Company did not experience any significant malfunctions or errors in its operating or business systems when the date changed from 1999 to 2000. Moreover, based on its operations since January 1, 2000, the Company does not expect any significant impact on its continuing business as a result of the "Year 2000 issues." It is possible that the full impact of the Year 2000 change has not yet been recognized. For example, it is possible that a problem or problems may occur at some specific interval, such as year-end 2000, with either the Company's systems or those of its suppliers. However, the Company believes that any such problems, should they arise, will be minor and correctable. To date, the Company is not aware of any significant Year 2000 problems that have arisen for its suppliers. Item 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. No disclosures are required with respect to this item because the Company did not hold, either during the six months ended June 30, 2000 and 1999, or at June 30, 2000 and December 31, 1999, any market risk sensitive instruments. PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is a party to ordinary and routine litigation proceedings that are incidental to the Company's business. Management believes that the outcome of all pending legal proceedings will not, in the aggregate, have a material adverse effect on the financial condition or results of operations of the Company. Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of James' limited partners or Finance Corp.'s sole shareholder during the second quarter of 2000. Item 5. Other Events C. Timothy Trenary's employment with James Communications Partners, the Company's general partner, ended effective June 8, 2000. 17 18 Item 6. (a) Exhibits.

18 19 --------------------------- * Incorporated by reference to the corresponding exhibits to the Registrants' Registration Statement on Form S-4 (Registration No. 333-35183). ** Incorporated by reference to Exhibit 4.7 of the registrant's Form 10-Q as filed with the Securities and Exchange Commission for the quarterly period ended June 30, 1998. *** Incorporated by reference to Exhibits (3)(a)/(10)(c), (4)(g) and (4)(h), respectively, of the registrant's Form 10-K as filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1999. **** Filed herewith. (b) Reports on Form 8-K None. 19 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized. JAMES CABLE PARTNERS, L.P. By: James Communications Partners General Partner By: Jamesco, Inc. Partner Date: August 10, 2000 By: /s/ William R. James --------------------------------- William R. James President By: James Communications Partners General Partner By: DKS Holdings, Inc. Partner Date: August 10, 2000 By: /s/ Daniel K. Shoemaker --------------------------------- Daniel K. Shoemaker President (Principal financial officer and chief accounting officer) JAMES CABLE FINANCE CORP. Date: August 10, 2000 By: /s/ William R. James --------------------------------- William R. James President Date: August 10, 2000 By: /s/ Daniel K. Shoemaker --------------------------------- Daniel K. Shoemaker Treasurer (Principal financial officer and chief accounting officer) 20 21 Exhibit Index -------------

JAMES CABLE PARTNERS LP /DE/ 10-Q