10-Q 1 k64387e10-q.txt FORM 10-Q FOR PERIOD ENDING JUNE 30, 2001 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, 2001 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 (I.R.S. Employer Identification or Organization of each Registrant) No. of each 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 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, 2001: 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 PAGE NO. PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements of James Cable Partners, L.P. and Subsidiary 3 Notes to Consolidated Financial Statements 7 Balance Sheets of James Cable Finance Corp. 11 Notes to Balance Sheets 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk 19 PART II. OTHER INFORMATION Item 1. Legal Proceedings 20 Item 4. Submission of Matters to a Vote of Security Holders 20 Item 6. Exhibits and Reports on Form 8-K 21 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 became 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, 2000 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, 2000 included in the Company's 2000 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. IMPAIRMENT ACCOUNTING - The Company reviews the recoverability of its long-lived and intangible assets, when events or changes in circumstances occur that indicate that the carrying value of the assets may not be recoverable. The measurement of possible impairment is based on the Company's ability to recover the carrying value of the asset from the expected future undiscounted cash flows generated and requires management to use estimates of expected future cash flows. If an impairment loss existed, the amount of the loss would be recorded in the consolidated statements of operations. It is possible that future events or circumstances could cause these estimates to change. 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. In June 2000, the FASB issued SFAS No. 138, which amended certain provisions of SFAS No. 133. SFAS No. 133, as amended, 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 was effective beginning in the first quarter of the Company's 2001 fiscal year. The adoption of SFAS No. 133, as amended, has not had a material impact on the Company's financial position or results of operations. On July 20, 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires that goodwill and other intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually. Amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of this statement. SFAS No. 142 will be effective for fiscal years beginning after December 15, 2001. The Company will adopt SFAS No. 142 beginning in the first quarter of 2002 and is currently evaluating the impact that this 7 8 standard will have on its financial position and/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 ("LFA's")). 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, in September 2000 the FCC initiated an inquiry into whether to establish access obligations on operators offering high-speed Internet service. Thus, regulation of such services could be imposed in the future as cable systems expand their broadband delivery of Internet services. In addition, 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. Also, some states and LFA's are considering the imposition of mandatory Internet access requirements as part of cable franchise renewals or transfer approvals. To date, however, where such actions have been challenged in court, the LFAs attempts to impose access requirements have been deemed unlawful. 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. On August 18, 2000, the Company, through its membership in the Alabama Cable Telecommunications Association, joined other Alabama cable operators in a pole attachment Complaint against Alabama Power Company ("APC") which was filed with the FCC's Cable Service Bureau (the "Bureau"). The complaint was initiated as a result of APC's imposition of significant pole rental rate increases (more than 500% for the Company), APC's refusal to engage in good faith negotiations and the threat, by APC, to terminate existing pole attachment agreements. The Bureau granted the Alabama cable operators, including the Company, all relief requested in the Complaint. Specifically, the Bureau ruled that APC had failed to make a persuasive argument on the merits that lawful just compensation was greater than the current rate paid by the cable operators, including the Company, under existing pole attachment agreements. Thus, the Bureau declared APC's new pole attachment rental rates of $38.81 void and reinstated the $7.47 rate previously in effect, as well as other terms and conditions that APC had sought to terminate. The Bureau also placed the parties under a bargaining order requiring good faith negotiation of a new pole attachment agreement and a new rental rate utilizing the FCC's established formulas. As expected, on September 11, 2000, APC appealed the Bureau's decision to the FCC's five Commissioner panel (the "Panel"). On May 25, 2001 the Panel issued a final decision affirming the earlier order issued by the Bureau. In addition, on September 12, 2000 and May 25, 2001, APC appealed the decisions discussed 8 9 above to the U.S. Court of Appeals for the Eleventh Circuit, which consolidated the appeals and has agreed to hear the case. Both parties have submitted full briefs and the Court has scheduled oral arguments to begin the week of September 10, 2001. A final decision from the Court is not expected until 2002. It is also important to note that APC is not the only utility company to propose significant pole attachment rental rate increases. For instance, Georgia Power Company, which also provides pole attachments to the Company, has proposed an even greater increase than APC, as well as an onerous new pole agreement. Both the rates and the agreement are currently being challenged at the FCC. Depending on the final outcome of these proceedings, as well as others that may arise in the future involving other utility companies, the Company could experience a significant increase in its pole attachment rental costs and the results of its operations could be negatively impacted if enough of its pole attachment rental rates increased at this pace. 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 of the financial condition or results of operations of the Company. (3) DEBT During the period from December 31, 2000 to March 2, 2001, the Company was in default of a debt to EBITDA ratio covenant under its credit facility. During the period from February 15, 2001 to March 2, 2001, the Company was also in default of its obligation to pay interest on its 10-3/4% Series B Senior Notes due 2004. On March 2, 2001, the Company amended and restated its secured credit facility with four new lenders which will permit it to borrow up to $30 million (See Note 3 and Exhibit (4)(b) included in the Company's Form 10-K for the year ended December 31, 2000). Approximately $18 million of the available credit was then drawn down to pay accrued interest on the Company's Series B Senior Notes and to purchase $12 million (face amount) of those Notes from affiliates of the lenders. The remaining credit available may be used, among other things, to (i) provide for working capital and general partnership purposes, (ii) make acquisitions of cable television systems, (iii) pay future installments of interest on the Company's Series B Senior Notes, and (iv) to finance capital improvements. The credit facility matures on March 2, 2004 and is guaranteed by James Cable Finance Corp. Interest accrues on amounts borrowed under the credit facility at a fixed rate of 11.5%, and such accrued interest is payable quarterly. The debt is comprised of: 10-3/4% Senior B Senior Notes due 2004 $ 88,000,000 Credit facility 18,000,000 -------------- Total debt $ 106,000,000 ==============

9 10 As discussed above, the Company purchased $12 million (face amount) of its 10-3/4% Senior Notes from affiliates of its credit facility lenders. These Notes were purchased at a discounted price of .81 and, thus, the Company must recognize an extraordinary gain on the extinguishment of debt as follows: Face value of Notes purchased $12,000,000 Purchase price of Notes 9,720,000 Unamortized value of costs associated with Notes 354,688 ----------- Subtotal 10,074,688 ----------- Extraordinary gain on extinguishment of debt $ 1,925,312 ===========

10 11 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. 11 12 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, 2001, a Statement of Operations, a Statement of Shareholder's Equity and a Statement of Cash Flows have not been presented. 12 13 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, 2000 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, Internet services and digital services) 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 and modem installation fees. Digital services revenue includes monthly subscription fees for tiers of digital programming and fees charged for pay-per-view movies, concerts and sporting events. In addition, 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, 2001, the Company had 68,719 basic subscribers and 24,703 premium subscriptions, representing basic penetration of 53.0% and premium penetration of 35.9% as compared to December 31, 2000 at which time the Company had 69,875 basic subscribers and 22,713 premium subscriptions which represented basic penetration of 53.9% and premium penetration of 32.5%. As of June 30, 2001 the Company was offering its high-speed Internet service to approximately 55% of its cable subscribers and had more than 5,000 high-speed Internet customers. In addition, the Company was offering its dial-up Internet services to over 50% of its cable subscribers and had approximately 4,000 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, premium and digital 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 13 14 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. 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 available cash and cash equivalents in relation to projected cash needs in an effort to maintain adequate balances for current payments. Cash Flows from Operating Activities. Net cash from operating activities was $200,000 for the six months ended June 30, 2001 as compared to $1.4 million for the six months ended June 30, 2000. Cash Flows used in Investing Activities. Net cash used in investing activities was $5.1 million for the six months ended June 30, 2001 as compared to $4.9 million for the six months ended June 30, 2000. Cash Flows from/used in Financing Activities. Cash flows from financing activities for the six months ended June 30, 2001 were $4.7 million. The $4.7 million consists of $18 million of proceeds from debt borrowings on the Company's credit facility net of $2.5 million of principal payments made on the credit facility, $1.1 million of costs associated with amending and restating the credit facility and $9.7 million used to repurchase $12 million face value of the 10-3/4% Senior Notes. There were no cash flows from or used in financing activities for the six months ended June 30, 2000. Balance Sheet. Cash decreased by $200,000 from $1.1 million at December 31, 2000 to $900,000 at June 30, 2001 as the $5.4 million interest payment made on March 2, 2001 was offset by borrowings the Company made against its credit facility. Property & Equipment increased by $5.1 million during the first six months of 2001 primarily due to capital spending made as a part of the Company's Tennessee system rebuild as well as Internet and digital installations. Deferred financing costs increased by $300,000 during the first six months of 2001 as a result of the amendment and restatement of the Company's credit facility as discussed below. Total debt increased from $102.5 million at December 31, 2000 to $106.0 million at June 30, 2001. During the period from December 31, 2000 to March 2, 2001, the Company was in default of a debt to EBITDA ratio covenant under its credit facility. During the period from February 15, 2001 to March 2, 2001, the Company was also in default of its obligation to pay interest on its 10-3/4% Series B Senior Notes due 2004. As discussed below, on March 2, 2001, the Company amended and restated its secured credit facility with four new lenders which will permit it to borrow up to $30 million. Approximately $18 million of the available credit was then drawn down to pay accrued interest on the Company's Series B Senior Notes and to purchase $12 million (face amount) of those Notes from affiliates of the lenders. The remaining credit available may be used, among other things, to (i) provide for working capital and general partnership purposes, (ii) make acquisitions of cable television systems, (iii) pay future installments of interest on the Company's Series B Senior Notes, and (iv) to finance capital improvements. The Notes. The Company has outstanding an aggregate principal amount of $88 million of its 10-3/4% Series B Senior Notes due 2004 (the "Notes"). The Notes are general senior unsecured 14 15 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 $30 million Credit Facility with four independent lenders which matures on March 2, 2004. Approximately $18 million of the available credit has been drawn down to pay accrued interest on the Company's Series B Senior Notes and to purchase $12 million (face amount) of those Notes from affiliates of the lenders. The remaining credit available may be used, among other things, to (i) provide for working capital and general partnership purposes, (ii) make acquisitions of cable television systems, (iii) pay future installments of interest on the Company's Series B Senior Notes, and (iv) to finance capital improvements. The Credit Facility, which is secured by a first priority lien on and security interest in substantially all of the assets of the Company, requires quarterly payments of accrued interest with the principal payable at maturity. The Credit Facility contains certain covenants, and provides for certain events of default, customarily contained in facilities of a similar type. Among other things, the Credit Facility requires the Company to (i) maintain the ratio of its total debt to annualized six-month EBITDA of no more than 9.25 to 1 and (ii) maintain a senior debt ratio (that is, the ratio of debt under the Credit Facility to annualized six-month EBITDA) of no more than 2.30 to 1. In addition, the Credit Facility imposes limitations on the amount of capital expenditures that the Company can make for the remainder of the term. Generally, capital expenditures are limited to $12 million per annum plus any unused portion of the capital expenditure allowance from the previous year. The Company believes that it will continue to generate cash or obtain financing sufficient to meet its requirements for debt service, working capital and capital expenditures contemplated in the near term and through the maturity date of the Notes. However, the ability of the Company to satisfy its obligations will be primarily dependent on its future financial and operating performance and upon its ability to renew or refinance borrowings or to raise additional equity capital if necessary. While the Company believes that it will be able to service its debt, there can be no assurance that it will be able to renew or refinance borrowings, or raise additional equity capital, if its future operating results fall short of expectations. 15 16 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. In addition, the calculation of EBITDA for the Company may differ from EBITDA calculations of other companies. 16 17 THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000 Revenues. Revenues for the three months ended June 30, 2001 increased by $430,000, or 4.5%, to $9.9 million from $9.5 million for the three months ended June 30, 2000. This increase is the direct result of increases in the Company's Internet and digital services revenues from 2000 to 2001. Basic revenues remained constant at $7.5 million for the three months ended June 30, 2000 and 2001. Average monthly total revenues per subscriber for the three months ended June 30, 2001 were $47.98, as compared to $45.14 for the same period last year. These increases were primarily the result of rate increases which the Company has taken on its cable services and increases in the Internet and digital revenues discussed above. Subscribers. At June 30, 2001 the Company had 68,719 subscribers which represents a decrease of 1,186, or 1.7%, from the 69,905 subscribers at June 30, 2000. Included in this decrease was a loss of approximately 650 subscribers which was a direct result of recent overbuilds in the Company's Lafayette, Alabama and Alachua, Florida systems by other franchised cable service providers (See "Competition"). The Company believes the remaining reduction in its subscriber base 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. System Operating Expenses. System operating expenses for the three months ended June 30, 2001 were $6.2 million, an increase of $740,000, or 13.7%, over the three months ended June 30, 2000. As a percentage of revenues, system operating expenses increased 5.0% from 56.9% in 2000 to 61.9% in 2001. The primary reasons for this increase are expenses associated with the Company's marketing campaigns, expenses associated with the Company's launch of digital services in many of its systems, and cost increases associated with higher programming rates and new programming launched in conjunction with rate increases. Non-System Operating Expenses. Non-system operating expenses for the three months ended June 30, 2001 were $570,000, an increase of $40,000, or 7.7%, over the three months ended June 30, 2000. This was primarily the result of increases in the fees paid to the Company's general partner as partially offset by a reduction in legal fees for the same periods. EBITDA. As a result of the foregoing, EBITDA decreased from $3.6 million for the three months ended June 30, 2000 to $3.2 million for the three months ended June 30, 2001. Depreciation and Amortization. Depreciation and amortization increased by $200,000, or 7.3%, from the three months ended June 30, 2000 to the three months ended June 30, 2001 due primarily to the capital expenditures made as a part of the Company's Tennessee system rebuild as well as Internet and digital installations. Interest Expense, Net. Interest expense, net was $3.0 million for the three months ended June 30, 2001 which represents an increase of $300,000, or 9.3%, from the three months ended June 30, 2000. This increase was primarily the result of $500,000 of interest on the $18 million in borrowings the Company had outstanding against its credit facility during the three months ended June 30, 2001 while no borrowings were outstanding against its credit facility during the three months ended June 30, 2000. The increase was partially offset by a reduction in interest expense on the 10-3/4% Senior Notes due to the $12 million (face value) of the Notes held by the Company. 17 18 Net Loss. As a result of the foregoing factors, the Company's net loss was $2.2 million for the three months ended June 30, 2001 as compared to $1.4 million for the three months ended June 30, 2000. SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000 Revenues. Revenues for the six months ended June 30, 2001 increased $900,000, or 4.7%, to $19.8 million from $18.9 million for the six months ended June 30, 2000. This increase is the direct result of increases in the Company's Internet and digital services revenues from 2000 to 2001. Basic revenues remained constant at $15.1 million for the six months ended June 30, 2000 and 2001. As a result of rate increases implemented by the Company since January 1, 2000, as well as the increases in Internet and digital revenues discussed above, average monthly total revenues per subscriber for the six months ended June 30, 2001 were $47.64, as compared to $44.70 for the same period last year. System Operating Expenses. System operating expenses for the six months ended June 30, 2001 were $12.1 million, an increase of $1.3 million, or 12.1%, over the six months ended June 30, 2000. As a percentage of revenues, system operating expenses increased 4.0% from 57.1% in 2000 to 61.1% in 2001. The primary reasons for this increase are expenses associated with the Company's marketing campaigns, expenses associated with the Company's launch of digital services in many of its systems, and 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 $1.2 million for the six months ended June 30, 2000 to $1.1 million for the six months ended June 30, 2001. This decrease was primarily due to a reduction in legal fees. EBITDA. As a result of the foregoing, EBITDA decreased from $7.0 million for the six months ended June 30, 2000 to $6.6 million for the six months ended June 30, 2001. Depreciation and Amortization. Depreciation and amortization increased from $4.4 million for the six months ended June 30, 2000 to $4.7 million for the six months ended June 30, 2001 due primarily to the capital expenditures made as a part of the Company's Tennessee system rebuild as well as Internet and digital installations. Interest Expense, Net. Interest expense, net was $5.9 million for the six months ended June 30, 2001 which represents an increase of $500,000, or 8.4%, from the six months ended June 30, 2000. This increase was primarily the result of interest on borrowings the Company had outstanding against its credit facility during the six months ended June 30, 2001 while no borrowings were outstanding against its credit facility during the six months ended June 30, 2000. The increase was partially offset by a reduction in interest expense on the 10-3/4% Senior Notes due to the $12 million (face value) of the Notes held by the Company. Loss before Extraordinary Item. As a result of the foregoing factors, the Company's loss before extraordinary item increased from $2.9 million for the six months ended June 30, 2000 to $4.0 million for the six months ended June 30, 2001. Extraordinary Gain due to Debt Extinguishment. On March 2, 2001 the Company purchased $12 million (face amount) of its 10-3/4% Series B Senior Notes from affiliates of its credit facility lenders. These Notes were purchased at a discount price of .81 and, thus, the Company must recognize an extraordinary gain due to debt extinguishment in 2001 as follows: 18 19 Face value of Notes purchased $12,000,000 Purchase price of Notes 9,720,000 Unamortized value of costs associated with Notes 354,688 ----------- Subtotal 10,074,688 ----------- Extraordinary gain on extinguishment of debt $ 1,925,312 ===========

Net loss. As a result of the foregoing factors, the Company had a net loss of $2.1 million for the six months ended June 30, 2001 as compared to $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. In June 2000, the FASB issued SFAS No. 138, which amended certain provisions of SFAS No. 133. SFAS No. 133, as amended, 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 was effective beginning in the first quarter of the Company's 2001 fiscal year. The adoption of SFAS No. 133, as amended, has not had a material impact on the Company's financial position or results of operations. On July 20, 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires that goodwill and other intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually. Amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of this statement. SFAS No. 142 will be effective for fiscal years beginning after December 15, 2001. The Company will adopt SFAS No. 142 beginning in the first quarter of 2002 and is currently evaluating the impact that this standard will have on its financial position and/or results of operations. COMPETITION As more thoroughly described in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000, cable television systems face competition from alternative methods of receiving and distributing television signals, from other sources of news, information and entertainment, and from other cable television systems that have authority to build and operate cable television systems within the same geographic territories as the Company (typically referred to as "overbuilds"). In such overbuild situations the Company may be in competition with municipalities or public or private entities that may be better capitalized. Although the total number of such overbuilt areas within the Company's operations remains small, overbuilds in Lafayette, Alabama and Alachua, Florida have resulted in a loss of approximately 650 subscribers as well as reduced subscription rates in these areas. The Company is responding to this competition through the introduction of advanced telecommunication services and aggressive marketing campaigns. Item 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company did not hold, either during the six months ended June 30, 2001 and 2000, or at June 30, 2001 and December 31, 2000, any market risk sensitive instruments. The Company has outstanding $88 million of its 10-3/4% Series B Senior Notes with a fixed interest rate of 10.75%. In 19 20 addition, the Company has borrowings outstanding against its credit facility of $18 million with a fixed interest rate of 11.5%. 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. On August 18, 2000, the Company, through its membership in the Alabama Cable Telecommunications Association, joined other Alabama cable operators in a pole attachment Complaint against Alabama Power Company ("APC") which was filed with the FCC's Cable Service Bureau (the "Bureau"). The complaint was initiated as a result of APC's imposition of significant pole rental rate increases (more than 500% for the Company), APC's refusal to engage in good faith negotiations and the threat, by APC, to terminate existing pole attachment agreements. The Bureau granted the Alabama cable operators, including the Company, all relief requested in the Complaint. Specifically, the Bureau ruled that APC had failed to make a persuasive argument on the merits that lawful just compensation was greater than the current rate paid by the cable operators, including the Company, under existing pole attachment agreements. Thus, the Bureau declared APC's new pole attachment rental rates of $38.81 void and reinstated the $7.47 rate previously in effect, as well as other terms and conditions that APC had sought to terminate. The Bureau also placed the parties under a bargaining order requiring good faith negotiation of a new pole attachment agreement and a new rental rate utilizing the FCC's established formulas. As expected, on September 11, 2000, APC appealed the Bureau's decision to the FCC's five Commissioner panel (the "Panel"). On May 25, 2001 the Panel issued a final decision affirming the earlier order issued by the Bureau. In addition, on September 12, 2000 and May 25, 2001, APC appealed the decisions discussed above to the U.S. Court of Appeals for the Eleventh Circuit, which consolidated the appeals and has agreed to hear the case. Both parties have submitted full briefs and the Court has scheduled oral arguments to begin the week of September 10, 2001. A final decision from the Court is not expected until 2002. It is also important to note that APC is not the only utility company to propose significant pole attachment rental rate increases. For instance, Georgia Power Company, which also provides pole attachments to the Company, has proposed an even greater increase than APC, as well as an onerous new pole agreement. Both the rates and the agreement are currently being challenged at the FCC. Depending on the final outcome of these proceedings, as well as others that may arise in the future involving other utility companies, the Company could experience a significant increase in its pole attachment rental costs and the results of its operations could be negatively impacted if enough of its pole attachment rental rates increased at this pace. 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. 20 21 Item 6. (a) Exhibits. EXHIBIT NO. DESCRIPTION ----------- ----------- 3.1 -- Second Amended and Restated Agreement of Limited Partnership of James Cable Partners, L.P. dated as of December 29, 1999, as amended by a First Amendment to Second Amended and Restated Agreement of Limited Partnership dated as of March 1, 2001*** 3.2 -- Certificate of Limited Partnership of James Cable Partners, L.P.* 3.3 -- Articles of Incorporation of James Cable Finance Corp.* 3.4 -- Bylaws of James Cable Finance Corp.* 4.1 -- Indenture dated as of August 15, 1997 among James Cable Partners, L.P., James Cable Finance Corp., and United States Trust Company of New York, as Trustee* 4.3 -- Credit Agreement dated as of March 2, 2001 between James Cable Partners, L.P., as Borrower, and the Lenders listed therein*** 4.4 -- Company Security Agreement dated as of March 2, 2001 between James Cable Partners, L.P., as Grantor, and GoldenTree Asset Management LLC, as agent for the Lenders*** 4.5 -- Guaranty Agreement dated as of March 2, 2001 by James Cable Finance Corp., in favor of each of the Lenders*** 4.6 -- Guarantor Security Agreement dated as of March 2, 2001 between James Cable Finance Corp., as Grantor, and GoldenTree Asset Management LLC, as agent for the Lenders*** 4.8 -- Option Agreement/Option Certificate dated as of December 29, 1999 by and between James Cable Partners, L.P. and James Communications Partners** 21 -- List of subsidiaries of James Cable Partners, L.P.: James Cable Finance Corp. (James Cable Finance Corp. has no subsidiaries) --------------------------- * 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)(h) of the registrant's Form 10-K as filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1999. *** Incorporated by reference to Exhibits (3)(a)/(10)(a) (Second Amended and Restated Agreement 21 22 of Limited Partnership), (4)(b) (Credit Agreement), (4)(c) (Company Security Agreement), (4)(d) (Guaranty Agreement) and (4)(e) (Guarantor Security Agreement), respectively, of the registrant's Form 10-K as filed with the Securities and Exchange Commission for the fiscal year ended December 31, 2000. (b) Reports on Form 8-K None. 22 23 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 13, 2001 By: /s/ William R. James ---------------------------------- William R. James President By: James Communications Partners General Partner By: DKS Holdings, Inc. Partner Date: August 13, 2001 By: /s/ Daniel K. Shoemaker ---------------------------------- Daniel K. Shoemaker President (Principal financial officer and chief accounting officer) JAMES CABLE FINANCE CORP. Date: August 13, 2001 By: /s/ William R. James ---------------------------------- William R. James President Date: August 13, 2001 By: /s/ Daniel K. Shoemaker ---------------------------------- Daniel K. Shoemaker Treasurer (Principal financial officer and chief accounting officer) 23

JAMES CABLE PARTNERS LP /DE/ 10-Q