<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-Q
(Mark one)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transaction period from to
-------------- ------------------
Commission File Number 333-3774
--------
CHARTER COMMUNICATIONS SOUTHEAST HOLDINGS, L.P.
CHARTER COMMUNICATIONS SOUTHEAST HOLDINGS CAPITAL
CORPORATION (Exact name of registrants as specified
in their charters)
Delaware 43-1728405
-------- ----------
43-1740264
(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
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
-- --
As of September 30, 1998, there was one share of common stock of Charter
Communications Southeast Holdings Capital Corporation outstanding, which was
owned by Charter Communications Southeast Holdings, L.P.
<PAGE> 2
CHARTER COMMUNICATIONS SOUTHEAST HOLDINGS, L.P.
CHARTER COMMUNICATIONS SOUTHEAST HOLDINGS CAPITAL CORPORATION
FORM 10-Q - FOR THE QUARTER ENDED SEPTEMBER 30, 1998
INDEX
<TABLE>
<CAPTION>
Page
Part I. Financial Information
<S> <C>
Item 1. Consolidated Financial Statements
a. Consolidated Balance Sheets - September 30, 1998 and December 31, 1997 3
b. Consolidated Statements of Operations - Three Months Ended
September 30, 1998 and 1997 4
c. Consolidated Statements of Operations - Nine Months Ended September 30, 1998 5
d. Consolidated Statement of Partners' Capital - Nine Months Ended
September 30, 1998 6
e. Consolidated Statements of Cash Flows - Nine Months Ended September 30, 1998 7
and 1997
f. Notes to Consolidated Financial Statements 8
Separate financial statements of Charter Communications
Southeast Holdings
Capital Corporation have not been presented as this entity
had no operations and substantially no assets or equity.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Part II. Other Information
Item 1. Legal Proceedings 17
Item 2. Change in Securities - None -
Item 3. Defaults upon Senior Securities - None -
Item 4. Submission of Matters to a Vote of Security Holders - None -
Item 5. Other Information - None -
Item 6. Exhibits and Reports on Form 8-K 17
Signature Page 18
</TABLE>
Page 2
<PAGE> 3
CHARTER COMMUNICATIONS SOUTHEAST HOLDINGS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
--------------- ------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 1,692,381 $ 2,742,119
Accounts receivable, net of allowance for doubtful accounts of $448,513 and
$312,048, respectively 3,173,748 3,158,282
Prepaid expenses and other 363,064 341,396
------------- -------------
Total current assets 5,229,193 6,241,797
------------- -------------
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property, plant and equipment, net 266,231,299 235,808,350
Franchise costs, net of accumulated amortization of $151,997,180 and
$119,968,082 respectively 453,072,294 480,201,100
Covenant not to compete, net of accumulated amortization of $660,000 and
$480,000 respectively 540,000 720,000
------------- -------------
719,843,593 716,729,450
OTHER ASSETS 11,085,846 15,455,893
------------- -------------
$ 736,158,632 $ 738,427,140
============= =============
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Current maturities of long term debt $ -- $ 5,375,000
Accounts payable and accrued expenses 30,548,897 29,972,845
Subscriber deposits and prepayments 471,533 532,595
Payable to manager of cable television systems 1,140,787 1,120,476
------------- -------------
Total current liabilities 32,161,217 37,000,916
------------- -------------
DEFERRED REVENUE 1,620,998 1,718,710
------------- -------------
LONG-TERM DEBT 722,090,606 666,662,475
------------- -------------
DEFERRED MANAGEMENT FEES 10,800,726 7,805,448
------------- -------------
------------- -------------
DEFERRED INCOME TAXES 5,111,308 5,111,308
------------- -------------
PARTNERS' CAPITAL:
General Partner (356,264) 201,281
Common Limited Partners - 1,850.05 units issued and outstanding (35,269,959) 19,927,002
------------- -------------
Total partners' capital (35,626,223) 20,128,283
------------- -------------
$ 736,158,632 $ 738,427,140
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
Page 3
<PAGE> 4
CHARTER COMMUNICATIONS SOUTHEAST HOLDINGS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
SERVICE REVENUES: $ 50,795,254 $ 46,221,916
------------ ------------
OPERATING EXPENSES:
Operating costs 21,870,507 19,829,960
General and administrative 3,460,673 3,330,344
Depreciation and amortization 22,529,090 18,641,197
Management fees 2,538,909 2,311,337
------------ ------------
50,399,179 44,112,838
------------ ------------
Income from operations 396,075 2,109,078
------------ ------------
OTHER INCOME (EXPENSE):
Interest income 55,328 49,230
Interest expense (16,787,720) (16,049,250)
Loss on sale of cable assets (1,137,867) --
------------ ------------
(17,870,259) (16,000,020)
------------ ------------
Loss before income taxes and extraordinary item (17,474,184) (13,890,942)
INCOME TAXES (75,000) --
------------ ------------
Loss before extraordinary item (17,549,184) (13,890,942)
EXTRAORDINARY ITEM - Loss on early retirement of debt (see Note 4) -- --
------------ ------------
Net loss $(17,549,184) $(13,890,942)
============ ============
NET LOSS ALLOCATION TO PARTNERS' CAPITAL ACCOUNTS:
General Partner $ (175,492) $ (138,909)
Common Limited Partners (17,373,692) (13,752,033)
------------ ------------
$(17,549,184) $(13,890,942)
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
Page 4
<PAGE> 5
CHARTER COMMUNICATIONS SOUTHEAST HOLDINGS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
---------------- -----------------
<S> <C> <C>
SERVICE REVENUES: $ 149,160,005 $ 128,454,528
------------- -------------
OPERATING EXPENSES:
Operating costs 63,112,815 55,167,138
General and administrative 11,247,482 9,698,203
Depreciation and amortization 65,608,156 52,096,546
Management fees 7,456,845 6,420,637
------------- -------------
147,425,298 123,382,524
------------- -------------
Income from operations 1,734,707 5,072,004
------------- -------------
OTHER INCOME (EXPENSE):
Interest income 163,964 138,049
Interest expense (50,176,251) (44,690,037)
Loss on sale of cable assets (1,137,867) --
------------- -------------
(51,150,154) (44,551,988)
------------- -------------
Loss before income taxes and extraordinary item (49,415,447) (39,479,984)
INCOME TAXES (75,000) --
------------- -------------
Loss before extraordinary item (49,490,447) (39,479,984)
EXTRAORDINARY ITEM - Loss on early retirement of debt (see Note 4) (6,264,059) --
------------- -------------
Net loss $ (55,754,506) $ (39,479,984)
============= =============
NET LOSS ALLOCATION TO PARTNERS' CAPITAL ACCOUNTS:
General Partner $ (557,545) $ (394,800)
Common Limited Partners (55,196,961) (39,085,184)
------------- -------------
$ (55,754,506) $ (39,479,984)
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
Page 5
<PAGE> 6
CHARTER COMMUNICATIONS SOUTHEAST HOLDINGS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
General Common Limited
Partner Partners Total
-------------- -------------- -------------
<S> <C> <C> <C>
BALANCE, December 31, 1997 $ 201,281 $ 19,927,002 $ 20,128,283
Allocation of net loss (557,545) (55,196,961) (55,754,506)
------------ ------------ ------------
BALANCE, September 30, 1998 $ (356,264) $(35,269,959) $(35,626,223)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
Page 6
<PAGE> 7
CHARTER COMMUNICATIONS SOUTHEAST HOLDINGS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
---------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (55,754,506) $ (39,479,984)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities-
Depreciation and amortization 65,608,156 52,096,546
Amortization of debt issuance costs and interest rate cap
agreements 1,307,257 1,642,469
Amortization on discount of debentures 10,253,131 8,955,480
Loss on sale of cable assets 1,137,867 --
Extraordinary item - loss on early retirement of debt 6,264,059 --
Changes in assets and liabilities, net of effects from
acquisitions -
Accounts receivable, net (15,466) 73,650
Prepaid expenses and other (21,667) (410,792)
Receivable from related parties 10,936 500,000
Accounts payable and accrued expenses 520,635 (2,025,097)
Subscriber deposits and prepayments (61,062) (219,744)
Payable to manager of cable television systems, including
deferred management fees 2,995,278 2,566,318
Deferred revenue (97,712) (31,906)
------------- -------------
Net cash provided by operating activities 32,146,906 23,666,940
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (65,749,402) (52,428,526)
Payments for acquisitions, net of cash acquired (5,835,208) (159,666,104)
Payments of franchise costs (29,984) (271,785)
Restricted funds held in escrow -- 1,782,537
Proceeds from sale of assets 2,207,303 --
------------- -------------
Net cash used in investing activities (69,407,291) (210,583,878)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of debt issuance costs (3,589,353) (3,428,712)
Borrowings under revolving credit agreement 532,100,000 200,750,000
Payments under revolving credit agreement (492,300,000) (42,130,000)
Partners' capital contributions -- 29,800,000
------------- -------------
Net cash provided by financing activities 36,210,647 184,991,288
------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,049,738) (1,925,650)
CASH AND CASH EQUIVALENTS, beginning of period 2,742,119 3,360,507
------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 1,692,381 $ 1,434,857
============= =============
CASH PAID FOR INTEREST $ 37,015,407 $ 35,198,647
============= =============
CASH PAID FOR TAXES
$ -- $ --
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
Page 7
<PAGE> 8
CHARTER COMMUNICATIONS SOUTHEAST HOLDINGS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION:
The accompanying consolidated financial statements of Charter Communications
Southeast Holdings, L.P. (Charter Holdings) and subsidiaries include the
accounts of Charter Holdings and its direct and indirect wholly owned
subsidiaries: Charter Communications Southeast Properties, Inc., Charter
Communications Southeast Holdings Capital Corporation, Charter Communications
Southeast L.P. (Charter Southeast), Charter Communications Southeast Capital
Corporation, CCP II, Inc., CCP One, Inc., Charter Communications II, L.P.
(CC-II), and Charter Communications, L.P. (CC-I), collectively referred to as
the "Partnership" or the "Company" herein. All significant intercompany balances
and transactions have been eliminated in consolidation.
The accompanying unaudited financial statements have been prepared in accordance
with the rules and regulations of the Securities and Exchange Commission.
Accordingly, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted.
Certain reclassifications have been made to the September 30, 1997 financial
statements to conform with the September 30, 1998 presentation.
2. RESPONSIBILITY FOR INTERIM FINANCIAL STATEMENTS:
The consolidated financial statements as of September 30, 1998 and 1997, are
unaudited; however, in the opinion of management, such statements include all
adjustments necessary for a fair presentation of the results for the periods
presented. The interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
contained in the Registrant's Form 10-K for the year ended December 31, 1997.
Interim results are not necessarily indicative of results for a full year.
3. 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, Mathews, 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 systems from
CCIP II in April 1997 at less than fair value. In connection with the purchase
of these assets, CC-I
Page 8
<PAGE> 9
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.
A class action lawsuit was filed in Alabama against the Partnership on behalf of
all persons residing in the state who are or were residential customers of the
Partnership's cable television service and who have been charged a processing
fee for delinquent payment of their cable television bill. The action challenges
the legality of the Partnership's processing fee and seeks declaratory judgment,
injunctive relief and unspecified damages. The Partnership believes the lawsuit
to be without merit and intends to defend the action vigorously. At this time,
the Partnership is not able to project the cost which is associated with this
action or to predict any potential outcome of the lawsuit.
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.
4. LONG-TERM DEBT
On June 1, 1998, the Partnership repaid and terminated the separate credit
facilities of CC-I and CC-II from borrowings of its new revolving credit and
term loan facilities. The new $640 million credit facilities were arranged
through a consortium of banks and consist of a $290 million revolver maturing
June 2007 and a pair of term facilities in the amounts of $200 million and $150
million maturing June 2007 and December 2007, respectively. The new credit
facilities are structured as a joint credit agreement whereby CC-I and CC-II
(and its subsidiaries) are each jointly and severally liable for the debt. The
credit facilities bear interest, at borrower's option, at rates based upon the
prime rate of the agent bank or based upon Eurodollar rates plus the applicable
margin determined by the Partnership's leverage ratio at the time of the
borrowing. The variable interest rates ranged from 6.96% to 7.69% at September
30, 1998. The extraordinary loss recognized by the Partnership due to the early
retirement of debt was related to the write off of deferred debt issuance costs
for the terminated credit facilities of CC-I and CC-II.
5. BOND REPURCHASE OFFER
On July 29, 1998, Charter Communications, Inc. ("CCI"), the company that
provides management service to the Partnership and its subsidiaries, along with
certain of its affiliates and their respective shareholders, entered into a
Purchase Agreement (the "Purchase Agreement") with Paul G. Allen pursuant to
which Mr. Allen agreed to purchase all of the outstanding privately-held equity
interests of CCI and the various other entities that together constitute the
owners and/or managers of the cable television systems operated under the name
"Charter Communications". The obligation of Mr. Allen to purchase these equity
interests is subject to the satisfaction of certain conditions set forth in the
Purchase Agreement including, without limitation, obtaining all necessary
governmental approvals. It is currently expected that the acquisition by Mr.
Allen will occur in December 1998. If the acquisition is consummated, the
Partnership will be obligated under the terms of the Indenture governing its
Senior Secured Discount Debentures due 2007 (the "Debentures") to make an offer
to repurchase all outstanding Debentures at a purchase price equal to 101% of
the accreted value thereof plus all accrued and unpaid interest to the date of
purchase. In addition, the Partnership's subsidiary, Charter Communications
Southeast, L.P., will be obligated under the terms of the Indenture governing
its 11.25% Senior Notes due 2006 (the "Senior Notes") to make an offer to
repurchase all outstanding Notes at a purchase price equal to 101% of the
principle amount thereof plus all accrued and unpaid interest to the date of
purchase.
Page 9
<PAGE> 10
CHARTER COMMUNICATIONS SOUTHEAST HOLDINGS, L.P.
CHARTER COMMUNICATIONS SOUTHEAST HOLDINGS CAPITAL CORP
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations Significant Transactions
Since April 1994, the Charter Communications Southeast Holdings, L.P. and its
subsidiaries (collectively the "Company" or the "Partnership") have completed
the following transactions:
<TABLE>
<CAPTION>
Approximate
Acquisition Date Purchase Price Location of Systems
---------------- -------------- -------------------
<S> <C> <C>
April 1994 $174.7 million Georgia, Alabama, Louisiana
January 1995 $108.0 million Kentucky, N. Carolina, S. Carolina
May 1995 $ 22.0 million Georgia
May 1995 $ 48.0 million Alabama
July 1995 $ 34.7 million Georgia
November 1995 $ 35.0 million S. Carolina
January 1996 $ 8.4 million S. Carolina
March 1996 $112.0 million Georgia, N. Carolina, Tenn., Ky.
November 1996 $ 22.0 million Alabama, Tennessee
February 1997 $69.1 million N. Carolina
February 1997 $3.7 million Georgia
April 1997 $90.5 million Carolina, S. Carolina
September 1998 $5.9 million Tennessee
</TABLE>
The only pending sale transaction is for approximately 1,700 subscribers in
Tennessee, subject to the buyer obtaining financing and completion of the asset
sale contract. There are no other pending acquisitions or asset sale
transactions.
Results of Operations
The following table sets forth the approximate number of basic subscribers and
premium subscriptions of the Partnership as of the dates indicated. The
Nashville Cluster includes approximately 3,300 basic subscribers and 1,700
premium subscription units that were associated with an acquisition on September
30, 1998.
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1998 1997 1997
------------------ ------------ --------------
Basic Subscribers:
<S> <C> <C> <C>
Nashville Cluster 48,100 43,700 43,000
Northern Alabama Cluster 65,200 62,900 62,600
New Orleans Cluster 38,400 36,600 36,500
Atlanta Cluster 72,600 69,000 68,200
Greenville-Spartanburg/Asheville Cluster 109,900 105,000 104,100
Hickory Cluster 52,700 51,000 50,400
Non-Cluster Systems 66,200 64,000 63,500
------- ------- -------
453,100 432,200 428,300
======= ======= =======
Premium Subscription Units:
Nashville Cluster 29,500 21,800 22,900
Northern Alabama Cluster 32,700 25,100 25,900
New Orleans Cluster 25,200 18,500 18,900
Atlanta Cluster 70,400 61,000 48,700
Greenville-Spartanburg/Ashville Cluster 58,700 41,500 42,500
Hickory Cluster 29,200 18,700 19,000
Non-Cluster Systems 47,300 36,200 37,100
------- ------- -------
293,000 222,800 215,000
======= ======= =======
</TABLE>
Page 10
<PAGE> 11
The following table sets forth certain items in dollars (in thousands) and as a
percentage of service revenues for the periods indicated:
For the Three Months
Ended September 30,
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
-------------------- ---------------------
% of
Amount Revenue Amount % of Revenue
------ ------- ------ ------------
<S> <C> <C> <C> <C>
Service Revenues $ 50,795 100.0% $ 46,222 100.0%
-------- ----- -------- ------
Operating Expenses:
Operating costs 21,870 43.1 19,830 42.9
General and administrative 3,461 6.8 3,330 7.2
Depreciation and Amortization 22,529 44.3 18,641 40.3
Management Fees - Related Party 2,539 5.0 2,312 5.0
-------- ------ -------- ------
50,399 99.2 44,113 95.4
-------- ------ -------- ------
Income From Operations 396 .8 2,109 4.6
-------- ------ -------- ------
Other Income (Expense):
Interest Income 55 .1 49 .1
Interest Expense (16,787) (33.1) (16,049) (34.7)
Loss on Sale of Cable Assets (1,138) (2.2) -- --
-------- ------ -------- ------
(17,870) (35.2) (16,000) (34.6)
-------- ------ -------- ------
Loss Before Income Taxes and
Extraordinary Item $(17,474) (34.4) $(13,891) (30.0)
Income Taxes (75) (.1) -- --
Extraordinary Item - Loss on Early
Retirement of Debt -- -- -- --
-------- ------ -------- ------
Net Loss $(17,549) (34.5) $(13,891) (30.0)
======== ===== ======== =====
</TABLE>
Page 11
<PAGE> 12
The following table sets forth certain items in dollars (in thousands) and as a
percentage of service revenues for the periods indicated:
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
-------------------
(Unaudited)
1998 1997
---------------------- ---------------------
% of % of
Amount Revenue Amount Revenue
------ ------- ------ -------
<S> <C> <C> <C> <C>
Service Revenues $ 149,160 100.0% $ 128,455 100.0%
--------- ----- --------- -----
Operating Expenses:
Operating costs 63,113 42.3 55,167 42.9
General and administrative 11,247 7.5 9,698 7.6
Depreciation and Amortization 65,608 44.0 52,097 40.6
Management Fees - Related Party 7,457 5.0 6,421 5.0
--------- ----- --------- -----
147,425 98.8 123,383 96.1
--------- ----- --------- -----
Income From Operations 1,735 1.2 5,072 3.9
--------- ----- --------- -----
Other Income (Expense):
Interest Income 164 .1 138 .1
Interest Expense (50,176) (33.6) (44,690) (34.8)
Other Expense (1,138) (.8) -- --
--------- ----- --------- -----
(51,150) (34.3) (44,552) (34.7)
--------- ----- --------- -----
Loss Before Income Taxes and
Extraordinary Item (49,415) (33.1) (39,480) (30.8)
Income Taxes (75) -- -- --
Extraordinary Item - Loss on Early
Retirement of Debt (6,264) (4.2) -- --
--------- ----- --------- -----
Net Loss $ (55,754) (37.3) $ (39,480) (30.8)
========= ===== ========= =====
</TABLE>
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 9.9% and 16.1% to $50.8 million and $149.2 million for the
three and nine month periods ended September 30, 1998, respectively, when
compared to the similar periods of 1997. These increases are primarily the
result of the Partnership having experienced significant internal subscriber
growth between periods and, second, implementation of basic and expanded tier
retail rate increases in certain systems in accordance with federal law. The
internal subscriber growth, approximately 5.0% when comparing September 30, 1998
to September 30, 1997, reflects the success of management's marketing efforts to
add new customers and retain existing customers, as well as improved customer
service. Excluding the basic subscribers associated with the September 30, 1998
acquisition, the Partnership added approximately 21,500 basic subscribers
through its internal growth efforts. In addition, a limited amount of new-build
construction increased the coverage of the systems. Average monthly revenue per
subscriber increased from $35.97 for the quarter ended September 30, 1997 to
$37.64 for the quarter ended September 31, 1998.
Page 12
<PAGE> 13
Operating Expenses
Operating costs increased by 10.3% and 14.4% and $2.0 million and $7.9 million
for the three and nine months ended September 30, 1998, respectively, when
compared to the similar periods of 1997. The majority of these increases were
related to costs associated with the acquisitions of additional cable television
systems during 1997. Operating costs, as a percentage of service revenues, have
increased from 41.8% for the quarter ended September 30, 1997 to 43.1% for the
quarter ended September 30, 1998, primarily as a result of increases in service
costs for the three month period.
General and administrative expenses increased by 3.9% and 16.0% for the three
and nine months ended September 30, 1998 when compared to the similar periods of
1997. These increases are primarily a result of the costs associated with
acquisitions of additional cable television systems during 1997. General and
administrative expenses, as a percentage of service revenues, have decreased to
6.8% from 7.2% for the quarters ended September 30, 1998 and September 30, 1997,
respectively.
The Partnership experienced growth in operating cash flow, defined as earnings
before interest, taxes, depreciation, amortization and management fees (or
EBITDA), of approximately 10.4% for the quarter ended September 30, 1998 when
compared to the quarter ended September 30, 1997. Operating cash flow margin
increased from 49.9% for the quarter ended September 30, 1997 to 50.1% for the
current quarter. These increases in operating cash flow and operating cash flow
margin are primarily the result of the 9.9% increase in revenue.
Depreciation and amortization increased by 20.9% and 25.9% and $3.9 million and
$13.5 million for the three and nine months ended September 30, 1998,
respectively, when compared to the similar periods of 1997. These increases in
depreciation and amortization are a result of capital expenditures made to the
systems, in addition to the increase in property, plant and equipment and
franchise costs resulting from the acquisitions of additional cable systems
during 1997. Depreciation expense as a percent of revenues increased during the
three and nine months ended September 30, 1998 compared to the similar periods
of 1997. These increases are due primarily to a decrease in the estimated useful
lives used in calculating depreciation.
Management fees are paid to Charter Communications, Inc., manager of the
Partnership's cable television systems, under contracts which provide for fees
equal to 5% of the Partnership's gross service revenues.
Other Income / Expense
Interest expense increased by 4.6% and 12.3% and $16.8 million and $50.2 million
for the three and nine months ended September 30, 1998, respectively, when
compared to the similar periods of 1997. These increases were primarily due to
the increase in the average outstanding bank debt balance between the comparable
periods. The extraordinary loss due to the early retirement of the separate CC-I
and CC-II credit facilities relates to the write-off of deferred debt issuance
costs of each facility.
Net Loss
Net loss increased by 26.3% and 41.2% to $17.5 million and $55.8 million for the
three and nine months ended September 30, 1998 when compared to the similar
periods of 1997. In 1998, increased depreciation and the extraordinary item were
significant factors versus the prior year.
Page 13
<PAGE> 14
Liquidity and Capital Resources
The Partnership's growth by acquisition has historically been funded primarily
by borrowings under bank credit facilities, the proceeds of the $146,820,000 of
Senior Secured Discount Debentures (the "Debentures") and the 11.25% Senior
Notes (the "Senior Notes"), and equity contributions. Cash flows provided by
operating activities together with borrowings under bank credit facilities have
been sufficient to fund the Partnership's debt service, capital expenditures and
working capital requirements. 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 future acquisitions, if any, 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, 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 and, thereby, could negatively impact the Partnership's
ability to pursue a strategy that includes growth through acquisitions.
On June 1, 1998, the Partnership repaid and terminated the separate credit
facilities of CC-I and CC-II from borrowings of its new revolving credit and
term loan facilities. The new $640 million credit facilities were arranged
through a consortium of banks and consist of a $290 million revolver maturing
June 2007 and a pair of term facilities in the amounts of $200 million and $150
million maturing June 2007 and December 2007, respectively. The new credit
facilities are structured as a joint credit agreement whereby CC-I and CC-II
(and its subsidiaries) are each jointly and severally liable for the debt. The
credit facilities bear interest, at borrower's option, at rates based upon the
prime rate of the agent bank or based upon Eurodollar rates plus the applicable
margin determined by the Partnership's leverage ratio at the time of the
borrowing. The variable interest rates ranged from 6.97% to 7.69% at September
30, 1998. The extraordinary loss recognized by the Partnership for the early
extinguishment of debt was related to the write off of deferred debt issuance
costs for the terminated credit facilities of CC-I and CC-II.
At September 30, 1998, the Partnership's long-term debt of $722.1 million
consisted of $491.5 million outstanding under the revolving credit and term loan
facility, $125.0 million of indebtedness from the sale of the Senior Notes by
Charter Southeast and $105.6 million of indebtedness from the sale of
Debentures. The Partnership had unused and available borrowing capacity of
$148.5 million at September 30, 1998.
On July 29, 1998, Charter Communications, Inc. ("CCI"), the company that
provides management service to the Partnership and its subsidiaries, along with
certain of its affiliates and their respective shareholders, entered into a
Purchase Agreement (the "Purchase Agreement") with Paul G. Allen pursuant to
which Mr. Allen agreed to purchase all of the outstanding privately-held equity
interests of CCI and the various other entities that together constitute the
owners and/or managers of the cable television systems operated under the name
"Charter Communications". The obligation of Mr. Allen to purchase these equity
interests is subject to the satisfaction of certain conditions set forth in the
Purchase Agreement including, without limitation, obtaining all necessary
governmental approvals. It is currently expected that the acquisition by Mr.
Allen will occur in December 1998. If the acquisition is consummated, the
Partnership will be obligated under the terms of the Indenture governing its
Debentures due 2007 to make an offer to repurchase all outstanding Debentures at
a purchase price equal to 101% of the accreted value thereof plus all accrued
and unpaid interest to the date of purchase. In addition, the Partnership's
subsidiary, Charter Communications Southeast, L.P., will be obligated under the
terms of the Indenture governing its 11.25% Senior Notes due 2006 to make an
offer to repurchase all outstanding Senior Notes at a purchase price equal to
101% of the principle amount thereof plus all accrued and unpaid interest to the
date of purchase.
Cash interest is payable on a monthly and quarterly basis for borrowings
outstanding under the Partnership's credit facilities. Cash interest is payable
semi-annually, in March and September, on the Senior Notes until March 2006. The
discount related to the original 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.
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 interest expense in the
period incurred. The affects of the Partnership's hedging
Page 14
<PAGE> 15
practices on its weighted average borrowing rate and on reported interest
expense were not material for the three and nine months ended September 30,
1998.
The Partnership incurred capital expenditures of approximately $ 65.7 million
during the first nine months of 1998 in connection with the improvement and
upgrading of the Partnership's cable systems. The Partnership anticipates that
capital expenditures for such purposes will be approximately $80.0 to $90.0
million during fiscal 1998.
On September 30, 1998, the Partnership consummated an acquisition transaction
with an unaffiliated third party for the purchase of approximately 3,300 basic
service customers for approximately $5.9 million. These customers are located
near the Partnership's cable television system in Clarksville, Tennessee, and
are reflected as a part of the Nashville Cluster customer base at September 30,
1998. This acquisition was financed through a borrowing on the Partnership's
existing credit facility.
During 1997 and 1998, the Partnership held discussions with several
municipalities, counties and utility companies in Georgia to explore the
possibility of a sale-leaseback venture whereby the Partnership would sell its
cable television distribution plant and subsequently enter into a long-term
capital lease to continue to operate the cable television system. On August 4,
1998, the Partnership and the City of LaGrange, Georgia, entered into such an
arrangement involving approximately 8,200 customers. The proceeds of a municipal
bond offering were utilized for the initial purchase of the cable television
system for approximately $2.2 million with the remaining funds to finance the
upgrade of the cable television system to 750 MHz. Upon completion of the
upgrade in early 1999, the Partnership will reflect a 16 year capital lease
agreement with an obligation of approximately $7.0 million recorded by the
Partnership.
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 Partnership's
underground plants at reasonable and cost-effective rates.
The Partnership believes that it has generally complied with the provisions of
the 1992 Cable 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 a material adverse
effect on the financial position or results of the Partnership.
Year 2000 Issue
The issue surrounding the Year 2000 is whether computer systems, software and
all equipment using a computer chip will properly recognize date sensitive
information when the year changes to 2000. Computerized information that does
not properly recognize such information could generate erroneous data or cause a
system to fail. This issue impacts the Partnership's owned and 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 Partnership may also be affected by virtue of its external
dealings with third parties in the ordinary course of business.
During 1998, the Partnership began a review of its computer systems and
databases. A committee comprised of members of Charter's senior management from
various disciplines has been formed and is meeting regularly to discuss the
steps necessary to deal with any potential Year 2000 problems. This project team
reports directly to the executive management of Charter, who has assigned a high
priority to such efforts.
The scope of the Partnership's Year 2000 readiness program includes the review
and evaluation of (i) the Partnership's information technology ("IT"), such as
hardware and software utilized in the operation of the Partnership's business;
(ii) the Partnership's non-IT systems or embedded technology such as
micro-controllers
Page 15
<PAGE> 16
contained in various equipment and facilities including the equipment used in
the transmission and reception of all signals; and (iii) the readiness of third
parties, including suppliers and other key vendors to the Partnership.
The Partnership utilizes a subscriber billing system under contractual
arrangements with a third party vendor. The Partnership has requested the third
party to advise the Partnership as to whether it anticipates difficulties in
addressing Year 2000 problems, and if so, the nature of such difficulties. The
Partnership has also initiated communications with its significant suppliers of
major computers, software, and other equipment used, operated or maintained by
the Partnership, and financial institutions to identify and, to the extent
possible, to ensure that those parties have appropriate plans to remediate Year
2000 problems. However, the Partnership has limited or no control over the
actions of these third party suppliers. Thus, while the Partnership anticipates
that it will be able to resolve any significant Year 2000 problems with these
systems, there can be no assurance that these third party suppliers will resolve
any or all Year 2000 problems before the occurrence of a material disruption to
the business of the Partnership. Any failure by these third parties to timely
resolve Year 2000 problems with their systems could have a material adverse
effect on the Partnership's business, financial condition, and results of
operations.
The Partnership has completed an inventory of all "mission critical" equipment
used in the transmission and reception of all signals and is in the process of
identifying equipment that need to be upgraded or replaced. The Partnership is
also monitoring industry-wide efforts with regards to signal delivery to its
cable distribution plant and is working with others in the industry seeking
potential solutions.
Management of the Partnership has not determined the total cost associated with
its Year 2000 readiness efforts and related potential impact on the
Partnership's results of operations. Amounts expended to date have not been
material. The estimated cost of the Year 2000 compliance program is not
anticipated to be material to the Partnership's financial position or results of
operations.
There can be no assurance that the Partnership's systems or systems of other
companies on which the Partnership relies will be converted in time or that any
such failure to convert by the Partnership or another company will not have a
material adverse effect on the Partnership's financial position or results of
operations. After evaluating its internal compliance efforts as well as the
compliance of third parties by the end of 1998, the Partnership will develop
appropriate contingency plans to address situations in which systems of the
Partnership, or of third parties with which the Partnership does business, are
not Year 2000 compliant.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133 is effective for fiscal years beginning after June 15, 1999. This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The effective adoption of SFAS No. 133 is
not expected to have a material impact on the Company's financial statements and
related disclosures.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward looking statements. Certain information included in this Form 10-Q
contains statements that are forward looking, such as statements relating to the
effects of future regulation, future capital commitments, future acquisitions
and the company's success in dealing with the Year 2000 issues. Such
forward-looking information involves important risks and uncertainties that
could significantly affect expected results in the future from those expressed
in any forward-looking statements made by, or on behalf of the Partnership.
These risks and uncertainties include, but are not limited to, uncertainties
relating to economic conditions, acquisitions and divestitures, government and
regulatory policies, the pricing and availability of equipment, materials,
inventories and programming, technological developments and changes in the
competitive environment in which the Partnership operates. Investors are
cautioned that all forward-looking statements involve risks and uncertainties.
Page 16
<PAGE> 17
Part II. Other Information
Item 1. Legal Proceedings
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 196, 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, Mathews, 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 systems 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.
A class action lawsuit was filed in Alabama against the Partnership on behalf of
all persons residing in the state who are or were residential customers of the
Partnership's cable television service and who have been charged a processing
fee for delinquent payment of their cable television bill. The action challenges
the legality of the Partnership's processing fee and seeks declaratory judgment,
injunctive relief and unspecified damages. The Partnership believes the lawsuit
to be without merit and intends to defend the action vigorously. At this time,
the Partnership is not able to project the cost which is associated with this
action or to predict any potential outcome of the lawsuit.
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.
Item 2. Change in Securities - None
Item 3. Defaults upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K-None
Page 17
<PAGE> 18
CHARTER COMMUNICATIONS SOUTHEAST HOLDINGS, L.P.
CHARTER COMMUNICATIONS SOUTHEAST HOLDINGS CAPITAL CORPORATION
FOR QUARTER ENDED SEPTEMBER 30, 1998
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHARTER COMMUNICATIONS SOUTHEAST HOLDINGS, L.P.
By: Charter Communications Holdings Properties, Inc..
its General Partner
By: /s/ Jerald L. Kent
-------------------------------------
Jerald L. Kent
President and
Chief Executive Officer
By: /s/Jerald L. Kent November 13, 1998
-------------------------------
Jerald L. Kent
President and
Chief Executive Officer
By: /s/Kent D. Kalkwarf November 13, 1998
------------------------------
Kent D. Kalkwarf
Senior Vice President and
Chief Financial Officer
CHARTER COMMUNICATIONS SOUTHEAST HOLDINGS
CAPITAL CORPORATION
By: /s/ Jerald L. Kent
-----------------------------------
Jerald L. Kent
President and
Chief Executive Officer
By: /s/Jerald L. Kent November 13, 1998
------------------------------
Jerald L. Kent
President and
Chief Executive Officer
By: /s/Kent D. Kalkwarf November 13, 1998
------------------------------
Kent D. Kalkwarf
Senior Vice President and
Chief Financial Officer
Page 18
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