<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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Commission file number 333-3772
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CHARTER COMMUNICATIONS SOUTHEAST, L.P.
CHARTER COMMUNICATIONS SOUTHEAST CAPITAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 43-1740131
43-1722376
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
12444 Powerscourt Drive, Suite 400
St. Louis, Missouri 63131
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (314) 965-0555
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
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 Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [|X|]
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated into this Report by reference:
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Total Pages:
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Exhibit Index: Page
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CHARTER COMMUNICATIONS SOUTHEAST, L.P.
CHARTER COMMUNICATIONS SOUTHEAST CAPITAL CORPORATION
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Item 1. Business ......................................................... 3
Item 2. Properties ....................................................... 12
Item 3. Legal Proceedings ................................................ 13
Item 4. Submission of Matters to a Vote of Security Holders .............. 14
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters ............................................. 15
Item 6. Selected Financial Data .......................................... 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................. 16
Item 8. Financial Statements and Supplementary Data ...................... 23
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ............................ 23
PART III
Item 10. Directors and Executive Officers of the Registrant .............. 24
Item 11. Executive Compensation .......................................... 25
Item 12. Security Ownership of Certain Beneficial Owners
and Management ................................................ 25
Item 13. Certain Relationships and Related Transactions .................. 26
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K ................................................... 29
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PART I
ITEM 1. BUSINESS
GENERAL
Charter Communications Southeast, L.P. ("Charter Southeast") was formed as a
Delaware limited partnership in 1995 and is a holding company for other limited
partnerships and corporations that own and operate cable television systems and
offer certain ancillary communications services in the southeastern region of
the United States (collectively referred to as the "Partnership" or the
"Company").
Charter Communications Southeast Capital Corporation ("Southeast Capital") was
formed in 1995 as a Delaware corporation to be a wholly-owned subsidiary of
Charter Southeast and for the exclusive purpose of serving as a co-issuer with
Charter Southeast for the 11 1/4% Senior Notes due 2006 (the "Senior Notes")
that were issued in March 1996. Charter Southeast and Southeast Capital,
referred to together herein as the "Registrants", maintain their principal
executive offices at 12444 Powerscourt Drive, Suite 400, St. Louis, Missouri
63131 and their telephone number is (314) 965-0555.
The Partnership receives management services and administrative support for its
operations from Charter Communications, Inc. ("Charter") pursuant to the terms
of a management agreement. See "Item 13. Certain Relationships and Related
Transactions." Charter is a privately-held multi-system operator and manager of
cable television systems serving in excess of one million subscribers. Charter
has an indirect equity interest in Charter Communications Southeast Holdings,
L.P. ("Charter Holdings") who in turn owns Charter Southeast. See "Item 12.
Security Ownership of Certain Beneficial Owners and Management".
The Partnership, acting through certain wholly-owned entities, acquired its
cable televisions systems (the "Systems") in a series of transactions commencing
in April 1994. At December 31, 1997, the Systems served an aggregate of
approximately 432,200 basic subscribers, of which 85% were located within six
clusters: the Greenville-Spartanburg/Asheville Cluster in western North Carolina
and South Carolina; the Atlanta cluster in the suburban corridor south of
Atlanta, Georgia; the northern Alabama Cluster near Huntsville and Birmingham;
the New Orleans Cluster in the suburban areas north of New Orleans, Louisiana;
the Nashville Cluster in the suburban areas northwest of Nashville, Tennessee;
and the Hickory Cluster in and around Hickory, North Carolina. The remaining 15%
of the Partnership's basic subscribers do not reside within the aforementioned
clusters.
During March 1996, in conjunction with certain acquisitions and the refinancing
of the credit facilities of the Operating Subsidiaries (as defined below),
Charter Holdings and Charter Communications Southeast Holdings Capital
Corporation ("Holdings Capital") issued $146.8 million of 14% Senior Secured
Discount Debentures due 2007 (the "Debentures") and Charter Southeast and
Southeast Capital issued $125.0 million of 11 1/4% Senior Notes due 2006, each
pursuant to an indenture (the "Indentures"). Initial proceeds of the Debentures
were approximately $75.0 million. For the Debentures, no interest is currently
payable. The discount related to the initial sale of the Debentures is amortized
through March 2001, thereafter, cash interest is payable on a semi-annual basis
in March and September until March 2007. For the Senior Notes, cash interest is
payable semi-annually in March and September.
ORGANIZATIONAL STRUCTURE
The general partner of Charter Southeast is Charter Communications Southeast
Properties, Inc. ("Southeast Properties"). Charter Holdings has direct and
indirect ownership of 100% of the outstanding equity interests in Charter
Southeast, which, in turn, serves as a holding company for certain subsidiary
entities that own cable television systems. The operating subsidiary entities
are Charter Communications, L.P. ("CC-I") and Charter Communications II, L.P.
("CC-II," which for purposes of this report, shall be deemed to include its
subsidiaries, Charter Communications III, L.P. and Peachtree Cable TV, Inc.),
and are collectively referred to herein as the "Operating Subsidiaries". Charter
Holdings and its general partner,
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in turn, are directly and/or indirectly owned by another holding company,
CharterComm Holdings, L.P. (See "Item 12. Security Ownership of Certain
Beneficial Owners and Management").
A summary of the organizational structure of the Registrants is set forth below.
[FLOW CHART]
MAJOR TRANSACTIONS IN 1997
On February 7, 1997, CC-II acquired a cable television system serving Hickory,
North Carolina serving approximately 35,400 subscribers, for a purchase price of
approximately $69.1 million, after closing adjustments.
On February 28, 1997, Charter Holdings received $30 million of additional
limited partnership contributions as well as the contribution of the assets and
related liabilities of a certain cable television system serving areas in and
around Stockbridge, Georgia. The Stockbridge system, which had an appraised
value of approximately $3.67 million (net of liabilities of approximately $3.1
million), was contributed by Charter Holdings to Charter Southeast which, in
turn, contributed such system to CC-II. The additional capital was likewise
contributed to the Operating Subsidiaries and ultimately used for the Cencom
Cable Income Partners II, L.P. ("CCIP-II")/Cencom Partners, L.P. ("CPLP")
Acquisition described below. See "Item 13. Certain Relationships and Related
Transactions."
On April 7, 1997, the Operating Subsidiaries acquired cable television systems
as part of the CCIP-II/CPLP Acquisition serving certain communities in and
around Anderson County and Abbeville, South Carolina and Lincolnton and Sanford,
North Carolina with an aggregate of approximately 51,500 subscribers on that
date, for an aggregate purchase price of $90.5 million, after closing
adjustments. The general partner of each of CPLP and CCIP-II is an affiliate of
Charter. See "Item 13. Certain Relationships and Related Transactions."
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THE CABLE TELEVISION INDUSTRY
Most cable television systems offer a variety of channels and programming and
are distinguished from competitive technologies because they bring a hard wire
connection to each subscriber over a wide area. In recent years, technological
improvements used in new construction or to upgrade existing plant of cable
television systems have improved signal quality as well as increased channel
capacity, which, in turn, has increased the potential number of programming
offerings available to subscribers.
A cable television system consists of two principal operating components: one or
more signal origination points called "headends" and a signal distribution
system. It may also include program origination facilities. Each headend
includes a tower, antennae or other receiving equipment at a location favorable
for receiving broadcast signals and one or more earth stations that receive
signals transmitted by satellite. The headend facility also houses the
electronic equipment which amplifies, modifies and modulates the signals,
preparing them for passage over the system's network of cables.
The signal distribution system consists of amplifiers and trunk lines which
originate at the headend and carry the signal to various parts of the system,
smaller distribution cable and distribution amplifiers which carry the signal to
the immediate vicinity of the subscriber and drop lines which carry the signal
into the subscriber's home. In the past several years, many cable operators have
utilized fiber optic technology (in place of, or in combination with, coaxial
cable) to transmit signals through the primary trunk lines.
SUBSCRIBER DATA OF THE PARTNERSHIP SYSTEMS
The following table sets forth a summary of subscriber data (rounded to the
nearest hundred) of the Systems as of the dates indicated:
<TABLE>
<CAPTION>
As of December 31,
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1997 1996 1995
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<S> <C> <C> <C>
Basic Subscribers:
Greenville-Spartanburg/Asheville Cluster 105,000 78,100 71,100
Atlanta Cluster 69,000 62,400 57,700
Northern Alabama Cluster 62,900 62,400 47,800
New Orleans Cluster 36,600 35,600 35,400
Nashville Cluster 43,700 42,400 --
Hickory Cluster 51,000 -- --
Non-Cluster Systems 64,000 49,700 37,100
------- ------- -------
432,200 330,600 249,100
======= ======= =======
Premium Subscriptions:
Greenville-Spartanburg/Asheville Cluster 41,500 30,400 26,400
Atlanta Cluster 61,000 23,700 22,400
Northern Alabama Cluster 25,100 27,000 50,400
New Orleans Cluster 18,500 16,800 19,100
Nashville Cluster 21,800 22,800 --
Hickory Cluster 18,700 -- --
Non-Cluster Systems 36,200 30,500 23,900
------- ------- -------
222,800 151,200 142,200
======= ======= =======
</TABLE>
See "Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of subscriber data.
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MARKETING, PROGRAMMING AND RATES
The Systems' marketing program is based upon offering various packages of cable
services designed to appeal to different market segments. Charter, in its
capacity as manager of the Systems, performs and utilizes market research on
selected Systems, compares the data to national research and tailors a marketing
program for each individual market. The Partnership utilizes a coordinated array
of marketing techniques to attract and retain subscribers, including
door-to-door solicitation, telemarketing, media advertising and direct mail
solicitations, gain new subscribers and increase basic and premium penetration
in the communities served by the Systems.
Although services vary from system to system because of differences in channel
capacity, viewer interests and community demographics, each of the individual
Systems offers a "basic service tier," consisting of local television channels
(network and independent stations) available over-the-air, local public channels
and governmental and leased access channels. The individual Systems also offer
an expanded basic tier of television stations relayed from distant cities,
specialized programming delivered via satellite and various alpha-numeric
channels providing information on news, time, weather and the stock market. In
addition to these services, the Systems typically provide one or more premium
services purchased from independent suppliers and combined in different formats
to appeal to the various segments of the viewing audience, such as Home Box
Office, Cinemax, Showtime and The Movie Channel. A "premium service unit" is a
single premium service for which a subscriber must pay an additional monthly fee
in order to receive the service. Subscribers may subscribe for one or more
premium service units. The Systems also receive revenues from the sale or
monthly use of certain equipment (e.g., converters, wireless remote control
devices, etc.) and from cable programming guides, with some Systems offering
enhanced audio services. Certain of the Systems also generate revenues from the
sale of advertising spots on one or more channels, from the distribution and
sale of pay-per-view movies and events, and from commissions resulting from
subscribers participating in home shopping.
Rates to subscribers vary from market to market and in accordance with the type
of service selected. The rates currently charged by the Systems reflect
reductions effected in response to the implementation of the 1992 Cable Act (as
hereafter defined). A one-time installation fee, which may be partially waived
during a promotional period, is charged to new subscribers. The practices of the
Partnership regarding cable rates are consistent with the current practices in
the industry. See Item 1 - "Regulation of the Cable Television Industry" for a
discussion of rate setting.
COMPETITION
Cable television systems compete with other providers of television signals and
other sources of home entertainment. Key competitors today include:
Broadcast Television. Cable television has long competed with broadcast
television, which consists of television signals that the viewer is able to
receive without charge using a traditional "off-air" antenna. The extent of such
competition is dependent upon the quality and quantity of broadcast signals
available through "off-air" reception compared to the services provided by the
local cable system. Accordingly, cable operators in rural areas, where "off-air"
reception is more limited, generally achieve higher penetration rates than do
operators in major metropolitan areas, where numerous, high quality "off-air"
signals are available.
DBS. In recent years, direct broadcast satellite ("DBS") has emerged as
significant competition to cable television systems. Earlier "direct-to-home"
satellite services required the subscriber to purchase a large and expensive
"dish" antenna, but newer medium and high powered alternatives now allow the
subscriber to receive video services directly via satellite using a relatively
small dish. Moreover, video compression technology allows DBS providers to offer
more than 100 digital channels, thereby surpassing the typical cable system. DBS
providers offer most of the same programming services as are available through
cable television, but also offer certain sports packages not available through
cable television systems. Although a home satellite subscription at one time
required purchase or lease of an expensive satellite dish, the cost and size of
DBS has decreased dramatically for the consumer. DBS does suffer certain
significant operating disadvantages compared to cable television, however,
including the subscriber's inability to view different programming on different
television sets, line-of-sight reception requirements, up-front costs associated
with the "dish" antenna, and the lack of local
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programming (unless the subscriber also receives off-air signals and installs a
rooftop antenna and a special toggle switch). DBS currently faces technical and
legal obstacles to providing local broadcast signals, although at least one DBS
provider is now attempting to do so in certain major markets, and legislation is
now pending that may remove the existing legal obstacle.
Traditional Overbuild. Cable television franchises are not exclusive, so that
more than one cable television system may be built in the same area (known as an
"overbuild"), with potential loss of revenue to the operator of the original
system. Overbuilds historically have been relatively rare, as constructing and
developing a cable television system is capital-intensive, and it is difficult
for the new operator to gain a marketing advantage over the incumbent operator.
Although a private competitor ordinarily would require a franchise from local
jurisdiction, municipalities themselves have sometimes built and operated their
own overbuild. The Company has experienced an overbuild in Newnan, Georgia. (See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources.")
Telephone. Federal cross-ownership restrictions historically limited entry by
local telephone companies into the cable television business. The 1997
Telecommunications Act eliminated this cross-ownership restriction, making it
possible for companies with considerable resources to overbuild existing cable
systems. Several telephone companies have begun seeking cable television
franchises from local governmental authorities and constructing cable television
systems. The entry of telephone companies as direct competitors is likely to
continue and could adversely affect the profitability and valuation of the
Partnership's systems. The entry of electric utility companies into the cable
television business, as now authorized by the 1997 Telecommunications Act, could
have a similar adverse effect.
Private Cable. Additional competition is posed by private cable television
systems, known as Satellite Master Antenna Television (SMATV), serving
multi-unit dwellings such as condominiums, apartment complex, and private
residential communities. These private cable systems may enter into exclusive
agreements with apartment owners and homeowners associations, which may preclude
operators of franchised systems from serving residents of such private
complexes. Private cable systems that do not cross public rights of way are free
from the federal, state and local regulatory requirements imposed on franchised
cable television operators.
Wireless Cable. Cable television systems also compete with wireless program
distribution services such as multichannel, multipoint distribution service
("MMDS"). MMDS uses low-power microwave frequencies to transmit television
programming over-the-air to paying subscribers. The FCC has recently taken a
series of actions, including the auctioning of additional spectrum for Local
Multipoint Distribution Services ("LMDS") that could enhance the ability of
wireless cable to compete with traditional cable systems. Telephone companies
have acquired or invested in wireless companies, and may use traditional analog
MMDS systems or digital MMDS to provide services within their service areas in
lieu of wired delivery systems. Enthusiasm for MMDS has waned in recent months,
however, as Bell Atlantic and NYNEX have suspended their joint investment in a
major MMDS company. Nevertheless, Pacific Bell (now part of SBC) has launched a
digital MMDS system in the Los Angeles area and BellSouth has launched digital
MMS systems in New Orleans and Atlanta.
Cable television systems are also in competition, in various degrees with other
communications and entertainment media, including motion pictures and home video
cassette recorders.
REGULATION AND LEGISLATION.
The operation of a cable television system is extensively regulated by the
Federal Communications Commission ("FCC"), some state governments and most local
governments. The 1996 Telecom Act has altered 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
Partnership's operations, and there has been a recent
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increase in calls in Congress and at the FCC to maintain or even tighten cable
regulation in absence of widespread effective competition. This section briefly
summarizes key laws and regulations affecting the operation of the Partnership's
cable systems and does not purport to describe all present, proposed, or
possible laws and regulations affecting the Partnership.
Cable Rate Regulation. The Cable Television Consumer Protection and Competition
Act of 1992 (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.
Although the FCC has established the underlying regulatory scheme, local
government units (commonly referred to as local franchising authorities or
"LFA's") 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 LFA's
have voluntarily declined to exercise this authority. LFA's 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 1996 Telecom Act allow operators
to aggregate costs for broad categories of equipment across geographic and
functional lines. This change should facilitate the introduction of new
technology.
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 product. However, federal law requires
that the BST be offered to all cable subscribers and limits the ability of
operators to require purchase of any CPST before purchasing premium services
offered on a per-channel or per-program basis.
At December 31, 1997, approximately 20% of the LFA's (covering approximately 35%
of the Systems' subscribers) that oversee the franchises under which the Systems
operate are certified to regulate basic tier rates. The 1992 Cable Act permits
communities to certify and regulate rates at any time, so that it is possible
that additional localities served by the systems may choose to certify and
regulate rates in the future.
The FCC and Congress have provided various forms of rate relief for smaller
cable systems owned by smaller operators. If requisite eligibility criteria are
satisfied, a cable operator may be allowed to rely on a vastly simplified
cost-of-service rate justification and/or may be allowed to avoid regulation of
CPST rates entirely. Under FCC regulations, cable systems serving 15,000 or
fewer subscribers, which are owned by or affiliated with a cable company serving
in the aggregate no more than 400,0000 subscribers, can submit a simplified
cost-of-service filing under which the regulated rate (including equipment
charges) will be presumed reasonable if it equates to no more than $1.24 per
channel. Eligibility for this relief continues if the small cable system is
subsequently acquired by a larger cable operator, but is lost when and if the
individual system serves in excess of 15,000 subscribers. With regards to cable
systems owned by small operators, the 1996 Telecom Act immediately deregulated
the CPST rates of cable systems serving communities with fewer than 50,000
subscribers, which are owned by or affiliated with entities serving, in the
aggregate, no more than one percent of the nation's cable customers
(approximately 617,000) and having no more than $250 million in annual revenues.
The FCC's
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rulemaking with regard to this issue is outstanding and Charter is unable to
determine whether or not it can or will benefit from this variety of
deregulation.
The 1996 Telecom Act sunsets FCC regulation of CPST rates for all systems
(regardless of size) on March 31, 1999. However, certain cable critics have
called for the delay in that regulatory sunset and even urged more rigorous rate
regulation in the interim, including a limit on operators passing through to
their customers increased programming costs. 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 complains 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 provided
telecommunications service, as well as cable service, over its plant. The FCC
recently clarified that a cable operator's favorable pole rates are not
endangered by the provision of Internet access.
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. In July 1997, the Eighth Circuit Court of Appeals
vacated certain aspects of the FCC's initial interconnection order. That
decision is now pending before the Supreme Court.
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. Local exchange carriers
("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. As described
above, the Partnership is now witnessing the beginning of LEC competition in
certain metropolitan areas in the southeastern U.S.
Under the 1996 Telecom Act, a LEC providing video programming to subscribers
will be regulated as a traditional cable operator (subject to local franchising
and federal regulatory requirements), unless the LEC elects to provide its
programming via an "open video system" ("OVS"). To qualify for OVS status, the
LEC must reserve two-thirds of the system's activated channels for unaffiliated
entities. Although LECs and cable operators can now expand their offerings
across traditional service boundaries, the general prohibition remains on LEC
buyouts (i.e., 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 LEC in the same market. The 1996 Telecom Act
provided a few limited exceptions to this buyout prohibition, including a
carefully circumscribed "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 Utility Holding Company Act. Electric utilities must
establish separate subsidiaries, known as "exempt telecommunications companies"
and must apply to the FCC for operating authority. Like telephone companies that
have substantial resources at their disposal, electric utilities could be
formidable competitors to traditional cable systems.
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 also eliminates the three
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years holding period required under the 1992 Cable Act's "anti-trafficking"
provision. The 1996 Telecom Act leaves in place existing restrictions on cable
cross-ownership with SMATV and MMDS facilities, but lifts those restrictions
were the cable operator is subject to effective competition. In January 1995,
however, the FCC adopted regulations which permit cable operators to own and
operate 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. Although the 1992 Cable Act also precluded
any cable operator from serving more than 30% of all U.S. domestic cable
subscribers, this provision has been stayed pending further judicial review and
FCC rulemaking.
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. Section 310(b)(4) of the Communications Act of 1934, as amended,
does, however, prohibit foreign ownership of FCC broadcast and telephone
licenses, unless the FCC concludes that such foreign ownership is consistent
with the public interest.
Must Carry/Retransmission Consent. The 1992 Cable Act contains broadcast signal
carriage requirements that, among other things, allow local commercial
television broadcast stations to elect once every three years between requiring
a cable system to carry the station ("must carry") or negotiating for payments
for granting permission to the cable operator to carry the station
("retransmission consent"). Less popular stations typically elect "must carry,"
and more popular stations (such as those affiliated with a national network)
typically elect "retransmission consent." Must carry requests can dilute the
appeal of a cable systems' programming offerings because a cable system with
limited channel capacity may be required to forego carriage of channels desired
by customers because available channel positions pre-empted by stations electing
must carry. Retransmission consent demands may require substantial payments or
other concessions. Either option has a potentially adverse affect on the
Partnership's business. The burden associated with "must carry" may increase
substantially if broadcasters proceed with planned conversion to digital
transmission and the FCC determines that cable systems must carry all analogue
and digital broadcasts in their entirety. A rulemaking is expected to be
initiated at the FCC shortly.
Access Channels. LFA's 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 the designated channel capacity, but use of commercial leased access
channels has been relatively limited. The FCC released revised rules in February
1997 mandating a modest rate reduction. The reduction sparked some increase in
part-time use, but did not make commercial leased access substantially more
attractive to third party programmers. Certain of those programmers have now
appealed the revised rules to the District of Columbia Court of Appeals. Should
the Court and the FCC ultimately determine that an additional reduction in
access rates is required, cable operators could lose programming control of a
substantial number of cable channels.
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 subjecting programmers who are not affiliated with cable operators to
all of the existing program access requirements.
Inside Wiring. The FCC recently 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 initially installed by the cable
operator. In addition, the FCC is reviewing the enforceability of contracts to
provide exclusive video service within an 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,
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<PAGE> 11
make it easier for an MDU complex owner to terminate service from an incumbent
cable operator in favor of a new entrant and make the already competitive MDU
sector even more challenging for incumbent cable operators.
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, and children's programming
advertisements), registration of cable systems and facilities licensing,
maintenance of various records and public inspection files, aeronautical
frequency usage, lockbox availability, antenna structure notification, tower
marking and lighting, consumer protection and customer service standards,
technical standards, and consumer electronics equipment capability. 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. Federal requirements governing Emergency Alert Systems and Closed
Captioning adopted in 1997 will impose additional costs on the operation of
cable systems. 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.
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 (that 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 adverse affect
the Partnership's ability to obtain desired broadcast programming. In addition,
pursuant to an industry-wide arrangement in effect through 1996, cable operators
paid music licensing fees to BMI. The cable industry also expects to enter into
a separate adjudicated rate arrangement with ASCAP, and expects to negotiate an
extension of the BMI arrangement. 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 failed to comply with
material provisions.
The specific terms and conditions of franchises vary materially between
jurisdictions. 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. A number of states (such as
Connecticut) subject cable television systems to the jurisdiction of centralized
state governmental agencies, some of which impose regulation of a character
similar to that of a public utility. Although local franchising authorities
("LFA's") have considerable discretion in establishing franchise terms, there
are certain federal limitations. For example, LFA's 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 service or increased
franchise fees as a condition of renewal. Similarly, if a franchise authority's
consent is required for 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 franchise.
The Systems operate pursuant to an aggregate of 279 non-exclusive franchises,
permits or similar authorizations issued by governmental authorities. Under the
terms of most of the franchises, a franchise fee of up to five percent (5%) of
the gross
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<PAGE> 12
revenues derived by a cable system from the provision of cable television
services is payable to the franchising authority. Currently, 29 of the these
franchises, serving approximately 12% of the Partnership's subscribers in the
aggregate, were within a three-year window period for renewal.
EMPLOYEES
Neither Charter Southeast nor Southeast Capital has any employees. As of
December 31, 1997, the Operating Subsidiaries employed a total of approximately
715 full-time equivalent persons in the operation of their cable television
systems. None of these employees are represented by a union and the Partnership
has never experienced a work stoppage. The Partnership considers its
relationships with its employees to be good.
Charter acts as the management company for the Partnership pursuant to a
Management Agreement, and is the employer of record of the persons who serve as
executive officers of Charter Southeast and Southeast Capital. See "Item 13.
Certain Relationships and Related Transactions."
OTHER MATTERS
The Partnership owns and operates cable television systems and does not engage
in any other identifiable industry segments. The Partnership does not believe
that changes of a seasonal nature are material to the cable television business.
The Partnership has not expended material amounts during the last two years on
research and development activities. As the Partnership is a service-related
organization, little or no raw materials are utilized by the Partnership. The
necessary hardware, coaxial cable and electronics required for construction of
new cable plant are available from a variety of vendors and are generally
available in ample supply. There is no one customer or affiliated group of
customers to whom sales are made in amounts which exceed ten percent (10%) of
the Partnership's revenues. The Partnership believes it is not affected by
inflation except to the extent that the economy in general is affected thereby.
ITEM 2. PROPERTIES
The Partnership's principal physical assets consist of the components of each of
the Systems, which include a headend, distribution cables and local business
offices. The receiving apparatus is comprised of a tower and antennas for
reception of over-the-air broadcast television signals and one or more earth
stations for reception of satellite signals. Located near these receiving
devices is a building that houses associated electronic gear and processing
equipment. The Partnership owns the receiving and distribution equipment of each
System and owns or leases small parcels of real property for the receiving
sites.
Cable is either buried in trenches or is attached to utility poles pursuant to
license agreements with the owners of the poles. As is typical in the cable
television industry, the Partnership maintains insurance on its above-ground
plant, but not for its underground plant. The Partnership owns or leases the
local business office of each system from which it dispatches service employees,
monitors the technical quality of the system, handles customer service and
billing inquiries and administers marketing programs. The office facilities of
some systems include certain equipment for program production, as required under
certain of the Partnership's franchises.
The Partnership believes that its properties are generally in good condition,
although the physical components of the cable systems do require maintenance and
periodic upgrades to keep pace with technological advances and to comply with
the requirements of certain franchising authorities. The Systems currently
operate at between 300 and 750 megahertz, whereas the General Partner believes
the standard in the cable television industry to generally be a minimum of 450
megahertz. For a discussion of historical and planned capital expenditures with
regard to upgrading the Systems, see "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations." The Partnership's
cable television plant as of December 31, 1997 is summarized as follows:
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<PAGE> 13
<TABLE>
<CAPTION>
42 or Fewer 43 to 54 55 to 62 63 or Greater
Channels Channels Channels Channels Total
-------- -------- -------- -------- -----
<S> <C> <C> <C> <C> <C>
Number of Systems ................ 44 19 17 7 87
Miles of Plant ................... 7,369 4,817 5,132 2,345 19,663
Basic Subscribers ................ 132,400 100,600 126,000 73,200 432,200
% of Total Basic Subscribers ..... 30.6% 23.3% 29.2% 16.9% 100%
</TABLE>
The Partnership's total mileage of fiber optic cable increased from
approximately 6,800 miles at December 31, 1996 to approximately 28,200 miles at
December 31, 1997.
ITEM 3. LEGAL PROCEEDINGS
On March 28, 1996, CC-I and CC-II purchased certain Systems in Illinois from a
public limited partnership in liquidation, Cencom Cable Income Partners, L.P.
("CCIP"). The general partner of CCIP is an affiliate of Charter. As the
purchaser of certain of CCIP's cable assets, CC-II was named as a defendant in a
class action lawsuit instituted on October 20, 1995, by certain limited partners
of CCIP in the Chancery Court of New Castle County Delaware, presently entitled
In re: Cencom Cable Income Partners, L.P. Litigation, Civil Action No. 14634
(the "Action"). The Action names the general partner of CCIP, CC-II and two
other purchasing affiliates identified in the disclosure statement (the
"Disclosure Statement") distributed to limited partners of CCIP in connection
with the solicitation of consents to the sale of CCIP's systems (the "Sale
Transaction"), Charter and certain individual defendants. In January of 1997,
Defendants filed a Motion for Summary Judgment, which the Court granted in part
and denied in part by a Memorandum Opinion dated October 15, 1997, thereby
narrowing the remaining issues in the Action. As to claims potentially involving
CC-II, the Court held that issues of fact remain as to whether the Defendants
breached the CCIP Partnership Agreement with regard to the Sale Transaction,
breached their duty of loyalty with regard to the Sale Transaction and breached
their duty of candor by failing to disclose certain information regarding the
Sale Transaction in the Disclosure Statement. The Court also narrowed
Plaintiffs' damages claim to those concerning failure to properly value the
systems as part of the Sale Transaction. In March of 1997, Plaintiffs filed
their Motion for Class Certification. In response, on February 25, 1998,
Defendants filed a Motion for Judgment on the Pleadings. Based upon, among other
things, advice of counsel, the general partner of CCIP and CC-II's general
partner believe that the remaining portions of the Consolidated Amended Class
Action Complaint are legally inadequate and intend to contest them vigorously.
However, management cannot at this time predict the outcome of the Action with
any certainty and there can be no assurance that Defendants will successfully
defeat all of Plaintiffs' claims for damages.
In connection with the CCIP-II/CPLP Acquisition, on June 10, 1997, a purported
class action was filed in Delaware Chancery Court under the name Wallace,
Matthews, Lerner and Roberts v. Wood et al, Case No. 15731, on behalf of the
limited partners of CCIP II, the general partner of CCIP II ( Cencom Properties
II), Cencom Cable Entertainment, Inc. (which provided management services to
both CCIP II and its affiliate, Cencom Partners, L.P. and also owned all of the
stock of the general partners of each of these partnerships prior to mid-1994),
Charter, the ultimate parent of Cencom Partners and Cencom Properties II, CC-I
and CC-II (which purchased assets in the CCIP-II/CPLP transaction), certain
individuals, including officers of Charter or Cencom Properties II and certain
other unaffiliated parties. The plaintiffs allege that the defendants breached
fiduciary duties and the terms of the Partnership Agreement in connection with
the sale of certain CCIP II assets. In November 1997, the plaintiffs amended
their complaint to restate their allegations as a shareholder's derivative
claim. As of December 31, 1997, the damages claimed by the plaintiffs are
unspecified. The Partnership believes that the claims against CC-I and CC-II are
without merit, but that it is too early in the litigation to assess the
likelihood of the outcome. CC-I and CC-II intend to vigorously contest the
claims in this lawsuit.
The Operating Subsidiaries are involved from time to time in routine legal
matters incidental to their business. Management believes that the resolution of
such matters will not have a material adverse effect on the Partnership's
financial position or results of operation.
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<PAGE> 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
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<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Charter Southeast is privately held and has two partners which, during 1997,
contributed an aggregate of approximately $33.7 million. These contributions
consisted of $30.0 million in cash and approximately $3.7 million in net assets.
Charter Southeast has a single shareholder.
There is no public trading market for the equity of either Charter Southeast or
Southeast Capital.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from the audited
financial statements of the Partnership and should be read in conjunction with
the financial statements and notes thereto included pursuant to Item 8 of this
Form 10-K.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1997 1996 1995 1994
------------------- ----------------------------------------------------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service Revenues.................. $175,591,083 $120,279,555 $72,830,913 $21,561,116
Income (loss) from Operations 1,942,447 857,074 (8,206,746) (4,989,077)
Net loss.......................... (46,949,074) (31,950,022) (27,536,001) (9,609,052)
BALANCE SHEET DATA:
Total assets...................... 736,369,805 574,611,141 425,611,427 173,352,903
Long-term obligations, including current
maturities..................... 576,700,000 410,300,000 259,125,000 93,500,000
Partners' capital................. 113,430,858 126,909,932 31,648,159 16,966,042
MISCELLANEOUS DATA:
Ratio of earnings to fixed charges1/
-- -- -- --
</TABLE>
- ----------
1/ Ratio of earnings to fixed charges is calculated using income from continuing
operations adding back fixed charges; fixed charges include interest expense and
amortization expense for debt issuance costs. Earnings for the years ended
December 31, 1997, 1996, 1995 and 1994 were insufficient to cover the fixed
charges by $46,949,074, $31,950,022, $27,536,001, and $9,609,052, respectively.
As a result of such insufficiencies, these ratios are not presented above.
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<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SIGNIFICANT ASSET ACQUISITIONS
The Partnership has operated cable television systems for a limited period of
time and had no operations prior to April 30, 1994. The Partnership completed
twelve acquisitions during the period of April 1994 through April 1997,
summarized as follows:
<TABLE>
<CAPTION>
Approximate
Acquisition Date Purchase Price Location of Systems
---------------- -------------- -------------------
<S> <C> <C>
April 30, 1994 $174.7 million Georgia, Alabama, Louisiana
January 1, 1995 $108.0 million Kentucky, N. Carolina, S. Carolina
May 1, 1995 $22.0 million Georgia
May 31, 1995 $48.0 million Alabama
July 31, 1995 $34.7 million Georgia
November 30, 1995 $35.0 million S. Carolina
January 1, 1996 $8.4 million S. Carolina
March 29, 1996 $112.0 million Georgia, N. Carolina, Tenn., Ky.
November 29, 1996 $22.0 million Alabama, Tennessee
February 7, 1997 $69.1 million N. Carolina
February 28, 1997 $3.7 million Georgia
April 7, 1997 $90.5 million N. Carolina, S. Carolina
</TABLE>
As of the date of this filing, the Partnership had no pending acquisitions.
Although the Partnership is negotiating with a non-affiliated third party for
the sale of certain systems in Tennessee serving approximately 1,600 basic
subscribers, the Partnership has ceased its efforts to sell certain other cable
television systems.
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<PAGE> 17
RESULTS OF OPERATIONS
The following table summarizes the amounts and the percentage of total revenues
for certain items for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------
1997 1996 1995
---------------------------- ---------------------------- ----------------------------
Amt. % Amt. % Amt. %
---------------- ---------- ---------------- --------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Service Revenues:
Basic Service $127,941,203 72.9 $87,056,898 72.4 $53,237,594 73.1
Premium Service 19,390,135 11.0 14,648,591 12.2 9,635,049 13.2
Other Services 28,259,745 16.1 18,574,066 15.4 9,958,270 13.7
---------------- ---------- ---------------- --------- --------------- ---------
175,591,083 100.0 120,279,555 100.0 72,830,913 100.0
---------------- ---------- ---------------- --------- --------------- ---------
Operating Expenses:
Total Operating and
General &
Administrative 88,334,047 50.3 60,275,843 50.1 37,247,983 51.2
Management Fees 8,779,355 5.0 6,013,899 5.0 3,642,012 5.0
Depreciation &
Amortization 76,535,234 43.6 53,132,739 44.2 40,147,664 55.1
---------------- ---------- ---------------- --------- --------------- ---------
Total Operating Expense 173,648,636 98.9 119,422,481 99.3 81,037,659 111.3
---------------- ---------- ---------------- --------- --------------- ---------
Income (Loss) from
Operations 1,942,447 1.1 857,074 0.7 (8,206,746) (11.3)
---------------- ---------- ---------------- --------- --------------- ---------
Other Income (Expenses):
Interest Income 172,552 0.1 177,763 0.1 197,965 0.3
Interest Expense (49,080,679) (28.0) (32,516,728) (27.0) (18,671,491) (25.6)
Other, Net 16,606 0.0 (468,131) (0.4) (784,983) (1.1)
---------------- ---------- ---------------- --------- --------------- ---------
Other Income (Expense) (48,891,512) (27.8) (32,807,096) (27.3) (19,258,509) (26.4)
---------------- ---------- ---------------- --------- --------------- ---------
Net Loss Before Income Tax
Benefit and
Extraordinary Item (46,949,074) (26.7) (31,950,022) (26.6) (27,465,255) (37.7)
Income Tax Benefit 0 0.0 0 0.0 1,888,692 2.6
---------------- ---------- ---------------- --------- --------------- ---------
Net Loss Before
Extraordinary Item (46,949,074) (26.7) (31,950,022) (26.6) (25,576,563) (35.2)
Extraordinary Item - Loss
on Early Retirement of 0 0.0 0 0.0 (1,959,438) (2.7)
Debt
---------------- ---------- ---------------- --------- --------------- ---------
Net Loss ($46,949,074) (26.7) ($31,950,022) (26.6) ($27,563,001) (37.8)
================ ========== ================ ========= =============== =========
</TABLE>
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<PAGE> 18
COMPARISON OF YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Service Revenues
The Partnership earns substantially all of its revenues from monthly
subscription fees for basic tier, expanded tier, premium channels, equipment
rental and ancillary services provided by its cable television Systems. Service
revenues increased by 65.1% from $72.8 million in 1995 to $120.3 million in
1996, and increased 46.0% to $175.6 million in 1997. These increases are
primarily due to the increase in the number of subscribers to the cable services
offered by the Partnership as a result of the acquisitions of cable television
systems during 1995, 1996 and 1997. The Partnership has been able to increase
revenues through the implementation of basic and expanded tier retail rate
increases in certain systems, in accordance with federal law. In addition to the
subscriber increases as a result of acquisitions, the Partnership has grown its
subscriber base internally as a result of management's marketing efforts to add
new subscribers, increased efforts to retain existing customers, and a limited
amount of new-build construction to increase the coverage area of its systems.
See "Item I - Description of the Partnership Systems" for a summary of the year
end subscriber data by operating cluster.
Premium service subscriptions increased to 142,200 at December 31, 1995 to
151,200 at December 31, 1996 to 222,800 at December 31, 1997. The increases in
total premium units is due primarily to the increase in the number of basic
subscribers as a result of the acquisitions during 1995, 1996 and 1997 and as a
result of the Partnership's marketing efforts. The number of premium service
subscriptions at December 31, 1995 included approximately 24,000 Flix and
American Movie Classic premium units, carriage of which was discontinued by
certain systems in the Northern Alabama Cluster in early 1996. The premium
ratio, determined by dividing the number of premium subscriptions by the number
of basic subscribers, decreased from 57.1 at December 31, 1995 to 45.7 at
December 31, 1996, primarily as a result of the discontinued premium units in
the Northern Alabama Cluster. The premium ratio increased from 45.7 at December
31, 1996 to 51.6 at December 31, 1997 as a result of the Partnership offering
premium services to customers in a packaged format with a discount from the
combined individual retail rates. The Partnership offers premium packages to
customers in certain of its markets, notably the Atlanta Cluster, in an effort
to maintain premium subscription levels and attract additional basic
subscribers. While revenue from premium subscriptions will continue to be an
important source of revenue for the Partnership, there is some concern that the
premium ratio may decline over the next few years.
Operating Expense
Operating and general and administrative expenses increased by 61.8% from $37.2
million in 1995 to $60.3 million in 1996, and increased by 46.5% to $88.3
million in 1997. These increases are primarily due to the increase in the number
of subscribers served by the Partnership as a result of the acquisitions of
cable television systems during 1995, 1996 and 1997. As a percentage of service
revenues, operating and general and administrative expenses declined from 51.2%
to 50.1% for the years ended December 31, 1995 versus 1996. However, operating
and general and administrative expenses rose slightly to 50.3% for the year
ended December 31, 1997. The Partnership has been able to achieve certain
operating cost efficiencies as a result of increasing the customer base within
each of its operating clusters. Offsetting these cost savings, however, the
Partnership continues to experience increases in programming costs, which the
Partnership believes to be consistent throughout the cable television industry.
Programming cost increases are the result of increases in the license fee rates
paid per subscriber to the distributors of cable television programming,
increases in the Partnership's subscriber base, and increases in the number of
channels of cable television programming provided to customers.
Management fee expense relates to the cost associated with the certain
management agreements between the Partnership and Charter. Management fee
expense of the Partnership is based on 5.0% of service revenues, with 40% of the
management fee expense deferred until repayment in full of the CC-I and CC-II
credit facilities, the Debentures and the Senior Notes. The remaining 60% of the
management fee expense is calculated and settled on a quarterly basis, paid in
arrears. See "Item 13 - Certain Relationships and Related Transactions" for a
discussion of the management agreements.
Depreciation and amortization expense increased by 32.3% from $40.1 million in
1995 to $53.1 million in 1996, and increased 44.0% to $76.5 million in 1997. The
increase is related to the increased base of property, plant and equipment and
franchise costs primarily as a result of the acquisitions of cable television
systems during 1995, 1996 and 1997. In
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<PAGE> 19
addition, the Partnership continues to incur capital expenditures for property,
plant and equipment related to the upgrade, rebuild and extension of the cable
television systems.
Other Income (Expense)
Interest expense increased by 74.2% from $18.7 million in 1995 to $32.5 million
in 1996, and increased by 50.9% to $49.1 million in 1997. The increased interest
expense is a result of the increase in the average outstanding total debt
balances between years, which includes bank debt and the Senior Notes, as a
result of the acquisitions of cable television systems.
Other, net, relates primarily to the insurance deductible costs expensed by the
Partnership for Hurricane Opal in 1995 and Hurricane Fran in 1996. The
Partnership maintains property and casualty insurance on its aerial plant,
headends and offices, but does not maintain property and casualty insurance
coverage on its underground distribution plant.
Net Loss
Net loss increased 16.0% from $27.5 million in 1995 to $32.0 million in 1996,
and increased 46.9% from $32.0 million in 1996 to $46.9 million in 1997.
Although the Partnership's income (loss) from operations went from a loss from
operations of $8.2 million in 1995 to income from operations of $0.8 million in
1996 and $1.9 million in 1997, the Partnership's increased interest expense
continues to be a significant factor toward the Partnership's annual net loss.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's growth by acquisition has been funded primarily by borrowings,
either through the credit facilities of CC-I and CC-II or with the proceeds of
the Senior Notes. Cash flows provided by operating activities together with
third party borrowings have historically been sufficient to fund the
Partnership's debt service, capital expenditures and working capital
requirements. In addition, the Partnership has funded portions of certain
acquisitions through the issuance of equity securities. Future cash flows
provided by operating activities and availability for borrowings under the
existing credit facilities are anticipated to be sufficient during the next 12
months for the Partnership's ongoing debt service, capital expenditures and
working capital needs. The Partnership anticipates that pending acquisitions or
other potential future acquisitions could be financed through borrowings, either
presently available under the existing credit facilities or as a result of
amending the existing credit facilities to allow for expanded borrowing
capacity, and, if necessary, combined with additional equity contributions.
Although to date the Partnership has been able to obtain financing on
satisfactory terms, there can be no assurance that this will continue to be the
case in the future. Inability to obtain financing on satisfactory terms could
negatively impact the Partnership's ability to pursue a strategy that includes
growth through acquisitions and significant capital expenditure outlays for
rebuilding or upgrading its cable television systems.
In March 1996, the Partnership engaged in a corporate restructuring and
refinancing plan. As a result, Southeast Holdings and Holdings Capital issued
$146.8 million principal amount of Debentures due 2007, from which the net
proceeds of $72.4 million were invested in its subsidiary, Charter Southeast,
for use in operations. Simultaneously with this offering by Charter Holdings and
Holdings Capital, Charter Southeast and Southeast Capital issued $125.0 million
aggregate principal amount of Senior Notes due 2006, from which the proceeds to
the issuers were $121.3 million. The net proceeds of these concurrent offerings
were ultimately used, among other things, as follows: $18.1 million to repay
outstanding credit facilities, $16.1 million to repay other indebtedness, $43.2
million to redeem the Special Limited Partner units of CC-I, and $114.9 million
to consummate the CCIP Acquisition and related transaction costs by CC-II. In
connection with the offerings of the Debentures and the Senior Notes, each of
CC-I and CC-II amended and restated its bank credit facility to increase the
total borrowing availability, lengthen the maturity, and improve the terms and
interest rates under the prior credit facilities. As a result of these
amendments, availability under the CC-I facility was adjusted from $110.0 to
$105.0 million, and for the CC-II facility, was increased from $135.0 to $205.0
million.
Both of these credit facilities were again amended in connection with subsequent
acquisitions. In November 1996, CC-I increased its facility to $150.0 million to
complete the acquisition of systems in Alabama and Tennessee (with a purchase
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<PAGE> 20
price of $21.9 million), and to complete the CCIP-II/CPLP Acquisition (with a
purchase price of $20.9 million). In February 1997, CC-II increased its facility
to $365.0 million to complete the acquisition of the Hickory, North Carolina
system (with a purchase price of $69.1 million) and to complete the CCIP-II/CPLP
Acquisition in April 1997 (with a purchase price of $69.6 million). On December
31, 1997, CC-II amended its facility to increase its availability to $390.0
million to complete an acquisition of a cable television system from CC-I (with
a purchase price of $22.8 million). Proceeds of this transaction were used to
reduce outstanding indebtedness of CC-I, thereby reducing availability under the
CC-I credit facility to $127.2 million.
At December 31, 1997, the Partnership's long-term debt (including current
maturities) of $576.7 million consisted of $112.2 million outstanding under the
revolving credit and term loan facility of CC-I, $339.5 million outstanding
under the revolving credit and term loan facility of CC-II, and $125 million of
indebtedness from the sale of the Senior Notes. The Partnership had unused and
available borrowing capacity of $15.0 million and $50.5 million under the credit
facilities of CC-I and CC-II, respectively, at December 31, 1997.
Under the CC-I and CC-II credit facilities, cash interest is payable on a
monthly and quarterly basis for borrowings outstanding. With respect to the CC-I
credit facility, the outstanding balance of $112.2 at December 31, 1997 had
interest rates ranging between 7.75% and 8.00%, based upon its existing LIBOR
contracts. The weighted average interest rates and weighted average borrowings
were approximately 8.19%, 7.93% and 8.72%, and $126.5 million, $84.7 million,
and $93.6 million during the years ended December 31, 1997, 1996 and 1995,
respectively. With respect to the CC-II credit facility, the outstanding balance
of $339.5 at December 31, 1997 had interest rates ranging between 7.625% and
8.250%, based upon its existing LIBOR contracts. The weighted average interest
rate and weighted average borrowings were 8.07%, 7.86% and 8.46% and
approximately $284.2 million, $174.5 million and $121.1 million, during 1997,
1996 and 1995, respectively.
For the Senior Notes, cash interest is payable semi-annually in March and
September. The Partnership manages risk arising from fluctuations in interest
rates through the use of interest rate swap and cap agreements required under
the terms of the existing credit facilities. Interest rate swap and cap
agreements are accounted for by the Partnership as a hedge of the debt
obligation. As a result, the net settlement amount of any such swap or cap is
recorded as an adjustment to interest expense in the period incurred. The
effects of the Partnership's hedging practices on its weighted average borrowing
rate and on reported interest expense were not material during 1995, 1996 or
1997. At December 31, 1997, the Partnership had fourteen interest swap and cap
agreements with an aggregate notional amount of $395.0 million. The estimated
fair value/termination cost for these contracts as of December 31, 1997 was a
net deficit of approximately $1.9 million.
On February 28, 1997, Charter Southeast received a cash contribution from
Charter Holdings of $30 million for additional equity as well as a contribution
of the assets and related liabilities for the cable television system located in
Stockbridge, Georgia. The Stockbridge system, which had an appraised value of
approximately $3.67 million, net of debt of approximately $3.1 million, was
contributed by Charter Holdings to Charter Southeast which in turn contributed
such system to CC-II, and the additional capital was contributed by Charter
Holdings to Charter Southeast which in turn contributed such capital to CC-I ($5
million) and CC-II ($25 million) to be ultimately used toward the CCIP-II/CPLP
Acquisition. See "Item 13. Certain Relationships and Related Transactions."
The Partnership incurred capital expenditures of approximately $72.2 million
during 1997 in connection with the improvement, rebuilding and upgrading of the
Systems. A significant portion of the Partnership's 1997 capital expenditures
were utilized in the deployment of fiber optic cable. The Partnership's total
mileage of fiber optic cable increased from approximately 6,800 miles at
December 31, 1996 to approximately 28,200 miles at December 31, 1997. The
Partnership anticipates that capital expenditures will be approximately $80.0
million to $90.0 million during 1998. However, the Partnership is continually
reevaluating its capital expenditure budget based on economic, technological,
competitive and other factors. The Partnership's current capital expenditure
plan contemplates the upgrade or rebuild of the majority of its existing cable
television systems, with the objective of delivering a minimum of 78 channels to
eighty percent of its customers by the second half of 2000. For a summary of the
Partnership's cable television plant as of December 31, 1997, see "Item 2.
Properties." The Partnership anticipates to fund its capital expenditures
through availability under its existing CC-I and CC-II credit facilities and
from cash generated by operations. As of December 31, 1997, the Partnership did
not have any significant contractual obligations for capital expenditures.
-20-
<PAGE> 21
During October 1996, the Partnership became aware that the local power
commission affiliated with the City of Newnan, Georgia, announced its intention
to construct a fiber optic system for the delivery of video and data services to
the entire city. In response to this situation, the Partnership completed the
upgrade of its existing cable television plant inside the City of Newnan to 750
MHz during December 1996, and began an aggressive marketing effort during the
first quarter of 1997 to promote its new channel offerings and other services.
During 1997, the local power commission also received a franchise for the
unincorporated county area surrounding the city. As of December 31, 1997, the
Partnership's cable system in and around the City of Newnan served approximately
14,800 basic subscribers, an increase of approximately 400 basic subscribers
since December 31, 1996. However, the number of basic subscribers within the
City of Newnan has decreased by approximately 900 subscribers since December 31,
1996, to approximately 2,600 at December 31, 1997. The Partnership cannot
determine the impact, if any, this project by the local power commission will
have on long-term results or strategies of the Partnership.
The Partnership has had discussions with several municipalities, counties and
utility companies in Georgia to explore the possibility of a sale and lease-back
venture whereby the Partnership would sell the cable television distribution
plant and then enter into a long-term capital lease and continue to operate the
cable system. One such proposal currently being explored by the Partnership
involves approximately 7,000 customers residing within the City of LaGrange,
Georgia. Pursuant to the proposal currently under discussion, the Partnership
and its venture partner would upgrade the plant to 750 MHz, allocating a portion
of the spectrum to the venture partner for its purposes. The Partnership would
expect to benefit by gaining access to upgraded plant, obtaining lower cost
financing through the venture partner and realizing certain operating cost
savings. There is no assurance that a final agreement will be reached with
respect to any such proposals.
The Partnership has insurance covering risks incurred in the ordinary course of
business, including general liability, property and business interruption
coverage. As is typical in the cable television industry, the Partnership does
not maintain insurance covering its underground plant, the cost of which
management believes is currently prohibitive. Management believes that the
Partnership's insurance coverage is adequate, and intends to monitor the
insurance markets to attempt to obtain coverage for the Partnerships underground
plants at reasonable and cost-effective rates.
The Partnership believes that it has generally complied with the provisions of
the 1992 Act regarding cable programming service rates. However, some systems
may be charging rates which are in excess of allowable rates and, accordingly,
may be subject to challenge by regulatory authorities, such challenge may result
in the Partnership being required to make refunds to subscribers. The amount of
refunds, if any, which could be payable by the Partnership in the event such
systems' rates are successfully challenged by regulatory authorities is not
currently estimable. The Partnership has not reserved any amounts for payment of
such refunds as the General Partner does not believe that the amounts of any
such refunds would have material adverse effect on the financial position or
results of the Partnership.
YEAR 2000 IMPACT
During the fiscal year ended December 31, 1997, the Company began a process to
identify and address issues surrounding the Year 2000 and its impact on the
Company's operations. The issue surrounding the Year 2000 is whether the
computer systems, software and all equipment using a computer chip will properly
recognize date sensitive information when the year changes to 2000, or "00".
Computerized systems that do not properly recognize such information could
generate erroneous data or cause a system to fail. This issue impacts the
Company as to its owned or licensed computer systems and equipment used in
connection with internal operations, including systems, software and equipment
supplied by vendors and third party service providers. The Company may also be
affected by virtue of its external dealings with third parties in the regular
course of business. As management of the Company has not completed its initial
assessment of the impact the Year 2000 may have on the Company's operations, it
cannot estimate the costs associated with ensuring the Company's operations are
Year 2000 compliant. The Company is in the initial phases of determining the
impact of the Year 2000, and management anticipates completion of the project by
December 1998, allowing adequate time for testing. However, there can be no
assurance that the Company's operations nor the computer systems of other
companies with whom the Company conducts business will be Year 2000 compliant
prior to December 31, 1999. If such modifications and conversions are not
completed timely, the Year 2000 problem may have a material impact on the
operations of the Company.
-21-
<PAGE> 22
SUPPLEMENTAL ANALYSIS OF OPERATING RESULTS FOR 1997 AND 1996 - UNAUDITED
The following table sets forth certain operating results and statistics for the
year ended December 31, 1997 compared to the year ended December 31, 1996. The
following dollar amounts are in thousands, except for per subscriber amounts:
<TABLE>
<CAPTION>
For the Year For the Year
Ended December 31, 1997 Ended December 31, 1996
----------------------- -----------------------
(Unaudited) (Unaudited)
------------- -- ------------- --- ----------- -------------- -- ------------- --- -----------
SYSTEMS SYSTEMS
ACQUIRED ON Systems ACQUIRED ON Systems
OR BEFORE Acquired OR BEFORE Acquired
1/1/96 After 1/1/96 Total 1/1/96 After 1/1/96 Total
------------- ------------- ----------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Service Revenues $112,226 $63,365 $175,591 $100,512 $19,768 $120,280
------------- ------------- ----------- -------------- ------------- -----------
Operating Expenses:
Operating Costs 48,939 26,789 75,728 43,049 7,922 50,971
General & Administrative 8,702 3,904 12,606 7,800 1,505 9,305
------------- ------------- ----------- -------------- ------------- -----------
$57,641 30,693 88,334 $50,849 $9,427 $60,276
------------- ------------- ----------- -------------- ------------- -----------
EBITDA (a) $54,585 $32,672 $87,257 $49,663 $10,341 $60,004
============= ============= =========== ============== ============= ===========
EBITDA Margin 48.6% 51.6% 49.7% 49.4% 52.3% 49.9%
============= ============= =========== ============== ============= ===========
Operating Statistical
Data, at end of Period
Revenue per subscriber $34.29 -- -- $31.86 -- --
Homes passed 415,100 249,900 665,000 398,900 97,900 496,800
Basic subscribers 272,800 159,400 432,200 262,900 67,700 330,600
Basic penetration 65.7% 63.8% 65.0% 65.9% 69.1% 66.5%
Premium subscriptions 152,500 70,300 222,800 115,300 35,900 151,200
</TABLE>
(a) EBITDA represents income before interest expense, income taxes,
depreciation and amortization, management fees and other income (expense).
EBITDA is calculated before payment of management fees so as to be
consistent with certain financial terms contained in the revolving credit
and term loan facilities. Management believes that EBITDA is a meaningful
measure of performance because it is commonly used in the cable television
industry to analyze and compare cable television companies on the basis of
operating performance, leverage and liquidity. EBITDA is not presented in
accordance with generally accepted accounting principles and should not be
considered an alternative to, or more meaningful than, operating income or
operating cash flows as an indicator of the Partnership's operating
performance. EBITDA does not include the Partnership's debt obligations or
other significant commitments.
-22-
<PAGE> 23
Results of Operations - Year Ended December 31, 1997 Versus the Year Ended
December 31, 1996 for Systems Acquired On or Before January 1, 1996
The following discussion is provided to show the results of operations on a
comparable basis for those systems owned by the Partnership during the year
ended December 31, 1997 versus the year ended December 31, 1996. Specifically,
the comparable analysis includes the results of operations for these systems
acquired on or before January 1, 1996, which the Partnership operated for the
entire fiscal years of 1997 and 1996. See "Item 7 - Significant Asset
Acquisitions" for a complete listing of all acquisitions by the Partnership.
Service revenues increased by $11,714,000 or 11.7% when comparing the revenues
for the year ended December 31, 1997 to the results for the comparable systems
for the year ended December 31, 1996. This increase is due to a net gain of
approximately 9,900 basic subscribers between years and, also, to retail rate
increases implemented in certain of the Partnership's systems. The internal
growth for basic subscribers was approximately 3.8% when comparing basic
subscribers at December 31, 1997 to December 31, 1996.
Operating expenses increased by $6,792,000 or 13.4% when comparing the operating
expenses for the year ended December 31, 1997 to the results for the comparable
systems for the year ended December 31, 1996. This increase is primarily due to
increases in license fees paid for programming as a result of additional
subscribers, new channels launched and increases in the rates paid per
subscriber to the distributors of programming services. The growth in
programming expense is consistent with industry-wide increases.
The Partnership experienced growth in operating cash flow (EBITDA) of
approximately $4,922,000 or 9.9% when comparing the operating cash flow for the
year ended December 31, 1997 to the results for the comparable systems for the
year ended December 31, 1996. EBITDA margin decreased from 49.4% to 48.6% when
comparing the similar periods, primarily due to increases in license fees paid
for programming and due to an increase in costs related to the Partnership's
system in Newnan, Georgia.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Index to Financial Statements and Schedules" on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the fiscal year ended December 31, 1997, the Registrants were not
involved in any disagreements with its independent certified public accountants
on accounting principles or practices or on financial disclosure.
-23-
<PAGE> 24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Charter Southeast has no officers or directors. Southeast Properties, the
general partner of Charter Southeast, manages the business and affairs of, and
has general responsibility and ultimate authority in all matters affecting
business for, Charter Southeast.
The following table sets for certain information, as of March 15, 1998, with
respect to the executive officers, the chief financial officer and directors of
Southeast Properties and Southeast Capital.
<TABLE>
<CAPTION>
YEAR FIRST
NAME AGE POSITION ELECTED
---- --- -------- -------
<S> <C> <C> <C>
Barry L. Babcock 51 Chairman of the Board of Southeast Properties 1995
and Southeast Capital
Thomas C. Dircks 40 Director of Southeast Properties 1995
Jerald L. Kent 41 President, Chief Executive Officer and Director 1995
of Southeast Properties and Southeast Capital
Howard L. Wood 58 Vice Chairman of the Board and Director of 1995
Southeast Properties and Southeast Capital
Kent D. Kalkwarf 38 Senior Vice President and Chief Financial Officer 1995
</TABLE>
BUSINESS EXPERIENCE
Mr. Babcock has been affiliated with Charter since 1993 and now holds the
position of Chairman of the Board. Mr. Babcock co-founded Charter Communications
Group ("CCG") in 1992. Prior to that time, he was associated with Cencom Cable
Associates, Inc. ("CCA") as the Executive Vice President of CCA from February
1986 to November 1992, and as Chief Operating Officer of CCA from May 1986 to
November 1992.
Mr. Dircks has been a Vice President of Charterhouse Group International, Inc.
since 1988 and is also a certified public accountant.
Mr. Kent has been affiliated with Charter since 1993 and now holds the position
of President and Chief Executive Officer. Mr. Kent also co-founded CCG in 1992.
Prior to that time, he was associated with CCA as Executive Vice President and
Chief Financial Officer of CCA from 1987 through November 1992.
Mr. Wood has been affiliated with Charter since 1993, now holding the position
of Vice Chairman of the Board of Charter. Mr. Wood also co-founded CCG in 1992.
Prior to that time, he was associated with CCA, which he joined in July 1987 as
Director; at CCA he held the position of President, Chief Executive Officer and
Director from January 1, 1989 to November 1992.
Mr. Kalkwarf, a certified public accountant, joined Charter in 1995 and now
serves as Senior Vice President and Chief Financial Officer. Previously, Mr.
Kalkwarf was a senior tax manager for Arthur Andersen LLP.
-24-
<PAGE> 25
ITEM 11. EXECUTIVE COMPENSATION
During 1997, Charter Southeast had no officers or directors, and neither Charter
Southeast nor its general partner, Southeast Properties, had any employees.
Furthermore, during 1997, none of the executive officers or the chief financial
officer of Southeast Properties, the general partner of Charter Southeast,
received any compensation in his capacity as an officer or director of Southeast
Properties. Charter performed management services for the Partnership during
1997 pursuant to the terms of the Charter Management Agreement (see "Item 13.
Certain Relationships and Related Transactions").
Southeast Capital does not have any employees nor does it pay any compensation
to its executive officers, chief financial officer or directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Charter Southeast is beneficially owned by Charter Holdings, which directly owns
all of the limited partnership interests of Charter Southeast, and indirectly
owns all of the general partnership interests through its wholly-owned
subsidiary, Southeast Properties. Southeast Properties is the sole general
partner of Charter Southeast. Charter Holdings is beneficially owned by
CharterComm Holdings, L.P. ("CharterComm Holdings"), which directly owns all of
the limited partnership interests in Charter Holdings, and indirectly owns all
of the general partnership interests (through its wholly-owned subsidiary,
Charter Communications Holdings Properties, Inc. ["Holdings Properties"], which
is the sole general partner of Charter Holdings). CharterComm Holdings, in turn,
has two general partners, CharterComm, Inc. and CharterComm II, L.L.C. (both
general partners together being the "CharterComm Entities"). The CharterComm
Entities are directly and /or indirectly owned by Charterhouse Group
International, Inc. and its affiliates ("Charterhouse") and Charter, with
approximately 93% and approximately 7% interests, respectively. As a result of
its investment, Charterhouse can exercise effective control over the management
and affairs of CharterComm and CharterComm II, and therefore of Charter
Holdings, Holdings Properties, Holdings Capital, and Charter Southeast.
The following table sets forth certain information on the beneficial ownership
of interests in Charter Holdings and Holdings Capital and CharterComm Holdings
as of March 15, 1998.
<TABLE>
<CAPTION>
Name and Address of Beneficial Owners Type of Interest % of Units
- ------------------------------------- ---------------- ----------
<S> <C> <C>
CHARTER SOUTHEAST AND SOUTHEAST CAPITAL
Charter Holdings ............................................ Limited Partnership Units 99.0%
12444 Powerscourt Drive, Suite 400
St. Louis, Missouri 63131
Charter Southeast ........................................... General Partnership Units 1.0%
12444 Powerscourt Drive, Suite 400
St. Louis, Missouri 63131
CHARTER HOLDINGS AND HOLDINGS CAPITAL
CharterComm Holdings ........................................ Limited Partnership Units 99.0%
12444 Powerscourt Drive, Suite 400
St. Louis, Missouri 63131
Holdings Properties ......................................... General Partnership Units 1.0%
12444 Powerscourt Drive, Suite 400
St. Louis, Missouri 63131
</TABLE>
-25-
<PAGE> 26
<TABLE>
<CAPTION>
CHARTERCOMM HOLDINGS
<S> <C> <C>
CharterComm II, L.L.C.(a) ................................... General Partnership Units 51.1%
c/o Charterhouse Group International, Inc.
535 Madison Avenue
New York, New York 10036
CharterComm, Inc.(b) ........................................ General Partnership Units 29.9%
c/o Charterhouse Group International, Inc.
535 Madison Avenue
New York, New York 10036
Certain institutional investors ............................. Preferred Limited Partnership Units 99.3%
Common Limited Partnership Units 18.9%
Directors and Executive Officers ............................ Preferred Limited Partnership Units 0.7%
of Holdings Properties and Holdings Capital Common Limited Partnership Units Less than 1%
as a group - 4 persons
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT AGREEMENTS
Charter provides management services to Charter Southeast under a Management
Agreement dated March 28, 1996 (the "Charter Management Agreement"), with
Charter Holdings assigning and delegating to Charter its management rights and
obligations under a series of subsidiary management agreements of the same date
(as defined below). As a result of these agreements, Charter effectively has the
exclusive right, authorization and responsibility to manage the day-to-day
business and affairs of the cable systems owned by the Operating Subsidiaries,
and is entitled to receive consulting/management fees equal to an aggregate of
five percent of the gross subscriber revenues of such systems for its services.
Management fees payable to Charter pursuant to the Charter Management Agreement
are based on 5.0% of the Partnership's annual revenues. The Indenture prohibits
the payment of 40.0% of such management fee until repayment in full of the
Debentures. Unpaid and deferred management fees accrue without interest.
Pursuant to the Charter Management Agreement, during 1997, management fees
recognized and expensed by the Partnership were $8,779,000. Of the total
management fees expensed in 1997, approximately $3,512,000 have been deferred
pursuant to the terms of the Management Agreement. At December 31, 1997,
approximately $1,432,000 of management fees were unpaid and payable to Charter.
CCIP-II/CPLP ACQUISITION
The Partnership, through its Operating Subsidiaries, acquired certain cable
television systems from two partnerships in the process of dissolution (CPLP and
CCIP-II), each of which has a general partner that is an affiliate of Charter.
As required by the Indentures for the Senior Notes and Debentures concerning
affiliate transactions having a fair market value exceeding $10.0 million, an
independent fairness opinion was obtained as to the fairness of the acquisitions
from a financial point of view. As a result of certain rights available to the
partners of CharterComm Holdings, the consent of the
- --------
(a) Charter, which beneficially owns approximately 7% of the issued and
outstanding interests of CharterComm, Inc. and CharterComm II, LLC may be deemed
to beneficially own general partnership units of CharterComm Holdings.
(b) Charterhouse, which beneficially owns approximately 93% of the issued and
outstanding stock of CharterComm, Inc. and CharterComm II, LLC may be deemed to
beneficially own general partnership units of CharterComm Holdings.
-26-
<PAGE> 27
holders of outstanding preferred limited partnership interests of CharterComm
Holdings was obtained for these acquisitions (see "Rights of Preferred Limited
Partners of CharterComm Holdings" below). In connection with these acquisitions,
each of Charter and Charterhouse received a transaction fee. See "Transaction
Fees" below, and "Item 1. Business - Major Transactions in 1997".
TRANSACTION FEES
In connection with acquisitions and financing transactions by Charter Holdings,
Charter Southeast and its subsidiaries, Charter and Charterhouse are typically
each paid financial advisory and investment banking fees. Such fees are
calculated as a percentage of the transaction, based upon the size of the
transaction; the smaller the transaction, the higher the percentage (up to a
maximum of approximately 1.5% for each, respectively). Typically, the fee is
approximately 1.0% of the transaction. In connection with acquisitions into
which Charter and Charterhouse are contributing equity, such fees may be taken
in the form of equity interests in the purchasing entity. In 1997 Charter
Holdings and its subsidiaries paid $982,000 in transaction fees to Charter
(including $557,000 payable with respect to the CCIP-II/CPLP Acquisition) and
$982,000 to Charterhouse (including $557,000 payable with respect to the
CCIP-II/CPLP Acquisition). The Indenture for each of the Debentures and the
Senior Notes limits the payment of such transaction fees, in the aggregate, to
1.25% of the purchase price of the transaction.
BENEFICIAL OWNERSHIP BY CHARTERHOUSE AND CHARTER
Charter Holdings holds a 99% limited partnership interest in, and through a
subsidiary, a 1.0% general partnership interest in Charter Southeast.
CharterComm Holdings holds a 99.0% limited partnership interest in, and, through
a wholly-owned subsidiary, a 1.0% general partnership interest in Charter
Holdings. CharterComm Holdings is capitalized with three classes of partnership
interests: preferred limited partner interests, common limited partner
interests, and general partner interests. Because Charterhouse indirectly
controls both general partners of CharterComm Holdings, Charterhouse can,
subject to applicable law, exercise effective control over the management and
affairs of the Charter Holdings. Charter has a non-controlling direct and/or
indirect interest in both general partners of CharterComm Holdings. See "Item
12. Security Ownership of Certain Beneficial Owners and Management."
RIGHTS OF PREFERRED LIMITED PARTNERS OF CHARTERCOMM HOLDINGS
The prior consent of the preferred limited partners of CharterComm Holdings is
required for certain significant corporate transactions, including, among
others, the dissolution of CharterComm Holdings, certain sales or transfers of
the assets of CharterComm Holdings or its subsidiaries, certain acquisitions of
assets by CharterComm Holdings or its subsidiaries and contributions of property
by any partner. In accordance with these provisions, the prior consent of the
preferred limited partners, and where required, the waiver by the common limited
partners, was obtained in connection with the contribution of $30 million of
capital and the Stockbridge system in February 1997 to Charter Holdings and the
immediate downstreaming thereof, the valuation for the Stockbridge system, and
the CCIP-II/CPLP Acquisition. (See "Item 1. Business - Major Transactions in
1997".) In addition, each of the limited partners of CharterComm Holdings has
certain rights to require CharterComm Holdings to purchase all or any portion of
its limited partnership interests upon the earlier to occur of (x) January 18,
2000 or (y) the occurrence of a Change of Control (as defined in the CharterComm
Holdings L.P. Agreement), at a redemption price calculated in accordance with
the CharterComm Holdings L.P. Agreement. The redemption price for CharterComm
Holdings' (i) preferred interests equals the accreted value of such interests at
the time of redemption and (ii) common interests equals the fair market value of
such interests at the time of redemption. Under the terms of the CharterComm
Holdings L.P. Agreement, a "Change of Control" is deemed to occur in the event
of, among other things, the voluntary departure of all of Messrs. Babcock, Kent
and Wood from active engagement in the management of CharterComm Holdings.
The CharterComm Holdings L.P. Agreement includes customary events of default
("Events of Default"), including, without limitation, events relating to the
bankruptcy of either general partner of CharterComm Holdings or CharterComm
Holdings itself, the failure of CharterComm Holdings to comply with material
provisions of the CharterComm Holdings
-27-
<PAGE> 28
L.P. Agreement and certain other agreements, including the failure to redeem
partnership interests of CharterComm Holdings when required. Upon the occurrence
of an Event of Default and subject to the prior consent of a majority of the
preferred limited partners, each of the preferred limited partners of
CharterComm Holdings has the right to (i) replace the management of CharterComm
Holdings, (ii) require the liquidation of CharterComm Holdings (with the consent
of the common limited partners), or (iii) require CharterComm Holdings to
purchase all or any portion of its partnership units. An Event of Default under
the terms of the CharterComm Holdings L.P. Agreement could therefore result in a
change of management of CharterComm Holdings, and, as result thereof, Charter
Southeast. Any of such events may constitute a Change of Control under the
Indenture and the credit facilities for CC-I and CC-II.
1997 CONTRIBUTION OF STOCKBRIDGE SYSTEM
On February 28, 1997, Charter and Charterhouse, in a series of transactions,
caused the contribution of a 100% interest in the assets and liabilities of the
Stockbridge system, which had previously been owned and operated by Charter
Communications IV, L.P., as to which the general partner was an affiliate of
Charter (see "--Rights of Preferred Limited Partners of CharterComm Holdings" ).
This contribution to Charter Holdings and subsequently to Charter Southeast was
valued at $3.67 million, net of debt of approximately $3.1 million, based on an
independent valuation.
-28-
<PAGE> 29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
See Index to Financial Statements and Schedules on page F-1 of this
Report.
2. Financial Statement Schedules:
See Index to Financial Statements and Schedules on page F-1 of this
Report.
3. Exhibits:
See Index on Page E-1 of this Report.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the fourth quarter of 1997.
-29-
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrants have duly caused this report to be signed on their
behalf by the undersigned, thereto duly authorized.
CHARTER COMMUNICATIONS CHARTER COMMUNICATIONS SOUTHEAST
SOUTHEAST, L.P. CAPITAL CORPORATION
By: Charter Communications Southeast
Properties, Inc.
General Partner
By: /s/ Jerald L. Kent By: /s/ Jerald L. Kent
--------------------------------- ------------------------------
Name: Jerald L. Kent Name: Jerald L. Kent
Title: President Title: President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrants and
in the capacities (as to the General Partner) and on the date indicated.
Signature and Title Date
- ------------------- ----
By: /s/ Barry L. Babcock March 27, 1998
---------------------------------------------------
Barry L. Babcock
Chairman of the Board of Southeast Capital
and Southeast Properties
By: /s/ Thomas C. Dircks March 27, 1998
---------------------------------------------------
Thomas C. Dircks
Director of Southeast Properties
By: /s/ Jerald L. Kent March 27, 1998
---------------------------------------------------
Jerald L. Kent
President, Chief Executive Officer and
Director of Southeast Capital and Southeast
Properties
By: /s/ Howard L. Wood March 27, 1998
---------------------------------------------------
Howard L. Wood
Vice Chairman of the Board and Director
of Southeast Capital and Southeast Properties
By: /s/ Kent D. Kalkwarf March 27, 1998
---------------------------------------------------
Kent D. Kalkwarf
Senior Vice President and Chief Financial Officer of
Southeast Capital and Southeast Properties (Principal
Financial Officer and Principal Accounting Officer)
S-1
<PAGE> 31
CHARTER COMMUNICATIONS SOUTHEAST, L.P.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page
----
CHARTER COMMUNICATIONS SOUTHEAST, L.P. FINANCIAL STATEMENTS:
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of December 31, 1997
and 1996 F-3
Consolidated Statements of Operations for the years
ended December 31, 1997, 1996 and 1995 F-5
Consolidated Statement of Partners' Capital for the
years ended December 31, 1997, 1996 and 1995 F-6
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995 F-7
Notes to Consolidated Financial Statements F-9
CHARTER COMMUNICATIONS SOUTHEAST, L.P. FINANCIAL STATEMENT SCHEDULES:
None required.
Separate financial statements of Charter Communications Southeast Capital
Corporation have not been presented as this entity had no operations and
substantially no assets or equity.
F-1
<PAGE> 32
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Charter Communications Southeast, L.P.:
We have audited the accompanying consolidated balance sheets of Charter
Communications Southeast, L.P. (a Delaware limited partnership) and subsidiaries
as of December 31, 1997 and 1996, and the related consolidated statements of
operations, partners' capital and cash flows for each of the three years in the
period ended December 31, 1997. These consolidated financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Charter Communications
Southeast, L.P. and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
St. Louis, Missouri,
February 6, 1998
F-2
<PAGE> 33
CHARTER COMMUNICATIONS SOUTHEAST, L.P.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
--------------------------------
1997 1996
---- ----
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,742,119 $ 3,145,309
Accounts receivable, net of allowance for doubtful accounts of $312,048 and
$300,378, respectively 3,158,282 2,123,324
Prepaid expenses and other 341,396 713,071
Receivable from related parties 1,028,480 1,572,381
------------- -------------
Total current assets 7,270,277 7,554,085
------------- -------------
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property, plant and equipment, net 235,808,350 163,998,045
Franchise costs, net of accumulated amortization of $119,968,082 and
$75,221,372, respectively 480,201,100 389,065,380
Covenant not to compete, net of accumulated amortization of $480,000 and
$240,000, respectively 720,000 960,000
------------- -------------
716,729,450 554,023,425
------------- -------------
RESTRICTED FUNDS HELD IN ESCROW - 1,782,537
------------- -------------
OTHER ASSETS, net 12,370,078 11,251,094
------------- -------------
$ 736,369,805 $ 574,611,141
============= =============
</TABLE>
(Continued on the following page)
F-3
<PAGE> 34
CHARTER COMMUNICATIONS SOUTHEAST, L.P.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (Continued)
<TABLE>
<CAPTION>
December 31
--------------------------------
1997 1996
---- ----
LIABILITIES AND PARTNERS' CAPITAL
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt $ 5,375,000 $ -
Accounts payable and accrued expenses 29,963,469 23,943,425
Subscriber deposits and prepayments 532,595 260,244
Payable to manager of cable television systems 1,107,417 2,131,197
------------- -------------
Total current liabilities 36,978,481 26,334,866
------------- -------------
DEFERRED REVENUE 1,718,710 1,661,503
------------- -------------
LONG-TERM DEBT 571,325,000 410,300,000
------------- -------------
DEFERRED MANAGEMENT FEES 7,805,448 4,293,532
------------- -------------
DEFERRED INCOME TAXES 5,111,308 5,111,308
------------- -------------
PARTNERS' CAPITAL:
General Partner 1,134,307 1,269,099
Common Limited Partners--1,513.36 and 477.19 units, issued and outstanding,
respectively 112,296,551 125,640,833
------------- -------------
Total partners' capital 113,430,858 126,909,932
------------- -------------
$ 736,369,805 $ 574,611,141
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE> 35
CHARTER COMMUNICATIONS SOUTHEAST, L.P.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
SERVICE REVENUES $ 175,591,083 $ 120,279,555 $ 72,830,913
-------------- -------------- ------------
OPERATING EXPENSES:
Operating costs 75,728,368 50,971,147 31,056,034
General and administrative 12,605,679 9,304,696 6,191,949
Depreciation and amortization 76,535,234 53,132,739 40,147,664
Management fees 8,779,355 6,013,899 3,642,012
-------------- -------------- ------------
173,648,636 119,422,481 81,037,659
-------------- -------------- ------------
Income (loss) from operations 1,942,447 857,074 (8,206,746)
-------------- -------------- ------------
OTHER INCOME (EXPENSE):
Interest income 172,552 177,763 197,965
Interest expense (49,080,679) (32,516,728) (18,671,491)
Other, net 16,606 (468,131) (784,983)
-------------- -------------- ------------
(48,891,512) (32,807,096) (19,258,509)
-------------- -------------- ------------
Loss before income tax benefit and extraordinary item
(46,949,074) (31,950,022) (27,465,255)
INCOME TAX BENEFIT - - 1,888,692
-------------- -------------- ------------
Loss before extraordinary item (46,949,074) (31,950,022) (25,576,563)
EXTRAORDINARY ITEM- Loss on early retirement of debt - - (1,959,438)
-------------- -------------- ------------
Net loss (46,949,074) (31,950,022) (27,536,001)
REDEMPTION PREFERENCE ALLOCATION:
Special Limited Partner units - (828,616) (3,051,040)
Redeemable Preferred Limited units - (1,452,343) (5,539,799)
NET LOSS ALLOCATED TO REDEEMABLE PREFERRED LIMITED UNITS
- 4,063,274 3,408,957
-------------- -------------- ------------
Net loss applicable to partners' capital accounts $ (46,949,074) $ (30,167,707) $(32,717,883)
============== ============== ============
NET LOSS ALLOCATION TO PARTNERS' CAPITAL ACCOUNTS:
General Partner $ (469,491) $ (301,677) $ (157,518)
Class B Preferred Limited Partners - - (16,966,042)
Common Limited Partners (46,479,583) (29,866,030) (15,594,323)
-------------- -------------- ------------
$ (46,949,074) $ (30,167,707) $(32,717,883)
============== ============== ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 36
CHARTER COMMUNICATIONS SOUTHEAST, L.P.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Class B
Preferred Common
General Limited Limited
Partner Partners Partners Total
------- -------- -------- -----
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 $ - $ 16,966,042 $ - $ 16,966,042
Capital contributions 474,000 - 46,926,000 47,400,000
Allocation of net loss (157,518) (16,966,042) (15,594,323) (32,717,883)
----------- -------------- ------------- -------------
BALANCE, DECEMBER 31, 1995 316,482 - 31,331,677 31,648,159
Capital contributions 1,254,294 - 124,175,186 125,429,480
Allocation of net loss (301,677) - (29,866,030) (30,167,707)
----------- -------------- ------------- -------------
BALANCE, DECEMBER 31, 1996 1,269,099 - 125,640,833 126,909,932
Capital contributions 334,699 - 33,135,301 33,470,000
Allocation of net loss (469,491) - (46,479,583) (46,949,074)
----------- -------------- ------------- -------------
BALANCE, DECEMBER 31, 1997 $ 1,134,307 $ - $ 112,296,551 $ 113,430,858
=========== ============== ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 37
CHARTER COMMUNICATIONS SOUTHEAST, L.P.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (46,949,074) $ (31,950,022) $ (27,536,001)
Adjustments to reconcile net loss to net cash provided by
operating activities-
Extraordinary item- Loss on early retirement of debt
- - 1,959,438
Depreciation and amortization 76,535,234 53,132,739 40,147,664
Amortization of debt issuance costs and interest rate
cap agreements 1,794,289 1,060,413 116,992
Loss on disposal of property, plant and equipment 203,387 367,000 744,800
Deferred income taxes - - (1,888,692)
Changes in assets and liabilities, net of effects from
acquisitions-
Accounts receivable, net 368,945 (303,340) 101,411
Prepaid expenses and other 442,765 (51,145) 27,795
Receivable from parent and affiliates 543,901 623,798 (2,196,179)
Accounts payable and accrued expenses 4,098,608 9,892,288 5,655,755
Subscriber deposits and prepayments (105,308) 2,767 34,632
Payable to manager of cable television systems,
including deferred management fees 3,206,342 3,466,274 (1,577,521)
Deferred revenue (81,702) 452,127 1,114,699
------------ ------------ ------------
Net cash provided by operating activities 40,057,387 36,692,899 16,704,793
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (72,177,734) (48,324,063) (20,010,811)
Proceeds from sale of property, plant and equipment - - 119,901
Payments for acquisitions, net of cash acquired (159,563,075) (145,366,096) (251,309,527)
Payments of organizational expenses (14,215) (120,551) (1,386,627)
Payments of franchise costs (190,381) (186,145) -
Restricted funds held in escrow 1,782,537 (1,782,537) 463,414
Proceeds from insurance settlement - - 500,000
------------ ------------ ------------
Net cash used in investing activities (230,162,868) (195,779,392) (271,623,650)
------------ ------------ ------------
</TABLE>
(Continued on the following page)
F-7
<PAGE> 38
CHARTER COMMUNICATIONS SOUTHEAST, L.P.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------------
1997 1996 1995
------------- -------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit agreement $ 231,250,000 $ 60,576,000 $ 247,425,000
Payments under revolving credit agreement (67,930,000) (34,401,000) (81,800,000)
Partners' capital contributions 29,800,000 72,375,061 47,400,000
Payment of debt issuance costs (3,417,709) (8,237,451) (4,393,266)
Proceeds from issuance of debt - 125,000,000 -
Payment of Special Limited Partner units - (43,242,948) -
Payment of note payable - related party - (15,000,000) -
Payments for interest rate cap agreements - (35,000) -
Preferred Limited Partners' contributions - - 35,000,000
Proceeds from note payable - related party - - 15,000,000
------------- -------------- -------------
Net cash provided by financing activities 189,702,291 157,034,662 258,631,734
------------- -------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(403,190) (2,051,831) 3,712,877
CASH AND CASH EQUIVALENTS, beginning of year 3,145,309 5,197,140 1,484,263
------------- -------------- -------------
CASH AND CASH EQUIVALENTS, end of year $ 2,742,119 $ 3,145,309 $ 5,197,140
============= ============== =============
CASH PAID FOR INTEREST $ 42,537,930 $ 28,859,817 $ 16,860,333
============= ============== =============
CASH PAID FOR TAXES, net of refunds $ - $ - $ -
============= ============== =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-8
<PAGE> 39
CHARTER COMMUNICATIONS SOUTHEAST, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Basis of Presentation
Charter Communications Southeast, L.P. (Southeast), wholly owned by Charter
Communications Southeast Holdings, L.P. (Southeast Holdings), was formed
effective January 1995. Southeast will terminate no later than December 31,
2014, as provided in its partnership agreement (the "Partnership Agreement").
As of December 31, 1997, CharterComm Holdings is indirectly owned 75.3% by
affiliates of Charterhouse Group International, Inc., a privately owned
investment firm (collectively referred to herein as "Charterhouse"), indirectly
owned 5.7% by Charter Communications, Inc. (Charter), manager of the
Partnership's (as defined below) cable television systems, and 19.0% primarily
by other institutional investors.
The accompanying consolidated financial statements include the accounts of
Southeast and its wholly owned subsidiaries, collectively referred to as the
"Partnership" herein. All significant intercompany balances and transactions
have been eliminated in consolidation.
As of December 31, 1997, the Partnership through its subsidiaries provided cable
television service to approximately 432,200 basic subscribers in Alabama,
Georgia, Kentucky, Louisiana, North Carolina, South Carolina and Tennessee.
Cash Equivalents
Cash equivalents at December 31, 1997 and 1996, consist primarily of repurchase
agreements with original maturities of 90 days or less. These investments are
carried at cost which approximates market value.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost, including all direct and
certain indirect costs associated with the construction of cable transmission
and distribution facilities, and the cost of new customer installation. The
costs of disconnecting a customer are charged to expense in the period incurred.
Expenditures for repairs and maintenance are charged to expense as incurred, and
equipment replacement costs and betterments are capitalized.
Depreciation is provided on a straight-line basis over the estimated useful
lives of the related assets as follows:
Cable distribution systems 5-15 years
Buildings and leasehold improvements 5-15 years
Premium subscription units 3-5 years
Vehicles and equipment 3-5 years
F-9
<PAGE> 40
During 1997, the Partnership shortened the estimated useful lives of certain
property, plant and equipment for depreciation purposes. As a result, an
additional $4,775,000 of depreciation was recorded during 1997.
Franchise Costs
Costs incurred in obtaining and renewing cable franchises are deferred and
amortized over the lives of the franchises. Costs relating to unsuccessful
franchise applications are charged to expense when it is determined that the
efforts to obtain the franchise will not be successful. Franchise rights
acquired through the purchase of cable television systems represent the excess
of the cost of properties acquired over the amounts assigned to net tangible
assets at date of acquisition and are amortized using the straight-line method
over a period of up to 15 years.
Other Assets, net
Organizational expenses are being amortized using the straight-line method over
five years. Debt issuance costs are being amortized over the term of the debt.
The interest rate cap costs are being amortized over the terms of the agreements
which approximates three years.
Impairment of Assets
If the facts and circumstances suggest that a long-lived asset may be impaired,
the carrying value is reviewed. If a review indicates that the carrying value of
such assets is not recoverable, as determined based on projected undiscounted
cash flows related to the asset over its remaining life, the carrying value of
such asset is reduced to its estimated fair value.
Service Revenues
Cable service revenues are recognized when the related services are provided.
Installation service revenues are recognized to the extent of direct selling
costs incurred. The remainder, if any, is deferred and amortized to income over
the average estimated period that customers are expected to remain connected to
the cable television system. No installation service revenue has been deferred
as of December 31, 1997 and 1996, as direct selling costs have exceeded
installation service revenues.
Fees collected from programmers to guarantee carriage are deferred and amortized
to revenues over the life of the contracts. Franchise fees collected from cable
subscribers and paid to local franchises are reported as Service revenues.
Interest Rate Hedge Agreements
The Company manages fluctuations in interest rates by using interest rate hedge
agreements, as required by certain debt agreements. The interest rate swaps,
caps and collars are accounted for as hedges of debt obligations, and
accordingly, the net settlement amounts are recorded as adjustments to interest
expense in the period incurred. Premiums paid for interest rate caps are
deferred, included in other assets, and are amortized over the original term of
the interest rate agreement as an adjustment to interest expense.
The Partnership's interest rate swap agreements require the Partnership to pay a
fixed rate and receive a floating rate thereby creating fixed rate debt.
Interest rate caps and collars are entered into by the Partnership to reduce the
impact of rising interest rates on floating rate debt.
F-10
<PAGE> 41
The Partnership's participation in interest hedging transactions involves
instruments that have a close correlation with its debt, thereby managing its
risk. Interest rate hedge agreements have been designed for hedging purposes and
are not held or issued for speculative purposes.
Other Income (Expense)
Other, net includes gains and loss on disposition of property, plant and
equipment, and other miscellaneous income and expenses, all of which are not
directly related to the Partnership's primary business. In 1996 and 1995, the
Partnership recorded $367,000 and $745,000, respectively, of nonoperating losses
for its portion of insurance deductibles pertaining to damage caused by
hurricanes to certain of the Partnership's cable television systems.
Income Taxes
Income taxes are the responsibility of the partners and are not provided for in
the accompanying consolidated financial statements except for Peachtree Cable
TV, Inc. (Peachtree), an indirect wholly owned subsidiary, which is a C
corporation. Taxes have been provided for in the accompanying financial
statements based on the asset and liability method, and deferred taxes are
determined based on the estimated future tax effects of differences between the
financial reporting and tax bases of assets and liabilities given the provisions
of the enacted tax laws.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. DISTRIBUTIONS AND ALLOCATIONS:
For financial reporting purposes, redemption preference allocations, profits and
losses are allocated to partners in accordance with the liquidation provisions
of the applicable partnership agreements.
Under terms of the Partnership Agreement, allocation of partnership profits for
income tax reporting purposes is as follows for Southeast: (i) to partners with
deficit capital account balances, in proportion to such deficits, until such
deficits are reduced to zero; (ii) 99% to the limited partners and 1% to the
General Partner. Partnership losses for income tax reporting purposes are
allocated as follows for Southeast: (i) 99% to the Limited Partners and 1% to
the General Partner until the Capital Account of any such Partner is reduced to
zero and (ii) to the General Partner and the limited partners in proportion to
the positive balances of their capital accounts until such balances are reduced
to zero.
As stated in the Partnership Agreement, the Partnership may make distributions
to the partners out of all available funds at such times and in such amounts as
the General Partner may determine in its sole discretion.
3. REDEEMABLE PREFERRED LIMITED UNITS:
As of December 31, 1995, certain Redeemable Preferred Limited Partner units of
Charter Communications I, L.P. (CC-I) and Charter Communications II, L.P.
(CC-II), both wholly owned subsidiaries, were outstanding.
F-11
<PAGE> 42
The Preferred Limited Partners' preference return has been reflected as an
addition to the Redeemable Preferred Limited Partner units, and the decrease has
been allocated to the General Partner and Common Limited Partners consistent
with the liquidation and distribution provisions in the partnership agreements.
At March 28, 1996, the balance related to CC-I and CC-II Preferred Limited
Partner units was as follows:
<TABLE>
<S> <C>
Balance, December 31, 1994 $ 15,976,333
Contributions 35,000,000
1995 redemption preference allocation 5,539,799
Allocation of net loss (3,408,957)
------------
Balance, December 31, 1995 53,107,175
1996 redemption preference allocation 1,452,343
Allocation of net loss (4,063,274)
Return of capital - Special Limited Partner units 2,558,173
------------
Balance, March 28, 1996 $ 53,054,419
============
</TABLE>
On March 28, 1996, the Preferred Limited Partners of CC-I and CC-II exchanged
their preferred interests in CC-I and CC-II for preferred and common limited
partnership interests in CharterComm Holdings. The balance at March 28, 1996,
was transferred to CharterComm Holdings and contributed to the Partnership
through Southeast Holdings.
4. SPECIAL LIMITED PARTNER UNITS (CC-I):
As of December 31, 1995, certain Special Limited Partner units of CC-I were
outstanding. CC-I's profits were allocated to the Special Limited Partners until
allocated profits equaled the unrecovered preference amount (preference amounts
range from 6% to 17.5% of the unrecovered initial cost of the partnership units
and unrecovered preference amounts per annum). When there was no profit to
allocate, the preference return was reflected as a decrease in the Partners'
Capital.
At December 31, 1995, the balance of $44,972,506 related to the Special Limited
Partner units consisted of $39,996,893 of initial cost of the partnership units
and $4,975,613 of preference allocation. For the period from January 1, 1996, to
March 28, 1996, the Special Limited Partners earned an additional $828,616 of
preference allocation resulting in a balance of $45,801,122. In accordance with
a purchase agreement and through the use of the proceeds of the Notes (see Note
11), CC-I paid the Special Limited Partners $43,242,948 as full consideration
for their partnership interests on March 28, 1996. The difference in the payment
amount and the March 28, 1996, Special Limited Partner balance of $2,558,173 was
reflected as a return of capital to the Preferred Limited Partner units (see
Note 3).
5. ACQUISITIONS:
In 1995, the Partnership acquired cable television systems in five separate
transactions for an aggregate purchase price, net of cash acquired, of
approximately $251.3 million. The excess of the cost of properties acquired over
the amounts assigned to the net tangible assets at the date of acquisition was
$196.0 million and is included in Franchise costs.
In 1996, the Partnership acquired cable television systems in three separate
transactions for an aggregate purchase price, net of cash acquired, of
approximately $145.4 million. The excess of the cost of properties acquired over
the amounts assigned to the net tangible assets at the date of acquisition was
$118.2 million and is included in Franchise costs.
F-12
<PAGE> 43
In 1997, the Partnership acquired cable television systems in three separate
transactions for an aggregate purchase price, net of cash acquired, of
approximately $159.6 million. The excess of the cost of properties acquired over
the amounts assigned to the net tangible assets at the date of acquisition was
$126.4 million and is included in Franchise costs.
The above acquisitions were accounted for using the purchase method of
accounting, and accordingly, results of operations of the acquired assets have
been included in the financial statements from the dates of acquisition.
The following are unaudited pro forma operating results for the 1997 and 1996
acquisitions as though the acquisitions had been made on January 1, 1996, with
pro forma adjustments to give effect to amortization of franchise costs,
interest expense and certain other adjustments. The unaudited pro forma
information does not purport to be indicative of the results of operations had
these transactions been completed as of the assumed date or which may be
obtained in the future.
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------
1997 1996
---- ----
(Unaudited)
<S> <C> <C>
Service revenues $ 182,769,976 $ 165,144,542
Income from operations 2,607,819 4,394,652
Net loss (48,981,206) (46,010,726)
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT, net:
Property, plant and equipment, net consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cable distribution systems $ 255,635,400 $ 164,618,772
Land, buildings and leasehold improvements 5,439,126 4,181,251
Premium subscription units 19,201,046 13,365,895
Vehicles and equipment 14,669,430 11,090,708
------------- -------------
294,945,002 193,256,626
Less- Accumulated depreciation (59,136,652) (29,258,581)
------------- -------------
$ 235,808,350 $ 163,998,045
============= =============
</TABLE>
7. RESTRICTED FUNDS HELD IN ESCROW:
In connection with an acquisition, the Partnership agreed to deposit a portion
of the purchase price into an escrow account to be transferred to the seller
upon consummation of the acquisition. These funds were transferred to the seller
in February 1997.
F-13
<PAGE> 44
8. OTHER ASSETS, net:
Other assets, net consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Debt issuance costs, net of accumulated amortization of $3,237,169
and $1,500,471 $ 11,477,997 $ 9,796,986
Organizational expenses, net of accumulated amortization of
$1,457,287 and $968,838 892,081 1,366,316
Interest rate cap agreements, net of accumulated amortization of
$-0- and $338,708 - 87,792
------------ ------------
$ 12,370,078 $ 11,251,094
============ ============
</TABLE>
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Salaries and related benefits $ 2,079,269 $ 1,171,032
Capital expenditures 2,099,370 7,590,284
Programming costs 3,391,354 2,344,725
Franchise fees 3,523,986 2,217,571
Accounts payable 2,479,481 1,682,636
Accrued interest 9,804,404 5,004,096
Other 6,585,605 3,933,081
----------- -----------
$29,963,469 $23,943,425
=========== ===========
</TABLE>
10. NOTE PAYABLE:
On November 30, 1995, Southeast Holdings entered into a Convertible Senior Note
(the "Convertible Senior Note") with Charterhouse for $15.0 million. The
interest rate was the rate publicly announced by Chemical Bank in New York, as
its reference rate plus 3% per annum. In March 1996, the Convertible Senior Note
was repaid using a portion of the proceeds from the Notes discussed in Note 11.
11. LONG-TERM DEBT:
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
11-1/4% Senior Notes $ 125,000,000 $ 125,000,000
Credit Agreements:
CC-I 112,200,000 106,700,000
CC-II 339,500,000 178,600,000
------------- -------------
576,700,000 410,300,000
Less- Current maturities (5,375,000) --
------------- -------------
$ 571,325,000 $ 410,300,000
============= =============
</TABLE>
F-14
<PAGE> 45
11-1/4% Senior Notes
On March 28, 1996, Southeast and Charter Communications Southeast Capital
Corporation (Southeast Capital), a wholly owned subsidiary of Southeast
(collectively the "Notes Issuers"), issued $125.0 million aggregate principal
amount of 11-1/4% Senior Notes (the "Notes"). The Notes are senior unsecured
obligations of the Notes Issuers and rank pari passu in right and priority of
payment to all other existing and future indebtedness of the Notes Issuers. The
Notes are effectively subordinated to the claims of creditors of Southeast's
subsidiaries, including the lenders under the CC-I and CC-II Credit Agreements
(as defined herein). The Notes are redeemable at the Notes Issuers' option at
amounts decreasing from 105.625% to 100% of principal, plus accrued and unpaid
interest to the date of redemption, beginning on March 15, 2001. The Notes
Issuers are required to make an offer to purchase all of the Notes, at a
purchase price equal to 101% of the principal amount, together with accrued and
unpaid interest, upon a Change in Control, as defined in the Notes indenture.
Interest is payable semiannually on March 15 and September 15 until maturity on
March 15, 2006.
The Notes require their respective issuers to comply with various financial and
nonfinancial covenants and restrictions, including substantial limitations on
additional indebtedness, restricted payments, transactions with affiliates,
liens, dividends and certain other items.
Southeast is a holding company with no significant assets other than its direct
and indirect investments in CC-I and CC-II. Southeast Capital was formed solely
for the purpose of serving as co-issuer and has no operations. Accordingly, the
Notes Issuers must rely upon distributions from CC-I and CC-II to generate funds
necessary to meet their obligations, including the payment of principal and
interest on the Notes.
CC-I Credit Agreement
CC-I maintains a credit agreement (the "CC-I Credit Agreement"), which
terminates in September 2005, with a consortium of banks for borrowings up to
$127.2 million, consisting of a revolving line of credit of $63.6 million and a
term loan of $63.6 million. In 1997, the CC-I Credit Agreement was amended to
reflect the impact of purchases and sales of cable television systems. The debt
bears interest, at CC-I's option, at rates based upon the Base Rate, as defined
in the CC-I Credit Agreement, LIBOR or prevailing bid rates of certificates of
deposit plus the applicable margin based upon CC-I's leverage ratio at the time
of the borrowings. The variable interest rates ranged from 7.75% to 8.00% and
7.44% to 7.50% at December 31, 1997 and 1996, respectively.
Commencing March 31, 1999, and at the end of each calendar quarter thereafter,
the available borrowings for the revolving line of credit shall be reduced on an
annual basis by 8.8% in 1999, 11.6% in 2000, 11.6% in 2001 and 14.4% in 2002.
Borrowings under the CC-I Credit Agreement are subject to certain financial and
nonfinancial covenants and restrictions, including the maintenance of a ratio of
debt to annualized operating cash flow, as defined, not to exceed 5.25 to 1 at
December 31, 1997. Borrowings under the CC-I Credit Agreement are collateralized
by the assets of CC-I. A quarterly commitment fee of 0.375% per annum is payable
on the unused revolving credit facility portion of the CC-I Credit Agreement.
CC-II Credit Agreement
CC-II maintains a credit agreement (the "CC-II Credit Agreement"), which
terminates in September 2005, with a consortium of banks for borrowings up to
$390.0 million, consisting of a revolving credit facility of $215.0 million, and
two term loans totaling $175.0 million. In 1997, the CC-II Credit Agreement was
amended to reflect the impact of purchases of cable television systems. The debt
bears interest, at CC-II's option, at rates based upon the Base Rate, as defined
in the CC-II Credit Agreement, LIBOR or prevailing bid rates of certificates of
deposit plus the applicable margin based upon CC-II's leverage ratio at the time
of the borrowings. The variable interest rates ranged from 7.63% to 8.25% and
7.25% to 8.125% at December 31, 1997 and 1996, respectively.
F-15
<PAGE> 46
Commencing September 30, 1998, and at the end of each calendar quarter
thereafter, the available borrowings for the revolving credit facility shall be
reduced on an annual basis by 5.0% in 1998, 7.8% in 1999, 11.3% in 2000, 12.0%
in 2001 and 13.2% in 2002.
Borrowings under the CC-II Credit Agreement are subject to certain financial and
nonfinancial covenants and restrictions, including the maintenance of a ratio of
debt to annualized operating cash flow, as defined, not to exceed 5.25 to 1 at
December 31, 1997. Borrowings under the CC-II Credit Agreement are
collateralized by the assets of CC-II. A quarterly commitment fee of 0.375% per
annum is payable on the unused revolving credit facility portion of the CC-II
Credit Agreement.
Based upon outstanding indebtedness at December 31, 1997, and the amortization
of term loans and scheduled reductions in available borrowings of the revolving
credit facilities detailed in the debt agreements, aggregate future principal
payments on the total borrowings under both credit agreements at December 31,
1997, are as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1998 $ 5,375,000
1999 13,771,800
2000 20,367,600
2001 50,904,600
2002 60,646,800
Thereafter 300,634,200
-------------
$ 451,700,000
=============
</TABLE>
12. FAIR VALUE OF FINANCIAL INSTRUMENTS:
A summary of debt and the related interest rate hedge agreements at December 31,
1997 and 1996, is as follows:
<TABLE>
<CAPTION>
1997
----------------------------------------------------
Carrying Notional Fair
Value Amount Value
------------ ---------------- ------------
Debt
<S> <C> <C> <C>
11-1/4% Senior Notes $125,000,000 $ $136,875,000
-
CC-I Credit Agreement 112,200,000 - 112,200,000
CC-II Credit Agreement 339,500,000 - 339,500,000
Interest Rate Hedge Agreements
CC-I:
Swaps - 100,000,000 (796,514)
CC-II:
Swaps - 170,000,000 (1,029,752)
Caps - 70,000,000 1,043
Collars - 55,000,000 (166,445)
</TABLE>
F-16
<PAGE> 47
<TABLE>
<CAPTION>
1996
----------------------------------------------
Carrying Notional Fair
Value Amount Value
------------ ------------- ------------
<S> <C> <C> <C>
Debt
11-1/4% Senior Notes $125,000,000 $ $130,625,000
------------ ------------- ------------
-
CC-I Credit Agreement 106,700,000 - 106,700,000
CC-II Credit Agreement 178,600,000 - 178,600,000
Interest Rate Hedge Agreements
CC-I:
Swaps - 105,000,000 (22,750)
Caps - 55,000,000 (1,746)
CC-II:
Swaps - 20,000,000 (82,570)
Caps - 70,000,000 52,814
</TABLE>
As the CC-I and CC-II credit agreements bear interest at current market rates,
their carrying amounts approximate fair market value at December 31, 1997 and
1996. The fair value of the Notes is based on closing market prices.
The weighted average interest pay rates for CC-I interest rate swap agreements
were 8.07% and 7.51% at December 31, 1997 and 1996, respectively. The weighted
average interest rate for interest rate cap agreements was 7.82% at December 31,
1996.
The weighted average interest pay rates for CC-II interest rate swap agreements
were 8.03% and 8.45% at December 31, 1997 and 1996, respectively. The weighted
average interest rate for CC-II interest rate cap agreements was 8.48% at
December 31, 1997 and 1996. The weighted average interest rates for CC-II
interest rate collar agreements were 9.01% and 7.61% for the cap and floor
components, respectively, at December 31, 1997.
The notional amounts of interest rate hedge agreements do not represent amounts
exchanged by the parties and, thus, are not a measure of the Partnership's
exposure through its use of the interest rate hedge agreements. The amounts
exchanged are determined by reference to the notional amount and the other terms
of the contracts.
The fair value of interest rate hedge agreements generally reflects the
estimated amounts that the Partnership would receive or pay (excluding accrued
interest) to terminate the contracts on the reporting date, thereby taking into
account the current unrealized gains or losses of open contracts. Dealer
quotations are available for the Partnership's interest rate hedge agreements.
Management believes that the sellers of the interest rate hedge agreements will
be able to meet their obligations under the agreements. The Partnership has
policies regarding the financial stability and credit standing of major
counterparties. Nonperformance by the counterparties is not anticipated nor
would it have a material adverse effect on the results of operations or the
financial position of the Partnership.
13. EXTRAORDINARY LOSS:
In 1995, CC-II refinanced certain indebtedness and wrote off the related debt
issuance costs totaling $1,959,438 as an extraordinary loss.
F-17
<PAGE> 48
14. INCOME TAXES:
The book value of the Partnership's net assets (excluding Peachtree) exceeds its
tax reporting basis by $2,928,569 and $5,550,695 as of December 31, 1997 and
1996, respectively.
The benefit for income taxes is comprised solely of deferred income taxes for
the year ended December 31, 1995. The effective tax rate approximated the
statutory rate.
As of December 31, 1997 and 1996, temporary differences and carryforwards that
gave rise to deferred income tax assets and liabilities pertaining for Peachtree
are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Deferred income tax assets:
Accounts receivable $ 3,502 $ 2,754
Accrued expenses 28,614 6,166
Deferred management fees 111,086 66,140
Deferred revenue 24,393 22,570
Tax loss carryforwards 294,158 502,552
Tax credit carryforwards 361,195 361,195
----------- -----------
Total deferred income tax assets 822,948 961,377
----------- -----------
Deferred income tax liabilities:
Property, plant and equipment (1,372,280) (1,484,167)
Franchise costs and other assets (4,561,976) (4,588,518)
----------- -----------
Total deferred income tax liabilities (5,934,256) (6,072,685)
----------- -----------
Net deferred income tax liability $(5,111,308) $(5,111,308)
=========== ===========
</TABLE>
At December 31, 1997, Peachtree had a net operating loss carryforward for income
tax purposes of approximately $735,000 which, if not utilized to reduce taxable
income in future periods, expires in the years 2003 through 2010. In addition,
Peachtree has an alternative minimum tax credit carryforward of approximately
$361,000, which may be carried forward indefinitely.
15. RELATED-PARTY TRANSACTIONS:
Charter provides management services to the Partnership under the terms of
contracts which provide for fees equal to 5% of the Partnership's gross service
revenues. The debt agreements prohibit payment of a portion of such management
fees (40% for both CC-I and CC-II) until repayment in full of the outstanding
indebtedness. Through December 31, 1998 and 1997, the remaining 60% of
management fees shall be paid quarterly. Thereafter, the entire fee may be
deferred if a multiple of EBITDA, as defined, does not exceed outstanding
indebtedness of CC-I and CC-II. In addition, payments due on the Notes and
Debentures shall be paid before any deferred management fees are paid. Expenses
recognized under the contracts during 1997, 1996 and 1995 were $8,779,355,
$6,013,899 and $3,642,012, respectively. Management fees currently payable of
$1,432,019 and $1,002,400 are included in Payables to manager of cable
television systems at December 31, 1997 and 1996, respectively.
The Partnership and all entities managed by Charter collectively utilize a
combination of insurance coverage and self-insurance programs for medical,
dental and workers' compensation claims. The Partnership is allocated charges
monthly based upon its total number of employees, historical claims and medical
cost trend rates. Management considers this allocation to be reasonable for the
operations of the Partnership. During 1997, 1996 and 1995, the Partnership
expensed $1,524,000, $1,135,900 and $619,000, respectively, relating to
insurance allocations.
F-18
<PAGE> 49
Beginning in 1996, the Partnership employed the services of Charter's National
Data Center (the "National Data Center"). The National Data Center performs
certain subscriber billing services and provides computer network, hardware and
software support for the Partnership and other entities managed by Charter. The
cost of these services is allocated based on the number of subscribers.
Management considers this allocation to be reasonable for the operations of the
Partnership. During 1997 and 1996, the Partnership expensed $605,600 and
$344,500, respectively, relating to these services.
CC-I, CC-II and other entities managed by Charter maintain regional offices. The
regional offices perform certain operational services. The cost of these
services is allocated based on number of subscribers. Management considers this
allocation to be reasonable for the operations of the Partnership. During 1997,
1996 and 1995, the Partnership expensed $1,992,000, $1,294,300 and $1,006,000,
respectively, relating to these services.
The Partnership pays certain acquisition advisory fees to Charter and
Charterhouse for cable television systems acquired. Total acquisition fees paid
to Charter in 1997, 1996 and 1995 were $982,000, $1,737,500 and $450,000,
respectively. Total acquisition fees paid to Charterhouse in 1997, 1996 and
1995, were $982,000, $1,737,500 and $100,000, respectively. In addition, Charter
received $2.9 million of partnership interests as consideration for certain
acquisitions during 1995.
As of December 31, 1996, Receivable from related parties consisted of an amount
due from Southeast Holdings and $500,000 related to a refundable deposit toward
the purchase of cable television systems from Cencom Partners, L.P. (CPLP).
During 1997, the latter amount was applied to CC-II's purchase of the systems.
Thus, Receivable from related parties at December 31, 1997, was comprised solely
of an amount due from Southeast Holdings.
During 1997, the ownership of CharterComm Holdings changed as a result of
CharterComm Holdings receiving a $25.0 million cash contribution from an
institutional investor, a $3.0 million cash contribution from Charterhouse and a
$2.0 million cash contribution from Charter, as well as the transfer of assets
and liabilities of a cable television system through a series of transactions
initiated by Charter and Charterhouse. Costs of $200,000 were incurred in
connection with the cash contributions. These contributions were contributed to
Southeast from Southeast Holdings.
As of December 31, 1995, CC-I had an unsecured note receivable of $100,000
bearing interest at 6% from a related party. During 1996, CC-I forgave the
amount outstanding under this note.
16. COMMITMENTS AND CONTINGENCIES:
Leases
The Partnership leases certain facilities and equipment under noncancelable
operating leases. Rent expense incurred under leases during 1997, 1996 and 1995
was $614,800, $522,000 and $324,200, respectively. Future minimum lease payments
are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $511,500
1999 412,100
2000 311,600
2001 181,200
2002 117,100
Thereafter 223,200
</TABLE>
The Partnership rents utility poles in its operations. Generally, pole rental
agreements are short term, but the Partnership anticipates that such rentals
will recur. Rent expense incurred for pole attachments during 1997, 1996 and
1995 was $2,929,800, $2,091,900 and $1,213,200, respectively.
F-19
<PAGE> 50
Litigation
A purported class action lawsuit on behalf of the Cencom Cable Income Partners,
L.P. (CCIP) limited partners was filed in 1995 (the "Action"), which sought,
among other things, to enjoin permanently the purchase of systems from CCIP,
including those by CC-II (the "CCIP Acquisition"). On February 15, 1996, all of
the plaintiff's claims for injunctive relief were dismissed (including that
which sought to prevent the consummation of the CCIP Acquisition); the
plaintiff's claims for money damages which may have resulted from the CCIP
Acquisition remain pending. In October 1996, the plaintiff filed a Consolidated
Amended Class Action Complaint (the "Amended Complaint"). The general partner of
CCIP believed that portions of the Amended Complaint were legally inadequate and
filed a dispositive motion as to all remaining claims in the Action. In October
1997, the court granted in part and denied in part the defendants motion, the
effect of which narrowed the remaining issues significantly. Each of the
defendants in the Action including the Partnership, believes the Action, which
remains pending, to be without merit and is contesting it vigorously. There can
be no assurance, however, that the plaintiff will not be awarded damages, some
or all of which may be payable by the Partnership, in connection with the
Action.
In June 1997, a purported class action lawsuit was filed in Delaware Chancery
Court under the name of Wallace, Matthews, Lerner and Roberts v. Wood et. al.,
Case No. 15731, by certain limited partners of Cencom Cable Income Partners II,
L.P. (CCIP II), a publicly held limited partnership, against numerous
defendants. The suit alleges that defendants CC-I and CC-II, both of which are
related to CCIP II's general partner, purchased cable television system assets
from CCIP II in April 1997 at less than fair value. In connection with the
purchase of these assets, CC-I and CC-II paid the highest amount bid in a
multiple round auction process involving nonaffiliated third parties.
Furthermore, the assets acquired had been appraised by two independent
appraisers, the purchase price paid as a result of the auction was higher than
the appraised value, and the proposed sale to the purchasers was approved by a
majority of CCIP II's limited partners. In November 1997, the plaintiffs amended
their complaint to restate their allegations as a shareholders' derivative
claim. For these reasons, amongst others, management of the Partnership believes
that the claims against CC-I and CC-II are without merit and will defend them
vigorously.
The Partnership is also a party to lawsuits which are generally incidental to
its business. In the opinion of management, after consulting with legal counsel,
the outcome of these lawsuits will not have a material adverse effect on the
Partnership's consolidated financial position or results of operations.
Regulation in the Cable Television Industry
The cable television industry is subject to extensive regulation at the federal,
local and, in some instances, state levels. In addition, recent legislative and
regulatory changes and additional regulatory proposals under consideration may
materially affect the cable television industry.
Congress enacted the Cable Television Consumer Protection and Competition Act of
1992 (the "1992 Cable Act"), which became effective on December 4, 1992. The
1992 Cable Act generally allows for a greater degree of regulation of the cable
television industry. Under the 1992 Cable Act's definition of effective
competition, nearly all cable systems in the United States are subject to rate
regulation of basic cable services, provided the local franchising authority
becomes certified to regulate basic service rates. The 1992 Cable Act and the
Federal Communications Commission's (FCC) rules implementing the 1992 Cable Act
have generally increased the administrative and operational expenses of cable
television systems and have resulted in additional regulatory oversight by the
FCC and local franchise authorities.
F-20
<PAGE> 51
While management believes that the Partnership has complied in all material
respects with the rate provisions of the 1992 Cable Act, in jurisdictions that
have not yet chosen to certify, refunds covering a one-year period on basic
services may be ordered upon future certification if the Partnership is unable
to justify its rates through a benchmark or cost-of-service filing or small
system cost-of-service filing pursuant to FCC rules. Management is unable to
estimate at this time the amount of refunds, if any, that may be payable by the
Partnership in the event certain of its rates are successfully challenged by
franchising authorities or found to be unreasonable by the FCC. Management does
not believe that the amount of any such refunds would have a material adverse
effect on the consolidated financial position or results of operations of the
Partnership.
During 1996, Congress passed and the President signed into law the
Telecommunications Act of 1996 (the "Telecommunications Act") which alters
federal, state, and local laws and regulations pertaining to cable television,
telecommunications and other services. Under the Telecommunications Act,
telephone companies can compete directly with cable operators in the provision
of video programming.
Certain provisions of the Telecommunications Act could materially affect the
growth and operation of the cable television industry and the cable services
provided by the Partnership. Although the new legislation may substantially
lessen regulatory burdens, the cable television industry may be subject to
additional competition as a result thereof. There are numerous rule makings to
be undertaken by the FCC which will interpret and implement the
Telecommunications Act's provisions. In addition, certain provisions of the
Telecommunications Act (such as the deregulation of cable programming rates) are
not immediately effective. Further, certain of the Telecommunications Act's
provisions have been and are likely to be subject to judicial challenges.
Management is unable at this time to predict the outcome of such rule makings or
litigation or the substantive effect of the new legislation and the rule makings
on the consolidated financial position and results of operations of the
Partnership.
Senior Secured Discount Debentures of Southeast Holdings
On March 28, 1996, Southeast Holdings and Charter Communications Holdings
Capital Corporation (Holdings Capital), a wholly owned subsidiary of Southeast
Holdings (the "Debenture Issuers"), issued $146.82 million of Senior Secured
Discount Debentures (the "Debentures") for proceeds of approximately $75.0
million. Proceeds from the Debentures were used to pay fees and expenses related
to the issuance of the Debentures and the balance of $72,375,061 was a capital
contribution to the Partnership. The Debentures are secured by all of Southeast
Holdings ownership interest in Southeast and rank pari passu in right and
priority of payment to all other existing and future indebtedness of the
Debentures Issuers. The Debentures are effectively subordinated to the claims of
creditors of Southeast Holdings' subsidiaries, including the CC-I and CC-II
Credit Agreements. The Debentures are redeemable at the Debenture Issuers'
option at amounts decreasing from 107% to 100% of principal, plus accrued and
unpaid interest to the redemption date, beginning on March 15, 2001. The
Debenture Issuers are required to make an offer to purchase all of the
Debentures, at a purchase price equal to 101% of the principal amount, together
with accrued and unpaid interest, upon a Change in Control, as defined in the
Debentures Indenture. No interest is payable on the Debentures prior to March
15, 2001. Thereafter, interest on the Debentures is payable semiannually in
arrears beginning September 15, 2001, until maturity on March 15, 2007. The
discount on the Debentures is being accreted using the effective interest method
at an interest rate of 14% from the date of issuance to March 15, 2001. The
unamortized discount was $51,482,525 at December 31, 1997.
The Debentures require their respective issuers to comply with various financial
and nonfinancial covenants and restrictions, including substantial limitations
on additional indebtedness, restricted payments, transactions with affiliates,
liens, dividends and certain other items.
F-21
<PAGE> 52
Southeast Holdings is a holding company with no significant assets other than
its direct and indirect investments in CC-I and CC-II. Holdings Capital was
formed solely for the purpose of serving as a co-issuer and has no operations.
Accordingly, the Debentures Issuers must rely upon distributions from CC-I and
CC-II to generate funds necessary to meet their obligations, including the
payment of principal and interest on the Debentures.
17. EMPLOYEE BENEFIT PLANS:
The Partnership's employees may participate in the Charter Communications, Inc.
401(k) Plan (the "401(k) Plan"). All employees who have attained age 21 and
completed two months of employment are eligible to participate in the 401(k)
Plan. The 401(k) Plan is a tax-qualified retirement savings plan to which
employees may elect to make pretax contributions up to the lesser of 10% of
their compensation or dollar thresholds established under the Internal Revenue
Code. The Partnership contributes an amount equal to 50% of the first 5%
contributed by each employee. During 1997, 1996 and 1995, the Partnership
contributed $261,800, $149,200 and $87,900, respectively.
Certain Partnership employees participate in the 1996 Charter
Communications/Charterhouse Group Appreciation Rights Plan (the "Appreciation
Rights Plan"). The Appreciation Rights Plan covers certain key employees and
consultants within the group of companies and partnerships controlled by
Charterhouse and managed by Charter. The obligation and related expenses of the
Appreciation Rights Plan are the responsibility of and have been recorded at
CharterComm Holdings.
18. SIGNIFICANT NONCASH TRANSACTIONS:
The Partnership engaged in the following significant noncash financing
transactions:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Redemption preference allocation--Special Limited
Partner units (CC-I) (see Note 4) $ - $ 828,616 $3,051,040
Redemption preference allocation--Redeemable Preferred
Limited units (CC-I) (see Note 3) - - 1,810,650
Redemption preference allocation--Redeemable Preferred
Limited units (CC-II) (see Note 3) - 1,452,343 3,729,149
Recording of franchise costs and deferred income taxes
in connection with the Peachtree acquisition - - 7,000,000
Exchange of Redeemable Preferred Limited Units (CC-I)
(see Note 3) - 12,872,925 -
Exchange of Redeemable Preferred Limited Units (CC-II)
(see Note 3) - 40,181,492 -
Return of capital - Special Limited Partner Units
(CC-I) (see Note 4) - 2,558,173 -
Issuance of additional partner units for transfer of
cable television system previously owned by Charter
and Charterhouse (see Note 15) 3,670,000 - -
</TABLE>
F-22
<PAGE> 53
*Filed herewith.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
No. Description Pages
------- ----------- -------------
<S> <C> <C>
3.1 Certificate of Limited Partnership of Charter Holdings, filed as Exhibit 3.1 to the
Registration Statement on Form S-4 (Registration No. 333-3774), and incorporated
herein by this reference. ............................................................. N/A
3.2 Amended and Restated Agreement of Limited Partnership of Charter Holdings, filed as
Exhibit 3.2 to the Registration Statement on Form S-4 (Registration No. 333-3774),
and incorporated herein by this reference. ............................................ N/A
3.2(a) First Amendment to Amended and Restated Agreement of Limited Partnership of Charter
Holdings, dated February 28, 1997, filed as Exhibit 3.2(a) to Registrants' 1996 Form
10-k and incorporated herein by this reference.......................................... N/A
3.3 Certificate of Incorporation of Holdings Capital, filed as Exhibit 3.3 to the
Registration Statement on Form S-4 (Registration No. 333-3774), and incorporated
herein by this reference. ............................................................. N/A
4.1 Indenture dated March 15, 1996 among the issuers and Boatmen's Trust Company, as
Trustee, filed as Exhibit 4.1 to the Registration Statement on Form S-4
(Registration No. 333-3774), and incorporated herein by this reference. ............... N/A
4.5 Form of new Debenture (included in Exhibit 4.1). ...................................... N/A
10.1 CCI Credit Facility: Amended and Restated Loan Agreement dated as of March 28,
1996, among Charter Communications, L.P., the Banks, Toronto Dominion (Texas), Inc.,
PNC Bank, National Association and Credit Lyonnais Cayman Island Branch, as
Co-Agents, Toronto Dominion (Texas), Inc., as Agent, and Toronto Dominion (Texas),
Inc., as Administrative Agent, filed as Exhibit 10.1 to the Registration Statement
on Form S-4 (Registration No. 333-3774), and incorporated herein by this reference. ... N/A
10.1(a) First Amendment dated as of November 29, 1996 to CC-I Credit Facility, filed as
Exhibit 10.1(a) to Registrants' 1996 Form 10-k and incorporated herein by this
reference. ............................................................................ N/A
*10.1(b) Second Amendment dated as of December 31, 1997 to CC-I Credit Facility ................
10.2(a) CC-II Credit Facility: Second Amended and Restated Revolving Credit Agreement dated
as of February 7, 1997, among Charter Communications II, L.P., Charter
Communications III, L.P., Peachtree Cable TV, Inc., the Banks, Credit Lyonnais New
York Branch and Toronto Dominion (Texas), Inc., as Arranging Agents, NationsBank of
Texas, N.A. and CIBC Inc., as Managing Agents, Toronto Dominion (Texas), Inc., as
Administrative agent and Credit Lyonnais New York Branch, as Documentation Agent,
filed as Exhibit 10.2(a) to Registrants' 1996 Form 10-k and incorporated herein by
this reference. ....................................................................... N/A
*10.2(b) Amendment Number 1 dated as of December 31, 1997 to CC-II Credit Facility .............
10.3 Management Agreement dated March 28, 1996, between Charter Holdings and Charter
Communications, Inc., filed as Exhibit 10.3 to the Registration Statement on Form
S-4 (Registration No. 333-3774), and incorporated herein by this reference. ........... N/A
10.4 Management Agreement dated March 28, 1996, between Charter Southeast and Charter
Holdings, filed as Exhibit 10.4 to the Registration Statement on Form S-4
(Registration No. 333-3774), and incorporated herein by this reference. ............... N/A
10.5 Management Agreement dated March 28, 1996, between Charter Southeast and CC-I, filed
as Exhibit 10.5 to the Registration Statement on Form S-4 (Registration No.
333-3774), and incorporated herein by this reference. ................................ N/A
</TABLE>
E-1
<PAGE> 54
<TABLE>
<S> <C> <C>
10.6 Management Agreement dated March 28, 1996, between Charter Southeast and CC-II,
filed as Exhibit 10.6 to the Registration Statement on Form S-4 (Registration No.
333-3774), and incorporated herein by this reference. ................................ N/A
10.10 Asset Purchase Agreement dated as of July 1, 1995, among CCIP, Charter
Communications Properties, Inc., CC-II and CC-I, filed as Exhibit 10.10 to the
Registration Statement on Form S-4 (Registration No. 333-3774), and incorporated
herein by this reference. ............................................................ N/A
10.11 Certificate of Limited Partnership of CC-I, filed as Exhibit 10.11 to the
Registration Statement on Form S-4 (Registration No. 333-3774), and incorporated
herein by this reference. ............................................................. N/A
10.12 Amended and Restated Agreement of Limited Partnership of CC-I dated March 28, 1996,
filed as Exhibit 10.12 to the Registration Statement on Form S-4 (Registration No.
333-3774), and incorporated herein by this reference. ................................ N/A
10.12(a) First Amendment to Amended and Restated Agreement of Limited Partnership of CC-I,
dated February 28, 1997, filed as Exhibit 10.12(a) to Registrants' 1996 Form 10-k
and incorporated herein by this reference............................................... N/A
10.13 Certificate of Limited Partnership of CC-II, filed as Exhibit 10.13 to the
Registration Statement on Form S-4 (Registration No. 333-3774), and incorporated
herein by this reference. ............................................................. N/A
10.14 Amended and Restated Agreement of Limited Partnership of CC-II dated March 28, 1996,
filed as Exhibit 10.14 to the Registration Statement on Form S-4 (Registration No.
333-3774), and incorporated herein by this reference. ................................. N/A
10.14(a) First Amendment to Amended and Restated Agreement of Limited Partnership of CC-II,
dated February 28, 1997, filed as Exhibit 10.14(a) to Registrants' 1996 Form 10-k
and incorporated herein by this reference............................................... N/A
10.15 Certificate of Limited Partnership of CC-III, filed as Exhibit 10.15 to the
Registration Statement on Form S-4 (Registration No. 333-3774), and incorporated
herein by this reference. ............................................................. N/A
10.16 Amended and Restated Agreement of Limited Partnership of CC-III dated March 28,
1996, filed as Exhibit 10.16 to the Registration Statement on Form S-4 (Registration
No. 333-3774), and incorporated herein by this reference. ............................. N/A
10.17 Articles of Organization of Peachtree, filed as Exhibit 10.17 to the Registration
Statement on Form S-4 (Registration No. 333-3774), and incorporated herein by this
reference. ............................................................................ N/A
10.18 By-laws of Peachtree, filed as Exhibit 10.18 to the Registration Statement on Form
S-4 (Registration No. 333-3774), and incorporated herein by this reference. ........... N/A
10.19 Certificate of Limited Partnership of Charter Southeast, filed as Exhibit 3.1 to the
Registration Statement on Form S-4 of Charter Communications Southeast, L.P.
(Registration No. 333-3772), and incorporated herein by this reference. ............... N/A
10.20 Amended and Restated Agreement of Limited Partnership of Charter Southeast dated
March 28, 1996, filed as Exhibit 3.2 to the Registration Statement on Form S-4 of
Charter Communications Southeast, L.P. (Registration No. 333-3772), and incorporated
herein by this reference. ............................................................. N/A
10.20(a) First Amendment to Amended and Restated Agreement of Limited
Partnership of Charter Holdings, dated February 28, 1997,
filed as Exhibit 3.2(a) to the Annual Report of Form 10-K for
the year ended December 31, 1996, of Charter Communications
Southeast, L.P., and incorporated herein by this reference.
10.21 Asset Sale Agreement by and between Prime Cable of Hickory, L.P., as Seller, and
Charter Communications II, L.P., as Buyer, dated August 6, 1996, filed as Exhibit
10.21 to Registrants' 1996 Form 10-k and incorporated herein by this reference. ....... N/A
10.22 Asset Purchase Agreement between Cencom Cable Income Partners II, L.P., as Seller,
and Charter Communications II, L.P., as Purchaser, dated as of May 30, 1996
(Anderson County, SC), filed as Exhibit 10.22 to Registrants' 1996 Form 10-k and
incorporated herein by this reference. ................................................ N/A
</TABLE>
E-2
<PAGE> 55
<TABLE>
<S> <C> <C>
10.23 Second Amended and Restated Asset Purchase Agreement between Cencom Partners, L.P.,
as Seller, and Charter Communications, L.P., as Purchaser, dated as of January 16,
1997 (Sanford, NC), filed as Exhibit 10.23 to Registrants' 1996 Form 10-k and
incorporated herein by this reference. ................................................ N/A
10.24 Second Amended and Restated Asset Purchase Agreement between Cencom Partners, L.P.,
as Seller, and Charter Communications II, L.P., as Purchaser, dated as of January
16, 1997 (Abbeville, SC), filed as Exhibit 10.24 to Registrants' 1996 Form 10-k and
incorporated herein by this reference. ................................................ N/A
10.25 Second Amended and Restated Asset Purchase Agreement between Cencom Partners, L.P.,
as Seller, and Charter Communications II, L.P., as Purchaser, dated as of January
16, 1997 (Lincolnton, NC), filed as Exhibit 10.25 to Registrants' 1996 Form 10-k and
incorporated herein by this reference. ................................................ N/A
*12.2 Ratio of Earnings to Fixed Charges Calculation - Charter Communications Southeast
L.P. ..................................................................................
21.1 List of Subsidiaries of Registrants, filed as Exhibit 21.1 to Registrant's 1996 Form
10-k and incorporated herein by reference. ............................................ N/A
*27.1 Financial Data Schedule ...............................................................
</TABLE>
E-3
<PAGE> 1
EXHIBIT 10.1(b)
SECOND AMENDMENT
TO
AMENDED AND RESTATED LOAN AGREEMENT
THIS SECOND AMENDMENT TO AMENDED AND RESTATED LOAN AGREEMENT (this
"Amendment"), dated as of the 31st day of December, 1997 (the "Amendment Date"),
is made by and among CHARTER COMMUNICATIONS, L.P., a Delaware limited
partnership (the "Borrower"), TORONTO DOMINION (TEXAS), INC., PNC BANK, NATIONAL
ASSOCIATION, CREDIT LYONNAIS NEW YORK BRANCH, UNION BANK OF CALIFORNIA, N.A.,
BANQUE PARIBAS, FLEET BANK, N.A., ABN AMRO BANK N.V., THE LONG-TERM CREDIT BANK
OF JAPAN, LTD., and CITY NATIONAL BANK (together with any financial institution
which subsequently becomes a `Bank' under the Loan Agreement, as such term is
defined therein, the "Banks"), TORONTO DOMINION (TEXAS), INC., PNC BANK,
NATIONAL ASSOCIATION and CREDIT LYONNAIS NEW YORK BRANCH, as co-agents (in such
capacity, the "Co-Agents"), CREDIT LYONNAIS NEW YORK BRANCH, as documentation
agent (in such capacity, the "Documentation Agent"), and TORONTO DOMINION
(TEXAS), INC., as administrative agent for the Co-Agents and the Banks (in such
capacity, the "Administrative Agent," and together with the Documentation Agent
and the Co-Agents, the "Agents").
W I T N E S S E T H:
WHEREAS, the Agents, the Borrower, and the Banks are all parties to
that certain Amended and Restated Loan Agreement dated as of March 28, 1996, as
amended by that certain First Amendment to Amended and Restated Loan Agreement
dated as of November 29, 1996 (as heretofore and hereafter amended, modified and
supplemented from time to time, the "Loan Agreement"); and
WHEREAS, the Borrower has requested that the Banks amend the Loan
Agreement to, among other things, (a) extend the Maturity Date, (b) revise the
amortization schedule, (c) modify certain financial covenants, and (d) make such
other changes as are set forth herein.
WHEREAS, the Agents and the Banks are willing to consent to such
amendments and such other matters as set forth herein on terms and conditions
contained herein;
NOW, THEREFORE, in consideration of the premises set forth above, the
covenants and agreements hereinafter set forth, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree that all capitalized terms used herein shall have the
meanings ascribed thereto in the Loan Agreement, and further agree as follows:
<PAGE> 2
1. Amendments to Article 1.
(a) Article 1 of the Loan Agreement, Definitions, is hereby
amended by deleting the existing definition of "Maturity Date" in its entirety
and by substituting the following in lieu thereof:
"`Maturity Date' shall mean December 31, 1999, or such earlier
date as payment of the Loans shall be due (whether by acceleration or
otherwise)."
(b) Article 1 of the Loan Agreement, Definitions, is hereby
further amended by adding thereto, appropriately alphabetized, the following new
definitions of "LaGrange System" and "Sanford System":
"'LaGrange System' shall mean those certain cable television
assets of the Borrower located in the City of LaGrange, Georgia
comprising 8,368 subscribers as of September 30, 1997."
"'Sanford System' shall mean those certain cable television
assets of the Borrower located in the City of Sanford, North Carolina
comprising 12,988 subscribers as of September 30, 1997."
2. Amendments to Article 2. Article 2 of the Loan Agreement,
Loans, is hereby amended as follows:
(a) Subsection 2.5(b)(ii) of the Loan Agreement, Scheduled
Reductions, is hereby amended by deleting such subsection in its entirety and by
substituting the following in lieu thereof:
"(ii) [Intentionally Omitted.]"
(b) Section 2.7 of the Loan Agreement, Repayment, is hereby
amended by deleting subsection (a), Scheduled Term Loan Repayments, and
subsection (c) Annual Excess Cash Flow Recapture, in their entireties and by
substituting the following in lieu thereof:
"(a) [Intentionally Omitted.]"
"(c) [Intentionally Omitted]."
3. Amendments to Article 7. Article 7 of the Loan Agreement, Negative
Covenants, is hereby amended as follows:
- 2 -
<PAGE> 3
(a) Section 7.1 of the Loan Agreement, Indebtedness of the
Borrower, is hereby amended by deleting subsection (c) thereof in its entirety
and by substituting the following subsection (c) in lieu thereof:
"(c) Capitalized Lease Obligations in an amount not
in excess of $4,000,000, provided, however, that any lease agreement
between the Borrower and the City of LaGrange, Georgia with respect to
the assets for the LaGrange System shall not exceed $2,500,000 and shall
be assigned as Collateral for the Obligations."
(b) Section 7.4 of the Loan Agreement, Liquidation, Change in
Ownership, Disposition or Acquisition of Assets, is hereby amended by adding to
subsection (a) at the end of the first full sentence of such subsection the
following new sentence which shall become the second complete sentence in such
subsection (a):
"In addition, the Borrower may sell (i) the assets of the Sanford
System (including the License with respect thereto), provided that the
purchase price of such sale is equal to or greater than $23,100,000 and
the Net Proceeds thereof are applied to the Loans pursuant to Section
2.7(b) hereof, and (ii) the assets of the LaGrange System, provided
that the purchase price of such sale is equal to or greater than
$2,000,000 and provided further that such assets are contemporaneously
leased back to the Borrower."
(c) Section 7.8 of the Loan Agreement, Leverage Ratio, is
hereby amended by deleting the existing table contained in Section 7.8 in its
entirety and by substituting the following in lieu thereof:
Leverage
"Period Ratio
------- -----
From December 31, 1997 through the Maturity Date 5.25:1"
(d) Section 7.9 of the Loan Agreement, Annualized Operating
Cash Flow to Fixed Charges Ratio, is hereby amended by deleting such Section in
its entirety and by substituting the following in lieu thereof:
"Section 7.9 [Intentionally omitted.]"
(e) Section 7.10 of the Loan Agreement, Annualized Operating
Cash Flow to Pro Forma Debt Service, is hereby amended by deleting such Section
in its entirety and by substituting the following lien thereof:
"Section 7.10 [Intentionally omitted.]"
- 3 -
<PAGE> 4
(f) Section 7.15, of the Loan Agreement, Capital Expenditures,
is hereby amended by deleting the existing table contained in Section 7.15 in
its entirety and by substituting the following in lieu thereof:
<TABLE>
<CAPTION>
Capital
"Period Expenditures Limit
------- ------------------
<S> <C>
From January 1, 1997 through December 31, 1997 $20,000,000
From January 1, 1998 through December 31, 1998 $20,000,000
From January 1, 1999 through December 31, 1999 $11,500,000"
</TABLE>
(g) Section 7.16 of the Loan Agreement, Consolidated Leverage
Ratio, is hereby amended by deleting the existing Section in its entirety and by
substituting the following in lieu thereof:
"Section 7.16 Consolidated Leverage Ratio. (a) As of the end
of any calendar quarter, and (b) at the time of any Advance (after
giving effect to such Advance), the Borrower shall not permit the ratio
of Consolidated Total Debt as of such date to Consolidated Annualized
Operating Cash Flow for the calendar quarter end being tested in the
case of Section 7.16(a) above, or the most recent quarter end for which
financial statements are required to be delivered to the Administrative
Agent and the Co-Agents pursuant to Sections 6.1 and 6.2 hereof in the
case of Section 7.16(b) above, to be greater than (i) prior to June 30,
1997, 6.75 to 1.0; (ii) from July 1, 1997 until December 31, 1997, 6.50
to 1.0; (iii) from January 1, 1998 until March 31, 1998, 6.75 to 1.0;
and (iv) from April 1, 1998 and at all times thereafter, 6.50 to 1.0."
(h) Article 7 of the Loan Agreement, Negative Covenants, is
hereby amended by adding thereto the following new Section 7.17, Interest
Coverage Ratio:
"Section 7.17 Interest Coverage Ratio. (a) As of the end of
any calendar quarter, and (b) at the time of any Advance (after giving
effect to such Advance), the Borrower shall not permit the ratio of its
(1) Annualized Operating Cash Flow to (2) the sum of (A) Interest
Expense and (B) Restricted Payments made pursuant to Sections 7.7(b)
and 7.7(c) for the calendar quarter end being tested in the case of
Section 7.17(a) above, or the most recent quarter end for which
financial statements are required to be delivered to the Administrative
Agent and the Co-Agents pursuant to Sections 6.1 and 6.2 hereof in the
case of Section 7.17(b) above, to be less than (i) prior to July 1,
1998, 1.35 to 1.0 and (ii) from July 1, 1998 and at all times
thereafter, 1.50 to 1.0."
- 4 -
<PAGE> 5
4. Representations and Warranties. The Borrower hereby represents and
warrants in favor of the Agents and the Banks as follows:
(a) The Borrower has the partnership power and authority (i)
to enter into this Amendment and (ii) to do all other acts and things as are
required or contemplated hereunder to be done, observed and performed by it;
(b) This Amendment has been duly authorized, validly executed
and delivered by one or more Authorized Signatories of the Borrower and
constitutes the legal, valid and binding obligations of the Borrower,
enforceable against the Borrower in accordance with their respective terms,
subject, as to enforcement of remedies, to the following qualifications: (i) an
order of specific performance and an injunction are discretionary remedies and,
in particular, may not be available where damages are considered an adequate
remedy at law, and (ii) enforcement may be limited by bankruptcy, insolvency,
liquidation, reorganization, reconstruction and other similar laws affecting
enforcement of creditors' rights generally (insofar as any such law relates to
the bankruptcy, insolvency or similar event of the Borrower); and
(c) The execution and delivery of this Amendment and the
performance by the Borrower under the Loan Agreement and the other Loan
Documents to which it is a party, as amended hereby, do not and will not require
the consent or approval of any regulatory authority or governmental authority or
agency having jurisdiction over the Borrower which has not already been
obtained, nor is in contravention of or in conflict with the partnership
agreement or other similar agreement of the Borrower, or the provision of any
statute, judgment, order, indenture, instrument, agreement, or undertaking, to
which the Borrower is a party or by which any of its assets or properties are or
may become bound.
5. Conditions Precedent. The effectiveness of this Amendment is subject
to receipt by the Administrative Agent and the Banks, in form and substance
satisfactory to the Administrative Agent and the Banks a certificate, signed by
an Authorized Signatory of the Borrower, certifying on the date hereof that
there exists no Default under the Loan Agreement, after giving effect to this
Amendment, and demonstrating the Borrower's compliance with Sections 7.8, 7.9,
7.10, 7.15, 7.16 and 7.17 of the Loan Agreement, after giving effect to this
Amendment.
6. Counterparts. This Amendment may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
separate counterparts shall together constitute but one and the same instrument.
7. Governing Law. This Amendment shall be construed in accordance with
and governed by the laws of the State of New York.
- 5 -
<PAGE> 6
8. Severability. Any provision of this Amendment which is prohibited or
unenforceable shall be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof in that
jurisdiction or affecting the validity or enforceability of such provision in
any other jurisdiction.
9. No Other Amendment or Waiver. Except for the amendments set forth
above, the text of the Loan Agreement and all other Loan Documents shall remain
unchanged and in full force and effect. No waiver by the Administrative Agent,
the other Agents or the Banks under the Loan Agreement or any other Loan
Document is granted or intended except as expressly set forth herein, and the
Administrative Agent, the other Agents and the Banks expressly reserve the right
to require strict compliance in all other respects (whether or not in connection
with any Requests for Advance). Except as set forth herein, the amendments
agreed to herein shall not constitute a modification of the Loan Agreement or
any of the other Loan Documents, or a course of dealing with the Administrative
Agent, the other Agents and the Banks, or any of them, at variance with the Loan
Agreement or any of the other Loan Documents, such as to require further notice
by the Administrative Agent, the other Agents, the Banks, the Majority Banks, or
any of them, to require strict compliance with the terms of the Loan Agreement
and the other Loan Documents in the future.
10. Loan Documents. This document shall be deemed to be a Loan Document
for all purposes.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
- 6 -
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their duly authorized officers, all as of the day and year first
above written.
BORROWER: CHARTER COMMUNICATIONS, L.P., a Delaware
limited partnership
By: Its General Partner
CCP ONE, INC., a Delaware corporation
By:_________________________________________
Its:_____________________________________
AGENTS AND BANKS: TORONTO DOMINION (TEXAS), INC., as
Administrative Agent, a Co-Agent and a Bank
By:_________________________________________
Its:_____________________________________
CREDIT LYONNAIS NEW YORK BRANCH, as
Documentation Agent, a Co-Agent and as a Bank
By:_________________________________________
Its:_____________________________________
By:_________________________________________
Its:_____________________________________
CHARTER COMMUNICATIONS, L.P.
SECOND AMENDMENT TO AMENDED
AND RESTATED LOAN AGREEMENT
Signature Page 1
<PAGE> 8
PNC BANK, NATIONAL ASSOCIATION, as a Co-
Agent and as a Bank
By:_________________________________________
Its:_____________________________________
UNION BANK OF CALIFORNIA, N.A., as a Bank
By:_________________________________________
Its:_____________________________________
BANQUE PARIBAS, as a Bank
By:_________________________________________
Its:_____________________________________
By:_________________________________________
Its:_____________________________________
CHARTER COMMUNICATIONS, L.P.
SECOND AMENDMENT TO AMENDED
AND RESTATED LOAN AGREEMENT
Signature Page 2
<PAGE> 9
ABN AMRO BANK N.V., as a Bank
By:_________________________________________
Its:_____________________________________
By:_________________________________________
Its:_____________________________________
FLEET BANK, N.A., as a Bank
By:_________________________________________
Its:_____________________________________
THE LONG-TERM CREDIT BANK OF JAPAN, LTD.,
as a Bank
By:_________________________________________
Its:_____________________________________
CITY NATIONAL BANK, as a Bank
By:_________________________________________
Its:_____________________________________
CHARTER COMMUNICATIONS, L.P.
SECOND AMENDMENT TO AMENDED
AND RESTATED LOAN AGREEMENT
Signature Page 3
<PAGE> 1
EXHIBIT 10.2(b)
AMENDMENT NO. 1
TO
AMENDED AND RESTATED FEE SUBORDINATION AGREEMENT
AGREEMENT, dated as of December 31, 1997, among CHARTER COMMUNICATIONS
II, L.P., a Delaware limited partnership, CHARTER COMMUNICATIONS III, L.P., a
Delaware limited partnership, PEACHTREE CABLE TV, INC., a Nevada corporation
(individually, a "Borrower", and collectively, the "Borrowers"), CHARTER
COMMUNICATIONS SOUTHEAST, L.P., a Delaware limited partnership ("Charter") and
TORONTO DOMINION (TEXAS), INC., as Agent (in such capacity, together with its
successors in such capacity, the "Administrative Agent").
W I T N E S S E T H:
FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency of
which is hereby acknowledged., the parties hereby agree as follows:
1. Definitions. All terms used herein, unless otherwise defined herein,
shall have the meanings ascribed to them in the Amended and Restated Fee
Subordination Agreement, dated as of January 31, 1997 (the "Subordination
Agreement") among the Borrowers, Charter and the Agent.
2. Amendment. Section 2 of the Subordination Agreement is hereby
amended in its entirety to read as follows:
"Each Borrower may make partial payments of Management Fees on
the due dates therefor as set forth in the Management Agreement to
which such Borrower is a party if at the time of such payments no
Default or Event of Default under the Credit Agreement shall have
occurred (or would occur upon payment of such Management Fees) and
be continuing, as follows: (i) from the date hereof until and
including December 31, 1999, an amount equal to 3% of such
Borrower's annual Gross Revenue (as defined in the Management
Agreement) accrued during such period may be paid by such Borrower
to Charter in cash; payment of the remaining balance of the annual
Management Fees accrued during such period shall be deferred until
the Senior Indebtedness is paid in full, and (ii) after December
31, 1999, payment of any and all Management Fees shall be deferred
until the Senior Indebtedness is paid in full. If a Default or
Event of Default shall have occurred (or would occur upon payment
of such Management Fees) and be continuing, the payment of all such
Management Fees shall be deferred until the Senior Indebtedness is
paid in full. All sums the payment of which is deferred pursuant to
this Section 2 shall become Subordinated Indebtedness hereunder,
and shall not be payable until and upon payment in full of any and
all Senior Indebtedness."
3. Miscellaneous.
(a) Except as expressly amended hereby, the Agreement will continue in
full force and effect.
(b) This Agreement may not be amended or modified orally but may be
amended or modified only in writing, signed by all parties hereto, provided that
the Administrative Agent shall have
<PAGE> 2
obtained any and all consents by the Banks to such amendment or modification as
required under the Credit Agreement. No waiver of any term or provision of this
Agreement shall be effective unless it is in writing, making specific reference
to this Agreement and signed by the party against whom such waiver is sought to
be enforced. This Agreement constitutes the entire agreement among the parties
hereto with respect to the subject matter hereof. This Agreement shall be
binding upon the Borrower and the Holders of Subordinated Indebtedness and their
respective successors, assigns, heirs and legal representatives and shall inure
to the benefit of the Banks, the Administrative Agent and their respective
successors and assigns.
(c) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS EXECUTED AND TO
BE WHOLLY PERFORMED WITHIN THAT STATE.
(d) This Agreement may be executed in any number of counterpart copies,
each of which shall be deemed an original, but which together shall constitute a
single instrument.
(e) Descriptive headings appearing herein are included solely for
convenience of reference and are not intended to affect the meaning or
construction of any of the provisions of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
CHARTER COMMUNICATIONS II, L.P.
By: CCP II, INC., General Partner
By:____________________________
Name:
Title:
CHARTER COMMUNICATIONS III, L.P.
By: CCP III, INC., General Partner
By:____________________________
Name:
Title:
PEACHTREE CABLE TV, INC.
By:_________________________________
Name:
Title:
- 2 -
<PAGE> 3
CHARTER COMMUNICATIONS SOUTHEAST, L.P.
By: Charter Southeast Properties,
L.P., General Partner
By:____________________________
Name:
Title:
TORONTO DOMINION (TEXAS), INC.,
as Administrative Agent
By:_________________________________
Name:
Title:
- 3 -
<PAGE> 1
EXHIBIT 12.2
CHARTER COMMUNICATIONS SOUTHEAST, L.P.
RATIO OF EARNINGS TO FIXED CHARGES CALCULATION
(In thousands except ratio amounts)
<TABLE>
<CAPTION>
1997 1996 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Earnings
Loss before taxes $(46,949) $(31,950) $(27,465) $(9,609)
Fixed Charges 49,377 32,723 18,803 4,688
-------- -------- -------- -------
Earnings 2,428 773 (8,662) (4,921)
Fixed Charges
Interest Expense (excluding amortization
of debt costs) 47,344 31,578 18,014 4,440
Interest Element of Rentals 296 206 132 33
Amortization of debt costs 1,737 939 657 215
-------- -------- -------- -------
Total Fixed Charges 49,377 $ 32,723 $18,803 $4,688
======== ======== ======== =======
Ratio of Earnings to Fixed Charges - - - -
</TABLE>
(1) Earnings for the year ended December 31, 1997, 1996, 1995 and 1994 were
insufficient to cover the fixed charges by $46,949, $31,950, $27,465 and
$9,609, respectively. As a result of such deficiencies, the ratios are not
presented above.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,742,119
<SECURITIES> 0
<RECEIVABLES> 3,158,282
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,270,277
<PP&E> 294,945,002
<DEPRECIATION> (59,136,652)
<TOTAL-ASSETS> 736,369,805
<CURRENT-LIABILITIES> 36,978,481
<BONDS> 571,325,000
0
0
<COMMON> 0
<OTHER-SE> 113,430,858
<TOTAL-LIABILITY-AND-EQUITY> 736,369,805
<SALES> 175,591,083
<TOTAL-REVENUES> 175,591,083
<CGS> 0
<TOTAL-COSTS> 173,648,636
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (49,080,679)
<INCOME-PRETAX> (46,949,074)
<INCOME-TAX> 0
<INCOME-CONTINUING> (46,949,074)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (46,949,074)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
