<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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 Registrants as specified in their charters)
Delaware 38-2778219
Michigan 38-3182724
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
710 North Woodward Avenue, Suite 180 48304
Bloomfield Hills, Michigan (Zip Code)
(Address of Principal Executive Offices)
Registrants' telephone number, including area code: (248) 647-1080
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether each of the registrants (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. Yes /x/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants' knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /x/
The aggregate market value of the voting and non-voting common equity of James
Cable Partners, L.P. held by non-affiliates of James Cable Partners, L.P. is
estimated to be $0.
The aggregate market value of the voting and non-voting common equity of James
Cable Finance Corp. held by non-affiliates of James Cable Finance Corp. is
estimated to be $0.
The number of shares of James Cable Finance Corp. outstanding as of March 15,
1999 was 1,000.
DOCUMENTS INCORPORATED BY REFERENCE
None.
* James Cable Finance Corp. meets the conditions set forth in General
Instruction I (1)(a) and (b) to Form 10-K and is therefore filing with the
reduced disclosure format.
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TABLE OF CONTENTS
Page No.
PART I
Item 1. Business............................................................ 3
General....................................................... 3
Business Strategy............................................. 3
Industry Overview............................................. 5
The Systems................................................... 6
Programming and Subscriber Rates.............................. 9
Internet Services............................................. 10
Customer Service and Marketing................................ 11
Technical Overview............................................ 11
Franchises.................................................... 12
Competition................................................... 13
Legislation and Regulation.................................... 14
Insurance..................................................... 18
Employees..................................................... 18
Item 2. Properties.......................................................... 18
Item 3. Legal Proceedings................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders................. 19
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters.......................................................... 19
Item 6. Selected Financial Data............................................. 20
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 23
Overview...................................................... 23
Results of Operations......................................... 24
Liquidity and Capital Resources............................... 25
Impact of Inflation and Changing Prices....................... 27
Year 2000 Compliance.......................................... 27
Effects of New Accounting Pronouncements...................... 27
Recent Events................................................. 28
Forward-Looking Statements.................................... 28
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......... 31
Item 8. Financial Statements and Supplementary Data......................... 31
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............................. 31
PART III
Item 10. Directors and Executive Officers.................................... 31
Item 11. Executive Compensation.............................................. 32
Item 12. Security Ownership of Certain Beneficial Owners and Management...... 32
Item 13. Certain Relationships and Related Transactions...................... 33
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.... 34
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PART I
ITEM 1. BUSINESS
GENERAL:
James Cable Partners, L.P. ("James," and together with its wholly owned
subsidiary James Cable Finance Corp., the "Company") owns, operates and develops
cable television systems (the "Systems") serving rural communities in eight
geographically and economically diverse clusters. The Company's Systems are
operated under the name "CommuniComm Services" and are located in Oklahoma,
Texas, Georgia, Louisiana, Colorado, Wyoming, Tennessee, Alabama and Florida. As
of December 31, 1998, the Systems passed an estimated 138,040 homes and served
84,755 basic subscribers, representing a basic penetration of 61.4%. The
Company's goal is to maintain its position as the preferred provider of video
services, and to become the single hard wire broadband provider of enhanced
video services, advanced telecommunication services and telephony, in the
markets that it serves. James' principal executive offices are located at 710 N.
Woodward Avenue, Suite 180, Bloomfield Hills, Michigan 48304, and its telephone
number is (248) 647-1080.
James was formed as a limited partnership pursuant to the provisions of the
Delaware Revised Uniform Limited Partnership Act, a certificate of limited
partnership that was filed with the Secretary of the State of Delaware on
January 12, 1988, and an Amended and Restated Agreement of Limited Partnership
dated as of June 30, 1995, as amended (the "Partnership Agreement"). The purpose
of James' formation, as set forth in the Partnership Agreement, is to realize
capital appreciation through the ownership, control and operation of assets
comprising cable television systems. James will be dissolved upon the earliest
to occur of (i) December 31, 2005 (the "Term"), (ii) a determination by the
General Partner of James that James should be dissolved, with the approval of
60% of the Limited Partner interests, (iii) the sale or disposition by James of
substantially all of its assets, (iv) the consent of holders of 66 2/3% of the
Limited Partner interests of James, (v) the removal of the General Partner
pursuant to the terms of the Partnership Agreement, or (vi) the bankruptcy,
insolvency, dissolution or withdrawal of the General Partner. The Term can be
extended upon the affirmative vote of 66 2/3% of the Limited Partner interests
and the consent of the General Partner. In certain of the foregoing cases, the
Limited Partners may elect under the Partnership Agreement to reconstitute the
business of James in a new limited partnership with a new General Partner
elected by the Limited Partners.
Since its inception in 1988, James' business and affairs have been managed and
controlled by its general partner, James Communications Partners, a Michigan
co-partnership (the "General Partner"). The General Partner is managed and
controlled by its three general partners, Jamesco, Inc., Trenary Corp., Ltd, and
DKS Holdings, Inc. See "Part III-Item 10. Directors and Executive Officers." The
General Partner's principal executive office is located at 710 N. Woodward
Avenue, Suite 180, Bloomfield Hills, Michigan 48304 and its telephone number is
(248) 647-1080.
James Cable Finance Corp. ("Finance Corp.") is a wholly-owned subsidiary of
James that was incorporated under the laws of the State of Michigan on June 19,
1997 for the purpose of serving as a co-issuer with James of the $100 million
principal amount notes due 2004 that the Company issued during the third and
fourth quarters of 1997. Finance Corp.'s only asset consists of $1,000 cash and
there are substantial contractual restrictions on its activities. Finance
Corp.'s principal executive office is located at 710 North Woodward Avenue,
Suite 180, Bloomfield Hills, Michigan 48304, and its telephone number is (248)
647-1080.
BUSINESS STRATEGY:
The Company believes that there are competitive and economic advantages to
owning and operating cable television systems in rural markets. Due to lower
population densities and higher per household plant installation costs, rural
markets are more likely than larger urban and suburban markets to have a single
hard wire broadband video and telecommunications service provider. In addition,
cable television systems in rural markets are typically characterized by lower
churn rates and greater penetration than larger urban and suburban markets. In
rural markets, cable service often is required for adequate reception of a full
range of over-the-air television stations. Moreover, fewer entertainment
alternatives are available, and cable television provides a major source of
entertainment.
The Company focuses on maintaining and improving system operating results. The
Company has implemented extensive management, operational and technical changes
designed to improve operating efficiencies, enhance operating cash flow and
reduce overhead through economies of scale. To this end, the Company has
"clustered" its Systems in concentrated geographic areas, which allows fixed
costs to be spread over an expanded subscriber base. In an effort to further
enhance its operational and financial performance, the Company from time to time
considers opportunities to acquire or exchange its assets for cable television
systems located near its existing markets.
Management intends to solidify the Company's position as the preferred provider
of video services and to become the single hard wire broadband provider of
advanced telecommunications services and telephony in the communities that it
serves. The Company's business strategy is to (i) selectively upgrade the
Company's Systems, (ii) provide enhanced digital video, (iii) deliver advanced
telecommunications services, including Internet access, and (iv) pursue
strategic acquisitions.
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- - Selectively Upgrade Systems. The Company is upgrading certain of its cable
television systems to further strengthen the Company's position as the
preferred provider of video services in the communities it serves. These
upgrades, which employ fiber optic technology, increase the bandwidth of
the Company's cable plant generally to 750 megahertz ("MHz"), thereby
increasing channel capacity, enhancing signal quality and improving
technical reliability. The Company believes the upgrades will enable it to
offer comparable or superior video service and quality at attractive
pricing levels relative to its competitors, such as direct broadcast
satellite ("DBS"). The Company also believes that the upgrades will
provide the technical platform necessary for the development and delivery
of advanced telecommunications services and telephony.
As of December 31, 1998, the Company had completed the upgrades of its
cable plant to 750 MHz in Durant and Calera, Oklahoma, serving
approximately 4,600 subscribers; and Hawkinsville and Cochran, Georgia,
serving approximately 2,500 subscribers. The upgrades of the cable plant
serving Douglas, Torrington, Wheatland and Lingle, Wyoming, serving
approximately 5,600 subscribers, have recently been completed.
In addition, the Company is currently in the construction phase of its 750
MHz upgrades to the cable plant in Roanoke, Alabama, serving approximately
2,100 subscribers; and Eatonton and Madison, Georgia, serving
approximately 3,200 subscribers. Also, the Company is supplementing its
450 MHz cable plant with fiber to allow for the introduction of advanced
telecommunications services in Westlake, Louisiana, serving approximately
6,400 subscribers; Decatur, Texas, serving approximately 1,200
subscribers; and High Springs and Alachua, Florida, serving approximately
2,700 subscribers. Upon completion of these projects, all of which are
expected to be completed during 1999, the Company will have the ability to
provide advanced telecommunications services to approximately 28,300
subscribers, which represents approximately 38% of its December 31, 1998
total subscriber base excluding the 9,551 subscribers in the Tennessee
(Wartburg) Cluster which were sold in the first quarter of 1999 (See "Part
II - Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Recent Events").
The Company is continually in the process of identifying other areas
within its Systems which can be upgraded to allow for the introduction of
advanced telecommunications services. However, the Company will only
proceed with upgrades which it believes are economically feasible after
carefully weighing the anticipated revenues against the costs of
completing the upgrade.
- - Provide Enhanced Digital Video. The Company intends to provide enhanced
digital video in the upgraded Systems and certain other Systems using
Headend In The Sky(R) ("HITS"), a digital compression service developed by
National Digital Television Center, Inc., a subsidiary of
Telecommunications, Inc. ("TCI"). HITS will enable the Company to deliver
video services such as pay-per-view programming and a tier or multiple
tiers of niche satellite programming. The Company believes that these
enhanced digital video services will allow it to provide a system
comparable to DBS at a lower cost. The Company had originally planned to
introduce HITS services in its Durant System during 1998, however, due to
delays on the delivery by TCI, the Company's launch date of the HITS
services has been pushed back, and is now expected to occur during the
second quarter of 1999. The Company may schedule introduction in other
Systems after evaluating the success of HITS services in Durant.
- - Deliver Advanced Telecommunications Services, Including Internet Access.
The Company believes that upgraded advanced telecommunications services
will provide additional revenue opportunities with relatively small
incremental capital investment. The Company further believes that cable
infrastructure will provide the fastest, most cost-effective delivery
mechanism for Internet access, inter- and intra- network data services and
telephony.
After its initial launch of high-speed Internet services in Durant,
Oklahoma during the fourth quarter of 1997, the Company has begun offering
either two-way or one-way high-speed Internet services in Roanoke,
Alabama; Decatur, Texas; High Springs and Alachua, Florida; Westlake,
Louisiana; and Hawkinsville, Cochran, Eatonton and Madison, Georgia. While
these high-speed Internet services are fairly new in many of the areas,
the Company currently has approximately 500 high-speed Internet customers.
The Company expects this number to increase throughout 1999 due to an
increased emphasis on marketing of the services offered and customer based
education about the benefits of the use of high-speed Internet services.
In addition to its high-speed Internet services, the Company is also
offering traditional dial-up Internet services in many of its Systems. The
Company's dial-up services are similar to those offered by companies such
as America Online and The Microsoft Network. The Company currently has
approximately 1,600 dial-up Internet customers.
In anticipation of providing telephony, the Company has installed the
required switch interface equipment and installed customer premises
equipment at selected sites in the Durant System. During 1998, the Company
successfully completed its testing of the equipment and also received the
certification necessary to provide telephone service in Oklahoma from the
Oklahoma Corporation Commission. Currently, the Company is seeking the
switching capabilities necessary to allow for the introduction of
telephony to its subscribers in the Durant System.
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- - Pursue Strategic Acquisitions. The Company intends to consider
opportunities to acquire cable television systems. Because it is more cost
effective to provide advanced telecommunications services over an expanded
subscriber base within a concentrated geographic area, the Company will
generally seek to acquire cable television systems, or groups of systems,
in close proximity to its existing Systems and markets. The Company may
also consider acquisitions in other geographic areas where consistent with
its business strategy. Furthermore, the Company may divest itself, through
asset exchanges or outright sales, of cable television systems that do not
readily lend themselves to the Company's business strategy. Factors likely
to be considered by the Company in evaluating the desirability of a
potential acquisition or asset exchange opportunity include price and
terms, subscriber densities, growth potential (in terms of both market and
cash flow) and whether the target system can be readily integrated into
the Company's operations.
INDUSTRY OVERVIEW:
A cable television system receives television, radio and data signals at the
system's "headend" site by means of off-air antennas, microwave relay systems
and satellite earth stations. These signals are then modulated, amplified and
distributed, primarily through coaxial and fiber optic distribution systems, to
deliver a wide variety of channels of television programming, primarily
entertainment and informational video programming, to the homes of subscribers
who pay fees for this service, generally on a monthly basis. A cable television
system may also originate its own television programming and other information
services for distribution through the system. Cable television systems generally
are constructed and operated pursuant to non-exclusive franchises or similar
licenses granted by local governmental authorities for a specified period of
time.
The cable television industry developed in the United States in the late 1940s
and early 1950s in response to the needs of residents in predominantly rural and
mountainous areas of the country where the quality of off-air television
reception was inadequate due to factors such as topography and remoteness from
television broadcast towers. In the 1960s, cable systems also developed in small
and medium-sized cities and suburban areas that had a limited availability of
clear off-air television station signals. All of these markets are regarded
within the cable industry as "classic" cable television system markets. In more
recent years, cable television systems have been constructed in large urban
cities and nearby suburban areas, where good off-air reception from multiple
television stations usually is already available, in order to offer customers
the numerous satellite-delivered channels typically carried by cable systems
that are not otherwise available through broadcast television reception.
Cable television systems offer customers various levels (or "tiers") of cable
services consisting of broadcast television signals of local network affiliates,
independent and educational television stations, a limited number of television
signals from so-called "super stations" originating from distant cities (such as
WGN), various satellite-delivered, non-broadcast channels (such as Cable News
Network ("CNN"), MTV: Music Television ("MTV"), the USA Network ("USA"), ESPN
and Turner Network Television ("TNT")), programming originated locally by the
cable television system (such as public, governmental and educational access
programs) and informational displays featuring news, weather and public service
announcements. For an extra monthly charge, cable television systems also offer
"premium" television services to customers on a per-channel basis. These
services (such as Home Box Office ("HBO"), Showtime and selected regional sports
networks) are satellite channels that consist principally of feature films, live
sporting events, concerts and other special entertainment features, usually
presented without commercial interruption.
A subscriber generally pays an initial installation charge and fixed monthly
fees for basic and premium television services and for other services (such as
the rental of converters and remote control devices). Such monthly service fees
constitute the primary source of revenues for cable television systems. In
addition to subscriber revenues, cable television systems also frequently offer
to their subscribers home shopping services, which pay such systems a share of
revenues from products sold in the systems' service areas. Some cable television
systems also receive revenue from the sale of available spots on
advertiser-supported programming.
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THE SYSTEMS:
The following table sets forth certain operating statistics for the Systems for
the periods indicated:
<TABLE>
<CAPTION>
(dollars in thousands except per subscriber data)
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Homes passed (1) 127,943 128,908 129,291 129,291 138,040
Basic subscribers (2) 80,529 80,190 78,449 78,197 84,755
Basic penetration (3) 62.9% 62.2% 60.7% 60.5% 61.4%
Basic revenues (4) $ 25,096 $ 26,914 $ 29,087 $ 29,978 $ 31,521
Average monthly basic
revenues per subscriber (5) $ 26.16 $ 27.93 $ 30.47 $ 31.92 $ 33.35
Premium subscriptions (6) 28,765 28,900 25,652 24,076 26,413
Premium penetration (7) 35.7% 36.0% 32.7% 30.8% 31.2%
Average monthly total revenues
per subscriber (5) $ 32.17 $ 34.56 $ 36.89 $ 38.10 $ 39.95
Average annual system operating
cash flow per subscriber (8) $ 206 $ 227 $ 238 $ 235 $ 233
Average annual EBITDA per
subscriber (9) $ 179 $ 199 $ 207 $ 202 $ 195
Miles of plant 3,430 3,483 3,483 3,483 3,883
</TABLE>
(1) Homes passed refers to estimates by the Company of the number of dwelling
units in a particular community that can be connected to the distribution
system without any further extension of principal transmission lines. Such
estimates are based upon a variety of sources, including billing records,
house counts, city directories and other local sources.
(2) For purposes of all information presented herein, and unless otherwise
indicated, the number of basic subscribers for the Systems has been
computed by adding the actual number of subscribers for all non-bulk
accounts and the equivalent subscribers for all bulk accounts. The number
of such equivalent subscribers has been calculated by dividing aggregate
basic service revenues for bulk accounts by the full basic service rate for
the community in which the account is located.
(3) Basic subscribers as a percentage of homes passed.
(4) Basic revenues consist of monthly subscription fees for all services (other
than premium programming and Internet service) and monthly charges for
customer equipment rental.
(5) The average of the monthly revenues divided by the number of basic
subscribers at the end of such month during the twelve-month periods ended
December 31 for each year presented.
(6) A customer may purchase more than one premium service, each of which is
counted as a separate premium subscription.
(7) Premium subscriptions as a percentage of basic subscribers.
(8) System operating cash flow divided by the average number of basic
subscribers for the period.
(9) EBITDA divided by the average number of basic subscribers for the period.
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The Company's Systems are divided into eight geographic groups ("Clusters"). The
following table summarizes certain operating data at and for the year ended
December 31, 1998 for the individual clusters:
<TABLE>
<CAPTION>
Average Annualized
Monthly System
Percent of Total Operating System
All Systems Revenues Cash Flow Operating
Homes Basic Basic Basic Premium Premium per per Cash Flow
Cluster Passed Subscribers Subscribers Penetration Subscriptions Penetration Subscriber Subscriber Margin
------- ------ ----------- ----------- ----------- ------------- ----------- ---------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Oklahoma / Texas 33,280 17,022 20.1% 51.1% 5,136 30.2% $ 40.39 $ 231 47.7%
Georgia 19,635 13,807 16.3 70.3 5,502 39.8 39.40 222 46.9
Louisiana 22,450 13,321 15.7 59.3 4,329 32.5 41.51 247 49.5
Colorado / Wyoming 14,750 9,524 11.2 64.6 2,810 29.5 36.97 204 46.0
Tennessee (Wartburg) 14,470 9,551 11.3 66.0 2,162 22.6 40.51 258 53.1
Alabama 13,955 8,344 9.9 59.8 2,187 26.2 36.93 227 51.2
Florida 10,500 6,629 7.8 63.1 2,871 43.3 44.69 248 46.3
Tennessee (Tazewell) 9,000 6,557 7.7 72.9 1,416 21.6 23.81 166 58.2
------- ------- ------ -------
Totals 138,040 84,755 100.0% 61.4% 26,413 31.2% $ 39.95 $ 233 48.6%
======= ======= ====== =======
</TABLE>
The Oklahoma/Texas Cluster. The Oklahoma/Texas Cluster is comprised of Systems
that were acquired in 1988 and 1989, and serves rural communities in
southeastern Oklahoma north of Dallas, Texas and in northern Texas northwest of
Fort Worth. Since 1988, the Company has made $11.7 million in capital
expenditures improving the plant and operations in this Cluster. These
improvements include upgrading many of the Systems to 450 MHz 60-channel
capacity plant, installing three microwave complexes (eliminating the need for
eight separate headends), and upgrading the Durant System to a 750 MHz hybrid
fiber optic-backbone/coaxial ("HFC") cable system.
Since the completion of its 750 MHz upgrade in the Durant System, the Company
has been offering two-way high-speed Internet services to approximately 4,500
subscribers. The Company is currently offering one-way high-speed Internet
services to approximately 1,200 subscribers in its Decatur, Texas System. The
Company is currently in the process of supplementing its 450 MHz cable plant in
Decatur, Texas with fiber. Once this process is complete, the Company will begin
to offer its two-way high-speed Internet service. In addition to the high-speed
Internet services, the Company is offering traditional dial-up Internet services
to a certain portion of the Oklahoma/Texas Cluster. Currently, the
Oklahoma/Texas Cluster has approximately 330 high-speed Internet customers and
approximately 1,160 dial-up Internet customers.
On February 23, 1999, the Company purchased approximately 1,000 dial-up
customers from International Software Consultants, Inc. The Company believes
that this acquisition will make it the largest supplier of Internet services in
the Durant System. The Company intends to promote the benefits of its high-speed
Internet service to the newly acquired customers.
The administrative and customer service operations for this cluster are
consolidated into one main office located in Durant, Oklahoma. This office
provides all customer support, billing, marketing and technical operations for
the Oklahoma/Texas Cluster. The primary employer in the Oklahoma/Texas Cluster's
area is the oil and gas industry. Small manufacturing companies also provide
employment, as does farming and ranching. At December 31, 1998, the number of
homes passed in the Oklahoma/Texas Cluster was estimated to be 33,280 and the
number of basic subscribers and premium subscriptions were 17,022 and 5,136,
respectively.
The Georgia Cluster. The Georgia Cluster is comprised of Systems that were
acquired in three transactions in 1988 and serves rural communities in central
Georgia located east of Atlanta and south of Macon. Since 1988, the Company has
made $9.2 million in capital improvements to the Georgia Cluster. These
improvements include the completion of the Company's 750 MHz upgrade of its
cable plant in Hawkinsville and Cochran as well as the 750 MHz upgrade of its
cable plant in Eatonton and Madison which is nearing completion.
Since the completion of its 750 MHz upgrade in Hawkinsville and Cochran, the
Company has been offering two-way high-speed Internet services to approximately
2,500 subscribers. The Company is currently offering one-way high-speed Internet
services to approximately 3,000 subscribers in Eatonton and Madison. In addition
to the high-speed Internet services, the Company is offering traditional dial-up
Internet services to a certain portion of the Georgia Cluster. Currently, the
Georgia Cluster has approximately 70 high-speed Internet customers and
approximately 25 dial-up Internet customers.
At December 31, 1998, the Georgia Cluster passed an estimated 19,635 homes and
had 13,807 basic subscribers and 5,502 premium subscriptions. The Systems in
this Cluster operate primarily out of one office located in Eatonton, Georgia,
where all customer service, billing, marketing and technical operations are
centralized.
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The Company believes that the economy in the Georgia Cluster's area is very
diversified. There are several large employers in the area, including the
corporate headquarters of Applebee's International, Inc., a regional restaurant
chain, and Warner Robbins Air Force Base.
The Louisiana Cluster. The Louisiana Cluster is comprised of Systems that were
acquired in three transactions in 1988 and serves rural communities in Louisiana
and Texas located near Lake Charles, Louisiana. Since its acquisition of the
Systems in this Cluster, the Company has made $9.4 million in capital
expenditures, upgrading virtually all of these Systems to 450 MHz 60-channel
plants and installing three microwave complexes eliminating the need for eight
headends. At December 31, 1998, the estimated number of homes passed for this
Cluster was 22,450 and the number of basic subscribers and premium subscriptions
were 13,321 and 4,329, respectively.
The Company is currently in the process of supplementing its cable plant in and
around Westlake, Louisiana with fiber. Once this process is complete, it will
allow the Company to offer two-way high-speed Internet services to approximately
6,400 subscribers. Currently, these subscribers are being offered the one-way
high-speed Internet service as well as traditional dial-up service. Currently,
the Louisiana Cluster has approximately 45 high-speed Internet customers and
approximately 10 dial-up Internet customers.
Since acquiring the Louisiana Cluster, the Company has consolidated all
administrative, customer service, technical and marketing operations into one
central office located in Westlake, Louisiana.
The economy in southwestern Louisiana ranges from the farming and cattle
industry to the petro-chemical industry and gaming. Major employers in the area
include CITGO Petroleum Corporation, PPG Industries, Inc. and Conoco, Inc. The
introduction of riverboat casinos on Lake Charles has become very popular due to
the proximity to Houston, and companies like Casino America, Inc. and Players
International, Inc. have become major employers in the area.
The Colorado/Wyoming Cluster. The Colorado/Wyoming Cluster is comprised of
Systems that were acquired in 1988 and serves rural communities located east of
Denver, Colorado and north and west of Cheyenne, Wyoming. This geographically
diverse group of Systems is operated from a central office in Douglas, Wyoming.
Since these Systems were acquired, the Company has made $6.0 million in capital
expenditures to improve plant reliability, reception and service. The Company
completed the 750 MHz HFC upgrade of the Systems serving approximately 5,600
subscribers in Douglas, Torrington, Wheatland and Lingle, Wyoming during the
first quarter of 1999.
With the completion of the 750 MHz upgrade in Douglas, Torrington, Wheatland and
Lingle, the Company can begin to offer its two-way high-speed Internet service
to the approximately 5,600 subscribers. During the first quarter of 1999 the
Colorado/Wyoming Cluster began offering traditional dial-up Internet service to
a portion of its subscriber base. Currently, the Colorado/Wyoming Cluster has
approximately 310 dial-up Internet customers.
The economy in the Colorado/Wyoming Cluster's area is largely dependent on
ranching and farming, the oil and gas industry, and mining. At December 31,
1998, the estimated number of homes passed in this Cluster was 14,750 and the
number of basic subscribers and premium subscriptions were 9,524 and 2,810,
respectively.
The Tennessee (Wartburg) Cluster. The Tennessee (Wartburg) Cluster is comprised
of Systems that were acquired in July 1988 and serves rural communities north
and west of Knoxville, Tennessee. Since its acquisition of the Systems in this
Cluster, the Company has made $5.2 million in capital expenditures, improving
plant reliability, reception and service as well as providing for the
availability of additional channels. Approximately half of these Systems have
been upgraded to 450 MHz 60-channel capacity plants. In addition, the Company
has installed a microwave complex serving over 95% of the subscribers in this
Cluster, thereby eliminating the need for three of the original headends. All
customer service, technical, administrative and marketing services are
centralized in one office in Wartburg, Tennessee.
The economy in the Tennessee Cluster is largely supported by a number of small
manufacturing plants. The Tennessee Valley Authority and the Departments of
Energy and Defense also provide employment in the Tennessee Cluster's
communities. At December 31, 1998, the estimated number of homes passed in this
Cluster was 14,470; the number of basic subscribers and premium subscriptions
were 9,551 and 2,162, respectively.
On July 31, 1998, the Company entered into an Asset Purchase Agreement pursuant
to which the Company agreed to sell its Tennessee (Wartburg) Cluster (See "Part
II - Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Recent Events").
The Alabama Cluster. The Company acquired the Systems comprising the Alabama
Cluster primarily in four transactions in 1988 and 1989. These Systems are
divided into two groups, with one group serving the rural communities located on
the western edge of the state west of Birmingham, Alabama, and the other group
serving communities located south and east of Birmingham, between Birmingham and
Atlanta, Georgia. Since its acquisition of the Systems in this Cluster, the
Company has made $4.4 million in capital
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<PAGE> 9
expenditures, improving the channel capacity in many of these Systems and
improving reliability and channel offerings. In the Systems serving eastern
Alabama, six separate headends have been consolidated into one microwave
complex.
In addition to the improvements described above, construction to upgrade the
cable plant serving approximately 2,100 subscribers in Roanoke, Alabama to 750
MHz is nearing completion. Once this upgrade is complete, which is expected to
occur in the second quarter of 1999, the Company will begin to offer its two-way
high-speed Internet service. In 1998, the Company began to offer its one-way
high-speed Internet service in Roanoke as well as traditional dial-up Internet
service to a portion of its Alabama Cluster. Currently, the Alabama Cluster has
approximately 30 high-speed Internet customers and approximately 65 dial-up
Internet customers.
The operations of the Alabama Cluster are managed from one main office located
in Roanoke, Alabama. All customer service, administrative, technical and
marketing functions have been centralized into the main office. The Alabama
Cluster, as of December 31, 1998, passed an estimated 13,955 homes and had 8,344
basic subscribers and 2,187 premium subscriptions.
The communities served by the Alabama Cluster benefit from a number of small and
large manufacturing companies in the area, including 3M and Wrangler. In
addition, Mercedes-Benz has recently completed a large manufacturing plant in
Tuscaloosa, Alabama, just south of the Company's Systems serving western
Alabama.
The Florida Cluster. The Florida Cluster is comprised of Systems that were
acquired in 1988 and serves several rural communities located near Gainesville,
Florida. Since May 1988, the Company has made $5.6 million in capital
expenditures in this Cluster. The Company has installed a microwave complex,
which eliminated the need for three headends, and has upgraded the majority of
its cable television plant in this Cluster to 450 MHz with 60 channels of
capacity. The majority of the Systems in this Cluster have been consolidated on
one microwave complex, which reduced maintenance and equipment costs.
The Company is in the process of supplementing its 450 MHz cable plant in High
Springs and Alachua, which serves approximately 2,700 subscribers, with fiber.
Once this process is complete, which is expected to occur during 1999, the
Company can begin to offer its two-way high-speed Internet service. The Company
is currently offering its one-way high-speed Internet service to High Springs
and Alachua, as well as traditional dial-up Internet service to a portion of the
Florida Cluster. Currently, the Florida Cluster has approximately 25 high-speed
Internet customers and approximately 50 dial-up Internet customers.
The Company's Florida Cluster operates from a centralized office in High
Springs, Florida. All administrative, customer service, technical and marketing
functions are coordinated from this location. The Florida Cluster, as of
December 31, 1998, passed an estimated 10,500 homes and had 6,629 basic
subscribers and 2,871 premium subscriptions.
The University of Florida, located in Gainesville, has contributed to the
economic stability of the Florida Cluster's areas. Other industries providing
employment in the area include agriculture, ranching and tourism.
The Tennessee (Tazewell) Cluster. The Company acquired the Systems comprising
the Tennessee (Tazewell) Cluster in one transaction on December 10, 1998 (See
"Part II - Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Recent Events"). These Systems serve rural
communities located Northeast of Knoxville, Tennessee. All administrative,
technical and marketing functions are coordinated out of one central office
located in New Tazewell, Tennessee.
The economies of the communities served by the Tennessee (Tazewell) Cluster
benefit from many furniture manufacturers as well as medical supply
manufacturers and the agriculture industry. As of December 31, 1998, the
Tennessee (Tazewell) Cluster passed an estimated 9,000 homes and had 6,557 basic
subscribers and 1,416 premium subscriptions.
PROGRAMMING AND SUBSCRIBER RATES:
The Company has various contracts to obtain basic, satellite and premium
programming for the Systems from program suppliers, including, in limited
circumstances, some broadcast stations, with compensation generally based on a
fixed fee per customer or a percentage of the gross receipts for the particular
service. Some program suppliers provide volume discount pricing structures
and/or offer marketing support. In addition, the Company is a member of a
programming consortium consisting of small to medium sized multiple system
operators and individual cable systems serving, in the aggregate, over ten
million cable subscribers. The consortium helps create efficiencies in the areas
of securing and administering programming contracts, as well as to establish
more favorable programming rates and contract terms for small and medium sized
cable operators. The Company does not have long-term programming contracts for
the supply of a substantial amount of its programming, due in part to ongoing
negotiations with a number of its programming suppliers, but also due to the
Company's belief that it is in its best interests to enter into long-term
programming contracts only if additional benefits are derived from the
contractual arrangements. In cases where the Company does have such contracts,
they are generally for fixed periods of time ranging from one to five years and
are subject to negotiated renewal. While the loss of contracts with certain of
the Company's programming suppliers could have an adverse effect on its results
of operations, management does not believe the risk of such a loss is
particularly great due to the substantial motivation of programming suppliers to
obtain the widest possible audience for their products.
-9-
<PAGE> 10
Cable programming costs are expected to continue to increase primarily due to
additional programming being provided to subscribers, increased costs to
purchase cable programming and inflationary increases. In 1996, 1997 and 1998,
programming costs as a percentage of revenues were 16.9%, 18.3% and 19.9%,
respectively. No assurance can be given that the Company's programming costs
will not increase substantially in the near future or that other materially
adverse terms will not be added to its programming contracts.
The Systems offer their subscribers programming that includes the local network,
independent and educational television stations, a limited number of television
signals from distant cities, numerous satellite-delivered, non-broadcast
channels (such as CNN, MTV, USA, ESPN and TNT) and in some systems local
information and public access channels. The programming offered by the Company
varies among the Systems depending upon each System's channel capacity and
viewer interests. Primarily for competitive reasons, the Company generally
endeavors to offer a single level of basic service containing all broadcast and
satellite-delivered programming. In a few Systems, however, the Company does
offer up to three tiers of basic cable television programming: a broadcast basic
programming tier (consisting generally of network and public television signals
available over-the-air), a satellite programming tier (consisting generally of
satellite-delivered programming such as CNN, USA, ESPN and TNT) and a super
station tier consisting of the so-called "super stations" (for example, WGN).
The Company also offers premium programming services, both on a per-channel
basis and, in many Systems, as part of premium service packages designed to
enhance customer perceived value.
Monthly subscriber rates for services vary from market to market, primarily
according to the amount of programming provided. At December 31, 1998, the
Company's monthly full basic service rates for residential subscribers ranged
from $13.95 to $36.99 and per-channel premium service rates (not including
special promotions) ranged from $5.95 to $12.95 per service. At December 31,
1998, the weighted average price for the Company's monthly full basic service
was approximately $32.89.
A one-time installation fee, which the Company may wholly or partially waive
during a promotional period, is usually charged to new subscribers. The Company
charges monthly fees for converters and remote control tuning devices. The
Company also charges administrative fees for delinquent payments for service.
Subscribers are free to discontinue service at any time without additional
charge but may be charged a reconnection fee to resume service. Commercial
customers, such as hotels, motels and hospitals, are charged a negotiated,
non-recurring fee for installation of service and monthly fees. Multiple
dwelling unit accounts may be offered a bulk rate in exchange for single-point
billing and basic service to all units.
In addition to subscriber fees, the Company derives a small amount of revenue
from the sale of local spot advertising time on locally originated and
satellite-delivered programming. The Company also derives modest amounts of
revenues from affiliations with home shopping services (which offer merchandise
for sale to subscribers and compensate system operators with a percentage of
their sales receipts).
Other potential sources of revenue for cable television systems include the
lease of tower space to cellular telephone, personal communications services
("PCS"), and paging companies and other transmission businesses and the sale of
programming featuring movies and special events to customers on a pay-per-view
basis, which requires the use of addressable technology not presently employed
by the Company. Although the Company does not currently offer pay-per-view
programming, it intends to do so in the future in those Systems where it plans
to launch the HITS service.
While the Company plans to offer advanced telecommunications services (including
Internet services as discussed below) and telephony in certain of its Systems,
it anticipates that monthly subscriber fees from cable television will continue
to constitute the majority of its total revenues for the foreseeable future.
INTERNET SERVICES:
During the fourth quarter of 1997, the Company began offering two-way high-speed
Internet in its Durant, Oklahoma System. During 1998, the Company expanded its
two-way high-speed Internet service into Hawkinsville and Cochran, Georgia, and
began offering one-way high-speed and traditional dial-up Internet services to
some portion of its cable subscribers in all but the Tennessee (Wartburg) and
Tennessee (Tazewell) Clusters.
The two-way high-speed Internet service, which utilizes a cable modem, provides
Internet access at speeds of up to 1.5 Megabits per second. The two-way
high-speed Internet service does not require a phone line for access since all
transmissions are through the customers cable television equipment. The one-way
high-speed Internet service is a hybrid between the two-way high-speed and
traditional dial-up services. With the one-way high-speed Internet service, the
customer dials in to the server over a traditional phone line but receives
information over the cable television equipment. Thus, while the upstream
connection is at a maximum speed of 56 Kilobits per second, the downstream
access can achieve speeds of up to 1.5 Megabits per second. The traditional
dial-up Internet service offered by the Company is similar to dial-up services
offered by companies such as America Online or The Microsoft Network. With
dial-up Internet service, the customer sends and receives information over a
traditional phone line with speeds of up to 56 Kilobits per second.
-10-
<PAGE> 11
Monthly rates charged to Internet customers vary based on the type of service
they receive. In some of the Systems a discount is given to those Internet
customers who also receive the Company's cable television service. At December
31, 1998, the Company's monthly Internet rate varied from $17.95, for a dial-up
customer who also receives cable television, to $54.95 for high-speed commercial
customers.
CUSTOMER SERVICE AND MARKETING:
The Company emphasizes customer service, which it believes is increasingly
important to the successful operation of its business. To meet its objective of
providing high levels of customer service, the Company offers its customers a
full line-up of programming, timely and reliable service (with virtually all
service inquiries responded to within 24 hours) and good picture quality. The
Company's employees receive ongoing training in customer service, sales and
subscriber retention, and technical support. Customer service representatives
and technicians are also trained to market upgrades at the point of sale or
service. In addition, the Company has attempted to establish and to maintain a
local presence and visibility within the communities it serves.
As part of its efforts to maximize cash flow, the Company has sought to add and
retain subscribers and increase cash flow per subscriber by aggressively
marketing its basic and premium service offerings. The Company utilizes a number
of coordinated marketing techniques, including (i) direct door to door sales,
(ii) local newspaper and radio advertising and cable system promotional
advertising insertion in certain satellite programs, (iii) direct mail, (iv)
telemarketing, primarily for premium service subscriptions, and (v) monthly
billing statement inserts.
TECHNICAL OVERVIEW:
The following table sets forth certain information, as of March 1999, regarding
the analog channel capacities and miles of plant of the Systems:
<TABLE>
<CAPTION>
300 MHz 330 MHz 400 MHz 450 MHz 750 MHz (1)
UP TO 36 UP TO 42 UP TO 54 UP TO 62 UP TO 100
CHANNELS CHANNELS CHANNELS CHANNELS CHANNELS TOTAL
-------- -------- -------- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Number of headends 15 19 2 13 5 54
Number of subscribers as of
December 31, 1998 17,716 13,441 2,161 33,613 17,824 84,755
% of subscribers 20.9% 15.9% 2.5% 39.7% 21.0% 100.0%
Miles of Plant 1,139 840 46 1,504 354 3,883
% of miles of plant 29.4% 21.6% 1.2% 38.7% 9.1% 100.0%
</TABLE>
(1) As of December 31, 1998 the Company had completed the upgrades of its cable
plant to 750 MHz in Durant and Calera, Oklahoma, serving approximately
4,600 subscribers; and Hawkinsville and Cochran, Georgia, serving
approximately 2,500 subscribers. The upgrades of the cable plant serving
Douglas, Torrington, Wheatland and Lingle, Wyoming, serving approximately
5,600 subscribers, have recently been completed.
The Company is currently in the construction phase of its 750 MHz upgrades to
the cable plant in Roanoke, Alabama, serving approximately 2,100 subscribers;
and Eatonton and Madison, Georgia, serving approximately 3,200 subscribers.
Also, the Company is supplementing its 450 MHz cable plant with fiber to allow
for the introduction of advanced telecommunications services in Westlake,
Louisiana, serving approximately 6,400 subscribers; Decatur, Texas, serving
approximately 1,200 subscribers; and High Springs and Alachua, Florida, serving
approximately 2,700 subscribers. Upon completion of these projects, all of which
are expected to be completed during 1999, the Company will have the ability to
provide advanced telecommunications services to approximately 28,300
subscribers, which represents approximately 38% of its December 31, 1998 total
subscriber base excluding the 9,551 subscribers in the Tennessee (Wartburg)
Cluster which were sold in the first quarter of 1999 (See "Part II - Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Recent Events").
The Company is continually in the process of identifying other areas within its
Systems which can be upgraded to allow for the introduction of advanced
telecommunications services. However, the Company will only proceed with
upgrades which it believes are economically feasible after carefully weighing
the anticipated revenues against the costs of completing the upgrade.
The Company's Systems have an average capacity of 61 channels. The Company
currently does not use any addressable technology. The Company utilizes a "trap"
scheme whereby a technician installs filters, or traps, at each cabled home
enabling the technician to configure the programming received by each
subscriber. Upon completion of a System upgrade, the Company will enable digital
addressable technology to certain of its subscribers to take advantage of the
HITS service. That service transmits digitally compressed
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<PAGE> 12
signals of niche satellite programming, multiplexed premium services,
pay-per-view movies and music for reception by cable systems, which in turn
deliver them to their subscribers.
The majority of the Company's Systems are wired exclusively with coaxial cable;
the remaining Systems utilize fiber optic cable in conjunction with coaxial
cable. Fiber optic strands are capable of carrying hundreds of video, data and
voice channels over extended distances without the extensive signal
amplification typically required for coaxial cable. The Company plans to use an
HFC design across those portions of its cable plant that serve its highest
subscriber densities to most efficiently upgrade the Systems to 750 MHz.
Additionally, the Company plans to use fiber optic technology to interconnect
certain headends and install fiber backbones to reduce amplifier cascades,
thereby gaining operational efficiencies and improved picture quality and system
reliability.
FRANCHISES:
Cable television systems are generally constructed and operated under
non-exclusive franchises granted by local governmental authorities. These
franchises typically contain many conditions, such as, among others, (i) time
limitations on commencement and completion of construction, (ii) conditions of
service, including number of channels, types of programming and the provision of
free service to schools and certain other public institutions and (iii) the
maintenance of insurance and indemnity bonds. Certain provisions of local
franchises are subject to federal regulation under the Cable Communications
Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act"), and the
Telecommunications Act of 1996 (the "1996 Telecom Act").
At December 31, 1998, the Company held 136 franchises. These franchises,
substantially all of which are non-exclusive, generally provide for the payment
of fees to the issuing authority. Annual franchise fees range up to 5% of the
gross revenues generated by a System. For the past three years, franchise fee
payments made by the Company have averaged approximately 2.7% of total gross
System revenues. Franchise fees are generally passed directly through to the
customers on their monthly bills. General business or utility taxes may also be
imposed in various jurisdictions. The 1984 Cable Act prohibits franchising
authorities from imposing franchise fees in excess of 5% of gross revenues and
also permits the cable operator to seek renegotiation and modification of
franchise requirements if warranted by changed circumstances. Most of the
Company's franchises can be terminated prior to their stated expirations for
uncured breaches of material provisions.
The following table sets forth the number of franchises by year of franchise
expiration and the number and percentage of basic subscribers at December 31,
1998:
<TABLE>
<CAPTION>
PERCENTAGE NUMBER PERCENTAGE
YEAR OF NUMBER OF OF TOTAL OF BASIC OF TOTAL BASIC
FRANCHISE EXPIRATION FRANCHISES FRANCHISES SUBSCRIBERS SUBSCRIBERS
-------------------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Prior to 2001 6 4.0% 1,612 1.9%
2001 - 2005 42 28.2 26,887 31.7
2006 - 2009 40 26.9 24,971 29.5
2010 and after 44 29.5 25,562 30.2
No expiration date 4 2.7 1,390 1.6
----- ----- ------ -----
Subtotal 136 91.3 80,422 94.9
No franchise required 13 8.7 4,333 5.1
----- ----- ------ -----
Total 149 100.0% 84,755 100.0%
===== ===== ====== =====
</TABLE>
The Company believes that it has good relationships with its franchising
authorities. To date, the Company has never had a franchise revoked for any of
its Systems, and no request by the Company for franchise renewals or extensions
has been denied, although such renewed or extended franchises have frequently
resulted in franchise modifications on satisfactory terms.
The 1984 Cable Act provides for, among other things, an orderly franchise
renewal process in which renewal of franchise licenses issued by governmental
authorities will not be unreasonably withheld, or, if renewal is withheld and
the franchise authority chooses to acquire the system or transfer ownership to
another person, such franchise authority or other person must pay the operator
either (i) the "fair market value" (without value assigned to the franchise) for
the system covered by such franchise if the franchise did not exist before the
effective date of the 1984 Cable Act (December 1984) or the franchise was
pre-existing but the franchise agreement did not provide for a buyout or (ii) in
the case of pre-existing franchises with buyout provisions, the price set forth
in such franchise agreements. In addition, the 1984 Cable Act established
comprehensive renewal procedures which require that an incumbent franchisee's
renewal application be assessed on its own merits and not as part of a
comparative process with competing applications.
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<PAGE> 13
The 1984 Cable Act also established buyout rates for franchises which post-date
the existence of the 1984 Cable Act or pre-date the 1984 Cable Act but the
franchise agreement does not contain buyout provisions; in the event the
franchise is terminated "for cause" and the franchise authority desires to
acquire the system, the franchise authority must pay the operator an "equitable"
price. To date, none of the Company's franchises has been terminated.
The 1992 Cable Act prohibits the award of exclusive franchises, prohibits
franchising authorities from unreasonably refusing to award additional
franchises and permits them to operate cable systems themselves without
franchises. The 1996 Telecom Act provides that no state or local laws or
regulations may prohibit or have the effect of prohibiting any entity from
providing any interstate or intrastate telecommunications service. State and
local authorities retain authority to manage the public rights of way and
"competitively neutral" requirements concerning right of way fees, universal
service, public safety and welfare, service quality, and consumer protection are
permitted with respect to telecommunications services.
COMPETITION:
Cable television systems face competition from alternative methods of receiving
and distributing television signals and from other sources of news, information
and entertainment such as off-air television broadcast programming, DBS
services, wireless cable services, newspapers, movie theaters, live sporting
events, online computer services and home video products, including videotape
cassette recorders. The extent to which a cable communications system is
competitive depends, in part, upon the cable system's ability to provide, at a
reasonable price to customers, a greater variety of programming and other
communications services than those which are available off-air or through other
alternative delivery sources and upon superior technical performance and
customer service.
Cable television systems generally operate pursuant to franchises granted on a
nonexclusive basis. The 1992 Cable Act prohibits franchising authorities from
unreasonably denying requests for additional franchises and permits franchising
authorities to operate cable television systems without a franchise. It is
possible that a franchising authority might grant a second franchise to another
company containing terms and conditions more favorable than those afforded the
Company.
Well-financed businesses from outside the cable industry (such as the public
utilities that own the poles to which cable is attached) may become competitors
for franchises or providers of competing services. Congress has repealed the
prohibition against national television networks owning cable systems, and
telephone companies may now enter the cable industry as described below. In one
of the Company's franchise areas, the Company faces direct competition from
another franchised cable television system. In addition, beginning in 1997,
there has been a significant increase in the number of cities that have
constructed their own cable television systems in a manner similar to
city-provided utility services. These systems typically will compete directly
with the existing cable operator without the burdens of franchise fees or other
local regulation. Although the total number of municipal overbuild cable systems
remains small, there appears to be an increasing trend in cities authorizing
such direct municipal competition with cable operators. (One such city is
Forsyth, Georgia. See "Item 3. Legal Proceedings.")
In recent years, the Federal Communications Commission ("FCC") and the Congress
have adopted policies providing a more favorable operating environment for new
and existing technologies that provide, or have the potential to provide,
substantial competition to cable television systems. These technologies include,
among others, DBS service, whereby signals are transmitted by satellite to
receiving facilities located on customer premises. Programming is currently
available to the owners of DBS dishes through conventional, medium and
high-powered satellites. DBS systems have increased channel capacity to over
100, enabling them to provide movies, broadcast stations, Internet access, and
other program service comparable to those of cable television systems. The 1992
Cable Act contains provisions, which the FCC has implemented with regulations,
to enhance the ability of cable competitors to purchase and make available to
home satellite dish owners certain satellite delivered cable programming at
competitive costs. Digital satellite service ("DSS") offered by DBS systems has
certain advantages over cable systems with respect to programming and digital
quality, as well as disadvantages that include high upfront costs and a lack of
local broadcast programming, service and equipment distribution. With respect to
the inability of DBS to provide local broadcast television programming to
subscribers in their local markets, Echostar and other potential DBS providers
have announced their intention to retransmit local broadcast television stations
back into a subscriber's local market. Both Congress and the U.S. Copyright
Office are currently reviewing proposals to allow such transmission and it is
possible that in the near future, DBS systems will be retransmitting local
television broadcast signals back into local television markets. The Company's
strategy of providing pay-per-view and satellite niche programming via the HITS
application in certain of its Systems is designed to combat DSS competition.
"Bundling" of the Company's video service with Internet services and other
advanced telecommunications services in certain of the Company's Systems may
also be an effective tool for combating DSS competition. The principal DBS
systems with which the Company's Systems compete are DirectTV, Echostar and
Primestar.
Cable television systems also compete with wireless program distribution
services such as multichannel multipoint distribution service ("MMDS") which
uses low power microwaves to transmit video programming over the air to
customers ("Wireless Cable"). Wireless Cable licensees were recently authorized
to provide two-way digital services, including Internet access. Additionally,
the FCC has licensed Local Multipoint Distribution Service ("LMDS") systems,
which can provide multichannel wireless video services in the 28 gigahertz
("GHz") band. LMDS is also suited for providing wireless data services,
including the possibility of Internet access.
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<PAGE> 14
Wireless Cable distribution services generally provide many of the programming
services provided by cable systems, and digital compression technology has
increased significantly the channel capacity of the systems. Because MMDS
service requires unobstructed "line of sight" transmission paths, the ability of
Wireless Cable systems to compete may be hampered in some areas by physical
terrain and foliage. Although prohibitive topography and limited "line of sight"
access have limited competition from Wireless Cable systems in a majority of the
Company's franchise service areas, the Company has experienced such competition
in portions of its Systems in Oklahoma, Texas, Louisiana and Florida.
The 1996 Telecom Act eliminated the previous prohibition on the provision of
video programming by local exchange telephone companies ("LECs") in their
telephone service areas. Various LECs currently are seeking to provide video
programming services within their telephone service areas through a variety of
distribution methods, primarily through the deployment of broadband wire
facilities, but also through the use of wireless (MMDS) transmission. Cable
television systems could be placed at a competitive disadvantage if the delivery
of video programming services by LECs becomes widespread, since LECs may not be
required, under certain circumstances, to obtain local franchises to deliver
such video services or to comply with the variety of obligations imposed upon
cable television systems under such franchises. Issues of cross-subsidization by
LECs of video and telephony services also pose strategic disadvantages for cable
operators seeking to compete with LECs that provide video services. The Company
believes, however, that the small markets in which it provides or expects to
provide cable services are unlikely to support competition in the provision of
video and broadband telecommunications services given the lower population
densities and higher costs per subscriber of installing plant.
Although LECs and cable operators can now expand their offerings across
traditional service boundaries, the general prohibition on LEC buyouts (i.e. any
ownership interest exceeding ten percent) of co-located cable systems, cable
operator buyouts of co-located LEC systems and joint ventures between cable
operators and LECs in the same market remains in place. The 1996 Telecom Act
provides a few limited exceptions to this buyout prohibition, including a "rural
exemption." The 1996 Telecom Act also provides the FCC with limited authority to
grant waivers of the buyout prohibition (subject to local franchising authority
approval). The Company believes that significant growth opportunities exist by
establishing cooperative rather than competitive relationships with LECs within
service areas, to the extent permitted by law.
Other new technologies may become competitive with non-entertainment services
that cable television systems can offer. The FCC has authorized television
broadcast stations to transmit textual and graphic information useful both to
consumers and businesses. The FCC also permits commercial and noncommercial FM
stations to use their subcarrier frequencies to provide nonbroadcast services
including data transmissions. The FCC has established an over-the-air
Interactive Video and Data Service that will permit two-way interaction with
commercial and educational programming along with informational and data
services. The expansion of fiber optic systems by LECs and other common carriers
is providing facilities for the transmission and distribution to homes and
businesses of video services, including interactive computer-based services like
the Internet, data and other nonvideo services. The FCC has held spectrum
auctions for licenses to provide PCS. PCS will enable license holders, including
cable operators, to provide voice and data services.
Advances in communications technology as well as changes in the marketplace and
the regulatory and legislative environments are constantly occurring. Thus, it
is not possible to predict the effect that ongoing or future developments might
have on the cable industry or on the operations of the Company.
LEGISLATION AND REGULATION:
General. The operation of cable television systems is extensively regulated by
the FCC, some state governments and most local governments. The
Telecommunications Act of 1996 alters the regulatory structure governing the
nation's telecommunications providers. It removes barriers to competition in
both the cable television market and the local telephone market. Among other
things, it also reduces the scope of cable rate regulation.
The 1996 Telecom Act requires the FCC to undertake a host of implementing
rulemakings, the final outcome of which cannot yet be determined. Moreover,
Congress and the FCC have frequently revisited the subject of cable regulation.
Future legislative and regulatory changes could adversely affect the Company's
operations. This section briefly summarizes key laws and regulations affecting
the operation of the Company's Systems and does not purport to describe all
present, proposed, or possible laws and regulations affecting the Company or its
Systems.
Cable Rate Regulation. The 1992 Cable Act imposed an extensive rate regulation
regime on the cable television industry. Under that regime, all cable systems
are subject to rate regulation, unless they face "effective competition" in
their local franchise area. Federal law now defines "effective competition" on a
community-specific basis as requiring either low penetration (less than 30%) by
the incumbent cable operator, appreciable penetration (more than 15%) by
competing multichannel video providers ("MVPs"), or the presence of a competing
MVP affiliated with a local telephone company.
-14-
<PAGE> 15
Although the FCC rules control, local government units (commonly referred to as
local franchising authorities or "LFAs") are primarily responsible for
administering the regulation of the lowest level of cable -- the basic service
tier ("BST"), which typically contains local broadcast stations and public,
educational, and government ("PEG") access channels. Before an LFA begins BST
rate regulation, it must certify to the FCC that it will follow applicable
federal rules, and many LFAs have voluntarily declined to exercise this
authority. LFAs also have primary responsibility for regulating cable equipment
rates. Under federal law, charges for various types of cable equipment must be
unbundled from each other and from monthly charges for programming services.
The FCC itself directly administers rate regulation of any cable programming
service tiers ("CPST"), which typically contain satellite-delivered programming.
Under the 1996 Telecom Act, the FCC can regulate CPST rates only if an LFA first
receives at least two rate complaints from local subscribers and then files a
formal complaint with the FCC. When new CPST rate complaints are filed, the FCC
now considers only whether the incremental increase is justified and will not
reduce the previously established CPST rate.
Under the FCC's rate regulations, most cable systems were required to reduce
their BST and CPST rates in 1993 and 1994, and have since had their rate
increases governed by a complicated price cap scheme that allows for the
recovery of inflation and certain increased costs, as well as providing some
incentive for expanding channel carriage. The FCC has modified its rate
adjustment regulations to allow for annual rate increases and to minimize
previous problems associated with regulatory lag. Operators also have the
opportunity of bypassing this "benchmark" regulatory scheme in favor of
traditional "cost-of-service" regulation in cases where the latter methodology
appears favorable. Premium cable services offered on a per-channel or
per-program basis remain unregulated, as do affirmatively marketed packages
consisting entirely of new programming products. Federal law requires that the
BST be offered to all cable subscribers, but limits the ability of operators to
require purchase of any CPST before purchasing premium services offered on a
per-channel or per-program basis.
In an effort to ease the regulatory burden on small cable systems, the FCC has
created special rate rules applicable for systems with fewer than 15,000
subscribers owned by an operator with fewer than 400,000 subscribers. The
special rate rules allow for a vastly simplified cost-of-service showing. The
Company is eligible for these simplified cost-of-service rules, and has
calculated its rates generally in accordance with those rules. The 1996 Telecom
Act provides additional relief for small cable operators. For franchising units
with less than 50,000 subscribers and owned by an operator with less than one
percent of the nation's cable subscribers (i.e. approximately 600,000
subscribers) that is not affiliated with any entities with aggregate annual
gross revenues exceeding $250 million, CPST rate regulation is automatically
eliminated. The Company does not now qualify for this additional relief because
certain investors in the Company exceed the annual gross revenue standard and
are deemed to be "affiliates" under current FCC rules. This definition of
"affiliate" is under review by the FCC, and may be modified in the future to
qualify the Company as a small cable operator.
As part of the 1996 Telecom Act, FCC regulation of CPST rates for all systems
(regardless of size) expires on March 31, 1999. However, critics of the cable
television industry have called for the delay of this regulatory sunset and
further have urged more rigorous rate regulation (including limits on
programming cost pass-throughs to cable subscribers) until a greater degree of
competition to incumbent cable operators has developed. The 1996 Telecom Act
also relaxes existing uniform rate requirements by specifying that uniform rate
requirements do not apply where the operator faces "effective competition," and
by exempting bulk discounts to multiple dwelling units, although complaints
about predatory pricing still may be made to the FCC.
Cable Entry Into Telecommunications. The 1996 Telecom Act provides that no state
or local laws or regulations may prohibit or have the effect of prohibiting any
entity from providing any interstate or intrastate telecommunications service.
States are authorized, however, to impose "competitively neutral" requirements
regarding universal service, public safety and welfare, service quality, and
consumer protection. State and local governments also retain their authority to
manage the public rights-of-way and may require reasonable, competitively
neutral compensation for management of the public rights-of-way when cable
operators provide telecommunications service. The favorable pole attachment
rates afforded cable operators under federal law can be gradually increased by
utility companies owning the poles (beginning in 2001) if the operator provides
telecommunications service, as well as cable service, over its plant.
Cable entry into telecommunications will be affected by the regulatory landscape
now being fashioned by the FCC and state regulators. One critical component of
the 1996 Telecom Act to facilitate the entry of new telecommunications providers
(including cable operators) is the interconnection obligation imposed on all
telecommunications carriers. The Eighth Circuit Court of Appeals vacated certain
aspects of the FCC's initial interconnection order, but that decision was
reversed by the Supreme Court in January 1999.
Telephone Company Entry into Cable Television. The 1996 Telecom Act allows
telephone companies to compete directly with cable operators by repealing the
historic telephone company/cable cross-ownership ban. LECs, including the Bell
Operating Companies, can now compete with cable operators both inside and
outside their telephone service areas. Because of their resources, LECs could be
formidable competitors to traditional cable operators, and certain LECs have
begun offering cable service.
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<PAGE> 16
Under the 1996 Telecom Act, a LEC, utility company, or other entity providing
video programming to subscribers through wired facilities will be regulated as a
traditional cable operator (subject to local franchising and federal regulatory
requirements), unless an election is made to provide the video programming via
an "open video system" ("OVS"). To qualify for OVS status, two-thirds of the
system's activated channels must be reserved for unaffiliated entities. The
Fifth Circuit Court of Appeals recently reversed certain of the FCC's OVS rules,
including the FCC's preemption of local franchising.
Although LECs and cable operators can now expand their offerings across
traditional service boundaries, the general prohibition on LEC buyouts (that
is, any ownership interest exceeding 10 percent) of co-located cable systems,
cable operator buyouts of co-located LEC systems, and joint ventures between
cable operators and LECs in the same market remains in place. The 1996 Telecom
Act provides a few limited exceptions to this buyout prohibition, including a
"rural exemption." The 1996 Telecom Act also provides the FCC with the limited
authority to grant waivers of the buyout prohibition (subject to LFA approval).
Electric Utility Entry Into Telecommunications/Cable Television. The 1996
Telecom Act provides that registered utility holding companies and subsidiaries
may provide telecommunications services (including cable television)
notwithstanding the Public Utilities Holding Company Act. Electric utilities
must establish separate subsidiaries, known as "exempt telecommunications
companies" and must apply to the FCC for operating authority. Again, because of
their resources, electric utilities could be formidable competitors to
traditional cable companies.
Additional Ownership Restrictions. The 1996 Telecom Act eliminates statutory
restrictions on broadcast/cable cross-ownership (including broadcast
network/cable restrictions), but leaves in place existing FCC regulations
prohibiting local cross-ownership between co-located television stations and
cable systems. The 1996 Telecom Act leaves in place existing restrictions on
cable cross-ownership with satellite master antenna television ("SMATV") and
MMDS facilities, but lifts those restrictions where the cable operator is
subject to effective competition. FCC regulations permit cable operators to own
and operate separate SMATV systems within their franchise area, provided that
such operation is consistent with local cable franchise requirements.
Pursuant to the 1992 Cable Act, the FCC adopted rules precluding a cable system
from devoting more than 40% of its activated channel capacity to the carriage of
affiliated national program services. A companion rule establishing a nationwide
ownership cap on any cable operator equal to 30% of all domestic cable
subscribers has been stayed pending further judicial review, although the FCC
recently expressed an interest in reviewing and reimposing this limit.
There are no federal restrictions on non-U.S. entities having an ownership
interest in cable television systems or the FCC licenses commonly employed by
such systems.
Must Carry/Retransmission Consent. The 1992 Cable Act conveyed to a commercial
broadcaster the right generally to elect every three years either to require (i)
the local cable operator to carry its signals ("must carry") or (ii) that such
operator obtain the broadcaster's retransmission consent before doing so. The
Company has been able to reach agreements with all of the broadcasters who
elected retransmission consent and has not been required by broadcasters to
remove any broadcast stations from the cable television channel line-ups. The
Company has, however, agreed in limited circumstances to the direct payment of
nominal fees for carriage and, again in limited circumstances, to carry
satellite-delivered cable programming which is affiliated with the network
carried by such stations. To date, compliance with the "retransmission consent"
and "must carry" provisions of the 1992 Cable Act has not had a material effect
on the Company, although this result may change in the future depending on such
factors as market conditions, channel capacity and similar matters when such
arrangements are renegotiated. In particular, the burden associated with must
carry obligations could dramatically increase if television broadcast stations
proceed with planned conversions to digital transmissions and if the FCC
determines that cable systems must carry all analog and digital signals
transmitted by the television stations. A rulemaking is now pending at the FCC
regarding the imposition of dual digital and analog must carry provisions.
Access Channels. LFAs can include franchise provisions requiring cable operators
to set aside certain channels for public, educational and governmental access
programming. Federal law also requires cable systems to designate a portion of
their channel capacity (up to 15% in some cases) for commercial leased access by
unaffiliated third parties. The FCC has adopted rules regulating the terms,
conditions and maximum rates a cable operator may charge for use of this
designated channel capacity, but, to date, use of commercial leased access
channels has been relatively limited.
Access to Programming. To spur the development of independent cable programmers
and competition to incumbent cable operators, the 1992 Cable Act imposed
restrictions on the dealings between cable operators and cable programmers. Of
special significance from a competitive business posture, the 1992 Cable Act
precludes video programmers affiliated with cable companies from favoring cable
operators over competitors and requires such programmers to sell their
programming to other multichannel video distributors. This provision limits the
ability of vertically integrated cable programmers to offer exclusive
programming arrangements to cable companies. Recently, there has been increased
interest in further restricting the marketing practices of cable programmers,
including the possibility of subjecting video programmers who are not affiliated
with cable operators to all program access requirements. In addition, some cable
industry critics have argued that vertically integrated, non-satellite
programming (such as certain regional sports networks), which are now exempt
from the ban on exclusive programming, should be subjected to this prohibition.
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<PAGE> 17
Inside Wiring. The FCC has determined that an incumbent cable operator can be
required by the owner of a multiple dwelling unit ("MDU") complex to remove,
abandon or sell the "home run" wiring it initially provided. In addition, the
FCC is reviewing the enforceability of contracts to provide exclusive video
services within a MDU complex. The FCC has proposed abrogating all such
contracts held by incumbent cable operators, but allowing such contracts when
held by new entrants. These changes, and others now being considered by the FCC,
would, if implemented, make it easier for a MDU complex owner to terminate
service from an incumbent cable operator in favor of a new entrant and leave the
already competitive MDU sector even more challenging for incumbent cable
operators. In a separate proceeding, the FCC has preempted restrictions on the
deployment of private antennas on rental property within the exclusive use of a
tenant (such as balconies and patios).
Other FCC Regulations. In addition to the FCC regulations noted above, there are
other FCC regulations covering such areas as equal employment opportunity,
subscriber privacy, programming practices (including, among other things,
syndicated program exclusivity, network program nonduplication, local sports
blackouts, indecent programming, lottery programming, political programming,
sponsorship identification, children's programming advertisements, and closed
captioning), registration of cable systems and facilities licensing, maintenance
of various records and public inspection files, frequency usage, lockbox
availability, antenna structure notification, tower marking and lighting,
consumer protection and customer service standards, technical standards,
consumer electronics equipment compatibility, and Emergency Alert Systems. The
FCC recently stated that cable customers must be allowed to purchase cable
converters from third party vendors, and established a multi-year phase-in
during which security functions (which would remain in the operator's exclusive
control) would be unbundled from basic converter functions (which could then be
satisfied by third party vendors). Details regarding this phase-in are still
under FCC review. The FCC has the authority to enforce its regulations through
the imposition of substantial fines, the issuance of cease and desist orders
and/or the imposition of other administrative sanctions, such as the revocation
of FCC licenses needed to operate certain transmission facilities used in
connection with cable operations.
The FCC is currently considering whether cable customers must be allowed to
purchase cable converters from third party vendors. If the FCC concludes that
such distribution is required, and does not make appropriate allowances for
signal piracy concerns, it may become more difficult for cable operators to
combat theft of service.
Internet Service Regulation. The Company began offering high-speed Internet
services to subscribers in its Durant System during 1997 and expanded its
Internet services to many other Systems during 1998. Although there is no
significant federal regulation of cable system delivery of Internet services at
the current time, and even though the FCC recently issued a report to Congress
finding no immediate need to impose such regulation, this situation may change
as cable systems expand their broadband delivery of Internet services. In
particular, proposals have been advanced at the FCC that would require cable
operators to provide access to unaffiliated Internet service providers and
online service providers. Certain Internet service providers are attempting
to use existing commercial leased access provisions to gain access to cable
system delivery. Finally, some LFAs are considering the imposition of mandatory
Internet access requirements as part of cable franchise renewals or transfer
approvals.
Copyright. Cable television systems are subject to federal copyright licensing
covering carriage of television and radio broadcast signals. In exchange for
filing certain reports and contributing a percentage of their revenues to a
federal copyright royalty pool (which varies depending on the size of the system
and the number of distant broadcast television signals carried), cable operators
can obtain blanket permission to retransmit copyrighted material on broadcast
signals. The possible modification or elimination of this compulsory copyright
license is the subject of continuing legislative review and could adversely
affect the Company's ability to obtain desired broadcast programming. In
addition, the cable industry pays music licensing fees to BMI and is negotiating
a similar arrangement with ASCAP. Copyright clearances for nonbroadcast
programming services are arranged through private negotiations.
State and Local Regulation. Cable television systems generally are operated
pursuant to nonexclusive franchises granted by a municipality or other state or
local government entity in order to cross public rights-of-way. Federal law now
prohibits franchise authorities from granting exclusive franchises or from
unreasonably refusing to award additional franchises. Cable franchises generally
are granted for fixed terms and in many cases include monetary penalties for
non-compliance and may be terminable if the franchisee fails to comply with
material provisions.
The terms and conditions of franchises vary materially from jurisdiction to
jurisdiction. Each franchise generally contains provisions governing cable
operations, service rates, franchise fees, system construction and maintenance
obligations, system channel capacity, design and technical performance, customer
service standards, and indemnification protections. Although LFAs have
considerable discretion in establishing franchise terms, there are certain
federal limitations. For example, LFAs cannot insist on franchise fees exceeding
5% of the system's gross revenues, cannot dictate the particular technology used
by the system, and cannot specify video programming other than identifying broad
categories of programming.
Federal law contains renewal procedures designed to protect incumbent
franchisees against arbitrary denials of renewal. Even if a franchise is
renewed, the franchise authority may seek to impose new and more onerous
requirements such as significant upgrades in facilities and services or
increased franchise fees as a condition of renewal. Similarly, if a franchise
authority's consent is required for
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<PAGE> 18
the purchase or sale of a cable system or franchise, such authority may attempt
to impose more burdensome or onerous franchise requirements in connection with a
request for consent. Historically, franchises have been renewed for cable
operators that have provided satisfactory services and have complied with the
terms of their franchises. However, there can be no assurance that renewal will
be granted or that renewals will be made on similar terms and conditions.
Various proposals have been introduced at the state and local levels with regard
to the regulation of cable television systems, and a number of states have
adopted legislation subjecting cable television systems to the jurisdiction of
state governmental agencies. Tennessee and Florida, states where the Company
operates Systems, have enacted legislation with respect to the regulation of
cable television systems. In addition, a number of communities that the Company
serves have adopted local rate regulation and customer service ordinances.
INSURANCE:
The Company has insurance covering risks incurred in the ordinary course of
business, including general liability, property coverage and business
interruption insurance. As is typical in the cable television industry, the
Company does not maintain insurance covering its underground plant. Because of
the industry-wide casualty insurance reductions that resulted from insurers'
loss experience with several hurricanes in the southeastern portion of the
United States, the Company's casualty insurance in Florida and Louisiana was
ultimately reduced to $1 million per occurrence. All of the Company's casualty
insurance coverage is subject to deductibles ranging between $10,000 and
$100,000 per occurrence. The Company believes that its Systems in Florida and
Louisiana are located in areas that are not subject to a high degree of risk
from hurricanes, or from ice storms (which do pose a significant risk for its
Systems in other areas), and that losses in excess of its existing coverage
would be unlikely. If the Company is unable to maintain adequate casualty
insurance it will be subject to a potential reduction in cash flow in the event
of a loss in excess of its policy limits, and if a significant loss were to
occur, it could have a material adverse effect on the Company's financial
condition and results of operations. Notwithstanding the foregoing, the Company
believes that the amounts and types of its insurance coverage are commercially
reasonable given the nature and types of the Company's business and properties.
EMPLOYEES:
At December 31, 1998, the Company had approximately 165 full-time employees and
5 part-time employees. None of the Company's employees is represented by a labor
union. The Company considers its relations with its employees to be good.
ITEM 2. PROPERTIES
A cable television system consists of four principal operating components. The
first component, known as the headend, receives television, radio and
information signals by means of special antennas and satellite earth stations.
The second component, the distribution network, which originates at the headend
and extends throughout the system's service area, consists of microwave relays,
coaxial or fiber optic cables placed on utility poles or buried underground and
associated electronic equipment. The third component of the system is a "drop
cable," which extends from the distribution network into each customer's home
and connects the distribution system to the customer's television set. The
fourth component, a converter, is the home terminal device that expands channel
capacity to permit reception of more than twelve channels of programming.
The Company's principal physical assets consist of cable television systems,
including signal-receiving, encoding and decoding apparatus, headends,
distribution systems and subscriber house drop equipment for each of its
Systems. The signal receiving apparatus typically includes a tower, antenna,
ancillary electronic equipment and earth stations for reception of satellite
signals. Headends, consisting of associated electronic equipment necessary for
the reception, amplification and modulation of signals, are located near the
receiving devices. The Company's distribution systems consist primarily of
coaxial cable and related electronic equipment. As the upgrades are completed,
the Systems will incorporate fiber optic cable. Subscriber equipment consists of
taps, house drops and converters. The Company owns its distribution systems,
various office fixtures, test equipment and certain service vehicles. The
physical components of the Systems require maintenance and periodic upgrading to
keep pace with technological advances.
The Company's cables generally are attached to utility poles under pole rental
agreements with local public utilities, although in some areas the distribution
cable is buried in underground ducts or trenches. The FCC regulates most pole
attachment rates under the federal Pole Attachment Act.
The Company owns or leases parcels of real property for signal reception sites
(antenna towers and headends), microwave complexes and business offices. The
Company believes that its properties, both owned and leased, are in good
condition and are suitable and adequate for the Company's business operations as
presently conducted.
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<PAGE> 19
ITEM 3. LEGAL PROCEEDINGS
In January 1992, in an action initiated by the Company, the Chancery Court for
Fentress County, Tennessee ordered the City of Jamestown, Tennessee
("Jamestown") to cease the operation of its municipally-owned cable television
system (which overbuilt approximately 900 of the Company's subscribers) for the
remaining term of the Company's exclusive franchise (which runs through March
14, 2002), and Jamestown ceased operation of its system. Subsequently, on
Jamestown's motion, the Chancery Court dissolved its order on the ground that
the 1992 Cable Act preempted the exclusivity provision of the Company's
exclusive franchise, and Jamestown resumed operation of its system. On April 7,
1993, in an action commenced by the Company, the United States District Court
for the Middle District of Tennessee entered an order enjoining Jamestown from
competing with the Company. Jamestown appealed to the United States Court of
Appeals for the Sixth Circuit, which affirmed the order. The Sixth Circuit Court
of Appeals subsequently ruled that Jamestown is required to correct violations
of the National Electric Safety Code with respect to its cable plant, and
remanded the case to the District Court for further proceedings consistent with
the Court of Appeals' decision.
On October 7, 1997, the City Council of Forsyth, Georgia ("Forsyth"), a
community in which the Company provides service, voted to spend $2.7 million to
build a broadband telecommunications plant in competition with the Company. On
December 2, 1997, Forsyth passed a resolution to sell $3 million in revenue
bonds to finance the proposed project. In order to protect its customer base in
Forsyth and surrounding Monroe County, Georgia, the Company sued Forsyth under
the Georgia Open Records Act to force the public disclosure of various documents
concerning, among other things, the feasibility and risk of Forsyth's proposed
project. Forsyth responded by counterclaiming to preliminarily enjoin the
Company from seeking further information under the Georgia Open Records Act and
from making further statements to the public concerning Forsyth's proposed
project. At a hearing before the Superior Court for Monroe County on January 27,
1998, the Court denied Forsyth's motion for preliminary injunction. After the
Company moved to have Forsyth's counterclaim dismissed, Forsyth voluntarily
dismissed its counterclaim. The Company has filed a motion with the court to
recover its legal costs related to Forsyth's counterclaim. A hearing on this
motion is pending. The court has not yet ruled on the Company's request, under
the Georgia Open Records Act, for disclosure of the documents relating to the
City's proposed project.
On February 2, 1999 the Company and Forsyth entered into an Asset Purchase
Agreement (the "Agreement"), pursuant to which the Company has agreed to sell
its cable television system which serves Forsyth, and surrounding Monroe County,
to Forsyth for approximately $2.3 million in cash. Consummation of the
transactions contemplated by this agreement is expected to occur during March
1999 and is subject to certain conditions. If the transactions contemplated in
the Agreement are consummated, all litigation related to the matter will be
dismissed through the exchange of mutual releases.
In addition, the Company is a party to ordinary and routine litigation
proceedings that are incidental to the Company's business. Management believes
that the outcome of all pending legal proceedings will not, in the aggregate,
have a material adverse effect on the financial condition or results of
operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of James' limited partners or Finance
Corp.'s sole shareholder during the fourth quarter of 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
EQUITY INTERESTS:
Equity interests in James consist of a general partnership interest and limited
partnership interests. The general partnership interest represents 0.97% of
James' total partnership interest and the limited partnership interests
represent the balance of James' total partnership interest. James has been a
privately held entity since its formation in 1988 and no trading market exists
for either the general partnership interest or the limited partnership
interests. At December 31, 1998, there was one holder of the general partnership
interest and 26 holders of the limited partnership interests. See also "Part III
- - Item 10. Directors and Executive Officers" and " - Item 12. Security Ownership
of Certain Beneficial Owners and Management." James has not made any
distributions of cash or property to any of its partners since the date of its
inception.
Equity interests in Finance Corp. consist of shares of its common stock, no par
value per share. Finance Corp. has been a privately held entity since its
formation and no trading market exists for such common stock. At December 31,
1998, 1,000 shares of common stock were issued and outstanding, all of which
were owned of record and beneficially by James. Finance Corp. has never paid or
declared a dividend.
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<PAGE> 20
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain historical financial data for
the Company for each of the years in the five-year period ended December 31,
1998. The financial data for the years ended December 31, 1994 to 1998 were
derived from the financial statements of the Company which have been audited by
Deloitte & Touche LLP, independent auditors. The financial statements of the
Company at December 31, 1997 and 1998 and for each of the years in the
three-year period ended December 31, 1998, together with the report of Deloitte
& Touche LLP thereon, appear elsewhere in this Form 10-K.
-20-
<PAGE> 21
SELECTED FINANCIAL DATA
(AMOUNTS IN THOUSANDS, EXCEPT SUBSCRIBER DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 30,864 $ 33,305 $ 35,213 $ 35,778 $ 37,758
System operating expenses (1) 14,408 15,073 16,249 17,400 19,410
Non-system operating expenses (2) 2,136 2,280 2,480 2,585 2,960
Depreciation and amortization 14,102 12,214 9,272 7,930 7,561
-------------------------------------------------------------------------
Operating income 218 3,738 7,212 7,863 7,827
Interest expense, net 8,416 9,659 8,852 9,470 11,026
Other expenses, net 607 141 254 233 112
-------------------------------------------------------------------------
Loss before extraordinary item (8,805) (6,062) (1,894) (1,840) (3,311)
Extraordinary loss due to debt
refinancing -- 548 -- 3,125 --
-------------------------------------------------------------------------
Net loss $( 8,805) $( 6,610) $( 1,894) $( 4,965) $( 3,311)
=========================================================================
OTHER DATA:
EBITDA (3) $ 14,320 $ 15,952 $ 16,484 $ 15,793 $ 15,388
System operating cash flow (4) 16,456 18,232 18,964 18,378 18,348
Capital expenditures 1,391 2,405 3,942 7,596 9,171
EBITDA margin (5) 46.4% 47.9% 46.8% 44.1% 40.8%
Ratio of earnings to fixed
charges (6) -- -- -- -- --
CASH FLOW DATA:
Cash provided by operating
activities $ 7,812 $ 6,901 $ 9,066 $ 8,403 $ 5,133
Cash used in investing
activities (1,105) (2,405) (3,942) (7,596) (16,971)
Cash (used in) provided by
financing activities (7,611) (3,844) (6,079) 8,995 3,400
-------------------------------------------------------------------------
Net (decrease) increase in cash $( 904) $ 652 $( 955) $ 9,802 $( 8,438)
=========================================================================
SUMMARY SUBSCRIBER DATA:
Homes passed (7) 127,943 128,908 129,291 129,291 138,040
Basic subscribers (8) 80,529 80,190 78,449 78,197 84,755
Basic penetration (9) 62.9% 62.2% 60.7% 60.5% 61.4%
Premium subscriptions (10) 28,765 28,900 25,652 24,076 26,413
Premium penetration (11) 35.7% 36.0% 32.7% 30.8% 31.2%
Average monthly total revenues
per subscriber (12) $ 32.17 $ 34.56 $ 36.89 $ 38.10 $ 39.95
System operating cash flow per
subscriber (13) $ 206 $ 227 $ 238 $ 235 $ 233
EBITDA per subscriber (14) $ 179 $ 199 $ 207 $ 202 $ 195
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 404 $ 1,056 $ 101 $ 9,903 $ 1,465
Total assets 46,746 39,727 32,844 43,912 44,367
Total debt 88,284 88,573 82,494 100,000 103,500
Partners' deficit (47,022) (54,452) (56,346) (65,711) (69,022)
</TABLE>
(see footnotes on the following page)
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<PAGE> 22
NOTES TO SELECTED FINANCIAL DATA
(1) System operating expenses exclude depreciation and amortization.
(2) Non-system operating expenses consist primarily of management fees payable
to the General Partner of the Company.
(3) 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.
(4) System operating cash flow represents revenues less system operating
expenses. System operating cash flow 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.
(5) EBITDA margin represents EBITDA divided by revenues.
(6) For purposes of calculating the ratio of earnings to fixed charges,
earnings include loss before extraordinary items plus interest expense
(which includes amortization of debt issuance costs). Fixed charges consist
of interest expense incurred (including amortization of debt issuance
costs) and the estimated interest component of rent expense. Earnings were
inadequate to cover fixed charges by $8.8 million, $6.1 million, $1.9
million, $1.8 million and $3.3 million for the years ended December 31,
1994, 1995, 1996, 1997 and 1998, respectively.
(7) Homes passed refers to estimates by the Company of the number of dwelling
units in a particular community that can be connected to the distribution
system without any further extension of principal transmission lines. Such
estimates are based upon a variety of sources, including billing records,
house counts, city directories and other local sources.
(8) For purposes of all information presented herein, unless otherwise
indicated, the number of basic subscribers for the Systems has been
computed by adding the actual number of subscribers for all non-bulk
accounts and the equivalent subscribers for all bulk accounts. The number
of such equivalent subscribers has been calculated by dividing aggregate
basic service revenues for bulk accounts by the full basic service rate for
the community in which the account is located.
(9) Basic subscribers as a percentage of homes passed.
(10) A customer may purchase more than one premium service, each of which is
counted as a separate premium subscription.
(11) Premium subscriptions as a percentage of basic subscribers.
(12) The average of the monthly total revenues divided by the number of basic
subscribers at the end of such month during the twelve-month periods ended
December 31 for each year presented.
(13) System operating cash flow divided by the average number of basic
subscribers for the period.
(14) EBITDA divided by the average number of basic subscribers for the period.
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<PAGE> 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion provides information regarding the Company's financial
condition and results of operations for each of the years ended December 31,
1996, 1997 and 1998. This discussion should be read in conjunction with the
consolidated financial statements of the Company, and the notes thereto, which
appear elsewhere herein.
OVERVIEW:
Revenues. The Company's revenues are primarily attributable to subscription fees
charged to subscribers to the Company's basic and premium cable television
programming services. Basic revenues consist of monthly subscription fees for
all services (other than premium programming and Internet service) as well as
monthly charges for customer equipment rental. Premium revenues consist of
monthly subscription fees for programming provided on a per-channel basis.
Internet revenues consist of monthly subscription fees, leased line fees and
cable modem installation charges. In addition, other revenues are derived from
installation and reconnection fees charged to subscribers to commence service,
late payment fees, franchise fees, advertising revenues and commissions related
to the sale of goods by home shopping services. At December 31, 1998, the
Company had 84,755 basic subscribers and 26,413 premium subscriptions,
representing basic penetration of 61.4% and premium penetration of 31.2%. The
table below sets forth for the periods indicated the percentage of the Company's
total revenues attributable to the various sources:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Basic 82.6% 83.8% 83.5%
Premium 10.0 9.2 8.7
Internet 0.0 0.0 0.3
Other 7.4 7.0 7.5
------ ------ ------
Total Revenues 100.0% 100.0% 100.0%
====== ====== ======
</TABLE>
System Operating Expenses. System operating expenses are comprised of variable
operating expenses and fixed selling, service and administrative expenses
directly attributable to the Systems. Variable operating expenses consist of
costs directly attributable to providing cable and Internet services to
customers and therefore generally vary directly with revenues. Variable
operating expenses include programming fees paid to suppliers of programming the
Company includes in its basic and premium cable television services, as well as
expenses related to copyright fees, franchise operating fees and bad debt
expenses. Satellite programming fees have historically increased at rates in
excess of inflation due in part to improvements in the quality of programming.
Selling, service and administrative expenses directly attributable to the
Systems include the salaries and wages of the field and office personnel, plant
operating expenses, office and administrative expenses and sales costs.
Non-System Operating Expenses. Non-system operating expenses consist primarily
of general overhead expenses which are not directly attributable to any one
System. These expenses include most legal, audit and tax fees, an incentive
bonus pool accrual for the General Managers of the Systems and amounts paid to
the General Partner for management expenses.
Significant Leverage. At December 31, 1998, the Company's indebtedness was
$103.5 million, its total assets were $44.4 million, and its partners' deficit
was $69.0 million. Due to the Company's high degree of leverage: (a) a
substantial portion of its cash flow from operations will be committed to the
payment of its interest expense and will not be available for other purposes;
(b) the Company's ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions or other purposes may be
limited; and (c) the Company is more highly leveraged than many cable television
companies and certain DBS and telephone companies, which may limit the Company's
flexibility in reacting to changes in its business.
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<PAGE> 24
RESULTS OF OPERATIONS:
The following table sets forth the percentage relationship that the various
items bear to revenues for the periods indicated:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
System operating expenses 46.1 48.6 51.4
Non-system operating expenses 7.0 7.2 7.9
Depreciation and amortization 26.3 22.2 20.0
------ ------ ------
Operating income 20.6 22.0 20.7
Interest expense, net 25.1 26.5 29.2
Other expenses, net 0.7 0.7 0.3
------ ------ ------
Loss before extraordinary item (5.2) (5.2) (8.8)
Extraordinary loss due to debt
refinancing -- 8.7 --
------ ------ ------
Net loss (5.2)% (13.9)% (8.8)%
====== ====== ======
EBITDA margin 46.8% 44.1% 40.8%
</TABLE>
RESULTS OF OPERATIONS -- YEAR ENDED DECEMBER 31, 1998 VERSUS YEAR ENDED DECEMBER
31, 1997:
Revenues. Revenues in 1998 were $37.8 million, an improvement of $2.0 million,
or 5.5%, over revenues of $35.8 million in 1997. In 1998, basic revenues
increased by $1.5 million, or 5.1%, primarily due to increases in subscription
rates. Average basic revenues per subscriber per month increased from $31.92 to
$33.35, or 4.5%, between 1997 and 1998.
Subscribers. During 1998 the Company experienced an increase of 6,558
subscribers (from 78,197 at December 31, 1997 to 84,755 at December 31, 1998).
The acquisition on Fannon Cable TV, Inc. (see "Recent Events") accounts for
6,557 of the increased subscribers. Without the Fannon acquisition, the
Company's subscriber count was essentially unchanged from 1997 to 1998. The
Company believes that the non growth of its subscriber base is a result of the
increased availability and affordability of competitive video services and
generally reflects the cable industry's experience as a whole with respect to
increased competition from satellite dishes and wireless cable services. The
Company continues to respond to this competition with an aggressive marketing
strategy and certain strategic capital improvement projects.
System Operating Expenses. System operating expenses increased 11.6% from $17.4
million in 1997 to $19.4 million in 1998. This increase was primarily due to
$900,000 of variable cost increases associated with higher programming fees
(which increased from $6.6 million in 1997 to $7.5 million in 1998). In
addition, selling, service and administrative expenses of the Systems increased
8.5%, from $9.3 million in 1997 to $10.1 million in 1998, due to increased fixed
costs (including approximately $360,000 of additional costs related to the
launching of Internet services in certain of the Company's Systems during 1998).
Non-System Operating Expenses. Non-system operating expenses, which consist
primarily of amounts paid to the General Partner for management expenses
increased 14.5% to $3.0 million in 1998 from $2.6 million in 1997, primarily due
to increases in legal and other professional fees.
EBITDA. As a result of the foregoing, EBITDA in 1998 was $15.4 million, a
decrease of 2.6% from EBITDA in 1997 of $15.8 million.
Depreciation and Amortization. Depreciation and amortization decreased 4.6% from
$7.9 million in 1997 to $7.6 million in 1998, primarily due to certain assets
becoming fully depreciated.
Interest Expense, Net. Interest expense, net increased $1.6 million, or 16.4%,
from $9.5 million in 1997 to $11.0 million in 1998. This increase is primarily
the result of a change in the Company's debt structure that occurred in 1997.
During 1997 the Company had an average debt balance of approximately $89 million
and an average interest rate of approximately 10.8%, both of which were affected
by the Company's refinancing which took place on August 15, 1997. During 1998,
the Company's average debt balance increased to $100 million with an average
interest rate of 10.75%. These changes in the debt structure resulted in an
increase in interest expense of approximately $1.7 million from 1997 to 1998.
This increase in interest expense was partially offset by an increase in
interest income of approximately $200,000 from 1997 to 1998.
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<PAGE> 25
Loss before Extraordinary Item. As a result of the foregoing factors, the
Company's loss before extraordinary items increased $1.5 million from $1.8
million in 1997 to $3.3 million in 1998.
Net Loss. As a result of the foregoing factors, and because of the extraordinary
loss due to debt refinancing of $3.1 million in 1997, net loss decreased $1.7
million from $5.0 million in 1997 to $3.3 million in 1998.
RESULTS OF OPERATIONS -- YEAR ENDED DECEMBER 31, 1997 VERSUS YEAR ENDED DECEMBER
31, 1996:
Revenues. Revenues in 1997 were $35.8 million, an improvement of $600,000, or
1.6%, over revenues of $35.2 million in 1996. In 1997, basic revenues increased
by $900,000, or 3.1%, primarily due to increases in subscription rates. Average
basic revenues per subscriber per month increased from $30.47 to $31.92, or
4.8%, between 1996 and 1997.
Subscribers. During 1997, the Company experienced a decline of 252 subscribers
(from 78,449 at December 31, 1996 to 78,197 at December 31, 1997). The Company
believes that this decline resulted from the increased availability and
affordability of competitive video services and generally reflects the cable
industry's experience as a whole with respect to increased competition from
satellite dishes and wireless cable services. The Company has responded with
increased and more concentrated marketing and certain strategic capital
improvement projects.
System Operating Expenses. System operating expenses increased 7.1% from $16.2
million in 1996 to $17.4 million in 1997. This increase was primarily due to
$600,000 of variable cost increases associated with higher programming fees
(which increased from $6.0 million in 1996 to $6.6 million in 1997). In
addition, selling, service and administrative expenses of the Systems increased
5.1%, from $8.8 million in 1996 to $9.3 million in 1997, due to increased fixed
costs (including approximately $380,000 of additional marketing costs related to
the marketing initiative implemented by the Company during the fourth quarter of
1996).
Non-System Operating Expenses. Non-system operating expenses, which consist
primarily of amounts paid to the General Partner for management expenses
increased 4.2% to $2.6 million in 1997 from $2.5 million in 1996, primarily due
to increases in legal and other professional fees.
EBITDA. As a result of the foregoing, EBITDA in 1997 was $15.8 million, a
decrease of 4.2% from EBITDA in 1996 of $16.5 million.
Depreciation and Amortization. Depreciation and amortization decreased 14.5%
from $9.3 million in 1996 to $7.9 million in 1997, primarily due to certain
assets becoming fully depreciated.
Interest Expense, Net. Interest expense, net increased to $9.5 million in 1997
from $8.9 million in 1996. This increase reflects the consummation of the
Company's change in its debt structure which occurred on August 15, 1997 when
the Company issued $100 million in notes and paid off its then outstanding bank
credit facility and subordinated debt (the "Refinancing"). This Refinancing
resulted in the Company's debt increasing from $82 million at December 31, 1996
to $100 million at December 31, 1997.
Net Loss. Net loss increased $3.1 million from $1.9 million in 1996 to $5.0
million in 1997. This increase is attributable to $3.1 million of extraordinary
losses related to the Refinancing.
LIQUIDITY AND CAPITAL RESOURCES:
General. Liquidity describes the ability to generate sufficient cash flows to
meet the cash requirements of continuing operations. Liquidity, in the context
of the Company's operations, is typically determined by the 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 to
maintain adequate balances for current payments while maximizing cash available
for investment opportunities.
Net cash from operating activities was $9.1 million, $8.4 million and $5.1
million for the years ended December 31, 1996, 1997 and 1998, respectively. Net
cash used in investing activities was $17.0 million for the year ended December
31, 1998 as compared to $7.6 million for the year ended December 31, 1997. This
increase was primarily due to the $7.8 million spent in acquiring Fannon Cable
TV, Inc. (see "Recent Events") as well as expenditures associated with the
Company's capital improvement projects which were in process during 1998. Cash
flows from financing activities were $3.4 million for the year ended December
31, 1998 as compared to cash flows used in financing activities of $9.0 million
for the year ended December 31, 1997. The increase is primarily attributable to
a $3.5 million draw the Company took against its bank credit facility to
partially fund the acquisition of Fannon Cable TV, Inc. (see "Recent Events").
Cash flows from financing activities for the year ended December 31, 1997 of
$9.0 were primarily the result of the consummation of the Company's refinancing
on August 15, 1997.
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<PAGE> 26
Total assets increased $500,000 from $43.9 million at December 31, 1997 to $44.4
million at December 31, 1998. This increase resulted from significant changes in
the Company's cash, property and equipment and intangible assets. Cash decreased
by $8.4 million primarily as a result of spending associated with the Company's
ongoing capital improvement projects as well as the acquisition of the assets of
Fannon Cable TV, Inc. (see "Recent Events"). Property and equipment increased by
$9.2 million as a result of the Company's capital improvement projects which
were in process during 1998. Intangible assets increased $4.1 million primarily
as a result of the acquisition of the assets of Fannon Cable TV, Inc. (see
"Recent Events").
Total debt increased from $100.0 million at December 31, 1997 to $103.5 million
at December 31, 1998. This $3.5 million increase in debt was the direct result
of the Company's draw on its bank credit facility to partially fund the
acquisition of the assets of Fannon Cable TV, Inc. (see "Recent Events").
As of December 31, 1998 the Company had completed the upgrades of its cable
plant to 750 MHz in Durant and Calera, Oklahoma, serving approximately 4,600
subscribers; and Hawkinsville and Cochran, Georgia, serving approximately 2,500
subscribers. The upgrades of the cable plant serving Douglas, Torrington,
Wheatland and Lingle, Wyoming, serving approximately 5,600 subscribers, have
recently been completed. The Company spent approximately $9 million to complete
these upgrades.
In addition, the Company is currently in the construction phase of its 750 MHz
upgrades to the cable plant in Roanoke, Alabama, serving approximately 2,100
subscribers; and Eatonton and Madison, Georgia, serving approximately 3,200
subscribers. Also, the Company is supplementing its 450 MHz cable plant with
fiber to allow for the introduction of advanced telecommunications services in
Westlake, Louisiana, serving approximately 6,400 subscribers; Decatur, Texas,
serving approximately 1,200 subscribers; and High Springs and Alachua, Florida,
serving approximately 2,700 subscribers. The Company anticipates that it will
spend approximately $7 million to complete these upgrades. However, due to
factors beyond the Company's control, such as material price changes and
availability, contract labor problems, and the ability to obtain permits from
the proper authorities, the Company cannot give any assurance that the actual
costs to complete these upgrades will not vary significantly from this estimate.
The Company is continually in the process of identifying other areas within its
Systems which can be upgraded to allow for the introduction of advanced
telecommunications services. However, the Company will only proceed with
upgrades which it believes are economically feasible after carefully weighing
the anticipated revenues against the costs of completing the upgrade.
The Notes. The Company has outstanding an aggregate principal amount of
$100,000,000 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 in arrears on February 15 and August 15, which commenced
on February 15, 1998, to holders of record on the immediately preceding February
1 and August 1. Interest on the Notes accrues from the most recent date to which
interest has been paid. Interest is computed on the basis of a 360-day year
comprised of twelve 30-day months.
There is no public market for the Notes. The Company has not and does not intend
to list the Notes on any securities exchange or to seek approval for quotation
through any automated quotation system.
The Credit Facility. The Company has a Credit Facility with Canadian Imperial
Bank of Commerce, an affiliate of CIBC Wood Gundy Securities Corp., and NBD
Bank, an affiliate of First Chicago Capital Markets, Inc., acting as the
lenders. The Credit Facility is a $20 million revolving credit facility (with an
option to increase the amount of credit available thereunder to $30 million).
The Credit Facility matures on August 15, 2002. Proceeds under the Credit
Facility will be available (i) to provide for working capital and general
corporate purposes, (ii) to fund certain permitted acquisitions of cable
television systems, (iii) to provide for certain permitted repurchases of up to
$5 million in the aggregate of limited partnership interests in the Company, and
(iv) to pay transaction fees and expenses. The Credit Facility requires the
Company to maintain the ratio of its total debt to annualized six-month EBITDA
at no more than 7.50 to 1. As of December 31, 1998, this covenant limited the
Company's maximum borrowings thereunder to approximately $12 million. The Credit
Facility requires payments of accrued interest on a monthly basis throughout the
term, with principal payment due at maturity.
The Credit Facility is secured by a first priority lien on and security interest
in substantially all of the assets of the Company. The Credit Facility contains
certain covenants and provides for certain events of default customarily
contained in facilities of a similar type. The financial covenants which the
Company considers most significant require it to: (a) maintain an interest
coverage ratio (that is, the ratio of annualized six-month EBITDA to interest
expense) of at least 1.1 to 1; (b) maintain a senior debt ratio (that is, the
ratio of debt under the Credit Facility to annualized six-month EBITDA) of no
more than 1.75 to 1; and (c) maintain the total debt ratio described above. The
Company is in compliance with each of these covenants.
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
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<PAGE> 27
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.
IMPACT OF INFLATION AND CHANGING PRICES:
The Company's costs and expenses are subject to inflation and price
fluctuations. However, because changes in costs are generally passed through to
subscribers, such changes historically have not had, and in the future are not
expected to have, a material effect on the Company's results of operations.
YEAR 2000 COMPLIANCE:
The Year 2000 issue impacts the Company in three different areas: (1) The
technical aspects of the Company's business, (2) the Company's accounting and
billing and (3) programming reception. These three areas are discussed below.
The Company's main line of business is the collection and distribution of cable
television signals. This collection and distribution of cable television signals
involves many electrical and digital components which gather, unscramble,
interpret and send readable signals to the television sets of the Company's
subscribers (for a more complete discussion of the technical aspects of the
Company, see "Item 1. Business - Industry Overview and Technical Overview").
Although some of the Company's technical equipment relies on date recognition,
the loss of such equipment, either temporarily or permanently, due to the Year
2000 issue, would not cause a material disruption in the Company's business and
the cost of replacing such equipment would not be material to the operations of
the Company.
The Company's accounting software and its billing operations, both of which are
supplied by third party vendors, are at a greater risk with respect to the Year
2000 issue. The Company uses third party accounting software for all of its
general ledger, payroll, accounts payable and financial statement purposes.
Currently, such software only requires a two digit entry in the year section of
date entries and, thus, cannot recognize the "20" in the year 2000 and may
instead treat the date as 1900. The Company has received both verbal and written
assurance from the third party vendor that the Year 2000 issue will be corrected
in an update which will be received by the Company during 1999. The Company also
believes that even if a working update is not received, the Year 2000 issues
inherent in the accounting software will not have a material effect on its
business operations.
The Company currently uses a third party vendor for its billing and accounts
receivable functions. While the Company does not know the extent of the Year
2000 issues within the vendor's operations, the Company's risk could be material
if its billing operations ceased to exist for an extended period of time. The
Company has received both verbal and written assurance from this vendor that the
vendor's internal Year 2000 issues will be corrected during 1999. Also, the
Company believes that any loss of its billing or accounts receivable functions
could be adequately replaced to avoid material losses in its business
operations.
The Company's ability to provide cable television services is significantly
dependent on its ability to adequately receive programming signals via satellite
distribution and off-air reception from various programmers and broadcasters. If
a significant amount of this programming was interrupted for a period of time
due to Year 2000 issues within the various satellite program or off-air
broadcast companies, it could have a material affect on the Company's
operations. To date, the Company has not received notification from any of its
satellite programmers or off-air broadcasters indicating that Year 2000 issues
exist which cannot be corrected by December 31, 1999. Also, the Company believes
that it would be able to adequately replace any lost signals so that there would
not be a material affect on its operations.
Because the Company's main Year 2000 risks are to be corrected by third party
vendors, its cost is expected to be minimal and immaterial to its operations.
The Company believes, based on its discussions with its third party vendors,
that it will be Year 2000 compliant during 1999. Also, in the event that either
the accounting software or billing system prove to be non-compliant, the Company
believes that it can rectify the situation so as to prevent the non-compliance
from materially affecting its operations.
EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS:
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," was issued. SFAS No. 131 establishes standards for the way
that public business enterprises report financial and descriptive information
about their reporting operating segments. The Company's adoption of SFAS No. 131
in 1998 had no impact on the accompanying financial statements because
substantially all of the Company's operations are in one reportable segment,
providing cable television services.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. The standard is effective for
the first quarter of the Company's fiscal year beginning January
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<PAGE> 28
1, 2000. The Company does not anticipate that the adoption of SFAS No. 133 will
have a material impact on its financial position or results of operations.
RECENT EVENTS:
Acquisition of Fannon Cable TV, Inc.. On December 10, 1998, pursuant to an Asset
Purchase Agreement dated as of June 24, 1998, the Company purchased the assets
of Fannon Cable TV, Inc. ("Fannon") for $7.65 million in cash. A portion of the
purchase price was funded with a $3.5 million draw against the Company's
existing $30 million bank credit facility. The remaining $4.15 million of the
purchase price was funded with cash-on-hand.
The acquired assets comprise a cable television system serving the communities
of New Tazewell, Tazewell, Harrogate and Cumberland Gap and certain
unincorporated portions of Claiborne County, Tennessee.
Included in the assets purchased were all necessary franchises, the rights to
receive and distribute cable television signals to subscribers and all of the
equipment and other personal and real property necessary for this reception and
distribution of cable television signals to such communities.
The purchase price of $7.65 million, plus a commission of $150,000 paid to a
broker, has been allocated among the following assets based upon their estimated
fair values:
<TABLE>
<CAPTION>
PURCHASE
PRICE
ASSET ALLOCATION
----- ----------
<S> <C>
Land $ 7,953
Vehicles 28,483
Non-Compete Agreement 305,882
Goodwill 7,457,682
----------
Total $7,800,000
==========
</TABLE>
Sale of the Tennessee (Wartburg) Cluster. On March 5, 1999, pursuant to an Asset
Purchase Agreement dated as of July 31, 1998, the Company sold its cable
television systems in Pickett County, Scott County, Morgan County, Roane County,
Fentress County and Cumberland County, Tennessee, all of which make-up the
Tennessee (Wartburg) Cluster (see "Item 1. Business - The Systems"), to Rapid
Communications Partners, L.P. ("Rapid") for $14.7 million in cash.
Sale of the Forsyth System. On February 2, 1999, the Company and the City of
Forsyth, Georgia ("Forsyth") entered into an Asset Purchase Agreement (the
"Agreement"), pursuant to which the Company has agreed to sell its cable
television system which serves the City of Forsyth, and surrounding Monroe
County, Georgia, to Forsyth for approximately $2.3 million in cash. Consummation
of the transactions contemplated by the Agreement is expected to occur during
March 1999 and is subject to certain conditions.
FORWARD-LOOKING STATEMENTS:
From time to time, we may publish forward-looking statements relating to such
matters as anticipated financial performance, business prospects, new products,
and similar matters. These forward-looking statements are subject to risks and
uncertainties.
When we use any of the words "believes," "expects," "anticipates" or similar
expressions, we are making forward-looking statements. For such statements we
claim the protection of the Private Securities Litigation Reform Act of 1995
which provides a safe harbor for forward-looking statements.
A variety of factors could cause our actual results and experiences to differ
materially from the anticipated results or other expectations expressed in our
forward-looking statements. Although we believe that our forward-looking
statements are reasonable, you should not place undue reliance on any of these
statements, which speak only as of the date made. You should understand that the
following important factors could cause our results or performance to differ
materially from those expressed in our forward-looking statements.
We could lose subscribers to new technologies. Since 1995, we have experienced
increased competition from new technologies such as wireless cable services and
DBS services. Due to regulatory changes, we also face potential competition from
telephone companies. Many of our competitors have significantly greater
financial resources than us. But for the approximately 6,557 subscribers
acquired in connection with our purchase of the assets of Fannon Cable TV, Inc.,
our total subscribers would have decreased by approximately 2.5% between
December 31, 1995 and December 31, 1998. While we believe our strategy of
upgrading certain Systems to provide
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<PAGE> 29
enhanced video programming, Internet access, telephony and other advanced
telecommunications services will be successful in reversing this trend, there
can be no assurance that this will be the case.
Our new lines of business involve additional risk. While we do not have
extensive experience providing Internet access, telephony and other advanced
telecommunications services, at December 31, 1998 we had successfully launched
commercial Internet service in ten of our Systems and had successfully tested
our telephony services in our Durant, Oklahoma System.
Some of the uncertainties associated with our offering Internet access
through cable are:
- customer acceptance of cable as an alternative to traditional
dial-up Internet access;
- the competitive response of traditional ISPs, online services (such
as The Microsoft Network, CompuServe and America Online) and long
distance inter-exchange carriers (such as AT&T Corp., MCI
Communications Corporation and Sprint Corporation), all of which
currently offer Internet access on a large scale; and
- the possibility that new technologies may be developed which offer
improved performance or other desirable features.
The success of our telephony services will depend on, among other things, access
to switching capability, obtaining appropriate governmental certifications, and
successful marketing of our services to existing telephone company customers.
While we are optimistic about the prospects for these new lines of business,
there can be no assurance that we will be successful or that additional cash
flow will be generated.
Our business is extensively regulated. The cable television industry is subject
to extensive governmental regulation, principally by the FCC and local
franchising authorities. Many aspects of such regulation have recently been
extensively revised and are currently the subject of judicial proceedings and
administrative rulemakings, which are potentially significant to us. Moreover,
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. These regulations, which have removed some barriers to
competition and added materially to the regulatory burdens of cable operators,
related to:
- cable system rates for both basic and certain nonbasic services;
- programming access and exclusivity arrangements;
- access to cable channels by unaffiliated programming services;
- leased access terms and conditions;
- horizontal and vertical ownership of cable systems;
- customer service requirements;
- franchise renewals;
- television broadcast signal carriage and retransmission consent;
- technical standards;
- customer privacy;
- consumer protection issues;
- cable equipment compatibility;
- obscene or indecent programming; and
- requiring subscribers to subscribe to tiers of service other than
basic service as a condition of purchasing premium services.
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<PAGE> 30
Under the FCC's rate regulations, most cable systems were required to reduce
their basic service and CPST rates in 1993 and 1994, and have since had their
rate increases governed by a complicated price cap scheme. However, operators
also have the opportunity of bypassing this "benchmark" regulatory scheme in
favor of traditional "cost of service" in cases where the latter methodology
appears favorable.
Because we qualify as a small cable company under FCC rules and have elected to
rely on the cost-of-service rules as and when our Systems are required to
justify their rates for regulated services, we have not implemented the rate
reductions that would otherwise have been required if we were subject to the
FCC's benchmarks. Instead, we were allowed to establish permitted rates under a
simple formula that considers total operating expenses (including amortization
expenses), net rate base, rate of return, channel count and subscribers. So long
as the per channel rate resulting from these inputs for one of our Systems is no
more than $1.24, that System's rates will be presumed reasonable. If the
formula-generated rate exceeds the $1.24, then we will be required to prove the
reasonableness of our calculations. Substantially all of our rates are under the
$1.24 per channel level. We believe that all of our rates in excess of the $1.24
per channel level are reasonable using the formula described above.
FCC rules permit local franchise authorities to review basic service rates, and
under certain circumstances, challenge CPST rates at the FCC. An adverse ruling
in any such proceeding could require us to reduce our rates and pay refunds. A
reduction in our rates or the payment of refunds could have a material adverse
effect on us. Once the maximum permitted rate allowed by FCC rules is being
charged by us in regulated communities, future rate increases may not exceed an
inflation-indexed amount, plus increases in certain costs beyond the cable
operator's control, such as taxes, franchise fees and increased programming
costs. Although the regulation of the CPST is set to expire for all cable
systems on March 31, 1999, critics of the cable television industry have
called for the delay of this regulatory sunset and further have urged more
rigorous rate regulation (including limits on programming cost pass-throughs to
cable subscribers) until a greater degree of competition to incumbent cable
operators has developed.
Our franchises are non-exclusive and are subject to renewal. We operate our
Systems under franchises granted by local authorities which are subject to
renewal and renegotiation from time to time. Each franchise is generally granted
for a fixed term ranging from five to 15 years but may be terminated if the
franchisee fails to comply with the material provisions thereof. Our franchises
typically impose conditions relating to the use and operation of the cable
television system, including requirements relating to the payment of fees,
system bandwidth capacity, customer service requirements, franchise renewal and
termination. As of December 31, 1998, we had 6 franchises (representing 4.0% of
our basic subscribers) expiring prior to 2001 and 42 franchises (representing
28.2% of our basic subscribers) expiring between 2001 and 2005.
Although we believe that we generally have good relationships with our
franchising authorities, no assurance can be given that we will be able to
retain or renew such franchises or that the terms of any such renewals will be
on terms as favorable to us as our existing franchises. The non-renewal or
termination of franchises relating to a significant portion of our subscribers
could have a material adverse effect on our results of operations.
We must successfully integrate our future acquisitions. An element of our
business strategy is to achieve operational efficiencies by providing advanced
telecommunications services and video services over an expanded subscriber base
within a concentrated geographic area. Consequently, we intend to consider
potential opportunities to acquire or trade cable television systems. Any
acquisition or trade could have an adverse effect upon our results of operations
or cash flow, particularly acquisitions of new systems which must be integrated
with our existing operations. There can be no assurance that we will be able to
integrate successfully any acquired systems with our existing operations or
realize any efficiencies from any acquisition or trade. There can also be no
assurance that any acquisition or trade, if consummated, will improve operating
results or that we will be able to obtain the financing that may be necessary to
fund any acquisition or trade in the future. In addition, any acquisition or
trade will be subject to, among other things, the satisfaction of customary
closing conditions and the receipt of certain third-party or governmental
approvals, including the consent of franchising authorities.
Our insurance coverage has been reduced in Florida and Louisiana. Because of
industry-wide casualty insurance reductions that resulted from insurers' loss
experience with several hurricanes in the southeastern portion of the United
States, our casualty insurance in Florida and Louisiana has been reduced to $1
million per occurrence. We believe that our Systems in Florida and Louisiana are
located in areas that are not subject to a high degree of risk from hurricanes,
or from ice storms (which do pose a significant risk for our Systems in other
areas), and that losses in excess of our existing coverage would be unlikely.
However, if such casualty insurance is inadequate, we could experience a
potential reduction in cash flow in the event of a loss in excess of our policy
limits. If a significant loss were to occur, it could have a material adverse
effect on our financial condition and results of operations.
Our operations are dependent upon the services of management. We rely
significantly on the services of the General Partner and the personnel employed
by or on behalf of the General Partner. We maintain $5 million of key-man life
insurance on Mr. William R. James, who effectively controls the General Partner.
We could be adversely affected, however, if Mr. James or any of Messrs. Trenary,
Shoemaker and Madison were unwilling or unable to continue to make their
services available to us.
-30-
<PAGE> 31
There are potential conflicts of interest. The General Partner, which is
controlled by William R. James, is the sole general partner of the Company. With
certain limitations, the General Partner has exclusive authority for the
management and control of our business and operations. It performs management
services for us, for which it is paid an annual fee.
We are subject to possible conflicts of interest arising out of our relationship
with the General Partner and Mr. James. Because we were organized and are
operated by the General Partner, these conflicts will not necessarily be
resolved through arm's-length negotiations but rather may be resolved through
the exercise of the General Partner's judgment consistent with its fiduciary
responsibilities to us and our limited partners. Our Partnership Agreement
provides for a Partnership Advisory Board, one of the functions of which is to
review any potential conflicts of interest involving the General Partner, and
provides that the General Partner may be removed by the limited partners but (so
long as the General Partner is controlled by Mr. James) only if the General
Partner has been found by an independent party to have been engaged in
malfeasance, criminal conduct, wanton, willful neglect or a material breach of
the Partnership Agreement. There are no other procedures for resolving conflicts
between us and the General Partner. The Indenture contains certain restrictions
on transactions between James and Finance Corp. and their subsidiaries and
affiliates.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
No disclosures are required with respect to this item because the Company did
not hold, either during the years ended December 31, 1998 and 1997, or at
December 31, 1998 or 1997, any market risk sensitive instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Pages FS-1 through FS-17 which pages are included in Item 14. Exhibits,
Financial Statement Schedules, and Reports on Form 8-K of this Annual Report on
Form 10-K for the fiscal year ended December 31, 1998.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Since its inception in 1988, the Company's business and affairs have been
managed and controlled by the General Partner. The General Partner is managed
and controlled by its three partners, Jamesco Inc., a Michigan corporation (of
which William R. James is the sole shareholder, sole executive officer and sole
director), Trenary Corp., Ltd., a Michigan corporation (of which C. Timothy
Trenary is the sole shareholder, sole executive officer and sole director), and
DKS Holdings, Inc., a Michigan corporation (of which Daniel K. Shoemaker is the
sole shareholder, sole executive officer and sole director). By virtue of these
arrangements, Messrs. James, Trenary and Shoemaker (each a "Director") perform
functions for the Company which are similar to those generally performed for a
corporation by its board of directors. The Directors also constitute all of the
directors of Finance Corp. Through the General Partner, the persons named below
(collectively, the "Executive Officers") perform for the Company functions
similar to those generally performed for a corporation by executive officers
having the titles set forth below:
<TABLE>
<CAPTION>
NAME AGE FUNCTIONS PERFORMED
---- --- -------------------
<S> <C> <C>
William R. James......... 65 President and
Chief Executive Officer
C. Timothy Trenary....... 42 Chief Operating Officer
Daniel K. Shoemaker...... 36 Chief Financial Officer
Scott A. Madison......... 41 Director of Engineering
</TABLE>
Messrs. James, Trenary and Shoemaker also constitute all of the executive
officers and directors of Finance Corp.
William R. James has been the sole shareholder and sole director of Jamesco, and
Jamesco has been a partner in the General Partner, since the Company was formed
in 1988. He has performed the functions of President and Chief Executive Officer
for the Company throughout the same period. He has been the President of Finance
Corp. since its formation in 1997.
In January 1986, Mr. James founded James Communications, Inc. ("JCI"), a cable
television company. He served as President and Chief Executive Officer of JCI
from its inception until it was sold in December 1987. From 1979 to 1986, Mr.
James was employed by Capital Cities Communications (which became Capital
Cities/ABC Inc.), during which time he oversaw the development of its
-31-
<PAGE> 32
cable division ("Capital Cities Cable"). At the time he left Capital Cities
Communications to found JCI, Mr. James was an Executive Vice President of
Capital Cities Communications and the President of Capital Cities Cable. Prior
to joining Capital Cities Communications, Mr. James was a partner at Touche Ross
& Co. in charge of national manufacturing consulting. Mr. James is a graduate of
Princeton University and graduated from the Harvard University Business School
with distinction.
C. Timothy Trenary was a partner in the General Partner from the formation of
the Company until July 1, 1997, when he contributed his partnership interest to
his wholly-owned corporation, Trenary Corp., Ltd. From 1988 to 1989, Mr. Trenary
performed the functions of Chief Financial Officer for the Company, and, since
1989, he has performed the functions of its Chief Operating Officer. He has also
been a Vice President of Finance Corp. since its formation in 1997. Mr. Trenary
was Vice President of Finance of JCI during 1987. From 1983 to 1986, he was
Operations Manager of the Northern Region of Capital Cities Cable, and from 1981
to 1983, he was Manager of Financial Controls for Capital Cities Cable. Prior to
joining Capital Cities Cable, Mr. Trenary was an auditor with Arthur Young & Co.
Daniel K. Shoemaker was a partner in the General Partner from 1989 until July 1,
1997, when he contributed his partnership interest to his wholly-owned
corporation, DKS Holdings, Inc. He has performed the functions of Chief
Financial Officer for the Company since 1993, and from 1988 to 1993, he served
as its Director of Management Information Systems. He has also been the
Treasurer and Secretary of Finance Corp. since its formation in 1997. From 1985
to 1988, Mr. Shoemaker was a systems engineer in a management consulting group
of Electronic Data Systems Corporation.
Scott A. Madison has served as the Company's Director of Engineering since 1991.
From 1988 to 1991 he was Director of Engineering for C4 Media Companies (cable
television operators), and from 1986 to 1988 he was a Regional Engineer for C4
Media Cable South, L.P.I.
ITEM 11. EXECUTIVE COMPENSATION
The Company does not pay any compensation to the Directors or Executive
Officers. The Partnership Agreement provides compensation to the General Partner
for management services. Under the terms of the Partnership Agreement, the
General Partner is entitled to an annual management fee equal to 4% of the
Company's annual revenues, plus $5 multiplied by the average aggregate number of
subscribers to the systems owned by the Company during such year. The amount of
the management fee was approximately $1,806,000, $1,822,000 and $1,905,000 in
1996, 1997 and 1998, respectively. No other amounts were paid to the General
Partner by the Company in those years.
The General Partner is entitled to compensation from the Company pursuant to an
Incentive Compensation Agreement dated as of December 31, 1994 (the "1994
Incentive Compensation Agreement"). The 1994 Incentive Compensation Agreement
provides that, in the event that all of the Company's cable television systems
are sold, the General Partner is entitled to a cash incentive compensation award
equal to 2% of the fair market value of all of the assets of James, less James'
debts and other accrued liabilities, other than those owed to the partners of
James, and without regard to any liability arising under the 1994 Incentive
Compensation Agreement, as of the date of such sale.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
James is the record and beneficial owner of all of the issued and outstanding
shares of Finance Corp. The following table sets forth, at December 31, 1998,
the partnership interests in James beneficially owned by: (a) each person known
to James to beneficially own 5% or more of James' total partnership interests;
and (b) each Director, each Executive Officer, and all Directors and Executive
Officers as a group:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF
BENEFICIAL OWNER TYPE OF INTEREST(1) % OF CLASS
---------------- ------------------- ----------
<S> <C> <C>
William R. James(2)..................................... General partnership *
710 North Woodward Avenue, Suite 180 Limited partnership 1.1%
Bloomfield Hills, Michigan 48304
C. Timothy Trenary(3)................................... General partnership *
710 North Woodward Avenue, Suite 180 Limited partnership *
Bloomfield Hills, Michigan 48304
Daniel K. Shoemaker(4).................................. General partnership *
710 North Woodward Avenue, Suite 180 Limited partnership *
Bloomfield Hills, Michigan 48304
Scott A. Madison........................................ None
710 North Woodward Avenue, Suite 180
Bloomfield Hills, Michigan 48304
</TABLE>
-32-
<PAGE> 33
<TABLE>
<S> <C> <C>
The Prudential Insurance Company of America............. Limited partnership 24.4%
Four Gateway Center
100 Mulberry Street
Newark, New Jersey 07102
State Farm Mutual Automobile Insurance Company.......... Limited partnership 24.4%
One State Farm Plaza
Bloomington, Illinois 61710
Teachers Insurance and Annuity Association of America... Limited partnership 12.2%
730 Third Avenue
New York, New York 10017
Bessemer Securities Corporation......................... Limited partnership 12.2%
630 Fifth Avenue
New York, New York 10111
The Dysson-Kissner-Moran Corporation.................... Limited partnership 6.1%
230 Park Avenue
New York, New York 10169
Brown University-Third Century Fund..................... Limited partnership 5.9%
Room 101 - University Hall, Box C
Providence, Rhode Island 02912
Citicorp................................................ Limited partnership 5.6%
599 Lexington Avenue
New York, New York 10043
All Directors and Executive Officers as a group......... General partnership *
Limited partnership 1.2%
</TABLE>
- -----------
* Less than 1.00%.
(1) The general partnership interest represents 0.97% of the Company's total
partnership interest.
(2) Reflects ownership of all of the capital stock of Jamesco Inc., which holds
a 91.5% interest in the General Partner. Mr. James performs the functions
of a Director of the Company. He also performs the functions of Chief
Executive Officer of the Company.
(3) Reflects ownership of all of the capital stock of Trenary Corp., Ltd.,
which holds a 7.5% interest in the General Partner. Mr. Trenary performs
the functions of a Director of the Company. He also performs the functions
of Chief Operating Officer of the Company.
(4) Reflects ownership of all of the capital stock of DKS Holdings, Inc., which
holds a 1.0% interest in the General Partner. Mr. Shoemaker performs the
functions of a Director of the Company. He also performs the functions of
Chief Financial Officer of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
-33-
<PAGE> 34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
EXHIBITS:
<TABLE>
<CAPTION>
ITEM 601
REGULATION S-K
EXHIBIT REFERENCE
NUMBER EXHIBIT DESCRIPTION
----------------- -------------------
<S> <C>
(2)(a)/(10)(a) Asset Purchase Agreement by and between
Fannon Cable T.V., Inc., a Tennessee
Corporation, and James Cable Partners,
L.P., a Delaware Limited Partnership,
dated as of June 24, 1998 (incorporated
by reference to Exhibit 2.1 of the
registrant's Form 8-K as filed with the
Securities and Exchange Commission on
December 22, 1998).
(2)(b)/(10)(b) Asset Purchase Agreement by and between
James Cable Partners, L.P., a Delaware
Limited Partnership, and Rapid
Communications Partners, L.P., a
Colorado Limited Partnership, dated as
of July 31, 1998 (incorporated by
reference to Exhibit 2.1 of the
registrant's Form 8-K as filed with the
Securities and Exchange Commission on
March 19, 1999).
(3)(a)/(10)(c) Amended and Restated Agreement of
Limited Partnership of the Company dated
as of June 30 , 1995 (incorporated by
reference to Exhibit 3.1 of the
registrant's Registration Statement on
Form S-4 as filed with the Securities
and Exchange Commission on September 8,
1997 (registration no. 333-35183)).
(3)(b) Certificate of Limited Partnership of
the Company (incorporated by reference
to Exhibit 3.2 of the registrant's
Registration Statement on Form S-4 as
filed with the Securities and Exchange
Commission on September 8, 1997
(registration no. 333-35183)).
(3)(c) Articles of Incorporation of Finance
Corp. (incorporated by reference to
Exhibit 3.3 of the registrant's
Registration Statement on Form S-4 as
filed with the Securities and Exchange
Commission on September 8, 1997
(registration no. 333-35183)).
(3)(d) Bylaws of Finance Corp. (incorporated by
reference to Exhibit 3.4 of the
registrant's Registration Statement on
Form S-4 as filed with the Securities
and Exchange Commission on September 8,
1997 (registration no. 333-35183)).
(4)(a) Indenture dated as of August 15, 1997
among the Company, Finance Corp., and
United States Trust Company of New York,
as Trustee (including form of Notes)
(incorporated by reference to Exhibit
4.1 of the registrant's Registration
Statement on Form S-4 as filed with the
Securities and Exchange Commission on
September 8, 1997 (registration no.
333-35183)).
(4)(b) Credit Agreement dated as of August 15,
1997 among the Company, the lenders
party thereto, NBD Bank as documentation
agent and Canadian Imperial Bank of
Commerce as co-agent (incorporated by
reference to Exhibit 4.3 of the
registrant's Registration Statement on
Form S-4 as filed with the Securities
and Exchange Commission on September 8,
1997 (registration no. 333-35183)).
(4)(c) Company Security Agreement dated as of
August 15, 1997 between the Company and
NBD Bank as documentation agent
(incorporated by reference to Exhibit
4.4 of the registrant's Registration
Statement on Form S-4 as filed with the
Securities and Exchange Commission on
September 8, 1997 (registration no.
333-35183)).
(4)(d) Guaranty Agreement dated as of August
15, 1997 by Finance Corp. in favor of
the Lenders and Agents named therein
(incorporated by reference to Exhibit
4.5 of the registrant's Registration
Statement on Form S-4 as filed with the
Securities and Exchange Commission on
September 8, 1997 (registration no.
333-35183)).
</TABLE>
-34-
<PAGE> 35
<TABLE>
<CAPTION>
ITEM 601
REGULATION S-K
EXHIBIT REFERENCE
NUMBER EXHIBIT DESCRIPTION
----------------- -------------------
<S> <C>
(4)(e) Guarantor Security Agreement dated as of
August 15, 1997 between Finance Corp.
and NBD Bank as documentation agent
(incorporated by reference to Exhibit
4.6 of the registrant's Registration
Statement on Form S-4 as filed with the
Securities and Exchange Commission on
September 8, 1997 (registration no.
333-35183)).
(4)(f) First Amendment to the Credit Agreement
dated as of August 5, 1998 among James
Cable Partners, L.P., the lenders party
thereto, NBD Bank, as documentation
agent, and Canadian Imperial Bank of
Commerce, as administrative agent
(incorporated by reference to Exhibit
4.7 of the registrant's Form 10-Q as
filed with the Securities and Exchange
Commission for the quarterly period
ended June 30, 1998).
(10)(d) 1994 General Partner Incentive
Compensation Agreement dated as of
December 31, 1994 between the Company
and the General Partner (incorporated by
reference to Exhibit 10.3 of the
registrant's Registration Statement on
Form S-4 as filed with the Securities
and Exchange Commission on September 8,
1997 (registration no. 333-35183)).
12 Statement re computation of ratios.*
21 List of subsidiaries of James: James
Cable Finance Corp. (James Cable Finance
Corp. has no subsidiaries.)
24 Powers of Attorney.*
27 Financial Data Schedule.*
</TABLE>
--------------------------
* Filed herewith.
Management contracts and compensatory plans or arrangements:
The management contracts and compensatory plans or arrangements required to be
filed as exhibits and included in such list of exhibits are as follows:
<TABLE>
<S> <C>
(3)(a)/(10)(c) Amended and Restated Agreement of Limited Partnership of
the Company dated as of June 30 , 1995 (incorporated by
reference to Exhibit 3.1 of the registrant's Registration
Statement on Form S-4 as filed with the Securities and
Exchange Commission on September 8, 1997 (registration no.
333-35183)).
(3)(b) Certificate of Limited Partnership of the Company
(incorporated by reference to Exhibit 3.2 of the
registrant's Registration Statement on Form S-4 as filed
with the Securities and Exchange Commission on September 8,
1997 (registration no. 333-35183)).
(10)(d) 1994 General Partner Incentive Compensation Agreement dated
as of December 31, 1994 between the Company and the General
Partner (incorporated by reference to Exhibit 10.3 of the
registrant's Registration Statement on Form S-4 as filed
with the Securities and Exchange Commission on September 8,
1997 (registration no. 333-35183)).
</TABLE>
REPORTS ON FORM 8-K:
During the fourth quarter of 1998, the Company filed a Current Report on Form
8-K dated December 10, 1998, relating to the acquisition of cable television
systems from Fannon Cable TV, Inc. by the Company pursuant to an Asset Purchase
Agreement dated as of June 24, 1998.
-35-
<PAGE> 36
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES:
<TABLE>
<CAPTION>
10-K
Report
page(s)
-------
<S> <C>
James Cable Partners, L.P. and Subsidiary:
Independent Auditors' Report............................................................. FS-1
Consolidated balance sheets as of December 31, 1997 and 1998............................. FS-2
Consolidated statements of operations for each of the years ended December 31, 1996,
1997 and 1998............................................................................ FS-3
Consolidated statements of partners' deficit for each of the years ended December 31,
1996, 1997 and 1998...................................................................... FS-4
Consolidated statements of cash flows for each of the years ended December 31, 1996,
1997 and 1998............................................................................ FS-5
Notes to consolidated financial statements............................................... FS-6
James Cable Finance Corp.:
Independent Auditors' Report............................................................. FS-15
Balance sheets as of December 31, 1997 and 1998.......................................... FS-16
Notes to balance sheets.................................................................. FS-17
</TABLE>
Financial Statement Schedules:
Any schedules for which provision is made in Regulation S-X either (i)
are not required under the related instructions or are inapplicable
and, therefore, have been omitted, or (ii) the information required is
included in the consolidated financial statements or the notes thereto
that are a part hereof.
-36-
<PAGE> 37
INDEPENDENT AUDITORS' REPORT
To the Partners of
James Cable Partners, L.P.
Bloomfield Hills, Michigan
We have audited the accompanying consolidated balance sheets of James Cable
Partners, L.P. (a Delaware Limited Partnership) at December 31, 1997 and 1998,
and the related consolidated statements of operations, partners' deficit and
cash flows for each of the three years in the period ended December 31, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of James Cable Partners, L.P. at
December 31, 1997 and 1998, and the results of their operations and their cash
flows for the three years in the period ended December 31, 1998 in conformity
with generally accepted accounting principles.
February 12, 1999
(March 5, 1999 as to Note 8)
Detroit, Michigan
FS-1
<PAGE> 38
JAMES CABLE PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1998
---- ----
<S> <C> <C>
ASSETS (NOTE 3)
Cash and cash equivalents $ 9,902,842 $ 1,465,193
Accounts receivable - Subscribers (net of allowance for doubtful
accounts of $20,872 in 1997 and $43,971 in 1998) 3,344,345 3,419,506
Prepaid expenses and other assets (Note 5) 213,816 140,426
Property and equipment: (Note 7)
Cable television distribution systems and equipment 79,248,360 87,266,805
Land and land improvements 229,704 306,426
Buildings and improvements 932,760 1,111,621
Office furniture and fixtures 1,216,867 1,720,616
Vehicles 3,126,367 3,556,304
------------- -------------
Total 84,754,058 93,961,772
Less accumulated depreciation (72,086,368) (76,026,758)
------------- -------------
Total 12,667,690 17,935,014
Deferred financing costs (net of accumulated amortization of $227,206
in 1997 and $843,508 in 1998) 3,883,956 3,367,654
Intangible assets, net (Notes 2 and 7) 13,883,699 18,026,202
Deposits 15,782 13,232
------------- -------------
Total assets $ 43,912,130 $ 44,367,227
============= =============
LIABILITIES AND PARTNERS' DEFICIT
Liabilities:
Debt (Note 3) $ 100,000,000 $ 103,500,000
Accounts payable 245,835 306,658
Accrued expenses (Note 5) 2,333,228 2,416,467
Accrued interest on 10-3/4% Senior Notes (Note 3) 4,031,249 4,031,249
Unearned revenue 2,987,979 3,111,739
Subscriber deposits 25,279 23,424
------------- -------------
Total 109,623,570 113,389,537
Commitments and contingencies (Notes 4 and 6) -- --
Partners' deficit:
Limited Partners ("L.P.") (59,500,005) (62,650,960)
General Partner ("G.P.") (6,211,435) (6,371,350)
------------- -------------
Total (65,711,440) (69,022,310)
------------- -------------
Total liabilities and partners' deficit $ 43,912,130 $ 44,367,227
============= =============
</TABLE>
See notes to consolidated financial statements.
FS-2
<PAGE> 39
JAMES CABLE PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Revenues $ 35,212,735 $ 35,777,675 $ 37,757,809
System operating expenses (excluding
depreciation and amortization) 16,248,981 17,399,790 19,409,691
Non-system operating expenses:
Management fee (Note 5) 1,806,226 1,822,417 1,904,984
Other 673,994 762,304 1,054,698
------------ ------------ ------------
Total non-system operating expenses 2,480,220 2,584,721 2,959,682
Depreciation and amortization 9,272,014 7,929,986 7,561,451
------------ ------------ ------------
Operating income 7,211,520 7,863,178 7,826,985
Interest and other:
Interest expense (8,878,285) (9,646,679) (11,383,449)
Interest income 26,852 176,136 357,138
Other (Note 3) (254,331) (232,845) (111,544)
------------ ------------ ------------
Total interest and other (9,105,764) (9,703,388) (11,137,855)
------------ ------------ ------------
Loss before extraordinary items (1,894,244) (1,840,210) (3,310,870)
Extraordinary loss due to debt
refinancing (Note 3) 0 (3,125,012) 0
------------ ------------ ------------
Net loss $ (1,894,244) $ (4,965,222) $ (3,310,870)
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
FS-3
<PAGE> 40
JAMES CABLE PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF PARTNERS' DEFICIT
<TABLE>
<CAPTION>
Limited General
Partners Partner Total
------------ ------------ ------------
<S> <C> <C> <C>
Balance, December 31, 1995 $(48,784,371) $ (5,667,603) $(54,451,974)
Net loss (1,802,752) (91,492) (1,894,244)
------------ ------------ ------------
Balance, December 31, 1996 (50,587,123) (5,759,095) (56,346,218)
Net loss (4,725,402) (239,820) (4,965,222)
Repurchase of warrants (4,187,480) (212,520) (4,400,000)
------------ ------------ ------------
Balance, December 31, 1997 (59,500,005) (6,211,435) (65,711,440)
Net loss (3,150,955) (159,915) (3,310,870)
------------ ------------ ------------
Balance, December 31, 1998 $(62,650,960) $ (6,371,350) $(69,022,310)
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
FS-4
<PAGE> 41
JAMES CABLE PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (1,894,244) $ (4,965,222) $ (3,310,870)
Adjustments to reconcile net loss
to net cash from operating activities:
Depreciation 3,050,080 2,932,587 3,940,390
Amortization 6,221,934 4,997,399 3,621,061
Noncash interest expense 672,667 647,623 616,302
Extraordinary item, net of additional
interest 0 1,894,451 0
(Increase) decrease in assets:
Accounts receivable (61,980) (37,271) (75,161)
Prepaid expenses (72,624) 2,128 73,390
Deposits 59,995 4,255 2,550
Increase (decrease) in liabilities:
Accounts payable 283,987 (116,801) 60,823
Accrued expenses 754,434 (1,095,548) 83,239
Accrued interest on 10-3/4%
Senior Notes 0 4,031,249 0
Unearned revenue 55,253 110,950 123,760
Subscriber deposits (3,392) (2,394) (1,855)
------------- ------------- -------------
Total adjustments 10,960,354 13,368,628 8,444,499
------------- ------------- -------------
Net cash flows from
operating activities 9,066,110 8,403,406 5,133,629
Cash Flows used in Investing Activities:
Purchase of Fannon Cable T.V., Inc. (7,800,000)
Additions to property and equipment (3,942,330) (7,595,978) (9,171,278)
------------- ------------- -------------
Net cash flows used in investing
activities (3,942,330) (7,595,978) (16,971,278)
Cash Flows (used in) from Financing Activities:
Principal payments on debt (6,745,563) (82,407,796)
Proceeds from debt borrowings 100,000,000 3,500,000
Deferred interest increase 778,359
Payments on capital lease obligation (111,679) (86,441)
Deferred financing costs (4,111,162) (100,000)
Repurchase of warrants (4,400,000)
------------- ------------- -------------
Net cash flows (used in) from
financing activities (6,078,883) 8,994,601 3,400,000
------------- ------------- -------------
Net (Decrease) Increase in Cash and
Cash Equivalents (955,103) 9,802,029 (8,437,649)
Cash and Cash Equivalents, Beginning
of Period 1,055,916 100,813 9,902,842
------------- ------------- -------------
Cash and Cash Equivalents, End of
Period $ 100,813 $ 9,902,842 $ 1,465,193
============= ============= =============
Supplemental Disclosure of Cash Flow
Information - Cash paid for interest
during the period $ 6,928,827 $ 5,651,010 $ 10,750,000
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
FS-5
<PAGE> 42
JAMES CABLE PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS - James Cable Partners, L.P. (a Delaware limited
partnership) ("James") was formed on January 12, 1988. James has system
locations in Alabama, Colorado, Wyoming, Oklahoma, Texas, Florida,
Tennessee, Louisiana and Georgia. James' principal investment objective is
to realize capital appreciation through the acquisition, ownership,
control, and operations of cable television systems.
James Cable Finance Corp., a Michigan corporation ("Finance Corp."),
was organized on June 19, 1997 and became a wholly-owned subsidiary of
James for the sole purpose of acting as co-issuer with James of the Notes
referred to below (Note 3). References to the "Company" herein are to
James and Finance Corp. consolidated, or to James prior to the
organization of Finance Corp., as appropriate.
PARTNERSHIP AGREEMENT - The following represents certain provisions of the
James Cable Partners, L.P. Amended and Restated Agreement of Limited
Partnership as amended (the "Partnership Agreement"):
Term of Agreement - James will be dissolved upon the earliest to occur
of (i) December 31, 2005 (the "Term"), (ii) a determination by the general
partner that James should be dissolved, with the approval of 60% of the
Limited Partner interests, (iii) the sale or disposition by James of
substantially all of its assets, (iv) the consent of holders of 66-2/3% of
the Limited Partner interests, (v) the removal of the general partner
pursuant to the terms of the Partnership Agreement, or (vi) the
bankruptcy, insolvency, dissolution or withdrawal of the general partner.
The Term can be extended upon the affirmative vote of 66-2/3% of the
Limited Partner interests and the consent of the general partner. In
certain of the foregoing cases, the Limited Partners may elect under the
Partnership Agreement to reconstitute the business of James in a new
limited partnership with a new general partner elected by the Limited
Partners.
Voting Rights - Except as to matters for which consent or approval is
expressly required under the Partnership Agreement, the Limited Partners
have no right to vote on any partnership matters. Where a vote or consent
is required, each Partner is entitled to vote based on its percentage
interest in James.
Contributions - Under the Partnership Agreement, the partners have made
certain contributions to James. The general partner is not required to
lend or advance any funds to James or to make any additional capital
contributions to James. No limited partner is required to lend any funds
to James or to make any capital contributions to James. The Partnership
Agreement provides that no partner of James shall have the right to
withdraw or demand the return of its capital contribution during the term
of James' existence. The general partner is not personally liable for the
return of the capital contributions made by Limited Partners.
Distributions - James has not made distributions to any of the
partners, cash or property, from the date of inception to the current
date. While James does not have plans to make any
FS-6
<PAGE> 43
distributions in the near future, any distributions made would be subject
to the provisions of the Partnership Agreement.
PROPERTY, PLANT AND EQUIPMENT are recorded at cost. Depreciation is
computed using accelerated methods and includes amounts charged to expense
under capital lease obligations. Estimated useful lives for major
categories are as follows:
<TABLE>
<CAPTION>
YEARS
<S> <C>
Buildings and improvements 31.5 and 39
Cable television distribution systems 7
Office furniture and fixtures 5 - 7
Vehicles 5
</TABLE>
INTANGIBLE ASSETS consist of subscriber lists, franchise operating rights
and covenants not to compete acquired in connection with acquisitions.
Also included is goodwill, which is the amount by which the cost of
acquisitions exceeded the fair values assigned to assets acquired.
Intangible assets are amortized using the straight-line method over
periods up to 40 years.
DEFERRED FINANCING COSTS in connection with the refinancing (Note 3) are
being amortized on the straight-line method over 5 years for the Credit
Facility and 7 years for the Notes.
REVENUES are recognized in the period in which the related services are
provided to the subscribers.
PROFITS AND LOSSES are generally allocated in accordance with James'
Partnership Agreement. Currently, profits are allocated approximately 99%
to the limited partners and 1% to the general partner, and losses are
allocated approximately 95% to the limited partners and 5% to the general
partner.
STATEMENT OF CASH FLOWS - For purposes of the statement of cash flows, the
Company considers all highly liquid debt instruments purchased with
maturities of ninety days or less at date of purchase to be cash
equivalents.
ESTIMATES - The preparation of the Company's financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
INCOME TAXES - The financial statements include only those assets,
liabilities and results of operations of the Company which relate to the
business of James Cable Partners, L.P. No recognition has been made of
income taxes since these taxes are the personal responsibility of the
partners.
IMPACT OF RECENTLY ADOPTED ACCOUNTING PRINCIPLES - In June 1997, SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information"
was issued. SFAS No. 131 establishes standards for the way that public
business enterprises report financial and descriptive information about
their reporting operating segments. The Company's adoption of SFAS No. 131
in 1998 had
FS-7
<PAGE> 44
no impact on the accompanying financial statements because substantially
all of the Company's operations are in one reportable segment, providing
cable television services.
In June 1998, SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities" was issued. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments
at fair value. The standard is effective for the first quarter of the
Company's fiscal year beginning January 1, 2000. The Company does not
anticipate that adoption of SFAS No. 133 will have a material impact on
its financial position or results of operations.
FAIR VALUES OF FINANCIAL INSTRUMENTS - The carrying values of cash and
cash equivalents, accounts receivable, accounts payable and the Credit
Facility (Note 3) approximate fair market value due to the short-term
maturities of these instruments.
The estimated fair value of the Company's Notes (Note 3) have been
determined using available market information. However, considerable
judgement is required in interpreting market data to develop the estimates
of fair value. Accordingly, the estimates presented herein may not be
indicative of the amounts that the Company could realize in a current
market exchange. The use of different assumptions or valuation
methodologies may have a material effect on the estimated fair value
amounts. The fair value of the Notes was estimated using quoted market
prices (in millions).
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1998
------------------- ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
The Notes $100.0 $105.5 $100.0 $105.0
</TABLE>
2. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Franchise operating rights $ 60,292,548 $ 60,292,548
Subscriber lists 13,631,000 13,631,000
Covenants not to compete 13,622,318 13,928,200
Goodwill 10,635,327 18,093,009
Organization costs 1,248,020 1,248,020
------------- -------------
Total 99,429,213 107,192,777
Less accumulated amortization (85,545,514) (89,166,575)
------------- -------------
Total $ 13,883,699 $ 18,026,202
============= =============
</TABLE>
3. DEBT
Debt consists of the following:
FS-8
<PAGE> 45
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
10-3/4% Series B Senior Notes due 2004 $100,000,000 $100,000,000
Bank Credit Facility -- 3,500,000
------------ ------------
Total $100,000,000 $103,500,000
============ ============
</TABLE>
THE NOTES - The Company has outstanding an aggregate principal amount of
$100,000,000 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 in 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.
RETIREMENT OF PRIOR DEBT AND WARRANTS - A portion of the proceeds from the
issuance of the Notes was used to repay $66.4 million principal, plus
interest, that was then outstanding under the Company's prior bank credit
facility and $16.6 million principal, plus interest, that was then
outstanding under the subordinated notes. In addition, $4.4 million of the
Note proceeds were used to repurchase warrants that had been issued to the
subordinated noteholders in conjunction with the subordinated notes.
The subordinated notes were not redeemable by the Company prior to June
30, 1998. In order to retire the subordinated notes, the Company was
required to pay the subordinated noteholders an additional amount agreed
by them to be the equivalent of the additional interest that would have
been payable to them had the subordinated notes remained outstanding until
June 30, 1998. This amount has been treated as an extraordinary item by
the Company in the third quarter of 1997.
Had the warrants become exercisable, they would have entitled the
subordinated noteholders to purchase a percentage of equity in James, when
and if certain criteria were met. They also had certain put and call
features with repurchase amounts to be calculated pursuant to specific
formulas, which would have become exercisable under certain conditions.
Neither the warrants nor the put and call features had become exercisable
by the time the Notes were issued, but the subordinated noteholders were
unwilling to permit prepayment of the subordinated notes at that time
unless the warrants were also purchased by the Company. Consequently, the
Company agreed to purchase them at the $4.4 million price required by the
subordinated noteholders. This payment has been treated as an equity
transaction by the Company in the third quarter of 1997.
THE CREDIT FACILITY - The Company has a Credit Facility with Canadian
Imperial Bank of Commerce, an affiliate of CIBC Wood Gundy Securities
Corp., and NBD Bank, an affiliate of
FS-9
<PAGE> 46
First Chicago Capital Markets, Inc., acting as the lenders. The Credit
Facility is a $20 million revolving credit facility (with an option to
increase the amount of credit available thereunder to $30 million). The
Credit Facility matures on August 15, 2002. Proceeds under the Credit
Facility will be available (i) to provide for working capital and general
corporate purposes, (ii) to fund certain permitted acquisitions of cable
television systems, (iii) to provide for certain permitted repurchases of
up to $5 million in the aggregate of limited partnership interests in the
Company, and (iv) to pay transaction fees and expenses. The Credit
Facility requires the Company to maintain the ratio of its total debt to
annualized six-month EBITDA at no more than 7.50 to 1. As of December 31,
1998, this covenant limited the Company's maximum borrowings thereunder to
approximately $12 million. The Credit Facility requires payments of
accrued interest on a monthly basis throughout the term, with principal
payment due at maturity. The interest rate of the Credit Facility is based
on Prime or one to six month LIBOR rates plus a certain percentage based
on provisions related to debt to earnings ratios and events of default, as
defined. At December 31, 1998 the Company had $3.5 million in borrowings
under the Credit Facility.
The Credit Facility is secured by a first priority lien on and security
interest in substantially all of the assets of the Company. The Credit
Facility contains certain covenants and provides for certain events of
default customarily contained in facilities of a similar type. The
financial covenants which the Company considers most significant require
it to: (a) maintain an interest coverage ratio (that is, the ratio of
annualized six-month EBITDA to interest expense) of at least 1.1 to 1; (b)
maintain a senior debt ratio (that is, the ratio of debt under the Credit
Facility to annualized six-month EBITDA) of no more than 1.75 to 1; and
(c) maintain the total debt ratio described above. The Company is in
compliance with each of these covenants.
EXTRAORDINARY LOSS - In connection with the prepayment of the prior bank
credit facility and the subordinated notes, the Company realized an
extraordinary loss as follows:
<TABLE>
<S> <C>
Write-off of deferred financing costs $1,894,451
Additional interest $1,230,561
----------
Total extraordinary loss $3,125,012
==========
</TABLE>
In addition, the Company has paid administrative and other fees to the
debtholders for maintenance and services related to the debt. Amounts paid
in the years ended December 31, 1996, 1997 and 1998 were $278,031,
$234,446 and $113,297, respectively.
In 1994, the Company incurred capital lease obligations of $291,746
related to various vehicles. The agreements have been capitalized in
accordance with the provisions of SFAS No. 13, "Accounting for Leases."
Total depreciation expense in the years ended December 31, 1996 and 1997
related to this capital lease obligation was $56,013 and $33,610,
respectively.
4. COMMITMENTS AND CONTINGENCIES
The Company leases office space under operating leases which expire at
varying dates through 2000. Total rental expense, including month-to-month
rentals, was approximately $78,519, $80,353 and $90,897 for the years
ended December 31, 1996, 1997 and 1998, respectively.
FS-10
<PAGE> 47
The Company is committed to monthly pole rentals of $52,708 as of
December 31, 1998, to various utilities and cities. These agreements are
subject to termination rights by both parties.
In January 1992, in an action initiated by the Company, the Chancery
Court for Fentress County, Tennessee ordered the City of Jamestown,
Tennessee ("Jamestown") to cease the operation of its municipally-owned
cable television system (which overbuilt approximately 900 of the
Company's subscribers) for the remaining term of the Company's exclusive
franchise (which runs through March 14, 2002), and Jamestown ceased
operation of its system. Subsequently, on Jamestown's motion, the Chancery
Court dissolved its order on the ground that the 1992 Cable Act preempted
the exclusivity provision of the Company's exclusive franchise, and
Jamestown resumed operation of its system. On April 7, 1993, in an action
commenced by the Company, the United States District Court for the Middle
District of Tennessee entered an order enjoining Jamestown from competing
with the Company. Jamestown appealed to the United States Court of Appeals
for the Sixth Circuit, which affirmed the order. The Sixth Circuit Court
of Appeals subsequently ruled that Jamestown is required to correct
violations of the National Electric Safety Code with respect to its cable
plant, and remanded the case to the District Court for further proceedings
consistent with the Court of Appeals' decision.
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.
5. RELATED PARTY TRANSACTIONS
The Company has an agreement with the general partner to operate and
manage its cable systems. The fee for management services, in accordance
with the Company's Partnership Agreement, is equal to 4% of annual
revenues plus $5.00 per average annual subscriber. Management fees paid by
the Company to the general partner amounted to $1,806,226, $1,822,417 and
$1,904,984 in the years ended December 31, 1996, 1997 and 1998,
respectively.
Included in prepaid expenses and other assets are amounts receivable
from related parties which total $16,017 and $13,757 for the years ended
December 31, 1997 and 1998, respectively.
Included in accrued expenses are amounts payable to related parties
which total $4,930 and $13,029 for the years ended December 31, 1997 and
1998, respectively.
6. REGULATORY MATTERS
The cable television industry is subject to extensive governmental
regulation on the federal, state and local levels (but principally by the
Federal Communications Commission ("FCC") and by local franchising
authorities). Many aspects of such regulation have recently been
extensively revised and are currently the subject of judicial proceedings
and administrative rulemakings, which are potentially significant to the
Company. In this regard, the Company believes that the regulation of cable
television systems, including the rates charged for cable services,
remains a matter of interest to Congress, the FCC and local regulatory
officials. Critics of the cable television industry continue to seek to
maintain or even tighten cable rate regulation in the absence
FS-11
<PAGE> 48
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.
Under the FCC's rate regulations, most cable systems were required to
reduce their basic service and cable programming service tiers ("CPST")
rates in 1993 and 1994, and have since had their rate increases governed
by a complicated price cap scheme. Operators also have the opportunity of
bypassing this "benchmark" regulatory scheme in favor of traditional "cost
of service" in cases where the latter methodology appears favorable. The
FCC also established a vastly simplified cost of service methodology for
small cable companies.
The Company, which qualifies as a small cable company under FCC rules,
has elected to rely on the cost-of service rules as and when the Systems
are required to justify their rates for regulated services and, therefore,
has not implemented the rate reductions that would otherwise have been
required if it were subject to the FCC's benchmarks. Under the
cost-of-service rules applicable to small cable companies, eligible
systems can establish permitted rates under a simple formula that
considers total operating expenses (including amortization expenses), net
rate base, rate of return, channel count and subscribers. If the per
channel rate resulting from these inputs for a cable system is no more
than $1.24, the cable system's rates will be presumed reasonable. If the
formula generated rate exceeds the $1.24, the burden is on the cable
operator to establish the reasonableness of its calculations.
Substantially all of the Company's rates are currently under the $1.24
per channel level, and the Company believes that all of its rates in
excess of the $1.24 per channel level are reasonable using the formula
described above. However, FCC rules permit local franchise authorities to
review basic service rates, and under certain circumstances, challenge
CPST rates at the FCC. An adverse ruling in any such proceeding could
require the Company to reduce its rates and pay refunds. A reduction in
the rates it charges for regulated services or the requirement that it pay
refunds could have a material adverse effect on the Company. Once the
maximum permitted rate allowed by FCC rules is being charged by the
Company in regulated communities, future rate increases may not exceed an
inflation-indexed amount, plus increases in certain costs beyond the cable
operator's control, such as taxes, franchise fees and increased
programming costs. The 1996 Telecommunications Act provides for regulation
of the CPST to expire for all cable systems on March 31, 1999. However,
certain critics of the cable television industry have called for the delay
of this regulatory sunset and further have urged more rigorous rate
regulation (including limits on programming cost pass-throughs to cable
subscribers) until a greater degree of competition to incumbent cable
operators has developed.
In addition, certain provisions of the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act") could in the
future have a material adverse effect on the Company's business. In
particular, the 1992 Cable Act conveyed to broadcasters the right
generally to elect either to require (i) the local cable operator to carry
their signal or (ii) that such operator obtain the broadcaster's consent
before doing so. To date, compliance with these provisions has not had a
material effect on the Company, although this result may change in the
future depending on such factors as market conditions, channel capacity
and similar matters when such arrangements are renegotiated. In this
regard, a rulemaking is now pending at the FCC regarding the imposition of
dual digital and analog must carry provisions.
FS-12
<PAGE> 49
7. ACQUISITION OF CABLE SYSTEM
On December 10, 1998, pursuant to an Asset Purchase Agreement dated as
of June 24, 1998, the Company purchased the Cable Systems (as described
below) of Fannon Cable T.V., Inc. ("Fannon") for $7.65 million in cash. A
portion of the purchase price was funded with a $3.5 million draw against
James' existing $30 million revolving bank line of credit (Note 3). The
remaining $4.15 million of the purchase price was funded with
cash-on-hand.
The acquired cable television systems (individually a "Cable System"
and collectively the "Cable Systems") serve the communities of New
Tazewell, Tazewell, Harrogate and Cumberland Gap and certain
unincorporated portions of Claiborne County in the State of Tennessee.
Included in the assets purchased were all necessary franchises, the
rights to receive and distribute cable television signals to subscribers
and all of the equipment and other personal and real property necessary
for this reception and distribution of cable television signals to such
communities. James intends to continue to use the assets in the same
manner and for the same purpose as Fannon.
The purchase price of $7.65 million, plus a commission of $150,000 paid
to a broker, has been allocated among the following assets based on their
estimated fair values and are being depreciated or amortized over the
following lives:
<TABLE>
<CAPTION>
PURCHASE DEPRECIATION /
ASSET PRICE ALLOC. AMORTIZATION LIFE
<S> <C> <C>
Land $ 7,953 n/a
Vehicles 28,483 5 Yrs.
Non-Compete Agreement 305,882 5 Yrs.
Goodwill 7,457,682 40 Yrs.
-----------
Total $ 7,800,000
===========
</TABLE>
The Company's statement of operations for the year ended December 31,
1998 reflects the operations of the Cable Systems for the period from
December 11 through 31, 1998. The following table summarizes the pro forma
financial information of the Company for the years ended December 31, 1997
and 1998 as if the acquisition of Fannon had occurred on January 1, 1997
(unaudited):
<TABLE>
<CAPTION>
1997 1998
---- ----
(in thousands)
<S> <C> <C>
Revenues $ 37,568 $ 39,447
Loss before Extraordinary item (1,629) (3,134)
Net loss (4,754) (3,134)
</TABLE>
This pro forma financial information is not necessarily indicative of
what the actual results of operations of the Company would have been had
the acquisition actually occurred as of January 1, 1997, nor does it
purport to represent the results of the Company for future periods.
FS-13
<PAGE> 50
8. SUBSEQUENT EVENTS AND SALES OF CABLE SYSTEMS
On October 7, 1997, the City Council of Forsyth, Georgia ("Forsyth"), a
community in which the Company provides service, voted to spend $2.7
million to build a broadband telecommunications plant in competition with
the Company. On December 2, 1997, Forsyth passed a resolution to sell $3
million in revenue bonds to finance the proposed project. In order to
protect its customer base in Forsyth and surrounding Monroe County,
Georgia ("Monroe County"), the Company sued Forsyth under the Georgia Open
Records Act to force the public disclosure of various documents
concerning, among other things, the feasibility and risk of Forsyth's
proposed project. Forsyth responded by counterclaiming to preliminarily
enjoin the Company from seeking further information under the Georgia Open
Records Act and from making further statements to the public concerning
Forsyth's proposed project. At a hearing before the Superior Court for
Monroe County on January 27, 1998, the court denied Forsyth's motion for
preliminary injunction. After the Company moved to have Forsyth's
counterclaim dismissed, Forsyth voluntarily dismissed its counterclaim.
The Company has filed a motion with the court to recover its legal costs
related to Forsyth's counterclaim. A hearing on this motion is pending.
The court has not yet ruled on the Company's request, under the Georgia
Open Records Act, for disclosure of the documents relating to the City's
proposed project.
On February 2, 1999 the Company and Forsyth entered into an Asset
Purchase Agreement (the "Agreement"), pursuant to which the Company has
agreed to sell its cable television system which serves the City of
Forsyth and surrounding Monroe County to Forsyth for approximately $2.3
million in cash. Consummation of the transactions contemplated by the
Agreement, which is expected to occur on or about March 31, 1999, is
subject to certain conditions. If the transactions contemplated in the
Agreement are consummated, all litigation related to the matter will be
dismissed through the exchange of mutual releases.
On July 31, 1998, the Company and Rapid Communications Partners, L.P.
("Rapid") entered into an Asset Purchase Agreement (the "Purchase
Agreement"), pursuant to which the Company agreed to sell a portion of its
cable television systems in Pickett County, Scott County, Morgan County,
Roane County, Fentress County and Cumberland County, Tennessee to Rapid
for $14.7 million in cash. The transactions contemplated by the Purchase
Agreement were consummated on March 5, 1999.
FS-14
<PAGE> 51
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder of
James Cable Finance Corp.
Bloomfield Hills, Michigan
We have audited the accompanying balance sheets of James Cable Finance Corp. (a
wholly-owned subsidiary of James Cable Partners, L.P., a Delaware Limited
Partnership) ("Finance Corp.") at December 31, 1997 and 1998. These balance
sheets are the responsibility of the management of Finance Corp. Our
responsibility is to express an opinion on these balance sheets based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheets are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheets. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such balance sheets present fairly, in all material respects,
the financial position of James Cable Finance Corp. at December 31, 1997 and
1998 in conformity with generally accepted accounting principles.
February 12, 1999
Detroit, Michigan
FS-15
<PAGE> 52
JAMES CABLE FINANCE CORP.
(A WHOLLY OWNED SUBSIDIARY OF JAMES CABLE PARTNERS, L.P.,
A DELAWARE LIMITED PARTNERSHIP)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1998
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $1,000 $1,000
====== ======
SHAREHOLDER'S EQUITY
Shareholder's equity - Common stock, no par value (1,000 shares issued and outstanding) $1,000 $1,000
====== ======
</TABLE>
See notes to balance sheets.
FS-16
<PAGE> 53
JAMES CABLE FINANCE CORP.
(A WHOLLY-OWNED SUBSIDIARY OF JAMES CABLE PARTNERS, L.P.,
A DELAWARE LIMITED PARTNERSHIP)
NOTES TO BALANCE SHEETS
1. ORGANIZATION
James Cable Finance Corp. ("Finance Corp."), a Michigan corporation, is
a wholly-owned subsidiary of James Cable Partners, L.P. ("James"), a Delaware
limited partnership, and was organized on June 19, 1997 (the "Date of
Inception") for the sole purpose of acting as co-issuer with the James of $100
million aggregate principal amount of the 10-3/4% Senior Notes. Finance Corp.
has nominal assets and does not have (and 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 December 31, 1998, a Statement of Operations, a Statement of
Shareholder's Equity and a Statement of Cash Flows have not been presented.
FS-17
<PAGE> 54
JAMES CABLE PARTNERS, L.P.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, James Cable Partners, L.P. has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
JAMES CABLE PARTNERS, L.P.
By: James Communications Partners
General Partner
By: Jamesco, Inc.
Partner
By: /s/ William R. James
--------------------
William R. James
President
Date: March 30, 1999
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
Person performing functions similar to
/s/ William R. James a director and a principal executive March 30, 1999
- -------------------- officer
William R. James
Person performing functions similar to
/s/ C. Timothy Trenary a director March 30, 1999
- ----------------------
C. Timothy Trenary
Person performing functions similar to March 30, 1999
/s/ Daniel K. Shoemaker a director, a principal financial
- ------------------------ officer, and a principal accounting
Daniel K. Shoemaker officer
</TABLE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.
(c) No annual report to security holders covering the registrants' last
fiscal year or proxy material has been sent to security holders. If
such report or proxy material is furnished to security holders
subsequent to the filing of this form, the registrants will furnish
copies of such material to the Commission when it is sent to security
holders.
-37-
<PAGE> 55
JAMES CABLE FINANCE CORP.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
James Cable Finance Corp.
By: /s/ William R. James
---------------------
William R. James
President
Date: March 30, 1999
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ William R. James Director; President (principal March 30, 1999
- --------------------- executive officer)
William R. James
/s/ C. Timothy Trenary Director; Vice President March 30, 1999
- -----------------------
C. Timothy Trenary
/s/ Daniel K. Shoemaker Director; Treasurer (principal March 30, 1999
- ------------------------ financial officer and principal
Daniel K. Shoemaker accounting officer)
</TABLE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.
(c) No annual report to security holders covering the registrants' last
fiscal year or proxy material has been sent to security holders. If
such report or proxy material is furnished to security holders
subsequent to the filing of this form, the registrants will furnish
copies of such material to the Commission when it is sent to security
holders.
-38-
<PAGE> 56
EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT DESCRIPTION
12 Statement re computation of ratios
24 Powers of Attorney
27 Financial Data Schedule
-39-
<PAGE> 1
EXHIBIT 12
RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges for each of the years in the
five-year period ended December 31, 1998 is presented below. Ratio of Earnings
to Fixed Charges means the ratio of pretax income from continuing operations
(with certain adjustments described below) to the total of: (i) interest and
(ii) such portion of rental expense as can be demonstrated to be representative
of the interest factor in the particular case.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
EARNINGS BEFORE FIXED CHARGES:
Net Loss $( 8,805,280) $( 6,061,758) $( 1,894,244) $( 1,840,210) $( 3,310,870)
Add: Interest Expense 8,492,134 9,717,511 8,878,285 9,646,679 11,383,449
Interest factor in rental
expense 201,224 223,099 233,243 243,890 252,106
------------------------------------------------------------------------------------
EARNINGS BEFORE FIXED CHARGES $( 111,922) $ 3,878,852 $ 7,217,284 $ 8,050,359 $ 8,324,685
====================================================================================
FIXED CHARGES:
Interest Expense $ 8,492,134 $ 9,717,511 $ 8,878,285 $ 9,646,679 $ 11,383,449
Interest factor in rental expense 201,224 223,099 233,243 243,890 252,106
------------------------------------------------------------------------------------
TOTAL FIXED CHARGES $ 8,693,358 $ 9,940,610 $ 9,111,528 $ 9,890,569 $ 11,635,555
====================================================================================
RATIO OF EARNINGS TO FIXED CHARGES -- -- -- -- --
DEFICIENCY IN EARNINGS AVAILABLE TO
COVER FIXED CHARGES $ 8,805,280 $ 6,061,758 $ 1,894,244 $ 1,840,210 $ 3,310,870
====================================================================================
</TABLE>
<PAGE> 1
EXHIBIT 24
KNOW ALL MEN by these presents that each of the undersigned does hereby
make, constitute and appoint William R. James, C. Timothy Trenary and Daniel K.
Shoemaker and each of them, the true and lawful attorney-in-fact of the
undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K of James Cable Partners, L.P. and James Cable Finance Corp.
for the year ended December 31, 1998, and any and all amendments thereto; such
Form 10-K and each such amendment to be in such form and to contain such terms
and provisions as said attorney or substitute shall deem necessary or desirable;
giving and granting unto said attorney, or to such person or persons as in any
case may be appointed pursuant to the power of substitution herein given, full
power and authority to do and perform any and every act and thing whatsoever
requisite, necessary or, in the opinion of said attorney or substitute, able to
be done in and about the premises as fully and to all intents and purposes as
the undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney for such substitute shall lawfully do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of
the 30 day of March, 1999.
/s/ WILLIAM R. JAMES
--------------------------------------
William R. James
/s/ C. TIMOTHY TRENARY
--------------------------------------
C. Timothy Trenary
/s/ DANIEL K. SHOEMAKER
--------------------------------------
Daniel K. Shoemaker
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000926283
<NAME> JAMES CABLE FINANCE CORP.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,465,193
<SECURITIES> 0
<RECEIVABLES> 3,463,477
<ALLOWANCES> 43,971
<INVENTORY> 0
<CURRENT-ASSETS> 5,025,125
<PP&E> 93,961,772
<DEPRECIATION> 76,026,758
<TOTAL-ASSETS> 44,367,227
<CURRENT-LIABILITIES> 9,889,537
<BONDS> 103,500,000
0
0
<COMMON> 0
<OTHER-SE> (69,022,310)
<TOTAL-LIABILITY-AND-EQUITY> 44,367,227
<SALES> 0
<TOTAL-REVENUES> 37,757,809
<CGS> 0
<TOTAL-COSTS> 29,930,824
<OTHER-EXPENSES> (245,594)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,383,449
<INCOME-PRETAX> (3,310,870)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,310,870)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,310,870)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
