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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, 2002
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
Organization of each Registrant) Identification Nos.)
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 14, 2002: 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
TABLE OF CONTENTS
PAGE NO.
PART I. FINANCIAL INFORMATION
Forward-Looking Statements 3
Item 1. Consolidated Financial Statements of James Cable
Partners, L.P. and Subsidiary 5
Notes to Consolidated Financial Statements 9
Balance Sheets of James Cable Finance Corp. 13
Notes to Balance Sheets 14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 6. Exhibits and Reports on Form 8-K 27
2
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q includes forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
Securities Act), and Section 21E of the Securities Exchange Act of 1934, as
amended (the Exchange Act), which can be identified by the use of
forward-looking terminology such as: "attempt," "goal," "foreseeable," "may,"
"might," "could," "would," "believe," "expect," "intend," "plan," "seek,"
"anticipate," "estimate," "project" or "continue" or the negative thereof or
other variations thereon or comparable terminology. All statements other than
statements of historical fact included in this quarterly report on Form 10-Q,
including without limitation the statements in this quarterly report on Form
10-Q under "Part I--Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation" and other statements located elsewhere
herein regarding our subscribers, operations, results of operations, financial
position, liquidity and capital resources are forward-looking statements. These
forward-looking statements also include, but are not limited to:
- estimates and expectations regarding our current and future
operations and markets;
- forecasts and expectations of growth regarding our industry,
operations, services and subscriber base;
- statements regarding our current plans and goals for our cable systems;
and
- statements and projections regarding our anticipated revenues, expense
levels, operating results, financial condition, liquidity and capital
resources.
Although we believe the expectations reflected in such forward-looking
statements are reasonable, we can give no assurance such expectations will prove
to be correct. Important factors with respect to any such forward-looking
statements, including certain risks and uncertainties that could cause actual
results to differ materially from our expectations, are disclosed in this
quarterly report on Form 10-Q and in our most recent annual report on Form 10-K.
See, e.g., (1) "Part I--Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Risk Factors" in this quarterly
report on Form 10-Q, and (2) "Part II--Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations--Risk Factors" in our
most recent annual report on Form 10-K. Important factors that could cause
actual results to differ materially from those in our forward-looking statements
include, but are not limited to, the risk factors described herein and in our
most recent annual report on Form 10-K and the following:
- our potential need for additional capital or to refinance our
existing indebtedness;
- changes or advances in technology;
- competition in the industry and markets in which we operate;
- our anticipation of future losses;
- unforeseen delays, cost overruns and expenses;
- potential fluctuations in our subscriber base and in the demand for
our services;
- our ability to manage and control costs and expenditures that impact
our results of operations, financial condition and liquidity;
- our ability to attract and retain skilled personnel;
- rate regulation and changes in government regulation and our cable
franchises; and
- general economic and business conditions.
Our forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance
or achievements to be materially different
3
from any future results, performance or achievements expressed or implied by
such forward-looking statements. All written and oral forward-looking statements
attributable to us or persons acting on our behalf are expressly qualified in
their entirety by our cautionary statements and risk factors in this quarterly
report on Form 10-Q and in our most recent annual report on Form 10-K.
4
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
JAMES CABLE PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2002 2001
------------ ------------
(Unaudited)
ASSETS
Cash & Cash Equivalents $ 3,007,073 $ 567,404
Accounts Receivable - Subscribers (Net of allowance for
doubtful accounts of $64,477 in 2002 and $15,852 in 2001) 4,150,865 4,024,248
Prepaid Expenses & Other 273,893 549,900
Property & Equipment:
Cable television distribution systems and equipment 106,001,529 104,257,833
Land and land improvements 333,958 333,958
Buildings and improvements 1,053,242 1,053,242
Office furniture & fixtures 4,549,932 4,549,932
Vehicles 5,083,292 5,083,292
------------ ------------
Total 117,021,953 115,278,257
Less accumulated depreciation (90,137,425) (85,999,799)
------------ ------------
Total 26,884,528 29,278,458
Deferred Financing Costs (Net of accumulated amortization of
$2,840,368 in 2002 and $2,407,372 in 2001) 1,670,132 2,094,469
Goodwill and Other Indefinite Lived Intangible Assets 11,864,385 11,864,385
Other Intangible Assets, Net 490,572 614,892
Deposits 64,080 65,260
------------ ------------
Total Assets $ 48,405,528 $ 49,059,016
============ ============
LIABILITIES & PARTNERS' DEFICIT
Liabilities:
Debt $116,000,000 $111,500,000
Accounts payable 9,863 701,812
Accrued expenses 2,589,901 2,739,611
Accrued interest on debt 3,547,499 3,547,499
Unearned revenue 3,500,561 3,411,759
Subscriber deposits 16,790 17,703
------------ ------------
Total 125,664,614 121,918,384
Commitments and Contingencies (Note 2)
Partners' Deficit:
Limited partners (70,955,098) (66,597,103)
General partner (6,303,988) (6,262,265)
------------ ------------
Total (77,259,086) (72,859,368)
------------ ------------
Total Liabilities & Partners' Deficit $ 48,405,528 $ 49,059,016
============ ============
See notes to consolidated financial statements.
5
JAMES CABLE PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three For the Three For the Six For the Six
Months Ended Months Ended Months Ended Months Ended
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
----------------- ----------------- ----------------- -----------------
(Unaudited)
Revenues $ 10,755,860 $ 9,949,724 $ 21,213,750 $ 19,831,102
System Operating Expenses (Excluding
Depreciation and Amortization) 6,785,980 6,155,784 13,437,288 12,121,878
Non-System Operating Expenses:
Management fee 525,000 457,492 985,000 883,487
Other 178,250 110,895 328,015 231,049
----------------- ----------------- ----------------- -----------------
Total non-system operating
expenses 703,250 568,387 1,313,015 1,114,536
Depreciation and Amortization 2,149,396 2,392,842 4,261,946 4,678,055
----------------- ----------------- ----------------- -----------------
Operating Income 1,117,234 832,711 2,201,501 1,916,633
Interest and Other:
Interest expense (3,341,904) (3,035,120) (6,610,352) (5,945,034)
Interest income 7,263 9,959 9,133 21,509
Other 0 0 0 (16,900)
----------------- ----------------- ----------------- -----------------
Total interest and other (3,334,641) (3,025,161) (6,601,219) (5,940,425)
----------------- ----------------- ----------------- -----------------
Loss before extraordinary item (2,217,407) (2,192,450) (4,399,718) (4,023,792)
Extraordinary gain due to extinguishment
of debt (Note 3) 0 0 0 1,925,312
----------------- ----------------- ----------------- -----------------
Net loss $ (2,217,407) $ (2,192,450) $ (4,399,718) $ (2,098,480)
================= ================= ================= =================
See notes to consolidated financial statements.
6
JAMES CABLE PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF PARTNERS' DEFICIT
Limited General
Partners Partner Total
------------------ ------------------ ------------------
Balance, December 31, 2001 $ (66,597,103) $ (6,262,265) $ (72,859,368)
Net loss (unaudited) (4,357,995) (41,723) (4,399,718)
------------------ ------------------ ------------------
Balance, June 30, 2002 (unaudited) $ (70,955,098) $ (6,303,988) $ (77,259,086)
================== ================== ==================
See notes to consolidated financial statements.
7
JAMES CABLE PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six For the Six
Months Ended Months Ended
June 30, June 30,
2002 2001
----------------- -----------------
(Unaudited)
Cash Flows (used in) from Operating Activities:
Net loss $ (4,399,718) $ (2,098,480)
Adjustments to reconcile net loss to cash flows
(used in) from operating activities:
Depreciation 4,137,626 3,656,825
Amortization 124,320 1,021,230
Noncash interest expense 432,996 383,064
Extraordinary gain on extinguishment of debt 0 (1,925,312)
(Increase) Decrease in assets:
Accounts receivable (126,617) (111,010)
Prepaid expenses 276,007 (225,562)
Deposits 1,180 (51,149)
(Decrease) Increase in liabilities:
Accounts payable (691,949) (14,305)
Accrued expenses (149,710) (84,560)
Accrued interest on debt 0 (430,000)
Unearned revenue 88,802 87,940
Subscriber deposits (913) (956)
---------------- ----------------
Total adjustments 4,091,742 2,306,205
---------------- ----------------
Cash flows (used in) from operating activities (307,976) 207,725
Cash Flows used in Investing Activities:
Additions to property and equipment (1,743,695) (5,069,440)
---------------- ----------------
Cash flows used in investing activities (1,743,695) (5,069,440)
Cash Flows from Financing Activities:
Principal payments on credit facility 0 (2,500,000)
Proceeds from credit facility borrowings 4,500,000 18,000,000
Costs associated with credit facility amendment (8,660) (1,077,842)
Purchase 10-3/4% Senior Notes 0 (9,720,000)
---------------- ----------------
Cash flows from financing activities 4,491,340 4,702,158
---------------- ----------------
Net Increase (Decrease) in Cash and Cash Equivalents 2,439,669 (159,557)
Cash and Cash Equivalents, Beginning of Period 567,404 1,098,890
---------------- ----------------
Cash and Cash Equivalents, End of Period $ 3,007,073 $ 939,333
================ ================
Supplemental Disclosure of Cash Flow Information -
Cash paid for interest during the period
(net of amounts capitalized and amounts paid on
Company owned Senior Notes) $ 6,177,356 $ 6,051,939
================ ================
See notes to consolidated financial statements.
8
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,
2001 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, 2001 included in the Company's 2001 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. See "Item
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Risk Factors."
IMPACT OF RECENTLY ADOPTED ACCOUNTING PRINCIPLES -- On July 20, 2001,
the FASB issued Statement of Financial Accounting Standards ("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.
The Company adopted SFAS No. 142 on January 1, 2002, as required by the
new statement. Upon adoption, the Company no longer amortizes goodwill and other
indefinite lived intangible assets, which consists of cable franchise operating
rights. The Company will be required to test its goodwill and intangible assets
that are determined to have an indefinite life for impairment at least annually.
The provisions of SFAS No. 142 require the completion of an initial transitional
impairment assessment, with any impairments identified treated as a cumulative
effect of a change in accounting principle. The Company has completed this
assessment and determined that no cumulative effect results from adopting this
change in accounting principle.
The effect of the adoption of SFAS No. 142 as of June 30, 2002 and
December 31, 2001 is presented in the following table (in thousands) which
includes only those assets which were not fully amortized prior to December 31,
2001:
9
(in thousands) June 30, 2002 December 31,2001
Gross Accum. Carrying Gross Accum. Carrying
Value Amort. Value Value Amort. Value
------- ------- ------- ------- ------- -------
Indefinite-lived intangibles:
Goodwill $7,457 $567 $6,890 $7,457 $567 $6,890
Franchise operating rights 16,656 11,682 4,974 16,656 11,682 4,974
------- ------- ------- ------- ------- -------
Totals $24,113 $12,249 $11,864 $24,113 $12,249 $11,864
======= ======= ======= ======= ======= =======
Other intangible assets:
Subscriber lists and non-
compete agreements $1,243 $752 $491 $1,243 $628 $615
======= ======= ======= ======= ======= =======
Amortization expense on the other intangible assets for the six months
ended June 30, 2002 was $124,320 and is expected to be $246,000, $110,000 and
$11,000 in 2003, 2004 and 2005, respectively.
Since the Company was not required to adopt SFAS No. 142 until
January 1, 2002, the 2001 net loss includes amortization of goodwill and
franchise operating rights. Thus, the table below presents comparative net
loss amounts for the six months ended June 30, 2002 and 2001.
Six Months Six Months
Ended Ended
June 30, 2002 June 30, 2001
------------- -------------
Loss before extraordinary item ($4,399,718) ($4,023,792)
Extraordinary gain due to debt extinguishment 1,925,312
----------- -----------
Reported net loss (4,399,718) (2,098,480)
Add back:
Amortization of goodwill 93,221
Amortization of franchise operating rights 803,689
----------- -----------
Adjusted net loss ($4,399,718) ($1,201,570)
=========== ===========
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The new standard requires one
model of accounting for long-lived assets to be disposed of, and broadens the
definition of discontinued operations to include a component of a segment. The
Company adopted SFAS No. 144 in the first quarter of 2002 and does not expect
that it will have a material impact 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.
10
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. Following efforts to regulate certain areas of cable
provided Internet service, there have been several inconsistent judicial
decisions regarding the proper regulatory treatment. In addition, the FCC
recently ruled that cable modem service is an interstate information service,
rather than a cable or telecommunications service. This classification should,
at least initially, leave cable modem service exempt from the burdens associated
with traditional cable and telecommunications regulation. However, numerous
Internet service providers, LFA's and telecommunications providers have appealed
the FCC's determination to the U.S. Court of Appeals for the Ninth Circuit. The
FCC also initiated a rulemaking to determine what power, if any, LFA's have over
cable modem service as an information service, including forced access (i.e.
mandatory access by unaffiliated third parties to cable networks for high-speed
Internet service), franchising and franchise fee obligations, and customer
service.
In 2001, the FCC granted a pole attachment complaint brought by the
Company, and other Alabama cable operators, against Alabama Power Company
("APC"). The Company initiated the complaint 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. APC, and other pole companies,
appealed the FCC order to the U.S. Court of Appeals for the Eleventh Circuit.
The parties have submitted full briefs and have presented their oral arguments
before the court. A ruling from the court is expected later this year.
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.
On October 31, 2001, Echostar Satellite Corporation ("ESC") filed a
suit against the Company in U.S. District Court for the District of Colorado,
alleging, among other things, unfair trade practices, and violations of the
Federal Communications Act of 1934 and the Digital Millennium Copyright Act.
In February 2002, the parties agreed to settle the case and entered
into a Confidential Settlement Agreement, which requires the Company to pay ESC
monetary consideration. The parties filed a Consent Motion for Entry of Final
Judgment and Permanent Injunction. On February 25, 2002, the court granted the
Consent Motion and entered the Final Judgment and Permanent Injunction as
submitted by the parties. The Final Judgment and Permanent Injunction included
only prospective injunctive relief and did not include any monetary judgment.
Under the Injunction, the Company will be enjoined in the future from taking
certain actions relating to Echostar's signals and satellites.
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.
11
(3) DEBT
At June 30, 2002, the Company's debt was $116.0 million, its total
assets were $48.4 million and its partners' deficit was $77.3 million. At
December 31, 2001, the Company's debt was $111.5 million, its total assets were
$49.1 million and its partners' deficit was $72.9 million. On August 12, 2002,
the Company borrowed the remaining $2 million of credit available under its
secured credit facility and used that money, together with other funds of the
Company, to pay the interest due on its Notes.
Due to the Company's high degree of leverage: (a) 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; (b) the Company's
ability to obtain additional financing in the future may be limited; and (c) the
Company is more highly leveraged than many other cable television companies and
other competitors.
The ability of the Company to satisfy its obligations going forward
will be primarily dependent on its future financial and operating performance or
upon its ability to renew or refinance borrowings or raise additional capital.
In an effort to mitigate the possibility that the Company will be unable to
satisfy its future interest payment obligations, the Company plans to limit its
capital spending in the foreseeable future. There can be no assurance that the
Company's mitigation efforts will be successful or that the Company will be able
to renew or refinance borrowings or raise additional equity capital if its
future operating results fall short of expectations.
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 Notes. On March 2, 2001, the
Company amended and restated its secured credit facility with new lenders which
will permit it to borrow up to $30 million. As of August 12, 2002, all of the
available credit had been drawn down to, among other things, pay accrued
interest on the Company's Notes and to purchase $12 million (face amount) of
those Notes from affiliates of the lenders. 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 is
payable quarterly in arrears. The debt, at June 30, 2002, is comprised of:
10-3/4% Senior B Senior Notes due 2004 $88,000,000
Credit facility 28,000,000
------------
Total debt $116,000,000
============
As discussed above, the Company purchased $12 million (face amount) of
its Notes from affiliates of its credit facility lenders. These Notes were
purchased at a discounted price of .81 and, thus, the Company recognized 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
===========
12
JAMES CABLE FINANCE CORP.
(A WHOLLY OWNED SUBSIDIARY OF JAMES CABLE PARTNERS, L.P.,
A DELAWARE LIMITED PARTNERSHIP)
BALANCE SHEETS
June 30, December 31,
2002 2001
------------ ------------
(Unaudited)
ASSETS
Cash and cash equivalents $1,000 $1,000
====== ======
SHAREHOLDER'S EQUITY
Shareholder's equity - Common stock (1,000 shares issued and outstanding) $1,000 $1,000
====== ======
See notes to balance sheets.
13
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, 2002, a Statement of Operations, a Statement of
Shareholder's Equity and a Statement of Cash Flows have not been presented.
14
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 this Quarterly Report on Form 10-Q under "Forward-Looking
Statements" and under "Item 2. Management's Discussion and Results of
Operations -- Risk Factors" and in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2001 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 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
high-speed and dial-up Internet access and 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, 2002, the Company had 66,548 basic subscribers and 25,183 premium
subscriptions, representing basic penetration of 51.2% and premium penetration
of 37.8% as compared to December 31, 2001 at which time the Company had 68,492
basic subscribers and 27,243 premium subscriptions which represented basic
penetration of 52.7% and premium penetration of 39.8%.
As of June 30, 2002 the Company had the capability to provide its
high-speed Internet service to more than 50% of its cable subscribers and had
more than 7,300 high-speed Internet customers. In addition, the Company was
offering its dial-up Internet service to over 57% of its cable subscribers and
had nearly 4,000 dial-up Internet customers.
In addition, the Company now has the capability of providing digital
services to substantially all of its basic subscribers. With these digital
services, the Company can provide tiers of niche satellite programming and
pay-per-view movies, sporting events and concerts, thus, allowing it to better
compete with direct broadcast satellite ("DBS") services. As of June 30, 2002,
the Company had its digital services in approximately 9,200 of its basic
subscribers' homes.
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
15
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.
Significant Leverage. At June 30, 2002, the Company's debt was $116.0
million, its total assets were $48.4 million and its partners' deficit was $77.3
million. At December 31, 2001, the Company's debt was $111.5 million, its total
assets were $49.1 million and its partners' deficit was $72.9 million. On August
12, 2002, the Company borrowed the remaining $2 million of credit available
under its secured credit facility and used that money, together with other funds
of the Company, to pay the interest due on its Notes.
Due to the Company's high degree of leverage: (a) 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; (b) the Company's
ability to obtain additional financing in the future may be limited; and (c) the
Company is more highly leveraged than many other cable television companies and
other competitors. See "Risk Factors" below.
The ability of the Company to satisfy its obligations going forward will
be primarily dependent on its future financial and operating performance or upon
its ability to renew or refinance borrowings or raise additional capital, if
necessary. There can be no assurance that the Company's future financial and
operating performance will be sufficient to satisfy those requirements and there
can be no assurance that the Company will be able to renew or refinance its
existing indebtedness or raise additional equity in the event that its future
financial and operating performance is insufficient. See "Risk Factors" below.
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.
Although the Company has generated positive EBITDA since its inception,
the Company has incurred significant net losses. During the six month period
ended June 30, 2002 the Company incurred a net loss of approximately $4.4
million and it expects to incur a net loss for calendar year 2002.
As of June 30, 2002, the Company's total debt outstanding was $116
million, comprised of $28 million borrowed under its secured credit facility and
$88 million due under its Notes. On August 12, 2002, the Company borrowed the
remaining $2 million of credit available under its secured credit facility and
used that money, together with other funds of the Company, to pay the interest
due on its Notes.
16
Under the terms of the indenture governing the Company's Notes, the
maximum amount of secured indebtedness that the Company is allowed to incur is
generally limited to the $30 million borrowed by the Company pursuant to its
secured credit facility. Because the Company has borrowed the maximum amount
permitted under its secured credit facility and, since there is no availability
of future borrowings under that credit facility, absent (1) an amendment to the
indenture permitting the Company to incur additional secured indebtedness and
(2) any refinancing or additional equity, the Company's liquidity will be
determined solely by its future financial and operating performance. (Generally,
an amendment to the indenture to permit the Company to incur additional secured
indebtedness would require, among other things, the written consent of the
holders of not less than a majority in aggregate principal amount of the
outstanding Notes.)
In an effort to maintain its financial and operating performance at a
level that will enable it to generate cash sufficient to meet its debt service
and working capital requirements in the near term and through the maturity date
of the Notes, the Company has reduced its capital expenditures, has undertaken
marketing efforts to maintain its subscriber base and revenues, and has
attempted to reduce and monitor its expenses. The Company is also exploring (1)
amending the indenture to permit it to incur additional secured indebtedness,
(2) renewing or refinancing its existing indebtedness, and (3) raising
additional equity. However, there can be no assurance that the Company's future
financial and operating performance will be sufficient to satisfy its debt
service and working capital requirements and there can be no assurance that it
will be able to amend the indenture, or to renew or refinance its existing
indebtedness or raise additional equity, in the event that its future financial
and operating performance is insufficient. See "Risk Factors" below.
Cash Flows (used in) from Operating Activities. Net cash used in
operating activities was $300,000 for the six months ended June 30, 2002 as
compared to net cash from operating activities of $200,000 for the six months
ended June 30, 2001.
Cash Flows used in Investing Activities. Net cash used in investing
activities decreased by $3.4 million from $5.1 million for the six months ended
June 30, 2001 to $1.7 million for the six months ended June 30, 2002. This
decrease is a result of a reduction in the number of rebuilds / upgrades that
the Company is in the process of completing as well as reduced costs associated
with Internet and digital service launches, the majority of which were completed
by the end of 2001.
Cash Flows from Financing Activities. Cash flows from financing
activities for the six months ended June 30, 2001 were $4.7 million and included
$2.5 million of principal payments on the Company's credit facility, $18 million
of proceeds from debt borrowings on the Company's credit facility, $1.1 million
of costs associated with amending and restating the Company's credit facility
and $9.7 million used to repurchase $12 million face value of the 10-3/4%
Senior Notes discussed below. Cash flows from financing activities for the six
months ended June 30, 2002 amounted to $4.5 million of proceeds from debt
borrowings on the Company's credit facility.
Balance Sheet. Cash increased by $2.4 million from $600,000 at December
31, 2001 to $3.0 million at June 30, 2002 primarily as a result of the decrease
in the Company's capital spending discussed above. Property & Equipment
increased by $1.7 million during the first six months of 2002 primarily due to
capital spending made as a part of the Company's 750 MHz upgrade of its entire
Tennessee System as well as equipment costs associated with Internet and digital
installations.
Total debt increased from $111.5 million at December 31, 2001 to $116.0
million at June 30, 2002. 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 (the "Notes"). As discussed below, on March 2,
2001, the Company amended and restated its secured credit facility with new
lenders which will permit it to borrow up to $30 million. As of August 12, 2002,
all of the available credit had been drawn down to, among other things, pay
accrued interest on the Company's Notes and to purchase $12 million (face
amount) of those Notes from affiliates of the lenders.
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 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 effectively
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
17
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
various independent lenders which matures on March 2, 2004. As of August 12,
2002, all of the available credit had been drawn down to, among other things,
pay accrued interest on the Company's Notes and to purchase $12 million (face
amount) of those Notes from affiliates of the lenders.
The Credit Facility, which is secured by a first priority lien on and
security interest in substantially all of the assets of the Company, accrues
interest at a fixed rate of 11.5% which is payable on a quarterly basis in
arrears. 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 2.40
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. At
June 30, 2002 the Company was in compliance with all of the above covenants.
18
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship that the various
items bear to revenues for the periods indicated:
For the Three Months ended June 30,
2002 2001
---- ----
Amount % Amount %
------ --- ------ ---
(Dollars in thousands)
Revenues $ 10,756 100.0% $ 9,950 100.0%
System operating expenses 6,786 63.1 6,156 61.9
Non-System operating expenses 703 6.5 568 5.7
Depreciation and amortization 2,150 19.9 2,393 24.0
-------- ------ -------- ------
Operating income 1,117 10.5 833 8.4
Interest expense, net 3,334 31.0 3,025 30.4
Other expenses 0 0.0 0 0.0
-------- ------ -------- ------
Net loss $ (2,217) (20.5)% $ (2,192) (22.0)%
======== ====== ======== ======
EBITDA (1) $ 3,267 30.4% $ 3,226 32.4%
For the Six Months ended June 30,
2002 2001
---- ----
Amount % Amount %
------ --- ------ ---
(Dollars in thousands)
Revenues $ 21,214 100.0 % $ 19,831 100.0%
System operating expenses 13,437 63.3 12,122 61.1
Non-System operating expenses 1,313 6.2 1,114 5.6
Depreciation and amortization 4,262 20.1 4,678 23.6
-------- ------ -------- ------
Operating income 2,202 10.4 1,917 9.7
Interest expense, net 6,602 31.1 5,923 29.9
Other expenses 0 0.0 17 0.1
-------- ------ -------- ------
Loss before extraordinary item (4,400) (20.7) (4,023) (20.3)
Extraordinary gain due to
extinguishment of debt 0 0.0 1,925 9.7
-------- ------ -------- ------
Net loss $ (4,400) (20.7)% $ (2,098) (10.6)%
======== ====== ======== ======
EBITDA (1) $ 6,464 30.5% $ 6,595 33.3%
(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.
19
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
Revenues. Revenues for the three months ended June 30, 2002 increased by
$810,000, or 8.1%, to $10.8 million from $9.9 million for the three months ended
June 30, 2001. This increase is primarily the result of an increase in the
Company's Internet revenues of $310,000, an increase in the Company's basic
revenues of $240,000, and an increase in the Company's digital services revenues
of $200,000 from 2001 to 2002. Basic revenues increased 3.2% from $7.5 million
for the three months ended June 30, 2001 to $7.8 million for the three months
ended June 30, 2002. Average monthly total revenue per subscriber for the three
months ended June 30, 2002 were $53.38, as compared to $47.98 for the same
period last year. This revenue improvement is largely the result of increased
rates charged to customers for cable, Internet and digital services, as well as
increased penetration of Internet and digital services.
Subscribers. At June 30, 2002 the Company had 66,548 subscribers which
represents a decrease of 2,171, or 3.2%, from the 68,719 subscribers at June 30,
2001. The Company believes that this 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. There can be no assurances that these efforts will be successful.
At June 30, 2002 the Company had more than 7,300 high-speed Internet
customers and approximately 4,000 dial-up Internet customers, for a total of
approximately 11,300 Internet customers which represents an increase of
approximately 2,400 customers, or 27%, since June 30, 2001. In addition, the
Company's had approximately 9,200 digital service subscribers at June 30, 2002
which represents a 44% increase over the approximately 6,400 at June 30, 2001.
System Operating Expenses. System operating expenses for the three
months ended June 30, 2002 were $6.8 million, an increase of $630,000, or 10.2%,
over the three months ended June 30, 2001. As a percentage of revenues, system
operating expenses increased 1.2% from 61.9% in 2001 to 63.1% in 2002. The
primary reasons for this increase are expenses associated with the Company's
deployment of digital services in many of its Systems, group and general
insurance rate increases, 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, 2002 were $700,000, an increase of $130,000, or
23.7%, over the three months ended June 30, 2001. These expenses consist
primarily of management costs paid to the Company's general partner as well as
legal and professional fees.
EBITDA. As a result of the foregoing, EBITDA increased from $3.2 million
for the three months ended June 30, 2001 to $3.3 million for the three months
ended June 30, 2002.
Depreciation and Amortization. Depreciation and amortization decreased
by $240,000, or 10.2%, from the three months ended June 30, 2001 to the three
months ended June 30, 2002 primarily as a result of the decrease in the capital
spending from 2001 to 2002 discussed in the "Liquidity and Capital Resources"
section as well as the reduction in goodwill and franchise amortization mandated
by SFAS No. 142 (See " - Effects of New Accounting Pronouncements").
Interest Expense, Net. Interest expense, net increased $310,000, or 10.2%,
from $3.0 million for the three months ended June 30, 2001 to $3.3 million for
the three months ended June 30, 2002. This increase was primarily the result of
the amount of borrowings the Company had outstanding on its credit
20
facility which accrues interest at a rate of 11.5%. During the three months
ended June 30, 2001 the Company had $18 million of borrowings outstanding while
during the three months ended June 30, 2002 it had $28 million of borrowings
outstanding.
Net Loss. As a result of the foregoing factors, the Company's net loss
remained constant at $2.2 million for the three months ended June 30, 2001 and
2002.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
Revenues. Revenues for the six months ended June 30, 2002 increased by
$1.4 million, or 7.0%, to $21.2 million from $19.8 million for the six months
ended June 30, 2001. This increase is primarily the result of an increase in the
Company's Internet revenues of $600,000, an increase in the Company's basic
revenues of $370,000, and an increase in the Company's digital services revenues
of $340,000 from 2001 to 2002. Basic revenues increased by 2.5% to $15.4 million
for the six months ended June 30, 2002, as compared to the same period in 2001.
Average monthly total revenue per subscriber for the six months ending June 30,
2002 were $52.33, as compared to $47.64 for the same period last year. This
revenue improvement is largely the result of increased rates charged to
customers for cable, Internet and digital services, as well as increased
penetration of Internet and digital services.
System Operating Expenses. System operating expenses for the six months
ended June 30, 2002 were $13.4 million, an increase of $1.3 million, or 10.9%,
over the six months ended June 30, 2001. As a percentage of revenues, system
operating expenses increased 2.2% from 61.1% in 2001 to 63.3% in 2002. The
primary reasons for this increase are expenses associated with the Company's
deployment of digital services in many of its Systems, group and general
insurance rate increases, 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 increased
by $200,000, or 17.8%, from the six months ended June 30, 2001 to the six months
ended June 30, 2002. These expenses consist primarily of management costs paid
to the Company's general partner as well as legal and professional fees.
EBITDA. As a result of the foregoing, EBITDA decreased by $130,000, or
2.0%, from $6.6 million for the six months ended June 30, 2001 to $6.5 million
for the six months ended June 30, 2002.
Depreciation and Amortization. Depreciation and amortization decreased
by $420,000, or 8.9%, from $4.7 million for the six months ended June 30, 2001
to $4.3 million for the six months ended June 30, 2002 primarily as a result of
the decrease in the capital spending from 2001 to 2002 discussed in the
"Liquidity and Capital Resources" section as well as the reduction in goodwill
and franchise amortization mandated by SFAS No. 142 (See "- Effects of New
Accounting Pronouncements").
Interest Expense, Net. Interest expense, net increased $680,000, or 11.4%,
from $5.9 million for the six months ended June 30, 2001 to $6.6 million for the
six months ended June 30, 2002. This increase was primarily the result of
borrowings the Company had outstanding on its credit facility during the six
months ended June 30, 2001 and 2002. From January 1, 2001 to March 2, 2001 the
Company had $2.5 million of borrowings outstanding at an interest rate of
approximately 10% and from March 3, 2001 to June 30, 2001 the Company had $18
million of borrowings outstanding at an interest rate of 11.5%. From January 1,
2002 to February 12, 2002 the Company had $23.5 million of borrowings
outstanding and from February 13, 2002 to June 30, 2002 the Company had $28
million of borrowings outstanding all of which is at an interest rate of 11.5%.
This increase in interest expense on the Company's credit facility was partially
offset by a reduction in interest expense on the Company's Notes as a result of
the $12
21
million (face value) in Notes that the Company repurchased on March 2, 2001.
Loss before Extraordinary Item. As a result of the foregoing factors,
the Company's loss before extraordinary item increased by $380,000, or 9.3%,
from the six months ended June 30, 2001 to the six months ended June 30, 2002.
Extraordinary Gain due to Debt Extinguishment. On March 2, 2001 the
Company purchased $12 million (face amount) of its Notes from affiliates of its
credit facility lenders. These Notes were purchased at a discount price of .81
and, thus, the Company recognized an extraordinary gain due to debt
extinguishment for the six months ended June 30, 2001 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
===========
Net loss. As a result of the foregoing factors, the Company had a net
loss of $4.4 million for the six months ended June 30, 2002 as compared to $2.1
million for the six months ended June 30, 2001.
EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS
On July 20, 2001, the FASB issued Statement of Financial Accounting
Standards ("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.
The Company adopted SFAS No. 142 on January 1, 2002, as required by the
new statement. Upon adoption, the Company no longer amortizes goodwill and other
indefinite lived intangible assets, which consists of cable franchise operating
rights. The Company will be required to test its goodwill and intangible assets
that are determined to have an indefinite life for impairment at least annually.
The provisions of SFAS No. 142 require the completion of an initial transitional
impairment assessment, with any impairments identified treated as a cumulative
effect of a change in accounting principle. The Company has completed this
assessment and determined that no cumulative effect results from adopting this
change in accounting principle.
The effect of the adoption of SFAS No. 142 as of June 30, 2002 and
December 31, 2001 is presented in the following table (in thousands) which
includes only those assets which were not fully amortized prior to December 31,
2001:
(in thousands) June 30, 2002 December 31,2001
Gross Accum. Carrying Gross Accum. Carrying
Value Amort. Value Value Amort. Value
----- ------ -------- ----- ------ --------
Indefinite-lived intangibles:
Goodwill $7,457 $567 $6,890 $7,457 $567 $6,890
Franchise operating rights 16,656 11,682 4,974 16,656 11,682 4,974
------- ------- ------- ------- ------- -------
Totals $24,113 $12,249 $11,864 $24,113 $12,249 $11,864
======= ======= ======= ======= ======= =======
Other intangible assets:
Subscriber lists and non-
compete agreements $1,243 $752 $491 $1,243 $628 $615
======= ======= ======= ======= ======= =======
22
Amortization expense on the other intangible assets for the six months
ended June 30, 2002 was $124,320 and is expected to be $246,000, $110,000 and
$11,000 in 2003, 2004 and 2005, respectively.
Since the Company was not required to adopt SFAS No. 142 until
January 1, 2002, the 2001 net loss includes amortization of goodwill and
franchise operating rights. Thus, the table below presents comparative net loss
amounts for the six months ended June 30, 2002 and 2001.
Six Months Six Months
Ended Ended
June 30, 2002 June 30, 2001
------------- -------------
Loss before extraordinary item ($4,399,718) ($4,023,792)
Extraordinary gain due to debt extinguishment 1,925,312
----------- -----------
Reported net loss (4,399,718) (2,098,480)
Add back:
Amortization of goodwill 93,221
Amortization of franchise operating rights 803,689
----------- -----------
Adjusted net loss ($4,399,718) ($1,201,570)
=========== ===========
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The new standard requires one
model of accounting for long-lived assets to be disposed of, and broadens the
definition of discontinued operations to include a component of a segment. The
Company adopted SFAS No. 144 in the first quarter of 2002 and does not expect
that it will have a material impact on its financial position and/or results of
operations.
RISK FACTORS
WE HAVE A HISTORY OF LOSSES AND WE EXPECT THAT TREND TO CONTINUE.
Although we have generated positive EBITDA since our inception, we have
incurred significant net losses. During the six month period ended June 30, 2002
we incurred a net loss of approximately $4.4 million and we expect to incur a
net loss for calendar year 2002.
WE ARE HIGHLY LEVERAGED AND HAVE SIGNIFICANT DEBT SERVICE REQUIREMENTS.
As of June 30, 2002, our total debt outstanding was $116 million,
comprised of $28 million borrowed under our secured credit facility and $88
million due under our Notes. On August 12, 2002, we borrowed the remaining $2
million of credit available under our secured credit facility and used that
money, together with other funds of the Company, to pay the interest due on our
Notes.
Because of our substantial debt and our use of all of the credit
available under our secured credit facility:
- we must dedicate a substantial portion of any cash flow from our
operations to the payment of interest on, and principal of, our debt;
- we may not be able to obtain additional financing for currently
unanticipated capital requirements, capital expenditures, working
capital requirements and other corporate purposes;
23
- we were required to lien substantially all of our assets and
pledge the equity ownership of our subsidiary to secure our
secured credit facility;
- we may be more vulnerable to general adverse economic and industry
conditions;
- our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate is limited; and
- we may be at a competitive disadvantage compared to our competitors
that have less debt.
Our ability to generate cash sufficient to meet our debt service and
working capital requirements in the near term, and through the maturity date of
the Notes, will be primarily dependent on our future financial and operating
performance and upon our ability to renew or refinance our existing indebtedness
or to raise additional equity. There can be no assurance that our future
financial and operating performance will be sufficient to satisfy those
requirements and there can be no assurance that we will be able to renew or
refinance our existing indebtedness or raise additional equity in the event that
our future financial and operating performance is insufficient.
WE HAVE DRAWN DOWN ALL OF THE FUNDS AVAILABLE UNDER OUR SECURED CREDIT FACILITY.
Our secured credit facility provides for aggregate borrowings of $30.0
million, all of which was borrowed as of August 12, 2002. Under the terms of the
indenture governing the Company's Notes, the maximum amount of secured
indebtedness that the Company is allowed to incur is generally limited to the
$30 million borrowed by the Company pursuant to its secured credit facility.
Consequently, there is no availability of future borrowings under that facility.
Because the Company has borrowed the maximum amount permitted under its secured
credit facility and, absent (1) any amendment to the indenture permitting the
Company to incur additional secured indebtedness and (2) any refinancing or
additional equity, our liquidity will be determined solely by our future
financial and operating performance. (Generally, an amendment to the indenture
to permit the Company to incur additional secured indebtedness would require,
among other things, the written consent of the holders of not less than a
majority in aggregate principal amount of the outstanding Notes.)
In an effort to maintain our financial and operating performance at a
level that will enable us to generate cash sufficient to meet our debt service
and working capital requirements in the near term and through the maturity date
of the Notes, we have reduced our capital expenditures, have undertaken
marketing efforts to maintain our subscriber base and revenues, and have
attempted to reduce and monitor our expenses. The Company is also exploring (1)
amending the indenture to permit it to incur additional secured indebtedness,
(2) renewing or refinancing its existing indebtedness, and (3) raising
additional equity. However, there can be no assurance that our future financial
and operating performance will be sufficient to satisfy our debt service and
working capital requirements and there can be no assurance that we will be able
to amend the indenture, or to renew or refinance our existing indebtedness or
raise additional equity, in the event that our future financial and operating
performance is insufficient.
MATERIAL RESTRICTIONS IN OUR DEBT INSTRUMENTS MAY MAKE IT DIFFICULT TO OBTAIN
ADDITIONAL FINANCING OR REACT TO CHANGES IN OUR BUSINESS.
Our secured credit facility, and the indenture governing our Notes,
contain various covenants that limit our ability to engage in a variety of
transactions. In addition, those instruments contain cross default provisions
and impose additional material operating and financial restrictions on us. These
restrictions, subject to certain exceptions, limit our ability to engage in some
transactions, including:
- declaring or paying dividends or distributions on, or redeeming or
repurchasing, our securities;
- prepaying or redeeming debt;
- incurring liens and engaging in sale/leaseback transactions;
- making loans and investments;
- incurring indebtedness and contingent obligations;
- amending or otherwise altering debt instruments and other material
agreements;
- engaging in mergers, consolidations, acquisitions and asset sales;
- engaging in transactions with affiliates; and
- changing our lines of business.
In addition, our senior secured credit facility requires us to maintain
certain leverage ratios.
These restrictions could impact our future financial and operating
performance and limit our ability to renew or refinance our existing
indebtedness or to raise additional equity, if necessary, or to react to changes
in our business and the industry in which we operate. There can be no assurance
that our future financial and operating performance will be sufficient to
satisfy our debt service and
24
working capital requirements and there can be no assurance that we will be able
to renew or refinance our existing indebtedness or raise additional equity in
the event that our future financial and operating performance is insufficient.
Moreover, in the event that we are unable to satisfy our debt service and
working capital requirements or comply with the above restrictions, our lenders
could elect to declare all amounts outstanding to be immediately due and
payable, together with accrued and unpaid interest, and to repossess our assets.
Accelerated debt repayment would have a material adverse affect on our liquidity
and capital resources.
Item 3. -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company did not hold, either during the six months ended June 30,
2002 and 2001, or at June 30, 2002 and December 31, 2001, any market risk
sensitive instruments. At June 30, 2002, the Company had outstanding $88 million
of its 10- 3/4% Series B Senior Notes with a fixed interest rate of 10.75% and
had borrowings outstanding against its credit facility of $28 million with a
fixed interest rate of 11.5%. On August 12, 2002, the Company borrowed the
remaining $2 million of credit available under its secured credit facility and
used that money, together with other funds of the Company, to pay the interest
due on its Notes. See "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Risk Factors."
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
submitted full briefs and, on October 31, 2001, presented their oral arguments
before the court. A final decision from the court is expected later this year.
25
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.
On October 31, 2001, Echostar Satellite Corporation ("ESC") filed a
suit against the Company in U.S. District Court for the District of Colorado,
alleging, among other things, unfair trade practices, and violations of the
Federal Communications Act of 1934 and the Digital Millennium Copyright Act.
In February 2002, the parties agreed to settle the case and entered into
a Confidential Settlement Agreement, which requires the Company to pay ESC
monetary consideration. The parties filed a Consent Motion for Entry of Final
Judgment and Permanent Injunction. On February 25, 2002, the court granted the
Consent Motion and entered the Final Judgment and Permanent Injunction as
submitted by the parties. The Final Judgment and Permanent Injunction included
only prospective injunctive relief and did not include any monetary judgment.
Under the Injunction, the Company will be enjoined in the future from taking
certain actions relating to Echostar's signals and satellites.
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 2002.
26
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), (4)(b), (4)(c),
(4)(d) and (4)(e), respectively, of the registrant's Form 10-K as filed
with the Securities and Exchange Commission for the fiscal year ended
December 31, 2000.
27
(b) Reports on Form 8-K
None.
28
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 14, 2002 By: /s/ William R. James
---------------------------------
William R. James
President
By: James Communications Partners
General Partner
By: DKS Holdings, Inc.
Partner
Date: August 14, 2002 By: /s/ Daniel K. Shoemaker
-------------------------------
Daniel K. Shoemaker
President (Principal financial
officer and chief accounting officer)
JAMES CABLE FINANCE CORP.
Date: August 14, 2002 By: /s/ William R. James
---------------------------------
William R. James
President
Date: August 14, 2002 By: /s/ Daniel K. Shoemaker
-------------------------------
Daniel K. Shoemaker
Treasurer (Principal financial
officer and chief accounting officer)
29